Document:

<PAGE>   1
                                                                    EXHIBIT 10.3

                                                                  EXECUTION COPY

                     FIRST AMENDMENT TO THE CREDIT AGREEMENT

         FIRST AMENDMENT, dated as of January 23, 2001 (this "Amendment"), to
the Credit Agreement, dated as of November 22, 2000 (the "Credit Agreement"),
among ENGLE HOMES, INC., a Florida corporation (the "Borrower"), the banks and
other financial institutions party thereto (the "Lenders"), and BANK OF AMERICA,
N.A., as administrative agent (in such capacity, the "Administrative Agent") for
the Lenders.

                                    RECITALS

         WHEREAS, the Borrower, the Administrative Agent and the Lenders wish to
amend the Credit Agreement, but only on the terms and subject to the conditions
set forth in this Amendment.

         NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower, the Administrative Agent and the Lenders hereby
agree as follows:

         1. Defined Terms. Unless otherwise defined herein, terms defined in the
Credit Agreement are used herein as therein defined.

         2. Amendments.

                  (a) The definition of "Consolidated EBITDA" contained in
         Section 1.1 of the Credit Agreement is hereby amended by deleting such
         definition in its entirety and substituting in lieu thereof the
         following new definition:

                            "`Consolidated EBITDA': for any period (a)
                   Consolidated Net Income for such period plus (b) the sum of
                   each of the following expenses that have been deducted from
                   the determination of Consolidated Net Income for such Period:
                   (i) all Consolidated Interest Expense for such period
                   (including, without duplication, previously capitalized
                   interest expense which would be included in "costs of goods
                   sold" and deducted from consolidated revenues in determining
                   Consolidated Net Income), (ii) all income tax expense
                   (whether federal, state, local, foreign or otherwise) for
                   such period, (iii) all depreciation expense for such period,
                   (iv) all amortization expense for such period and (v) all
                   extraordinary losses otherwise deducted in determining
                   Consolidated Net Income for such period less (c) all
                   extraordinary gains added in determining Consolidated Net
                   Income for such period, in each case determined on a
                   consolidated basis and in accordance with GAAP for such
                   period."

                  (b) The definition of "Consolidated Fixed Charges" contained
         in Section 1.1 of the Credit Agreement is hereby amended by deleting
         such definition in its entirety and substituting in lieu thereof the
         following new definition:

                           "`Consolidated Fixed Charges': for any period, the
                  sum, without duplication, of (i) Consolidated Interest Expense
                  for such period plus any imputed interest included in payments
                  under Financing Leases and capitalized interest in respect of
                  Indebtedness for such period, (ii) the aggregate principal
                  amount or equivalent thereof of all scheduled payments of
                  Indebtedness of the Borrower and its Subsidiaries during such
                  period and

<PAGE>   2

                  (iii) the aggregate amounts of dividends and distributions
                  required to be paid by the Borrower during such period in
                  respect of its outstanding preferred stock, if any."

                  (c) The definition of "Consolidated Interest Expense"
         contained in Section 1.1 of the Credit Agreement is hereby amended by
         deleting such definition in its entirety and substituting in lieu
         thereof the following new definition:

                           "`Consolidated Interest Expense': for any period, the
                  amount which, in conformity with GAAP, would be set forth
                  opposite the caption "interest expense" or any like caption on
                  a consolidated income statement of the Borrower and the
                  Subsidiaries for such period excluding the amortization of any
                  original issue discount."

                  (d) The definition of "Required Lenders" contained in Section
         1.1 of the Credit Agreement is hereby amended by deleting such
         definition in its entirety and substituting in lieu thereof the
         following new definition:

                           "`Required Lenders': (a) at any time when either (i)
                  Bank of America, N.A. (together with its Affiliates) shall
                  have an aggregate Credit Exposure of $150,000,000 or less or
                  (ii) Bank of America, N.A. (together with its Affiliates)
                  shall have an aggregate Credit Exposure of $200,000,000 or
                  less and Bank of America, N.A. or Banc of America Mortgage
                  Capital Corporation (together with any of their respective
                  Affiliates) shall not be a "Lender" under the Acquisition
                  Bridge Facility Documents, Lenders, the aggregate Credit
                  Exposures of which constitute at least 66-2/3% of the
                  aggregate Credit Exposure of all Lenders at such time and (b)
                  at all other times, Lenders, the aggregate Credit Exposures of
                  which constitute at least 75% of the aggregate Credit Exposure
                  of all Lenders at such time."

                  (e) The definition of "Revolving Credit Note" contained in
         Section 1.1 of the Credit Agreement is hereby amended by deleting the
         reference to "Term Loan Lender" and substituting in lieu thereof the
         new reference "Revolving Credit Lender".

                  (f) Section 6.12 of the Credit Agreement is hereby amended by
         deleting Paragraph (b) thereof in its entirety and substituting in lieu
         thereof the following new Paragraph:

                           "(b) Each Lender that is not incorporated under the
                  laws of the United States of America or a state thereof shall:

                                    (i) (A) if such Lender is a "bank" within
                           the meaning of Section 881(c)(3)(A) of the Code,
                           deliver to the Borrower and the Administrative Agent
                           two complete and executed (x) U.S. Internal Revenue
                           Forms W-8BEN (or any successor form thereto) with
                           respect to an income tax treaty providing for a zero
                           rate of withholding tax on interest, or (y) U.S.
                           Internal Revenue Service Forms W-8ECI (or any
                           successor form thereto), or (B) if such Lender is not
                           a "bank" within the meaning of Section 881(c)(3)(A)
                           of the Code deliver to the Borrower and the
                           Administrative Agent two complete and executed U.S.
                           Internal Revenue Service Forms W-8BEN (or any
                           successor form thereto), including all appropriate
                           attachments and (y) a certificate substantially in
                           the form of Exhibit D (a "Non-Bank Status
                           Certificate");

                                    (ii) deliver to the Borrower and the
                           Administrative Agent two further copies of any such
                           form or certification on or before the date that any

                                      -2-
<PAGE>   3

                           such form or certification expires or becomes
                           obsolete and after the occurrence of any event
                           requiring a change in the most recent form previously
                           delivered by it to the Borrower; and

                                    (iii) obtain such extensions of time for
                           filing and complete such forms or certifications as
                           may reasonably be requested by the Borrower or the
                           Administrative Agent;

                  unless in any such case an event (including, without
                  limitation, any change in treaty, law or regulation) has
                  occurred prior to the date on which any such delivery would
                  otherwise be required which renders all such forms
                  inapplicable or which would prevent such Lender from duly
                  completing and delivering any such form with respect to it and
                  such Lender so advises the Borrower and the Administrative
                  Agent. Such Lender shall certify (i) in the case of a Form
                  W-8BEN or W-8ECI (or any successor form thereto), that it is
                  entitled to receive payments under this Agreement without
                  deduction or withholding of any United States federal income
                  taxes and (ii) in the case of a Non-Bank Status Certificate,
                  that it is not a "bank" as such term is defined in Section
                  881(c)(3)(A) of the Code. Each Person that shall become a
                  Lender or a Participant pursuant to Section 13.6 shall, upon
                  the effectiveness of the related transfer, be required to
                  provide all of the forms and statements required pursuant to
                  this Section; provided, that in the case of a Participant such
                  Participant shall furnish all such required forms and
                  statements to the Lender from which the related participation
                  shall have been purchased."

                  (g) Section 10.10 of the Credit Agreement is hereby amended by
         adding the words "other than" before the phrase "on terms that are fair
         and reasonable" in the sixth line thereof.

                  (h) Section 12.9 of the Credit Agreement is hereby amended by
         deleting such Section in its entirety and substituting in lieu thereof
         the following new Section:

                           "12.9 Successor Administrative Agent. The
                  Administrative Agent may resign as Administrative Agent at any
                  time by giving written notice thereof to the Lenders and the
                  Borrower. The Administrative Agent shall resign as
                  Administrative Agent by giving written notice thereof to the
                  Lenders and the Borrower if at any time the Administrative
                  Agent shall cease to hold an aggregate Credit Exposure of at
                  least $35,000,000. The Required Lenders may, by giving written
                  notice to the Administrative Agent and the Borrower, remove
                  the Administrative Agent from its position as Administrative
                  Agent at any time if any action or failure to act by the
                  Administrative Agent is determined to have directly resulted
                  from its gross negligence or willful misconduct. Upon any such
                  resignation or removal, the Required Lenders shall have the
                  right to appoint a successor Administrative Agent with, so
                  long as no Event of Default has occurred and is continuing at
                  the time of the related appointment, the approval of the
                  Borrower (such approval not to be unreasonably withheld or
                  delayed and such approval to be deemed to have been given if
                  no objection thereto is received by the Required Lenders
                  within two Business Days after the date on which notice of the
                  proposed appointment is provided to the Borrower). If no
                  successor Administrative Agent shall have been appointed by
                  the Required Lenders and shall have accepted such appointment
                  within 30 days after the retiring Administrative Agent's
                  giving of notice of resignation or the Administrative Agent's
                  receiving notice of removal, then the retiring or removed
                  Administrative Agent may, on behalf of the Lenders, appoint a
                  successor Administrative Agent which shall be a commercial
                  bank organized under the laws of the United States of America
                  or any state thereof and having a combined capital and surplus
                  of at least $100,000,000. If within 45 days after written

                                      -3-
<PAGE>   4

                  notice is given of the Administrative Agent's resignation or
                  removal no successor Administrative Agent shall have been
                  appointed and shall have accepted such appointment, then on
                  such 45th day (a) the Administrative Agent's resignation or
                  removal shall become effective, (b) the Administrative Agent
                  shall thereupon be discharged from its duties and obligations
                  under the Loan Documents and (c) the Required Lenders shall
                  thereafter perform all duties and obligations of the
                  Administrative Agent under the Loan Documents until such time,
                  if any, as the Required Lenders appoint a successor
                  Administrative Agent. Upon acceptance of any appointment as
                  Administrative Agent hereunder by a successor, such successor
                  Administrative Agent shall thereupon succeed to and become
                  vested with all the rights, powers, discretion, privileges and
                  duties of the retiring or removed Administrative Agent, and
                  the retiring or removed Administrative Agent shall be
                  discharged from its duties and obligations under the Loan
                  Documents. After any Administrative Agent's resignation or
                  removal hereunder as Administrative Agent, the provisions of
                  this Section 12 shall continue in effect for its benefit in
                  respect of any actions taken or omitted to be taken by it
                  while it was acting as Administrative Agent."

                  (i) Section 13.6(c) of the Credit Agreement is hereby amended
         by deleting the first proviso thereof in its entirety and substituting
         in lieu thereof the following new proviso:

                           "provided, that until the earlier of June 30, 2001
                  and such time as the Arranger (or the Administrative Agent on
                  its behalf) shall have notified the Lenders that the
                  syndication of the Commitments has been completed, no such
                  assignment shall be permitted, and no Lender shall engage in
                  any discussions with any Person relating to any such
                  assignment or potential assignment, without the prior written
                  consent of the Arranger or the Administrative Agent."

         3. Conditions Precedent to the Effectiveness of this Amendment. This
Amendment shall become effective as of the first date (the "Amendment Effective
Date") on which each of the following conditions precedent shall have been
satisfied:

                  (a) The Administrative Agent shall have received counterparts
         of this Amendment executed by the Borrower, all of the Lenders, the
         Administrative Agent and each of the Guarantors.

                  (b) The representations and warranties contained in each of
         the Loan Documents shall be correct on and as of the Amendment
         Effective Date, before and after giving effect to this Amendment, as
         though made on and as of such date.

                  (c) No event shall have occurred and be continuing, or shall
         result from the effectiveness of this Amendment, that constitutes a
         Default.

                  (d) All of the accrued fees and expenses of the Administrative
         Agent (including the reasonable accrued and invoiced fees and expenses
         of counsel for the Administrative Agent) shall have been paid in full
         in accordance with Section 13.5 of the Credit Agreement.

The effectiveness of this Amendment is further conditioned upon the accuracy of
all of the factual matters described herein. This Amendment is subject to the
provisions of Section 13.1 of the Credit Agreement.

                                      -4-
<PAGE>   5

         4. Reference to and Effect on the Loan Documents.

                  (a) On and after the Amendment Effective Date, each reference
         in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
         words of like import referring to the Credit Agreement, and each
         reference in the other Loan Documents to the "Credit Agreement",
         "thereunder", "thereof" or words of like import referring to the Credit
         Agreement, shall mean and be a reference to the Credit Agreement, as
         amended and otherwise modified by this Amendment.

                  (b) The Credit Agreement and each of the other Loan Documents,
         as amended and otherwise modified by the amendments and other
         modifications specifically provided above in Section 2, are and shall
         continue to be in full force and effect and are hereby in all respects
         ratified and confirmed.

                  (c) The execution, delivery and effectiveness of this
         Amendment shall not, except as expressly provided herein, operate as a
         waiver of any right, power or remedy of the Administrative Agent under
         any of the Loan Documents, nor constitute a waiver of any provision of
         any of the Loan Documents.

         5. Costs and Expenses. The Borrower hereby agrees to reimburse, upon
demand, all reasonable out-of-pocket costs and expenses of the Administrative
Agent (including, without limitation, the reasonable fees and disbursements of
counsel for the Administrative Agent) in connection with the preparation,
execution, delivery, administration, modification and amendment of this
Amendment and the other documents, instruments and agreements to be delivered
hereunder or in connection herewith, all in accordance with the terms of Section
13.5 of the Credit Agreement.

         6. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement. Delivery of an
executed counterpart of a signature page to this Amendment by telecopier shall
be effective as delivery of a manually executed counterpart of this Amendment.

                                      -5-
<PAGE>   6

         7. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.

         IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.

                                         ENGLE HOMES INC.

                                         By: /s/ DAVID SHAPIRO
                                            ------------------------------------
                                              Name:        David Shapiro
                                              Title:       Vice President

                                         BANK OF AMERICA, N.A.,
                                         as Administrative Agent and as Lender

                                         By: /s/ KELLEY PRENTISS
                                            ------------------------------------
                                              Name:        Kelley Prentiss
                                              Title:       Vice President

                                      -6-
<PAGE>   7

Acknowledged and Accepted:

The Guarantors:

ENGLE HOLDINGS CORP.,
     a Delaware corporation

By: /s/ TOMMY MCADEN
   ------------------------------------
     Name:  Tommy McAden
     Title: Vice President

ENGLE HOMES REALTY, INC.,
     a Georgia corporation

ENGLE HOMES/ARIZONA, INC.,
     a Florida corporation

ENGLE HOMES/ARIZONA CONSTRUCTION, INC.,
     an Arizona corporation

ENGLE HOMES/ATLANTA, INC.,
     a Florida corporation

BANYAN TRAILS, INC.,
     a Florida corporation

ENGLE HOMES/BROWARD, INC.,
     a Florida corporation

ENGLE HOMES/COLORADO, INC.,
     a Florida corporation

ENGLE HOMES/GEORGIA, INC.,
     a Georgia corporation

GREENLEAF HOMES, INC.,
     a Florida corporation

ENGLE HOMES/GULF COAST, INC.,
     a Florida corporation

ENGLE HOMES/JACKSONVILLE, INC.,
     a Florida corporation

ENGLE HOMES/LAKE BERNADETTE, INC.,
     a Florida corporation

                                      -7-
<PAGE>   8

ENGLE HOMES/NORTH CAROLINA, INC.,
     a Florida corporation

ENGLE HOMES/ORLANDO, INC.,
     a Florida corporation

ENGLE HOMES/PALM BEACH, INC.,
     a Florida corporation

ENGLE HOMES/PEMBROKE, INC.,
     a Florida corporation

PEMBROKE FALLS REALTY, INC.,
     a Florida corporation

PREFERRED BUILDERS REALTY, INC.,
     a Florida corporation

PREFERRED HOME MORTGAGE COMPANY,
     a Florida corporation

ENGLE HOMES/SOUTHWEST FLORIDA, INC.,
     a Florida corporation

ST. TROPEZ AT BOCA GOLF, INC.,
     a Florida corporation

ENGLE HOMES/TEXAS, INC.,
     a Florida corporation

UNIVERSAL LAND TITLE, INC.,
     a Florida corporation

UNIVERSAL LAND TITLE OF COLORADO, INC.,
     a Colorado corporation

ENGLE HOMES/VIRGINIA, INC.,
     a Florida corporation

UNIVERSAL LAND TITLE OF VIRGINIA, INC.,
     a Virginia corporation

UNIVERSAL LAND TITLE OF TEXAS, INC.,
     a Texas corporation

UNIVERSAL LAND TITLE AGENCY, INC.,
     a Arizona corporation

By: /s/ DAVID SHAPIRO
   ------------------------------------
     Name:  David Shapiro
     Title: Vice President

                                      -8-
<PAGE>   9

UNIVERSAL LAND TITLE OF THE PALM BEACHES, LTD.,
     a Florida limited partnership

PROFESSIONAL ADVANTAGE TITLE, LTD.,
     a Florida limited partnership

THE CENTURY TITLE AGENCY, LTD.,
     a Florida limited partnership

EASTERN TITLE SERVICES, LTD.,
     a Florida limited partnership

By:  UNIVERSAL LAND TITLE, INC.
     a Florida corporation and its general partner

By: /s/ DAVID SHAPIRO
   ------------------------------------
     Name:  David Shapiro
     Title: Vice President

ENGLE HOMES DELAWARE, INC.,
     a Delaware corporation

By: /s/ MILDRED F. SMITH
   ------------------------------------
     Name:  Mildred F. Smith
     Title: President

ENGLE HOMES FINANCING, INC.,
     a Delaware corporation

By: /s/ MILDRED F. SMITH
   ------------------------------------
     Name:  Mildred F. Smith
     Title: President

                                      -9-<PAGE>

                             EMPLOYMENT AGREEMENT
                             --------------------

          AGREEMENT, as of the date set forth on the signature page hereof, by
and between P&L Coal Holdings Corporation, a Delaware corporation (the
"Company") and the undersigned executive (the "Executive").

                                   RECITALS
                                   --------

          In order to induce Executive to continue to serve in the executive
team position set forth on the signature page hereof, the Company desires to
provide Executive with compensation and other benefits on the terms and
conditions set forth in this Agreement.

          Executive is willing to accept such employment and perform services
for the Company, on the terms and conditions hereinafter set forth.

          It is therefore hereby agreed by and between the parties as follows:

          1.   Employment.
               ----------

          1.1  Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term hereof in the executive team
position set forth on the signature page hereof.  In such capacity, Executive
shall report to the Chief Executive Officer of the Company (the "CEO") and shall
have the customary powers, responsibilities and authorities of executives
holding such positions in corporations of the size, type and nature of the
Company, as it exists from time to time, and as are assigned by the Board of
Directors of the Company (the "Board") and the CEO.

          1.2  Subject to the terms and conditions of this Agreement, Executive
hereby accepts employment in the executive team position set forth on the
signature page hereof commencing as of the date hereof (the "Commencement Date")
and agrees, subject to any period
<PAGE>

of vacation and sick leave, to devote his full business time and efforts to the
performance of services, duties and responsibilities in connection therewith,
subject at all times to review and control of the Board or the CEO.

          1.3  Nothing in this Agreement shall preclude Executive from engaging
in charitable work and community affairs, from delivering lectures, fulfilling
speaking engagements or teaching at educational institutions, from managing any
investment made by him or his immediate family with respect to which Executive
or such family member is not substantially involved with the management or
operation of the entity in which Executive has invested (provided that no such
investment in publicly traded equity securities or other property may exceed 5%
of the equity of any entity, without the prior approval of the CEO or the Board)
or from serving, subject to the prior approval of the CEO or the Board, as a
member of boards of directors or as a trustee of any other corporation,
association or entity, to the extent that any of the above activities do not
materially interfere with the performance of his duties hereunder.  For purposes
of the preceding sentence, any approval by the CEO or the Board required therein
shall not be unreasonably withheld.

          2.   Term of Employment.  Executive's term of employment under this
               ------------------
Agreement (the "Term of Employment") shall commence on the Commencement Date
and, subject to termination by the terms hereunder, shall have an initial term
of two years (the "Initial Term"), which, beginning on the first anniversary of
the Commencement Date, shall extend thereafter on a day-to-day basis for an
"evergreen" one-year term.

          3.   Compensation.
               ------------

          3.1  Salary.  During the Term of Employment, the Company shall pay
               ------
Executive a base salary ("Base Salary") at an initial rate as set forth on the
signature page hereof.

                                       2
<PAGE>

Base Salary shall be payable in accordance with the ordinary payroll practices
of the Company. During the Term of Employment, the Board and the CEO shall, in
good faith, review, at least annually, Executive's Base Salary in accordance
with the Company's customary procedures and practices regarding the salaries of
senior executives and may, if determined by the Board to be appropriate,
increase Executive's Base Salary following such review; provided, however, that
                                                        --------  -------
no such increase shall be made before the Company obtains ratings on its
unsecured debt from Standard & Poor's and Moody's of at least BBB- and Baa3,
respectively ("Investment-Grade Credit Rating"). "Base Salary" for all purposes
herein shall be deemed to be a reference to any such increased amount.

          3.2  Annual Bonus.  In addition to his Base Salary, Executive shall,
               ------------
commencing with the 1999 fiscal year and continuing each fiscal year thereafter,
be eligible to receive an annual cash bonus (the "Bonus") during the term of his
employment hereunder to be developed by the Board, based on achievement of
performance targets established by the Board in consultation with the CEO as
soon as practicable at the beginning of the fiscal year for which the
performance targets relate.  Executive's target Bonus for the 1999 fiscal year
is set forth on the signature page hereof, and such target shall not be
increased before the Company obtains an Investment-Grade Credit Rating.  A Bonus
award shall be payable to Executive at the time bonuses are paid to executive
officers in accordance with the Company's policies and practices as set by the
Board in consultation with the CEO.

          4.   Employee Benefits.
               -----------------

          4.1  Equity and Stock Options.  Simultaneously with the execution of
               ------------------------
this Agreement, the Company and Executive are entering into the Common Stock
Ownership Agreement, Option Grant Agreement[s] and the Stockholders Agreement in
the forms attached

                                       3
<PAGE>

hereto as Exhibits A, B and C, respectively (together with any other agreement
approved by the Board and designated by the Board an "Ancillary Document" for
purposes of this Agreement, the "Ancillary Documents"). Executive shall not be
eligible to receive any stock option or other equity incentive other than as set
forth in the Ancillary Documents.

          4.2  Employee Benefit Programs, Plans and Practices; Perquisites.  The
               -----------------------------------------------------------
Company shall provide Executive while employed hereunder with coverage under
such employee benefits (commensurate with his position in the Company and to the
extent permitted under any employee benefit plan) in accordance with the terms
thereof, including the Continuation Benefits (as defined herein), D&O insurance,
which covers claims arising out of actions or inactions occurring during the
Term of Employment, in accordance with the D&O insurance policy, and other
employee benefits which the Company may make available to its senior executives
from time to time in its discretion.  The Company shall also provide Executive
with perquisites which the Company may make available to its senior executives
from time to time in its discretion.

          4.3  Vacation.  Executive shall be entitled to the number of business
               --------
days paid vacation in each calendar year as determined in accordance with the
Company's applicable vacation policies, which shall be taken at such times as
are consistent with Executive's responsibilities hereunder.

          5.   Expenses. Subject to prevailing Company policy or such guidelines
               --------
as may be established by the Board, the Company will reimburse Executive for all
reasonable expenses incurred by Executive in carrying out his duties.

                                       4
<PAGE>

          6.   Termination of Employment.
               -------------------------

          6.1  Termination Not for Cause or for Good Reason.  (a)  The Company
               --------------------------------------------
or Executive may terminate Executive's Term of Employment at any time for any
reason by written notice at least thirty (30) days in advance.  If Executive's
employment is terminated (i) by the Company other than for Cause (as defined in
Section 6.2(b) hereof), Disability (as defined in Section 6.3 hereof) or death
or (ii) by Executive for Good Reason (as defined in Section 6.1(b) hereof), the
Company, as liquidated damages and in lieu of any other damages therefor, shall
(A) continue to pay to Executive Base Salary through the end of the Initial Term
if such termination occurs during the first year of the Initial Term for a
period of one year for such termination thereafter (the "Continuation Period"),
with such payments to be made in accordance with the terms of Section 3.1. and
(B) pay to Executive an additional amount equal to the Bonus actually paid in
the year prior to such termination (the "Severance Payments").  The Severance
Payments shall be made in substantially equal installments over the Continuation
Period in accordance with Company payroll practices, unless the CEO or the Board
approves payment in a lump sum.  In addition, the Company shall pay to Executive
a prorated bonus (the "Prorated Bonus") for the year of termination, payable
when such bonuses are paid to other senior executives of the Company, calculated
as the Bonus Executive would have received in such year based on the Company's
actual performance multiplied by a fraction, the numerator of which is the
number of business days during the year of termination that Executive was
employed and the denominator of which is the total number of business days
during the year of termination.  The Company shall also continue to provide
Executive during the Continuation Period with qualified and nonqualified defined
benefit and defined contribution pension, life insurance, medical and other
benefits set forth on the signature page hereof (collectively, the "Continuation
Benefits");

                                       5
<PAGE>

provided, however, that the Company shall not be obligated to provide any
--------  -------
benefits under tax qualified plans which are not permitted by the terms of such
plan or by applicable law or could jeopardize the plan's tax status; provided,
                                                                     --------
further, that any such coverage shall terminate to the extent that Executive is
-------
offered or obtains comparable benefits from any other employer during the
Continuation Period. Notwithstanding the foregoing, if Executive breaches any
provision of Section 11 hereof, the remaining balance of the Severance Payments,
the Prorated Bonus and any Continuation Benefits shall be forfeited.

          (b) For purposes of this Agreement, "Good Reason" shall mean (i) a
reduction by the Company in Executive's Base Salary (in which event Severance
Payments shall be made based upon Executive's Base Salary in effect prior to any
such reduction), (ii) a material reduction in the aggregate program of employee
benefits and perquisites to which Executive is entitled (other than a reduction
which affects all executives and is approved by the initial CEO; provided,
                                                                 --------
however; that if the initial CEO terminates without Good Reason, voluntarily
-------
retires, dies or has a Disability or if such reduction is necessary to maintain
the financial viability or solvency of the Company, the reduction does not
require the approval of the initial CEO); or, without the approval of the
initial CEO:  (iii) relocation by more than 50 miles from Executive's workplace,
(iv) any material diminution or material adverse change in Executive's duties,
responsibilities or reporting relationships, which causes Executive to fall
below the level of the executive team, or (v) a material decline in Executive's
Bonus opportunity; provided, however, that after a Change of Control of the
                   --------  -------
Company or an IPO (as those terms are defined in the 1998 Stock Purchase and
Option Plan for Key Employees of P&L Coal Holdings Corporation), clauses (ii)
through (v) above shall be replaced by the following: (ii) a material reduction
in the aggregate program of employee benefits and perquisites to which Executive
is entitled (other

                                       6
<PAGE>

than a reduction which affects all executives), (iii) relocation by more than 50
miles from Executive's workplace, (iv) any material diminution or material
adverse change in Executive's duties, responsibilities or reporting
relationships, which causes Executive to fall below the level of the executive
team, or (v) a material decline in Executive's Bonus opportunity.

          (c)  Termination by Executive for Good Reason shall be made by
delivery to the Company by Executive of written notice, given at least 45 days
prior to such termination, which sets forth the conduct believed to constitute
Good Reason; provided, however, that the Company shall have the opportunity to
             --------  -------
cure the Good Reason during the first 30 days of such notice period and if the
Good Reason is cured within such 30-day period, Executive's notice of
termination shall be deemed withdrawn. If no notice is given within 90 days of
the event giving rise to Good Reason, the Good Reason shall be deemed waived.

          6.2  Voluntary Termination by Executive; Discharge for Cause.  (a)  In
               -------------------------------------------------------
the event that Executive's employment is terminated (i) by the Company for
Cause, as hereinafter defined, (ii) by Executive other than for Good Reason,
Disability or death, or (iii) by Executive for retirement, Executive shall only
be entitled to receive (A) any Base Salary accrued but unpaid prior to such
termination and (B) any vacation accrued but unused prior to such termination
and any other benefits provided under the employee benefit programs, plans and
practices referred to in Section 4.2 hereof, in accordance with their terms.
After the termination of Executive's employment under this Section 6.2, the
obligations of the Company under this Agreement to make any further payments, or
provide any benefits specified herein, to Executive, except as provided in the
previous sentence, shall thereupon cease and terminate.

          (b)  As used herein, the term "Cause" shall be limited to (i) any
material and uncorrected breach by Executive of the terms of this Agreement,
including, but not limited to,

                                       7
<PAGE>

engaging in action in violation of Section 11 hereof, (ii) any willful fraud or
dishonesty of Executive involving the property or business of the Company, (iii)
a deliberate or willful refusal or failure of Executive to comply with any major
corporate policy of the Company which is communicated to Executive in writing or
(iv) Executive's conviction of, or plea of nolo contendere to, any felony if
                                           ---------------
such conviction shall result in his imprisonment; provided that with respect to
clauses (i), (ii) or (iii) above, Executive shall have 10 days following written
notice of the conduct which is the basis for the potential termination for Cause
within which to cure such conduct in order to prevent termination for Cause by
the Company. In the event that Executive is terminated for failure to meet
performance goals, as determined by the initial CEO, such termination shall be
considered a termination for Cause for all purposes relating to his equity
(stock and options), but it shall be considered a termination without Cause for
purposes of such Executive's right to receive Severance Payments, the Prorated
Bonus and the Continuation Benefits.

          6.3  Disability.  In the event of the Disability (as defined below) of
               ----------
Executive during the Term of Employment, the Company may terminate Executive's
Term of Employment upon written notice to Executive (or Executive's personal
representative, if applicable) effective upon the date of receipt thereof (the
"Disability Commencement Date").  The obligation of the Company to make any
further payments under this Agreement shall, except for earned but unpaid Base
Salary, amounts attributable to accrued but unused vacation days and the
Prorated Bonus cease as of the Disability Commencement Date.  The term
"Disability," for purposes of this Agreement, shall mean Executive's absence
from the full-time performance of Executive's duties pursuant to a reasonable
determination made in accordance with the Company's disability plan that
Executive is disabled as a result of incapacity due to physical or mental
illness that

                                       8
<PAGE>

lasts, or is reasonably expected to last, for at least six months. Benefits
under all other employee benefit programs, plans and practices shall be paid in
accordance with their terms.

          6.4  Death.  In the event of Executive's death during his Term of
               -----
Employment hereunder or at any time thereafter while payments are still owing to
Executive under the terms of this Agreement, all obligations of the Company to
make any further payments, other than the obligation to pay any accrued but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus or any remaining payments that were payable to Executive by
reason of his termination of employment under Section 6.1 to which Executive was
entitled at the time of his death, shall terminate upon Executive's death.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.

          6.5  No Further Notice or Compensation or Damages.  Executive
               --------------------------------------------
understands and agrees that he shall not be entitled to any further notice,
compensation or damages upon Termination of Employment under this Agreement,
other than amounts specified in this Section 6 and the Ancillary Documents.

          6.6  Executive's Duty to Provide Materials.  Upon the termination of
               -------------------------------------
the Term of Employment for any reason, Executive or his estate shall surrender
to the Company all correspondence, letters, files, contracts, mailing lists,
customer lists, advertising materials, ledgers, supplies, equipment, checks, and
all other materials and records of any kind that are the property of the Company
or any of its subsidiaries or affiliates, that may be in Executive's possession
or under his control, including all copies of any of the foregoing.

          7.   Notices.  All notices or communications hereunder shall be in
               -------
writing, addressed as follows:

                                       9
<PAGE>

          To the Company:

               P&L Coal Holdings Corporation
               701 Market Street, Suite 700
               St. Louis, Missouri 63101-1826
               attn: Chief Executive Officer

          with a copy to:

               Alvin H. Brown, Esq.
               Simpson Thacher & Bartlett
               425 Lexington Avenue
               New York, New York 10017

          To Executive at the address set forth on the signature page hereof,
Any such notice or communication shall be delivered by hand or by courier or
sent certified or registered mail, return receipt requested, postage prepaid,
addressed as above (or to such other address as such party may designate in a
notice duly delivered as described above), and the third business day after the
actual date of sending shall constitute the time at which notice was given.

          8.   Separability.  If any provision of this Agreement shall be
               ------------
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.

          9.   Assignment.  This Agreement shall be binding upon, inure to the
               ----------
benefit of and be enforceable by the heirs and representatives of Executive and
the assigns and successors of the Company, but neither this Agreement nor any
rights or obligations hereunder shall be assignable or otherwise subject to
hypothecation by Executive (except by will or by operation of the laws of
intestate succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company.

                                       10
<PAGE>

          10.  Amendment.  This Agreement may only be amended by written
               ---------
agreement of the parties hereto.

          11.  Nondisclosure of Confidential Information; Non-Competition.  (a)
               ----------------------------------------------------------
Executive, both during the term hereof and thereafter, will not, directly or
indirectly,  use for himself or use for, or disclose to, any party other than
the Company, or any subsidiary of the Company (other than in the ordinary course
of Executive's duties for the benefit of the Company or any subsidiary of the
Company), any secret or confidential information regarding the business or
property of the Company or its subsidiaries or regarding any secret or
confidential apparatus, process, system, or other method at any time used,
developed, acquired, discovered or investigated by or for the Company or its
subsidiaries, whether or not developed, acquired, discovered or investigated by
Executive.  At the termination of Executive's employment or at any other time
the Company or any of its subsidiaries may request, Executive shall promptly
deliver to the Company all memoranda, notes, records, plats, sketches, plans or
other documents made by, compiled by, delivered to, or otherwise acquired by
Executive concerning the business or properties of the Company or its
subsidiaries or any secret or confidential product, apparatus or process used
developed, acquired or investigated by the Company or its subsidiaries.

          (b)  In consideration of the Company's obligations under this
Agreement, Executive agrees that during the period of his employment hereunder
and for a period of one year thereafter, without the prior written consent of
the Board, (i) he will not, directly or indirectly, either as principal,
manager, agent, consultant, officer, stockholder, partner, investor, lender or
employee or in any other capacity, carry on, be engaged in or have any financial
interest in, any entity which is in competition with the business of the Company
or its subsidiaries and (ii) he shall not, on his own behalf or on behalf of any
person, firm or company,

                                       11
<PAGE>

directly or indirectly, solicit or offer employment to any person who is or has
been employed by the Company or its subsidiaries at any time during the twelve
(12) months immediately preceding such solicitation.

          (c)  For purposes of this Section 11, an entity shall be deemed to be
in competition with the Company if it is principally involved in the purchase,
sale or other dealing in any property or the rendering of any service purchased,
sold, dealt in or rendered by the Company as a part of the business of the
Company within the same geographic area in which the Company effects such sales
or dealings or renders such services.  Notwithstanding this subsection 11(c) or
subsection 11(b), nothing herein shall be construed so as to preclude Executive
from investing in any publicly or privately held company, provided Executive's
beneficial ownership of any class of such company's securities does not exceed
5% of the outstanding securities of such class.

          (d)  Executive agrees that this covenant not to compete is reasonable
under the circumstances and will not interfere with his ability to earn a living
or to otherwise meet his financial obligations. Executive and the Company agree
that if in the opinion of any court of competent jurisdiction such restraint is
not reasonable in any respect, such court shall have the right, power and
authority to excise or modify such provision or provisions of this covenant as
to the court shall appear not reasonable and to enforce the remainder of the
covenant as so amended. Executive agrees that any breach of the covenants
contained in this Section 11 would irreparably injure the Company. Accordingly,
Executive agrees that, in the event that a court enjoins Executive from any
activity prohibited by this Section 11, the Company may, in addition to pursuing
any other remedies it may have in law or in equity, cease making any payments
otherwise required by this Agreement and obtain an injunction against Executive
from any court

                                       12
<PAGE>

having jurisdiction over the matter restraining any further violation of this
Agreement by Executive.

          12.  Beneficiaries; References.  Executive shall be entitled to select
               -------------------------
(and change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death, and may change such election, in either case by giving the
Company written notice thereof.  In the event of Executive's death or a judicial
determination of his incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to his beneficiary, estate or other
legal representative.  Any reference to the masculine gender in this Agreement
shall include, where appropriate, the feminine.

          13.  Dispute Resolution.  Any dispute or controversy arising under or
               ------------------
in connection with this Agreement (other than an action to enforce the covenants
in Section 11 hereof) or the Ancillary Documents shall be resolved by
arbitration.  Arbitrators shall be selected, and arbitration shall be conducted,
in accordance with the rules of the American Arbitration Association.  The
Company shall pay any legal fees in connection with such arbitration in the
event that Executive prevails on a material element of his claim or defense.

          14.  Governing Law.  This Agreement shall be construed, interpreted
               -------------
and governed in accordance with the laws of the State of New York, without
reference to rules relating to conflicts of law.

          15.  Effect on Prior Agreements.  This Agreement and the Ancillary
               --------------------------
Documents contain the entire understanding between the parties hereto and
supersedes in all respects any prior or other agreement or understanding, both
written and oral, between the

                                       13
<PAGE>

Company, any affiliate of the Company or any predecessor of the Company or
affiliate of the Company and Executive.

          16.  Withholding.  The Company shall be entitled to withhold from
               -----------
payment any amount of withholding required by law.

          17.  Survival.  Notwithstanding the expiration of the term of this
               --------
Agreement, the provisions of Section 11 hereunder shall remain in effect as long
as is reasonably necessary to give effect thereto in accordance with the terms
hereof.

          18.  Counterparts.  This Agreement may be executed in two or more
               ------------
counterparts, each of which will be deemed an original.

                                    P&L Coal Holdings Corporation

                                    By___________________________
                                      Irl F. Engelhardt

Signature of Executive:             _____________________________
                                    Richard A. Navarre

Date of Agreement:                  May 19, 1998

Name of Executive:                  Richard A. Navarre
Address of Executive:               149 Rosebrook Drive
                                    Florissant, MO 63031

Executive Team Position:            President Peabody COALSALES

Base Salary:                        $220,000 per annum

Bonus Target:                       150% of Base Salary

Continuation Benefits:              1.   Medical, dental and vision benefits;
                                    2.   Defined contribution plans (qualified
                                         and non-qualified);
                                    3.   Life insurance;
                                    4.   AD&D;
                                    5.   Health care reimbursement account; and
                                    6.   Day care reimbursement account.

                                       14

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