Exhibit 10.1


 


EMPLOYMENT AGREEMENT


 


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


 


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


 


WHEREAS, the Compensation
Committee of the Board (the “Compensation Committee”) has determined that the
performance goals established with respect to the bonus described in Section 4(b) of
the 2004 Agreement (the “Initial Bonus”) have been achieved; and


 


WHEREAS, the Board of
Directors of the Company (the “Board”) desires to continue to retain the
Executive as the President and Chief Executive Officer of the Company and
thereafter as an advisor, and to encourage the attention and dedication to the
Company of the Executive as a member of the Company’s management, in the best
interests of the Company and its shareholders;


 


WHEREAS, in consideration
of the Executive’s agreeing to enter into this Agreement and remain in the
position of President and Chief Executive Officer of the Company through February 1,
2007, the Board has determined to accelerate the payment of the Initial Bonus;


 


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


 


WHEREAS, the Executive is
willing to continue to serve the Company, on the terms and conditions herein
provided; and


 


WHEREAS, the Company and
the Executive have simultaneously herewith executed a Severance Agreement (the “Severance
Agreement”);


 


NOW, THEREFORE, in order
to effectuate the forgoing, and in consideration of the premises and the
respective covenants and agreements of the parties herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:


 


1.             Employment; Term.  The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, on the terms 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 (as defined in Section 7(b) hereof).  The term of this Agreement (the “Term”) shall
begin on the Effective Date and shall end on February 1, 2010.  The period beginning on the Effective Date
and ending on February 1, 2007 is herein referred to as the “Base Term”,
and the period beginning on February 1, 2007 and ending on February 1,
2010 is herein referred to as the “Ancillary Term”.


 


2.             Position and
Duties.  As of the Effective Date and
for the Base Term, the Executive shall be employed by the Company as President
and Chief Executive Officer of the Company, in which capacity the Executive
shall perform the usual and customary duties of such


 





















 


office, which shall be those normally inherent in such
capacity in U.S. publicly held corporations of similar size and character.


 


During the Ancillary Term
the Executive shall serve the Company as an advisor to the senior executives of
the Company with respect to strategy, management development and other matters
consistent with the Executive’s experience and expertise and consistent with
the Executive’s having completed the Base Term as Chief Executive Officer of
the Company.


 


The Executive agrees and
acknowledges that, in connection with his employment relationship with the
Company, the Executive owes fiduciary duties to the Company and will act
accordingly.


 


During the Base Term, the
Executive agrees to devote substantially his full time, attention and energies
to the Company’s business and agrees to faithfully and diligently endeavor to
the best of his ability to further the best interests of the Company.  The Executive shall not engage in any other
business activity, whether or not such business activity is pursued for gain,
profit or other pecuniary advantage. 
Subject to the covenants of Section 9 herein, this shall not be
construed as preventing the Executive from investing his own assets in such
form or manner as will not require his services in the daily operations of the
affairs of the companies in which such investments are made.  Further, subject to Section 9 herein,
the Executive may serve as a director of other companies so long as such
service is not detrimental to the Company and does not interfere with his
service to the Company and so long as such service does not present the
Executive with a conflict of interest.


 


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


 


In keeping with the
Executive’s fiduciary duties to the Company, the Executive agrees that he shall
not knowingly, directly or indirectly, become involved in any Conflict of
Interest, or upon discovery thereof, allow such a conflict to continue.  Moreover, the Executive agrees that he shall
promptly disclose to the Board any facts known to him which might involve any
reasonable 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 any material 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 a manner which will be materially detrimental to
the Company’s interest; (c) disclosure or other misuse of material
Confidential Information (as defined in Section 9); (d) acquiring or
trading in, directly or indirectly, other properties or interests material to
the design, manufacture or marketing of products designed, manufactured or
marketed by the Company; (e) the appropriation to the Executive or the
diversion to others, directly or indirectly, of any material opportunity in
which it is known or could reasonably be anticipated that the Company would be
interested; or (f) the ownership, directly or indirectly, of a material
interest in an enterprise in competition with the Company or its dealers and
distributors or acting as a director, officer,


 


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partner, consultant, employee or agent of any
enterprise which is in competition with the Company or its dealers or
distributors.


 


3.             Place of Performance.  In connection with the Executive’s employment
by the Company, the Executive’s principal business address shall be at the
Company’s current principal executive offices in Houston, Texas (the “Principal
Place of Employment”) or in such other place as the Executive and the Company
may agree.


 


4.             Compensation and
Related Matters.


 


(a)           Base Salary.  During the Base Term, the Company shall pay
the Executive an annual base salary (“Base Salary”), payable in approximately
equal installments in accordance with the Company’s customary payroll
practices.  The Base Salary shall be
$750,000.  The Base Salary may not be
decreased during the Base Term.  During
the Base Term, the Executive shall not be eligible for any equity compensation
provided for or afforded to members of the Board of Directors as such.


 


(b)           Bonuses.


 


(i)            Initial
Bonus.  As soon as practicable after
the date hereof, but in no event later than December 31, 2005, the Company
shall pay to the Executive a lump sum amount in cash equal to $1,500,000 in
consideration of the achievement of the performance goals established with
respect to the contingent bonus award contemplated by Section 4(b) of
the 2004 Agreement.


 


(ii)           Discretionary
Bonuses.  At the end of the Base
Term, the Executive shall be eligible for a discretionary bonus (the “Discretionary
Bonus”) taking into account the following criteria: (A) return during the Base
Term on net capital employed in the Company’s businesses on a consolidated
basis; (B) the Company’s earnings per share during the Base Term; (C) the
Company’s revenues during the Base Term; (D) the development of the
Company’s management team so as to facilitate a succession plan to come into
effect after the Base Term; (E) the successful winding down of the DES
segment of the Company’s business and (F) meeting performance objectives
for Automotive Technik (Holdings) Limited.


 


The Discretionary Bonus
shall be paid as promptly as possible after the end of the Base Term, but in any
event prior to April 1, 2007.   The
Executive shall be eligible for a Discretionary Bonus of up to 100 (for target
level performance) percent of his annual Base Salary during the Term (up to $750,000)
but the actual amount thereof shall, in any event, be dependent upon the
assessment of the members of the Compensation Committee and other members of
the Board who are independent directors, in good faith, of his performance and
contribution to the Company during the Base Term taking the above factors into
account; provided, however, in the event there is a Change in Control as
defined in the Severance Agreement, the Discretionary Bonus shall be $750,000, subject to the termination provisions of the
Severance Agreement during the Term of the Severance Agreement.


 


(c)           Ancillary Term
Compensation.  During the Ancillary
Term, the Executive, shall not be eligible for any equity compensation provided
for or afforded to members of the Board of Directors as such.  During the Ancillary Term, the Company shall
pay the Executive an


 


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annual salary of $35,000, payable in approximately
equal installments in accordance with the Company’s customary payroll
practices.  In the event the parties by
mutual agreement increase the time the Executive shall provide services from that
provided in Section 2, the Company shall pay the Executive an additional
$6,250 per day for such services. The compensation to be paid to the Executive
for his services during the Ancillary Term is herein referred to as the “Ancillary
Term Compensation”.


 


(d)           Stock Option.  If the Exective remains employed with the
Company on February 1, 2006 (the “Grant Date”), the Executive will be
granted an option to purchase 5,000 shares of the Company’s common stock under
the Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock
Option Plan, as amended and restated effective as of June 10, 1997 (the “1988
Option Plan”), which shall be subject to the terms and conditions thereof and
of the stock option agreement with respect thereto as contemplated by the 1988
Option Plan.  The option agreement for
such option shall contain the same terms as are specified in the Executive’s
option agreement dated March 31, 2004; provided however that the per share
exercise price applicable to such option shall be the fair market value of a
share of the Company’s common stock on the Grant Date (determined in accordance
with the terms of the 1988 Option Plan) and such option shall be fully
exercisable on the first anniversary of the date of grant of such option.


 


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


 


(f)            Other Benefits.  During the Employment Period, the Executive
shall be entitled to participate in all of the employee benefit plans and
arrangements, other than equity compensation and bonus plans, made available by
the Company to its other senior executive officers, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements, and shall be entitled to all perquisites and special benefits
suitable to the character of the Chief Executive Officer while acting as Chief
Executive Officer.  Notwithstanding the
foregoing, the Company shall have the right to change, amend or discontinue any
benefit plan, program, or perquisite, so long as such changes are similarly
applicable to senior executive officers of the Company (or any successor to its
business and/or assets) generally.


 


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


 


(h)           Services Furnished.  During the Employment Period, the Executive
shall at all times be provided with office space, clerical assistance and such
other facilities and services as are suitable to his then position.


 


5.             Offices.  Subject to Sections 2, 3 and 4 hereof, during
the Base Term the Executive agrees to serve without additional compensation, if
elected or appointed thereto, as a director of any of the Company’s
subsidiaries and as a member of any committees of the board of directors of any
such corporations, and in one or more executive positions of any of the


 


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Company’s subsidiaries, provided that the Executive is
indemnified for serving in any and all such capacities on a basis no less
favorable than is currently, or may in the future be, provided to any other
director or officer of the Company, any of its subsidiaries or in connection
with any such executive position, as the case may be.


 


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


 


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


 


(b)           Disability.  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 his duties hereunder for the entire period of
ninety (90) days in the aggregate during any period of twelve (12) consecutive
months or it is reasonably expected that such disability will exist for more
than such period of time, and within thirty (30) days after written Notice of
Termination (as defined in Section 7) is given (which notice may be given
during such ninety (90) day period) shall not have returned to the performance
of his duties hereunder on a full-time basis, the Company may terminate the
Executive’s employment hereunder for “Disability.”


 


During any period that
the Executive fails to perform his duties hereunder as a result of incapacity
due to physical or mental illness (“Disability Period”), the Executive shall
continue to receive his Base Salary or his Ancillary Term Compensation, as the
case may be, at the rate in effect at the beginning of such period as well as
all other payments and benefits set forth in Section 4 hereof, reduced by
any payments made to the Executive during the Disability Period under the
disability benefit plans of the Company then in effect or under the Social
Security disability insurance program.


 


(c)           Cause.  The Company may terminate the Executive’s
employment hereunder for Cause.  For
purposes of this Agreement, the Company shall have “Cause” to terminate the
Executive’s employment hereunder upon the occurrence of any of the following
events:


 


(i)            the
commission by the Executive of an act of fraud, embezzlement, theft or other
criminal act constituting a felony;


 


(ii)           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 issuance of a Notice of Termination for Good
Reason by the Executive) 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


 


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(iii)          the
willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or its subsidiaries, monetarily or
otherwise.


 


provided,
that, the Executive shall have thirty (30) business days from the date on which
the Executive receives the Company’s Notice of Termination for Cause under
clause (ii) or (iii) above to remedy any such occurrence otherwise
constituting Cause under such clause (ii) or (iii).  For purposes of clauses (ii) and (iii) of
this definition, no act, or failure to act, on the Executive’s part shall be
deemed to be “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.


 


Cause shall not exist
unless and until the Company has delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of a majority of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel, to be heard before the Board), finding in
the good faith opinion of the Board on clear and convincing evidence there is
Cause as set forth in this Section 6(c), specifying the material
particulars thereof and, if applicable, determining that such Cause has not
been remedied within the applicable 30-day time frame specified in Section 6(c).


 


(d)           Good Reason.  The Executive may terminate his employment
hereunder for “Good Reason.”  Good Reason
for the Executive’s termination of employment shall mean the occurrence,
without the Executive’s prior written consent, of any one or more of the
following;


 


(i)            the
assignment to the Executive of any duties inconsistent with the Executive’s
position (including status, office, title and reporting requirements),
authorities, duties or other responsibilities as contemplated by Section 2
of this Agreement (it being understood that the Executive no longer serving as
Chief Executive Officer of a publicly held United States corporation shall
constitute Good Reason);


 


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


 


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


 


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


 


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


 


(e)           Without reliance upon Section 6(b),
6(c) or 6(d), either party hereto may terminate this Agreement during the
Base Term at any time by giving the other no less than thirty (30) days’ and no
more than sixty (60) days’ prior written notice, in accordance with Section 7
hereof, of such party’s intent to so terminate this Agreement.


 


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7.             Termination
Procedure.


 


(a)           Notice of
Termination.  Any termination of the
Executive’s employment by the Company or by the Executive (other than
termination pursuant to Section 6(a) hereof) shall be communicated by
written Notice of Termination to the other party hereto in accordance with Section 12
hereof.  For purposes of this Agreement,
a “Notice of Termination” shall mean a notice that shall indicate the specific
termination provision in this Agreement relied upon and if Section 6(b), 6(c) or
6(d) is relied upon, 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.


 


(b)           Date of Termination.  “Date of Termination” shall mean (i) if
the Executive’s employment is terminated pursuant to Section 6(a) above,
the date of the Executive’s death, (ii) if the Executive’s employment is
terminated pursuant to Section 6(b) above, thirty (30) days after the
date Notice of Termination is given (provided that the Executive shall not have
returned to the performance of his duties on a full-time basis during such
thirty (30) day period), (iii) if the Executive’s employment is terminated
pursuant to Section 6(c)(i) above, the date specified in the Notice
of Termination, (iv) if the Executive’s employment is terminated pursuant
to Section 6(c)(ii) or (iii) above, thirty (30) days after the
date on which a Notice of Termination is given, (v) if the Executive’s
employment is terminated for any other reason, the date specified in the Notice
of Termination, which date shall be not earlier than thirty (30) days following
the date on which Notice of Termination is given and not later than sixty (60)
days following the date on which Notice of Termination is given; provided,
however, that, if within ten (10) days after any Notice of
Termination under Section 6(b),(c) or (d) is given the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning such termination, the Date of Termination shall be the date
on which the dispute is finally determined, either by mutual written agreement
of the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected).


 


(c)           Compensation During
Dispute.  If a purported termination
occurs during the Term, and such termination is disputed in accordance with subsection (b) of
this Section 7, 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, Base Salary, if applicable) 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, until the Date of Termination, determined in accordance with
subsection (b) of this Section 7.  Amounts paid under this Section 7(c) are
in addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.


 


8.             Compensation upon
Termination or During Disability.


 


(a)           Accrued Obligation
Defined.  For purposes of this
Agreement, payment of the “Accrued Obligation” shall mean payment by the
Company to the Executive (or his designated beneficiary or legal
representative, as applicable), when due, of all vested benefits to which the
Executive is entitled under the terms of the employee benefit plans in which
the Executive is a participant as of the Date of Termination and a lump sum
amount in cash equal to the sum of (i) the Executive’s Base Salary or
Ancillary Term Compensation, as the case may be,


 


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through the Date of Termination, (ii) any accrued
vacation pay and (iii) any other amounts due the Executive as of the Date
of Termination, in each case to the extent not theretofore paid.


 


(b)           Disability; Death.  Upon termination of the Executive’s
employment pursuant to Sections 6(a) or (b) hereof, the Company shall
within thirty (30) days pay to the Executive (or his designated beneficiary or
legal representative, if applicable) (i) the Accrued Obligation, and (ii) a
lump sum amount, in cash, equal to a pro rata portion to the Date of
Termination of the aggregate value of the contingent bonus award contemplated
by Section 4(b)(ii) of this Agreement, calculated as to such award by
multiplying the award that the Executive would have earned as of the last day
of the Base Term, assuming the achievement, at the expected value target level,
of the performance goals established with respect to such awards, by the
fraction obtained by dividing the number of full days during the Base Term through
the Date of Termination by the total number of days contained in the Base Term.


 


(c)           By the Company for
Cause.  If during the Term the
Executive’s employment is terminated by the Company pursuant to Section 6(c) hereof,
the Company shall pay to the Executive the Accrued Obligation within thirty
(30) days following the Date of Termination. 
Following such payment, the Company shall have no further obligations to
the Executive other than as may be required by law or the terms of an employee
benefit plan or stock option plan of the Company.


 


(d)           By the Executive
Without Good Reason.  If during the
Term the Executive terminates his employment for any reason other than Good
Reason, the Company shall pay to the Executive the Accrued Obligation within
thirty (30) days following the Date of Termination.  Following such payment, the Company shall have
no further obligations to the Executive other than as may be required by law or
the terms of an employee benefit plan or stock option plan of the Company.


 


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


 


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


 


(ii)           the
Company shall pay to the Executive a lump sum amount equal to his Base Salary
and Ancillary Term Compensation (at the rate in effect as of the Date of
Termination) for the remainder of the Base Term and the Ancillary Term;


 


(iii)          all
equity-based awards then held by Executive shall become fully vested and
exercisable as of the Notice of Termination;


 


(iv)          the
Company shall continue to provide to the Executive the benefits described in Section 4(f),
to the extent legally permitted, until the end of the Term (and the Executive
shall, upon termination of health plan coverage under this Section and to
the extent permitted by applicable law, have the right to elect COBRA
continuation coverage under Section 4980B of the Code (“COBRA Coverage”));
provided that the benefits described in this Section 8(e)(iv) shall
be reduced to the extent benefits of the same type are received by, or made
available at no greater cost to, the Executive under any group plan, whether by
reason of new employment, participation in


 


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a spouse’s plan or
otherwise, during such period, and provided, further, that the Executive shall
have the obligation to notify the Company that he is entitled to receive such
benefits;


 


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


 


(vi)          the
Company shall pay to the Executive a lump sum amount, in cash, equal to the
aggregate value of the Discretionary Bonus award contemplated by Section 4(b)(ii) that
the Executive would have earned as of the last day of the Base Term, assuming
the achievement, at the expected value target level, of the performance goals
established with respect to such award (it being understood that such amount is
$750,000); and


 


(vii)         if
the Executive’s employment is terminated before he has been granted the stock
option contemplated by Section 4(d), then in lieu of granting such stock
option 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
February 1, 2006, 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 the Company’s common stock on the date of Executive’s termination,
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.


 


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 this Section 8.  Further, except with respect to the benefits
provided pursuant to clause (iv) above, the amount of any payment or
benefit provided for in this Agreement 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. 
Satisfaction of the obligations to the Executive under Sections 8(b) and
8(e) of this Agreement is contingent upon the Executive’s (or, if
applicable, his designated beneficiary or legal representative’s) execution of
a release substantially in the form of Exhibit A hereto.


 


9.             Confidential
Information; Non-Competition; Non-Solicitation.


 


(a)           Confidential
Information.  The Executive shall
hold in a fiduciary capacity for the benefit of the Company all trade
secrets,  and information, knowledge or
data relating to the Company and its businesses treated as confidential by the
Company, which shall have been obtained by the Executive during the Executive’s
employment by the Company and which shall not have been or hereafter become
public knowledge (other than by acts by the Executive or


 


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representatives of the Executive in violation of this
Agreement) (hereinafter being collectively referred to as “Confidential
Information”).  The Executive shall not,
without the prior written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any such trade
secrets, information, knowledge or data to anyone other than the Company and
those designated by the Company.  Any
termination of the Executive’s employment or of this Agreement shall have no
effect on the continuing operation of this Section 9(a).  The Executive agrees to return all
Confidential Information, including all photocopies, extracts and summaries
thereof, and any such information stored electronically on tapes, computer
disks or in any other manner to the Company at any time upon request by the
Company and upon the termination of his employment hereunder for any reason.


 


(b)           Non-Competition.  During the Employment Period and for a period
of two (2) years following the Date of Termination (such period following
the Employment Period, the “Restricted Period”), the Executive shall not engage
in Competition, as defined below, with the Company; provided, that it
shall not be a violation of this Section 9(b) for the Executive to
become the registered or beneficial owner of up to one percent (1%) of any
class of the capital stock of a corporation registered under the Securities
Exchange Act of 1934, as amended, provided that the Executive does not actively
participate in the business of such corporation until such time as this
covenant expires.


 


For purposes of this
Agreement, Competition by the Executive shall mean the Executive’s engaging in,
or otherwise directly or indirectly being employed by or acting as a consultant
or lender to, or being a director, officer, employee, principal, agent,
stockholder, member, owner or partner of, or permitting his name to be used in
connection with the activities of any other business or organization which
competes, directly or indirectly, with the business of the Company as the same
shall be constituted at any time during the Employment Period.


 


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


 


(i)            solicit
from any customer doing business with the Company as of the Date of
Termination, business of the same or of a similar nature to the business of the
Company with such customer;


 


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


 


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


 


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


 


10





















 


The Executive and the
Company agree and acknowledge that the Company has a substantial and legitimate
interest in protecting the Company’s Confidential Information and goodwill.  The Executive and the Company further agree
and acknowledge that the provisions of this Section 9 are reasonably
necessary to protect the Company’s legitimate business interests and are
designed to protect the Company’s Confidential Information and goodwill.


 


The Executive agrees that
the scope of the restrictions as to time, geographic area, and scope of
activity in this Section 9 are reasonably necessary for the protection of
the Company’s legitimate business interests and are not oppressive or injurious
to the public interest.  The Executive
agrees that in the event of a breach or threatened breach of any of the
provisions of this Section 9 the Company shall, notwithstanding Section 14
hereof, be entitled to injunctive relief against the Executive’s activities to
the extent allowed by law.  The Executive
further agrees that any breach or threatened breach of any of the provisions of
Section 9(a) would cause irreparable injury to the Company for which
it would have no adequate remedy at law.


 


(d)           Publicity.  The Executive agrees that the Company may
use, and hereby grants the Company the nonexclusive and worldwide right to use,
the Executive’s name, picture, likeness, photograph, signature or any other
attribute of the Executive’s persona (all of such attributes are hereafter
collectively 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 his
Persona will not result in any invasion or violation of any privacy or property
rights the Executive may have; and the Executive agrees that he will receive no
additional compensation for the use of his Persona.  The Executive further agrees that any
negatives, prints or other material for printing or reproduction purposes
prepared in connection with the use of his Persona by the Company shall be and
are the sole property of the Company.


 


10.           Indemnification;
Legal Fees.  The Company shall
indemnify the Executive to the fullest extent permitted by the laws of the
Company’s state of incorporation in effect at that time, or certificate of
incorporation and by-laws of the Company, whichever affords the greater
protection to the Executive, for any judgments, penalties, fines, settlements
and reasonable expenses (including, without limitation, reasonable attorneys’
fees and costs) incurred by the Executive in connection with any action, suit
or proceeding, threatened or pending, to which he may be made a party by reason
of his being a director, officer or advisor, as contemplated hereby, whether
incurred during or after the Term.  The
Executive will be entitled to any insurance policies the Company may elect to
maintain generally for the benefit of its officers, directors or advisors
against 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, officer or
advisor of the Company.


 


11.           Successors; Binding
Agreement.


 


(a)           Company’s Successors.  This Agreement shall be binding 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 as hereinbefore
defined and any successor to its business and/or assets or any entity which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law or by contract.


 


11





















 


(b)           Executive’s
Successors.  This Agreement and all
rights of the Executive hereunder 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 should die while any amounts
are payable to him hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Executive’s devisee, legatee or other designee or, if there is no such
designee, 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 in
writing and shall be deemed to have been duly given when delivered or (unless
otherwise specified) mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:


 


If the Executive: At the last address on the books and
records of the Company


 


If to the Company:

Stewart & Stevenson Services, Inc.

2707 North Loop West

Houston, TX 77008-1088

Attention:              Secretary


 


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


 


13.           Amendment or
Modification; Waiver.  No provisions
of this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing signed by the Executive and
such officer of the Company as may be specifically designated by the Board or
the Compensation Committee of the Board. 
No waiver by either party hereto at any time of any breach by the other
party hereto of, or 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.  No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in Agreement.


 


14.           Arbitration.  Any 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.   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


 


12





















 


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.  The Company shall pay
to the Executive all reasonable legal fees and expenses, when incurred by the
Executive, in contesting or disputing any termination of employment or seeking
to obtain or enforce any right, payment or benefit provided by this Agreement,
regardless of outcome, unless a final decision is rendered that such claim was
not brought by the Executive in good faith.


 


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


 


16.           Miscellaneous.  All references to sections of any statute
shall be deemed also to refer to any successor provisions to such
sections.  The obligations of the parties
under Sections 4, 8, 9, 10, 11, 12, 14, 15, 16, 17, 18, 19 and 20 hereof shall
survive the expiration of the Term to the extent they may be applicable by
their terms.  The compensation and
benefits payable to the Executive or his beneficiary under Section 8 of
this Agreement shall be in lieu of any other severance benefits to which the
Executive may otherwise be entitled upon his termination of employment under
any severance plan, program, policy, practice or arrangement of the Company
other than the Severance Agreement, and the Executive shall not be entitled to
receive any benefits under Section 8(e) hereof if he is eligible to
receive benefits under the Severance Agreement (it being understood that upon
the expiration of the Term of the Severance Agreement prior to the Executive’s
termination of employment with the Company for any reason, Executive may
thereafter claim benefits under this Agreement).


 


17.           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 7 and 8 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 regulations under Section 409A 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.


 


18.           Severability.  The invalidity or unenforceability of any
provision or provisions 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 throughout the Term.  Should any one or


 


13





















 


more of the provisions of this Agreement be held to be
excessive or unreasonable as to duration, geographical scope or activity, then
that provision shall be construed by limiting and reducing it so as to be
reasonable and enforceable to the extent compatible with the applicable law.


 


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


 


20.           Entire Agreement.  This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and, as of the Effective Date, supersedes all prior agreements (including,
without limitation, the 2004 Agreement), promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; provided, however,
that the Executive’s stock option agreements and Severance Agreement shall not
be superseded hereby but shall remain in full force and effect.


 


IN WITNESS WHEREOF, the
parties have executed this Agreement on the date first above written.


 


 


	
   

  	
  STEWART & STEVENSON SERVICES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Carl B. King

  	
   

  
	
   

  	
   

  	
  Carl B. King

  	
   

  
	
   

  	
   

  	
  Senior Vice
  President, Secretary,

  	
   

  
	
   

  	
   

  	
  and General
  Counsel

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Max L.
  Lukens

  	
   

  
	
   

  	
  Max L. Lukens

  	
   

  



 


14





















 


EXHIBIT A


 


RELEASE


 


The Executive hereby
irrevocably and unconditionally releases, acquits and forever discharges the
Company and its affiliated companies and their directors, officers, employees
and representatives, (collectively “Releasees”), from any and all claims,
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 of alleged
violations of any contracts, express or implied, any covenant of good faith and
fair dealing, express or implied, or any tort, or any legal restrictions 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 Federal Age Discrimination
in Employment Act, which the Executive claims to have against any of the
Releasees.  In addition, the Executive
waives all rights and benefits afforded by any state laws which provide in
substance that a general release does not extend to claims which a person does
not know or suspect to exist in his favor at the time of executing the release
which, if known by him, must have materially affected the Executive’s settlement
with the other person.  The only
exception to the foregoing are claims and rights that may arise after the date
of execution of this Release.


 


The Executive represents
and acknowledges that in executing this Release he does not rely and has not relied
upon any representation or statement, oral or written, not set forth herein or
in the Agreement made by any of the Releasees or by any of the Releasees’
agents, representatives or attorneys with regard to the subject matter, basis
or effect of this Release, the Agreement or otherwise.


 


The Executive represents
and agrees that he fully understands his right to discuss all aspects 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 carefully read and fully
understands all of the provisions of this Release and that he is voluntarily
entering into this Release.


 


AGREED AND ACCEPTED, on
this            day of                             ,
20   .