Exhibit
10.3


 


STEWART & STEVENSON SERVICES,
INC.

NONQUALIFIED STOCK OPTION AGREEMENT


 


THIS
AGREEMENT, made and entered into as of March 31,
2004 (the “Grant
Date”), is between Stewart & Stevenson Services, Inc., a
Texas corporation (hereinafter called the “Company”) and Max L. Lukens (hereinafter
called the “Employee”).


 


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


 


NOW
THEREFORE, in consideration of the mutual promises
hereafter set forth and for other good and valuable consideration, the parties
hereby agree as follows:


 


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


 


2.                                      Expiration
of Option.  The Option shall
terminate and become null and void upon the earliest to occur of (1) the tenth
anniversary of the Grant Date, (2) the 30th day after the severance
of the employment relationship between the Employee and the Company and all of
its affiliates for any reason other than death, Disability, Retirement, or for
Cause, (3) the first anniversary of the severance of the employment
relationship between the Employee and the Company and all of its affiliates due
to death, Disability or Retirement, or (4) the date of the severance of the
employment relationship between the Employee and the Company and all of its
affiliates for Cause.   In the event of
the  severance of the employment  relationship between the Employee and the
Company and all of its affiliates for any reason other than death, Disability,
Retirement or Cause, the Option shall not continue to vest after such severance
of employment.


 


3.                                      Vesting
of Option.


 


The Option is exercisable in accordance with
the following schedule:


 


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


 


(ii)                                  on
the second anniversary of the Grant Date the Option shall be exercisable in
full.


 


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


 

















 


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


 


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


 


4.                                      Certain
Terminations Agreed to Constitute Retirement.  Any termination of the Employee’s employment by the Company other
than for “cause” or by the Employee for “good reason” (as such terms are
defined in the Employment Agreement between the Company and the Employee dated
effective as of February 1, 2004) prior to the expiration of the Option
shall be treated as a Retirement for all purposes of the Plan and this
Agreement.


 


5.                                      Manner
of Exercise.  The Employee shall
exercise the Option by written notice to the Company specifying the number of
shares as to which the Option is being exercised.


 


6.                                      Payment
of Purchase Price Upon Exercise.  At
the time of any exercise, the purchase price of the shares as to which the
Option is exercised shall be paid to the Company in cash or with Stock already
owned by the Employee for at least six months (‘Mature Shares”) having a
total fair market value, as determined by the Committee appointed pursuant to
paragraph 3 of the Plan, equal to the purchase price, or a combination of cash
and Mature Shares having a total fair market value, as so determined, equal to
the purchase price.


 


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


 


8.                                      Adjustments.  In the event of any change in the Stock of
the Company by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares, or any
rights offering to purchase Stock at a price substantially below fair market
value, or of any similar change affecting the Stock, the number and kind of
shares subject to the Option and their purchase price per share shall be appropriately
adjusted consistent with such change in such manner as the Committee may deem
equitable to prevent substantial dilution or enlargement of the rights granted
to the Employee hereunder.  Any
adjustment so made shall be final and binding upon the Employee.


 


9.                                      No
Rights as Stockholder.  The Employee
shall have no rights as a stockholder with respect to any shares of Stock
subject to the Option prior to the date of exercise and payment for such
shares.


 


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10.                               No
Right to Continued Employment.  The
Option shall not confer upon the Employee any right with respect to continuance
of employment by the Company, nor shall it interfere in any way with the right
of his employer to terminate the Employee’s employment at any time.


 


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


 


12.                               Investment
Representation.  The Committee may
require the Employee to furnish to the Company, prior to the issuance of any
shares upon the exercise of all or any part of the Option, an agreement (in
such form as the Committee may specify) in which the Employee represents that
the shares acquired by him upon exercise are being acquired for investment and
not for resale or with a view to distribution thereof.


 


13.                               Withholding
Taxes.  The Company may directly or
indirectly withhold all federal, state, city or other taxes as a result of the
Employee’s exercise of the Option.


 


In order to provide for the necessary
withholding under this Agreement, the Company will deduct the additional amount
of withholding required from the Employee’s salary unless the Employee makes
other provision in accordance with this Agreement.  The Employee has an option to provide the Company with the necessary
funds for this purpose or advising the Company that the Employee will accept a
reduction in the amount of Stock due equal to the amount of withholding
required.


 


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


 


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


 


14.                               Binding
Terms.  The Employee hereby
acknowledges receipt of a copy of the Plan and agrees to be bound by all the
terms and provisions thereof, including the terms and provisions adopted after
the granting of the Option but prior to the complete exercise hereof.  This Agreement shall be binding upon, and
shall inure to the benefit of, the Employee and the Company and their
respective permitted successors, assigns, heirs, beneficiaries, and
representatives.  All capitalized terms
in this Agreement that are not specifically defined herein shall have the
meanings set forth in the Plan.


 


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15.                               Notices.  All notices, requests, demands, and other
communications required or permitted hereunder shall be given in writing.


 


16.                               Headings
of No Effect.  The
section headings contained in this Agreement are included solely for
convenience of reference and shall not in any way affect the meaning or interpretation
of any of the provisions of the Agreement.


 


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


 


18.                               Governing
Law.  This Agreement has been
executed and delivered in the State of Texas and its validity, interpretation,
performance, and enforcement shall be governed by the laws of that state.  If any provisions of this instrument shall
be held by a court of competent jurisdiction to be invalid or unenforceable,
the remaining provisions hereof shall continue to be fully effective.  In the event the Company determines that an
adverse claim exists to payments to be made pursuant to this Agreement, the
Company shall have the right, but not the obligation, to interplead the parties
with claims to such payments and recover reasonable attorney fees and court
costs from interplead funds.


 


IN
WITNESS WHEREOF, this Agreement has been duly executed
and delivered to be effective as of the Grant Date.


 


 


	
   

  	
  STEWART & STEVENSON SERVICES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   
  /s/ Carl B. King

  	
   

  
	
   

  	
   

  
	
  ACCEPTED:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
    /s/ Max L. Lukens

  	
   

  	
   

  	
   

  
	
  Max L. Lukens

  	
   

  	
   

  	
   

  
						



 


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