Exhibit 10.1


 


EMPLOYMENT
AGREEMENT


 


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


 


WHEREAS, the Board
of Directors of the Company (the “Board”) desires initially 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, the
Executive is willing to commit himself to serve the Company, on the terms and
conditions herein provided; and


 


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


 


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


 


NOW, THEREFORE, 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 the fourth anniversary thereof.  The period beginning on the Effective Date and ending on the
second anniversary thereof is herein referred to as the “Base Term”, and the
period beginning on the day following such second anniversary and ending on the
fourth anniversary of the Effective Date 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 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, 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


 


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accordance with the Company’s customary payroll practices.  The Base Salary shall be $750,000.  The Base Salary may not be decreased 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.  At the end of the Base Term, the Executive
shall be eligible for a discretionary bonus taking into account the following
criteria:


 


(i)                                     return
during the Base Period on net capital employed in the Company’s businesses on a
consolidated basis;


 


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


 


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


 


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


 


Any bonus earned
pursuant to this Agreement shall be paid as promptly as possible after the end
of the Base Period.   The Executive
shall be eligible for a bonus of up to 100 (for target level performance)
percent of his aggregate Base Salary during the Base Period (up to $1,500,000)
but the actual amount thereof shall, in any event, be dependent upon 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 Period taking the above factors
into account.


 


(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 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.  On January 3, 2005 the
Executive will be granted an option to purchase 100,000 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 1998 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 January 3, 2005
(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.


 


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(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 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 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 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


 


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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


 


(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 not in good 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).


 


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(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;


 


(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 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.


 


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


 


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(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, 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, 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) of the Employment Agreement, calculated as to
such award by multiplying the award that the Executive would have earned as of
the last day of the Base Period (as defined in the Employment Agreement),
assuming the achievement, at the expected value target level, of the
performance goals established with respect to such award, by the fraction
obtained by dividing the number of full days during the Base Period through the
Date of Termination by the total number of days contained in the Base Period.


 


(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 of the Company.


 


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(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 continue to pay to the Executive his Base Salary or Ancillary
Term Compensation (at the rate in effect as of the Date of Termination) for the
remainder of the Base Term or the Ancillary Term, as the case may be, payable
consistent with the Company’s normal payroll practices.


 


(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 contractually and legally permitted, provided
that such benefits 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 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;


 


(vi)                              the
Company shall pay to the Executive a lump sum amount, in cash, equal to the
aggregate value of the contingent bonus award contemplated by Section 4(b)
that the Executive would have earned as of the last day of the Base Period,
assuming the achievement, at the expected value target level, of the
performance goals established with respect to such award; 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
March 31, 2004, of an option to purchase 100,000 shares of the Company’s
common stock, assuming for this purpose the option was granted on
March 31, 2004, the per share exercise price under the option is $ 14.62,
the option has the same terms and conditions as applied to the option 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


 


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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 2003 fiscal
year as reflected in its fiscal year 2003 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 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  one  (1) year 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


 


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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.


 


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.


 


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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 or officer
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.


 


(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:


 


Max L. Lukens

3415 Albans

Houston, Texas   77005


 


If to the Company:


 


Stewart &
Stevenson Services, Inc.

2707 North Loop West

Houston, TX 77008-1088

Attention:      Secretary


 


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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 Commercial Arbitration Rules 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 Commercial 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.  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,  and 19 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


 


12

















 


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


 


17.                                 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 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.


 


18.                                 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.


 


19.                                 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, 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
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

  
	
   

  	
  3415 Albans

  Houston, Texas 77005

  



 


13

















 


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   .