On April 27, 2009, Source Interlink and 17 of its affiliates (the “Debtors”) filed chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware.  As reflected in its bankruptcy petitions, Debtors have assets totaling $2.4 billion against debts of $2.0 billion.  According to Debtors’ Declaration in Support of First Day Motions,  Debtors began in 1995 as “The Source Company” and by 1998 Debtors became a “leader of direct magazine distribution, an information repository and the preeminent front-end checkout management provider for major retail chains by acquiring ten magazine retail display companies.”

Based in Bonita Springs, Florida,  Debtors import and export over 1,500 different publications. Since its formation in 1995, Debtors rapidly expanded their operations by merging or acquiring various entities.  In  February 2005, Debtors merged with Alliance Entertainment Corp., a distributor of home entertainment products.  Three months later, Debtors acquired Chas Levy Circulating Co., a magazine wholesaler.  Less than one year after acquiring Chas Levy, Debtors purchased magazine and book distribution markets in the Washington D.C. metropolitan and Southern California areas.  By August 2007, Debtors purchased Primedia, owner of publications such as Motor Trend, Automobile, Surfer and Soap Opera Digest.

Events Leading to Bankruptcy

According to the Bankruptcy Declaration, the “recent economic recession and dislocation of credit markets has caused an unprecedented and severe decline in Debtors’ print advertising revenue.”  As the economy declines, many of the companies that advertise in Debtors’ magazines have cut back on advertising spending.  Automotive manufacturers, one of Debtors’ largest advertisers, are one of many industries Debtors’ rely on for ad revenue that are in decline.

Debtors’ Finances

Going into bankruptcy,  Debtors debt structure includes an $867 million term loan, a secured revolver agreement drawn down to $160 million, subordinated trade debt of $70 million  and $465 million in unsecured notes.  As stated in the Declaration,  Debtors pledged substantially all of their assets as collateral securing the pre-petition loans.  Source-Canada Corp. is a non-debtor entity that Debtors contend is not a borrower or guarantor under the pre-petition loan agreements.  Even so, Debtors state that 65% of the voting stock in Source-Canada is pledged as collateral under loan security agreements.

Although Debtors’ stock is traded on NASDAQ, the company remains closely held.  Debtors estimate that there are only 125 holders of Debtors’ common stock.  Debtors’ largest shareholder is AEC Associates, which owns approximately 48% of the common stock outstanding.

First Steps in Bankruptcy

One of the first motions filed in this bankruptcy proceeding is Debtors’ motion to seek additional time to file schedules and statements of financial affairs.  Debtors estimate that they have more than 50,000 creditors and serve over 100,000 retail stores in North America.  Given the size of Debtors’ operations, they seek additional time to assemble and organize the information that must be filed with the Court.  Debtors did include in their bankruptcy petitions a list of its largest unsecured creditors.  Click here to review Source Interlink’s list of its largest creditors.

This bankruptcy proceeding is before the Honorable Kevin Gross.