exv10w3



 





Exhibit 10.3




Lower Call Option Transaction




November 21, 2007




	 	 	 	 	 
	To:

	 	TXCO Resources, Inc.
	 	 
	 

	 	777 E. Sonterra Blvd., Suite 350	 	 
	 

	 	San Antonio, TX 78258


Attention: James E. Sigmon, President	 	 
	 
	 	 	 	 
	From:

	 	Capital Ventures International	 	 
	 

	 	By: Heights Capital Management, Inc., Its Authorized Agent	 	 
	 

	 	101 California Street, Suite 3250	 	 
	 

	 	San Francisco, CA 94111	 	 
	 

	 	Attention: Martin Kobinger	 	 






Ladies and Gentlemen:




     The purpose of this letter agreement (this “Confirmation”) is to confirm the terms and
conditions of the Transaction entered into between Capital Ventures International (“Party
A”) and TXCO Resources, Inc. (“Party B”) on the Trade Date specified below (the
“Transaction”). This Confirmation constitutes a “Confirmation” as referred to in the
Agreement specified below.




	1.	 	This Confirmation is subject to, and incorporates, the definitions and provisions of the 2000
ISDA Definitions (including the Annex thereto) (the “2000 Definitions”) and the
definitions and provisions of the 2002 ISDA Equity Derivatives Definitions (the “Equity
Definitions”, and together with the 2000 Definitions, the “Definitions”), in each
case as published by the International Swaps and Derivatives Association, Inc.
(“ISDA”). In the event of any inconsistency between the 2000 Definitions and the
Equity Definitions, the Equity Definitions will govern.
	 
	 	 	This Confirmation evidences a complete and binding agreement between Party A and Party B as
to the terms of the Transaction to which this Confirmation relates. The parties may agree
to negotiate an agreement in the form of the ISDA Form. Until any such time, this
Confirmation, together with all other documents referring to the ISDA Form (each a
“Confirmation”) confirming Transactions entered into between us (notwithstanding
anything to the contrary in a Confirmation), shall supplement, form a part of, and be
subject to an agreement in the form of the ISDA Form as if we had executed an agreement in
such form (but without any election in the Schedule) on the Trade Date of the first such
Transaction between us. This Confirmation shall be subject to an agreement (the
“Agreement”) in the form of the 2002 ISDA Master Agreement (the “ISDA Form”)
as if Party A and Party B had executed an agreement in such form (without any Schedule but
with the elections set forth in this Confirmation, it being understood the “Cross-Default”
shall not apply to this Transaction). For the avoidance of doubt, the Transaction shall be
the only transaction under the Agreement.
	 
	 	 	All provisions contained in, or incorporated by reference to, the Agreement will govern this
Confirmation except as expressly modified herein. In the event of any inconsistency between
this Confirmation and either the Definitions or the Agreement, this Confirmation shall
govern.




 









 













LOWER CALL OPTION TRANSACTION





	2.	 	The general terms relating to the Transaction are as follows:





	 	 	 
	Option Style:

	 	European, subject to the automatic early
exercise provisions described below.
	 
	 	 
	Option Seller:

	 	Party A
	 
	 	 
	Option Buyer:

	 	Party B
	 
	 	 
	Option Multiple Exercise:

	 	Not Applicable
	 
	 	 
	Strike Price:

	 	 $14.48
	 
	 	 
	Trade Date:

	 	November 21, 2007
	 
	 	 
	Effective Date:

	 	November 26, 2007
	 
	 	 
	Option Type:

	 	Call
	 
	 	 
	Issuer:

	 	TXCO Resources, Inc.
	 
	 	 
	Shares:

	 	The shares of common stock of the Issuer,
par value $0.01 per Share (Ticker Symbol: TXCO)
	 
	 	 
	Number of Options:

	 	 3,798,343 less any Early Exercise Options.
	 
	 	 
	Option Entitlement:

	 	One Share per Option
	 
	 	 
	Market Disruption Event:

	 	Section 6.3(a) of the Equity Definitions
is hereby amended by replacing clause
(ii) thereof in its entirety with the
following: “(ii) an Exchange Disruption,
or” and inserting immediately following
clause (iii) thereof the following: “; in
each case that the Calculation Agent
determines is material.”
	 
	 	 
	Relevant Price:

	 	VWAP Price
	 
	 	 
	VWAP Price:

	 	The “Volume Weighted Average Price” per
Share on such day, as displayed on
Bloomberg Page “TXCO UQ<equity>AQR”
(or any successor thereto) for the Issuer
with respect to the period from 9:30 a.m.
to 4:00 p.m. (New York City time) on such
day, as determined by the Calculation
Agent. If no price at such time is
available, or there is a Market
Disruption Event on such Expiration Date,
the Calculation Agent shall determine the
VWAP Price in a commercially reasonable
manner.






2









 




LOWER CALL OPTION TRANSACTION





	 	 	 
	     Premium:

	 	 $21,518,879.10
	 
	 	 
	     Premium Payment Date:

	 	Effective Date
	 
	 	 
	     Exchange:

	 	The Nasdaq Global Market
	 
	 	 
	     Related Exchange:

	 	Any exchange on which options or futures
on the relevant Shares are traded.
	 
	 	 
	     Clearance System:

	 	DTC
	 
	 	 
	     Calculation Agent: 



	 	Party A. Whenever the Calculation Agent
acts or makes a determination, it will do
so in good faith and in a commercially
reasonable manner consistent with its
obligations under the Equity Definitions.
	 
	     Procedure for Exercise:
	 	 
	 
	          Expiration Time:

	 	The close of trading on the Exchange
	 
	 	 
	          Expiration Date:

	 	Each of the thirty (30) consecutive
Scheduled Trading Days (the “Scheduled
Expiration Period”) occurring immediately
prior to November 21, 2012 or such
earlier date specified by Party B in a
written notice to Party A at least ten
(10) calendar days prior to the Scheduled
Expiration Period (an “Early Exercise
Notice”); provided that if Party A
receives notice that any of the Preferred
Shares are converted prior to the tenth
(10th) calendar day prior to the
Scheduled Expiration Period (an “Early
Exercise Event”), the Expiration Date
with respect to a number of Options equal
to the product of (x) the number of
Preferred Shares converted and (y) the
conversion rate then applicable to the
Preferred Shares, (such Options being
referred to herein as “Early Exercise
Options”) shall occur on each of the
thirty (30) consecutive Scheduled Trading
Days occurring after the tenth (10th)
calendar day after Party A receives
notice of such event, or such earlier
date after the Early Exercise Event that
the Calculation Agent shall deem
appropriate. If any Expiration Date
shall not be an Exchange Business Day,
such Expiration Date shall be postponed
to the immediately succeeding Exchange
Business Day and the corresponding
Expiration Date for each subsequent Daily
Number of Options shall be moved back an
equal number of Exchange Business Days
reflecting such postponement.
	 
	 	 
	          Daily Number of Options:

	 	One thirtieth (1/30th) of the Number of
Options; provided that with respect to
any Expiration Date resulting from an






3









 




LOWER CALL OPTION TRANSACTION





	 	 	 
	 

	 	Early Exercise Event, one thirtieth
(1/30th) of such Early Exercise Options.
	 
	 	 
	     Automatic Exercise:

	 	Applicable
	 
	 	 
	     Settlement Terms:
	 	 
	 
	 	 
	     Settlement Method Election:

	 	Applicable; provided that (i) any such
election shall apply to all Exercise
Dates (in accordance with the terms
below) and may be for Cash Settlement or
Net Share Settlement; (ii) references to
“Physical Settlement” in Section 7.1 of
the Equity Definitions shall be replaced
by references to “Net Share Settlement”;
and (iii) Party B may elect Cash
Settlement only if Party B represents and
warrants to Party A in writing on the
date of such election that, as of such
date, Party B is not aware of any
material nonpublic information concerning
itself or the Shares and is electing Cash
Settlement in good faith and not as part
of a plan or scheme to evade compliance
with the federal securities laws. At any
time prior to making a Settlement Method
Election, Party B may, without the
consent of Party A, amend this
Confirmation by notice to Party A to
eliminate Party B’s right to elect Cash
Settlement.
	 
	 	 
	     Electing Party

	 	Party B
	 
	 	 
	     Settlement Method Election Date

	 	The 30th Scheduled Trading Day preceding
the first Expiration Date
	 
	 	 
	     Default Settlement Method

	 	Net Share Settlement
	 
	 	 
	     Settlement Date:

	 	For all Daily Number Options exercised or
deemed exercised on each Expiration Date,
the third Exchange Business Day following
the final Expiration Date.
	 
	 	 
	     Cash Settlement

	 	If Cash Settlement applies, then,
notwithstanding any contrary terms of
Article 8 of the Equity Definitions, for
any Daily Number of Options exercised or
deemed exercised on any Exercise Date,
Party A shall pay, on the Settlement
Date, the Cash Settlement Amount to Party
B. The Cash Settlement Amount shall be
determined as follows:






4









 




LOWER CALL OPTION TRANSACTION





	 	 	 
	 

	 	(i) If the Settlement Price is less than
or equal to the Strike Price, then the
Cash Settlement Amount shall equal zero.
	 
	 	 
	 

	 	(ii) If the Settlement Price is greater
than the Strike Price, then the Cash
Settlement Amount shall equal the product
of (i) the Daily Number of Options, (ii)
the Option Entitlement and (iii) the
Settlement Price minus the Strike Price.
	 
	 	 
	     Net Share Settlement:

	 	On the Settlement Date, Party A shall
deliver to Party B a number of whole
Shares equal to the Number of Shares to
be Delivered and will pay to Party B the
Fractional Share Amount, if any.
	 
	 	 
	     Number of Shares to be Delivered:

	 	The Cash Settlement Amount (determined as
if Cash Settlement were applicable)
divided by the Settlement Price, rounded
down to the nearest whole number.
	 
	 	 
	     Cash Settlement Payment Date:

	 	For all Daily Number of Options exercised
or deemed exercised on each Exercise
Date, the third Exchange Business Day
following the final Expiration Date.
	 
	 	 
	     Settlement Currency:

	 	USD
	 
	 	 
	     Settlement Price:

	 	For any Daily Number of Options, the VWAP
Price of the Shares on the relevant
Expiration Date determined by Calculation
Agent at the Expiration Time on the
relevant Expiration Date for such Daily
Number of Options. If no price at such
time is available, or there is a Market
Disruption Event on such Expiration Date,
the Calculation Agent shall determine the
Settlement Price in a commercially
reasonable manner.
	 
	 	 
	     Failure to Deliver:

	 	Applicable
	 
	 	 
	     Other Applicable Provisions:

	 	To the extent Party A is obligated to
deliver Shares hereunder, the provisions
of Sections 9.1(c), 9.8, 9.9, 9.10, 9.11
(except that the Representation and
Agreement contained in Section 9.11 of
the Equity Definitions shall be modified
by excluding any representations therein
relating to restrictions, obligations,
limitations or requirements under
applicable securities laws as a result of
the fact that Party B is the issuer of
the Shares) and 9.12 of the Equity
Definitions will be applicable as if
“Physical






5









 





LOWER CALL OPTION TRANSACTION





	 	 	 
	 

	 	Settlement” applied to the
Transaction.
	 
	 	 
	          Restricted Certificated Shares:

	 	Notwithstanding anything to the contrary
in the Equity Definitions, Party A may
deliver, in whole or in part, any Shares
required to be delivered to Party B
hereunder in the form of restricted
securities under the Securities Act (as
defined below) and/or in certificated
form in lieu of delivery through the
Clearance System. With respect to any
such certificated Shares, the
Representation and Agreement contained in
Section 9.11 of the Equity Definitions
shall be modified by deleting the
remainder of the provision after the word
“encumbrance” in the fourth line thereof.
	 
	 	 
	     Adjustments:
	 	 
	 
	 	 
	          Method of Adjustment:

	 	Calculation Agent Adjustment
	 
	 	 
	     Extraordinary Dividend:



	 	Any dividend or distribution that has an
ex-dividend date occurring on or after
the Trade Date and on or prior to the
date on which Party B satisfies all of
its delivery obligations hereunder;
provided that no regular or periodic
dividend on Party B’s Preferred Shares
shall be an Extraordinary Dividend.
	 
	     Extraordinary Events:
	 	 
	 
	          Consequences of Merger Events and
Tender Offers:
	 	 
	 
	 	 
	               (a) Share-for-Share:

	 	Modified Calculation Agent Adjustment, or
at Party A’s election, Cancellation and
Payment (Calculation Agent Determination)
	 
	 	 
	               (b) Share-for-Other:

	 	Cancellation and Payment (Calculation
Agent Determination)
	 
	 	 
	               (c) Share-for-Combined:

	 	Component Adjustment, or at Party A’s
election, Cancellation and Payment
(Calculation Agent Determination)
	 
	 	 
	          Tender Offer:

	 	Applicable
	 
	 	 
	          Delisting, Nationalization or
Insolvency:

	 	Cancellation and Payment (Calculation
Agent Determination)






6









 





LOWER CALL OPTION TRANSACTION





	 	 	 
	     Additional Disruption Events:
	 	 
	 
	 	 
	          (a) Change in Law:

	 	Applicable; provided that Section 12.9(a)(ii) of the
Equity Definitions is hereby amended by (i) replacing
the phrase “the interpretation” in the third line
thereof with the phrase “or announcement or statement
of the formal or informal interpretation” and (ii)
immediately following the word “Transaction” in clause
(X) thereof, adding the phrase “in the manner
contemplated by the Hedging Party on the Trade Date”.
	 
	 	 
	          (b) Failure to Deliver:

	 	Applicable
	 
	 	 
	          (c) Insolvency Filing:

	 	Applicable
	 
	 	 
	          (d) Hedging Disruption:

	 	Applicable
	 
	 	 
	          (e) Increased Cost of Hedging:

	 	Applicable
	 
	 	 
	          (f) Loss of Stock Borrow:

	 	Not Applicable
	 
	 	 
	          Hedging Party:

	 	For all applicable Additional Disruption Events, Party A
	 
	 	 
	          Determining Party:

	 	For all applicable Additional Disruption Events, Party A
	 
	 	 
	          Non-Reliance:

	 	Applicable
	 
	 	 
	          Agreements and Acknowledgments
Regarding Hedging Activities:

	 	Applicable
	 
	 	 
	          Additional Acknowledgments:

	 	Applicable
	 
	 	 
	          Additional Termination Events:

	 	Applicable. The following will constitute an Additional
Termination Event:
	 
	 	 
	 

	 	(a)     Such other events specified in this Confirmation as
being Additional Termination Events.

	 
	 	 
	 

	 	For the purpose of the foregoing Termination Event, the
sole Affected Party will be Party B.
	 
	 	 
	          Conversion Notice

	 	In the event Party B shall elect a mandatory conversion
of some or all of its Perpetual Convertible Preferred
Stock pursuant to Article 2(d)(viii) of the Certificate
of Designation, or if Party B receives a conversion
notice under Section 2(b) of the Certificate of
Designation, Party B shall promptly notify Party A in
writing of such event,






7









 





LOWER CALL OPTION TRANSACTION





	 	 	 
	 

	 	and in any event no later than 2
Exchange Trading Days after such election or receipt of
such conversion notice.







	3.	 	If any of the transactions contemplated by the Securities Purchase Agreement dated as of
November 21, 2007 (the “Purchase Agreement”) among Party B and each of the Buyers
specified therein relating to the sale of up to 100,000 shares of Perpetual Convertible
Preferred Stock (the “Preferred Shares”) of Party B, shall fail to close on the date
specified therein for any reason, or any subsequent date allowed thereunder for postponements
permitted under the terms thereof , the entirety of this Transaction shall terminate
automatically and Party B shall be the sole Affected Party and this Transaction shall be the
sole Affected Transaction and such termination shall be treated as an Additional Termination
Event.
	 
	4.	 	Calculations and Payment on Early Termination and on Certain Extraordinary Events. If Party
A shall owe Party B any amount pursuant to Sections 12.2, 12.3, 12.6, 12.7 or 12.9 of the
Equity Definitions (except in the event of a Merger Event, Tender Offer, Insolvency or a
Nationalization, in each case, in which the consideration or proceeds to be paid to holders of
Shares consists solely of cash) or pursuant to Section 6(d)(ii) of the Agreement (except in
the event of an Event of Default in which Party B is the Defaulting Party or a Termination
Event in which Party B is the Affected Party, that resulted from an event or events within
Party B’s control) (a “Payment Obligation”), Party B shall have the right, in its sole
discretion, to require Party A to satisfy any such Payment Obligation by the Share Termination
Alternative (as defined below) by giving irrevocable telephonic notice to Party A, confirmed
in writing within one Scheduled Trading Day, between the hours of 9:00 A.M. and 12:00 P.M. New
York City time on the relevant Merger Date, Tender Offer Date, Announcement Date or Early
Termination Date, as applicable (“Notice of Share Termination”). Upon such Notice of
Share Termination, the following provisions shall apply on the Scheduled Trading Day
immediately following the relevant Merger Date, Tender Offer Date, Announcement Date or Early
Termination Date, as applicable:





	 	 	 	 	 
	 

	 	Share Termination Alternative:
	 	Applicable and means that Party A shall deliver to
Party B the Share Termination Delivery Property on the date on which the Payment
Obligation would otherwise be due pursuant to Section 12.7 or 12.9 of the Equity
Definitions or Section 6(d)(ii) of the Agreement, as applicable (the “Share
Termination Payment Date”), in satisfaction of the Payment Obligation.
	 
	 	 	 	 
	 

	 	Share Termination Delivery
Property:
	 	A number of Share Termination Delivery Units, as calculated by the Calculation
Agent, equal to the Payment Obligation divided by the Share Termination Unit Price.
The Calculation Agent shall adjust the Share Termination Delivery Property by replacing
any fractional portion of a security therein with an amount of cash equal to the value
of such fractional security based on the values used to calculate the Share Termination
Unit Price.
	 
	 	 	 	 
	 

	 	Share Termination Unit Price:
	 	The value of property contained in one Share
Termination Delivery Unit on the date such Share Termination Delivery Units are to be
delivered as Share Termination Delivery Property, as determined by the Calculation
Agent by commercially reasonable means and notified by the Calculation Agent to Party A
at the time of notification of the Payment Obligation.
	 
	 	 	 	 
	 

	 	Share Termination Delivery
Unit:
	 	In the case of a Termination Event, Event of Default or Delisting, one Share
or, in the case of a Merger Event, a Tender Offer, an Insolvency or






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LOWER CALL OPTION TRANSACTION





	 	 	 	 	 
	 

	 	 	 	Nationalization, a unit consisting of the number or amount of
each type of property received by a holder of one Share (without
consideration of any requirement to pay cash or other
consideration in lieu of fractional amounts of any securities)
in such Merger Event, Tender Offer, Insolvency or
Nationalization. If such Merger Event, Tender Offer, Insolvency
or Nationalization involves a choice of consideration to be
received by holders, such holder shall be deemed to have elected
to receive the maximum possible amount of cash.
	 
	 	 	 	 
	 

	 	Failure to Deliver:
	 	Applicable
	 
	 	 	 	 
	 

	 	Other applicable provisions:
	 	If Share Termination Alternative is applicable, the
provisions of Sections 9.8, 9.9, 9.10, 9.11 and 9.12 of the Equity Definitions will be
applicable as if “Physical Settlement” were applicable, except that all references to
“Shares” shall be read as references to “Share Termination Delivery Units”; provided
that the Representation and Agreement contained in Section 9.11 of the Equity
Definitions shall be modified by excluding any representations therein relating to
restrictions, obligations, limitations or requirements under applicable securities laws
as a result of the fact that Party B is the issuer of any Share Termination Delivery
Units (or any part thereof).







	5.	 	Additional Agreements, Representations and Covenants:






	 	(a)	 	Party B hereby represents and warrants to Party A, on each day from the Trade
Date to and including the business day following the date on which Party A is able to
initially complete a hedge of its position created by this Transaction, that Party B
has publicly disclosed all material information necessary for Party B to be able to
purchase or sell Shares in compliance with applicable federal securities laws and that
it has publicly disclosed all material information with respect to its condition
(financial or otherwise).
	 
	 	(b)	 	If Party B would be obligated to receive cash from Party A pursuant to the
terms of this Agreement for any reason without having had the right to elect to receive
Shares in satisfaction of such payment obligation, then Party B may elect that Party A
deliver to Party B a number of Shares having a cash value equal to the amount of such
payment obligation (such number of Shares to be delivered to be determined by the
Calculation Agent acting in a commercially reasonable manner to determine the number of
Shares that could be purchased over a reasonable period of time with the cash
equivalent of such payment obligation). Settlement relating to any delivery of Shares
pursuant to this paragraph (b) shall occur within a reasonable period of time.
	 
	 	(c)	 	Party B shall deliver to the Party A an opinion or opinions of counsel with
respect to the matters set forth on Annex 1 hereto on or before the Effective Date.
	 
	 	(d)	 	In addition to the representations and warranties in the Agreement and those
contained elsewhere herein, Party B represents and warrants to and for the benefit of,
and agrees with, Party A as follows:






     (i) (A) On the Effective Date, the Shares or securities that are convertible into, or
exchangeable or exercisable for Shares, are not, and shall not be, subject to a “restricted
period,” as such term is defined in Regulation M (“Regulation M”) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and (B) Party B
shall not engage in any “distribution,” as such term is defined in Regulation M, other than
a



9









 





 LOWER CALL OPTION TRANSACTION





distribution meeting the requirements of the exceptions set forth in sections
101(b)(10) and 102(b)(7) of Regulation M, until the second Exchange Business Day immediately
following the Trade Date.




     (ii) Party B is not entering into this Confirmation to create actual or apparent
trading activity in the Shares (or any security convertible into or exchangeable for Shares)
or to manipulate the price of the Shares (or any security convertible into or exchangeable
for Shares) or otherwise in violation of the Exchange Act.




     (iii) Without limiting the generality of Section 3(a)(iii) of the Agreement, the
Transaction will not violate Rule 13e-1 or Rule 13e-4 under the Exchange Act.




     (iv) Prior to the Effective Date, Party B shall deliver to Party A a resolution of
Party B’s board of directors authorizing the Transaction and such other certificate or
certificates as Party A shall reasonably request.




     (v) Party B is not, and after giving effect to the transactions contemplated hereby
will not be, required to register as an “investment company” as such term is defined in the
Investment Company Act of 1940, as amended.




     (vi) On the Trade Date (A) the assets of Party B at their fair valuation exceed the
liabilities of Party B, including contingent liabilities, (B) the capital of Party B is
adequate to conduct the business of Party B and (C) Party B has the ability to pay its debts
and obligations as such debts mature and does not intend to, or does not believe that it
will, incur debt beyond its ability to pay as such debts mature.




     (vii) Party B acknowledges its responsibilities under applicable federal securities
laws, including without limitation Rule 10b-5 under the Exchange Act, in relation to the
Transaction.




	 	(e)	 	Each of Party A and Party B agrees and represents that it is an “eligible
contract participant” as defined in Section 1a(12) of the U.S. Commodity Exchange Act,
as amended. The parties hereto further agree and acknowledge (A) that this
Confirmation is (i) a “securities contract,” as such term is defined in Section 741(7)
of the Bankruptcy Code, with respect to which each payment and delivery hereunder is a
“settlement payment,” as such term is defined in Section 741(8) of the Bankruptcy Code,
and (ii) a “swap agreement,” as such term is defined in Section 101(53B) of the
Bankruptcy Code, with respect to which each payment and delivery hereunder is a
“transfer,” as such term is defined in Section 101(54) of the Bankruptcy Code, and (B)
that Party A is entitled to the protections afforded by, among other sections, Sections
362(b)(6), 362(b)(17), 546(e), 546(g), 555 and 560 of the Bankruptcy Code.
	 
	 	(f)	 	Party B intends that all documentation with respect to this Transaction is
intended to qualify this Transaction as an equity instrument for purposes of SFAS 150
and EITF 00-19. Party A acknowledges and agrees that this Confirmation is not intended
to convey to it rights with respect to the Transaction that are senior to the claims of
common stockholders in the event of Party B’s bankruptcy. For the avoidance of doubt,
the parties agree that the preceding sentence shall not apply at any time other than
during Party B’s bankruptcy to any claim arising as a result of a breach by Party B of
any of its obligations under this Confirmation or the Agreement.






	6.	 	Staggered Settlement:
	 
	 	 	If Party A determines reasonably and in good faith that the sum of (i) the number of Shares
required to be delivered to Party B hereunder on any Cash Settlement Payment Date, and (ii)
any other Shares beneficially owned by Party A, would exceed 9.9% of all outstanding Shares,
then Party A may, by notice to Party B on or prior to such Cash Settlement Payment Date (a
“Nominal Settlement Date”), elect to deliver the Shares




10









 





LOWER CALL OPTION TRANSACTION











	 	 	comprising the related Cash Settlement Amount (in the case of Net Share Settlement) on two
or more dates (each, a “Staggered Settlement Date”) as follows:






	 	(a)	 	in such notice, Party A will specify to Party B the related Staggered
Settlement Dates (the first of which will be such Nominal Settlement Date and the
last of which will be no later than the twentieth (20th) Exchange Business Day
following such Nominal Settlement Date) and the number of Shares that it will deliver
on each Staggered Settlement Date;
	 
	 	(b)	 	the aggregate number of Shares that Party A will deliver to Party B
hereunder on all such Staggered Settlement Dates will equal the number of Shares that
Party A would otherwise be required to deliver on such Nominal Settlement Date; and
	 
	 	(c)	 	if the Net Share Settlement terms set forth above were to apply on the
Nominal Settlement Date, then the Net Share Settlement terms will apply on each
Staggered Settlement Date, except that the Shares comprising the Cash Settlement
Amount will be allocated among such Staggered Settlement Dates as specified by Party
A in the notice referred to in clause (a) above.






	 	 	Notwithstanding anything herein to the contrary, Party A shall be entitled to deliver Shares
to Party B from time to time prior to the date on which Party A would be obligated to
deliver them to Party B pursuant to the Net Share Settlement terms set forth above, and
Party B agrees to credit all such early deliveries against Party A’s obligations hereunder
in the direct order in which such obligations arise. To the extent Party A receives or is
entitled to receive any distribution or payment in respect of Shares by reason of Party A’s
being a holder of record of such Shares on any date after the Nominal Settlement Date which
Party A would have delivered to Party B on such Nominal Settlement Date but for the
provisions of this Section 6, Party A shall deliver such distribution or payment to Party B
at the time Party A delivers the related Shares to Party B in accordance with this Section
6, if such distribution or payment has already been received by Party A at such time, or
within a reasonable period of time following Party A’s receipt of the distribution or
payment, if such distribution or payment has not already been received by Party A at the
time Party A delivers the related Shares to Party B in accordance with this Section 6.
	 
	7.	 	Transfer. Party B shall not transfer or assign its rights or obligations hereunder and under
the Agreement without the prior written consent of Party A. Party A may transfer or assign
without Party B’s consent its rights and obligations hereunder and under the Agreement, in
whole or in part.
	 
	8.	 	Disposition of Hedge Shares. Party B hereby agrees that if, in the good faith reasonable
judgment of Party A or Issuer, based on the advice of counsel, the Shares (the “Hedge
Shares”) acquired by Party A for the purpose of hedging its obligations pursuant to the
Transaction cannot be sold in the public market by Party A without registration under the
Securities Act, Party B shall, at its election: (i) in order to allow Party A to sell the
Hedge Shares in a registered offering, make available to Party A an effective registration
statement under the Securities Act to cover the resale of such Hedge Shares and (A) enter into
an agreement, in form and substance satisfactory to Party A, substantially in the form of an
underwriting agreement for underwritten follow-on offerings of equity securities of companies
of comparable size, maturity and lines of business, (B) provide accountant’s “comfort” letters
in customary form for underwritten follow-on offerings of equity securities of companies of
comparable size, maturity and lines of business, (C) provide disclosure opinions of nationally
recognized outside counsel to Party B as are customarily requested in connection with
underwritten follow-on offers of equity securities of companies of comparable size, maturity
and lines of business, (D) provide other customary opinions, certificates and closing
documents customary in form for underwritten follow-on offers of equity securities of
companies of comparable size, maturity and lines of business and (E) afford Party A a
reasonable opportunity to conduct a “due diligence” investigation with respect to Party B
customary in scope




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LOWER CALL OPTION TRANSACTION




	 	 	for underwritten follow-on offers of equity securities of companies of comparable size,
maturity and lines of business; provided, however, that if Party A, in its sole discretion,
is not satisfied with access to due diligence materials, the results of its due diligence
investigation, or the procedures and documentation for the registered offering referred to
above, then clause (ii) of this Section 8(c) shall apply; provided that Party A has given
the Party B reasonable notice of its determination and provided the Party B with reasonable
opportunity to satisfy Party A’s concerns; (ii) in order to allow Party A to sell the Hedge
Shares in a private placement enter into a private placement agreement substantially similar
to private placement purchase agreements customary for private placements of equity
securities of companies of comparable size, maturity and lines of business, in form and
substance reasonably satisfactory to Party A, including customary representations,
covenants, blue sky and other governmental filings and/or registrations, indemnities to
Party A, due diligence rights (for Party A or any designated buyer of the Hedge Shares from
Party A), opinions and certificates and such other documentation as is customary for private
placements agreements, all reasonably acceptable to Party A (in which case, the Calculation
Agent shall make any adjustments to the terms of the Transaction that are necessary, in its
reasonable judgment, to compensate Party A for any discount from the public market price of
the Shares incurred on the sale of Hedge Shares in a private placement).






	9.	 	Account Details:





	 	 	 
	Payments to Party A:

	 	To be provided in writing upon request
	 
	 	 
	Payments to Party B:

	 	To be advised in writing upon request
	 
	 	 
	Deliveries to Party B:

	 	To be advised in writing upon request







	10.	 	Waiver of Jury Trial. EACH OF PARTY B AND PARTY A HEREBY IRREVOCABLY WAIVES (ON ITS OWN
BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS STOCKHOLDERS) ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT,
TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE TRANSACTION OR THE ACTIONS OF PARTY B OR
ITS AFFILIATES OR PARTY A OR ITS AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT
HEREOF






	11.	 	Governing Law. THE AGREEMENT AND THIS CONFIRMATION AND ANY OTHER MATTERS ARISING OUT OF OR
RELATING TO THE TRANSACTION OR THE ACTIONS OF PARTY B OR ITS AFFILIATES OR PARTY A OR ITS
AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT HEREOF SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK. THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK IN CONNECTION WITH ALL MATTERS RELATING HERETO AND WAIVE ANY OBJECTION TO THE
LAYING OF VENUE IN, AND ANY CLAIM OF INCONVENIENT FORUM WITH RESPECT TO, THESE COURTS.




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LOWER CALL OPTION TRANSACTION









     Please confirm that the foregoing correctly sets forth the terms of your agreement by signing
and returning this Confirmation.



	 	 	 	 	 
	 	 	Very truly yours,
	 
	 	 	 	 
	 	 	CAPITAL VENTURES INTERNATIONAL
	 	 	BY: HEIGHTS CAPITAL MANAGEMENT, INC,
	 	 	Its Authorized Agent
	 	 	(Party A)
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 

	 	Name:
	 	Martin Kobinger
	 

	 	Title:
	 	Investment Manager






	 	 	 	 	 
	Confirmed as of the date first written above:	 	 
	 
	 	 	 	 
	TXCO RESOURCES INC.	 	 
	(Party B)	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	Name:

	 	 

James E. Sigmon
	 	 
	Title:

	 	President	 	 






 









 






LOWER CALL OPTION TRANSACTION




ANNEX I




Matters to be covered in Opinion of Counsel to Party B




     1. Party B is validly existing as a corporation in good standing under the laws of the State
of Delaware.



     2. Party B has the requisite corporate power and authority to enter into the Transaction (for
purposes of this Annex 1, the “Agreement”) and to carry out the Transactions contemplated
thereby.



     3. The execution and delivery by Party B of the Transaction, and the performance by Party B of
its obligations under the Transaction, have been duly authorized by all necessary corporate action
on the part of Party B.



     4. The Transaction has been duly authorized, executed and delivered by Party B.



     5. No consent, approval or authorization of, or registration, filing or declaration with, any
governmental or public body or authority is required in connection with the execution, delivery or
performance by Party B of the Transaction.



     6. The execution, delivery and performance by Party B of the Transaction and compliance by
Party B with the terms and provisions thereof will not, whether with or without the giving of
notice or lapse of time or both, result in a breach or violation of any of the terms and provisions
of, or constitute a default under, (A) any material indenture, mortgage, deed of trust, loan,
purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or
instrument to which Party B or any subsidiary is bound or by which Party B or any subsidiary or any
of their respective properties may be bound or affected, or (B) any Delaware or federal law,
statute, rule, regulation or order or any judgment, order, writ or decree of any governmental
agency or body or any court having jurisdiction over Party B or any of its properties.



     7. Neither Party B nor any subsidiary is an “investment company” or a company “controlled” by
an “investment company”, in each case within the meanings ascribed to such terms in the Investment
Company Act of 1940, as amended, nor is Party B or any subsidiary subject to regulation under said
Act.