Exhibit 10.3

 

MERITAGE HOMES CORPORATION

STOCK OPTION PLAN

 

1.                                      Establishment, Purpose and Definitions

 

(a)                                  The Stock Option Plan (the “Option Plan”)
of Meritage Homes Corporation (the “Company”) is hereby adopted.  The Option
Plan shall provide for the issuance of incentive stock options (“ISOs”) and
nonqualified stock options (“NSOs”).

 

(b)                                 The purpose of this Option Plan is to
promote the long-term success of the Company by attracting, motivating and
retaining key executives, consultants and directors (the “Participants”) through
the use of competitive long-term incentives which are tied to stockholder
interests by providing incentives to the Participants in the form of stock
options which offer rewards for achieving the long-term strategic and financial
objectives of the Company.

 

(c)                                  The Option Plan is intended to provide a
means whereby Participants may be given an opportunity to purchase shares of
Stock (as defined herein) of the Company pursuant to (i) options which may
qualify as ISOs under Section 422 of the Internal Revenue Code of 1986, as
amended (the “Internal Revenue Code”), or (ii) NSOs which may not so qualify.

 

(d)                                 The term “Affiliates” as used in this Option
Plan means parent or subsidiary corporations, as defined in Section 424(e) and
(f) of the Code (but substituting “the Company” for “employer corporation”),
including parents or subsidiaries which become such after adoption of the Option
Plan.

 

2.                                      Administration of the Plan

 

(a)                                  The Option Plan shall be administered by
members of the Board of Directors of the Company (the “Board”) qualifying as
“non-employee directors” as such term is defined in Rule 16b-3 promulgated by
the Securities and Exchange Commission (the “Commission”).

 

(b)                                 The Board may from time to time determine
which employees of the Company or its Affiliates or other individuals or
entities (each an “option holder”) shall be granted options under the Option
Plan, the terms thereof (including without limitation determining whether the
option is an incentive stock option and the times at which the options shall
become exercisable), and the number of shares of Stock for which an option or
options may be granted.

 

(c)                                  If rights of the Company to repurchase
Stock are imposed, the Board may, in its sole discretion, accelerate, in whole
or in part, the time for lapsing of any rights of the Company to repurchase
shares of such Stock or forfeiture restrictions.

 

(d)                                 If rights of the Company to repurchase Stock
are imposed, the certificates evidencing such shares of Stock awarded hereunder,
although issued in the name of the option holder concerned, shall be held by the
Company or a third party designated by the Board in escrow subject to delivery
to the option holder or to the Company at such times and in such amounts as
shall be directed by the Board under the terms of this Option Plan.  Share
certificates

 

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representing Stock that is subject to repurchase rights shall have imprinted or
typed thereon a legend or legends summarizing or referring to the repurchase
rights.

 

(e)                                  The Board shall have the sole authority, in
its absolute discretion, to adopt, amend and rescind such rules and regulations,
consistent with the provisions of the Option Plan, as, in its opinion, may be
advisable in the administration of the Option Plan, to construe and interpret
the Option Plan, the rules and regulations, and the instruments evidencing
options granted under the Option Plan and to make all other determinations
deemed necessary or advisable for the administration of the Option Plan.  All
decisions, determinations and interpretations of the Board shall be binding on
all option holders under the Option Plan.

 

3.                                      Stock Subject to the Plan

 

(a)                                  “Stock” shall mean Common Stock of the
Company or such stock as may be changed as contemplated by Section 3(c) below. 
Stock shall include shares drawn from either the Company’s authorized but
unissued shares of Common Stock or from reacquired shares of Common Stock,
including without limitation shares repurchased by the Company in the open
market.  The maximum number of shares of Common Stock that can be issued under
this Option Plan is 5,900,000 shares, and the maximum number of shares of Common
Stock that can be issued to any one person under this Option Plan is 100,000
shares per year.

 

(b)                                 Options may be granted under the Option Plan
from time to time to eligible persons.  Stock options awarded pursuant to the
Option Plan which are forfeited, terminated, surrendered or canceled for any
reason prior to exercise shall again become available for grants under the
Option Plan (including any option canceled in accordance with the cancellation
regrant provisions of Section 6(f) herein).

 

(c)                                  If there shall be any changes in the Stock
subject to the Option Plan, including Stock subject to any option granted
hereunder, through merger, consolidation, recapitalization, reorganization,
reincorporation, stock split, reverse stock split, stock dividend, combination
or reclassification of the Company’s Stock or other similar events, an
appropriate adjustment shall be made by the Board in the number of shares of
Stock.  Consistent with the foregoing, in the event that the outstanding Stock
is changed into another class or series of capital stock of the Company,
outstanding options to purchase Stock granted under the Option Plan shall become
options to purchase such other class or series and the provisions of this
Section 3(c) shall apply to such new class or series.

 

(d)                                 The aggregate number of shares of Stock
approved by the Option Plan may not be exceeded without amending the Option Plan
and obtaining stockholder approval within twelve months of such amendment.

 

4.                                      Eligibility

 

Persons who shall be eligible to receive stock options granted under the Option
Plan shall be those individuals and entities as the Board in its discretion
determines should be awarded such incentives given the best interests of the
Company; provided, however, that (i) ISOs may only be granted to employees of
the Company and its Affiliates and (ii) any person holding capital stock
possessing more than 10% of the total combined voting power of all classes of
Stock of the

 

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Company or any Affiliate shall not be eligible to receive ISOs unless the
exercise price per share of Stock is at least 110% of the fair market value of
the Stock on the date the option is granted.

 

5.                                      Exercise Price for Options Granted Under
the Plan

 

(a)                                  All ISOs and NSOs will have option exercise
prices per option share not less than the fair market value of a share of the
Stock on the date the option is granted, except that in the case of ISOs granted
to any person possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any Affiliate the price shall be not less
than 110% of such fair market value.  The price of ISOs or NSOs granted under
the Option Plan shall be subject to adjustment to the extent provided in Section
3(c) above.

 

(b)                                 The fair market value on the date of grant
shall be determined based upon the closing price on an exchange on that day or,
if the Stock is not listed on an exchange, on the average of the closing bid and
asked prices in the Over the Counter Market on that day.

 

6.                                      Terms and Conditions of Options

 

(a)                                  Each option granted pursuant to the Option
Plan shall be evidenced by a written stock option agreement (the “Option
Agreement”) executed by the Company and the person to whom such option is
granted.  The Option Agreement shall designate whether the option is an ISO or
an NSO.

 

(b)                                 The term of each ISO and NSO shall be no
more than 10 years, except that the term of each ISO issued to any person
possessing more than 10% of the voting power of all classes of stock of the
Company or any Affiliate shall be no more than 5 years.  Subsequently issued
options, if Stock becomes available because of further allocations or the lapse
of previously outstanding options, will extend for terms determined by the Board
or the Committee but in no event shall an ISO be exercised after the expiration
of 10 years from the date of its grant.

 

(c)                                  In the case of ISOs, the aggregate fair
market value (determined as of the time such option is granted) of the Stock to
which ISOs are exercisable for the first time by such individual during any
calendar year (under this Option Plan and any other plans of the Company or its
Affiliates if any) shall not exceed the amount specified in Section 422(d) of
the Internal Revenue Code, or any successor provision in effect at the time an
ISO becomes exercisable.

 

(d)                                 The Option Agreement may contain such other
terms, provisions and conditions regarding vesting, repurchase or other
provisions as may be determined by the Board.  To the extent such terms,
provisions and conditions are inconsistent with this Option Plan, the specific
provisions of the Option Plan shall prevail.  If an option, or any part thereof,
is intended to qualify as an ISO, the Option Agreement shall contain those terms
and conditions, which the Board determines, are necessary to so qualify under
Section 422 of the Internal Revenue Code.

 

(e)                                  The Board shall have full power and
authority to extend the period of time for which any option granted under the
Option Plan is to remain exercisable following the option holder’s cessation of
service as an employee, director or consultant, including without limitation

 

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cessation as a result of death or disability; provided, however, that in no
event shall such option be exercisable after the specified expiration date of
the option term.

 

(f)                                    As a condition to option grants under the
Option Plan, the option holder agrees to grant the Company the repurchase rights
as the Company may at its option require and as may be set forth in a separate
repurchase agreement.  Any option granted under the Option Plan may be subject
to a vesting schedule as provided in the Option Agreement and, except as
provided in this Section 6 herein, only the vested portion of such option may be
exercised at any time during the Option Period.  All rights to exercise any
option shall lapse and be of no further effect whatsoever immediately if the
option holder’s service as an employee is terminated for “Cause” (as hereinafter
defined) or if the option holder voluntarily terminates the option holder’s
service as an employee.  The unvested portion of the option will lapse and be of
no further effect immediately upon any termination of employment of the option
holder for any reason.  In the remaining cases where the option holder’s service
as an employee is terminated due to death, permanent disability, or is
terminated by the Company (or its affiliates) without Cause at any time, unless
otherwise provided by the Committee, the vested portion of the option will
extend for a period of three (3) months following the termination of employment
and shall lapse and be of no further force or effect whatsoever only if it is
not exercised before the end of such three (3) month period.  “Cause” shall be
defined in an Employment Agreement between Company and option holder and if none
there shall be “Cause” for termination if (i) the option holder is convicted of
a felony, (ii) the option holder engages in any fraudulent or other dishonest
act to the detriment of the Company, (iii) the option holder fails to report for
work on a regular basis, except for periods of authorized absence or bona fide
illness, (iv) the option holder misappropriates trade secrets, customer lists or
other proprietary information belonging to the Company for the option holder’s
own benefit or for the benefit of a competitor, (v) the option holder engages in
any willful misconduct designed to harm the Company or its stockholders, or (vi)
the option holder fails to perform properly assigned duties.

 

(g)                                 No fractional shares of Stock shall be
issued under the Option Plan, whether by initial grants or any adjustments to
the Option Plan.

 

7.                                      Use of Proceeds

 

Cash proceeds realized from the sale of Stock under the Option Plan shall
constitute general funds of the Company.

 

8.                                      Amendment, Suspension or Termination of
Plan

 

(a)                                  The Board may at any time suspend or
terminate the Option Plan, and may amend it from time to time in such respects
as the Board may deem advisable provided that (i) such amendment, suspension or
termination complies with all applicable state and federal requirements and
requirements of any stock exchange on which the Stock is then listed, including
any applicable requirement that the Option Plan or an amendment to the Option
Plan be approved by the stockholders, and (ii) the Board shall not amend the
Option Plan to increase the maximum number of shares of Stock subject to ISOs
under the Option Plan or to change the description or class of persons eligible
to receive ISOs under the Option Plan without the consent of the stockholders of
the Company sufficient to approve the Option Plan in the first instance.

 

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The Option Plan shall terminate on the earlier of (i) tenth anniversary of the
Plan’s approval or (ii) the date on which no additional shares of Stock are
available for issuance under the Option Plan.

 

(b)                                 No option may be granted during any
suspension or after the termination of the Option Plan, and no amendment,
suspension or termination of the Option Plan shall, without the option holder’s
consent, alter or impair any rights or obligation under any option granted under
the Option Plan.

 

(c)                                  [Reserved.]

 

(d)                                 Nothing contained herein shall be construed
to permit a termination, modification or amendment adversely affecting the
rights of any option holder under an existing option theretofore granted without
the consent of the option holder.

 

9.                                      Assignability of Options and Rights

 

(a)                                  Except as set forth in Section (b) below,
each ISO and NSO granted pursuant to this Option Plan shall, during the holder’s
lifetime, be exercisable only by the option holder, and neither the option nor
any right to purchase Stock shall be transferred, assigned or pledged by the
option holder, by operation of law or otherwise, other than upon a beneficiary
designation executed by the option holder and delivered to the Company or the
laws of descent and distribution.

 

(b)                                 The Board shall have the authority, in its
discretion, to grant (or to sanction by way of amendment to an existing option)
NSOs which may be transferred by the Participant during his or her lifetime to
any Family Member (as defined below).  Unless transfers for the Participant have
been previously approved by the Board, a transfer of an option pursuant hereto
may only be effected by the Company at the written request of the Participant. 
In the event an option is transferred as contemplated herein, such transferred
option may not be subsequently transferred by the transferee (other than another
transfer meeting the conditions herein) except by will or the laws of descent
and distribution.  A transferred option shall continue to be governed by and
subject to the terms and limitations of the Option Plan and relevant Option
Agreement, and the transferee shall be entitled to the same rights as the
Participant, as if the transfer had not taken place.

 

For purposes of this Section 9(b), the term “Family Member” means spouse and any
parent, stepparent, grandparent, child, stepchild, or grandchild, including
adoptive relationships or a trust or any other entity in which these persons (or
the Participant) have more than 50% of the beneficial interest.

 

10.                               Payment Upon Exercise

 

Payment of the purchase price upon exercise of any option or right to purchase
Stock granted under this Option Plan shall be made by giving the Company written
notice of such exercise, specifying the number of such shares of Stock as to
which the option is exercised.  Such notice shall be accompanied by payment of
an amount equal to the Option Price of such shares of Stock.  Such payment may
be (i) cash, (ii) by check drawn against sufficient funds,

 

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(iii) such other consideration as the Board, in its sole discretion, determines
and is consistent with the Option Plan’s purpose and applicable law, or (iv) any
combination of the foregoing.  Any Stock used to exercise options to purchase
Stock (including Stock withheld upon the exercise of an option to pay the
purchase price of the shares of Stock as to which the option is exercised) shall
be valued in accordance with procedures established by the Board.  If accepted
by the Committee in its discretion, such consideration also may be paid through
a broker-dealer sale and remittance procedure pursuant to which the option
holder (i) shall provide irrevocable written instructions to a designated
brokerage firm to effect the immediate sale of the purchased Stock and remit to
the Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate option price payable for the purchased
Stock plus all applicable Federal and State income and employment taxes required
to be withheld by the Company in connection with such purchase and (ii) shall
provide written directives to the Company to deliver the certificates for the
purchased Stock directly to such brokerage firm in order to complete the sale
transaction.

 

11.                               Withholding Taxes

 

(a)                                  Shares of Stock issued hereunder shall be
delivered to an option holder only upon payment by such person to the Company of
the amount of any withholding tax required by applicable federal, state, local
or foreign law.  The Company shall not be required to issue any Stock to an
option holder until such obligations are satisfied.

 

(b)                                 The Board may, under such terms and
conditions as it deems appropriate, authorize an option holder to satisfy
withholding tax obligations under this Section 11 by surrendering a portion of
any Stock previously issued to the option holder or by electing to have the
Company withhold shares of Stock from the Stock to be issued to the option
holder, in each case having a fair market value equal to the amount of the
withholding tax required to be withheld.

 

12.                               Ratification

 

This Option Plan and all options issued under this Option Plan shall be void
unless this Option Plan is or was approved or ratified by (i) the Board; and
(ii) a majority of the votes cast at a stockholder meeting at which a quorum
representing at least a majority of the outstanding shares of Stock is (either
in person or by proxy) present and voting on the Option Plan within twelve
months of the date this Option Plan is adopted by the Board.  No ISOs shall be
exercisable prior to the date such stockholder approval is obtained.

 

13.                               Corporate Transactions

 

(a)                                  For the purpose of this Section 13, a
“Corporate Transaction” shall include any of the following stockholder-approved
transactions to which the Company is a party:

 

(i)                                     a merger or consolidation in which the
Company is not the surviving entity, except for a transaction the principal
purpose of which is to change the State of the Company’s incorporation;

 

(ii)                                  the sale, transfer or other disposition of
all or substantially all of the assets of the Company in liquidation or
dissolution of the Company; or

 

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(iii)                               any reverse merger in which the Company is
the surviving entity but in which beneficial ownership of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Company’s outstanding securities are transferred to holders different from those
who held such securities immediately prior to such merger.

 

(b)                                 Upon the occurrence of a Corporate
Transaction, if the surviving corporation or the purchaser, as the case may be,
does not assume the obligations of the Company under the Option Plan, then
irrespective of the vesting provisions contained in individual option
agreements, all outstanding options shall become immediately exercisable in full
and each option holder will be afforded an opportunity to exercise their options
prior to the consummation of the merger or sale transaction so that they can
participate on a pro rata basis in the transaction based upon the number of
shares of Stock purchased by them on exercise of options if they so desire.  To
the extent that the Option Plan is unaffected and assumed by the successor
corporation or its parent company a Corporate Transaction will have no effect on
outstanding options and the options shall continue in effect according to their
terms.

 

(c)                                  Each outstanding option under this Option
Plan which is assumed in connection with the Corporate Transaction or is
otherwise to continue in effect shall be appropriately adjusted, immediately
after such Corporate Transaction, to apply and pertain to the number and class
of securities which would have been issued to the option holder in connection
with the consummation of such Corporate Transaction had such person exercised
the option immediately prior to such Corporate Transaction.  Appropriate
adjustments shall also be made to the option price payable per share, provided
the aggregate option price payable for such securities shall remain the same. 
In addition, the class and number of securities available for issuance under
this Option Plan following the consummation of the Corporate Transaction shall
be appropriately adjusted.

 

(d)                                 The grant of options under this Option Plan
shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

 

14.                               Regulatory Approvals

 

The obligation of the Company with respect to Stock issued under the Plan shall
be subject to all applicable laws, rules and regulations and such approvals by
any governmental agencies or stock exchanges as may be required.  The Company
reserves the right to restrict, in whole or in part, the delivery of Stock under
the Plan until such time as any legal requirements or regulations have been met
relating to the issuance of Stock, to their registration or qualification under
the Securities Exchange Act of 1934, if applicable, or any applicable state
securities laws, or to their listing on any stock exchange at which time such
listing may be applicable.

 

15.                               No Employment/Service Rights

 

Neither the action of the Company in establishing this Option Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of this
Option Plan shall be construed so as to grant any individual the right to remain
in the employ or service of the

 

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Company (or any parent, subsidiary or affiliated corporation) for any period of
specific duration, and the Company (or any parent, subsidiary or affiliated
corporation retaining the services of such individual) may terminate or change
the terms of such individual’s employment or service at any time and for any
reason, with or without cause.

 

16.                               Miscellaneous Provisions

 

(a)                                  The provisions of this Option Plan shall be
governed by the laws of the State of Arizona, as such laws are applied to
contracts entered into and performed in such State, without regard to its rules
concerning conflicts of law.

 

(b)                                 The provisions of this Option Plan shall
insure to the benefit of, and be binding upon, the Company and its successors or
assigns, whether by Corporate Transaction or otherwise, and the option holders,
the legal representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.

 

(c)                                  The option holders shall have no dividend
rights, voting rights or any other rights as a stockholder with respect to any
options under the Option Plan prior to the issuance of a stock certificate for
such Stock.

 

(d)                                 If there is a conflict between the terms of
any employment agreement pursuant to which options under this Plan are to be
granted and the provisions of this Plan, the terms of the employment agreement
shall prevail.

 

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