"No source code to compile" sounds like the file isn't being loaded from disk.
Your directory structure looks correct, assuming that when the game tries to open a file it looks in the directory with the executable or in a subdirectory relative to that directory - so that e.g. fopen("proc\cm_base.c", ...) should open cm_base.c in the proc subdirectory. But it's finding the font files, so it looks like that's working properly.
Does your init.txt file have a line like this?
template 0 proc/cm_base.c
Are you getting any error messages sent to stdout when the game starts up? (I have Code::Blocks set up so that the game opens a stdout console when run, but I guess your system may work differently)
Edit: Now I think about it, the problem may be that the init file isn't being read at all.
If you have a chance, would you be able to try including this line in init.txt:
then checking whether it turns the music off? If it doesn't, the init file isn't loading.
If that's the problem, I don't know why it would happen. Is it possible that you have some kind of environment variable or something like that which makes Allegro file access functions load correctly from the game directory, but which doesn't affect C stdio functions like fopen?