Exhibit 10.1
EMPLOYMENT AGREEMENT

This Agreement made effective as of August 13, 2012 by and between Advocat Inc.,
a Delaware corporation (the “Company”), and James R. McKnight, Jr. (the
“Executive”).

In consideration of the mutual covenants contained in this Agreement, the
parties hereby agree as follows:
SECTION I
EMPLOYMENT

The Company agrees to employ the Executive and the Executive agrees to be
employed by the Company for the Period of Employment as provided in Section
III.A. below and upon the terms and conditions provided in the Agreement.

SECTION II
POSITION AND RESPONSIBILITIES

The Executive agrees to serve as Executive Vice President and Chief Financial
Officer of the Company and to be responsible for the typical management
responsibilities expected of an officer holding such positions and such other
responsibilities as may be assigned to Executive from time to time by the Chief
Executive Officer or the Board of Directors of the Company.

SECTION III
TERMS AND DUTIES

A.    Period of Employment

The period of Executive’s employment under this Agreement will commence as of
the date hereof and shall continue through March 31, 2013, subject to extension
or termination as provided in this Agreement (“Period of Employment”). On March
31 of each year beginning March 31, 2013, the period of Executive’s employment
shall be extended for additional one (1) year periods, unless either party gives
notice thirty (30) days in advance of the expiration of the then current period
of employment of such party’s intent not to extend the Period of Employment.

B.    Duties

During the Period of Employment, the Executive shall devote all of his business
time, attention and skill to the business and affairs of the Company and its
subsidiaries. The Executive will perform faithfully the duties which may be
assigned to him from time to time by the Board of Directors.

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SECTION IV
COMPENSATION AND BENEFITS

A.    Compensation

For all services rendered by the Executive in any capacity during the Period of
Employment, the Executive shall be compensated as follows:

1.    Base Salary

The Company shall pay the Executive a base salary (“Base Salary”) as follows:
Two Hundred Twenty Five Thousand Dollars ($225,000) per annum.

Base Salary shall be payable according to the customary payroll practices of the
Company but in no event less frequently than once each month. The base salary
shall be reviewed annually and shall be subject to increase according to the
policies and practices adopted by the Company from time to time.

B.    Annual Incentive Awards

The Company will pay the Executive annual incentive compensation awards as may
be granted by the Board or a Compensation Committee to the Executive under any
executive bonus or incentive plan in effect from time to time. In all events,
any such incentive bonuses or payments will be made on or before March 15
following the Executive’s taxable year in which such award is no longer subject
to a substantial risk of forfeiture as defined by Treasury Regulation Section
1.409A-1(d).

C.    Additional Benefits

The Executive will be entitled to participate in all compensation or employee
benefit plans or programs and receive all benefits and perquisites for which any
salaried employees are eligible under any existing or future plan or program
established by the Company for salaried employees. The Executive will
participate to the extent permissible under the terms and provisions of such
plans or programs in accordance with program provisions. These may include group
hospitalization, health, dental care, life or other insurance, tax qualified
pension, car allowance, savings, thrift and profit sharing plans, termination
pay programs, sick leave plans, travel or accident insurance, disability
insurance, and contingent compensation plans including capital accumulation
programs, Restricted Stock programs, stock purchase programs and stock option
plans. Nothing in this Agreement will preclude the Company from amending or
terminating any of the plans or programs applicable to salaried or senior
executives as long as such amendment or termination is applicable to all
salaried employees or senior executives.

SECTION V
BUSINESS EXPENSES

The Company will reimburse the Executive for all reasonable travel and other
expenses incurred by the Executive in connection with the performance of his
duties and obligations under this Agreement.

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SECTION VI
DISABILITY

A.    In the event of disability of the Executive during the Period of
Employment, the Company will continue to pay the Executive according to the
compensation provisions of this Agreement during the period of his disability,
until such time as Executive’s long term disability insurance benefits are
available. Once the Executive’s long term disability insurance benefits are
available, the Company’s obligation to continue paying compensation shall cease
unless the disability ends. In the event the Executive is disabled for a
continuous period of six (6) months after the Executive first becomes disabled,
the Company may terminate the employment of the Executive. In this case, the
Company’s obligation to make payments under this Agreement shall cease as of the
date of termination, except for earned but unpaid Base Salary and Incentive
Compensation Awards which will be paid on a pro-rated basis for the year in
which the disability occurred. In the event of such termination, all unvested
stock options held by Executive shall be deemed fully vested on the date of such
termination.

B.    During the period the Executive is receiving payments of either regular
compensation or disability insurance described in this Agreement and as long as
he is physically and mentally able to do so, the Executive will furnish
information and assistance to the Company and from time to time will make
himself available to the Company to undertake assignments consistent with his
prior position with the Company and his physical and mental health. If the
Company fails to make a payment or provide a benefit required as part of the
Agreement, the Executive’s obligation to fulfill information and assistance will
end.

SECTION VII
DEATH

In the event of the death of the Executive during the Period of Employment, the
Company’s obligation to make payments under this Agreement shall cease as of the
date of death, except for earned but unpaid Base Salary and Incentive
Compensation Awards which will be paid on a pro-rated basis for that year. The
Executive’s designated beneficiary will be entitled to receive the proceeds of
any life or other insurance or other death benefit programs provided in this
Agreement.

SECTION VIII
EFFECT OF TERMINATION OF EMPLOYMENT

A.    If the Executive’s employment terminates after February 13, 2013 due to
either a Without Cause Termination or a Constructive Discharge, as defined later
in this Agreement, the Company will pay the Executive in a lump sum an amount
equal to 100% of his Base Salary as in effect at the time of the termination
upon such Termination or Constructive Discharge, and subject to Section XII,
such amount will be paid at the time of termination of employment. Earned but
unpaid Base Salary and Incentive Compensation Awards will be paid in a lump sum
upon such Termination or Constructive Discharge. The benefits and perquisites
described in this Agreement as in effect at the date of termination of
employment will be continued for twelve (12) months. If the Executive’s
employment terminates due to either a Without Cause Termination or a
Constructive Discharge, or pursuant to Section XI, all stock options, SOSARs,
restricted stock or other equity grants granted to the Executive under the
Company’s 2010 Long-Term Incentive Plan or other stock option program or plan
(the “Plan”) shall be deemed vested, and the Company shall cause any options or
SOSARs to remain exercisable until the earlier of (i) the latest date upon which
the option or SOSAR could have expired by its original terms under any
circumstances

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or the tenth anniversary of the original date of grant of such option or SOSAR
or (ii) the later of the fifteenth (15th) day of the third (3rd) month following
the date on which the Options would have expired or December 31 of the calendar
year in which the Option would have expired.

B.    If the Executive’s employment terminates due to a Termination for Cause,
earned but unpaid Base Salary will be paid on a pro-rated basis for the year in
which the termination occurs. No other payments will be made or benefits
provided by the Company.

C.    Upon termination of the Executive’s employment for any reason prior to
February 13, 2013 or at any time for reasons other than due to death,
disability, or pursuant to Paragraph A of this Section or Section XI, the Period
of Employment and the Company’s obligation to make payments under this Agreement
will cease as of the date of the termination except as expressly defined in this
Agreement.

D.    For this Agreement, the following terms have the following meanings:

1.    “Termination for Cause” means termination of the Executive’s employment by
the Company’s Board of Directors acting in good faith by the Company by written
notice to the Executive specifying the event relied upon for such termination,
due to the Executive’s serious, willful misconduct with respect to his duties
under this Agreement, including but not limited to conviction for a felony or
perpetration of a common law fraud, which has resulted or is likely to result in
material economic damage to the Company.

2.    “Constructive Discharge” means termination of the Executive’s employment
by the Executive as a result of any of the following: a material diminution of
base salary of Executive; a material diminution in the Executive’s authority,
duties or responsibilities; a material diminution in the budget over which the
Executive retains authority; a material change in geographic location at which
the Executive must perform the services; or any other action or inaction that
constitutes a material breach of the terms of this Agreement. Provided, however,
that such condition shall not constitute a reason for Constructive Discharge
unless the Executive provides written notice of such condition within sixty (60)
days of its occurrence and provides the Company with thirty (30) days to remedy
the condition. Further, any termination of employment by the Executive must
occur within one hundred twenty (120) days from the initial existence of the
condition giving rise to the Constructive Discharge.

3.    “Without Cause Termination” means termination of the Executive’s
employment by the Company (a) other than due to death, disability, Termination
for Cause or pursuant to Section XI; or (b) upon expiration of the Period of
Employment as a result of the giving of notice by the Company of its intent not
to extend the Period of Employment as provided in Section III.A.

SECTION IX
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE PERIOD OF EMPLOYMENT

A.    The Executive will, with reasonable notice during or after the Period of
Employment, furnish information as may be in his possession and cooperate with
the Company as may reasonably be requested in connection with any claims or
legal actions in which the Company is or may become a party.

B.    The Executive recognizes and acknowledges that all information pertaining
to the affairs, business, clients, customers or other relationships of the
Company, as hereinafter defined, is confidential

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and is a unique and valuable asset of the Company. Access to and knowledge of
this information are essential to the performance of the Executive’s duties
under this Agreement. The Executive will not during the Period of Employment or
after except to the extent reasonably necessary in performance of the duties
under this Agreement, give to any person, firm, association, corporation or
governmental agency any information concerning the affairs, business, clients,
customers or other relationships of the Company except as required by law. The
Executive will not make use of this type of information for his own purposes or
for the benefit of any person or organization other than the Company. The
Executive will also use his best efforts to prevent the disclosure of this
information by others. All records, memoranda, etc. relating to the business of
the Company whether made by the Executive or otherwise coming into his
possession are confidential and will remain the property of the Company.

C.    During the Period of Employment and for a twelve (12) month period
thereafter, the Executive will not use his status with the Company to obtain
loans, goods or services from another organization on terms that would not be
available to him in the absence of his relationship to the Company. During the
Period of Employment and for a twelve (12) month period following termination of
the Period of Employment, other than termination due to a Without Cause
Termination, a Constructive Discharge or termination pursuant to Section XI: the
Executive will not make any statements or perform any acts intended to advance
the interest of any existing or prospective competitors of the Company in any
way that will injure the interest of the Company; the Executive without prior
express written approval by the Board of Directors of the Company will not
directly or indirectly own or hold any proprietary interest in or be employed by
or receive compensation from any party engaged in the same or any similar
business in the same geographic areas the Company does business; and the
Executive without express prior written approval from the Board of Directors,
will not solicit any members of the then current clients of the Company or
discuss with any employee of the Company information or operation of any
business intended to compete with the Company. For the purposes of the
Agreement, proprietary interest means legal or equitable ownership, whether
through stock holdings or otherwise, of a debt or equity interest (including
options, warrants, rights and convertible interests) in a business firm or
entity, or ownership of more than 5% of any class of equity interest in a
publicly-held company. The Executive acknowledges that the covenants contained
herein are reasonable as to geographic and temporal scope. For a twelve (12)
month period after termination of the Period of Employment for any reason, the
Executive will not directly or indirectly hire any employee of the Company or
solicit or encourage any such employee to leave the employ of the Company.

D.    The Executive acknowledges that his breach or threatened or attempted
breach of any provision of Section IX would cause irreparable harm to the
Company not compensable in monetary damages and that the Company shall be
entitled, in addition to all other applicable remedies, to a temporary and
permanent injunction and a decree for specific performance of the terms of
Section IX without being required to prove damages or furnish any bond or other
security.

E.    The Executive shall not be bound by the provisions of Section IX in the
event of the default by the Company in its obligations under this Agreement
which are to be performed upon or after termination of this Agreement.

SECTION X
INDEMNIFICATION, LITIGATION

The Company will indemnify the Executive to the fullest extent permitted by the
laws of the state of incorporation in effect at that time, or certificate of
incorporation and by-laws of the Company whichever affords the greater
protection to the Executive. The Executive will be entitled to any insurance

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proceeds related to any award, or any fees or expenses incurred in connection
with any action, suit or proceeding to which he may be made a party by reason of
being a director or officer of the Company.

SECTION XI
CHANGE IN CONTROL

In the event there is a Change in Control of the ownership of the Company and
within the six (6) month period following such event, the Executive elects to
resign upon written notice to the Company, the Company shall pay to the
Executive on such resignation in a lump sum an amount equal to 100% of his Base
Salary as in effect at the time of such resignation, and subject to Section XII,
such amount will be paid at the time of termination of employment. In addition,
earned but unpaid Base Salary and Incentive Compensation Awards will be paid on
a pro-rated basis for the year in which resignation occurs. Any stock options
granted to the Executive prior to termination pursuant to the Plan, but subject
to vesting restrictions, will be fully vested upon a Change in Control whether
or not the Executive resigns. The benefits and perquisites described in this
Agreement as in effect at the date of termination of employment will also be
continued for twelve (12) months from the effective date of termination pursuant
to Change of Control.

A “Change in Control” shall be deemed to have occurred if (i) a tender offer
shall be made and consummated for the ownership of more than 50% of the
outstanding voting securities of the Company, (ii) the Company shall be merged
or consolidated with another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, as the same shall have existed immediately prior to
such merger or consolidation, (iii) the Company shall sell all or substantially
all of its assets to another corporation which is not a wholly-owned subsidiary,
(iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as
in effect on the date hereof) of the Securities and Exchange Act of 1934
(“Exchange Act”), shall acquire more than 50% of the outstanding voting
securities of the Company (whether directly, indirectly, beneficially or of
record) ) or (v) the individuals who, as of the date hereof, constitute the
Board of the Company (the “Incumbent Board”) cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company’s shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a person or group other
than the Board. For purposes hereof, ownership of voting securities shall take
into account and shall include ownership as determined by applying the
provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to
the Exchange Act.

SECTION XII
CODE SECTION 409A COMPLIANCE

A.    This Agreement and any payments or benefits provided hereunder shall be
interpreted, operated and administered in a manner intended to avoid the
imposition of additional taxes under Section 409A of the Internal Revenue Code
of 1986, as amended (the “Code”). Further, the parties acknowledge and agree
that the form and timing of the payments and benefits to be provided pursuant to
this Agreement are intended comply with Section 409A of the Code or to be exempt
from, or to comply with, one or more exceptions to the requirements of Section
409A of the Code. Notwithstanding any provision

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of this Agreement to the contrary, the Company, its affiliates, subsidiaries,
successors, and each of their respective officers, directors, employees and
representatives, neither represent nor warrant the tax treatment under any
federal, state, local, or foreign laws or regulations thereunder (individually
and collectively referred to as the “Tax Laws”) of any payment or benefits
contemplated by this Agreement including, but not limited to, when and to what
extent such payments or benefits may be subject to tax, penalties and interest
under the Tax Laws.

B.    If and to the extent required to comply with Section 409A of the Code, no
payment or benefit required to be paid under this Agreement on account of
termination of the Executive’s employment shall be made unless and until the
Executive incurs a “separation from service” within the meaning of Section 409A
of the Code.

C.     Delayed Payments.

1.    Notwithstanding any other payment schedule provided herein or any
provision herein regarding the timing of payments in this Agreement to the
contrary, if, and only if, the Executive is deemed on the date of termination of
employment to be a “specified employee” within the meaning of that term under
Section 409A(a)(2)(B) of the Code, then the terms of this Section XII.C. shall
apply as required by Section 409A of the Code so as to avoid the imposition of
additional tax under Section 409A of the Code. Any payment that is considered
deferred compensation under Section 409A of the Code payable on account of a
“separation from service” shall be made on the date which is the earlier of (a)
the expiration of the six (6) month period measured from the date of such
“separation from service” of Executive or (b) the date of Executive’s death (the
“Delay Period”) to the extent required under Section 409A of the Code. Upon the
expiration of the Delay Period, all payments delayed pursuant to the immediately
preceding sentence (whether they otherwise would have been payable in a single
sum or in installments in the absence of such delay) shall be paid to Executive
in a lump sum by the Company at the end of the Delay Period, and all remaining
payments due under this Agreement shall be paid or provided in accordance with
the normal payment dates specified for them herein; and

2.    To the extent that any benefits to be provided during the Delay Period are
considered deferred compensation under Section 409A of the Code provided on
account of a “separation from service,” and such benefits are not otherwise
exempt from Section 409A of the Code, Executive shall pay the cost of such
benefits during the Delay Period, and the Company shall reimburse Executive, to
the extent that such costs otherwise would have been paid by the Company or to
the extent that such benefits otherwise would have been provided by the Company
at no cost to Executive, the Company’s share of the cost of such benefits upon
expiration of the Delay Period, and any remaining benefits shall be reimbursed
or provided by the Company in accordance with the procedures specified herein.

D.    Disability shall mean a medically determinable physical or mental
impairment that can be expected to result in death or can be expected to last
for a continuous period of not less than twelve months, where such impairment
causes the Executive to be unable to perform the duties under this Agreement or
any substantially similar position of employment.

E.    The Executive and the Company shall cooperate to determine the application
of Section 409A of the Code to the provisions of this Agreement. If the
Executive and the Company are unable to agree on the application of Section 409A
of the Code within ten (10) business days after the Executive’s separation from
service with the Company, then the application of Section 409A of the Code to
any provision of this Agreement in dispute shall be determined by an accounting
firm of recognized national standing acceptable to the Executive and the
Company. The accounting firm shall be instructed to use

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every reasonable effort to make its determination within ten (10) business days
after it is retained. The parties will cooperate fully with the accounting firm.
The costs and expenses for the services of the accounting firm shall be borne
equally by the Executive and the Company.

SECTION XIII
WITHHOLDING TAXES

The Company may directly or indirectly withhold from any payments under this
Agreement all federal, state, city or other taxes that shall be required
pursuant to any law or governmental regulation.

SECTION XIV
EFFECTIVE PRIOR AGREEMENTS

This Agreement contains the entire understanding between the Company and the
Executive with respect to the subject matter and supersedes any prior employment
or severance agreements between the Company and its affiliates, and the
Executive.

SECTION XV
CONSOLIDATION, MERGER OR SALE OF ASSETS

Nothing in this Agreement shall preclude the Company from consolidating or
merging into or with, or transferring all or substantially all of its assets to,
another corporation which assumes this Agreement and all obligations and
undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale
of Assets, the term “the Company” as used will mean the other corporation and
this Agreement shall continue in full force and effect. This Section XV is not
intended to modify or limit the rights of the Executive hereunder, including
without limitation, the rights of Executive under Section XI.

SECTION XVI
MODIFICATION

This Agreement may not be modified or amended except in writing signed by the
parties. No term or condition of this Agreement will be deemed to have been
waived except in writing by the party charged with waiver. A waiver shall
operate only as to the specific term or condition waived and will not constitute
a waiver for the future or act on anything other than that which is specifically
waived.

SECTION XVII
GOVERNING LAW; ARBITRATION

This Agreement has been executed and delivered in the State of Tennessee and its
validity, interpretation, performance and enforcement shall be governed by the
laws of that state.

Any dispute among the parties hereto shall be settled by arbitration in
Nashville, Tennessee, in accordance with the rules then obtaining of the
American Arbitration Association and judgment upon the award rendered may be
entered in any court having jurisdiction thereof.

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SECTION XVIII
NOTICES

All notices, requests, consents and other communications hereunder shall be in
writing and shall be deemed to have been made when delivered or mailed
first-class postage prepaid by registered mail, return receipt requested, or if
delivered by hand, overnight delivery service or confirmed facsimile
transmission, to the following:

(a) If to the Company, at 1621 Galleria Boulevard, Brentwood, TN 37027-2926,
Attention: President or Chief Executive Officer, or at such other address as may
have been furnished to the Executive by the Company in writing; or

(b) If to the Executive, at 2068 Goose Creek Dr. Franklin, Tennessee 37064, or
such other address as may have been furnished to the Company by the Executive in
writing.

SECTION XIX
BINDING AGREEMENT

This Agreement shall be binding on the parties’ successors, heirs and assigns.

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written.

ADVOCAT INC.

 
By: /s/ Kelly Gill
   Kelly Gill
Title: President and Chief Executive Officer
 
 
EXECUTIVE:

 
/s/ James R. McKnight, Jr.
James R. McKnight, Jr.