Rand Logistics Corp - PART I ITEM 1. FINANCIAL STATEMENTS RAND...

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Rand Logistics Corp - Recent Material Event

PART I ITEM 1. FINANCIAL STATEMENTS RAND LOGISTICS, INC. Consolidated Balance Sheets (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ <TABLE> <CAPTION> December 31, March 31, 2007 2007 ASSETS (unaudited) (audited) ----------------------------- <S> <C> <C> CURRENT Cash and cash equivalents $ 3,150 $ 7,207 Blocked Account (Note 3) 2,700 -- Accounts receivable (Note 4) 16,943 2,702 Prepaid expenses and other current assets (Note 5) 3,848 3,122 Income taxes receivable 263 263 Deferred income taxes 1,238 1,219 ------------------------------------------------------------------------------------------------------------------------ 28,142 14,513 Total current assets BLOCKED ACCOUNT (Note 3) -- 2,700 PROPERTY AND EQUIPMENT, NET (Note 6) 83,622 66,859 DEFERRED INCOME TAXES 14,408 13,574 DEFERRED DRYDOCK COSTS, NET (Note 7) 7,412 5,895 INTANGIBLE ASSETS, NET (Note 8) 16,468 13,334 GOODWILL (Note 8) 11,711 6,363 ------------------------------------------------------------------------------------------------------------------------ $ 161,763 $ 123,238 Total assets ======================================================================================================================== LIABILITIES CURRENT Bank indebtedness (Note 10) $ 2,823 $ 5,097 Accounts payable 12,342 11,445 Accrued liabilities (Note 11) 6,178 3,237 Acquired Management Bonus Program (Note 21) 3,000 -- Interest rate swap contract (Note 19) 187 135 Income taxes payable 338 385 Deferred income taxes 969 589 Current portion of long-term debt (Note 12) 17,994 4,398 ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 43,831 25,286 LONG-TERM DEBT (Note 12) 38,823 34,864 ACQUIRED MANAGEMENT BONUS PROGRAM (Note 21) -- 3,000 DEFERRED INCOME TAXES 14,397 13,624 ------------------------------------------------------------------------------------------------------------------------ 97,051 76,774 Total liabilities ------------------------------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (Notes 13 and 14) STOCKHOLDERS' EQUITY Preferred stock, $.0001 par value, 14,900 14,900 Authorized 1,000,000 shares, Issued and outstanding 300,000 shares (Note 15) Common stock, $.0001 par value 1 1 Authorized 50,000,000 shares, Issued and outstanding 12,092,142 shares (Note 15) Additional paid-in capital 58,232 38,407 Accumulated deficit (9,962) (5,947) Accumulated other comprehensive income (loss) 1,625 (1,073) Minority interest of variable interest entity (Note 22) (84) 176 ------------------------------------------------------------------------------------------------------------------------ 64,712 46,464 Total stockholders' equity ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 161,763 $ 123,238 ======================================================================================================================== </TABLE> The accompanying notes are an integral part of these financial statements RAND LOGISTICS, INC. Consolidated Statements of Operations (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ <TABLE> <CAPTION> Three months Three months Nine months Nine months ended December ended December ended December ended December 31, 2007 31, 2006 31, 2007 31, 2006 (unaudited) (unaudited) (unaudited) (unaudited) ============== ============== ============== ============== <S> <C> <C> <C> <C> REVENUE $ 35,917 $ 26,104 $ 90,024 $ 75,737 ----------------------------------------------------------------------------------------------------------------------------------- EXPENSES Outside voyage charter fees (Note 16) 4,034 1,310 8,605 4,935 Vessel operating expenses 26,281 19,819 63,381 52,304 Repairs and maintenance 7 40 101 97 General and administrative 2,648 1,955 7,391 4,914 Depreciation 1,719 1,408 4,882 3,737 Amortization of drydock costs 376 83 1,149 251 Amortization of intangibles 633 295 1,392 1,001 Amortization of chartering agreement costs 16 54 112 90 Write-off of retired vessel to salvage value 1,687 -- 1,687 -- (Gain) loss on foreign exchange 11 88 (208) 178 ----------------------------------------------------------------------------------------------------------------------------------- 37,412 25,052 88,492 67,507 ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE OTHER INCOME AND EXPENSES AND INCOME TAXES (1,495) 1,052 1,532 8,230 ----------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME AND EXPENSES Interest expense (Note 17) 1,369 1,166 3,486 2,875 Interest income (53) (135) (195) (223) Loss on interest rate swap contract 35 -- 43 -- ----------------------------------------------------------------------------------------------------------------------------------- 1,351 1,031 3,334 2,652 ----------------------------------------------------------------------------------------------------------------------------------- (2,846) 21 (1,802) 5,578 INCOME (LOSS) BEFORE INCOME TAXES =================================================================================================================================== PROVISION (RECOVERY) FOR INCOME TAXES Current 76 (68) 43 (57) Deferred (833) (245) (462) 1,960 ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) BEFORE MINORITY INTEREST (2,089) 334 (1,383) 3,675 MINORITY INTEREST (Note 22) (228) (443) (259) (360) =================================================================================================================================== NET INCOME (LOSS) (1,861) 777 (1,124) 4,035 =================================================================================================================================== PREFERRED STOCK DIVIDENDS 317 295 909 885 =================================================================================================================================== COMMON STOCK DIVIDEND OF VIE -- 250 -- 250 STOCK WARRANT INDUCEMENT DISCOUNT (Note 15) -- -- 1,982 -- =================================================================================================================================== NET INCOME (LOSS) INCOME APPLICABLE TO COMMON $ (2,178) $ 232 $ (4,015) $ 2,900 STOCKHOLDERS =================================================================================================================================== Net (loss) earnings per share basic (Note 20) $ (0.18) $ 0.03 $ (0.36) $ 0.42 Net (loss) earnings per share diluted $ (0.18) $ 0.03 $ (0.36) $ 0.35 Weighted average shares basic 12,092,142 8,003,754 11,109,942 6,937,185 Weighted average shares diluted 12,092,142 12,466,881 11,109,942 10,830,400 </TABLE> The accompanying notes are an integral part of these financial statements RAND LOGISTICS, INC. Consolidated Statements of Stockholders' Equity and Other Comprehensive Income (Loss) (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ <TABLE> <CAPTION> Additional Common Stock Preferred Stock Paid-In Shares Amount Shares Amount Capital ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Balances, March 31, 2006 5,600,000 $ 1 300,000 $ 14,900 $ 24,629 Net loss -- -- -- -- -- Minority Interest -- -- -- -- -- Preferred dividend -- -- -- -- -- Common stock dividend -- -- -- -- -- Warrant conversion (Note 15 (a)) 3,820 -- -- -- 19 Shares issued, net of issuance cost of $50 (Note 15) 2,402,957 -- -- -- 12,950 Restricted stock issued (Note 15) 120,400 -- -- -- 809 Translation adjustment -- -- -- -- -- Comprehensive loss -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Balances, March 31, 2007 8,127,177 $ 1 300,000 $ 14,900 $ 38,407 ==================================================================================================================================== Net income -- -- -- -- -- Minority Interest -- -- -- -- -- Preferred dividend -- -- -- -- -- Warrant conversion, net of stock warrant inducement discount (Note 15 (b)) 1,914,201 -- -- -- 9,571 Translation adjustment -- -- -- -- -- Comprehensive income -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Balances, June 30, 2007 10,041,378 $ 1 300,000 $ 14,900 $ 47,978 ==================================================================================================================================== Net income -- -- -- -- -- Minority Interest -- -- -- -- -- Preferred dividend -- -- -- -- -- Warrant conversion, net of stock warrant inducement discount (Note 15 (b)) 2,050,764 -- -- -- 10,254 Translation adjustment -- -- -- -- -- Comprehensive income -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Balances, September 30, 2007 12,092,142 $ 1 300,000 $ 14,900 $ 58,232 Net loss -- -- -- -- -- Minority Interest -- -- -- -- -- Preferred dividend -- -- -- -- -- Translation adjustment -- -- -- -- -- Comprehensive loss -- -- -- -- -- Balances, December 31, 2007 12,092,142 $ 1 300,000 $ 14,900 $ 58,232 ------------------------------------------------------------------------------------------------------------------------------------ <CAPTION> Accumulated Minority Other Total Surplus Interest Comprehensive Stockholders' (Deficit) VIE Income (Loss) Equity ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balances, March 31, 2006 $ (1,426) $ -- $ (1,347) $ 36,757 Net loss (3,313) -- -- (3,313) Minority Interest 224 176 -- 400 Preferred dividend (1,182) -- -- (1,182) Common stock dividend (250) -- -- (250) Warrant conversion (Note 15 (a)) -- -- -- 19 Shares issued, net of issuance cost of $50 (Note 15) -- -- -- 12,950 Restricted stock issued (Note 15) -- -- -- 809 Translation adjustment -- -- 274 274 Comprehensive loss -- -- -- (3,039) ----------------------------------------------------------------------------------------------------------------------- Balances, March 31, 2007 $ (5,947) $ 176 $ (1,073) $ 46,464 ======================================================================================================================= Net income 420 -- -- 420 Minority Interest (321) 321 -- -- Preferred dividend (296) -- -- (296) Warrant conversion, net of stock warrant inducement discount (Note 15 (b)) (957) -- -- 8,614 Translation adjustment -- -- 1,649 1,649 Comprehensive income -- -- -- 2,069 ----------------------------------------------------------------------------------------------------------------------- Balances, June 30, 2007 $ (7,101) $ 497 $ 576 $ 56,851 ======================================================================================================================= Net income 285 -- -- 285 Minority Interest 353 (353) -- -- Preferred dividend (296) -- -- (296) Warrant conversion, net of stock warrant inducement discount (Note 15 (b)) (1,025) -- -- 9,229 Translation adjustment -- -- 1,311 1,311 Comprehensive income -- -- -- 1,596 ----------------------------------------------------------------------------------------------------------------------- Balances, September 30, 2007 $ (7,784) $ 144 $ 1,887 $ 67,380 Net loss (2,089) -- -- (2,089) Minority Interest 228 (228) -- -- Preferred dividend (317) -- -- (317) Translation adjustment -- -- (262) (262) Comprehensive loss -- -- -- (2,351) Balances, December 31, 2007 $ (9,962) $ (84) $ 1,625 $ 64,712 ----------------------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of these financial statements RAND LOGISTICS, INC. Consolidated Statements of Cash Flows (U.S. Dollars 000's) ================================================================================ <TABLE> <CAPTION> Nine months Nine months ended ended December 31, 2007 December 31, 2006 (unaudited) (unaudited) ----------------- ----------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,383) $ 3,675 Adjustments to reconcile net income (loss) to net cash used by operating activities Depreciation and amortization of drydock costs 6,031 3,987 Amortization of intangibles and deferred financing costs 1,805 1,329 Deferred income taxes 299 1,896 Loss on interest rate swap 43 -- Equity compensation 271 -- Write-off of retired vessel to salvage value 1,687 -- Changes in non cash operating working capital: Accounts receivable (14,241) (11,658) Prepaid expenses and other current assets (642) (246) Accounts payable and accrued liabilities 2,687 633 Income taxes payable (48) (258) -------------------------------------------------------------------------------------------------------------------------- (3,491) (642) -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,028) (19,761) Acquisition of business (24,520) -- Blocked account -- (2,700) Deferred drydock costs (2,232) -- Deferred acquisition costs -- (1,067) -------------------------------------------------------------------------------------------------------------------------- (28,780) (23,528) -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of warrants (Note 15 (b)) 17,843 19 Proceeds from sale of shares of common stock -- 13,000 Stock issuance costs -- (50) Proceeds from long-term debt 17,117 14,500 Proceeds from issuance of subordinated debt -- 2,200 Long-term debt repayment (3,523) (1,137) Debt financing costs (330) Capital lease repayment -- (31) Proceeds from bank indebtedness 3,885 12,167 Repayment of bank indebtedness (6,181) (8,555) Dividend paid -- (685) -------------------------------------------------------------------------------------------------------------------------- 28,811 31,428 -------------------------------------------------------------------------------------------------------------------------- EFFECT OF FOREIGN EXCHANGE RATES ON CASH (597) (465) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,057) 6,793 ========================================================================================================================== CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,207 2,574 -------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,150 $ 9,367 ========================================================================================================================== SUPPLEMENTAL CASH FLOW DISCLOSURE Payments for interest $ 2,864 $ 2,324 Payment of income taxes $ 132 $ 162 </TABLE> The accompanying notes are an integral part of these financial statements RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and consolidation The consolidated financial statements for the periods ended at December 31, 2007 and December 31, 2006 are unaudited. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Rand Finance Corp. and Rand LL Holdings Corp., 100% subsidiaries of the Company, and the accounts of Lower Lakes Towing Ltd., Lower Lakes Transportation Company Limited and Grand River Navigation Company, Inc., each of which is a 100% subsidiary of Rand LL Holdings Corp. and Wisconsin & Michigan Steamship Company ("WMS"), a variable interest entity as discussed in Note 22. On February 28, 2007, Port Dover Steamship Company Limited, a 100% wholly owned subsidiary of Lower Lakes Towing Ltd. was amalgamated under Canadian law with Lower Lakes Towing Ltd. and the newly amalgamated Lower Lakes Towing Ltd. is a 100% subsidiary of Rand LL Holdings Corp. The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated. Operating results for the interim period presented are not necessarily indicative of the results to be expected for a full year, in part due to the seasonal nature of the business. The statements and related notes have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements that were included in the Company's Annual Report on Form 10-KSB for the period ended March 31, 2007. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Accounts receivable and concentration of credit risk The majority of the Company's accounts receivable are amounts due from customers with other accounts receivable including insurance and Goods and Service Tax refunds accounting for the balance. The majority of accounts receivable are due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company has an allowance for doubtful accounts of $50 as of December 31, 2007 and March 31, 2007. The company has historically had no significant bad debts. Interest is not accrued on outstanding receivables. Revenue recognition The Company generates revenues from freight billings under contracts of affreightment (voyage charters) generally on a rate per ton basis. Voyage charter revenue is recognized ratably over the period from the departure of a vessel from its original shipping point to its destination, when the following conditions are met: the Company has a signed contract of affreightment, the contract price is fixed or determinable and collection is reasonably assured. Included in freight billings are other fees such as fuel surcharges and other freight surcharges, which represent pass-through charges to customers for toll fees, lockage fees and ice breaking fees paid to other parties. Fuel surcharges are recognized ratably over the voyage, while freight surcharges are recognized when the associated costs are incurred. Freight surcharges are insignificant and amount to less than 1% of total revenues for the periods presented. The Company subcontracts excess customer demand to other freight providers. Service to customers under such arrangements is transparent to the customer and no additional services are being provided to customers. Consequently, revenues recognized for customers serviced by freight subcontractors are recognized on the same basis as described above. In addition, revenues are presented on a gross basis in accordance with the guidance in EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Costs for subcontracted freight providers, presented as "Outside voyage charter fees" on the statement of operations are recognized ratably over the voyage. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Fuel and lubricant inventories Raw materials, fuel, and operating supplies, are accounted for on a first-in, first-out cost method (based on monthly averages). Raw materials are stated at the lower of actual cost (first-in, first-out method) or market. Operating supplies are stated at actual cost or average cost. Intangible assets and goodwill The Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and other Intangible Assets ("SFAS 142")." SFAS No. 141 requires all business combinations to be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination must be recognized as assets separate from goodwill. SFAS No. 142 provides that intangible assets with indefinite lives and goodwill will not be amortized but will be tested at least annually for impairment and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered. If the asset is impaired, it will be written down to its fair value. Intangible assets consist primarily of goodwill, financing costs, trademarks, trade names, non-competition agreements and customer relationships and contracts. In accordance with SFAS 142, the Company reviews goodwill for impairment at least annually using a two-step impairment test to first identify potential impairment and then to measure the amount of the impairment, if any. Chartering agreement costs are primarily legal costs of establishing the time chartering agreements with the VIE, including loan and guaranty documentation. These costs are being amortized over the term of the time chartering agreement, and related debt. Other intangibles are amortized as follows: <TABLE> <S> <C> Trademarks and trade names 10 years straight-line Non-competition agreements 4 years straight-line Customer relationships and contracts 15 years straight-line Chartering agreement costs 29 months (term of Chartering agreement) </TABLE> Property and equipment Property and equipment are recorded at cost and have been valued as of the date of acquisition. Depreciation methods for capital assets are as follows: <TABLE> <S> <C> Vessels 4 - 25 years straight-line Leasehold improvements 7 - 12 years straight-line Furniture and equipment 20% declining-balance Computer equipment 45% declining-balance </TABLE> Deferred charges Deferred charges include capitalized drydock expenditures and deferred financing costs. Drydock costs incurred during statutory Canadian and United States certification processes are capitalized and amortized on a straight-line basis over the benefit period, which is 60 months. Drydock costs include costs of work performed by third party shipyards, subcontractors and other direct expenses to complete the mandatory certification process. Deferred financing costs are amortized on a straight-line basis over the term of the related debt, which approximates the effective interest method. Repairs and maintenance The Company's vessels require repair and maintenance each year to ensure the fleet is operating efficiently during the shipping season. The vast majority of repairs and maintenance are completed in January, February and March of each year when the vessels are inactive. The Company expenses such routine repairs and maintenance costs. Significant repairs to the Company's vessels, whether owned or available to the Company under a time charter, such as major engine overhauls and hull repairs, are capitalized and amortized over the remaining life of the asset repaired, or remaining lease term, whether it is engine equipment, the vessel or leasehold improvements to a vessel leased under time charter agreement. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of long-lived assets Long-lived assets include property, intangible assets subject to amortization, and certain other assets. The carrying values of these assets are periodically reviewed for impairment or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company evaluates impairment by comparing the fair value of the intangible assets with indefinite lives and goodwill with their carrying values. The Company determines fair value of goodwill by evaluating the fair value of the acquired business as well as using the sum of the undiscounted cash flows projected to be generated by the acquired business giving rise to that goodwill. This requires the Company to make long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Company's services and future market conditions. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to result from its use and eventual disposition. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying value of the asset exceeds its fair value. If a readily determinable market price does not exist, fair value is estimated using undiscounted expected cash flows attributable to the assets. Presentation of Taxes Collected from Customers (Gross Versus Net) In June 2006, FASB ratified the consensus reached by the Emerging Issues Task Force in Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should be presented in the Income Statement (That is, Gross Versus Net Presentation)." Issue No. 06-3 requires disclosure of an entity's accounting policy regarding the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes. The company presents sales net of taxes in its consolidated statement of income. The adoption of Issue No. 06-3, which is effective for interim and annual reporting periods beginning after December 15, 2006, did not have an impact on the Corporation's consolidated financial statements. Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of tax assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized, if necessary, to measure tax benefits to the extent that, based on available evidence, it is more likely than not that they will be realized. Accounting for uncertainty in income taxes In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The impact of the Company's reassessment of its tax positions in accordance with FIN 48 did not have a material effect on the results of operations, financial condition or liquidity. The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN 48") effective April 1, 2007. The adoption of FIN 48 on April 1, 2007 did not result in a cumulative effect adjustment to accumulated deficit. At April 1, 2007, the Company had $nil of unrecognized tax benefits which, if recognized, would favorably affect the effective income tax rate in future periods. Consistent with its historical financial reporting, the Company has elected to classify interest expense related to income tax liabilities, when applicable, as part of the interest expense in its Consolidated Statements of Operations rather than income tax expense. The Company will continue to classify income tax penalties as part of selling, general and administrative expense in its Consolidated Statements of Operations. To date, the Company has not incurred material interest expenses or penalties relating to assessed taxation years. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 1. SIGNIFICANT ACCOUNTING POLICIES (continued) The last year examined by the IRS is unknown. The Company's primary state tax jurisdictions are Michigan, Ohio and New York and its only international jurisdiction is Canada. The following table summarizes the open tax years for each major jurisdiction: Jurisdiction Open Tax Years ------------ -------------- Federal 2004 - 2007 Michigan 2004 - 2007 Ohio 2004 - 2007 New York 2004 - 2007 Canada 2002 - 2007 Foreign currency translation The Company uses the U.S. Dollar as its reporting currency. The functional currency of Lower Lakes Towing Ltd. is the Canadian Dollar. The functional currency of the Company's U.S. subsidiaries is the U.S. Dollar. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", assets and liabilities denominated in foreign currencies are translated into U.S. Dollars at the rate of exchange at the balance sheet date, while revenue and expenses are translated at the weighted average rates prevailing during the respective periods. Components of shareholders' equity are translated at historical rates. Exchange gains and losses resulting from translation are reflected in accumulated other comprehensive loss. Advertising costs The Company expenses all advertising costs as incurred. These costs are included in administration costs and were insignificant during the periods presented. Estimates and measurement uncertainty The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates included in the preparation of these financial statements include the assumptions used in determining whether assets are impaired and the assumptions used in determining the valuation allowance for deferred income tax assets. Actual results could differ from those estimates. Stock-based compensation Effective April 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method. This method requires compensation cost to be recognized beginning on the effective date based on the requirements of SFAS 123(R) for all share-based payments granted or modified after the effective date. Under this method, the Company recognizes compensation expense for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding after the effective date as the remaining service is rendered. Variable interest entities Effective for the second fiscal quarter ended September 30, 2006, the Company implemented FASB Interpretation ("FIN") 46R, which requires that the Company consolidate certain entities on the basis other than through ownership of a voting interest of the entity (see Note 22). Two VIE's have been identified and one has been consolidated in accordance with FIN 46R. Though the Voyageur group of companies (see Note 9) is a variable interest entity for Rand, it does not meet criteria for consolidation and hence is not consolidated. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 2. RECENTLY ISSUED PRONOUNCEMENTS Fair value measurement In September 2006, the FASB issued FASB Statement 157, "Fair Value Measurements", for fiscal years beginning after November 15, 2007. The Company will be required to adopt this standard for the fiscal year March 31, 2009 and is presently evaluating the impact of adopting this standard on its consolidated financial statements. Fair value option for financial assets and financial liabilities In February 2007, the FASB issued SFAS No. 159, "Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides all companies the option to irrevocably elect to report recognized financial assets and liabilities at fair value on a contract-by-contract basis. Effective as of the beginning of the first fiscal year that begins after November 15, 2007, the Company has the option of early adoption, provided the Company also elects to apply the provisions of FASB Statement No. 157, "Fair Value Measurements". The Company is presently evaluating the impact of adopting this standard on its consolidated financial statements. The adoption of SFAS No. 159 is not expected to have a material impact on the Company's consolidated financial statements. Non-controlling interests in consolidated financial statements On December 4, 2007, the FASB issued FASB Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 151. FAS 160 applies to all fiscal years beginning on or after December 15, 2008. The Company will be required to adopt this standard for the fiscal year March 31, 2010 and is presently evaluating the impact of adopting this standard on its consolidated financial statements. Business Combinations On December 4, 2007, the FASB also issued FASB Statement No. 141(R), "Business Combinations". This statement also applies to fiscal years beginning on or after December 15, 2008. The Company will be required to adopt this standard for the fiscal year March 31, 2010. The Company is presently evaluating the impact of adopting this standard on its consolidated financial statements. 3. BLOCKED ACCOUNT SECURITY AGREEMENT On August 1, 2006, Rand Finance Corp. entered into a Blocked Account Security Agreement with National Commercial Capital Company, LLC, and deposited $2,700 on August 1, 2006 into a blocked account. The blocked account represents amounts which may be drawn by WMS under the Senior Subordinated Note Purchase Agreement between, among others, Rand Finance Corp. and WMS. Amounts on deposit in the blocked account will become available to the Company after October 31, 2008. 4. ACCOUNTS RECEIVABLE Trade receivables are presented net of an allowance for doubtful accounts. The allowance was $50 as of December 31, 2007 and March 31, 2007. The allowance for doubtful accounts reflects estimates of probable losses in trade receivables. The Company manages and evaluates the collectability of its trade receivables as follows: Management reviews aged accounts receivable listings and contact is made with customers that have extended beyond agreed upon credit terms. Senior management and operations are notified such that when they are contacted by such customers for a future delivery the customer can be requested to pay any past amounts, before any future cargo is booked for shipment. Customer credit risk is also managed by reviewing the history of payments of the customer, the size of the customer, the period of time within the shipping season and demand for future cargos. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets are comprised of the following: <TABLE> <CAPTION> December 31, 2007 March 31, 2007 (unaudited) (audited) ----------------- ----------------- <S> <C> <C> Prepaid insurance $ 272 $ 207 Fuel and lubricants 2,151 1,364 Deposits and other prepaid 1,425 1,551 ------------------------------------------------------------------------------------------------- $ 3,848 $ 3,122 ================================================================================================= </TABLE> 6. PROPERTY AND EQUIPMENT Property and equipment are comprised of the following: <TABLE> <CAPTION> December 31, 2007 March 31, 2007 (unaudited) (audited) ----------------- ----------------- <S> <C> <C> Cost Vessels $ 90,856 $ 70,543 Leasehold improvements 1,440 1,397 Furniture and equipment 235 116 Computer equipment and purchased software 457 229 ------------------------------------------------------------------------------------------------- $ 92,988 $ 72,285 ================================================================================================= Accumulated depreciation Vessels $ 8,962 $ 5,204 Leasehold improvements 216 125 Furniture and equipment 36 24 Computer equipment and purchased software 152 73 ------------------------------------------------------------------------------------------------- 9,366 5,426 ------------------------------------------------------------------------------------------------- $ 83,622 $ 66,859 ================================================================================================= </TABLE> RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 7. DEFERRED DRYDOCK COSTS Deferred drydock costs are comprised of the following: <TABLE> <CAPTION> December 31, 2007 March 31, 2007 (unaudited) (audited) ----------------- ----------------- <S> <C> <C> Drydock expenditures $ 9,696 $ 6,279 Accumulated amortization 2,284 384 -------------------------------------- $ 7,412 $ 5,895 ================================================================================================= </TABLE> 8. INTANGIBLE ASSETS AND GOODWILL Intangibles are comprised of the following: <TABLE> <CAPTION> December 31, 2007 March 31, 2007 (unaudited) (audited) ----------------- ----------------- <S> <C> <C> Intangible assets Deferred financing costs $ 1,599 $ 1,172 Trademarks, trade names 1,028 922 Non-competition agreements 2,356 2,114 Customer relationships and contracts 14,801 10,563 Chartering agreement costs 481 481 ------------------------------------------------------------------------------------------------- Total Identifiable Intangibles $ 20,265 $ 15,252 ------------------------------------------------------------------------------------------------- Accumulated amortization Deferred financing costs $ 587 $ 270 Trademarks, trade names 188 99 Non-competition agreements 1,195 632 Customer relationships and contracts 1,571 773 Chartering agreement costs 256 144 ------------------------------------------------------------------------------------------------- 3,797 1,918 ------------------------------------------------------------------------------------------------- Total intangible assets $ 16,468 $ 13,334 ================================================================================================= Goodwill $ 11,711 $ 6,363 ================================================================================================= </TABLE> Intangible asset amortization over the next five years is estimated as follows: 2008 $ 2,613 2009 2,015 2010 1,347 2011 1,321 2012 1,321 ---------------------------------------------------------------- $ 8,617 ================================================================ RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 9. ACQUISITION On August 27, 2007, Lower Lakes entered into and consummated the transactions under a Memorandum of Agreement with Voyageur Marine Transport Limited ("Voyageur") and Voyageur Pioneer Marine Inc. (collectively, the "Sellers") pursuant to which Lower Lakes purchased the assets of the bulk freight shipping business related to the VOYAGEUR INDEPENDENT and the VOYAGEUR PIONEER (collectively, the "Vessels") from the Sellers for an aggregate purchase price of CDN $25,000 plus certain adjustments. The acquisition was partially financed under the Fifth Amendment to the Credit Agreement t with General Electric Capital Corporation, as Agent and a lender, and GE Canada Finance Holding Company, as a lender, and certain of each such party's affiliates. Pursuant to the Fifth Amendment, among other things, (i) the outstanding balance of the Canadian term loan facility has been increased by CDN $18,000 to CDN $36,868. The estimated purchase price allocation to the fair values of assets and liabilities acquired is as follows: CDN $ US $ -------------------------------------------------------------------- Purchase price 25,774 24,520 -------------------------------------------------------------------- Current assets 374 356 Property and equipment 16,576 15,762 Goodwill 5,624 5,348 Other identifiable intangible assets 3,200 3,054 ---------------------------- 25,774 24,520 ---------------------------- The Company's estimate of allocation between goodwill and other identifiable intangible assets is being evaluated by a third party and is not final. Certain customer's contracts were also assigned to the Company under Contract of Assignment. In addition, on August 27, 2007, Lower Lakes entered into a Crew Manning Agreement with Voyageur pursuant to which Voyageur agreed to staff the Vessels with qualified crew members in accordance with sound crew management practices. Under the Crew Manning Agreement, Voyageur is responsible for selecting and training the Vessels' crews, payroll, tax and pension administration, union negotiations and disputes and ensuring compliance with applicable requirements of Canadian maritime law. Under the Crew Manning Agreement, Lower Lakes is obligated to pay Voyageur an annual fee of $175 and pay or reimburse Voyageur for its reasonable crew payroll expenses. Also on August 27, 2007, Lower Lakes entered into a Contract of Affreightment ("COA") with Voyageur and Voyageur Maritime Trading Inc ("VMT") pursuant to which Voyageur and VMT made a Canadian flagged vessel owned by VMT, the MARITIME TRADER (the "Trader"), available exclusively to Lower Lakes for its use in providing transportation and storage services for its customers. In connection with the COA, on August 27, 2007, Lower Lakes entered into an Option Agreement (the "Option Agreement") with VMT pursuant to which Lower Lakes obtained the option to acquire the Trader for CDN $5,000 subject to certain adjustments. The option is exercisable between January 1, 2012 and December 31, 2017, subject to certain early exercise provisions. If, at any time prior to expiration of the option, VMT receives a bona fide offer from a third party to purchase the Trader which VMT wishes to accept, Lower Lakes shall have the right to acquire the Trader at the option price. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 10. BANK INDEBTEDNESS At December 31, 2007, the Company had authorized operating lines of credit in the amounts of CDN $3,000 and US $ 6,500 (March 31, 2007 - CDN $3,000 and US $6,500) with its senior lender, and was utilizing $2,823 at December 31, 2007 ($5,097 at March 31, 2007), and maintained letters of credit of CDN $1,325. The line of credit bears interest at Canadian Prime Rate plus 1.5% or Canadian 30 day BA rate plus 2.5% on Canadian dollar borrowings and U.S. Base rate plus 1.5% or LIBOR plus 2.5% on U.S. Dollar borrowings and is secured under the same terms and has the same financial covenants as described in Note 12. The effective interest rates on the operating lines of credit at December 31, 2007 were 7.16% on the Canadian line of credit and 7.725% on the U.S. operating line of credit. 11. ACCRUED LIABILITIES Accrued liabilities are comprised of the following: December 31, March 31, 2007 2007 (unaudited) (audited) ------------------ ----------------- Payroll $ 3,253 $ 2,097 Preferred stock dividends 1,206 296 Professional fees 897 689 Interest 285 99 Other 537 56 ---------------------------------------- $ 6,178 $ 3,237 ======================================================================== RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 12. LONG-TERM DEBT On March 3, 2006, Lower Lakes Towing Ltd., Lower Lakes Transportation and Grand River as borrowers, entered into the Credit Agreement which provides for a senior credit facility with General Electric Capital Corporation and a Canadian affiliate, as agent and as a lender. On August 1, 2006, Lower Lakes Towing Ltd., Lower Lakes Transportation Company, Grand River Navigation Company, Inc., Rand LL Holdings, each subsidiaries of Rand entered into a First Amendment to the Credit Agreement, dated March 3, 2006, with General Electric Capital Corporation, as Agent and a lender, and GE Canada Finance Holding Company, as a lender, and certain of each such party's affiliates (the "Credit Agreement"). The Amendment increased the maximum available under the operating lines of credit described in Note 10. On February 28, 2007 the parties to the Credit Agreement entered into a Second Amendment of the Credit Agreement to permit the amalgamation of two Canadian subsidiaries. On March 23, 2007, a Third Amendment, permitting the acquisition of one of the vessels, Manistee, was made to the Credit Agreement. On June 27, 2007, each of the parties to the Credit Agreement entered into a Fourth Amendment. The Fourth Amendment permitted all Fiscal 2007 capital expenditures, and allowed certain time charter expenses to be excluded from EBITDA, in the financial covenant calculations within the Credit Agreement. The senior credit facility, as amended, provides the operating line of credit described in Note 10, (a) a Canadian dollar denominated term loan facility under which Lower Lakes borrowed CDN $21,200, and (b) a US dollar denominated term loan facility under which Grand River borrowed US $6,200. Rand is neither a party to the Credit Agreement nor a guarantor of any obligations under the Credit Agreement. On August 27, 2007, Lower Lakes, Lower Lakes Transportation Company, Grand River Navigation Company, Inc. and Rand LL Holdings Corp. entered into a Fifth Amendment to the Credit Agreement, dated March 3, 2006, pursuant to the Amendment, among other things, (i) the outstanding balance of the Canadian term loan facility has been increased by CDN $18,000 to CDN $36,868 (ii) the quarterly principal installment payments applicable to the Canadian term loan borrowings have been increased by CDN $540 to CDN $1,176 per quarter effective June 2008, (iii) the "Commitment Termination Date" (as defined therein) was extended by one year to March 3, 2012, (iv) the quarterly principal installment payments applicable to the US term loan borrowings have been extended at their current rate through December, 2011 and (v) the borrowers under the Credit Agreement amended certain financial covenants. Obligations under the senior credit facility are collateralized by a first priority lien and security interest on all of the borrowers' assets, tangible or intangible, real, personal or mixed, existing and newly acquired, and a pledge by Rand LL Holdings Corp. of all of the outstanding capital stock of Lower Lakes Transportation and Grand River and 65% of the outstanding capital stock of Lower Lakes Towing Ltd.. In addition, all obligations under the senior credit facility will also be secured by a pledge, with limited exception, of all the outstanding capital stock of the borrowers' subsidiaries. The indebtedness of each borrower under the credit facility is unconditionally guaranteed by each other borrower and by Rand LL Holdings Corp. and such guaranty is secured by a lien on substantially all of the assets of each borrower and Rand LL Holdings Corp. Under the senior credit facility, the borrowers will be required to make mandatory prepayments of principal on term loan borrowings (i) if the outstanding balance of the term loans plus the outstanding balance of the seasonal facilities exceeds the sum of 75% of the fair market value of the vessels owned by the borrowers, less the amount of outstanding liens against the vessels with priority over the Lenders' liens, in an amount equal to such excess, (ii) in the event of certain dispositions of assets and insurance proceeds (all subject to certain exceptions), in an amount equal to 100% of the net proceeds received by the borrowers there from, and (iii) in an amount equal to 100% of the net proceeds to a borrower from any issuance of a borrower's debt or equity securities. The senior credit facility contains certain covenants, including those limiting borrowers' and their subsidiaries' ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the senior credit facility requires the borrowers to maintain certain financial ratios. Failure of the borrowers to comply with any of these covenants or RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 12. LONG-TERM DEBT (continued) financial ratios could result in the loans under the senior credit facility being accelerated. As of December 31, 2007, the Company was in breach of certain financial covenants contained in the senior credit facility. As a result of the new financing obtained subsequent to period end and discussed in detail in Note 23, the covenant breaches that existed were effectively rectified. Senior debt instrument (a) is collateralized by a first charge against all property, a general security agreement over inventory and equipment, marine mortgages on all vessels owned by the Company and its affiliates as well as assignment of contracts of affreightment and insurance. Senior debt instrument (b) is collateralized by assets of Grand River, a marine mortgage and collateral marine agreement covering the vessels owned by Grand River. The effective interest rates on the term loans at December 31, 2007 were 7.16% on the Canadian term loan and 7.725% on the U.S. term loan. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 12. LONG-TERM DEBT (continued) <TABLE> <CAPTION> December 31, 2007 March 31, 2007 (unaudited) (audited) ----------------- ----------------- <S> <C> <C> a) Term loan bearing interest at Canadian Prime rate plus 1.5% or Canadian BA rate plus 2.5% at the Company's option. The loan is repayable over a five year term until December 2011 with current quarterly payments of CDN $636 until March 2008 and $1,176 thereafter until December 2011, and the balance due March 2012. The term loan is collateralized by the assets of Lower Lakes Towing Ltd. $ 35,909 $ 16,892 b) Term loan bearing interest at U.S. Base rate plus 1.5% or U.S. LIBOR rate plus 2.5% at the Company's option. The loan is repayable over a five year term until December 2011 with current quarterly payments of US $186 until December 2011, and the balance due March 2012. The term loan is collateralized by assets of Grand River. 5,322 5,880 c) VIE's subordinated note bearing Payment in Kind (PIK) interest at 10%. No principal payments until July 31, 2009, at which time the entire balance of the note and PIK interest is due. The note is unsecured. 2,536 2,352 d) VIE's senior note bearing interest at a rate of 9.06%. The note is repayable in quarterly payments of $362 and the balance is due December 31, 2008. The note is collateralized by a mortgage on three time-chartered vessels and lien on all Wisconsin & Michigan Steamship Company assets. 13,050 14,138 ---------------------------------------------------------------------------------------------------------------------------- $ 56,817 $ 39,262 Less amounts due within 12 months 17,994 4,398 ---------------------------------------------------------------------------------------------------------------------------- $ 38,823 $ 34,864 ============================================================================================================================ </TABLE> Principal payments are due as follows: 2008 $ 17,994 2009 8,025 2010 5,490 2011 5,490 2012 19,818 ---------------------------------------------------------- $ 56,817 ========================================================== RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 13. COMMITMENTS The Company entered into a bareboat charter agreement for the McKee Sons barge which expires in 2018. Total charter commitments for the McKee vessel for the term of the lease before inflation adjustment are given below. The lease contains a clause whereby annual payments escalate at the Consumer Price Index, capped at a maximum annual increase of 3%. 2008 $ 675 2009 675 2010 675 2011 675 2012 675 Thereafter 3,375 ======================================================== $ 6,750 ======================================================== The Company has not entered into any other significant operating leases. The Company entered into purchase commitments with several vendors in order to repower the Saginaw vessel. The commitment is approximately $12,800. The repowered engine will be completed for the fiscal 2009 sailing season. 14. CONTINGENCIES Rand is not involved in any legal proceedings which may have a significant effect on its business, financial position, results of operations or liquidity, nor are we aware of any proceedings that are pending or threatened which may have a significant effect on our business, financial position, results of operations or liquidity. From time to time, Lower Lakes may be subject to legal proceedings and claims in the ordinary course of business, involving principally commercial charter party disputes. It is expected that these claims would be covered by insurance if they involve liabilities such as arise from collision, other marine casualty, damage to cargoes, oil pollution, death or personal injuries to crew, subject to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. Most of these claims are for insignificant amounts. Given Management's assessment that losses were probable and reasonably estimable, and based on advice from the Company's outside counsel, a provision of $200 as of December 31, 2007 and $250 as of March 31, 2007 has been recorded for various claims. Management does not anticipate material variations in actual losses from the amounts accrued related to these claims. On August 27, 2007, in connection with the COA and Option Agreement (see Note 9), Lower Lakes entered into a Guarantee (the "Guarantee") with GE Canada, pursuant to which Lower Lakes agreed to guarantee up to CDN $1,250 (the "Guaranteed Obligations") of Voyageur's indebtedness to GE Canada. Lower Lakes' maximum future payments under the Guarantee are limited to the Guaranteed Obligations plus the costs and expenses GE Canada incurs while enforcing its rights under the Guarantee. Lower Lakes' obligations under the Guarantee shall become due should Voyageur fail to meet certain financial covenants under the terms of its loan from GE Canada or if Voyageur breaches certain of its obligations under the COA. Lower Lakes has several options available to it in the event that GE Canada intends to draw under the Guarantee, including (i) the right to exercise its option for the Trader under the Option Agreement and (ii) the right to make a subordinated secured loan to Voyageur in an amount at least equal to the amount intended to be drawn by GE Canada on terms as are reasonably satisfactory to GE Canada and Voyageur. In the event GE Canada makes a demand against Lower Lakes pursuant to the terms of the Guarantee, through a Letter of Credit Agreement, dated August 27, 2007, an affiliate of Voyageur has agreed to contribute half of any amounts drawn under the Guarantee through a CDN $625 letter of credit provided to Lower Lakes. In addition, Lower Lakes has guaranteed Voyageur's account with The St. Lawrence Seaway Management Corporation, up to CDN $120, which is offset by a set-off agreement under the Contract of Affreightment. The Company has determined that there is no carrying amount of the liability, for the guarantor's obligations under the guarantees under FIN 45. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 15. STOCKHOLDERS' EQUITY On October 7, 2004, the Company's Board of Directors authorized a stock dividend of 0.1428571 shares of common stock for each outstanding share of common stock. All references in the accompanying financial statements to the number of shares of stock have been retroactively restated to reflect this transaction. At December 31, 2005, 10,100,000 shares of common stock were reserved for issuance upon exercise of redeemable warrants and the underwriters' unit purchase option. Each warrant allows its holder to purchase one fully paid and non-assessable share of the Company's common stock at the price of $5.00 per share. The warrants expire on October 26, 2008. The Company may call the warrants for redemption, in whole and not in part, at a price of $.01 per warrant at any time after the warrants become exercisable, upon not less than 30 days prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of the Company's common stock equals or exceeds $8.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. Options and warrants issued in conjunction with the Company's initial public offering are equity linked derivatives and accordingly represent off-balance sheet arrangements. The options and warrants meet the scope exception in paragraph 11(a) of FAS 133 and are accordingly not accounted for as derivatives for purposes of FAS 133, but instead are accounted for as equity. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or the Company's recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices. No warrants will be exercisable unless at the time of exercise a prospectus relating to the common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the agreement, the Company has agreed to meet these conditions and use its best efforts to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants. However, the Company cannot assure that it will be able to do so. The warrants may be deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. The Company is not obligated to incur any liquidation damages or penalties in connection with the exercise of the warrants. No fractional shares will be issued upon exercise of the warrants. However, if a warrant holder exercises all warrants then owned of record by him, the Company will pay to the warrant holder, in lieu of the issuance of any fractional share which is otherwise issuable to the warrant holder, an amount in cash based on the market value of the common stock on the last trading day prior to the exercise date. On April 30, 2007, the Company entered into a Warrant Exercise Agreement with Knott Partners, LP; Knott Partners Offshore Master Fund, LP; CommonFund Hedged Equity Company; Shoshone Partners, LP; Finderne, LLC; Good Steward Trading Company SPC; and Leonard & Margaret Frierman (the "Knott Entities"), pursuant to which the Knott Entities agreed to exercise 1,504,000 of the Company's publicly traded warrants and the Company agreed to accept $4.50, rather than the $5.00 exercise price provided in the warrant, as the exercise price for each such warrant. On the same date, the Company received $6,768, net of stock warrant inducement discount, of proceeds from the exercise of the subject warrants and the Company authorized the issuance of the 1,504,000 shares of its common stock issuable upon exercise of such warrants. On May 4, 2007, the Company reduced the exercise price of its outstanding, publicly traded warrants to $4.50 (from the $5.00 exercise price provided by the original terms of the warrants) until July 13, 2007 (the extended "Expiration Time"). Any and all warrants properly exercised in accordance with the terms of the warrants prior to the Expiration Time were accepted by the Company at the reduced exercise price, and one share of registered common stock per warrant was issued to the exercising warrant holder. After the Expiration Time, the $5.00 exercise price included in the original terms of the warrants was reinstituted. Except for the reduced exercise price of the warrants prior to the Expiration Time, the terms of the warrants remain unchanged. The reduced exercise price applied to all of the Company's currently outstanding publicly traded warrants, including those warrants still included as part of the units issued in the Company's initial public offering. Each officer, director, employee and consultant of the Company has agreed not to exercise their warrants prior to the Expiration Time. As of December 31, 2007, 2,460,965 warrants had been exercised, pursuant to the program, generating RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 15. STOCKHOLDERS' EQUITY (continued) proceeds of $11,075 net of stock warrant inducement discount. EarlyBirdCapital, who acted as the representative to the underwriters in connection with the Company's initial public offering, holds an underwriter's option to purchase up to 300,000 units at a purchase price of $9.90 per unit. Each unit consists of one share of common stock and two warrants. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.25. If the option is exercised in full, the Company would receive gross proceeds of $2,970 and issue an additional 300,000 units consisting of 300,000 shares of the Company's common stock and 600,000 warrants. If all of these warrants are exercised, the Company would issue an additional 600,000 shares of our common stock and receive additional gross proceeds of $3,750. The Company estimated that the fair value of this option at the date of grant was approximately $558 ($1.86 per Unit) using a Black-Scholes option-pricing model. The fair value of the option has been estimated as of the date of grant using the following assumptions: (1) expected volatility of 47.79%, (2) risk-free interest rate of 3.34% and (3) expected life of 5 years. The option may be exercised by the holder for cash or on a "cashless" basis, at the holder's option, such that the holder may use the appreciated value of the option (the difference between the exercise prices of the option and the underlying warrants and the market price of the units and underlying securities) to exercise the option without the payment of any cash. EarlyBirdCapital's option was purchased for a de minimus amount and became exercisable in March, 2006, upon the consummation of the acquisition of Lower Lakes Towing Ltd. The underwriter's option expires on October 12, 2009. On March 3, 2006 the Company's Certificate of Incorporation was amended and restated to, among other things, increase the number of shares of common stock that the Company is authorized to issue from 20,000,000 to 50,000,000 shares. The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences that may be determined from time to time by the Board of Directors. On March 3, 2006, pursuant to the terms of the Preferred Stock Purchase Agreement, dated September 2, 2005, by and among the Company and Knott Partners LP, Matterhorn Offshore Fund Ltd., Anno LP and Good Steward Fund Ltd., Bay II Resources Partners, Bay Resources Partners L.P., Bay Resources Partners Offshore Fund Ltd. and Thomas E. Claugus, Rand issued 300,000 shares of its series A convertible preferred stock for an aggregate purchase price of $15,000. Issuance costs of $100 were incurred, generating proceeds net of issuance costs of $14,900. The shares of series A convertible preferred stock: rank senior to the Company's common stock with respect to liquidation and dividends; are entitled to receive a cash dividend at the annual rate of 7.75% (based on the $50 per share issue price), payable quarterly (subject to increases of 0.5% for each six month period in respect of which the dividend is not timely paid, up to a maximum of 12%, subject to reversion to 7.75% upon payment of all accrued and unpaid dividends); are convertible into shares of the Company's common stock at any time at the option of the series A preferred stockholder at a conversion price of $6.20 per share (based on the $50 per share issue price and subject to adjustment) or 8.065 shares of common stock for each Series A Preferred Share (subject to adjustment); are convertible into shares of the Company's common stock (based on a conversion price of $6.20 per share, subject to adjustment) at the option of the Company if, after the third anniversary of the acquisition, the trading price of the Company's common stock for 20 trading days within any 30 trading day period equals or exceeds $8.50 per share (subject to adjustment); may be redeemed by the Company in connection with certain change of control or acquisition transactions; will vote on an as-converted basis with the Company's common stock; and have a separate vote over certain material transactions or changes involving the Company. The accrued dividend payable at December 31, 2007 was $ 1,206 and at March 31, 2007 was $296. (a) On August 1, 2006, pursuant to the terms of a Stock Purchase Agreement, effective as of the same date (the "Stock Purchase Agreement"), the Company issued to a group of accredited investors 2,402,957 shares of common stock for $5.41 per share for an aggregate purchase price of $13,000 with issuance costs of $50. (b) Through December 31, 2007 3,964,965 warrants were converted to shares at a rate of $4.50 per warrant for total gross proceeds of $17,843 net of stock warrant inducement discount. During the previous year 3,820 warrants were converted to shares at a rate of $5.00 per warrant for total gross proceeds of $19. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 15. STOCKHOLDERS' EQUITY (continued) (c) On January 17, 2007, the Company awarded 215,000 shares of its common stock, par value $.0001 per share, to two key executives. The shares of common stock awarded (the "Restricted Shares") were not registered under the Securities Act of 1933 and constitute "restricted securities" within the meaning of the Act. The Restricted Shares were awarded pursuant to Restricted Share Award Agreements (the "Award Agreements"), dated January 17, 2007. The shares were valued at the closing price on January 17, 2007 of $6.72 per share. The Company has recorded expense of $993 through December 31, 2007, including $271 in the nine month period ending December 31, 2007. Pursuant to the Award Agreements: 44% of the Restricted Shares vested on the date of the award; 6% of the Restricted Shares vested on March 31, 2007; 25% of the Restricted Shares will vest on March 31, 2008; and 25% of the Restricted Shares will vest on March 31, 2009. However, in order to facilitate the Company's federal and state tax withholding obligations in respect of the Restricted Stock awards, the Restricted Shares which vested on the date of the award were withheld by the Company which paid the withholding taxes, resulting in 120,400 shares actually issued. If the recipient's employment with the Company is terminated for "cause" as defined in the Award Agreements, or the recipient terminates his employment with the Company without "good reason" as defined in the Award Agreements, any Restricted Shares not vested prior to the date of any such termination shall immediately be canceled, with any rights or interests in and with respect to such Restricted Shares forfeited. The Company may, at its sole discretion, determine, prior to or within ninety days after the date of any such termination, that all or a portion of such unvested Restricted Shares shall not be so canceled and forfeited. If the recipient's employment with the Company is terminated by the Company without cause, by the recipient for good reason, or as a result of death or permanent disability, 100% of the Restricted Shares awarded pursuant to the applicable Award Agreement shall become fully vested as of the date of such termination. In the event of a "change of control" of the Company as defined in the Award Agreements, all restrictions, terms and conditions applicable to the Restricted Shares shall be deemed lapsed and satisfied as of the date of such change of control. The following table summarizes information about time-based restricted stock awards: Shares ------- Outstanding on April 1, 2006 -- Granted 120,400 Released -- Cancelled / forfeited -- -------------------------------------------------------------------- Outstanding on March 31, 2007 120,400 ==================================================================== Granted -- Released -- Cancelled / forfeited -- -------------------------------------------------------------------- Outstanding on December 31, 2007 120,400 ==================================================================== The values of time based restricted stock awards at March 31, 2006 and December 31, 2006 are nil. The total number of the above stock awards that have vested at December 31, 2007 is 12,900. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 15. STOCKHOLDERS' EQUITY (continued) The following continuity schedule summarizes outstanding share purchase warrants: <TABLE> <CAPTION> Cumulative proceeds from exercise of Outstanding warrants Exercise Price warrants -------------------------------------------------------------------- <S> <C> <C> <C> Balance March 31, 2006 9,200,000 Issued -- Exercised (3,820) $ 5.00 19 -------------------------------------------------------------------------------------------------- Balance March 31, 2007 9,196,180 $ 19 ================================================================================================== Issued -- Exercised (1,914,201) $ 4.50 8,614 -------------------------------------------------------------------------------------------------- Balance June 30, 2007 7,281,979 $ 8,633 ================================================================================================== Issued -- Exercised (2,050,764) $ 4.50 9,228 -------------------------------------------------------------------------------------------------- Balance September 30, 2007 5,231,215 $ 17,861 ================================================================================================== Issued -- -- Exercised -- -- -------------------------------------------------------------------------------------------------- Balance December 31, 2007 5,231,215 $ 17,861 ================================================================================================== </TABLE> Exercise price of $4.50 is net of $0.50 stock warrant inducement discount per stock warrant. The total stock warrant inducement discount was $Nil for the three months ended December 31, 2007 ($Nil for three months ended December 31, 2006). 16. OUTSIDE VOYAGE CHARTER FEES Outside voyage charter fees relate to the subcontracting of external vessels chartered to service the Company's customers to supplement the existing shipments made by the Company's operated vessels. 17. INTEREST EXPENSE Interest expense is comprised of the following: <TABLE> <CAPTION> Three months ended Three months ended Nine months ended Nine months ended December 31, 2007 December 31, 2006 December 31, 2007 December 31, 2006 (unaudited) (unaudited) (unaudited) (unaudited) ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Bank indebtedness $ 108 $ 118 $ 266 $ 318 Amortization of deferred finance costs 112 142 300 238 Long-term debt - senior 1,086 743 2,736 1,910 Long-term debt - subordinated 63 57 184 95 Long-term debt - capital lease -- 106 -- 314 --------------------------------------------------------------------------------------------------------------------------- $ 1,369 $ 1,166 $ 3,486 $ 2,875 =========================================================================================================================== </TABLE> RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 18. SEGMENT INFORMATION The Company has identified only one reportable segment under Statement of Financial Accounting Standards No.131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). Information about geographic operations is as follows: <TABLE> <CAPTION> Three months Three months Nine months Nine months ended ended ended ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006 (unaudited) (unaudited) (unaudited) (unaudited) ------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues by country Canada $ 20,907 $ 10,937 $ 50,865 $ 37,562 United States 15,010 15,167 39,159 38,175 --------------------------------------------------------------------------------------------------- $ 35,917 $ 26,104 $ 90,024 $ 75,737 =================================================================================================== Net income (loss) by country Canada $ 545 $ (391) $ 3,513 $ 2,603 United States (2,723) 623 (7,528) 297 --------------------------------------------------------------------------------------------------- $ (2,178) $ 232 $ (4,015) $ 2,900 =================================================================================================== </TABLE> Revenues from external customers are allocated based on the country of the legal entity of the Company in which the revenues were recognized. <TABLE> <CAPTION> December 31, 2007 March 31, 2007 (unaudited) (audited) ------------------- ------------------ <S> <C> <C> Property and equipment by country Canada $ 51,757 $ 30,612 United States 31,865 36,247 -------------------------------------------------------------------------------- $ 83,622 $ 66,859 ================================================================================ Total assets by country Canada $ 97,672 $ 56,652 United States 64,091 66,586 -------------------------------------------------------------------------------- $ 161,763 $ 123,238 ================================================================================ </TABLE> RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 19. FINANCIAL INSTRUMENTS Fair value of financial instruments Financial instruments comprise cash and cash equivalents, accounts receivable, accounts payable, long-term debts and accrued liabilities and bank indebtedness. The estimated fair values of cash, accounts receivable, accounts payable, long-term debts and accrued liabilities approximate book values because of the short-term maturities of these instruments. The estimated fair value of senior debt approximates the carrying value as the debt bears interest at variable interest rates. The Company has recorded a liability of $187 ($135 as of March 31, 2007) for an interest rate swap contract entered into by the VIE. Foreign exchange risk Foreign currency exchange risk to the Company results primarily from changes in exchange rates between the Company's reporting currency, the U.S. Dollar and the Canadian dollar. The Company is exposed to fluctuations in foreign exchange as a significant portion of revenue and operating expenses are denominated in Canadian dollars. Interest rate risk The Company is exposed to fluctuations in interest rates as a result of its banking facilities and senior debt bearing variable interest rates. Credit risk Accounts receivable credit risk is mitigated by the dispersion of the Company's customers among industries and the short shipping season. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 20. EARNINGS PER SHARE The Company has a total of 12,092,142 common shares issued and outstanding, out of an authorized total of 50,000,000 shares. The fully diluted calculation utilizes a total of 18,772,528 and 17,638,793 shares for the three and nine month period ending December 31, 2007 based on the following calculations. Since the calculation is anti-dilutive, the basic and fully diluted weighted average shares outstanding are 12,092,142 and 11,109,942 for the same period. Warrants issued from the initial prospectus and over allotment converts to 4,261,031 based on the average quarterly share price as of December 31, 2007 of $ 6.14 and 4,109,496 based on the nine month average share price of $6.36 as of December 31, 2007 and convertible preferred shares converts to 2,419,355 common shares based on a price of $6.20. In connection with the Company's initial public offering, the Company issued to the representative of the underwriters in the initial public offering, for a de minimus amount, an option to purchase up to a total of 300,000 units, with each unit consisting of one share of common stock and two warrants. The units issuable upon exercise of the option are identical to those issued in the Company's initial public offering except that the warrants included in the units underlying the option have an exercise price of $6.25 per share. The option will be exercisable by the holder at $9.90 per unit commencing upon the consummation of a business combination by the Company and will expire on October 26, 2009. The underwriter units are excluded from the dilution calculation on an annual basis as the exercise price of $9.90 exceeded the estimated market value. <TABLE> <CAPTION> Three months Three months Nine months Nine months ended, ended ended, ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006 (unaudited) (unaudited) (unaudited) (unaudited) ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Numerator: Net income (loss) $ (2,089) $ 334 $ (1,383) $ 3,675 Preferred stock dividends (317) (295) (909) (885) Dividend paid by VIE (250) (250) Minority interest 228 443 259 360 Stock warrant inducement discount -- -- (1,982) -- =================================================================================================================== Income (loss) available to common shareholders $ (2,178) $ 232 $ (4,015) $ 2,900 =================================================================================================================== Denominator: Weighted average common shares for basic EPS 12,092,142 8,003,754 11,109,942 6,937,185 ------------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Total outstanding warrants 5,231,215 9,196,180 5,231,215 9,196,980 Average exercise price 5.00 5.00 5.00 5.00 Average price during period 6.14 6.43 6.36 5.95 ------------------------------------------------------------------------------------------------------------------- Weighted average warrants 4,261,031 2,043,772 4,109,496 1,473,860 ------------------------------------------------------------------------------------------------------------------- Weighted average convertible preferred shares at $6.20 2,419,355 2,419,355 2,419,355 2,419,355 ------------------------------------------------------------------------------------------------------------------- Weighted average common shares for diluted EPS 12,092,142 12,466,881 11,109,942 10,830,400 =================================================================================================================== Basic EPS $ (0.18) $ 0.03 $ (0.36) $ 0.42 Diluted EPS $ (0.18) $ 0.03 $ (0.36) $ 0.35 =================================================================================================================== </TABLE> RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 21. MANAGEMENT BONUS PROGRAM On March 3, 2006, in connection with the closing of the acquisition of Lower Lakes, the Company adopted a management bonus program ("the Program"), the participants of which are employed by Lower Lakes or its affiliates. Participants are eligible to receive awards based on a formula that adjusts an aggregate initial plan account balance of $3,000 by audited earnings before interest, taxes, depreciation and amortization for fiscal years 2007 and 2008. Awards will be settled on July 31, 2008 and may be settled in cash and/or shares of the Company's common stock, or any combination thereof, all at the discretion of the plan administrator, and shall be subject to a cap which limits appreciation of the initial plan account balance to the percentage increase in the market price of the Company's common stock between the closing date and the award settlement date. Subject to a participant's separation from service of the Company, on each of March 31, 2006, 2007 and 2008, each participant then employed by the Company or one of its affiliates shall vest into one-third of such participant's plan account balance. The Company shall grant registration rights to any participant that is issued shares of the Company's common stock in settlement of an award under the Management Bonus Program. If a participant's service with the Company or its affiliates is terminated by the Company for cause (as defined in the Program) or by the participant voluntarily without notice (other than for good reason, as defined in the participant's employment agreement, if applicable), then such participant's rights to his plan account balance, including any vested amounts, shall be forfeited, and such participant shall no longer have any rights in or to its plan account balance or under the Management Bonus Program. If a participant incurs a voluntary separation from service with the Company or its affiliate (other than for good reason) and who does provide appropriate notice to the Company of such separation, the participant shall retain his rights in his plan account balance to the extent such has vested as of the effective date of separation, but shall, as of such effective date, cease to further vest in such participant's plan account balance. Any unvested portion of a participant's plan account balance resulting from such a separation from service shall be added to the plan account balances of each then remaining participant in proportion to the respective plan account balance of each such remaining participant, and with respect to each such remaining participant, in proportion to each such participant's vested and unvested plan account balance. If a participant's service with the Company or its affiliate is terminated by the Company without cause (as defined in the Program) or by the participant for good reason or for death or disability, then the participant is entitled to be considered fully vested with respect to the participant's plan account balance; and have the option to elect to freeze the amount of such participant's award as of the date of such separation from service, but with payment of such amount not being made until July 31, 2008. The company has recorded additional liabilities of $560 to date for this program. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 22. VARIABLE INTEREST ENTITIES In the normal course of business, the Company interacts with various entities that may be variable interest entities (VIEs) under the subjective guidelines of FIN 46R. WMS has been determined to be a type of VIE, which must be consolidated in accordance with FIN-46R. The Company does not have any ownership interest in WMS and as a result 100% of the equity is shown as minority interest. On August 1, 2006, Lower Lakes Transportation Company ("LLTC"), an indirect wholly-owned subsidiary of the Company, entered into a Time Charter Agreement (the "Time Charter Agreement") with WMS, an unaffiliated third party. Under the Time Charter Agreement, WMS will make three United States flag vessels owned by WMS, the DAVID Z. NORTON, the EARL W. OGLEBAY and the WOLVERINE (the "Vessels"), available exclusively to LLTC for LLTC's use in providing transportation and storage services for its customers. The basic charter period under the Time Charter Agreement expires on December 31, 2008, and LLTC has the option to extend the charter period through December 31, 2013. The Time Charter Agreement also provides LLTC the option of purchasing the Vessels at any time during the charter period at a price based, in part, generally on the amount of WMS indebtedness outstanding at the time of purchase relating to WMS's acquisition and maintenance of the Vessels. Rand and its subsidiary, Rand LL Holdings Corp. ("Rand LL Holdings"), each executed separate guaranties in favor of WMS with respect to separate financial obligations of LLTC under the Time Charter Agreement. On June 28, 2007, Rand LL Holdings Corp. and Wisconsin & Michigan Steamship Company entered into a First Amendment Agreement to the Time Charter Guaranty, dated June 27, 2007, pursuant to which the parties amended certain definitions relating to its financial covenants to remain in compliance with such financial covenants. On August 27, 2007, Lower Lakes entered into and consummated the transactions under a Memorandum of Agreement with Voyageur Marine Transport Limited ("Voyageur") and Voyageur Pioneer Marine Inc. (collectively, the "Sellers") pursuant to which Lower Lakes purchased VOYAGEUR INDEPENDENT and the VOYAGEUR PIONEER (collectively, the "Vessels") from the Sellers. Certain customer's contracts were also assigned to the Company under a Contract of Assignment. In addition, on August 27, 2007, Lower Lakes entered into a Crew Manning Agreement with Voyageur pursuant to which Voyageur agreed to staff the Vessels with qualified crew members in accordance with sound crew management practices. Under the Crew Manning Agreement, Voyageur is responsible for selecting and training the Vessels' crews, payroll, tax and pension administration, union negotiations and disputes and ensuring compliance with applicable requirements of Canadian maritime law. Under the Crew Manning Agreement, Lower Lakes is obligated to pay Voyageur an annual fee of $175 and pay or reimburse Voyageur for its reasonable crew payroll expenses. Also on August 27, 2007, Lower Lakes entered into a Contract of Affreightment ("COA") with Voyageur and Voyageur Maritime Trading Inc ("VMT") pursuant to which Voyageur and VMT made a Canadian flagged vessel owned by VMT, the MARITIME TRADER (the "Trader"), available exclusively to Lower Lakes for its use in providing transportation and storage services for its customers. In connection with the COA, on August 27, 2007, Lower Lakes entered into an Option Agreement (the "Option Agreement") with VMT pursuant to which Lower Lakes obtained the option to acquire the Trader for CDN $5,000 subject to certain adjustments. The option is exercisable between January 1, 2012 and December 31, 2017, subject to certain early exercise provisions. If, at any time prior to expiration of the option, VMT receives a bona fide offer from a third party to purchase the Trader which VMT wishes to accept, Lower Lakes shall have the right to acquire the Trader at the option price. On August 27, 2007, Lower Lakes entered into a Guarantee (the "Guarantee") with GE Canada, pursuant to which Lower Lakes agreed to guarantee up to CDN $1,250 (the "Guaranteed Obligations") of Voyageur's indebtedness to GE Canada. Through a Letter of Credit Agreement, dated August 27, 2007, an affiliate of Voyageur has agreed to contribute half of any amounts drawn under the Guarantee. Under the Guarantee, Lower Lakes has several options available to it in the event that GE Canada intends to draw under the Guarantee, including (i) the right to exercise its option for the Trader under an Option Agreement and (ii) the right to make a subordinated secured loan to Voyageur in an amount at least equal to the amount intended to be drawn by GE Canada on terms as are reasonably satisfactory to GE Canada and Voyageur. RAND LOGISTICS, INC. Notes to the Consolidated Financial Statements (U.S. Dollars 000's except for Earnings Per Share figures) ================================================================================ 22. VARIABLE INTEREST ENTITIES (continued) In addition, Lower Lakes has guaranteed Voyageur's account with The St. Lawrence Seaway Management Corporation, up to CDN $120, which is offset by a set-off agreement under the Contract of Affreightment. Though the Voyageur group of companies (Voyageur and its subsidiaries) is a variable interest entity for Rand, the Company is not deemed the "Primary Beneficiary" of Voyageur and therefore is not required to consolidate Voyageur's financial statements. Voyageur became a VIE to the Company on August 27, 2007. Voyageur is a privately held Canadian corporation and operates a Canadian flagged vessel in The Great Lakes region for bulk shipping, which operates under a Contract of Affreightment with the Company. The maximum exposure of the Company in the event the Voyageur