(7) LINES OF CREDIT AND LOANS PAYABLE

(a) Domestic line of credit and loan payable

The Company’s wholly-owned subsidiaries, Digital Recorders, Inc. and TwinVision of North America, Inc. (collectively, the “Borrowers”), have in place an asset-based lending agreement (as amended, the “PNC Agreement”) with PNC Bank, National Association (“PNC”), which matures on the earlier of (a) April 30, 2012 or (b) five days prior to the maturity date of the BHC Agreement (as defined in the following paragraph). DRI has agreed to guarantee the obligations of the Borrowers under the PNC Agreement. The PNC Agreement provides up to $8.0 million in borrowings under a revolving credit facility and is secured by substantially all tangible and intangible U.S. assets of the Company. Borrowing availability under the PNC Agreement is based upon an advance rate equal to 85% of eligible domestic accounts receivable of the Borrowers, plus 75% of eligible foreign accounts receivable of the Borrowers, limited to the lesser of $2.5 million in the aggregate or the aggregate amount of coverage under Acceptable Credit Insurance Policies (as defined in the PNC Agreement) that the Borrowers have with respect to eligible foreign receivables, as determined by PNC in its reasonable discretion, plus 85% of the appraised net orderly liquidation value of inventory of the Borrowers, limited to $750,000. The PNC Agreement provides for one of two possible interest rates on borrowings: (1) an interest rate based on the rate (the “Eurodollar Rate”) at which U.S. dollar deposits are offered by leading banks in the London interbank deposit market (a “Eurodollar Rate Loan”) or (2) interest at a rate (the “Domestic Rate”) based on either (a) the base commercial lending rate of PNC, or (b) the open rate for federal funds transactions among members of the Federal Reserve System, as determined by PNC (a “Domestic Rate Loan”). The actual annual interest rate for borrowings under the PNC Agreement is (a) the Eurodollar Rate plus 3.25% for Eurodollar Rate Loans and (b) the Domestic Rate plus 1.75% for Domestic Rate Loans. Interest is calculated on the principal amount of borrowings outstanding, subject to a minimum principal amount of $3.5 million. If all outstanding obligations under the PNC Agreement are paid before the maturity date, the Borrowers will be obligated to pay an early termination fee of $40,000. At September 30, 2011, the outstanding principal balance on the revolving credit facility established under the PNC Agreement was approximately $2.8 million, which amount is included in the current portion of long-term debt on the Company’s accompanying consolidated balance sheet, and the remaining borrowing availability under the revolving credit facility was approximately $1.4 million.

Pursuant to terms of a loan agreement (the “BHC Agreement”) with BHC Interim Funding III, L.P. (“BHC”), the Borrowers have outstanding a $4.8 million term loan (the “Term Loan”) that matures April 30, 2012 and which is included in the current portion of long-term debt on the Company’s accompanying consolidated balance sheet. DRI agreed to guarantee the Borrowers’ obligations under the BHC Agreement. The Term Loan bears interest at an annual rate of 12.75% and is secured by substantially all tangible and intangible assets of the Company. Additionally, the Term Loan is secured by a pledge of all outstanding common stock of the Borrowers and Robinson Turney International, Inc., a wholly-owned subsidiary of DRI, and a pledge of 65% of the outstanding common stock of all our foreign subsidiaries other than Mobitec Pty Ltd., Castmaster Mobitec India Private Ltd., and Mobitec Far East Pte. Ltd. If the Term Loan is paid before its maturity date, the Borrowers are subject to a termination fee which escalates over time to a maximum amount of $1.7 million. The amount of the termination fee due is dependent upon the date of repayment of the Term Loan, with the maximum amount of $1.7 million due if the Term Loan is not paid until January 1, 2012 or thereafter. We are recording the maximum termination fee on the Term Loan ratably over the remaining term of the BHC Agreement as interest expense. During the nine months ended September 30, 2011 and 2010, we recorded approximately $548,000 and $176,000, respectively, of interest expense related to the Term Loan termination fee, all of which is included in the current portion of long-term debt on the Company’s accompanying consolidated balance sheet.

The PNC Agreement and the BHC Agreement contain certain financial covenants with which we and our subsidiaries must comply. One such covenant in the BHC Agreement provides that the aggregate indebtedness of our foreign subsidiaries, as defined in the BHC Agreement, shall not exceed $7.0 million at any time during or at the end of any fiscal quarter. Due primarily to changes in foreign currency exchange rates from the quarter ended December 31, 2010 to the quarter ended March 31, 2011, we were not in compliance with this covenant for the quarter ended March 31, 2011, as the aggregate indebtedness of our foreign subsidiaries exceeded $7.0 million by approximately $127,000. Had foreign currency exchange rates during the quarter ended March 31, 2011 remained constant with foreign currency exchange rates as of the end of the prior quarter, the aggregate indebtedness of our foreign subsidiaries as of March 31, 2011 would have been approximately $432,000 lower than the amount we reported as of that date and no covenant violation would have occurred. BHC agreed to waive this covenant violation for the quarter ended March 31, 2011. We were in compliance with all covenants of the PNC Agreement and BHC Agreement for each of the quarters ended June 30, 2011 and September 30, 2011.

Management believes there is a possibility that the Company may not be in compliance with some of the covenants required to be maintained under terms of the PNC Agreement and BHC Agreement for the fourth quarter of 2011. Pursuant to terms of those agreements, a covenant violation is a breach of the loan agreement and the lender then has the right to demand immediate payment of all outstanding balances due under the agreement. In the event we were not in compliance with one or more covenants in the fourth quarter of 2011, management would request waivers or amendments to the PNC Agreement and BHC Agreement. Although management expects, based on past experience, both PNC and BHC would issue a waiver or amendment, we can give no assurance of such.

At September 30, 2011, Digital Recorders, Inc. had an outstanding principal balance of $17,000 due on a term loan with SITec Services LLC (the “Digital Recorders Loan”), which matures May 15, 2015. The outstanding principal balance due on the Digital Recorders Loan is reflected as long-term debt in the accompanying consolidated balance sheet.

b) International lines of credit and loans payable

Mobitec AB, our wholly-owned Swedish subsidiary, has in place agreements with Svenska Handelsbanken AB (“Handelsbanken”) under which working capital credit facilities have been established. On February 25, 2011, May 30, 2011, and August 30, 2011, Mobitec AB and Handelsbanken entered into amendments to these agreements to, among other things, maintain the aggregate borrowing capacity on these credit facilities at 38.0 million Swedish krona (“SEK”) (approximately $5.6 million, based on exchange rates at September 30, 2011) through October 31, 2011, on which date the aggregate borrowing capacity would be reduced by 7.0 million SEK (approximately $1.0 million, based on exchange rates at September 30, 2011) to 31.0 million SEK (approximately $4.6 million, based on exchange rates at September 30, 2011). At September 30, 2011, borrowings due and outstanding under these credit facilities totaled 31.6 million SEK (approximately $4.7 million, based on exchange rates at September 30, 2011) and are reflected as lines of credit in the accompanying consolidated balance sheet. Additional borrowing availability under these agreements at September 30, 2011 amounted to approximately $678,000. These credit agreements renew annually on a calendar-year basis. See Note 15 for disclosure of an amendment to these credit facilities executed subsequent to September 30, 2011.

At September 30, 2011, Mobitec AB had an outstanding principal balance of 750,000 SEK (approximately $111,000, based on exchange rates at September 30, 2011) due on a term loan under a credit agreement with Handelsbanken (the “Mobitec Loan”) which matures March 31, 2012. The outstanding principal balance due on the Mobitec Loan is included in the current portion of long-term debt in the accompanying consolidated balance sheet.

Mobitec GmbH, the Company’s wholly-owned German subsidiary, has a credit facility in place under an agreement with Handelsbanken pursuant to which a maximum of 912,000 Euro (“EUR”) (approximately $1.2 million, based on exchange rates at September 30, 2011) can be borrowed. At September 30, 2011, borrowings due and outstanding under this credit facility totaled 336,000 EUR (approximately $456,000, based on exchange rates at September 30, 2011) and are reflected as lines of credit in the accompanying consolidated balance sheet. Additional borrowing availability under this credit facility at September 30, 2011 amounted to approximately $784,000. The agreement under which this credit facility is extended has an open-ended term and allows Handelsbanken to terminate the credit facility at any time.

At September 30, 2011, Mobitec Empreendimientos e Participações Ltda. (“Mobitec EP”), our wholly-owned Brazilian subsidiary, had an outstanding balance of approximately $975,000 due on a promissory note entered into in connection with the July 1, 2009 acquisition of the remaining fifty percent (50%) of the issued and outstanding interests of Mobitec Brazil Ltda. The note is payable in twelve (12) successive fixed quarterly principal payments of $162,500 within thirty (30) days after the close of each calendar quarter (each such payment, an “Installment Payment”) with the last Installment Payment due within thirty (30) days after the close of the calendar quarter ending September 30, 2012. The unpaid principal balance of the note bears simple interest at a rate of five percent (5%) per annum, which is payable quarterly on each date on which an Installment Payment is due. Mobitec EP has the right, at its discretion, with certain interest rate provisions applied, to not make up to two Installment Payments, provided such two Installment Payments are not consecutive (with such amounts to bear interest therefrom at a rate of nine percent (9%) per annum) and to defer such Installment Payments to the end date of the note. The outstanding principal balance due on this note is included in long-term debt in the accompanying consolidated balance sheet. Mobitec EP elected to not make the Installment Payment that was due July 30, 2010. The missed Installment Payment will be deferred until the end date of the note, if not paid sooner, and will bear interest at an annual rate of 9%. Mobitec EP has made all other Installment Payments due under the terms of the promissory note.

At September 30, 2011, Castmaster Mobitec India Private Limited had two loans payable to HDFC Bank in India with an aggregate outstanding principal balance of approximately 3.1 million Indian rupees (“INR”) (approximately $63,000, based on exchange rates at September 30, 2011). One loan has a principal balance of approximately 2.4 million INR (approximately $48,000, based on exchange rates at September 30, 2011), which is included in the current portion of long-term debt in the accompanying consolidated balance sheet, bears interest at an annual rate of 8.0%, and matures on September 7, 2012. The second loan has a principal balance of approximately 736,000 INR (approximately $15,000, based on exchange rates at September 30, 2011), bears interest at an annual rate of 9.51%, and matures on November 7, 2014. The outstanding principal balance due on this note is included in long-term debt in the accompanying consolidated balance sheet.

Domestic and international lines of credit consist of the following:


	September 30,		December 31,
	2011		2010
	(In thousands)
Line of credit with PNC Bank, National Association dated June 30, 2008; payable in full on the earlier of (a) April 30, 2012 or (b) five days prior to the maturity date of the BHC Agreement; secured by all tangible and intangible U.S. assets of the Company; bears average interest rate of 5.00% and 5.00% in 2011 and 2010, respectively.	$	2,828	$	2,841

Line of credit with Svenska Handelsbanken AB; renews annually on a calendar-year basis; secured by certain assets of the Swedish subsidiary, Mobitec AB; bears average interest rate of 6.11% and 4.48% in 2011 and 2010, respectively.		2,121		2,301

Line of credit with Svenska Handelsbanken AB; renews annually on a calendar-year basis; secured by accounts receivable of the Swedish subsidiary, Mobitec AB; bears average interest rate of 6.57% and 4.59% in 2011 and 2010, respectively.		2,538		2,575

Line of credit with Svenska Handelsbanken AB dated June 23, 2004; open-ended term; secured by accounts receivable and inventory of the German subsidiary, Mobitec GmbH; bears average interest rate of 4.62% and 4.39% in 2011 and 2010, respectively.		456		737

Total lines of credit	$	7,943	$	8,454

Historically, we have primarily measured our liquidity by the borrowing availability on our domestic and international revolving lines of credit, which would be determined, at any point in time, either a) by comparing our borrowing base (generally, eligible accounts receivable and inventory) to the balances of our outstanding lines of credit; or b) by analyzing unutilized borrowing capacity in circumstances the comparison to the borrowing base was not instructive. Borrowing availability on our domestic and international lines of credit is driven by several factors, including the timing and amount of orders received from customers, the timing and amount of customer billings, the timing of collections on such billings, lead times and amounts of inventory purchases, and the timing of payments to vendors, primarily on payments to vendors from whom we purchase inventory. Due to a number of factors, including net losses reported in the last twelve months, the borrowing availability on our revolving lines of credit has been negatively impacted, and the Company’s working capital has decreased. Therefore, we implemented a range of cash management procedures with an objective of working within our liquidity and capital resource constraints.

The revolving credit facility under the PNC Agreement and the Term Loan under the BHC Agreement each matures in April 2012, requiring a combined cash payment from the Company in an amount, based on outstanding principal balances as of September 30, 2011, ranging from approximately $8.9 million to $9.3 million. Absent a transaction that would facilitate our repayment of this indebtedness before the maturity dates of the PNC and BHC Agreements we will not have adequate cash resources from operations to pay the outstanding debt balances of these two credit facilities on or before their maturity dates.