Exhibit 10.3 SEPARATION AGREEMENT This SEPARATION AGREEMENT (this "Agreement"), effective upon expiration of the revocation period set forth herein, is by and between American Italian Pasta Company ("AIPC") and David B. Potter ("Potter") (collectively "the parties"). WITNESSETH: WHEREAS, AIPC and Potter are parties to a certain Employment Agreement effective September 1, 2002; and WHEREAS, the parties wish to terminate Potter's employment with AIPC on the terms and conditions set forth herein, notwithstanding the provisions of the Employment Agreement; and WHEREAS, the parties wish to terminate the Employment Agreement on the terms and conditions set forth herein and except as expressly provided herein; NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties do hereby agree as follows: 1. Termination of Employment. 1.1 Resignation Date. Potter agrees to resign his employment with AIPC on a date between November 26, 2003, and February 27, 2004, determined by the parties after good faith consultation and negotiation ("Resignation Date"); provided, however, that if the parties are unable through good faith negotiation and consultation to determine and set a Resignation Date, then Potter may determine and set such Resignation Date by providing thirty (30) days' written notice thereof to AIPC. In no event will the Resignation Date be later than February 27, 2004. 1.2 Nature of Resignation. For any and all purposes, including but not limited to for purposes of the Employment Agreement, Potter's resignation shall be voluntary and without Good Reason. 1.3 Severance/Other Benefits After Resignation. (a) As consideration for Potter's resignation and signed release: (i) AIPC shall provide Potter with severance pay and benefits in accordance with Section 7.1.1 of the Employment Agreement (except that Potter shall not be entitled to any bonus related to fiscal year 2003 or any subsequent period), to which severance pay and benefits Potter agrees he is not otherwise entitled; Specifically, AIPC agrees to provide Potter his annual base salary in bi-weekly severance payments during the 12 months following the resignation date, subject to mitigation as Potter gains employment elsewhere. Upon Potter gaining 1
employment elsewhere during the 12 months of payments, AIPC agrees to pay Potter 50% of the mitigated amount within 10 days of Potter's written notice of new employment, but the payment shall not exceed $40,000 plus any resulting difference in bi-weekly salary for the remainder of the 12 month severance period beginning on the Resignation date. EXAMPLE: Potter is currently paid $7,235 every 2 weeks. If Potter gains new employment after 3 months at an annual salary of $160,000 ($6,154 every 2 weeks), saving AIPC $120,000 in severance payments over the remaining 9 months, AIPC shall 1) Issue Potter a payment of $40,000 (calculated as $60,000 but capped at $40,000) to Potter within 10 days, and 2) Continue to pay Potter $1,081 every 2 weeks ($7,235 severance commitment - $6,154 new salary) for the remaining 9 months." (ii) AIPC shall provide Potter with outplacement assistance in accordance with AIPC's standard arrangements regarding outplacement assistance for employees at or near Potter's level within the organization, up to a maximum cost to AIPC of $5,000; (iii) AIPC shall reimburse Potter for reasonable costs and expenses incurred in preparing his individual income tax returns for tax years 2003 and 2004 in an amount not to exceed $2,865 each year. (iv) All payments amounts made under this agreement are gross figures and are subject to applicable withholding amounts. (v) Timothy S. Webster, President and Chief Executive Officer of AIPC, will provide Potter with a positive employment reference in a form reasonably to be agreed upon by Potter and Timothy S. Webster. (b) As a condition of Potter's receipt and retention of any severance pay and/or benefits under this Agreement, Potter shall remain subject to and shall comply with the terms of Sections 4, 5, 6, 7.1.1, 7.1.2, 7.1.3, and 7.5 of the Employment Agreement, which are hereby incorporated by reference as if fully set forth herein. (i) In addition, by signature, Potter acknowledges that Section 4.1 would include, but not be limited to, named employers: Barilla, New World Pasta and Dakota Growers. 1.4 Stock Options and Restricted Shares. (a) Prior to the execution of this Agreement, Potter held 1,000 shares of Restricted Stock, with scheduled vesting through 8/27/2005. Subject to the terms and conditions of Section 1.3(b), above, such Restricted Shares shall continue to be held by 2
Potter and shall continue to vest through the second anniversary of his Resignation Date. Any Restricted Shares not then vested will forfeit and be null and void. (b) Prior to the execution of this Agreement, Potter held unvested options to acquire 15,000 shares of AIPC common stock. As of the date hereof, 7,500 of such options are cancelled and null and void. Subject to the terms and conditions of Section 1.3(b), above, the remaining 7,500 of such options shall continue to vest until 8/27/04 and can be exercised anytime between 8/27/2004 and through the second anniversary of his Resignation Date subject to normal terms and conditions. Any of such options not then vested as of 8/27/2004 will be cancelled and be null and void. In the event that Potter takes any action within six months following the end of his 18 month noncompete period contained in Section 4 of his Employment Agreement that, if taken during the 18 month noncompetition period would have been a violation of such Section 4, then immediately upon such action, all remaining vested but unexercised options and all remaining unvested options shall expire, be cancelled and be null and void. 2. Release and Waiver of Claims/Other Representations. 2.1 Release and Waiver of Claims. To the maximum extent permitted by law, Potter hereby RELEASES AND FOREVER DISCHARGES AIPC and/or any AIPC Affiliates from any and all claims, demands, and/or causes of action ("claims"), known or unknown, suspected or unsuspected, that Potter and/or anyone acting on his behalf now holds or owns or has at any time before this date held or owned against them, which claims include but are not limited to the following: claims for breach of the Employment Agreement or any other contract by and between the parties; claims for attorney's fees; claims under the U.S. Constitution; claims under any state Constitution; claims under any federal and/or state common law, including claims sounding in tort and/or contract; claims under any federal and/or state public policy; claims under the Employee Retirement Income Security Act; claims under the Family and Medical Leave Act; claims under the Equal Pay Act; claims for workers' compensation benefits, discrimination, and/or retaliation; claims under the Fair Labor Standards Act and/or any state wage payment law; claims for discrimination (including harassment) and/or retaliation under any federal, state, and/or local law, including but not limited to 42 U.S.C. ss. 1981, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Kansas Act Against Discrimination, the Missouri Human Rights Act, and/or the Kansas City Human Rights Ordinance; claims under any and all other federal, state, and/or local laws, including statutory and/or common law, without exception; and claims under any AIPC practice and/or policy, including but not limited to any benefit plan of AIPC and/or any AIPC Affiliates. 2.2 Confidentiality. Potter agrees this Agreement and the circumstances and/or the discussions leading to this Agreement are confidential and, as such, agrees (a) he will not communicate the contents of this Agreement or the circumstances or the discussions leading to this Agreement ("Confidential Information") other than to his immediate family members, his attorney, his accountant, to governmental taxing 3
authorities, or if compelled by a court of competent jurisdiction or otherwise required by law ("Authorized Persons"); (b) before he discloses any Confidential Information to any Authorized Persons, he must inform them that the matter is confidential, that compliance with this confidentiality provision is a material condition of this Agreement, and that any disclosure of such Confidential Information to persons or entities not authorized to receive it is a material breach of this Agreement; and (c) if he is compelled to disclose any Confidential Information by a court of competent jurisdiction or otherwise, then he will give counsel for AIPC (James Ash of Blackwell Sanders Peper Martin LLP) as much notice as is reasonably practicable before such disclosure in the event AIPC wishes to intervene to protect its rights under this Agreement. 2.3 Employment/Application. Potter will never be reemployed in any capacity by AIPC and will not ever be employed by any AIPC Affiliates; Potter will not apply for reemployment at AIPC or for employment with any AIPC Affiliates after the date he signs this Agreement; and if Potter ever applies for reemployment with AIPC or for employment with any AIPC Affiliates in violation of this Agreement, then AIPC and/or any AIPC Affiliates may reject his reapplication/application with impunity solely on the basis of his breach of this Agreement. 2.4 Review/Revocation. Potter had twenty-one (21) calendar days from the date he received this Agreement to consider it, although he could sign it sooner if he wished; Potter has been advised/is hereby advised to consult with independent legal counsel before signing this Agreement; Potter may revoke this Agreement after he signs it by delivering a written notice of revocation via telecopier ((816) 983-8080) and certified mail to counsel for AIPC (James Ash of Blackwell Sanders Peper Martin LLP) within seven (7) calendar days after he signs this Agreement; and (iv) absent revocation, this Agreement will become effective and enforceable on the eighth (8th) calendar day following the date set forth in the execution Section hereof. 2.4 Assistance. Potter will, upon AIPC's reasonable request, assist AIPC in any investigation and/or litigation instituted/brought by or against AIPC and/or any AIPC Affiliates; provided, however, that AIPC shall reimburse Potter for expenses incurred and approved by AIPC in rendering such assistance. 2.5 Nondisparagement. Potter will not disparage AIPC and/or any AIPC Affiliates. 2.6 Mitigation. Potter shall have the duty to attempt to mitigate the amounts and benefits payable to him hereunder and AIPC shall be entitled to set off against the amounts and benefits payable hereunder any amounts or benefits received by Potter from any other employment source. 3. Miscellaneous Terms. 3.1 Effect on Employment Agreement. Other than as provided herein, the Employment Agreement is hereby terminated and is of no force or effect; provided, 4
however, that Potter remains bound by Sections 4-6 of the Employment Agreement, which are hereby incorporated by reference as if fully set forth herein. 3.2 Binding Effect. This Agreement shall be binding upon, and shall inure to the benefit of, AIPC and Potter, their respective heirs, personal, and legal representatives, successors, and assigns. 3.3 Choice of Law/Forum/Jurisdiction. In view of the fact that the principal office of AIPC is located in the State of Missouri, the parties understand and agree that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Missouri, that the state and federal courts situated in the State of Missouri shall have exclusive jurisdiction over any claims arising under or in relation to this Agreement, and that the parties consent to personal jurisdiction in such state and federal courts. 3.4 Headings. The headings of the Sections of this Agreement are for reference only and not to limit, expand, or otherwise affect the contents of this Agreement. 3.5 Entire Agreement. This Agreement contains the entire agreement and understanding by and between the parties with respect to the subject matter hereof, and any representations, promises, agreements, or understandings, written or oral, not herein contained shall be of no force or effect. No change, waiver, or modification of any provision of this Agreement shall be valid or binding unless the same is in writing and duly executed by the parties, and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed as aforesaid, and the parties further agree that the provisions of this Section 3.4 may not be waived except as set forth herein. 3.6 Waiver. The waiver by AIPC of a breach of any provision of this Agreement by Potter shall not operate or be construed as a waiver of any subsequent breach by Potter. 3.7 Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement; provided, however, that all notices to AIPC shall be directed to the attention of the Board of Directors of AIPC with a copy to the Secretary of AIPC, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 5
3.8 Withholdings. AIPC shall withhold from any amounts payable under this Agreement such federal, state, and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 3.8 Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, Potter and AIPC have duly executed this Agreement as of this 12th day of December 2003. BY OR ON BEHALF OF POTTER: Signature: /s/ David B. Potter ------------------------------- Printed Name: David B. Potter Address: 8400 Allman Rd. Lenexa, KS 66219 AMERICAN ITALIAN PASTA COMPANY By: /s/ Timothy S. Webster -------------------------------------- Printed Name: Timothy S. Webster Address: 4100 North Mulberry Drive Suite 200 Kansas City MO 64116-0696 6