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Online music company Napster Inc. filed for bankruptcy relief Monday. The Redwood City, Calif., company, which once attracted 4.9 million users per month to its music-swapping Web site before it was shut down by angry record companies, filed for Chapter 11 protection in the U.S. Bankruptcy Court in Wilmington, Del. The move was expected following the company’s announced sale to German media giant Bertelsmann AG May 17. In its filing, Napster listed liabilities of $101 million and assets of $7.9 million. The company owes millions of dollars to numerous unsecured creditors, including $3.79 million to Association of Independent Music of London, $2.1 million to law firm Boies, Schiller & Flexner of Armonk, N.Y., and $1.2 million to e-commerce company Digital World Services of New York. But Napster’s largest creditor by far is Bertelsmann, which has invested about $91 million in the company since October 2000. Bertelsmann offered $8 million in cash for Napster’s assets last month on condition it declared bankruptcy, a person close to the deal said. The offer also erased the debt Napster owed the German conglomerate. Bertelsmann declined to comment on Napster. In May, Napster’s board of directors rejected a bid by Bertelsmann to take control of the company for about $16 million. That angered Napster founder Shawn Fanning and CEO Konrad Hilbers enough to prompt their resignations, although both returned to the company after the new deal was reached. Now, the bankruptcy court will decide how Napster should best settle claims. The court will also hold an auction for the company and decide whether or not to approve Napster’s sale to Bertelsmann. “Anyone else who is coming in to bid would have to be bidding over $100 million,” the source said, calling that scenario “unlikely.” Under its plan, Napster can seek debtor-in-possession financing from Bertelsmann up to $5.125 million. Napster can immediately obtain post-petition loans of no more than $1.3 million for expenses incurred and detailed in its budget, according to the document. Napster shut down in July 2001 after major record labels convinced a federal judge that the company’s service violated copyright laws. The company has been developing technology to power a fee-based site but so far has attracted few customers. Phil Benyola, research associate at Raymond James Associates in St. Petersburg, Fla., said Napster’s bankruptcy proceeding allows Bertelsmann to take control of the music company. “Now that the company is in bankruptcy, it helps Bertelsmann figure out what debts are going to be paid first, and Bertelsmann will be free to really deal with it and do what they want,” he said. “I don’t see any [other] potential buyer willing to take that on.” Related chart: Deal Memo and Deal Timeline Copyright �2002 TDD, LLC. All rights reserved.

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