**Exhibit 10.16**

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**DAKOTA GROWERS PASTA COMPANY, INC.2002 STOCK OPTION PLAN**

 

1.             Purpose.  The purpose of the Dakota Growers PastaCompany, Inc. 2002 Stock Option Plan is to align the interests of managementand the stockholders of Dakota Growers Pasta Company, Inc. (“Dakota Growers”)for the benefit of Dakota Growers. Options granted under the Plan areNon-Qualified Stock Options, as defined below.

 

2.             Definitions.  The following words and phrases as usedherein shall have the meanings set forth below:

 

a.             “Board” shallmean the Board of Directors of Dakota Growers as it may be comprised from timeto time.

 

b.             “Change inControl” shall mean any of the following

 

(1)           any “person” (as such term is used in Sections 13(d)and 14(d) of the Securities Exchange Act of 1934) becomes a “beneficial owner”(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, ofsecurities of Dakota Growers representing 50% or more of the combined votingpower of Dakota Growers’ then outstanding securities; or

 

(2)           a business combination, following which shareholdersof Dakota Growers do not continue to own at least 50% of the voting power ofthe resulting entity or the members of Dakota Growers’ Board of Directors priorto the transaction do not constitute a majority of the resulting entity’s Boardof Directors; or

 

(3)           a liquidation, dissolution or sale of all orsubstantially all of the assets of Dakota Growers, and immediately thereafter,there is no substantial continuity of ownership with respect to Dakota Growers andthe entity to which such assets have been transferred.

 

c.             “Code” shallmean the Internal Revenue Code of 1986, as amended from time to time or anysuccessor statute.

 

d.             “Committee”shall mean a committee of the Board as may be designated by the Board, fromtime to time, for the purpose of administering this plan as contemplated byArticle 4 hereof.  If at any time noCommittee shall be in office, then the functions of the Committee specified inthe Plan shall be exercised by the Board.

 

e.             “Common Stock”shall mean the common stock, $.01 par value, of Dakota Growers.

 

f.              “Fair MarketValue” of any security on any given date shall be determined by the Committeeas follows:  (a) if the security islisted for trading on one or more national securities exchanges, or is tradedon the Nasdaq National Market System or the Nasdaq Small Cap Market, the lastreported sales price on the principal such exchange or Nasdaq System on thedate in question, or if such security shall not have been traded on such principalexchange on such date, the last reported sales price on such principal exchangeor the Nasdaq System on the first day prior thereto on which such security wasso traded; or (b) if the security is not listed for trading on a nationalsecurities exchange or the Nasdaq System, but is traded in the over-the-countermarket, including the Nasdaq OTC Bulletin Board System, closing bid price forsuch security on the date in question, or if there is no such bid price forsuch security on such date, the closing bid price on the first day priorthereto on which such price existed; or (c) if neither (a) nor (b) isapplicable, by any means deemed fair and reasonable by the Committee, whichdetermination shall be final and binding on all parties.

 

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g.             “IncentiveStock Option” shall mean any stock option granted as an “incentive stockoption” within the meaning of Section 422 of the Code.

 

h.             “Non-QualifiedStock Option” shall mean any stock option granted that is not an IncentiveStock Option.

 

i.              “Option” shallmean any Non-Qualified Stock Option granted pursuant to this Plan.

 

j.              “Optionee”shall mean any person who is the holder of an Option granted pursuant to thisPlan.

 

k.             “Plan” shallmean this 2002 Stock Option Plan of Dakota Growers.

 

l.              “Tax Date”shall mean the date on which the amount of tax to be withheld is determinedunder the Code.

 

3.             Shares Available Under Plan.  The number of shares which may be issuedpursuant to Options granted under this Plan shall not exceed 294,456 shares ofthe Common Stock of Dakota Growers.

 

4.             Administration.

 

4.1.          The Plan will be administered by a Committee of atleast two directors, all of whom shall be Outside Directors and Non-EmployeeDirectors, or, if a Committee is not appointed, by the Board.  The Committee may be the CompensationCommittee or a subcommittee of the Compensation Committee of the Board.

 

4.2.          The Committee will have plenary authority, subjectto provisions of the Plan, to determine when and to whom Options will begranted, the term of each Option, the number of shares covered by it, theparticipation by the Optionee in other plans, and any other terms or conditionsof each Option. The number of shares, the term and the other terms andconditions of a particular kind of Option need not be the same, even as toOptions granted at the same time.  TheCommittee’s recommendations regarding Option grants and terms and conditionsthereof will be conclusive.

 

4.3.          The Committee will have the sole responsibility forconstruing and interpreting the Plan, for establishing and amending any rulesand regulations as it deems necessary or desirable for the properadministration of the Plan, and for resolving all questions arising under thePlan.  Any decision or action taken bythe Committee arising out of or about the construction, administration,interpretation and effect of the Plan and of its rules and regulations will, tothe extent permitted by law, be within its absolute discretion, except asotherwise specifically provided herein, and will be conclusive and binding onall Optionees, all successors, and any other person, whether that person isclaiming under or through any Optionee or otherwise.

 

4.4.          The Committee will designate one of its members aschairman.  It will hold its meetings atthe times and places as it may determine. A majority of its members will constitute a quorum, and alldeterminations of the Committee will be made by a majority of its members.  Any determination reduced to writing andsigned by all members will be fully as effective as if it had been made by amajority vote at a meeting duly called and held.  The Committee may appoint a secretary, who need not be a memberof the Committee, and may make such rules and regulations for the conduct ofits business as it may deem advisable.

 

4.5.          No member of the Committee will be liable, in theabsence of bad faith, for any act or omission with respect to his services onthe Committee.  Service on the Committeewill constitute service as a member of the Board, so that the members of theCommittee will be entitled to indemnification and reimbursement as Boardmembers pursuant to its Bylaws.

 

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4.6.          The Committee will regularly inform the Board as toits actions with respect to all Options granted under the Plan and the termsand conditions and any such Options in a manner, at any times, and in any formas the Board may reasonably request.

 

4.7.          Any other provision of the Plan to the contrarynotwithstanding, the Committee is authorized to take such action as it, in itsdiscretion, may deem necessary or advisable and fair and equitable to Optioneesin the event of:  a Change in Control ofDakota Growers; a tender, exchange or similar offer for all or any part of theCommon Stock made by any entity, person or group (other than Dakota Growers orany savings, pension or other benefit plan for the benefit of employees ofDakota Growers); a merger of Dakota Growers into, a consolidation of DakotaGrowers with, or an acquisition of Dakota Growers by another corporation; or asale or transfer of all or substantially all of Dakota Growers’ assets.  Such action, in the Committee’s discretion,may include (but shall not be deemed limited to):  establishing, amending or waiving the forms, terms, conditions orduration of Options so as to provide for earlier, later, extended or additionalterms for exercise of the whole, or any installment, thereof; alternate formsof payment; or other modifications.  TheCommittee may take any such actions pursuant to this Section 4.7 by adoptingrules or regulations of general applicability to all Optionees, or to certaincategories of Optionees; by amending or waiving terms and conditions in stockoption agreements; or by taking action with respect to individualOptionees.  The Committee may take anysuch actions before or after the public announcement of any such Change inControl, tender offer, exchange offer, merger, consolidation, acquisition or saleor transfer of assets.

 

5.             Participants.

 

5.1.          Participation in this Plan shall be limited toofficers of Dakota Growers.

 

5.2.          Subject to other provisions of this Plan, Optionsmay be granted to the same participants on more than one occasion.

 

5.3.          The Committee’s determination under the Planincluding, without limitation, determination of the persons to receive Options,the form and amount of such Options, and the terms and provisions of Options,need not be uniform and may be made selectively among otherwise eligibleparticipants, whether or not the participants are similarly situated.

 

6.             Terms and Conditions.

 

6.1.          Each Option granted under the Plan shall beevidenced by a written agreement, which shall be subject to the provisions ofthis Plan and to such other terms and conditions as Dakota Growers may deemappropriate.

 

6.2.          Each Option agreement shall specify the period forwhich the Option thereunder is granted, which in no event shall exceed tenyears and one day from the date of grant and shall provide that the Optionshall expire at the end of such period; provided, however, the term of eachOption shall be subject to the power of the Committee, among other things, toaccelerate or otherwise adjust the terms for exercise of Options pursuant toSection 4.7 hereof in the event of the occurrence of any of the events setforth therein.

 

6.3.          The exercise price per share shall be determined bythe Committee at the time any Option is granted.

 

6.4.          An Option shall be exercisable at such time ortimes, and with respect to such minimum number of shares, as may be determinedby Dakota Growers at the time of the grant. The Option agreement may require, if so determined by Dakota Growers,that no part of the Option may be exercised until the Optionee shall haveremained in the employ of Dakota Growers for such period after the date of theOption as Dakota Growers may specify.

 

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6.5.          Dakota Growers may prescribe the form of legendwhich shall be affixed to the stock certificate representing shares to beissued and the shares shall be subject to the provisions of any repurchaseagreement or other agreement restricting the sale or transfer thereof.  Such agreements or restrictions shall benoted on the certificate representing the shares to be issued.

 

7.             Exercise of Option.

 

7.1.          Each exercise of an Option granted hereunder,whether in whole or in part, shall be by written notice thereof, delivered tothe Secretary of Dakota Growers (or such other person as he maydesignate).  The notice shall state thenumber of shares with respect to which the Options are being exercised andshall be accompanied by payment in full for the number of shares sodesignated.  Shares shall be registeredin the name of the Optionee unless the Optionee otherwise directs in his or hernotice of election.

 

7.2.          Payment shall be made to Dakota Growers either (i)in cash, including certified check, bank draft or money order, (ii) at thediscretion of Dakota Growers, by delivering Common Stock of Dakota Growersalready owned by the participant and held by such participant for at least 6months; (iii) at the discretion of Dakota Growers, by deduction from the numberof shares to be delivered upon exercise of the Option a number of shares, theaggregate Fair Market Value of which, as of the same date the Exercise Price isdetermined, shall equal the exercise price, or a combination of (i), (ii) and(iii).  With respect to (ii) the FairMarket Value of stock so delivered shall be determined as of the dateimmediately preceding the date of exercise.

 

7.3.          Upon notification of the amount due and prior to, orconcurrently with, the delivery to the Optionee of a certificate representingany shares purchased pursuant to the exercise of an Option, the Optionee shallpromptly pay to Dakota Growers any amount necessary to satisfy applicablefederal, state or local withholding tax requirements.

 

7.4.          If the terms of an Option so permit, an Optionee,other than a member of the Committee, may elect by written notice to theSecretary of Dakota Growers (or such other person as he may designate), tosatisfy the withholding tax requirements associated with the exercise of anOption by authorizing Dakota Growers to retain from the number of shares ofCommon Stock that would otherwise be deliverable to the Optionee that number ofshares having an aggregate Fair Market Value on the Tax Date equal to the taxpayable by the Optionee under Section 7.3. Any such election shall be in accordance with, and subject to, applicabletax and securities laws, and regulations and rulings and in the event sharesare withheld, the amount withheld may not exceed the minimum required federal,state and FICA withholding amounts. Where shares are transferred to an Optionee prior to the Tax Date, theOptionee shall agree in any such election to surrender that number of shareshaving an aggregate Fair Market Value on the Tax Date equal to the tax payableby the Optionee under Section 7.3.  Inaddition, any election to have shares withheld pursuant to this Section 7.4will be irrevocable by the Optionee and will in any event be subject to thedisapproval of the Committee.

 

8.             Adjustments of Option Stock.  In case the shares issuable upon exercise ofany Option granted under the Plan at any time outstanding shall be subdividedinto a greater or combined into a lesser number of shares (whether with orwithout par value), the number of shares purchasable upon exercise of suchOption immediately prior thereto shall be adjusted so that the Optionee shallbe entitled to receive a number of shares which he or she would have owned orhave been entitled to receive after the happening of such event had such Optionbeen exercised immediately prior to the happening of such subdivision orcombination or any record date with respect thereto.  An adjustment made pursuant to this paragraph shall becomeeffective immediately after the effective date of such subdivision orcombination retroactive to the record date, if any, for such subdivision orcombination.  The Option price (as suchamount may have theretofore been adjusted pursuant to the provisions hereof)shall be adjusted by multiplying the Option price immediately prior to theadjustment of the number of shares purchasable under the Option by a fraction,of which the numerator shall be the number of shares purchasable upon theexercise of the Option immediately prior to such adjustment, and of which thedenominator shall be the number of

 

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sharesso purchasable immediately thereafter. Substituted shares of stock shall be deemed shares under Section 3 ofthe Plan.

 

9.             Assignments.  Any Option granted under this Plan shall beexercisable only by the Optionee to whom granted during his or her lifetime andshall not be assignable or transferable otherwise than by will or by the lawsof descent and distribution. Notwithstanding the foregoing, the Board or theCommittee may, in its discretion, determine that an Option may be exercised bya person other than the Optionee and that an Option may be transferable basedon the tax and federal securities law considerations then in effect for suchOptions.

 

10.           Severance; Death; Disability.  An Option shall terminate, and no rightsthereunder may be exercised, if the person to whom it is granted ceases to be employedby Dakota Growers except that:

 

10.1.        If the employment of the Optionee is terminated byany reason other than his or her death or disability, the Optionee may at anytime within 90 days after termination of his or her employment, exercise his orher Option rights, but only to the extent they were exercisable by the Optioneeon the date of termination of his or her employment.  Provided, however, that if the employment is terminated bydeliberate, willful or gross misconduct as determined by the Committee or forcause as defined under the employee’s employment agreement with Dakota Growersas determined by the committee, all rights under any Option shall terminate andexpire upon such termination.

 

10.2.        If the Optionee dies while in the employ of DakotaGrowers or within not more than three months after termination of his or heremployment, the Optionee’s rights under the Option may be exercised at any timewithin one year following such death by his or her personal representative orby the person or persons to whom such rights under the Option shall pass bywill or by the laws of descent and distribution, but only to the extent theywere exercisable by the Optionee on the date of death.

 

10.3.        If the employment of the Optionee is terminatedbecause of disability, the Optionee, or his or her legal representative, may atany time within not more than one year after termination of his or heremployment, exercise his or her Option rights but only to the extent they wereexercisable by the Optionee on the date of termination of his or heremployment.

 

10.4.        Notwithstanding anything contained in Sections 10.1,10.2 and 10.3 to the contrary, no Option rights shall be exercisable by anyoneafter the expiration of the term of the Option.

 

10.5.        The Committee may specify in the terms andconditions of an Option whether any authorized leave of absence or absence formilitary or government service or for any other reasons will constitute atermination of employment for purposes of the Option and the Plan.

 

11.           Rights of Participants.  Neither the participant nor the personalrepresentatives, heirs, or legatees of such participant shall be or have any ofthe rights or privileges of a shareholder of Dakota Growers in respect of anyof the shares issuable upon the exercise of an Option granted under this Planunless and until certificates representing such shares shall have been issuedand delivered to the participant or to such personal representatives, heirs orlegatees.

 

12.           Securities Registration.  If any law or regulation of the Securitiesand Exchange Commission or of any other body having jurisdiction shall requireDakota Growers or the participant to take any action in connection with theexercise of an Option, then notwithstanding any contrary provision of an Optionagreement or this Plan, the date for exercise of such Option and the deliveryof the shares purchased thereunder shall be deferred until the completion ofthe necessary action.  In the event thatDakota Growers shall deem it necessary, Dakota Growers may condition the grantor exercise of an Option granted under this Plan upon the receipt of asatisfactory certificate that the Optionee is acquiring the Option or theshares obtained by exercise of the Option for investment purposes and not withthe view or intent to resell or otherwise distribute such Option orshares.  In such event, the stockcertificate evidencing such shares shall bear a legend referring to applicablelaws restricting transfer of such shares. In the event that Dakota Growers shall deem it necessary to registerunder the Securities Act of 1933, as amended, or any other applicable statute,any Options or any shares with respect to which an

 

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Optionshall have been granted or exercised, then the participant shall cooperate withDakota Growers and take such action as is necessary to permit registration orqualification of such Options or shares.

 

13.           Duration and Amendment.

 

13.1.        There is no express limitation upon the duration ofthe Plan.

 

13.2.        The Board may terminate or may amend the Plan at anytime, provided, however, that the Board may not, without approval of theshareholders of Dakota Growers by a majority of the voting power of sharesissued and outstanding, permit the granting of Incentive Stock Options, underthe Plan.

 

14.           Conditions of Employment.  The granting of an Option to a participantunder this Plan who is an employee shall impose no obligation on Dakota Growersto continue the employment of any participant and shall not lessen or affectthe right of Dakota Growers to terminate the employment of the participant.

 

15.           Other Options.  Nothing in the Plan will be construed tolimit the authority of Dakota Growers to exercise its corporate rights andpowers, including, by way of illustration and not by way of limitation, theright to grant options for proper corporate purposes otherwise than under thePlan to any employee or any other person, firm, corporation, association, orother entity, or to grant Options to, or assume Options of, any person for theacquisition by purchase, lease, merger, consolidation, or otherwise, of all orany part of the business and assets of any person, firm, corporation,association, or other entity.

 

 

Adoptedby Board of Directors:                        November 21,2002

 

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