<PAGE>   1
                                                                   EXHIBIT 10.31

                                 PROMISSORY NOTE


U.S. $486,220.00                 Houston, Texas                December 17, 1998

         John D. Schiller, Jr. ("Maker"), whose address is 4523 Elmstone Court,
Kingwood, Texas 77345, for value received, promises to pay to the order of
SEAGULL ENERGY CORPORATION, a Texas corporation ("Payee"), at its headquarters
at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002, the
principal sum of FOUR HUNDRED EIGHTY-SIX THOUSAND TWO HUNDRED TWENTY and 00/100s
U.S. DOLLARS (U.S. $486,220.00), together with interest thereon at the rate of
four and four-fifths percent (4.8%) per annum (but in no event to exceed the
maximum rate of interest allowed by law), payable as hereinafter provided.

         THIS NOTE is due and payable in full on December 17, 2002, including
all accrued interest thereon; provided, however, that to the extent that any of
the shares of Payee's common stock, par value $0.10 per share ("Common Stock")
acquired by Maker pursuant to the Expiring Option (as defined below) or any of
the securities, property or other rights received by Maker in respect of such
shares or as a dividend or distribution thereon are sold, transferred or
otherwise disposed of by Maker (which sales, transfers or dispositions shall be
subject to the provisions of the Security Agreement described below), then Maker
shall, within five business days after each such sale, transfer or disposition,
prepay the principal and accrued interest then owing under this Note to the
extent of the amount of cash proceeds (net of brokerage commissions and any tax
liability of Maker as a result of such sale) resulting therefrom.

         ALL SUMS paid hereon (whether at maturity or pursuant to any mandatory
or voluntary prepayment) shall apply first to the satisfaction of accrued
interest and the balance to the unpaid principal. All past due principal and
interest on this Note shall bear interest at the maximum rate permitted by law
from maturity until paid. All sums called for, payable or to be paid hereunder
shall be paid in lawful money of the United States of America which at the time
of payment is legal tender for the payment of public and private debts therein.

         MAKER AGREES to use the proceeds from the loan evidenced hereby solely
for the purposes of exercising his option to purchase Seventy-Seven Thousand
Twenty-Five (77,025) shares of Common Stock pursuant to the option that expires
December 18, 1998 (the "Expiring Option"), and to pay any applicable taxes
imposed on Maker by reason of the exercise of the Expiring Option. The Expiring
Option is a non-statutory stock option granted to Maker on December 17, 1998,
under the Seagull Energy Corporation 1998 Omnibus Stock Plan, covering 77,025
shares at an exercise price of $6.3125. The Seagull Energy Corporation 1998
Omnibus Stock Plan was approved by the shareholders of Payee on May 13, 1998.

         MAKER HEREBY waives presentment and demand for payment, notice of
intent to accelerate maturity, notice of acceleration of maturity, protest or
notice of protest and non-payment, bringing of suit

                              (Page 1 of 3 Pages)

<PAGE>   2
U.S. $486,220.00                 Houston, Texas                December 17, 1998


and diligence in taking any action to collect any sums owing hereunder and in
proceeding against any of the rights and properties securing payment hereof, and
agrees that its liability on this Note shall not be affected by any release of
or change in any security for the payment of this Note.

         IN THE EVENT of (i) a default in the payment of any installment of
either principal or interest as provided for herein or in the performance of any
agreement or covenant contained in any instrument securing payment hereof or
(ii) the voluntary termination of Maker's employment with Payee or the
involuntary termination of Maker's employment with Payee for cause, then,
without the giving of any notice of any kind, the holder of this Note shall have
the right and option, to declare the unpaid balance of principal and accrued
interest on this Note at once due and payable and to foreclose or require
foreclosure of any and all liens securing payment hereof, and to exercise any
and all other rights and remedies it may have. Failure to exercise this option
upon any default or event as described above shall not constitute a waiver of
the right to exercise it in the event of any such subsequent default or event.

         IN ADDITION to the mandatory prepayment obligations described above,
Maker reserves the option of prepaying the principal of this note, in whole or
in part, at any time after the date hereof without penalty. Accrued and unpaid
interest with respect to such principal amount prepaid is due and payable on the
date of such prepayment.

         IN THE EVENT of Maker's death or disability or an "involuntary
termination" subsequent to a "change in control," a portion of the original
principal amount of this Note may be forgiven and a schedule for repayment of
this Note may be established all in accordance with and pursuant to the terms of
the Equity Ownership Plan as adopted by the Compensation Committee of the Board
of Directors of Payee, as modified or amended by such Committee from time to
time (the "EOP"). For purposes of this paragraph, the terms "involuntary
termination" and "change in control" shall have the meanings given such terms in
that certain Severance Agreement between Maker and Payee in effect as of the
date of this Note. The terms and provisions of the EOP are hereby incorporated
into this Note by reference.

         IN ADDITION to any loan forgiveness made in connection with the events
described above, the original principal amount of this Note may be further
forgiven in accordance with and pursuant to the terms of the EOP based on
Maker's continued employment with Payee from the date of this Note and on
Payee's performance expressed by the relative ranking of Payee's "total
shareholder return" for any applicable period as ranked against the "total
shareholder return" of the other members of the "peer group" established for
such purpose as set forth in the EOP. For purposes of this paragraph, the terms
"total shareholder return" and "peer group" have the meanings ascribed to such
terms as set forth in the EOP.

         THIS NOTE is issued in connection with the terms of EOP, and is
entitled to the benefits and security afforded by a Security Agreement dated as
of December 17, 1998, between Maker and Payee (the "Security Agreement").


                              (Page 2 of 3 Pages)

<PAGE>   3
U.S. $486,220.00                 Houston, Texas                December 17, 1998

         THIS NOTE is and shall be construed and governed under the laws of the
State of Texas.

         IT IS EXPRESSLY stipulated and agreed to be the intent of Maker and
Payee to at all times comply with the usury and other laws applicable to this
Note and the Security Agreement and any subsequent revisions, repeals, or
judicial interpretations thereof, to the extent any of the same are applicable
hereto. If such laws are ever revised, repealed, or judicially interpreted so as
to render usurious any amount called for under this Note or under the Security
Agreement, or contracted for, charged, or received with respect to the
indebtedness evidenced by this Note, or if Payee's exercise of the option herein
contained to accelerate the maturity of this Note or if any prepayment by Maker
results in Maker having paid any interest in excess of that permitted by law,
then it is Maker's and Payee's express intent that all excess amounts
theretofore collected by Payee be credited on the principal balance of this Note
(or, if the Note has been paid in full, refunded to Maker), and the provisions
of this Note and the Security Agreement immediately be deemed reformed and the
amounts thereafter collectable hereunder and thereunder reduced, without the
necessity of the execution of any new document, so as to comply with the then
applicable law, but so as to permit the recovery of the fullest amount otherwise
called for hereunder and thereunder.

         AT MATURITY, HOWEVER SUCH MATURITY COMES ABOUT, SUBJECT TO THE TERMS
AND CONDITIONS OF THE EOP, MAKER MUST REPAY THE ENTIRE OUTSTANDING PRINCIPAL
AMOUNT AND ALL UNPAID INTEREST ACCRUED UNDER THIS NOTE. PAYEE IS UNDER NO
OBLIGATION TO REFINANCE OR RENEW THIS NOTE AT THAT TIME. MAKER, THEREFORE, WILL
BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT MAKER MAY OWN OR WILL HAVE
TO FIND ANOTHER LENDER WILLING TO LEND MAKER THE FUNDS TO MAKE THE PAYMENT ON
THIS NOTE.



                                       -----------------------------------------
                                                JOHN D. SCHILLER, JR.


                              (Page 3 of 3 Pages)

<PAGE>   4
                               SECURITY AGREEMENT

                  (Common Stock of Seagull Energy Corporation)



                                   Executed by

                              JOHN D. SCHILLER, JR.

                                   in favor of

                           SEAGULL ENERGY CORPORATION

                                   dated as of

                                December 17, 1998


<PAGE>   5
                               SECURITY AGREEMENT

                   Common Stock of Seagull Energy Corporation

     THIS SECURITY AGREEMENT (this "Agreement") is made as of December 17, 1998,
by JOHN D. SCHILLER, JR., a natural person, who resides at 4523 Elmstone Court,
Kingwood, Texas 77345 ("Pledgor") in favor of SEAGULL ENERGY CORPORATION, a
Texas corporation, with offices at 1700 First City Tower, 1001 Fannin Street,
Houston, Texas 77002 ("Secured Party").

     A. WHEREAS, Secured Party has granted Pledgor an option to purchase 77,025
shares of the common stock of Secured Party that expires as of December 18, 1998
(the "Expiring Option"), in connection with Secured Party's Equity Ownership
Program adopted by the Compensation Committee of the Board of Directors of
Secured Party (such program, as may from time to time be amended or
supplemented, being hereinafter called the "EOP").

     B. WHEREAS, Pledgor has elected to purchase shares of the common stock of
Secured Party pursuant to the Expiring Option described above.

     C. WHEREAS, Secured Party has provided a loan to Pledgor for the purchase
price of the common stock of Secured Party to be purchased by Pledgor pursuant
to the Expiring Option.

     D. WHEREAS, Secured Party has conditioned its obligations to provide such
loan to Pledgor upon the execution and delivery by Pledgor of this Agreement,
and Pledgor has agreed to enter into this Agreement.

     C. THEREFORE, in order to comply with the terms and conditions of the EOP,
to secure the Obligations as hereinafter defined, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Pledgor hereby agrees with Secured Party as follows:

     Section 1. Pledge. Pledgor hereby pledges, assigns and grants to Secured
Party a security interest in and right of set-off against the assets referred to
in Section 2 (the "Collateral") to secure the prompt payment and performance of
the "Obligations" (as herein defined) and the performance by Pledgor of this
Agreement.

     Section 2. Collateral. The Collateral consists of the following types or
items of property:

          (A) The following securities: Seventy-Seven Thousand Twenty-Five
     (77,025) shares of the Common Stock of Seagull Energy Corporation ("Seagull
     Common Stock") represented by Certificate No. _______________________ as
     delivered herewith and each such share having a par value of $0.10.

          (B) (i) the certificates or instruments, if any, representing such
     securities, (ii) all dividends (cash, stock or otherwise), cash,
     securities, instruments, rights to subscribe, purchase or sell and all
     other rights and property from time to time received, receivable or
     otherwise distributed in respect of or in exchange for any or all of such
     securities, (iii) all replacements, additions to and substitutions for any
     of the property referred to in this Section 2, including, without
     limitation, claims against third parties and including without limitation
     pursuant to any merger, conversion, share exchange, recapitalization or


<PAGE>   6
     other transaction, and (iv) the proceeds, interest, profits and other
     income of or on any of the property referred to in this Section 2.

     It is expressly contemplated that additional securities or other property
may from time to time be pledged, assigned or granted to Secured Party as
additional security for the Obligations, and the term "Collateral" as used
herein shall be deemed for all purposes hereof to include all such additional
securities and property, together with all other property of the types described
above related thereto.

     Section 3. Transfer of Collateral. All certificates or instruments
representing or evidencing the Pledged Securities shall be delivered to and held
pursuant hereto by Secured Party or a person or entity designated by Secured
Party and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank.

     Section 4. Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings, unless the context otherwise requires:

          "Agreement" means this Security Agreement, as the same may from time
     to time be amended or supplemented.

          "Code" means the Uniform Commercial Code as presently in effect in the
     State of Texas, Business and Commerce Code, Chapters 1 through 9. Unless
     otherwise indicated by the context herein, all uncapitalized terms (or
     terms that are otherwise uncapitalized in this Agreement but are
     capitalized at the beginning of a sentence) which are defined in the Code
     shall have their respective meanings as used in Chapters 8 and 9 of the
     Code.

          "Event of Default" means any event specified in Section 15.

          "Highest Lawful Rate" means the maximum rate of nonusurious interest
     allowed from time to time by applicable law.

          "Obligations" means the promissory note of Pledgor dated December 17,
     1998, payable to the order of Seagull Energy Corporation in the principal
     amount of Four Hundred Eighty-Six Thousand Two Hundred Twenty and 00/100
     Dollars ($486,220.00), and any and all renewals, extensions for any period,
     rearrangements or enlargements. The Obligations shall also include all
     interest and any other sums payable by Pledgor to Secured Party in
     connection with the execution, administration or enforcement of Secured
     Party's rights and remedies hereunder or any other agreement with Pledgor.

          "Pledged Securities" means all of the securities and other property
     (whether or not the same constitutes a "security" under the Code) referred
     to in Section 2 and all additional securities (as that term is defined in
     the Code), if any, constituting Collateral under this Agreement.

     Section 5. Representations. In order to induce Secured Party to accept this
Agreement, Pledgor represents and warrants to Secured Party (which
representations and warranties will survive the creation and payment of the
Obligations) that:


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<PAGE>   7

          (A) Ownership of Collateral; Encumbrances; Valid and Binding
     Agreement. Pledgor is the legal and beneficial owner of the Collateral free
     and clear of any adverse claim, lien, security interest, option or other
     charge or encumbrance except for the security interest created by this
     Agreement, and Pledgor has full right, power and authority to pledge,
     assign and grant a security interest in the Collateral to Secured Party.
     This Agreement and the Obligations constitute legal, valid and binding
     obligations of Pledgor enforceable against Pledgor in accordance with their
     respective terms. The execution, delivery and performance of this Agreement
     or the Obligations will not violate the terms of any contract, agreement,
     law, regulation, order, injunction, judgment, decree or writ to which
     Pledgor is subject and do not require the consent or approval of any other
     person or entity.

          (B) The pledge of Pledged Securities pursuant to this Agreement
     creates a valid and perfected first priority security interest in the
     Collateral, enforceable against Pledgor and all third parties and securing
     payment of the Obligations.

     Section 6. Covenants and Agreement. Pledgor will at all times comply with
the covenants and agreements contained in this Section 6, from the date hereof
and for so long as any part of the Obligations are outstanding.

          (A) Sale, Disposition or Encumbrance of Collateral. Pledgor will not
     in any way encumber any of the Collateral (or permit or suffer any of the
     Collateral to be encumbered) or sell, pledge, assign, lend or otherwise
     dispose of or transfer any of the Collateral to or in favor of any person
     or entity other than Secured Party. Notwithstanding the foregoing, Pledgor
     may sell shares of Seagull Energy Corporation Common Stock that constitute
     Pledged Securities in open market brokerage transactions for cash but only
     if and to the extent that the cash proceeds (net of brokerage commissions
     and any tax liability of Pledgor as a result of such sale) are used to
     satisfy the mandatory prepayment obligations in accordance with the terms
     of the promissory note comprising the Obligations and any applicable terms
     of the EOP.

          (B) Dividends, Distributions, Merger and Recapitalizations. Any and
     all dividends and interest paid in respect of the Collateral (as well as
     any other cash, securities, properties, rights or other assets constituting
     Collateral) shall be, and shall be forthwith delivered to Secured Party to
     hold as, Collateral and shall, if received by Pledgor, be received in trust
     for the benefit of Secured Party, be segregated from the other property or
     funds of Pledgor, and be forthwith delivered to Secured Party as Collateral
     in the same form as so received (with any necessary endorsement).

          (C) Payment of Taxes and Liens. Pledgor will pay prior to delinquency
     all taxes, charges, liens and assessments against the Collateral.

          (D) Further Assurances; Stock Powers. Upon the request of Secured
     Party, Pledgor shall (at Pledgor's expense) execute and deliver all such
     documents, including, without limitation, all documents necessary to comply
     with federal regulations relating to margin lending against securities,
     assignments, certificates, instruments, securities, financing statements,
     notifications to financial intermediaries or other third parties or other
     documents and give further assurances and do all other acts and things as
     Secured Party may reasonably request to perfect Secured Party's interest in
     the Collateral or to protect, enforce or otherwise effect Secured Party's
     rights and remedies hereunder. Pledgor shall also furnish


                                      -3-
<PAGE>   8

     to Secured Party such stock powers and other instruments as may be required
     by Secured Party to assure the transferability of the Collateral when and
     as often as may be requested by Secured Party.

          (E) Voting and Other Consensual Rights. Except to the extent otherwise
     provided in Section 18(D), Pledgor shall be entitled to exercise any and
     all voting and other consensual rights pertaining to the Collateral or any
     part thereof for any purpose not inconsistent with the terms of this
     Agreement; provided however, that Pledgor shall not exercise or refrain
     from exercising any such right if such action would have a material adverse
     effect on the value of the Collateral or any part thereof, and, provided,
     further, that upon request of Secured Party at any time or from time to
     time, Pledgor shall give Secured Party prompt written notice of the manner
     in which Pledgor has exercised, or the reasons for refraining from
     exercising, any such right.

          (F) Performance of Obligations. Pledgor will promptly and properly
     perform all of his obligations under this Agreement and any other agreement
     or contract of any kind now or hereafter existing as security for or in
     connection with the payment of the Obligations.

     Section 7. Non-judicial Enforcement. Secured Party may enforce its rights
with respect to the Collateral without prior judicial process or judicial
hearing, and to the extent permitted by law Pledgor expressly waives any and all
legal rights which might otherwise require Secured Party to enforce its rights
with respect to the Collateral by judicial process.

     Section 8. Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured
Party as Pledgor's attorney-in-fact, with full authority in the place and stead
of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured
Party's discretion, but at Pledgor's cost and expense and without notice to
Pledgor, to take any action and to execute any assignment, certificate,
financing statement, stock power, notification, document or instrument which
Secured Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation, to receive, endorse and collect all
instruments made payable to Pledgor representing any dividend, interest payment
or other distribution in respect of the Collateral or any part thereof and to
give full discharge for the same.

     Section 9. Discharge Encumbrances. Secured Party may, at its option,
discharge any taxes, liens, security interests or other encumbrances at any time
levied or placed on the Collateral. Pledgor agrees to reimburse Secured Party
upon demand for any payment so made, plus interest thereon from the date of
Secured Party's demand at the Highest Lawful Rate.

     Section 10. Transfer of Collateral. Secured Party may transfer any or all
of the Obligations, and upon any such transfer Secured Party may transfer its
interest in any or all of the Collateral and shall be fully discharged
thereafter from all liability therefor. Any transferee of the Collateral shall
be vested with all rights, powers and remedies of Secured Party hereunder.

     Section 11. Cumulative and Other Rights. The rights, powers and remedies of
Secured Party hereunder are in addition to all rights, powers and remedies given
by law or in equity. The exercise by Secured Party of any one or more of the
rights, powers and remedies herein shall not be construed as a waiver of any
other rights, powers and remedies, including, without limitation, any other
rights of set-off.


                                      -4-
<PAGE>   9

     Section 12. Disclaimer of Certain Duties.

          (A) The powers conferred upon Secured Party by this Agreement are to
     protect its interest in the Collateral and shall not impose any duty upon
     Secured Party to exercise any such powers. Pledgor hereby agrees that
     Secured Party shall not be liable for, nor shall the indebtedness evidenced
     by the Obligations be diminished by, Secured Party's commercially
     reasonable delay or failure to collect upon, foreclose, sell, take
     possession of or otherwise obtain value for the Collateral.

          (B) Secured Party shall be under no duty whatsoever to make or give
     any presentment, notice of dishonor, protest, demand for performance,
     notice of non-performance, notice of intent to accelerate, notice of
     acceleration, or other notice or demand in connection with any Collateral
     or the Obligations, or to take any steps necessary to preserve any rights
     against any Obligor or other person or entity. Pledgor waives any right of
     marshaling in respect of any and all Collateral, and waives any right to
     require Secured Party to proceed against any Obligor or other person or
     entity or enforce any other remedy which Secured Party now has or may
     hereafter have against any Obligor or other person or entity.

     Section 13. Waiver of Notice; Demand and Presentment. Pledgor hereby waives
any demand, notice of default, notice of acceleration of the maturity of the
Obligations, notice of intention to accelerate the maturity of the Obligations,
presentment, protest and notice of dishonor as to any action taken by Secured
Party in connection with this Agreement, or any instrument or document.

     Section 14. Custody and Preservation of the Collateral. Secured Party shall
be deemed to have exercised reasonable care in the custody and preservation of
the Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which comparable secured parties accord comparable
collateral, it being understood and agreed, however, that Secured Party shall
not have responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Collateral, whether or not Secured Party has or is deemed to have knowledge
of such matters, or (ii) taking any necessary steps to preserve rights against
persons or entities with respect to any Collateral.

     Section 15. Events of Default. Any of the following events shall constitute
an Event of Default under this Agreement:

          (A) Payments - Pledgor defaults in any payment due and owing pursuant
     to the Obligations;

          (B) Representations and Warranties - any representation or warranty
     made by Pledgor to Secured Party proves to have been incorrect in any
     material respect as of the date thereof;

          (C) Covenants - material default is made by Pledgor in the performance
     of any covenant or agreement contained in this Agreement or in any of the
     Obligations or in any other document now or hereafter executed in
     connection with or as security for the Obligations;

          (D) Insolvency, etc. - Pledgor shall: (i) become insolvent, (ii) have
     a custodian, receiver or agent appointed or authorized to take charge of
     his properties, (iii) make an assignment for the benefit


                                      -5-
<PAGE>   10

     of creditors or call a meeting of creditors for the composition of debts,
     or (iv) be subject to the commencement of any proceeding in bankruptcy or
     under other insolvency laws;

          (E) Defaults on Other Obligations - (i) default by Pledgor in any
     payment of principal of or interest on any other indebtedness, guaranty or
     other obligation (whether to Secured Party or others) beyond any period of
     grace provided with respect thereto, or (ii) any material default by
     Pledgor in the performance of any other agreement, term or condition if the
     effect of such default is to cause such obligation to become due on demand
     or before its stated maturity or to permit the holder(s) of such obligation
     or the trustee(s) under any such agreement or instrument to cause such
     obligation to become due on demand or prior to its stated maturity, whether
     or not such default or failure to perform should be waived by the holder(s)
     of such obligation or such trustee(s); or

          (F) Defaults Under the EOP - Pledgor shall fail to comply with or
     defaults is made with respect to the terms and conditions of the EOP
     regarding the Obligations or the Pledged Securities.

     Section 16. Remedies. Upon the occurrence and during the continuance of any
Event of Default, subject to the terms and provisions of the EOP, Secured Party
may take any or all of the following actions without notice (except where
expressly required below or as otherwise required by law) or demand to Pledgor:

          (A) Declare all or part of the indebtedness pursuant to the
     Obligations immediately due and payable and enforce payment of the same by
     Pledgor.

          (B) Sell or otherwise dispose of any or all of the Collateral in any
     commercially reasonable manner as Secured Party may elect, pursuant to the
     provisions of the Code and other applicable law, including, without
     limitation, sell, in one or more sales and in one or more parcels, or
     otherwise dispose of any or all of the Collateral in any commercially
     reasonable manner as Secured Party may elect, in a public or private
     transaction, at any location as deemed reasonable by Secured Party either
     for cash or credit or for future delivery at such price as Secured Party
     may deem fair, and (unless prohibited by the Code, as adopted in any
     applicable jurisdiction) Secured Party may be the purchaser of any or all
     Collateral so sold and may apply upon the purchase price therefor any
     Obligations secured hereby. Any such sale or transfer by Secured Party
     either to itself or to any other person or entity shall be absolutely free
     from any claim or right by Pledgor, including any equity or right of
     redemption, stay or appraisal which Pledgor has or may have under any rule
     of law, regulation or statute now existing or hereafter adopted. Upon any
     such sale or transfer, Secured Party shall have the right to deliver,
     assign and transfer to the purchaser or transferee thereof the Collateral
     so sold or transferred. If Secured Party deems it advisable to do so, it
     may restrict the bidders or purchasers of any such sale or transfer to
     persons or entities who will represent and agree that they are purchasing
     the Collateral for their own account and not with the view to the
     distribution or resale of any of the Collateral. Secured Party may, at its
     discretion, provide for a public sale, and any such public sale shall be
     held at such time or times within ordinary business hours and at such place
     or places as Secured Party may fix in the notice of such sale. Secured
     Party shall not be obligated to make any sale pursuant to any such notice.
     Secured Party may, without notice or publication, adjourn any public or
     private sale by announcement at any time and place fixed for such sale, and
     such sale may be made at any time or place to which the same may be so
     adjourned. In the event any sale or transfer hereunder is not completed or
     is defective in the reasonable opinion of Secured Party, such sale or
     transfer shall not exhaust the rights of Secured Party hereunder,


                                      -6-
<PAGE>   11

     and Secured Party shall have the right to cause one or more subsequent
     sales or transfers to be made hereunder. If only part of the Collateral is
     sold or transferred such that the Obligations remain outstanding (in whole
     or in part), Secured Party's rights and remedies hereunder shall not be
     exhausted, waived or modified, and Secured Party is specifically empowered
     to make one or more successive sales or transfers until all the Collateral
     shall be sold or transferred and all the Obligations are paid. In the event
     that Secured Party elects not to sell the Collateral, Secured Party retains
     its rights to dispose of or utilize the Collateral or any part or parts
     thereof in any manner authorized or permitted by law or in equity, and to
     apply the proceeds of the same towards payment of the Obligations. Each and
     every method of disposition of the Collateral described in this subsection
     or in subsection (D) shall constitute disposition in a commercially
     reasonable manner.

          (C) Apply proceeds of the disposition of the Collateral to the
     Obligations in any manner elected by Secured Party and permitted by the
     Code or otherwise permitted by law or in equity.

          (D) Appoint any person or entity as agent to perform any act or acts
     necessary or incident to any sale or transfer by Secured Party of the
     Collateral.

          (E) Exercise all other rights and remedies permitted by law or in
     equity.

     Section 17. Liability for Deficiency. Except as may be set forth in the EOP
with respect to the death or disability of Pledgor, if any sale or other
disposition of Collateral by Secured Party or any other action of Secured Party
hereunder results in reduction of the Obligations, such action will not release
Pledgor from its liability to Secured Party for any unpaid Obligations, together
with interest thereon, and the same shall be immediately due and payable to
Secured Party at Secured Party's address set forth in the opening paragraph
hereof.

     Section 18. Pledged Securities. Upon the occurrence and during the
continuance of an Event of Default:

          (A) All rights of Pledgor to receive the dividends and interest
     payments which it would otherwise be authorized to receive and retain
     pursuant to Section 6(E) shall cease, and all such rights shall thereupon
     become vested in Secured Party who shall thereupon have the sole right to
     receive and hold as Collateral such dividends and interest payments, but
     Secured Party shall have no duty to receive and hold such dividends and
     interest payments and shall not be responsible for any failure to do so or
     delay in so doing.

          (B) All dividends and interest payments which are received by Pledgor
     contrary to the provisions of this Section 18 shall be received in trust
     for the benefit of Secured Party, shall be segregated from other funds of
     Pledgor and shall be forthwith paid over to Secured Party as Collateral in
     the same form as so received (with any necessary indorsement).

          (C) Secured Party may exercise any and all rights of conversion,
     exchange, subscription or any other rights, privileges or options
     pertaining to any of the Pledged Securities as if it were the absolute
     owner thereof, including without limitation, the right to exchange at its
     discretion, any and all of the Pledged Securities upon the merger,
     consolidation, reorganization, recapitalization or other readjustment of
     any issuer of such Pledged Securities or upon the exercise by any such
     issuer or Secured


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<PAGE>   12

     Party of any right, privilege or option pertaining to any of the Pledged
     Securities, and in connection therewith, to deposit and deliver any and all
     of the Pledged Securities with any committee, depositary, transfer agent,
     registrar or other designated agency upon such terms and conditions as it
     may determine, all without liability except to account for property
     actually received by it, but Secured Party shall have no duty to exercise
     any of the aforesaid rights, privileges or options and shall not be
     responsible for any failure to do so or delay in so doing.

          (D) If the issuer of any Pledged Securities is the subject of
     bankruptcy, insolvency, receivership, custodianship or other proceedings
     under the supervision of any court or governmental agency or
     instrumentality, then all rights of Pledgor to exercise the voting and
     other consensual rights which Pledgor would otherwise be entitled to
     exercise pursuant to Section 6(E) with respect to the Pledged Securities
     issued by such issuer shall cease, and all such rights shall thereupon
     become vested in Secured Party who shall thereupon have the sole right to
     exercise such voting and other consensual rights, but Secured Party shall
     have no duty to exercise any such voting or other consensual rights and
     shall not be responsible for any failure to do so or delay in so doing.

     Section 19. Reasonable Notice. If any applicable provision of any law
requires Secured Party to give reasonable notice of any sale or disposition or
other action, Pledgor hereby agrees that five days' prior written notice shall
constitute reasonable notice thereof.

     Section 20. Notices. Any notice required or permitted to be given under or
in connection with this Agreement shall be in writing and shall be mailed by
first class or express mail, postage prepaid, or sent by telecopy or other
similar form of rapid written transmission or personally delivered to the
receiving party. All such communications shall be mailed, sent or delivered at
the address respectively indicated in the opening paragraph hereof or at such
other address as either party may have furnished the other party in writing. Any
communication so addressed and mailed shall be deemed to be given when so
mailed, any notice so sent by rapid written transmission shall be deemed to be
given when receipt of such transmission is acknowledged by the receiving
operator or equipment, and any communication so delivered in person shall be
deemed to be given when receipted for or actually received by Pledgor or Secured
Party, as the case may be.

     Section 21. Amendments and Waivers. Secured Party's acceptance of partial
or delinquent payments or any forbearance, failure or delay by Secured Party in
exercising any right, power or remedy hereunder shall not be deemed a waiver of
any obligation of Pledgor, or of any right, power or remedy of Secured Party;
and no partial exercise of any right, power or remedy shall preclude any other
or further exercise thereof. Secured Party may remedy any Event of Default
hereunder or in connection with the Obligations without waiving the Event of
Default so remedied. Pledgor hereby agrees that if Secured Party agrees to a
waiver of any provision hereunder, or an exchange of or release of the
Collateral, or the addition or release of any obligor or other person or entity,
any such action shall not constitute a waiver of any of Secured Party's other
rights or of Pledgor's obligations hereunder. This Agreement may be amended only
by an instrument in writing executed jointly by Pledgor and Secured Party.

     Section 22. Interest. It is the intention of the parties hereto to conform
strictly to usury laws applicable to Secured Party. Accordingly, if the
transactions contemplated hereby would be usurious under applicable state or
federal law, then, notwithstanding anything to the contrary in this Agreement or
in any other agreement entered into in connection with or as security for the
Obligations, it is agreed as follows:


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<PAGE>   13

(i) the aggregate of all consideration which constitutes interest under law
applicable to Secured Party that is contracted for, taken, reserved, charged or
received under the Obligations, this Agreement or under any of such other
agreements or otherwise in connection with the Obligations shall under no
circumstances exceed the maximum amount allowed by such applicable law, (ii) in
the event that the maturity of the Obligations is accelerated for any reason, or
in the event of any required or permitted prepayment, then such consideration
that constitutes interest under law applicable to Secured Party may never
include more than such maximum amount, and (iii) excess interest, if any,
provided for in this Agreement or otherwise shall be canceled automatically and,
if theretofore paid, shall be credited by Secured Party on the principal amount
of the Obligations (or, to the extent that the principal amount of the
Obligations shall have been or would thereby be paid in full, refunded by
Secured Party to Pledgor). The right to accelerate the maturity of the
Obligations does not include the right to accelerate any interest which has not
otherwise accrued on the date of such acceleration, and Secured Party does not
intend to, and will not, collect any unearned interest in the event of
acceleration. All sums paid or agreed to be paid to Secured Party for the use,
forbearance or detention of sums included in the initial Obligations shall, to
the extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full term of the Obligations until payment in full so that
the rate or amount of interest on account of the initial Obligations does not
exceed the applicable usury ceiling, if any. To the extent that Article
5069-1.04 of the Texas Revised Civil Statutes is relevant to Secured Party for
the purpose of determining the Highest Lawful Rate, Secured Party hereby elects
to determine the applicable rate ceiling under such Article by the indicated
(weekly) rate ceiling from time to time in effect, subject to Secured Party's
right subsequently to change such method in accordance with applicable law.

     Section 23. Governing Law; Jurisdiction. This Agreement and the security
interest granted hereby shall be construed in accordance with and governed by
the laws of the State of Texas, without giving effect to principles of conflict
of laws (except to the extent that the laws of any other jurisdiction govern the
perfection and priority of the security interests granted hereby). Pledgor
consents to and submits to in personam jurisdiction and venue in the state
district and county courts of the county wherein Secured Party's offices are
located at the address specified in the opening paragraph hereof, and in the
Federal District Courts of the district wherein such offices of Secured Party
are located. This submission to jurisdiction is nonexclusive and does not
preclude Secured Party from obtaining jurisdiction over Pledgor or the
Collateral in any court otherwise having jurisdiction.

     Section 24. Subrogation. Until all indebtedness in connection with the
Obligations shall have been paid in full, Pledgor shall have no right to
subrogation or to enforce any remedy or participate in any Collateral or
security whatsoever now or hereafter held by Secured Party.

     Section 25. Continuing Security Agreement.

          (A) This Agreement shall constitute a continuing security agreement,
     and all representations and warranties, covenants and agreements shall, as
     applicable, apply to all future as well as existing transactions.
     Provisions of this Agreement, unless by their terms exclusive, shall be in
     addition to other agreements between the parties.

          (B) Except as may be expressly applicable pursuant to Section 9.505 of
     the Code, no action taken or omission to act by Secured Party hereunder,
     including, without limitation, any exercise of voting or consensual rights
     pursuant to Section 6(D) or any other action taken or inaction pursuant to


                                      -9-
<PAGE>   14

     Section 16, shall be deemed to constitute a retention of the Collateral in
     satisfaction of the Obligations or otherwise to be in full satisfaction of
     the Obligations, and the Obligations shall remain in full force and effect,
     until Secured Party shall have applied payments (including, without
     limitation, collections from Collateral) towards the Obligations in the
     full amount then outstanding or until such subsequent time as is
     hereinafter provided in subsection (C) below.

          (C) To the extent that any payments on the Obligations or proceeds of
     the Collateral are subsequently invalidated, declared to be fraudulent or
     preferential, set aside or required to be repaid to a trustee, debtor in
     possession, receiver or other person or entity under any bankruptcy law,
     common law or equitable cause, then to such extent the Obligations so
     satisfied shall be revived and continue as if such payment or proceeds had
     not been received by Secured Party, and Secured Party's security interests,
     rights, powers and remedies hereunder shall continue in full force and
     effect. In such event, this Agreement shall be automatically reinstated if
     it shall theretofore have been terminated pursuant to Section 28.

     Section 26. Redelivery of Collateral. If any sale or transfer of Collateral
by Secured Party results in full satisfaction of the Obligations, and after such
sale or transfer and discharge there remains a surplus of proceeds, Secured
Party will deliver to Pledgor such excess proceeds in a commercially reasonable
time; provided, however, that Secured Party shall not be liable for any
interest, cost or expense in connection with any reasonable delay in delivering
such proceeds to Pledgor.

     Section 27. Custody and Preservation of the Collateral. Secured Party shall
be deemed to have exercised reasonable care in the custody and preservation of
the Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which comparable secured parties accord comparable
collateral, it being understood and agreed, however, that Secured Party shall
not have responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Collateral, whether or not Secured Party has or is deemed to have knowledge
of such matters, or (ii) taking any necessary steps to preserve rights against
persons or entities with respect to any Collateral.

     Section 28. Termination. The grant of a security interest hereunder and all
of Secured Party's rights, powers and remedies in connection therewith shall
remain in full force and effect until Secured Party has (i) retransferred and
delivered all Collateral in its possession to Pledgor, (ii) executed a
registration of release with respect to all Pledged Securities, if any, as to
which Secured Party held a registered pledge; and (iii) executed a written
release or termination statement and reassigned to Pledgor without recourse or
warranty any remaining Collateral and all rights conveyed hereby. Upon the
complete payment of the Obligations, the compliance by Pledgor with all
covenants and agreements hereof and the compliance by Pledgor of the terms and
conditions of the EOP, Secured Party, at the written request of Pledgor, will
release, reassign and transfer the Collateral to Pledgor and declare this
Agreement to be of no further force or effect. Notwithstanding the foregoing,
the provisions of subsection 25(C) shall survive the termination of this
Agreement.


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<PAGE>   15

     IN WITNESS WHEREOF, Pledgor has signed this Agreement as of the date first
written above.


PLEDGOR:

                                       -----------------------------------------
                                                 JOHN D. SCHILLER, JR.

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