**Exhibit10.3**

 

**STEWART & STEVENSON SERVICES,INC.NONQUALIFIED STOCK OPTION AGREEMENT**

** **

**THISAGREEMENT**, made and entered into as of March 31,2004 (the “*GrantDate*”), is between Stewart & Stevenson Services, Inc., aTexas corporation (hereinafter called the “*Company*”) and Max L. Lukens (hereinaftercalled the “*Employee*”).

 

**WHEREAS**,the Company has determined that its interests will be advanced by providing anincentive to the Employee to acquire a proprietary interest in the Company and,as a stockholder, to share in its success, with added incentive to workeffectively for and in the Company’s interest;

 

**NOWTHEREFORE,** in consideration of the mutual promiseshereafter set forth and for other good and valuable consideration, the partieshereby agree as follows:

 

# **1.****                                      Grant**.  Pursuant to the provisions of the Stewart& Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (the “*Plan*”)the Company hereby grants to the Employee, subject to the terms and conditionsof the Plan and subject further to the terms and conditions herein set forth,the right and option (the “*Option*”) to purchase from the Company, allor any part of 200,000 shares of Common Stock, without par value, of theCompany  (the “*Stock*”) at the purchaseprice of $14.62 per share, subject to adjustment as provided in the Plan.

#  

# **2.****                                      Expirationof Option**.  The Option shallterminate and become null and void upon the earliest to occur of (1) the tenthanniversary of the Grant Date, (2) the 30th day after the severanceof the employment relationship between the Employee and the Company and all ofits affiliates for any reason other than death, Disability, Retirement, or forCause, (3) the first anniversary of the severance of the employmentrelationship between the Employee and the Company and all of its affiliates dueto death, Disability or Retirement, or (4) the date of the severance of theemployment relationship between the Employee and the Company and all of itsaffiliates for Cause.   In the event ofthe  severance of the employment  relationship between the Employee and theCompany and all of its affiliates for any reason other than death, Disability,Retirement or Cause, the Option shall not continue to vest after such severanceof employment.

#  

# **3.****                                      Vestingof Option.**

#  

The Option is exercisable in accordance withthe following schedule:

 

## (i)                                     onthe first anniversary of the Grant Date, the Option may be exercised withrespect to up to fifty percent (50%) of the shares subject to the Option; and

##  

## (ii)                                  onthe second anniversary of the Grant Date the Option shall be exercisable infull.

##  

Notwithstanding the foregoing, upon thedeath, Disability or Retirement of the Employee prior to the expiration of theOption, the Option shall be exercisable in full.

 

----

 

Further, notwithstanding the foregoing or anyprovision of the Plan, upon the occurrence of a “change in control” (as definedin the Severance Agreement between the Company and the Employee dated effectiveas of February 1, 2004) prior to the expiration of the Option, the Optionshall be exercisable in full.

 

Further, notwithstanding the foregoing or anyprovision of the Plan, upon the termination of the Employee’s employment by theCompany other than for “cause” or by the Employee for “good reason” (as suchterms are defined in the Employment Agreement between the Company and theEmployee dated effective as of February 1, 2004) prior to the expirationof the Option, the Option shall be exercisable in full.

 

# **4.****                                      CertainTerminations Agreed to Constitute Retirement**.  Any termination of the Employee’s employment by the Company otherthan for “cause” or by the Employee for “good reason” (as such terms aredefined in the Employment Agreement between the Company and the Employee datedeffective as of February 1, 2004) prior to the expiration of the Optionshall be treated as a Retirement for all purposes of the Plan and thisAgreement.

#  

# **5.****                                      Mannerof Exercise**.  The Employee shallexercise the Option by written notice to the Company specifying the number ofshares as to which the Option is being exercised.

#  

# **6.****                                      Paymentof Purchase Price Upon Exercise**.  Atthe time of any exercise, the purchase price of the shares as to which theOption is exercised shall be paid to the Company in cash or with Stock alreadyowned by the Employee for at least six months (‘*Mature Shares*”) having atotal fair market value, as determined by the Committee appointed pursuant toparagraph 3 of the Plan, equal to the purchase price, or a combination of cashand Mature Shares having a total fair market value, as so determined, equal tothe purchase price.

#  

# **7.****                                      Transfer**.  The Option shall not be transferable otherthan by will or by the laws of descent and distribution and may not be pledged,hypothecated, encumbered, garnished, attached, executed on or levied against.  During the lifetime of the Employee, theOption shall be exercisable only by the Employee.

#  

# **8.****                                      Adjustments**.  In the event of any change in the Stock ofthe Company by reason of any stock dividend, recapitalization, reorganization,merger, consolidation, split-up, combination or exchange of shares, or anyrights offering to purchase Stock at a price substantially below fair marketvalue, or of any similar change affecting the Stock, the number and kind ofshares subject to the Option and their purchase price per share shall be appropriatelyadjusted consistent with such change in such manner as the Committee may deemequitable to prevent substantial dilution or enlargement of the rights grantedto the Employee hereunder.  Anyadjustment so made shall be final and binding upon the Employee.

#  

# **9.****                                      NoRights as Stockholder**.  The Employeeshall have no rights as a stockholder with respect to any shares of Stocksubject to the Option prior to the date of exercise and payment for suchshares.

 

2

----

 

# **10.****                               NoRight to Continued Employment**.  TheOption shall not confer upon the Employee any right with respect to continuanceof employment by the Company, nor shall it interfere in any way with the rightof his employer to terminate the Employee’s employment at any time.

#  

# **11.****                               Compliancewith Laws and Regulations**.  TheOption, and the obligation of the Company to sell and deliver shares hereunder,shall be subject to all applicable federal and state laws, rules andregulations and to such approvals by any government or regulatory agency as maybe required.  The Company shall not berequired to issue or deliver any certificates for shares of Stock prior to (i)the listing of such shares on any stock exchange on which the Stock may then belisted; and (ii) the completion of any registration or qualification of suchshares under any federal or state law, or any rule or regulation of anygovernment body which the Company shall, in its sole discretion, determine tobe necessary or advisable.  Moreover,the Option may not be exercised if its exercise or the receipt of shares ofStock pursuant thereto, would be contrary to applicable law.

#  

# **12.****                               InvestmentRepresentation**.  The Committee mayrequire the Employee to furnish to the Company, prior to the issuance of anyshares upon the exercise of all or any part of the Option, an agreement (insuch form as the Committee may specify) in which the Employee represents thatthe shares acquired by him upon exercise are being acquired for investment andnot for resale or with a view to distribution thereof.

#  

# **13.****                               WithholdingTaxes**.  The Company may directly orindirectly withhold all federal, state, city or other taxes as a result of theEmployee’s exercise of the Option.

#  

In order to provide for the necessarywithholding under this Agreement, the Company will deduct the additional amountof withholding required from the Employee’s salary unless the Employee makesother provision in accordance with this Agreement.  The Employee has an option to provide the Company with the necessaryfunds for this purpose or advising the Company that the Employee will accept areduction in the amount of Stock due equal to the amount of withholdingrequired.

 

The Company will advise the Employee at theappropriate time when the additional withholding funds are required so that theEmployee can provide for the necessary funds or advise the Company that theEmployee will accept a reduction in the amount of Stock due.

 

If a reduction in Stock is requested, theCompany may deliver only the number of whole shares remaining after thewithholding has been accomplished.

 

# **14.****                               BindingTerms**.  The Employee herebyacknowledges receipt of a copy of the Plan and agrees to be bound by all theterms and provisions thereof, including the terms and provisions adopted afterthe granting of the Option but prior to the complete exercise hereof.  This Agreement shall be binding upon, andshall inure to the benefit of, the Employee and the Company and theirrespective permitted successors, assigns, heirs, beneficiaries, andrepresentatives.  All capitalized termsin this Agreement that are not specifically defined herein shall have themeanings set forth in the Plan.

 

3

----

 

# **15.****                               Notices**.  All notices, requests, demands, and othercommunications required or permitted hereunder shall be given in writing.

#  

# **16.****                               Headingsof No Effect**.  Thesection headings contained in this Agreement are included solely forconvenience of reference and shall not in any way affect the meaning or interpretationof any of the provisions of the Agreement.

#  

# **17.****                               Counterparts**.  This Agreement may be executed in two (2)counterparts, each of which shall constitute one and the same instrument.

#  

# **18.****                               GoverningLaw**.  This Agreement has beenexecuted and delivered in the State of Texas and its validity, interpretation,performance, and enforcement shall be governed by the laws of that state.  If any provisions of this instrument shallbe held by a court of competent jurisdiction to be invalid or unenforceable,the remaining provisions hereof shall continue to be fully effective.  In the event the Company determines that anadverse claim exists to payments to be made pursuant to this Agreement, theCompany shall have the right, but not the obligation, to interplead the partieswith claims to such payments and recover reasonable attorney fees and courtcosts from interplead funds.

#  

**INWITNESS WHEREOF**, this Agreement has been duly executedand delivered to be effective as of the Grant Date.

 

 
|                     | **STEWART & STEVENSON SERVICES, INC.** |
|--------------------------|--------------------------------------------|
|                     |                                       |   |
|                     |                                       |
|                     | By:                                        |    /s/ Carl B. King |   |
|                     |                                       |
| ACCEPTED:                |                                       |   |
|                     |                                       |   |
|                     |                                       |   |
|   /s/ Max L. Lukens |                                       |   |   |
| Max L. Lukens            |                                       |   |   |
|                          |                                            |  |  |  |  |

 

4

----