Employment Agreement between American Italian Pasta Company and John P. Kelly

 Exhibit 10.1 AMERICAN ITALIAN PASTA COMPANY EMPLOYMENT AGREEMENT JOHN P. KELLY This EMPLOYMENT AGREEMENT (this "Agreement"), effective November 6, 2007 (the "Effective Date") is by and between American Italian Pasta Company ("Employer"), and John P. Kelly ("Executive") (collectively "the parties") and supersedes any and all prior oral or written agreements between the parties with respect to the subject matter hereof. WITNESSETH: WHEREAS, in connection with such business, Employer desires to employ Executive in the capacity of Chief Operating Officer until the current Chief Executive Officer steps down, and thereafter it is intended that he be employed in the capacity of Chief Executive Officer; and WHEREAS, Executive desires to be employed by Employer in such capacity. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Term of Employment. The term of Executive's employment under this Agreement (the "Employment Term") will commence as of the Effective Date and continue until terminated pursuant to Section 7, below. The provisions of Sections 4, 5 and 6, below, survive any termination of Executive's employment and/or any termination or expiration of this Agreement. 2. Duties of Executive. 2.1 In accepting such employment, Executive shall undertake and assume the responsibility of performing for and on behalf of Employer such duties as shall reasonably be assigned to Executive by the board of directors of Employer (the "Board") at any time and from time to time and in accordance with all of Employer's policies, practices and procedures. It is understood and agreed that Executive's principal duties on behalf of Employer are and shall be to serve as Chief Operating Officer until the current Chief Executive Officer is no longer employed as such, and thereafter it is intended that he serve as Chief Executive Officer. 2.2 Executive will, to the reasonable satisfaction of the Board, at all times faithfully, industriously, and to the best of Executive's ability, experience, and talents perform all of the duties that may be required of and from Executive pursuant to the express and implicit terms hereof. 2.3 Executive shall devote substantially all of Executive's professional time, attention, knowledge, and skills solely to the business and interests of Employer, and Employer 

 shall be entitled to all of the benefits, profits, and other issues arising from or incident to all professional work, services, and advice of Executive. Executive may, with the prior written approval of the Board's Nominating/Governance Committee, participate in civic or charitable organizations and serve as a member of the board of directors of noncompetitive public or private businesses, which approval must be reviewed annually. 3. Compensation. Employer shall pay Executive, and Executive shall accept from Employer, in payment for Executive's services rendered to Employer hereunder an annual base salary ("Base Salary") equal to Four Hundred Fifty Thousand Dollars ($450,000). Executive shall pay such Base Salary in equal bi-weekly installments. Base Salary shall be reviewed annually by the Board's Compensation Committee for possible adjustment. 3.1 Position Acceptance Payment. On the Effective Date, Employer shall award Executive 49,000 shares of restricted stock of Employer and 145,000 stock appreciation rights pursuant to the attached forms of award agreement. Such awards shall have been approved by the Board of Directors or Compensation Committee of the Board in accordance with the provisions of the Employer's 2000 Equity Incentive Plan, as amended (the "Plan"). Notwithstanding any vesting requirements provided in such award agreements, the Plan or the Severance Plan, these awards will accelerate and become fully vested upon any termination of Executive by the Employer other than for Cause as defined in Section 7, below (provided, however, the award agreements shall control in the event of Executive's disability, death or retirement). 3.2 Annual Incentive Program. Executive will be eligible for an annual cash incentive payment based on Employer's measures of EBITDA and cash flow as set forth on Exhibit A, hereto, at threshold, target and maximum levels. At threshold level of Employer performance for the fiscal year ending September 26, 2008 ("FY2008"), Executive will be eligible for a payment for FY2008 equivalent to 49% of Base Salary; at target level of Employer performance for the fiscal year ending September 26, 2008 ("FY2008"), Executive will be eligible for a payment for FY2008 equivalent to 70% of Base Salary; and at maximum level of Employer performance for FY2008, Executive will be eligible for a payout for FY2008 of 91% of Base Salary. Payout for FY2008 will be guaranteed at $157,500. Annual cash incentives post-FY2008 will be established in the discretion of the Compensation Committee. 3.3 Long Term Incentive Program. Executive will be eligible for equity grants under the Employer's Long Term Incentive Program in the discretion of the Compensation Committee. In the event any such awards are made, they will be divided equally between stock appreciation rights and shares of restricted stock and will vest ratably over a three (3) year period. 3.4 Reimbursement of Business Expenses. Employer agrees to reimburse Executive for reasonable travel, entertainment, and other business expenses incurred in the performance of Executive's duties hereunder in accordance with Employer's policies on terms no less favorable than those policies in effect immediately prior to the date hereof. 3.5 Benefits. Executive shall be entitled to relocation and living expenses of $130,000 during his family's transition to the Kansas City metropolitan area during the period ending no later than 120 days after the Effective Date, and reimbursement of up to $7,500 for 2 

 legal services related to review of this Agreement. These payments will be made on or before December 1, 2007. Executive shall participate in an equitable manner with other senior executive employees of Employer in all welfare benefit, incentive compensation, or other plans or arrangements authorized, adopted, and maintained from time to time by Employer, including, without limitation, the following: automobile allowance, profit sharing plan, medical reimbursement plan, group life insurance plan, medical and dental insurance plan, and long-term disability income plan, if in effect with Employer. Executive shall be entitled to four (4) weeks vacation annually. 4. Non-Competition, Nonsolicitation and Nondisparagement. 4.1 Executive acknowledges and recognizes the highly competitive nature of the business of Employer and its affiliates and accordingly agrees as follows: during the Employment Term and until the date that is eighteen (18) months after the date that Executive ceases employment with Employer for any reason (the Employment Term and such period hereinafter referred to as the "Noncompetition Period"), Executive will not, in any area in the world where Employer conducts business, directly or indirectly own, manage, operate, control, be employed by, consult with, or be connected in any manner with the ownership (other than passive investments of not more than one percent of any class of the outstanding equity of any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), management, operation, or control of any business activity in which the Company is actively engaged at the time Executive's employment with the Company ceases. 4.2 During the Noncompetition Period, Executive will not directly or indirectly induce or attempt to induce any employee of Employer or any of its affiliates to engage in any activity in which Executive is prohibited from engaging by Section 4.1 hereof or to terminate his or her employment with Employer or any of its affiliates, will not directly or indirectly assist or attempt to assist others in engaging in any of the activities in which Executive is prohibited from engaging by Section 4.1 hereof, and will not directly or indirectly employ or offer employment to any person who was employed by Employer or any of its affiliates unless such person shall have ceased to be employed by Employer or any of its affiliates for a period of at least 12 months. 4.3 During the Noncompetition Period, Executive will not directly or indirectly induce or attempt to induce any customer or supplier of Employer or any of its affiliates to move, reduce or not increase its trade or business with Employer or any of its affiliates (whether or not the communication relates to doing business during a period that is during or after the Noncompetition Period). 4.4 (a) Executive acknowledges and agrees that disparaging statements made by Executive about Employer or its board members, officers or employees would be uniquely detrimental to the interests of both parties. Therefore, Executive agrees to refrain from making any disparaging statements about Employer or its board members, officers or employees, except as may be compelled by law. 3 

 (b) Employer acknowledges and agrees that disparaging statements made about Executive would be detrimental to Executive and, therefore, during the Noncompetition Period, Employer agrees, for itself and its officers and Board members, to refrain from making any disparaging statements about Executive, except as may be compelled by law. 4.5 Any and all inventions, designs, discoveries, writings, analyses, improvements, processes, procedures and/or techniques (hereafter "Intellectual Property") that Executive has made, conceived, discovered or developed, or may hereafter make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time during the term of Executive's employment with Employer, whether during working hours or at any other time, whether conceived by Executive alone or with others, whether conceived in conjunction with the use of any assets of Employer, and whether at the request or upon the suggestion of the Board or otherwise, that relate to or are useful in connection with any business carried on or contemplated by the Employer shall be the sole and exclusive property of Employer. Executive shall make full disclosure to the Board of all Intellectual Property as and when requested by the Board. Executive shall do everything necessary to vest the absolute title thereto in Employer. Executive agrees that he shall not be entitled to any additional or special compensation or reimbursement in connection with any and all Intellectual Property. All Intellectual Property shall be the exclusive property of Employer whether or not patent or trademark applications are filed thereon. Executive agrees that Executive shall never at any time during or after termination of Executive's employment with Employer have or claim any right, title or interest in any Intellectual Property belonging to or used by Employer. Executive shall execute all necessary papers, maintain adequate and current records and otherwise provide assistance, at the expense of Employer, during and after termination of Executive's employment with Employer to enable Employer to obtain for themselves or their nominee patents, copyrights, trademarks, registrations or other legal protection for such Intellectual Property and protect the same against infringement by others. 4.6 Executive acknowledges that the restrictions contained in Section 4 are reasonable and appropriate and that, in the event of any termination of Executive's employment, Executive shall not challenge such restrictions as overbroad or otherwise unenforceable. Executive further acknowledges and agrees that, if a court of competent jurisdiction determines such restrictions are unenforceable for any reason, such court shall modify the restrictions in order for, but only to the least extent necessary for, the restrictions to be enforced by such court. If such court finds that any such restriction cannot be modified so as to make it enforceable, such restriction may be deleted by such court and the enforceability of all other restrictions will be unaffected by such deletion. 5. Confidentiality. Executive acknowledges that, in and as a result of Executive's employment by Employer, Executive has been and will be making use of, acquiring, and/or adding to confidential information of a special and unique nature and value relating to such matters as Employer's trade secrets, systems, procedures, manuals, confidential reports, and lists of customers and/or other services rendered by Employer, the equipment and methods used and preferred by Employer's customers, and the prices paid by such customers. As a material inducement to Employer to enter into this Agreement, and to pay to Executive the compensation referred to in Section 3.1 hereof, Executive covenants and agrees Executive shall not, at any time 4 

 during or after the Employment Term, directly or indirectly disclose, divulge, or use for Executive's own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation, or other business organization, entity, or enterprise other than Employer and any of its subsidiaries or affiliates any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, prices, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of Employer generally or of any subsidiary or affiliate of Employer; provided, however, that the foregoing shall not apply to information that is not unique to Employer or that is generally known to the industry or the public other than as a result of breach of this covenant. Executive agrees that, upon termination of Executive's employment with Employer for any reason, Executive will return to Employer immediately all Employer property, including, without limitation, all memoranda, books, manuals, training materials, records, computer software, papers, plans, contracts, agreements, information, letters, and other data, and all copies thereof or therefrom, in any way relating to the business of Employer and its affiliates, except that Executive may retain personal notes, notebooks, and diaries. Executive further agrees that Executive will not retain or use for Executive's account at any time any trade names, trademark, or other proprietary business designation used or owned in connection with the business of Employer or its affiliates. 6. Specific Performance and Survival. 6.1 Executive acknowledges and agrees that Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 4 hereof or Section 5 hereof would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, Employer, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction, or any other equitable remedy that may then be available. 6.2 The parties agree that the terms of Sections 4, 5, and 6 are independent of and separable from the other provisions of this Agreement and that the termination of this Agreement (or of Executive's employment) for any reason will not affect Executive's obligations under Sections 4, 5, and 6 and further shall not affect the enforceability of Sections 4, 5, and 6. Those Sections will survive and continue to be fully binding on and enforceable against Executive and Employer after any termination of this Agreement. 7. Termination of Employment. 7.1 Termination of Employment. Either party may terminate this Agreement and Executive's employment hereunder at any time, with or without cause or reason. Executive shall be a participant in Employer's Severance Plan for Senior Vice Presidents and Above effective May 2, 2006 (the "Severance Plan") and the terms of the Severance Plan shall apply to Executive. 5 

 7.2 Termination for Cause; Resignation. 7.2.1 General. If Executive's employment hereunder is terminated by Employer for Cause (as defined in the Severance Plan), or if Executive resigns from Executive's employment hereunder, then Executive shall be entitled only to payment of Executive's Base Salary, as adjusted under Section 3, earned through and including the date of termination or resignation, plus any bonus that had been approved by the Compensation Committee prior to the date of such termination for which Executive has met all eligibility criteria. Executive shall have no further right to receive any other compensation or to participate in any other plan, arrangement, or benefit, after such termination for Cause. 7.2.2 Involuntary Termination. In the event Employer materially reduces the duties and responsibilities of the Executive below the level of Chief Operating Officer (or as he becomes Chief Executive Officer then below the level of Chief Executive Officer) or materially reduces the compensation and benefits of the Executive, other than as part of compensation and benefit reduction implemented with respect to the Employer's executive officers generally, Executive may resign within ten business days thereafter and treat such resignation as an involuntary termination under the Severance Plan. 7.2.3 Date of Termination. The date of termination for Cause shall be the date of receipt by Executive of notice of such termination. The date of resignation shall be the date of receipt by Employer of the notice of resignation. 7.2.4 Certain Breaches. Notwithstanding any provision of this Agreement to the contrary, if Executive is employed by Employer, then any breach of Sections 4 or 5 shall permit Employer to terminate the employment of Executive for Cause (regardless of the definition of Cause in the Severance Plan), and, whether or not Executive is employed by Employer, from and after any breach by Executive of Sections 4 or 5, then Employer shall cease to have any obligation to make payments to Executive under this Agreement. 7.3 Conditions to Severance Payments. Employer's obligation to make any severance payments due pursuant to the Severance Plan or to make available any benefits to Executive pursuant to the Severance Plan (other than COBRA benefits) is expressly conditioned on Executive complying in full with the obligations of the Severance Plan and the obligations under Sections 4, 5, and 6 of this Agreement. In the event Executive does not fully comply with such obligations or in the event any such obligations are determined by any court to be unenforceable to any extent, Employer shall be relieved of all obligations to provide any severance or post-termination benefits. Any dispute between the parties as to whether the Executive fully complied with such obligations shall be subject to arbitration under the provisions of Section 10.13, hereof, and during the pendency of any such arbitration Employer shall make any severance payments otherwise due into an "rabbi trust account" to be held pending finality of the arbitration. Notwithstanding anything in the Severance Plan or this Agreement to the contrary, in order to avoid a violation of Section 409A of the Internal Revenue Code of 1986 (the "Code") any severance payments due Executive shall be deferred for a period of six (6) months following his termination, after which time any severance payments due Executive shall begin, with the 6 

 first such payment including an amount equal to the aggregate amount deferred for such six (6) month period. 8. Death or Permanent Disability. 8.1 Death. If Executive's employment hereunder is terminated by death, then Employer shall, within 90 days of the date of death, make a lump sum payment to Executive's estate (or other beneficiary designated by Executive in writing) equal to all Base Salary and bonuses, if any, earned and accrued through the date of death. Thereafter, Employer shall have no further obligation to Executive under the Agreement. 8.2 Permanent Disability. If Executive becomes physically or mentally disabled while employed by Employer under this Agreement so that Executive is--with or without reasonable accommodation--unable to render the services provided for by this Agreement for a period of six consecutive months or for shorter periods aggregating six months during any 24-month period, or so that Executive has a Disability (as defined under Employer's then-current disability policy), then Employer may, at any time after the last day of the six consecutive months of disability, the day on which the shorter periods of disability equal an aggregate of six months, or the day on which Executive is determined to have a Disability, terminate Executive's employment hereunder for "Permanent Disability" by written notice to Executive. Following such termination, Executive shall be entitled to receive from Employer (i) all Base Salary and bonuses, if any, accrued through the date of termination and (ii) any other benefits payable under Employer's then-current disability policy, but all other rights of Executive hereunder shall terminate as of the date of Executive's termination. 9. Excess Parachute Payments. 9.1 If any payment by Employer or the receipt of any benefit from Employer (whether or not pursuant to this Agreement) shall be deemed to constitute an "excess parachute payment" as such term is described in Section 280G of the Code so as to result in the loss of a deduction to Employer under Code Section 280G or in the imposition of an excise tax on the Executive under Code Section 4999, or any successor sections thereto (an "Excess Parachute Payment"), then the Executive shall be paid either (i) the amounts and benefits due, or (ii) the amounts and benefits due shall be reduced to an amount equal to one-dollar ($1) less than the maximum amount allowed under the Code that would avoid the existence of an "Excess Parachute Payment," whichever amount results in the greater after-tax payment to the Executive. Employer, in its sole discretion, shall determine whether or not an "excess parachute payment" would otherwise occur and shall determine the amount and method of the foregoing reduction. 9.2 Notwithstanding the provisions of Section 9.1 above, if any payment by Employer or the receipt of any benefit from Employer (whether or not pursuant to this Agreement) in calendar year 2008 or 2009 shall be deemed to constitute an "excess parachute payment" as such term is described in Section 280G of the Code so as to result in the loss of a deduction to Employer under Code Section 280G or in the imposition of an excise tax on the Executive under Code Section 4999, or any successor sections thereto, then in addition to the amounts payable or benefits provided under this Agreement, Executive shall receive an additional amount equal to the amount of any excise tax imposed on Executive under Code Section 4999. Such additional 7 

 amount shall be paid to Executive on or before December 31 of the calendar year following the calendar year in which the Executive remits such excise tax. Employer, in its sole discretion, shall determine whether or not an "excess parachute payment" would otherwise occur and shall determine the amount and method of the foregoing reduction. 10. Miscellaneous. 10.1 Assignment of Executive Benefits. This Agreement shall inure to the benefit of and be enforceable by each of the parties hereto, and Employer's successors and assigns and, in the case of the Executive, his personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. Executive's obligations under this Agreement are personal and not assignable by Executive. 10.2 No Right to Employment. Nothing contained in this Agreement or any act done pursuant hereto shall be construed as giving any person any legal or equitable right against Employer, except to enforce the provisions of this Agreement, or as giving any person a right to be retained in the employ of Employer. Subject to the provisions set forth herein, Executive shall remain subject to assignment, reassignment, promotion, transfer, layoff, reduction, change in employment terms, suspension, and discharge to the same extent as if this Agreement had never been executed. 10.3 No Conflicting Agreements. Executive represents to Employer (i) that there are no restrictions, agreements or understandings whatsoever to which Executive is a party that would prevent or make unlawful Executive's execution or performance of this Agreement or employment hereunder; and (ii) that the execution of this Agreement and Executive's employment does not constitute a breach of any contract, agreement or understanding, oral or written, to which Executive is a party or by which Executive is bound. 10.4 Governing Law. In view of the fact that the principal office of Employer 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 (subject to the arbitration provision in Section 10.13, below), and that the parties consent to personal jurisdiction in such state and federal courts. 10.5 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. 10.6 Entire Agreement; Modification. Except as to Employer's Severance Plan, equity benefit plan, any instrument relating to an option or restricted share granted thereunder and written agreements signed by both of the parties hereto from time to time after the date hereof, this Agreement contains the entire agreement and understanding by and between Employer and Executive with respect to the subject matter hereof, and any representations, promises, agreements, or understandings, written or oral, not herein contained, whether related to Employer's operations or financial condition, the terms and conditions of Executive's employment, or any other matter, shall be of no force or effect. Except as provided in Section 8 

 4.6, 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 both 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 10.6 may not be waived except as set forth herein. 10.7 Waiver of Breach. The waiver by Employer of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any subsequent breach by Executive. 10.8 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 Employer shall be directed to the attention of the Board of Directors of Employer with a copy to the Secretary of Employer, 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. 10.9 Withholding Taxes. Employer may 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. 10.10 Consultation with Attorney. Executive represents that he has consulted with an attorney concerning the terms of this Agreement and understands the Agreement, including but not limited to the provisions of Sections 4, 5 and 6. 10.11 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. 10.12 Interpretation of Agreement. In any action to enforce or interpret this Agreement, the parties shall be considered joint authors; this Agreement shall not be strictly construed for any purpose against either party. 10.13 Arbitration of Disputes. 10.13.1 Any dispute or claim arising out of or relating to this Agreement or any termination of Executive's employment, other than a dispute or claim arising under Sections 4 through 6, shall be settled by final and binding arbitration in the greater Kansas City metropolitan area in accordance with the Employment Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 9 

 10.13.2 The fees and expenses of the arbitration panel shall be borne equally by Executive and Employer, unless the arbitrator orders otherwise. 10.13.3 Either party may elect to have any dispute governed by this Section 10.13 to be resolved by a panel of three arbitrators, and the party electing same shall bear any additional costs resulting from such selection, the provision of Section 10.13.2 notwithstanding. IN WITNESS WHEREOF, Employer and Executive have duly executed this Agreement as of the day and year first hereof written. I ACKNOWLEDGE AND UNDERSTAND THIS AGREEMENT CONTAINS AN ARBITRATION CLAUSE. EXECUTIVE: Signature: /s/ John P. Kelly ------------------------------- Printed Name: John P. Kelly Address: 109 Rio Cordillera Bourne, TX 78006 AMERICAN ITALIAN PASTA COMPANY By: /s/ William R. Patterson -------------------------------------- Printed Name: William R. Patterson, Chairman Address: 4100 N. Mulberry Dr. Suite 200 Kansas City, MO 64116 10