Exhibit 10.3
Execution
Version
SECOND
LIEN FORBEARANCE AGREEMENT
THIS SECOND LIEN
FORBEARANCE AGREEMENT (as the same may from time to time be
amended, restated or otherwise modified, this “
Agreement ”) is made as of February 13, 2008 and
entered into by and among Prospect Medical Holdings, Inc.
(“ Holdings ”) and Prospect Medical
Group, Inc. (“ Prospect ” and, collectively
with Holdings, the “ Borrowers ” and each,
individually, a “ Borrower ”), Bank of America,
N.A., as Administrative Agent (in such capacity, the “
Second Lien Administrative Agent ”), and the lenders
party hereto (collectively, the “ Second Lien Lenders
”).
RECITALS
WHEREAS, the
Borrowers, the Second Lien Lenders and the Second Lien
Administrative Agent have entered into that certain Second Lien
Credit Agreement dated as of August 8, 2007 (as amended,
restated, supplemented or otherwise modified, the “ Second
Lien Credit Agreement ”), pursuant to which the Second
Lien Lenders have agreed to make the Term Loan (such term, together
with each other capitalized term used in this Agreement but not
defined in this Agreement, shall be defined in accordance with the
Second Lien Credit Agreement) and other extensions of credit, all
upon the terms and conditions set forth in the Second Lien Credit
Agreement;
WHEREAS, the
Second Lien Administrative Agent, inter alia , is a party to
the Intercreditor Agreement;
WHEREAS, as of the
date hereof, certain Defaults and Events of Default exist under the
Second Lien Credit Agreement and, as a result of such Defaults and
Events of Default, the Second Lien Lenders and the Second Lien
Administrative Agent have the right, among other things and subject
to the terms and conditions of the Intercreditor Agreement, to
exercise any and all remedies available to the Second Lien Lenders
under the Second Lien Credit Agreement;
WHEREAS, the
Borrowers have requested that the Second Lien Lenders and the
Second Lien Administrative Agent forbear from exercising such
rights for a limited period of time; and
WHEREAS, the
Second Lien Lenders and the Second Lien Administrative Agent are
willing to forbear from exercising such rights for a limited period
of time on the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in
consideration of the foregoing, the parties agree as
follows:
ARTICLE
I
FORBEARANCE
Section 1.1.
Outstanding Indebtedness . Each Borrower acknowledges
and confirms (a) that Exhibit A hereto sets forth,
as of the date hereof, the aggregate principal amount of the
outstanding Term Loans, and (b) that such amount is not
subject to any defense, counterclaim, recoupment or offset of any
kind.
Section 1.2.
Existing Defaults . Each Borrower acknowledges that
the Borrowers have failed to comply with the provisions of the
Second Lien Credit Agreement as set forth under the heading
“January 28 th Events of Defaults” on
Exhibit B hereto (collectively, the “
January 28 Events of Default ”). Each
Borrower further acknowledges (and has so advised the Second Lien
Administrative Agent) that it anticipates that it may fail during
the Forbearance Period (as defined herein) to comply with the
provisions of the Second Lien Credit Agreement as set forth under
the heading “Anticipated Events of Default” on
Exhibit B hereto (collectively, the “ Anticipated
Events of Default ” and together with the January 28
Events of Default, the “ Existing Events of Default
”).
Section 1.3.
Continuing Defaults . With respect to each of the
Existing Events of Default, each Borrower acknowledges that
(a) such Existing Event of Default is continuing and has not
been waived by virtue of any previous actions (or failure to act)
by the Second Lien Administrative Agent or the Second Lien Lenders
through any course of conduct or course of dealing or otherwise,
(b) as a result of the existence of such Existing Event of
Default, the Second Lien Lenders and the Second Lien Administrative
Agent, pursuant to Section 8.02 of the Second Lien Credit
Agreement and the other Loan Documents and subject to the
Intercreditor Agreement, have the right to, among other things,
accelerate the maturity of the Term Loan and all of the other
Obligations.
Section 1.4.
Forbearance and Forbearance Period.
(a)
The Second Lien Lenders and the Second Lien Administrative Agent,
by executing this Agreement and upon the satisfaction of the
conditions set forth in Article II hereof, hereby agree to
forbear from exercising their rights and remedies that exist by
virtue of the Existing Events of Default for the period from
January 28, 2008 through and including March 31, 2008
(the “ Forbearance Period ”) subject to the
continuing satisfaction during the Forbearance Period of each of
the following conditions:
(i)
after giving effect to the terms of this Agreement, other than the
Existing Events of Default, no other Default or Event of Default
shall exist under the Second Lien Credit Agreement or any Loan
Document;
(ii)
during the Forbearance Period, other than the Existing Events of
Default, no other Default or Event of Default shall occur or arise
under the Second Lien Credit Agreement or any Loan Document and no
default or event of default shall occur or arise under this
Agreement;
(iii)
neither the First Lien Administrative Agent nor the First Lien
Lenders shall exercise or seek to exercise any of their respective
rights or remedies under the First Lien Loan Documents or take or
seek to take any action that violates or is inconsistent with the
terms of the Intercreditor Agreement or is inconsistent with the
terms of the forbearance agreement described in
Section 3.1(c) hereof;
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(iv)
the first lien forbearance agreement as described in
Section 3.1(c) hereof shall not have expired by its terms
and the “Forbearance Period” set forth therein shall
not have terminated; and
(v)
the Borrowers shall be in compliance with their obligations under
the Fee Letter (as defined in Section 3.1(d) hereof).
(b)
Unless the Forbearance Period has been previously terminated in
accordance with the terms hereof, so long as the Second Lien
Lenders and the Second Lien Administrative Agent shall have
received the Required Reporting Package (as defined below) as soon
as available and in any event no later than March 31, 2008,
the Forbearance Period shall be automatically extended until
April 10, 2008 (such date, the “ Extended Forbearance
Period Termination Date ”).
“ Required
Reporting Package ” shall mean the following, in each
case in form and substance satisfactory to the Second Lien Lenders
and the Second Lien Administrative Agent:
(i)
a final draft of Holdings’ and its Subsidiaries audited
financial statements for the fiscal year ended September 30,
2007 all prepared in accordance with Section 6.01(a) of
the Second Lien Credit Agreement, which such draft audited
financial statements will only require the delivery of a mutually
acceptable waiver and amendment from the First Lien Lenders and the
Second Lien Lenders with respect to the Existing Events of Default
in order for the audit to be finalized and accompanied by an
unqualified opinion of Holdings’ auditor;
(ii)
unaudited copies of Holdings’ and its Subsidiaries quarterly
financial statements for the fiscal quarter ended December 31,
2007, all prepared in accordance with Section 6.01(b) of
the First Lien Credit Agreement;
(iii)
updated copies of all financial information previously provided
under Sections 6.01(b) and 6.01(c) of the Second Lien
Credit Agreement (in each case, together with the related
Compliance Certificate referred to in Section 6.02(b) of
the Second Lien Credit Agreement), in each case revised to give
effect to the restatement of the financial statements of Holdings
and its Subsidiaries relating to the 2007 fiscal year;
(iv)
updated copies of the historical monthly financial statements for
Holdings and its Subsidiaries for the period of October 2006
through the closing date of the Second Lien Credit Agreement;
(v)
Compliance Certificates to be delivered in connection with each set
of financial statements referenced in Section 1.4(b)(i)
and Section 1.4(b)(ii) above;
(vi)
revised financial projections for fiscal year 2008 and fiscal year
2009, including (i) a financial (cash flow) budget (i.e., a
schedule of anticipated revenue and expenditures) prepared on a
monthly basis for fiscal year 2008 prepared in accordance with
Section 6.01(d) of the Second Lien Credit Agreement,
(ii) a
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financial (cash flow)
budget (i.e., a schedule of anticipated revenue and expenditures)
prepared on a quarterly basis for fiscal year 2009 prepared in
accordance with Section 6.01(d) of the Second Lien Credit
Agreement, (iii) a projected EBITDA run rate for fiscal year
2008 and fiscal year 2009 and (iv) a written assessment by
management of the run-rate revenue and run-rate EBITDA by business
line, which assessment bridges to the financial information in
respect of the period ended March 31, 2007, which such
financial information was provided to the Second Lien Lenders prior
to closing of, and upon which the Second Lien Lenders relied in
entering into the Second Lien Credit Agreement; and
(vii)
a monthly report that shows projected versus actual comparison of
the items listed on the cash flow budget for 2008.
(c)
Each Borrower acknowledges and agrees that, upon the failure of any
Borrower to satisfy any of the foregoing conditions at any time
during the Forbearance Period, the Forbearance Period shall
automatically terminate, and each such failure shall immediately
constitute an Event of Default under the Second Lien Credit
Agreement. The Second Lien Administrative Agent agrees to
provide the Borrowers promptly with notice of the termination of
the Forbearance Period; provided , however , that the
failure to give such notice shall not affect the automatic
termination of the Forbearance Period or its immediate constitution
of an Event of Default, and the Borrowers hereby waive any such
notice. Upon termination of the Forbearance Period, the
Second Lien Administrative Agent and the Second Lien Lenders,
subject to the Intercreditor Agreement, shall be permitted to
exercise any and all rights and remedies that exist with respect to
the Existing Events of Default.
ARTICLE
II
OTHER
AGREEMENTS
Section 2.1.
Default Interest During the Forbearance Period, all
outstanding Obligations under the Second Lien Credit Agreement
shall bear interest at the Default Rate.
Section 2.2.
Intercreditor Agreement . The Second Lien
Administrative Agent and the Second Lien Lenders acknowledge and
agree that (i) they consent to the first lien forbearance
agreement described in Section 3.1(c) hereof and the
terms and conditions thereof; (ii) in accordance with the
terms and conditions of this Agreement, that, during the
Forbearance Period, the Second Lien Administrative Agent shall be
prohibited from issuing to the First Lien Administrative Agent the
notice contemplated in the definition of “Second Lien
Enforcement Date” set forth in the Intercreditor Agreement;
(iii) the effectiveness of neither the first lien forbearance
agreement described in Section 3.1(c) hereof nor of this
Agreement shall constitute, or be deemed to constitute, the
commencement of a “Standstill Period” as such term is
defined in Section 3.01(a)(i)(A) of the Intercreditor
Agreement; (iv) the first lien forbearance agreement described
in Section 3.1(c) of hereof constitutes a “delay in
or refrain from exercising . . . right[s] or remed[ies] against
[the] Borrowers” by the First Lien Administrative Agent and
the First Lien Lenders within the meaning of
Section 7.03(b)(v) of the Intercreditor Agreement;
(v) the
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Intercreditor Agreement
remains in full force and effect (including to the extent that it
is modified by clause (ii) hereof); and (vi) the First
Lien Administrative Agent and the First Lien Lenders are
third-party beneficiaries of the Second Lien Administrative Agent
and the Second Lien Lenders’ obligations under this
Section 2.2.
Section 2.3.
Consultant Matters . Further to their obligations
under Sections 6.10 and 10.04 of the Second Lien Credit Agreement,
the Borrowers and their Subsidiaries (a) acknowledge and
consent to the retention of a third-party consultant or consultants
hired on behalf of the Second Lien Lenders (the “
Consultant ”), (b) acknowledge and agree that
they will be responsible for the payment of all fees and expenses
of such Consultant, (c) agree to fully cooperate with such
Consultant and allow such Consultant to: visit and inspect any of
the properties of the Borrowers and their Subsidiaries; examine
corporate, financial and operating records of the Borrowers and
their Subsidiaries; make copies thereof or abstracts therefrom; and
discuss the affairs, finances and accounts of the Borrowers and
their Subsidiaries with their respective directors, officers, and
independent public accountants, and (d) shall, beginning on
February 13, 2008 and on a bi-weekly basis thereafter, provide
to the Consultant (to be forwarded to the Second Lien
Administrative Agent and the Second Lien Lenders) on a rolling
basis a thirteen-week financial (cash-flow) budget (i.e., schedule
of anticipated revenue and expenditures) and shall, when they
update such budget, also provide to the Consultant (to be forwarded
to the Second Lien Administrative Agent and the Second Lien
Lenders) a schedule that shows a projected versus actual comparison
of the items set forth in the budget over the course of
(i) the preceding two weeks; and (ii) the period
beginning on February 18, 2008.
Section 2.4.
Modification of Maturity Date . In the event that the
Borrowers,
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