Source Interlink, which owns Alliance Entertainment, has filed a "pre-packaged" Chapter 11, that will wipe out current shareholders holders, see a consortium of banks led by Citigroup Global Markets, Inc. and J.P. Morgan Securities convert nearly $1 billion in debt into ownership of the company, and take the company private. With the lenders approving the plan on the front-end and all vendors expected to be paid in full and on time, the company anticipates emerging from Chapter 11 within 35 days.

As part of the restructuring, the lender group is providing the company with an additional $100 million in liquidity. Currently, Source Interlink has an $880 million term loan; $465 million in notes and, sources say, about $100 million drawn down from its $300 million revolving credit facility.

"This restructuring will materially reduce our interest expense and debt levels, substantially improve free cash flow and allow us to capitalize on several operational opportunities to further improve and grow our business,” Source Interlink chairman and CEO Greg Mays said in a statement." "Current management will remain in place, daily operations will continue as usual...importantly, all of our vendors will be paid in full for both pre-petition and on going charges according to our terms of trade."

Sources say Source Interlink's debt service will be reduced to be about $65 million annually from its current level of about $115 million. The management team will remain in place with a 5% stake in the company.

According to executive familiar with the plan, Source Interlink approached the lenders saying that if the business environment doesn't change, the company could be in trouble by the end of this year. If that were to occur, vendors would become tight with credit, which would result in a less orderly Chapter 11. This way, the company gets in front of its problems, eliminates debt, cuts other costs and keeps the vendor community "whole," that source says. Its important to keep all the vendor community current in payments, not just the majors, because Alliance is a deep catalog shop, he adds.

The company's acquisition of Primedia's Enthusiast Media Group left Source Interlink, a leading distributor of magazines, with a heavy debt load. In moves to cut costs, Source Interlink merged its magazine distribution operation with its CD and DVD wholesale operation, late last year.

This latest turn of events marks the second time that Alliance Entertainment has been in Chapter 11. In 1998, it become the only U.S. one-stop to successfully emerge from a Chapter 11 filing.

Since the second week of November, the company's shares have been mainly trading around the 15-20 cent range, an indication that its investors anticipated this Chapter 11 filing. The company's shares are currently trading at 8.6 cents, down from the 16 cent close it had yesterday.

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