Exhibit 10.2


 


SEVERANCE
AGREEMENT


 


THIS AGREEMENT, effective as of December 23, 2005,
is made by and between Stewart & Stevenson Services, Inc., a Texas
corporation (the “Company”), and Max L. Lukens (the “Executive”).


 


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


 


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


 


WHEREAS, the Board has determined that appropriate
steps should be taken to reinforce and encourage the continued attention and
dedication of members of the Company’s management, including the Executive, to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control;


 


WHEREAS, the Executive and the Company are parties
to that certain severance agreement, dated February 1, 2004 (the “2004
Agreement”);


 


WHEREAS, simultaneously herewith, the Company and
the Executive have entered into a new Employment Agreement with the Executive
(the “Employment Agreement”) that extends the term of the Executive’s
employment with the Company;


 


WHEREAS, in order to continue to effectuate the
foregoing, the Company and Executive wish to enter into this Agreement on the
terms and conditions set forth below;


 


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


 


1.             Defined Terms.  The definitions of capitalized terms used in
this Agreement are provided in Section 14 hereof.


 


2.             Term of Agreement.  The Term of this Agreement shall commence on
the date hereof and shall continue in effect through February 1, 2007.


 


3.             Company’s Covenants Summarized.  In order to
induce the Executive to remain in the employ of the Company and in
consideration of the Executive’s covenants set forth in Section 3 hereof, the
Company agrees, under the conditions described herein, to pay the Executive the
Severance Payments and the other payments and benefits described herein.  Except as provided in Section 8.1 hereof, no
Severance Payments shall be payable under this Agreement unless there shall
have been (or, under the terms of the second sentence of Section 5.1 hereof,
there shall be deemed to have been) a termination of the Executive’s employment
with the Company following a Change in Control and during the Term.  This Agreement shall not be construed as
creating an express or implied contract of employment and, except as otherwise


 





















 


agreed in writing
between the Executive and the Company, the Executive shall not have any rights
to be retained in the employ of the Company.


 


4.             Compensation Other Than Severance Payments.


 


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


 


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


 


4.3           If the Executive’s employment
shall be terminated for any reason following a Change in Control and during the
Term, the Company shall pay to the Executive the Executive’s normal
post-termination compensation and benefits as such payments become due in
accordance with written plans.  Such
post-termination compensation and benefits shall be determined under, and paid
in accordance with, the Company’s retirement, insurance and other compensation
or benefit plans, programs and arrangements as in effect immediately prior to
the Date of Termination or, if more favorable to the Executive, as in effect
immediately prior to the occurrence of the first event or circumstance
constituting Good Reason.


 


4.4           Upon termination of the
Executive’s employment due to the Executive’s death or Disability following a
Change in Control and during the Term, the Company shall, within thirty (30)
days pay to the Executive (or his designated beneficiary or legal
representative, if applicable) (A) the Accrued Obligation (as defined in the
Employment Agreement), and (B) a lump sum amount, in cash, equal to the product
of (i) the Discretionary Bonus (as defined in the Employment Agreement) and
(ii) the fraction obtained by dividing the number of full days during the Base
Term (as defined in the Employment Agreement) through the Date of Termination
by the total number of days contained in the Base Term.


 


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


 


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5.             Severance.


 


5.1           If the Executive’s employment is
terminated following a Change in Control and during the Term, other than (x) by
the Company for Cause, (y) by reason of death or Disability, or (z) by the
Executive without Good Reason, then, the Company shall pay the Executive the
amounts, and provide the Executive the benefits, described in this Section 5.1
(“Severance Payments”) and Section 5.2, in addition to any payments and
benefits to which the Executive is entitled under Section 4 hereof.  Solely for purposes of determining whether
termination occurred following a Change in Control pursuant to this Agreement
(and without any implication that a Change in Control has in fact occurred),
the Executive’s employment shall be deemed to have been terminated following a
Change in Control by the Company without Cause or by the Executive with Good
Reason, if (i) the Executive’s employment is terminated by the Company without
Cause prior to a Change in Control and such termination was at the request,
direction or suggestion, directly or indirectly, of a Person who has entered
into an agreement or who the Company contemplates will enter into an agreement
with the Company the consummation of which would constitute a Change in Control
or, (ii) the Executive terminates his employment for Good Reason prior to a
Change in Control and the circumstance or event which constitutes Good Reason
occurs at the request, direction or suggestion of such Person described in
clause (i).  For purposes of any
determination regarding the applicability of the immediately preceding
sentence, any position taken by the Executive shall be presumed to be correct
unless the Company establishes to the Committee by clear and convincing
evidence that such position is not correct.


 


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


 


(B)           Until February 1, 2010, the
Company shall arrange to provide the Executive and his dependents life,
disability, accident and health and medical benefits and perquisites
(including, but not limited to, executive life insurance, club memberships, financial
planning and tax preparation, annual physical examination and charitable
contributions), in each case, substantially similar to those provided to the
Executive and his dependents immediately prior to the Date of Termination or,
if more favorable to the Executive, those provided to the Executive and his
dependents immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, at no greater cost to the Executive than the cost to
the Executive immediately prior to such date or occurrence; provided, however,
that, unless the Executive consents to a different method (after taking into account
the effect of such method on the calculation of “parachute payments” pursuant
to Section 5.2 hereof), such medical and health benefits shall be provided
through the Company’s (or any successor to its business and/or assets) group
health plan.  Upon the termination of
health plan coverage under this Section 5.1(B) and to the extent permitted by
applicable law, the Executive shall have the right to elect COBRA continuation
coverage under Section 4980B of the Code (“COBRA Coverage”). Benefits otherwise
receivable by the Executive pursuant to this Section 5.1(B) shall be reduced to
the extent benefits of the same type are received by the Executive under any
individual or group policy or program, or made available to the Executive under
a group


 


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plan
whether by reason of the employment of the Executive or the employment of the
spouse of the Executive prior to February 1, 2010 (and any such benefits
received by or made available to the Executive 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 prior to the Date of Termination or, if more favorable to the
Executive, the first occurrence of an event or circumstance constituting Good
Reason.


 


(C)           Notwithstanding any provision of
that certain Employment Agreement between the Company and the Executive
effective as of even date herewith (the “Employment Agreement”), the Company
shall pay to the Executive a lump sum amount, in cash, equal to the aggregate
value of the Discretionary Bonus contemplated by Section 4(b)(ii) of the
Employment Agreement that the Executive would have earned as of the last day of
the Base Term (as defined in the Employment Agreement), assuming the
achievement, at the expected value target level ($750,000), of the performance
goals established with respect to such award (it being understood that amount
being $750,000).


 


(D)          The committee (as defined by the
Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan)
shall deem the Executive’s termination of employment as a retirement for
purposes of the Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock
Option Plan.


 


(E)           If a Change in Control occurs
prior to February 1, 2006, the Company shall pay to the Executive a lump sum
payment, in cash, equal to the Black-Scholes value, as reasonably determined by
the Company as of the date of the Change of Control, of an option to purchase
5,000 shares of the Company’s common stock, assuming for this purpose the
option was granted on February 1, 2006, the per share exercise price under the
option is the fair market value of a share of common stock on the date of the
Executive’s termination of employment, the option has the same terms and
conditions as applied to the option granted by the Company to the Executive on
March 31, 2004 (other than the number of shares subject to the option), and the
option remains outstanding for the full ten year term; and utilizing the risk
free interest rate, dividend yield, and expected volatility assumptions used by
the Company for purposes of valuing stock options for its 2005 fiscal year as
reflected in its fiscal year 2005 Form 10-K filed with the Securities and Exchange
Commission.


 


5.2           (A)  Anything in this Agreement to the contrary
notwithstanding and except as set forth below, in the event it shall be
determined that any Payment would be subject to the Excise Tax, then the
Executive shall be entitled to receive an additional payment (the “Gross-Up
Payment”) in an amount such that, after payment by the Executive of all taxes
(and any interest or penalties imposed with respect to such taxes), including,
without limitation, any income taxes (and any interest and penalties imposed
with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax (and any interest and penalties with respect thereto)
imposed upon the Payments.  The Company’s
obligation to make Gross-Up Payments under this Section 5.2 shall not be conditioned
upon the Executive’s termination of employment.


 


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(B)           Subject to the provisions of
Section 5.2(C), all determinations required to be made under this Section
5.2, including whether and when a Gross-Up Payment is required, the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the Auditor, or such other nationally
recognized certified public accounting firm as may be designated by the
Executive (the “Accounting Firm”).  The Accounting
Firm shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment or such earlier time as is requested by the Company.  In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting
the Change of Control, the Executive may appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder).  All fees and expenses of the Accounting Firm
shall be borne solely by the Company. 
Any Gross-Up Payment, as determined pursuant to this Section 5.2, shall
be paid by the Company to the Executive within 5 days of the receipt of the
Accounting Firm’s determination.  Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive.  As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments that will not have been made by the Company should have been
made (the “Underpayment”), consistent with the calculations required to be made
hereunder.  In the event the Company
exhausts its remedies pursuant to Section 5.2(C) and the Executive thereafter
is required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such Underpayment
shall be promptly paid by the Company to or for the benefit of the Executive.


 


(C)           The Executive shall notify the
Company in writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of the Gross-Up
Payment.  Such notification shall be
given as soon as practicable, but no later than 10 business days after the
Executive is informed in writing of such claim. 
The Executive shall apprise the Company of the nature of such claim and
the date on which such claim is requested to be paid.  The Executive shall not pay such claim prior
to the expiration of the 30-day period following the date on which the
Executive gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due).  If the Company notifies the Executive in
writing prior to the expiration of such period that the Company desires to
contest such claim, the Executive shall:


 


(I)            give the Company any information reasonably
requested by the Company relating to such claim,


 


(II)           take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the Company,


 


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(III)         cooperate with the Company in good faith in
order effectively to contest such claim, and


 


(IV)         permit the Company to participate in any
proceedings relating to such claim;


 


provided, however, that
the Company shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with such contest,
and shall indemnify and hold the Executive harmless, on an after-tax basis, for
any Excise Tax or income tax (including interest and penalties) imposed as a
result of such representation and payment of costs and expenses.  Without limitation on the foregoing provisions
of this Section 5.2(C), the Company shall control all proceedings taken in
connection with such contest, and, at its sole discretion, may pursue or forgo
any and all administrative appeals, proceedings, hearings and conferences with
the applicable taxing authority in respect of such claim and may, at its sole
discretion, either pay the tax claimed to the appropriate taxing authority on
behalf of the Executive and direct the Executive to sue for a refund or contest
the claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however,
that, if the Company pays such claim and directs the Executive to sue for a refund,
the Company shall indemnify and hold the Executive harmless, on an after-tax
basis, from any Excise Tax or income tax (including interest or penalties)
imposed with respect to such payment or with respect to any imputed income in
connection with such payment; and provided, further, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount.  Furthermore, the
Company’s control of the contest shall be limited to issues with respect to
which the Gross-Up Payment would be payable hereunder, and the Executive shall
be entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.


 


(D)          If, after the receipt by the
Executive of a Gross-Up Payment or payment by the Company of an amount on the
Executive’s behalf pursuant to Section 5.2(C), the Executive becomes entitled
to receive any refund with respect to the Excise Tax to which such Gross-Up
Payment relates or with respect to such claim, the Executive shall (subject to
the Company’s complying with the requirements of Section 5.2(C), if applicable)
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto).  If, after payment by the Company of an amount
on the Executive’s behalf pursuant to Section 5.2(C), a determination is made
that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then the amount of such payment shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.


 


(E)           Notwithstanding any other
provision of this Section 5.2, the Company may, in its sole discretion (but only pursuant to a good faith interpretation of


 


6





















 


statutes regarding an employer’s
duty to withhold tax obligations and remit same directly to the taxing
authority), withhold and pay over to the Internal
Revenue Service or any other applicable taxing authority, for the benefit of
the Executive, all or any portion of any Gross-Up Payment, and the Executive
hereby consents to such withholding.


 


5.3           If the Executive’s employment
with the Company is terminated following a Change in Control and during the
Term, the Company shall pay to the Executive all legal fees and expenses
incurred by the Executive in disputing in good faith any issue hereunder
relating to the termination of the Executive’s employment, in seeking in good
faith to obtain or enforce any benefit or right provided by this Agreement or
in connection with any tax audit or proceeding to the extent attributable to
the application of section 4999 of the Code to any payment or benefit provided
hereunder.  Such payments shall be made
within five (5) business days after delivery of the Executive’s written
requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.


 


6.             Termination Procedures and Compensation During Dispute.


 


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


 


6.2           Date
of Termination.  “Date of
Termination,” with respect to any purported termination of the Executive’s
employment after a Change in Control and during the Term, shall mean (i) if the
Executive’s employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that the Executive shall not have returned
to the full-time performance of the Executive’s duties during such thirty (30)
day period), and (ii) if the Executive’s employment is terminated for 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 by the 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).


 


6.3           Dispute
Concerning Termination.  If within fifteen (15) days after any Notice
of Termination is given following a Change in Control, or, if later, prior to
the Date of Termination (as determined without regard to this Section 6.3), the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be
extended until the earlier of (i) the date on which the Term ends or


 


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(ii) the date on which the dispute is
finally resolved, either by mutual written agreement of the parties or by a
final judgment, order or decree of an arbitrator or a court of competent jurisdiction
(which is not appealable or with respect to which the time for appeal therefrom
has expired and no appeal has been perfected); provided, however, that the Date
of Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving notice pursues the resolution of such
dispute with reasonable diligence.


 


6.4           Compensation
During Dispute.  If a purported
termination occurs following a Change in Control and during the Term and the
Date of Termination is extended in accordance with Section 6.3 hereof, the
Company shall continue to pay the Executive the full compensation in effect
when the notice giving rise to the dispute was given (including, but not
limited to, salary) and continue the Executive as a participant in all
compensation, benefit and insurance plans in which the Executive was
participating when the notice giving rise to the dispute was given or those
plans in which the Executive was participating immediately prior to the first occurrence
of an event or circumstance giving rise to the Notice of Termination, if more
favorable to the Executive, until the Date of Termination, as determined in
accordance with Section 6.3 hereof.  Amounts paid under this Section 6.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 4.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.


 


7.             No Mitigation.  The Company agrees that, if the Executive’s
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any
amounts payable to the Executive by the Company pursuant to Sections 4, 5 or
6.4 hereof.  Further, the amount of any
payment or benefit provided for in this Agreement (other than Section 5.1(B)
hereof but including (but not limited to) Section 6.4 hereof) shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer, by retirement benefits, by offset against any amount
claimed to be owed by the Executive to the Company, or otherwise.


 


8.             Successors; Binding Agreement.


 


8.1           In addition 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 business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place.  Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle the Executive to compensation
from the Company in the same amount and on the same terms as the Executive
would be entitled to hereunder if the Executive were to terminate the Executive’s
employment for Good Reason after a Change in Control, except that, for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination.


 


8.2           This Agreement shall inure to
the benefit of and be enforceable by the Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.  If the Executive
shall die while any amount would still be


 


8





















 


payable to the Executive hereunder
(other than amounts which, by their terms, terminate upon the death of the
Executive) if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to the executors, personal representatives or administrators of the Executive’s
estate.


 


9.             Notices.  For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed,
if to the Executive, to the last address on the books and records of the
Company 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 in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:


 


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 be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Committee.  No waiver by either party hereto at any time
of any breach by the other party hereto of, or of any lack of compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.  This Agreement supersedes any other agreements
or representations, oral or otherwise, express or implied (including, without
limitation, the 2004 Agreement), with respect to the subject matter hereof
which have been made by either party, provided, however, that this Agreement
shall supersede any agreement setting forth the terms and conditions of the
Executive’s employment with the Company only in the event that the Executive’s
employment with the Company is terminated on or following a Change in Control,
by the Company other than for Cause or by the Executive for Good Reason; and
provided further that all agreements otherwise superseded by this Agreement
shall be automatically reinstated with full force and effect to the extent this
Agreement is terminated.  Notwithstanding
the foregoing, the Executive’s covenants set forth in Section 9 of the
Employment Agreement shall not be superseded by this Agreement but shall remain
in full force and effect in the event that the Executive’s employment with the
Company terminates on or following a Change in Control.  The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Texas.  All references to sections of the
Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections.  Any
payments provided for hereunder shall be paid net of any applicable withholding
required under federal, state or local law and any additional withholding to
which the Executive has agreed.  The
obligations of the Company and the Executive under this Agreement which by
their nature may require either partial or total performance after the
expiration of the Term (including, without limitation, those under Sections 5
and 6 hereof) shall survive such expiration.


 


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11.           Validity.  The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.


 


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


 


13.           Settlement of Disputes; Arbitration.


 


13.1         All claims by the Executive for
benefits under this Agreement shall be directed to and determined by the
Committee and shall be in writing.  Any
denial by the Committee of a claim for benefits under this Agreement shall be
delivered to the Executive in writing within thirty (30) days after written
notice of the claim is provided to the Company in accordance with Section 10
and shall set forth the specific reasons for the denial and the specific
provisions of this Agreement relied upon.  The Committee shall afford a reasonable
opportunity to the Executive for a review of the decision denying a claim and
shall further allow the Executive to appeal to the Committee a decision of the
Committee within sixty (60) days after notification by the Committee that the
Executive’s claim has been denied.


 


13.2         Any further dispute or
controversy arising out of or relating to this Agreement, including without
limitation, any and all disputes, claims (whether in tort, contract, statutory
or otherwise), breaches or disagreements concerning the interpretation or application
of the provisions of this Agreement shall be resolved by arbitration before a
panel of three arbitrators and administered by the American Arbitration
Association (“AAA”) under its Rules For Resolution Of Employment Disputes then
in effect.  No arbitration proceeding
relating to this Agreement may be initiated by either the Company or the
Executive unless the claims review and appeals procedures specified in Section 13.1
have been exhausted.  Within ten (10)
business days of the initiation of an arbitration hereunder, the Company and
the Executive will each separately designate an arbitrator, and within twenty (20)
business days of selection, the appointed arbitrators will appoint a neutral
arbitrator.  All arbitrators shall be
members of the National Panel of Employment Arbitrators maintained by the AAA.  The arbitrators shall issue their written
decision (including a statement of finding of facts) within thirty (30) days
from the date of the close of the arbitration hearing.  The decision of the arbitrators selected
hereunder will be final and binding on both parties.  This arbitration provision is expressly made
pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C.
Sections 1-16 (or replacement or successor statute).  Pursuant to Section 9 of the Federal
Arbitration Act, the Company and the Executive agree that a judgment of the
United States District Court for the Southern District of Texas may be entered
upon the award made pursuant to the arbitration.


 


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


 


(A)          “Accounting Firm” has the meaning
set forth in Section 5.2(B) hereof.


 


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(B)           “Accrued Obligation” has the
meaning set forth in Section 8(a) of the
Employment Agreement.


 


(C)           “Affiliate” shall have the
meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange
Act.


 


(D)          “Auditor” shall mean the
accounting firm which was, immediately prior to the Change in Control, the
Company’s independent auditor.


 


(E)           “Base Amount” shall have the
meaning set forth in section 280G(b)(3) of the Code.


 


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


 


(G)           “Business Combination” has the
meaning set forth in Section 14(F)(III) hereof.


 


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


 


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


 


(I)            The acquisition by any Person of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 35% or more of either (A) the then-outstanding shares of common stock of the
Company (the “Outstanding Company Common Stock”) or (B) the combined voting
power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the “Outstanding Company Voting
Securities”); provided, however, that, for purposes of this Section 14(F), the
following acquisitions shall not constitute a Change of Control:  (i) any


 


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acquisition directly from
the Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any Affiliated Company or (iv) any acquisition by any corporation pursuant
to a transaction that complies with Sections 14(F)(III)(A), 14(F)(III)(B) and
14(F)(III)(C);


 


(II)           Any time at which individuals who, as of the
date hereof, constitute the Board (the “Incumbent Board”) cease for any reason
to constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company’s stockholders, was approved by a vote
of at least two thirds (2/3) of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or


 


(III)         Consummation of a reorganization, merger,
statutory share exchange or consolidation or similar corporate transaction
involving the Company or any of its subsidiaries, a sale or other disposition
of all or substantially all of the assets of the Company, or the acquisition of
assets or stock of another entity by the Company or any of its subsidiaries
(each, a “Business Combination”), in each case unless, following such Business
Combination, (A) all or substantially all of the individuals and entities that
were the beneficial owners of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of the
then-outstanding shares of common stock and the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation that, as a
result of such transaction, owns the Company or all or substantially all of the
Company’s assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership immediately prior to such
Business Combination of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or indirectly,
35% or more of, respectively, the then-outstanding shares of common stock of
the corporation resulting from such Business Combination or the combined voting
power of the then-outstanding voting securities of such corporation, except to
the extent that such ownership existed prior to the Business Combination, and
(C) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement or of the
action of the Board providing for such Business Combination; or


 


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(IV)         Approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.


 


(J)            “Code”
shall mean the Internal Revenue Code of 1986, as amended from time to time.


 


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


 


(L)           “Company” shall mean Stewart
& Stevenson Services, Inc. and, except in determining under Section 14(G)
hereof whether or not any Change in Control of the Company has occurred, shall
include any successor to its business and/or assets which assumes and agrees to
perform this Agreement by operation of law, or otherwise.


 


(M)         “Date of Termination” shall have
the meaning set forth in Section 6.2 hereof.


 


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


 


(O)          “Excise Tax” shall mean the
excise tax imposed by Section 4999 of the Code, together with any interest or
penalties imposed with respect to such excise tax.


 


(P)           “Exchange Act” shall mean the
Securities Exchange Act of 1934, as amended from time to time.


 


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


 


(R)           “Extension Date” shall have the
meaning set forth in Section 2 hereof.


 


(S)           “Good Reason” for termination by
the Executive of the Executive’s employment shall mean the occurrence (without
the Executive’s express written consent) after any Change in Control, or prior
to a Change in Control under the


 


13





















 


circumstances
described in clause (ii) of the second sentence of Section 5.1 hereof of any
one of the following acts by the Company, or failures by the Company to act,
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 to the
Date of Termination specified in the Notice of Termination given in respect
thereof:


 


(I)            the assignment to the Executive of any duties
inconsistent with the Executive’s status as a senior executive officer of the
Company or a substantial adverse alteration in the nature or status of the Executive’s
responsibilities from those in effect immediately prior to the Change in
Control (including, without limitation, that the Executive no longer serves as
the Chief Executive Officer of a public company);


 


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


 


(III)         the relocation of the Executive’s principal
place of employment to a location more than 50 miles from the Executive’s principal
place of employment immediately prior to the Change in Control or the Company’s
requiring the Executive to be based anywhere other than such principal place of
employment (or permitted relocation thereof) except for required travel on the
Company’s business to an extent substantially consistent with the Executive’s
present business travel obligations;


 


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


 


(V)           the failure by the Company to continue in
effect any compensation plan in which the Executive participates immediately
prior to the Change in Control which is material to the Executive’s total compensation,
including but not limited to the Company’s stock option plans or any substitute
plans adopted prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, or the failure by the Company to continue the Executive’s
participation therein (or in such 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 the level of the Executive’s participation relative to
other participants, as existed immediately prior to the Change in Control;


 


14





















 


(VI)         the failure by the Company to continue to
provide the Executive with benefits substantially similar to those enjoyed by
the Executive under any of the Company’s pension, savings, life insurance,
medical, health and accident, or disability plans in which the Executive was
participating immediately prior to the Change in Control (except for across the
board changes similarly affecting all senior executives of the Company and all
senior executives of any Person in control of the Company), the taking of any
other action by the Company which would directly or indirectly materially reduce
any of such benefits or deprive the Executive of any material fringe benefit or
perquisite enjoyed by the Executive at the time of the Change in Control, or
the failure by the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis of years of
service with the Company in accordance with the Company’s normal vacation
policy in effect at the time of the Change in Control; or


 


(VII)        any purported termination of the Executive’s
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 6.1 hereof; for purposes of this Agreement, no such
purported termination shall be effective.


 


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


 


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


 


(T)           “Gross-Up Payment” shall have
the meaning set forth in Section 5.2 hereof.


 


(U)          “Incumbent Board” has the
meaning set forth in Section 14(F)(II) hereof.


 


(V)           “Notice of Termination” shall
have the meaning set forth in Section 6.1 hereof.


 


(W)         “Outstanding Company Common
Stock” has the meaning set forth in Section 14(F)(I) hereof.


 


(X)          “Outstanding Company Voting
Stock” has the meaning set forth in Section 14(F)(I) hereof.


 


(Y)           “Payment” shall mean any payment
or distribution in the nature of compensation (within the meaning of Section
280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or
payable pursuant to this Agreement or otherwise.


 


15





















 


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


 


(AA)       “Severance Payments” shall have
the meaning set forth in Section 5.1 hereof.


 


(BB)        “Term” shall mean the period of
time described in Section 2 hereof.


 


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


 


15.           Section 409A of the Code.  To the extent
that any payment or benefit under this Agreement would be deemed to be deferred
compensation subject to the requirements of Section 409A of the Code that does
not comply with such requirements, the Company and the Executive shall amend
this Agreement (in a manner that as closely as practicable achieves the
original intent of this Agreement) so that such payment or benefit will be made
in accordance with such requirements. 
Without limiting the generality of the foregoing, in the event that it
is determined that any payment pursuant to Sections 4 or 5 that is to otherwise
be made upon or shortly following termination of employment cannot be made prior
to the six-month anniversary of such termination because the Executive is a “key
employee” (as defined in Section 1.409A-1(i)(1) of the Code), such payment
shall be paid on the first business day following such six-month
anniversary.  To the extent that the
benefits to be provided to the Executive under Section 8(e)(iv) are so delayed,
the Company shall use its reasonable best efforts to provide that such benefits shall be reinstated as if in effect as
of the date of Executive’s termination (e.g., for purposes of any pre-existing
condition) immediately following the six month anniversary of Executive’s
termination of employment.  The parties
agree that the Executive shall be entitled to COBRA Coverage during the six month period following the date of Executive’s
termination, and the Company agrees to reimburse the Executive for any
Company portions of such COBRA Coverage which
the Company is obligated to pay pursuant to this Agreement in the
seventh month following the Date of Termination.


 


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


 


 


	
   

  	
  STEWART & STEVENSON SERVICES,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Carl B. King

  	
   

  
	
   

  	
   

  	
  Carl
  B. King

  	
   

  
	
   

  	
   

  	
  Senior
  Vice President, Secretary,

  	
   

  
	
   

  	
   

  	
  and
  General Counsel

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Max L. Lukens

  	
   

  



 


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