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PLAN VERSION

Debtor-in-Possession Senior Secured Facilities
 
Summary of Principal Terms and Conditions
 
THIS SUMMARY OF PRINCIPAL TERMS AND CONDITIONS IS FOR USE IN THE
 
COMPANY'S SOLICITATION OF ACCEPTANCES OF A PREPACKAGED PLAN OF
 
REORGANIZATION AND DOES NOT CONSTITUTE A COMMITMENT TO LEND OR
 
TO SYNDICATE A FINANCING OR AN AGREEMENT TO PREPARE, NEGOTIATE,
 
EXECUTE OR DELIVER SUCH A COMMITMENT.
 
Borrower:
Source Interlink Companies, Inc., as a debtor and debtor-in-possession
(“Borrower”) in a case (the “Case”) filed under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court
for the District of Delaware (the “Bankruptcy Court”).
Joint Lead Arrangers and Joint Bookrunners:
 
DIP Revolving Facility: Citigroup Global Markets Inc. (“CGMI”) and J.P. Morgan
Securities Inc. (“JPMSI”).
DIP Term Facility: CGMI and JPMSI
Syndication Agent:
DIP Revolving Facility: Wells Fargo Foothill, LLC
DIP Term Facility: JPMorgan Chase Bank, N.A.
Administrative Agent:
Citicorp North America, Inc. (in its capacity as Administrative Agent, the
“Administrative Agent”).
Collateral Agent:
DIP Revolving Facility: Citicorp North America, Inc. and Wells Fargo Foothill,
LLC (or its designated affiliate or subsidiary)
DIP Term Facility: Citicorp North America, Inc.
DIP Lenders:
(A)DIP Term Facility
 
A syndicate of financial institutions consisting of lenders under the Borrower's
prepetition Term Loan Agreement, dated as of August 1, 2007 (as amended, the
“Prepetition Term Loan”) (the “DIP Term Lenders”).
 
For each dollar of DIP Term Loans (as defined below) committed to be made by
each DIP Term Lender, such DIP Term Lender shall have the right, in accordance
with the terms and subject to the conditions of the Senior Secured Credit
Facilities Summary of Principal Terms and Conditions attached here to as Annex
II (the “Exit Term Sheet”), to have a dollar of its Prepetition Term Loan
converted to Term B Loans (as defined in the Exit Term Sheet) under an amended
and restated Prepetition Term Loan agreement.
 
(B)DIP Revolving Facility
 
A syndicate of financial institutions consisting of lenders under the Borrower's
prepetition Revolving Credit Agreement, dated as of August 1, 2007 (as amended,
the “Prepetition Revolving Facility” and, collectively with the Prepetition Term
Loan, the “Prepetition Facilities”) (the “DIP Revolving Lenders” and,
collectively with the DIP Term Lenders, the “DIP Lenders”), providing revolving
commitments equivalent to their respective commitments under the Prepetition
Revolving Facility.
Debtor-in-Possession Senior Secured Facilities:
(A)A super-priority senior secured multiple-draw term loan facility in an
aggregate principal amount of $85,000,000 (the “DIP Term Facility”).
 
(B)A super-priority senior secured revolving credit facility in an aggregate
principal amount of $300,000,000, subject to the Borrowing Base (as defined
below) (the “DIP Revolving Facility” and, together with the DIP Term Facility,
the “DIP Facilities”).
 
The DIP Term Facility will be documented pursuant to a credit agreement separate
from that governing the DIP Revolving Facility.
Closing Date:
Not later than three (3) Business Days after entry of the Interim Order (as
defined below), but in any event, not later than April 30, 2009 (the “Closing
Date”).
Purpose and Availability:
(A)DIP Term Facility
 
The DIP Term Facility (the loans thereunder, the “DIP Term Loans”) will be
available to be drawn in up to three drawings consistent with the Cash Flow
Forecast (as defined below), with drawings permitted on the Closing Date and on
a weekly basis thereafter; provided that the full remaining commitment may be
drawn on the third draw without regard to the Cash Flow Forecast; provided
further that if a plan of reorganization is consummated in accordance with the
Exit Term Sheet, any remaining commitments to make DIP Term Loans will be
available to be funded in an additional draw in connection therewith.  Amounts
borrowed under the DIP Term Facility that are repaid or prepaid may not be
reborrowed.
 
The proceeds of loans under the DIP Term Facility will be used by Borrower (i)
to pay fees and expenses associated with the DIP Facilities, (ii) to provide
working capital from time to time for the Borrower and its subsidiaries and for
other general corporate purposes during the pendency of the Chapter 11 Cases (as
defined below), and (iii) in connection with the consummation of a plan of
reorganization in accordance with the Exit Term Sheet.
 
(B)Revolving Facility
 
The amount from time to time available under the DIP Revolving Facility
(including in respect of Letters of Credit) shall not exceed the lesser of (A)
sum (the “Borrowing Base”) of (i) the lower of (x) 85% of the net orderly
liquidation value of, and (y) 65% of the cost of, all eligible inventory of
Borrower and its subsidiaries and (ii) 85% of eligible accounts receivable of
Borrower and its subsidiaries, with reserves and eligibility criteria in respect
of the Borrowing Base as determined by the Collateral Agents in their reasonable
discretion and (B) the then available commitments.  The eligibility reserve
under the Prepetition Revolving Facility (which is $20,000,000 as of April 22,
2009, and is scheduled to $25,000,000 on April 29, 2009) will be released and
replaced with a minimum excess availability covenant as set forth under
“Financial Covenants” below.  The Collateral Agents shall be entitled to
maintain a reserve in an amount equal to the Carve-Out.
 
The proceeds of loans under the DIP Revolving Facility (the loans thereunder,
the “DIP Revolving Loans” and, together with the DIP Term Loans, the “DIP
Loans”) will be used by Borrower (i) to refinance the Prepetition Revolving
Facility in full, (ii) to pay fees and expenses associated with the DIP
Facilities, and (iii) to provide working capital from time to time for the
Borrower and its subsidiaries and for other general corporate purposes during
the pendency of the Chapter 11 Cases.  Loans under the DIP Revolving Facility
are available at any time before the final maturity of the DIP Revolving
Facility, in agreed minimum principal amounts.
 
$50,000,000 of the DIP Revolving Facility (subject to the Borrowing Base) is
available for the issuance of letters of credit (the “Letters of Credit”) by
Citibank, N.A. or one or more Lenders to be agreed upon (any Lender in such
capacity, an “Issuing Lender”).  No Letter of Credit shall have an expiration
date after one year after the date of issuance, provided that any Letter of
Credit with a one-year tenor may provide for the renewal thereof for additional
one-year periods.  Letters of credit outstanding under the Prepetition Revolving
Facility on the Closing Date shall be deemed to be Letters of Credit under the
DIP Revolving Facility.
 
Drawings under any Letter of Credit shall be reimbursed by Borrower (whether
with its own funds or with the proceeds of revolving loans) within one business
day.  To the extent that Borrower does not so reimburse the applicable Issuing
Lender within one business day, the Lenders under the DIP Revolving Facility
shall be irrevocably and unconditionally obligated to reimburse the applicable
Issuing Lender on a pro rata basis.
 
Availability of the DIP Facilities for vendor payments on account of prepetition
claims shall be limited to ordinary course payments to vendors who have agreed
in writing (which may be by confirmatory email) to provide commercial and credit
terms no worse for the Borrower and its subsidiaries than in accordance with
such vendor's ordinary course past practices with the Borrower and its
subsidiaries; provided that, to the extent that such written acknowledgment is
not practical, in lieu of such writing, payments may be made on account of
prepetition claims to vendors who have been advised that the payments have been
made pursuant to a court order on the basis that such vendors will maintain such
commercial and credit terms.
Final Maturity Date:
The date which is the earliest of (i) the two-month anniversary of the Closing
Date (the “Scheduled Maturity Date”), (ii) 30 days after the entry of the
Interim Order if the Final Order (defined below) has not been entered by the
Bankruptcy Court on or before such date, (iii) the date of substantial
consummation (as defined in Section 1101 of the Bankruptcy Code) of a plan of
reorganization that is confirmed pursuant to an order entered by the Bankruptcy
Court and (iv) such earlier date on which all DIP Loans shall become due and
payable in accordance with the terms of the Operative Documents.
Amortization / Payment at Maturity:
No amortization prior to Final Maturity Date.  Amounts outstanding under the DIP
Facilities shall become due and payable on the Final Maturity Date; provided
that if a plan of reorganization is consummated in accordance with the Exit Term
Sheet, (i) any remaining commitments to make DIP Term Loans will be available to
be funded in connection therewith, and the DIP Term Loans (including any amounts
so funded) shall be converted on a dollar-for-dollar basis on the effective date
of such plan of reorganization into Term A Loans (as defined in the Exit Term
Sheet) under an amended and restated Prepetition Term Loan agreement in
accordance with the terms set forth in the Exit Term Sheet in satisfaction of
the corresponding obligations under the DIP Term Facility and (ii) the DIP
Revolving Loans and commitments shall be converted on a dollar-for-dollar basis
on the effective date of such plan of reorganization into Revolving Loans (as
defined in the Exit Term Sheet) and commitments in accordance with the terms set
forth in the Exit Term Sheet in satisfaction of the corresponding obligations
under the DIP Revolving Facility.
Interest Rates and Fees:
As set forth on Annex I hereto.
Guarantors:
Borrower’s direct and indirect domestic subsidiaries existing on the Closing
Date or thereafter created or acquired, except as otherwise provided in the
credit documents, each as a debtor and debtor-in-possession in a case
(collectively with the Case of the Borrower, the “Chapter 11 Cases”) filed under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, shall unconditionally
guarantee, on a joint and several basis, all obligations of Borrower under the
DIP Facilities and under each cash management agreement entered into with a DIP
Lender or an affiliate of a DIP Lender.  Each guarantor of the DIP Facilities is
herein referred to as a “Guarantor” and its guarantee is referred to herein as a
“Guarantee”; Borrower and the Guarantors are herein referred to as the “Credit
Parties.”
Adequate Protection:
The lenders under the Prepetition Facilities shall agree that their adequate
protection, as that term is used in section 361 of the Bankruptcy Code
(“Adequate Protection”) on account of Borrower's use of cash collateral,
collateral diminution, obtaining priming lien financing, the imposition of the
automatic stay, the Term Loan Primed Liens, Revolving Loan Primed Liens or any
other reason shall be as set forth in the Interim Order or the Final Order, as
applicable, and shall be of the type and in amounts acceptable to the DIP
Lenders.
Cash Collateral:
The lenders under the Prepetition Facilities shall authorize and consent to
Borrower's use of cash collateral for, among other things, working capital and
general corporate purposes (provided that such lenders shall receive Adequate
Protection as provided herein), all in accordance with and subject to the
Interim Order or the Final Order, as applicable, in each case on terms
acceptable to the DIP Lenders.
Collateral:
The DIP Term Facility and the Guarantees in respect thereof shall at all times:
(i) pursuant to section 364(c)(1) of the Bankruptcy Code, be entitled to
superpriority administrative claim status in the Chapter 11 Cases;
(ii) pursuant to section 364(c)(2) of the Bankruptcy Code, be secured by
perfected first priority liens on all property of the Borrowers or the
Guarantors of the kind that would come within the definition of Fixed Asset
Collateral (as defined in the Intercreditor Agreement) if such property were
subject to liens securing the Prepetition Revolving Facility or the Prepetition
Term Loan and second priority liens on all property of the Borrower and the
Guarantors of the kind that would come within the definition of Current Asset
Collateral (as defined in the Intercreditor Agreement) if such property were
subject to liens securing the Prepetition Revolving Facility or the Prepetition
Term Loan, in each case, that is not subject to valid, perfected and
non-avoidable liens in existence on the Petition Date (defined below) in favor
of any party, including, without limitation, stock in subsidiaries, foreign and
domestic, except that with respect to non-U.S. subsidiaries such lien and pledge
shall be limited to 65% of the capital stock of “first-tier” non-U.S.
subsidiaries;
(iii) pursuant to section 364(c)(3) of the Bankruptcy Code, be secured by
perfected junior liens on all property of the Borrower and Guarantors now owned
or hereafter acquired that are subject to valid, perfected and non-avoidable
liens in existence on the Petition Date or to valid liens in existence on the
Petition Date as permitted by Section 546(b) of the Bankruptcy Code, below
(other than as provided with respect to priming liens in clause (iv), below);
(iv) pursuant to Section 364(d)(1) of the Bankruptcy Code, be secured by a
perfected first priority, senior priming lien on all the property of the
Borrower and Guarantors now owned or hereafter acquired of any kind, senior to
(a) the liens that secure the obligations of the Borrower and Guarantors, under
the Prepetition Term Loans, (b) any liens to which such liens are senior
(including Prepetition Vendor Liens (as defined below)), all of which existing
liens (together with the liens referred to in clause (a) above, the “Term Loan
Primed Liens”) shall be primed by and made subject and subordinate to the
perfected first priority senior liens to be granted to the Administrative Agent,
which senior priming liens in favor of the Administrative Agent shall also prime
any liens after the commencement of the Chapter 11 Cases to provide adequate
protection in respect of any Term Loan Primed Liens but shall not prime liens,
if any, to which the Term Loan Primed Liens are subject at the time of the
commencement of the Chapter 11 Cases; provided, that in no event shall the Term
Loan Primed Liens include liens (including replacement liens) on Current Asset
Collateral securing the Prepetition Revolving Facility or the DIP Revolving
Facility; and
(v) such liens and security interests shall not be subject or subordinate to any
liens or security interests that are avoided and preserved for the benefit of
any of the Borrower or the Guarantors under section 551 of the Bankruptcy Code
or any liens arising after the Petition Date including, without limitation, any
liens or security interests granted in favor of any federal, state, municipal or
other governmental unit, commission, board or court for any liability of any of
the Borrower or the Guarantors other than with respect to any liens or security
interest arising after the Petition Date and permitted under the DIP Term
Facility to be senior to the liens granted thereunder.
The DIP Revolving Facility, the Guarantees in respect thereof and the
obligations of Borrower under each cash management agreement entered into with a
DIP Revolving Lender, any affiliate of a DIP Revolving Lender, a DIP Term Lender
or any affiliate of a DIP Term Lender shall at all times:
(i) pursuant to section 364(c)(1) of the Bankruptcy Code, be entitled to
superpriority administrative claim status in the Chapter 11 Cases;
(ii) pursuant to section 364(c)(2) of the Bankruptcy Code, be secured by
perfected first priority liens on all property of the Borrowers or the
Guarantors of the kind that would come within the definition Current Asset
Collateral if such property were subject to liens securing the Prepetition
Revolving Facility or the Prepetition Term Loan and second priority liens on all
property of the Borrower and the Guarantors of the kind that would come within
the definition Fixed Asset Collateral if such property were subject to liens
securing the Prepetition Revolving Facility or the Prepetition Term Loan, in
each case, that is not subject to valid, perfected and non-avoidable liens in
existence on the Petition Date (defined below) in favor of any party, including,
without limitation, stock in subsidiaries, foreign and domestic, except that
with respect to non-U.S. subsidiaries such lien and pledge shall be limited to
65% of the capital stock of “first-tier” non-U.S. subsidiaries;
(iii) pursuant to section 364(c)(3) of the Bankruptcy Code, be secured by
perfected junior liens on all property of the Borrower and Guarantors now owned
or hereafter acquired that is subject to valid, perfected and non-avoidable
liens in existence on the Petition Date or to valid liens in existence on the
Petition Date as permitted by Section 546(b) of the Bankruptcy Code, below
(other than as provided with respect to priming liens in clause (iv), below);
(iv) pursuant to Section 364(d)(1) of the Bankruptcy Code, be secured by a
perfected first priority, senior priming lien on all the property of the
Borrower and Guarantors now owned or hereafter acquired of any kind, senior to
(a) the liens that secure the obligations of the Borrower and Guarantors, under
the Prepetition Revolving Facility, (b) any liens to which such liens are senior
(including the Prepetition Vendor Liens), all of which existing liens (together
with the liens referred to in clause (a) above, the “Revolving Loan Primed
Liens”) shall be primed by and made subject and subordinate to the perfected
first priority senior liens to be granted to the Collateral Agent and
Administrative Agent, which senior priming liens in favor of the Administrative
Agent and Collateral Agent shall also prime any liens after the commencement of
the Chapter 11 Cases to provide adequate protection in respect of any Revolving
Loan Primed Liens but shall not prime liens, if any, to which the Revolving Loan
Primed Liens are subject at the time of the commencement of the Chapter 11
Cases; provided, that in no event shall the Revolving Loan Primed Liens include
liens (including replacement liens) on Fixed Asset Collateral securing the
Prepetition Term Loan or the DIP Term Facility; and
(v) such liens and security interests shall not be subject or subordinate to any
liens or security interests that are avoided and preserved for the benefit of
any of the Borrower or the Guarantors under section 551 of the Bankruptcy Code
or any liens arising after the Petition Date including, without limitation, any
liens or security interests granted in favor of any federal, state, municipal or
other governmental unit, commission, board or court for any liability of any of
the Borrower or the Guarantors other than with respect to any liens or security
interest arising after the Petition Date and permitted under the DIP Revolving
Facility to be senior to the liens granted thereunder.
Upon entry of the Final Order, the collateral shall include all proceeds of any
avoidance actions under chapter 5 of the Bankruptcy Code and any proceeds
thereof.
Notwithstanding the foregoing, the claims and liens set forth above would be
subject and subordinate to the following “Carve Out”, which shall mean the
following amounts:  (i) all fees required to be paid to the Clerk of the
Bankruptcy Court and statutory fees payable to the U.S. Trustee pursuant to 28
U.S.C. § 1930(a)(6); and (ii) in the event of an occurrence and during the
continuance of an Event of Default, the “Case Professionals Carve Out”,
comprising the sum of (a) all allowed unpaid fees, expenses and disbursements
(regardless of when such fees, expenses, and disbursements become allowed by
order of the Court) for any professionals retained by the Debtors pursuant to
section 327 of the Bankruptcy Code (the “Case Professionals”) incurred
subsequent to receipt of notice delivered by the DIP Term Loan Agent to counsel
for the Debtors following the occurrence of an Event of Default expressly
stating that the Carve Out has been invoked (a “Carve Out Trigger Notice”) in an
aggregate amount not in excess of $2,000,000 (the “Carve Out Cap”), plus (b) all
unpaid professional fees, expenses, and disbursements of such Case Professionals
incurred prior to receipt of the Carve Out Trigger Notice to the extent
previously or subsequently allowed pursuant to an order of the Court
(collectively, “Allowed Professional Fees”) under sections 328, 330 and/or 331
of the Bankruptcy Code, but in the case of clause (b), solely to the extent such
fees, expenses and disbursements were incurred in accordance with the Cash Flow
Forecast (as such fees, expenses and disbursements provided for in the Cash Flow
Forecast may be increased by prior notice from the Borrower or its counsel to
the Administrative Agent).  The liens of the DIP Facilities shall prime the
liens of vendors (the “Prepetition Vendor Liens”) to the Credit Parties in
assets of the Credit Parties.
Cash Management:
In addition, with respect to the DIP Revolving Facility, the Credit Parties will
be required to maintain with the Administrative Agent or a bank affiliate of the
Administrative Agent main cash concentration accounts, and with the
Administrative Agent or a bank affiliate of the Administrative Agent or other
banks reasonably acceptable to the Administrative Agent (it being agreed that
Wachovia Bank, National Association and Wells Fargo Bank, N.A. (and their
respective successors) are each an acceptable bank to the Administrative Agent)
blocked accounts (with specified exceptions for certain accounts) into which all
proceeds of collateral are paid (and with respect to which (with specified
exceptions for certain accounts), if requested by the Administrative Agent,
account control agreements in form and substance acceptable to the
Administrative Agent have been executed).  All amounts on deposit in any blocked
account shall be transferred to the main concentration account at the end of
each business day and all amounts on deposit in the main concentration account
shall be applied on a daily basis by the Administrative Agent to reduce amounts
outstanding under the DIP Revolving Facility.
Intercreditor Agreement:
The DIP Revolving Facility and the DIP Term Facility shall be subject to such
intercreditor arrangements as may be necessary to reflect the lien priority,
relative rights and other creditors’ rights issues in respect of each other, the
Prepetition Facilities.  The parties to the Borrower's existing Intercreditor
Agreement with respect to the Prepetition Facilities (the “Intercreditor
Agreement”) shall acknowledge that the obligations under the DIP Term Facility
shall be treated as “Term Loan Obligations” for purposes of the Intercreditor
Agreement, entitled to all of the benefits of such agreement.
 
Operative Documents:
Credit agreements, security agreements, guarantees, intercreditor agreements and
other agreements to be mutually agreed executed, delivered and/or filed or
recorded at any time in connection with the DIP Facilities (the “Operative
Documents”).
Optional Prepayments and
Reductions in Commitments:
 
Loans may be prepaid and commitments may be reduced by Borrower, in minimum
agreed amounts, at Borrower’s option at any time, without penalty, premium or
fees (subject to breakage costs).
Mandatory Prepayments:
Loans under the DIP Facilities shall be prepaid in an amount equal to 100% of
the net cash proceeds of all non-ordinary-course asset sales or other
dispositions of property by Borrower and its subsidiaries (including insurance
and condemnation proceeds in excess of an agreed amount), subject to specified
exceptions (with net cash proceeds of Fixed Asset Collateral to be applied first
to obligations under the DIP Term Facility, and net cash proceeds of Current
Asset Collateral to be applied first to obligations under the DIP Revolving
Facility).
 
In addition, loans under the DIP Revolving Facility shall be repaid (and any
excess amounts shall be applied to cash collateralize outstanding Letters of
Credit) to the extent that such loans and Letters of Credit exceed the lesser of
the then current Borrowing Base or effective commitments thereunder.
Representations and Warranties:
The Operative Documents will contain representations and warranties customarily
found in the Administrative Agent’s loan agreements for similar financings and
other representations and warranties deemed by the Administrative Agent
appropriate to the specific transaction, subject to, where appropriate,
materiality thresholds to be agreed (which will be applicable to the Borrower,
the Guarantors and their respective subsidiaries), including, without limitation
with respect to:
 
1.Corporate status and authority.
 
2.Execution, delivery, and performance of Operative Documents do not violate law
or other agreements.
 
3.No government or regulatory approvals required, other than approvals in
effect.
 
4.Due authorization, execution and delivery of Operative Documents; legality,
validity, binding effect and enforceability of the Operative Documents.
 
5.Ownership of Borrower and its subsidiaries.
 
6.Accuracy of financial statements and other information.
 
7.No material adverse change in (i) the business, assets, operations,
properties, financial condition or results of operations of Borrower and its
subsidiaries, taken as a whole (other than events leading up to and resulting
from the anticipated filing of the Chapter 11 Cases), (ii) the legality,
validity, binding effect or enforceability of the credit documents against
Borrower or the Guarantors or (iii) the rights and remedies available to the
Administrative Agent, any other agent, the DIP Lenders or any other secured
party under any Operative Document (any of the foregoing a “Material Adverse
Change”).
 
8.No action, suit, investigation, litigation or proceeding pending or threatened
in any court or before any arbitrator or governmental authority that could
reasonably be expected to result in a Material Adverse Change.
 
9.Payment of taxes.
 
10.Accurate and complete disclosure.
 
11.Compliance with margin regulations.
 
12.No default under agreements if such default could reasonably be expected to
result in a Material Adverse Change.
 
13.Inapplicability of the Investment Company Act.
 
14.Use of proceeds.
 
15.Insurance.
 
16.Labor matters.
 
17.Compliance with laws and regulations, including ERISA, and all applicable
environmental laws and regulations.
 
18.Ownership of properties and necessary rights to intellectual property.
 
19.Validity, priority and perfection of security interests in collateral.
 
20.Status of DIP Facilities as senior debt entitled to superpriority
administrative claim status in the Chapter 11 Cases.
Conditions Precedent to the Closing Date:
The Operative Documents will contain conditions to the closing of the DIP
Facilities customarily found in the Administrative Agent’s loan agreements for
similar financings and other conditions deemed by the Administrative Agent to be
appropriate to the specific transaction and in any event including without
limitation:
 
1.All documentation relating to the DIP Facilities shall be in form and
substance consistent with this term sheet and otherwise satisfactory to the
Borrower and its counsel and the Administrative Agent and its counsel (including
any applicable intercreditor agreements or amendments thereto and appropriate
fee reimbursement letters), and the primary documentation for each DIP Facility
also shall be in form and substance satisfactory to each DIP Lender thereunder.
 
2.All fees and out-of-pocket expenses (including reasonable fees and expenses of
counsel) required to be paid to the Administrative Agent, each other agent, and
the DIP Lenders on or before the Closing Date shall have been paid.
 
3.The DIP Lenders shall have received, and the Required DIP Revolving Lenders
and the Required DIP Term Lenders be satisfied with, (i) audited financial
statements (or, if audited financial statements are not available, current draft
financial statements) of the Borrower and its subsidiaries for the fiscal period
ending January 31, 2009, (ii) interim unaudited monthly financial statements of
the Borrower and its subsidiaries through the fiscal months ending February and
(if available) March, 2009, (iv) the Borrower’s business plan which shall
include a financial forecast on a monthly basis for the fiscal year ending
January 31, 2010, and on an annual basis through the year of the last scheduled
maturity of any of the Senior Secured Facilities (as defined in the Exit Term
Sheet), and shall detail projected borrowing base capacity and availability for
such periods prepared by the Borrower’s management, and (v) the initial Cash
Flow Forecast.
 
4.The Administrative Agent shall be satisfied that (i) the Borrower’s, the
Guarantors’, and their respective subsidiaries’ existing debts and liens do not
exceed an amount agreed upon prior to the Closing Date, and (ii) there shall not
occur as a result of, and after giving effect to, the consummation of the
funding of the DIP Facilities, a default (or any event which with the giving of
notice or lapse of time or both would be a default) under any of the Borrower’s,
the Guarantors’ or their respective subsidiaries’ debt instruments and other
agreements that could reasonably be expected to result in a Material Adverse
Change.
 
5.The Administrative Agent shall have received satisfactory opinions of
independent counsel to the Borrower and the Guarantors, addressing such
customary matters as the Administrative Agent shall reasonably request,
including, without limitation, the enforceability of all Operative Documents, no
conflicts with applicable laws and regulations, and entry of the Interim Order.
 
6.The absence of a material adverse change, or any event or occurrence which
could reasonably be expected to result in a material adverse change, in (i) the
business, condition (financial or otherwise), operations, performance,
properties, contingent liabilities, material agreements or prospects of the
Borrower, the Guarantors and their respective subsidiaries, taken as a whole,
since January 31, 2008 (other than events leading up to and resulting from the
anticipated filing of the Chapter 11 Cases), (ii) the ability of the Borrower or
the Guarantors to perform their respective obligations under the Operative
Documents or (iii) the ability of the Administrative Agent and the DIP Lenders
to enforce the Operative Documents.
 
7.There shall exist no action, suit, investigation, litigation or proceeding
pending or threatened in any court or before any arbitrator or governmental
instrumentality (other than the Chapter 11 Cases) that (i) could reasonably be
expected to result in a Material Adverse Change or (ii) restrains, prevents or
imposes or can reasonably be expected to impose materially adverse conditions
upon the DIP Facilities or the transactions contemplated thereby.
 
8.All necessary governmental and third party consents and approvals necessary in
connection with the DIP Facilities and the transactions contemplated thereby
shall have been obtained (without the imposition of any conditions that are not
reasonably acceptable to the DIP Lenders) and shall remain in effect, and all
applicable governmental filings have been made and all applicable waiting
periods shall have expired without in either case any action being taken by any
competent authority; and no law or regulation shall be applicable in the
judgment of the DIP Lenders that restrains, prevents or imposes materially
adverse conditions upon the DIP Facilities or the transactions contemplated
thereby.
 
9.The DIP Lenders shall have a valid and perfected lien on and security interest
in the collateral referred to above under “Collateral” having the priority
described in such section; searches necessary or desirable in connection with
such liens and security interests that have been requested by the Administrative
Agent shall have been duly made.
 
10.The Administrative Agent shall have received endorsements naming the
Administrative Agent, on behalf of the DIP Lenders, as an additional insured and
loss payee under all insurance policies to be maintained with respect to the
properties of the Borrower, the Guarantors and their respective subsidiaries
forming part of the DIP Lenders’ collateral.
 
11.The filing of voluntary petitions for relief under chapter 11 of title 11 the
Bankruptcy Code by the Borrower and each Guarantor (the date of such filing, the
“Petition Date”) shall have occurred.
 
12.Not later than three (3) business days after the Petition Date, entry of an
order of the Bankruptcy Court (the “Interim Order”) acceptable in all respects
to the Required DIP Revolving Lenders and the Required DIP Term Lenders on an
application or motion by the Borrower and Guarantors, that motion to be
satisfactory in form and substance to the Required DIP Revolving Lenders and the
Required DIP Term Lenders, which Interim Order shall have been entered on such
notice to such parties as may be satisfactory to the Required DIP Revolving
Lenders and the Required DIP Term Lenders, approving the transactions
contemplated herein and granting the superiority claim status and liens referred
to above, and which Interim Order, among other things, shall (i) approve the DIP
Facilities and authorize extensions of credit under the DIP Facilities, (ii)
approve the payment by the Borrower and Guarantors of all the fees provided for
herein, (iii) lift the automatic stay to permit the Borrower and Guarantors to
perform their obligations, and the Administrative Agent and the Lenders to
exercise their remedies, with respect to the DIP Facilities, (iv) provide for
the automatic termination of the automatic stay (but solely with respect to the
DIP Facilities) after three (3) business days notice of an Event of Default,
with a full waiver by the Borrower and Guarantors of all rights to contest such
termination except with respect to the existence of an Event of Default; (v) not
have been reversed, modified, amended or stayed, and (vi) have such other
findings, orders and relief typical for financings of the type contemplated
herein.
 
13.All first-day and related orders entered by the Bankruptcy Court in the
Chapter 11 Cases shall be in form and substance reasonably satisfactory to the
Required DIP Revolving Lenders and the Required DIP Term Lenders.
 
14.The DIP Lenders shall be satisfied in their sole discretion with the status
of the vendor relationships of the Borrower and its subsidiaries and matters
related thereto.
 
15.The aggregate commitments of all DIP Lenders in respect of the DIP Facilities
shall be no less than the maximum aggregate amount of the respective DIP
Facilities, and the aggregate commitments of all Senior Lenders in respect of
the Senior Secured Facilities (each as defined in the Exit Term Sheet), as
applicable, shall be no less than the maximum aggregate amount of the respective
Senior Secured Facilities.
 
16.The Borrower shall have received the requisite votes needed to confirm the
Debtor's Prepackaged Joint Plan of Reorganization Pursuant to Chapter 11 of the
Bankruptcy Code.
 
17.As a condition to the effectiveness of the DIP Term Facility, all
documentation relating to the DIP Revolving Facility shall have been completed
in form and substance satisfactory to the Required DIP Revolving Lenders and the
Required DIP Term Lenders.  All conditions precedent to the DIP Revolving
Facility shall have been met (or waived with the consent of the Required DIP
Revolving Lenders) and the DIP Revolving Facility shall be in full force and
effect.  As a condition to the effectiveness of the DIP Revolving Facility, all
documentation relating to the DIP Term Facility shall have been completed in
form and substance satisfactory to the Required DIP Term Lenders.  All
conditions precedent to the DIP Term Facility shall have been met (or waived
with the consent the Required DIP Term Lenders) and the DIP Term Facility shall
be in full force and effect.
 
18.The accuracy of all representations and warranties.
 
Each of the conditions precedent may be waived (i) in case of conditions that do
not specify any person, by the Required DIP Revolving Lenders and/or the
Required DIP Term Lenders, as applicable, (ii) in the case of conditions that
specify the DIP Lenders, all DIP Revolving Lenders and/or DIP Term Lenders, as
applicable, (iii) in the case of conditions that specify any other person, such
person, and (iv) in the case of any waiver of any immaterial condition that does
not adversely affect the DIP Lenders, the Administrative Agent.
Conditions Precedent to Each Borrowing:
(1) The absence (both before and after the making of any extension of credit) of
any continuing default or Event of Default, (2) the accuracy of all
representations and warranties in all material respects, (3) delivery of
borrowing notice, (4) the making of such loan shall not violate any requirement
of law and shall not be enjoined, temporarily, preliminarily or permanently, (5)
unless otherwise waived by the DIP Lenders, no appeal or petition for review,
rehearing or certiorari with respect to the Final Order (or, prior to entry of
the Final Order, the Interim Order) shall be pending, and (6) the Final Order
(or, prior to entry of the Final Order, the Interim Order) shall otherwise be in
full force and effect.
Reporting Covenants:
To include, without limitation, the following, to be applicable to Borrower and
each of its subsidiaries:
1.Delivery of independently audited annual consolidated financial statements and
unaudited quarterly and monthly consolidated financial statements, together with
a comparison to the Borrower's prior corresponding financial statements and
annual financial plan and, with respect to quarterly and annual financial
statements, a detailed explanation of significant variances.
2.Weekly borrowing base certificates and other collateral reporting as agreed.
3.A rolling 13-week cash forecast of receipts and disbursements in form and
substance satisfactory to the Administrative Agent, delivered weekly, including
all information provided in the cash flow forecast delivered by the Borrower
pursuant to the Prepetition Facilities, together with a variance report and a
detailed explanation of significant variances (the “Cash Flow Forecast”).
4.Delivery to all DIP Lenders of copies of any and all inspection reports,
appraisals and field exams performed under the DIP Facilities (which delivery
shall be consented to by the Administrative Agent or the Collateral Agents, as
applicable).
5.Other reporting requirements and notices, including notices of default and
litigation.
Affirmative Covenants:
The Operative Documents will contain affirmative covenants customarily found in
the Administrative Agent’s loan agreements for similar financings and other
affirmative covenants deemed by the Administrative Agent appropriate to the
specific transaction, subject to, where appropriate, materiality thresholds,
carve-outs, and exceptions to be mutually agreed (which will be applicable to
the Borrower, the Guarantors and their respective subsidiaries), including,
without limitation, the following:
 
1.Preservation of corporate existence.
 
2.Material compliance with laws (including ERISA and applicable environmental
laws).
 
3.Payment of taxes.
 
4.Payment and/or performance of obligations.
 
5.Maintenance of insurance.
 
6.Access to books and records and visitation and access rights, and quarterly
lender update calls with management, and once per year a lender meeting and a
presentation regarding the annual budget.
 
7.Maintenance of books and records.
 
8.Maintenance of properties.
 
9.Environmental matters.
 
10.Provision of additional collateral, guarantees and mortgages (including duly
making all filings, recordations and searches necessary or desirable in
connection with such liens and security interests that have been requested by
the Administrative Agent or the Collateral Agents, account control agreements in
accordance with “Cash Management” above promptly upon request by the
Administrative Agent or the Collateral Agents, and due payment of all filing and
recording fees and taxes to the extent applicable).
 
11.Inspections, appraisals and field exams with respect to Current Asset
Collateral (to include at least semi-annual inventory appraisals and quarterly
field examinations (for field examinations, each field examination will cover
the Alliance Entertainment business, and at least two field exams per year will
cover each of the Company's other business segments), and otherwise at such
times as agreed); provided that, not more than one field exam shall be at the
Borrower’s expense between the Closing Date and the Scheduled Maturity Date
(unless the Scheduled Maturity Date has been extended) so long as no Event of
Default is continuing.
 
12.Not later than thirty (30) days after the Petition Date, the Bankruptcy Court
shall have entered a final order (in form and substance acceptable to the
Administrative Agent) on an application or motion by the Borrower and
Guarantors, that motion to be in form and substance to the Administrative Agent,
approving the financing transactions contemplated herein and granting the
superpriority claim status and liens referred to above, and which Final Order,
among other things, shall (i) approve the DIP Facilities and authorize
extensions of credit under the DIP Facilities, (ii) approve the payment by the
Borrower and Guarantors of all the fees provided for herein, (iii) lift the
automatic stay to permit the Borrower and Guarantors to perform their
obligations, and the Administrative Agent and the Lenders to exercise their
remedies, with respect to the DIP Facilities, (iv) provide for the automatic
termination of the automatic stay (but solely with respect to the DIP
Facilities) after three (3) business days notice of an Event of Default, with a
full waiver by the Borrower and Guarantors of all rights to contest such
termination except with respect to the existence of an Event of Default, (v) not
have been reversed, modified, amended or stayed, and (vi) have such other
findings, orders and relief typical for financings of the type contemplated
herein.  The Final Order shall have been entered on such notice to such parties
as may be reasonably satisfactory to the DIP Lenders and as required by the
Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, orders of the
Bankruptcy Court, and any applicable local bankruptcy rules.
Negative Covenants:
The Operative Documents will contain negative covenants customarily found in the
Administrative Agent’s loan agreements for similar financings and other negative
covenants deemed by the Administrative Agent appropriate to the specific
transaction, subject to, where appropriate, materiality thresholds, carve-outs,
and exceptions to be mutually agreed (which will be applicable to the Borrower,
the Guarantors and their respective subsidiaries), including, without
limitation, the following:
 
1.Limitations on liens.
 
2.Limitations on debt (including debt incurred by direct or indirect
subsidiaries and obligations in respect of foreign currency exchange and other
hedging arrangements).
 
3.Limitations on dividends, redemptions and repurchases with respect to capital
stock.
 
4.Limitations on voluntary or optional prepayments, redemptions and repurchases
of debt (other than loans under the DIP Revolving Facility).
 
5.Limitations on loans and investments.
 
6.Limitations on mergers, consolidations, acquisitions, asset dispositions and
sale/leaseback transactions.
 
7.Limitations on transactions with affiliates.
 
8.Limitations on changes in business conducted by Borrower and its subsidiaries.
 
9.Limitations on amendment of debt and organizational documents.
 
10.Limitations on restrictions on distributions from subsidiaries.
 
11.Prohibitions on the issuance and sale of capital stock or other equity
interests of Borrower and its subsidiaries.
Financial Covenants:
The DIP Facilities will have the following financial covenants:
 
1.The difference of (i) excess availability minus (ii) the amount of accounts
payable that are greater than 60 days past due, shall be at least $15,000,000 at
all times; provided that such difference shall be permitted to be as low as $0
from time to time during each of two periods selected by the Borrower of 14
consecutive calendar days each; provided, however, that the first day of any
such 14-day period shall be no less than 30 days after the first day of the
prior such period.
 
2.Actual average cash receipts for any period of three weeks shall not be less
than 85% of average cash receipts for such period projected in the initial Cash
Flow Forecast, and actual average cash disbursements (calculated without giving
effect to debt service, professional fees and other restructuring expenses) for
any period of three weeks shall not be more than 115% of average cash
disbursements for such period projected in the initial Cash Flow Forecast, in
each case tested on a rolling weekly basis.
Events of Default:
The Operative Documents will contain events of default customarily found in the
Administrative Agent’s loan agreements for similar financings and other events
of default deemed by the Administrative Agent appropriate to the specific
transaction (which will be applicable to the Borrower, the Guarantors and their
respective subsidiaries), including, without limitation, the following, with,
where appropriate, grace periods and exceptions to be mutually agreed upon:
 
1.Failure to pay principal, interest or any other amount when due (subject to a
grace period of five business days in the case of interest and other amounts).
 
2.Representations or warranties materially incorrect when given.
 
3.Failure to comply with covenants (with notice and cure periods as applicable).
 
4.Cross-default and cross-acceleration to debt aggregating an amount to be
mutually agreed upon.
 
5.Unsatisfied judgment or order in excess of an amount to be mutually agreed
upon individually or in the aggregate.
 
6.The occurrence of certain ERISA events that result in liabilities in excess of
an amount to be mutually agreed upon.
 
7.Change of control or ownership (to be defined).
 
8.Actual invalidity, or any assertion by any Credit Party or any affiliate of a
Credit Party of invalidity, of any collateral or Guarantee or other Operative
Document.
 
9.Entry of an order granting relief from the automatic stay with respect to any
claim in excess of specified amounts to be mutually agreed upon.
 
10.Entry of or application for order appointing a trustee under Section 1104 of
the Bankruptcy Code or examiner with enlarged powers under Section 1106(b) of
the Bankruptcy Code.
 
11.Entry of an order converting any of the Chapter 11 Cases into a chapter 7
case.
 
12.Submission of, or entry of an order confirming, a plan of reorganization that
does not (i) provide for termination of the DIP Facilities and payment in full
in cash of all obligations under the Operative Documents on or before the
effective date of such plan, except pursuant to (A) a conversion of the DIP Term
Facility to a Term A Facility (as defined in the Exit Term Sheet) substantially
in accordance with the Exit Term Sheet, with such changes as may be agreed to by
the DIP Term Lenders, or (B) a conversion of the DIP Revolving Facility to a
Revolving Facility (as defined in the Exit Term Sheet) substantially in
accordance with the Exit Term Sheet, with such changes as may be agreed to by
the DIP Revolving Lenders, in each case pursuant to a Plan of Reorganization (as
defined in the Exit Term Sheet) in form and substance acceptable to the Required
DIP Term Lenders and the Required DIP Revolving Lenders and otherwise in
compliance with the requirements of the Exit Term Sheet, or (ii) provide for the
continuation of the liens and security interests of the Administrative Agent and
continued priority thereof until such plan effective date.
 
13.Entry of an order dismissing any of the Chapter 11 Cases that does not
provide for termination of the DIP Facilities and payment in full in cash of all
obligations under the Operative Documents.
 
14.Entry of an order to (i) revoke, reverse, stay, modify, supplement or amend
the Interim Order or the Final Order, (ii) permit any administrative expense or
claim to have administrative priority as to any of the Borrower or Guarantors
equal or superior to the priority of the Administrative Agent and the Lenders in
respect of the DIP Facilities, or (iii) grant or permit the grant of the liens
on the collateral other than as permitted by the Operative Documents.
 
15.Failure by the Bankruptcy Court to enter a Final Order within 30 days of the
Petition Date.
 
16.There shall be filed by any Credit Party any motion to sell all or a
substantial part of the Collateral on terms that are not acceptable to the
Required DIP Term Lenders or the Required DIP Revolving Lenders, as applicable.
 
17.Any Credit Party shall file any action, suit or other proceeding or contested
matter challenging the validity, perfection or priority of any Liens securing
the Prepetition Facilities, or the validity or enforceability of any of the
Credit Documents (as defined therein), or asserting any avoidance claim against,
or seeking to recover any monetary damages from, any agent or lender under any
of the Prepetition Facilities or DIP Facilities.
 
18.Without Required DIP Revolving Lenders or Required DIP Term Lenders consent,
as applicable, any Credit Party shall discontinue or suspend all or any material
part of its business operations or commence an orderly wind-down or liquidation
of any material part of the Collateral.
 
19.Publishers representing a material portion of the supply for the Magazine
Distribution business cease distributing through the Borrower for a two week
period and such cessation causes a Material Adverse Effect.
 
The Administrative Agent shall not exercise rights of setoff or other remedies
against the collateral on account of an Event of Default until the Remedies
Notice Period (as defined in the Interim Order) has expired.
Voting:
Amendments, modifications, terminations and waivers of the Operative Documents
for the DIP Term Facility or the terms thereof will require the approval of DIP
Term Lenders holding more than 50% of the aggregate amount of the loans and
commitments under the DIP Term Facility (but in any event at least three
unaffiliated DIP Term Lenders) (the “Required DIP Term Lenders”), except that in
certain circumstances the consent of a greater percentage of the aggregate
amount of the loans and commitments of the DIP Term Lenders may be required.
Amendments, modifications, terminations and waivers of the Operative Documents
for the DIP Revolving Facility or any provisions thereof will require the
approval of DIP Revolving Lenders holding more than 50% of the aggregate amount
of the loans and commitments under the DIP Revolving Facility (the “Required DIP
Revolving Lenders”), except that in certain circumstances the consent of a
greater percentage of the aggregate amount of the loans and commitments of the
DIP Revolving Lenders may be required (including consent of Lenders holding more
than 75% of the aggregate amount of loans and commitments under the DIP
Revolving Facility to reduce, amend, waive or terminate the financial covenants
or to amend certain provisions relating to protective advances).
Assignment and Participation:
The DIP Lenders will have the right to assign loans and commitments to their
affiliates, other DIP Lenders (and affiliates of such other DIP Lenders) and to
any Federal Reserve Bank without restriction, and to other financial
institutions with the consent, not to be unreasonably withheld, of the
Administrative Agent and, with respect to the DIP Revolving Facility, each
issuing bank.  Minimum aggregate assignment level (which shall not be applicable
to assignments to affiliates of the assigning DIP Lenders and other DIP Lenders
and their affiliates) of $1,000,000 and increments of $1,000,000 in excess
thereof.  The parties to the assignment (other than Borrower) shall pay to the
Administrative Agent an administrative fee of $3,500.
 
Each DIP Lender has the right to sell participations in its rights and
obligations under the loan documents, subject to customary restrictions on the
participants’ voting rights.
Yield Protection, Taxes
and Other Deductions:
 
The loan documents will contain yield protection provisions, customary for
facilities of this nature, protecting the DIP Lenders in the event of
unavailability of funding, funding losses, reserve and capital adequacy
requirements.
 
All payments to be free and clear of any present or future taxes, withholdings
or other deductions whatsoever (other than income taxes).  The DIP Lenders will
use reasonable efforts to minimize to the extent possible any applicable taxes
and Borrower will indemnify the DIP Lenders and the Administrative Agent for
such taxes paid by the DIP Lenders or the Administrative Agent.
Expenses:
Customary provisions regarding expense reimbursement by Borrower.
Governing Law:
New York.
Exclusive Jurisdiction:
Bankruptcy Court (and, to the extent jurisdiction is not exercised by the
Bankruptcy Court, a court of the State of New York sitting in New York County or
a federal court sitting in New York County).
Counsel to Administrative Agent:
Skadden, Arps, Slate, Meagher & Flom LLP.

 
 
 

--------------------------------------------------------------------------------

 

ANNEX I
 

 
Debtor-in-Possession Senior Secured Credit Facilities
 
Interest Rates and Fees
 
Interest Rates:
Borrower will be entitled to make borrowings under the DIP Revolving Facility
based on ABR plus 5.00% or LIBOR plus 6.00%.
Borrower will be entitled to make borrowings under the DIP Term Facility based
on ABR plus 11.00% or LIBOR plus 12.00%.
 
Borrower may elect interest periods of 1 month for LIBOR borrowings.
 
Calculation of interest shall be on the basis of actual days elapsed in a year
of 360 days (or 365 or 366 days, as the case may be, in the case of ABR loans,
except where ABR is determined pursuant to clause (ii) of the definition
thereof).
 
Interest will be payable in arrears (a) for loans accruing interest at a rate
based on LIBOR, at the end of each interest period and on the applicable
maturity date, (b) for loans accruing interest based on the ABR, monthly in
arrears and on the applicable maturity date.
 
LIBOR will at all times include statutory reserves, and interest rates will be
subject to a 3.00% LIBOR floor and a 4.00% ABR floor.  Definitions related to
determination of LIBOR and ABR will be updated to the Administrative Agent's
current form.
Default Rate:
Upon the occurrence and during the continuance of an Event of Default, the
loans, interest, fees, and all other amounts outstanding under the DIP Term
Facility or the DIP Revolving Facility, as applicable, shall bear interest at
the applicable interest rate plus 2% per annum payable upon demand.
Commitment Fees:
A per annum commitment fee on the undrawn portion of the commitments in respect
of the DIP Revolving Facility shall accrue from the date of execution and
delivery of the Operative Documents at a rate per annum equal to 0.75%, payable
monthly in arrears.
A per annum commitment fee on the undrawn portion of the commitments in respect
of the DIP Term Facility shall accrue from the date of execution and delivery of
the Operative Documents at a rate per annum equal to 1.50%, payable monthly in
arrears.
 
Borrower shall pay a fee on all outstanding Letters of Credit at a per annum
rate equal to the Applicable Margin then in effect with respect to LIBOR Loans
under the DIP Revolving Facility on the face amount of each such Letter of
Credit less the fronting fee described in the next paragraph.  Such fee shall be
shared ratably among the Lenders participating in the DIP Revolving Facility and
shall be payable quarterly in arrears.
 
A fronting fee equal to 0.25% per annum on the face amount of each Letter of
Credit shall be payable quarterly in arrears to the Issuing Lender for its own
account.  In addition, customary administrative, issuance, amendment, payment
and negotiation charges shall be payable to the Issuing Lender for its own
account.
Up-Front Fees:
DIP Revolving Facility: An up-front fee of 1.00% of the DIP Revolving Facility
shall be earned and payable on the Closing Date.
DIP Term Facility: An up-front fee of 3.00% of the DIP Term Facility shall be
earned and payable on the Closing Date.