================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2008
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-33345
_______________
RAND LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware No. 20-1195343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
461 Fifth Avenue, 25th Floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 644-3450
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.0001 par value per share The NASDAQ Capital Market
Warrants to purchase shares of Common Stock The NASDAQ Capital Market
Units consisting of one share of Common Stock, par value $.0001 The NASDAQ Capital Market
per share, and two Warrants
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 28, 2007 was $30,520,125.
12,105,051 shares of Common Stock were outstanding at June 26, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed with
the Securities and Exchange Commission within 120 days after the end of the
registrant's fiscal year covered by this Annual Report on Form 10-K, with
respect to the Annual Meeting of Stockholders to be held on September 23, 2008,
are incorporated by reference into Part III of this Annual Report on Form 10-K.
================================================================================
RAND LOGISTICS, INC.
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................................................................1
Item 1A. Risk Factors..........................................................................................................3
Item 1B. Unresolved Staff Comments............................................................................................12
Item 2. Properties...........................................................................................................12
Item 3. Legal Proceedings....................................................................................................12
Item 4. Submission of Matters to a Vote of Security Holders..................................................................12
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities....................................................................................................12
Item 6. Selected Financial Data..............................................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction...................13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk............................................................25
Item 8. Financial Statements and Supplementary Data..........................................................................25
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure..................................25
Item 9A(T). Controls and Procedures..............................................................................................25
Item 9B. Other Information....................................................................................................26
PART III
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant.............................................26
Item 11. Executive Compensation...............................................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................27
Item 13. Certain Relationships and Related Transactions, and Director Independence............................................27
Item 14. Principal Accountant Fees and Services...............................................................................27
PART IV
Item 15. Exhibits and Financial Statement Schedules...........................................................................27
i
PART I
Item 1. Business
Overview
Rand Logistics, Inc. (formerly Rand Acquisition Corporation) was
incorporated in the State of Delaware on June 2, 2004 as a blank check company
to effect a merger, capital stock exchange, asset acquisition or other similar
business combination with an operating business. On November 2, 2004, we closed
our initial public offering of 4,000,000 units with each unit consisting of one
share of our common stock and two warrants, each to purchase one share of our
common stock at an exercise price of $5.00 per share. The units were sold at an
offering price of $6.00 per unit, generating gross proceeds of $24.0 million. On
November 3, 2004, we sold an additional 600,000 units pursuant to the
underwriters' over-allotment option raising additional gross proceeds of $3.6
million. After deducting the underwriting discounts and commissions and the
offering expenses, the total net proceeds to us from the offering were
approximately $24.6 million.
On March 3, 2006, we acquired all of the outstanding shares of capital
stock of Lower Lakes Towing Ltd., a Canadian corporation which, with its
subsidiary Lower Lakes Transportation Company, provides bulk freight shipping
services throughout the Great Lakes region and operated eight vessels (the "Core
Vessels"). As part of the acquisition of Lower Lakes, we also acquired Lower
Lakes' affiliate, Grand River Navigation Company, Inc. Prior to the acquisition,
we did not conduct, or have any investment in, any operating business. In this
discussion of Rand's business, unless the context otherwise requires, references
to Rand include Rand and its direct and indirect subsidiaries, and references to
Lower Lakes' business or the business of Lower Lakes mean the combined
businesses of Lower Lakes Towing, Lower Lakes Transportation and Grand River.
Rand's shipping business is operated in Canada by Lower Lakes Towing and
in the United States by Lower Lakes Transportation. Lower Lakes Towing was
organized in March 1994 under the laws of Canada to provide marine
transportation services to dry bulk goods suppliers and purchasers operating in
ports in the Great Lakes that were restricted in their ability to receive larger
vessels. Lower Lakes has grown from its origin as a small tug and barge operator
to a full service shipping company with a fleet of thirteen cargo-carrying
vessels, one of which is operated under a contract of affreightment. From its
exclusively Canadian beginnings, Lower Lakes has also grown to offer domestic
services to both Canadian and U.S. customers as well as cross-border routes.
Lower Lakes services the construction, electric utility and integrated steel
industries through the transportation of limestone, coal, iron ore, salt, grain
and other dry bulk commodities.
We believe that Lower Lakes is the only company providing significant
domestic port-to-port services to both Canada and the United States in the Great
Lakes region. Lower Lakes maintains this operating flexibility by operating both
U.S. and Canadian flagged vessels in compliance with the Shipping Act, 1916, and
the Merchant Marine Act, 1920, commonly referred to as the Jones Act, in the
U.S. and the Coasting Trade Act (Canada) in Canada.
Lower Lakes' fleet consists of five self-unloading bulk carriers and three
conventional bulk carriers in Canada and five self-unloading bulk carriers in
the U.S., including an integrated tug and barge unit. Lower Lakes Towing owns
seven of the Canadian vessels and charters the eighth pursuant to the terms of a
Contract of Affreightment. Lower Lakes Transportation time charters five of the
U.S. vessels, including the tug and barge unit, from Grand River. With the
exception of the barge (which Grand River bareboat charters from an affiliate of
Wisconsin & Michigan Steamship Company ("WMS")), Grand River owns the vessels
that it time charters to Lower Lakes Transportation.
Lower Lakes is a leader in the provision of River Class bulk freight
shipping services throughout the Great Lakes, operating more than one-third of
all River Class vessels servicing the Great Lakes and the majority of
boom-forward equipped vessels in this category. Boom forward self-unloading
vessels - those with their booms located in front of the cargo holds - offer
greater accessibility for delivery of cargo to locations where only forward
access is possible. Six of the vessels used in Lower Lakes' operations are boom
forward self-unloaders and four vessels are boom aft self-unloaders. River Class
vessels - which represent the smaller end of Great Lakes vessels with maximum
dimensions of approximately 650 feet in length and 72 feet in beam and carrying
capacities of 15,000 to 20,000 tons - are ideal for customers seeking to move
significant quantities of dry bulk product to ports which restrict non-River
Class vessels due to size and capacity constraints.
Lower Lakes services approximately 50 customers in a diverse array of end
markets by shipping dry bulk commodities such as construction aggregates, coal,
grain, iron ore and salt. Lower Lakes' top ten customers accounted for
approximately 62% of its revenue during the twelve months ended March 31, 2008.
Lower Lakes is the sole-source shipping provider to several of its customers.
Many of Lower Lakes' customers are under long-term contracts with Lower Lakes,
which typically average three to five years in duration and provide for minimum
and maximum tonnage, annual price escalation features, and fuel surcharges.
Lower Lakes faces competition from other marine and land-based
transporters of dry bulk commodities in and around the Great Lakes area. In the
River Class market segment, Lower Lakes generally faces two primary competitors:
Seaway Marine Transport and American Steamship Company. Seaway Marine Transport
is a Canadian traffic and marketing partnership, which owns 22 self-unloading
vessels, four of which are River Class boom-forward vessels. American Steamship
Company operates in the U.S. and maintains a fleet of 18 vessels, four of which
are River Class vessels. We believe that industry participants compete on the
basis of customer relationships, price and service, and that the ability to meet
a customer's schedule and offer shipping flexibility is a key competitive
factor. Moreover, we believe that customers are generally willing to continue to
use the same carrier assuming such carrier provides satisfactory service with
competitive pricing.
We believe that demand now exceeds available shipping capacity on the
Great Lakes, which should cause prices and margins to increase steadily over
time. While freight carried is steadily increasing, the available capacity is
declining over the long term as the aging Great Lakes fleet is retired. We do
not believe that such retirements will be replaced with new or refurbished
capacity until freight rates are substantially increased to justify such capital
investments.
As of March 31, 2008, Lower Lakes had approximately 361 full-time
employees, 26 of whom were shoreside and management and 335 that were
operational. Approximately 42% of Lower Lakes' employees (all U.S. based Grand
River crews) are unionized with the International Organization of Masters, Mates
and Pilots, AFL-CIO. Lower Lakes has never experienced a work stoppage on its
crewed vessels as a result of labor issues, and we believe that our employee
relations are good.
Our executive officers are Laurence S. Levy, who serves as our chairman of
the board and chief executive officer; Edward Levy, who serves as our president;
and Joseph W. McHugh, Jr., who serves as our chief financial officer. Carol
Zelinski is the secretary of Rand.
Acquisitions in the year ending March 31, 2008
On August 27, 2007, Lower Lakes entered into and consummated the
transactions under a Memorandum of Agreement (the "Memorandum of Agreement"),
dated as of the same date, with Voyageur Marine Transport Limited ("Voyageur")
and Voyageur Pioneer Marine Inc. pursuant to which Lower Lakes purchased the
VOYAGEUR INDEPENDENT and the VOYAGEUR PIONEER (collectively, the "Vessels") for
an aggregate purchase price of CDN $25.0 million.
Also on August 27, 2007, Lower Lakes entered into a Crew Manning Agreement
(the "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 CDN
$175,000 and pay or reimburse Voyageur for its reasonable crew payroll expenses.
Lower Lakes terminated the Crew Manning Agreement in March 2008 and now crews
the Vessels with its own employees.
On August 27, 2007, Lower Lakes entered into a Contract of Affreightment
(the "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. The COA expires
on December 31, 2011, and renews automatically annually thereafter unless Lower
Lakes provides Voyageur or VMT with notice of cancellation six months prior to
the end of the then-current term. Under the COA, Lower Lakes is obligated to pay
Voyageur and VMT substantially all of the freight rate it charges its customers,
subject to certain adjustments. Lower Lakes is also responsible for all taxes,
tolls, fees or tariffs levied against the Trader or its cargo, provided that it
can be recouped from its customers, otherwise, these costs will be for the
account of Voyageur and VMT. Pursuant to the COA, Voyageur and VMT are
responsible for ensuring the seaworthiness of the Trader and the compliance of
its crew with all safety, health and other applicable laws and regulations of
Canada. Voyageur, VMT and Voyageur's president also agreed not to compete with,
nor induce any employee to leave his employment with, Lower Lakes.
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 $5.0 million, 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.
2
In connection with the COA and Option Agreement, on August 27, 2007, Lower
Lakes entered into a Guarantee (the "Guarantee") with GE Canada. A description
of the Guarantee follows under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Off-Balance Sheet
Arrangements".
On February 13, 2008, Grand River and Rand LL Holdings entered into and
consummated a Vessel Purchase Agreement with Wisconsin & Michigan Steamship
Company ("WMS") providing for the purchase by Grand River of three United States
flagged vessels, the DAVID Z. NORTON, the EARL W. OGLEBAY and the WOLVERINE, for
an aggregate purchase price of $20.0 million plus transaction expenses. Lower
Lakes Transportation had time chartered these three vessels since August 1, 2006
pursuant to the terms of a Time Charter Agreement between Lower Lakes
Transportation and WMS, which also provided for an option to purchase the
vessels.
Prior to commencement of the 2008 sailing season, we transferred one of
the vessels acquired from United States to Canadian registry for deployment as
part of the Registrant's Canadian fleet.
In connection with the sale of vessels under the Vessel Purchase
Agreement:
- WMS repaid all amounts owed to Rand Finance under that certain Note
Purchase Agreement, dated as of August 1, 2006;
- WMS repaid all amounts owed to Oglebay Norton Marine Services Company,
under that certain Note Purchase Agreement, dated as of August 1, 2006;
- WMS repaid all of its obligations due to National City Commercial
Capital Company, LLC under WMS' financing arrangements with National City, the
principal and interest amounts of which were included in the hire payable by
Lower Lakes Transportation under the Time Charter Agreement and in parts
guaranteed by Rand LL Holdings; and
- Grand River and Rand LL Holdings agreed to bear certain wind-down costs
of WMS.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You
should carefully consider the following material risks before you decide to buy
our common stock. If any of the following risks actually occur, our business,
results of operations and financial condition would likely suffer. In these
circumstances, the market price of our common stock could decline and you may
lose all or part of your investment.
Our business is dependent upon key personnel whose loss may adversely impact our
business.
We depend on the expertise, experience and continued services of Lower
Lakes' senior management employees, especially Scott Bravener, its President.
Bravener has acquired specialized knowledge and skills with respect to Lower
Lakes and its operations and most decisions concerning the business of Lower
Lakes will be made or significantly influenced by him. Although Lower Lakes
maintains life insurance with respect to Bravener, the proceeds of such
insurance may not be adequate to compensate Lower Lakes in the event of
Bravener's death. The loss of Bravener or other senior management employees, or
an inability to attract or retain other key individuals, could materially
adversely affect our business. We seek to compensate and incentivize executives,
as well as other employees, through competitive salaries and bonus plans, but
there can be no assurance that these programs will allow us to retain key
employees or hire new key employees. As a result, if Bravener were to leave
Lower Lakes, we could face substantial difficulty in hiring a qualified
successor and could experience a loss in productivity while any such successor
obtains the necessary training and experience.
Our officers and directors may allocate their time to other businesses thereby
causing conflicts of interest in their determination as to how much time to
devote to our affairs.
Our officers and directors are not required to commit their full time to
our affairs, which may result in a conflict of interest in allocating their time
between our operations and other businesses. Laurence S. Levy and Edward Levy
are each engaged in several other business endeavors and are not obligated to
contribute any specific number of hours per week to our affairs.
3
Some of our officers and directors may have conflicts of interest in business
opportunities.
Some of our officers and directors may become aware of business
opportunities which may be appropriate for presentation to us as well as the
other entities with which they are or may be affiliated. Due to our officers'
and directors' existing affiliations with other entities, they may have
fiduciary obligations to present potential business opportunities to those
entities in addition to presenting them to us which could cause additional
conflicts of interest. Accordingly, they may have conflicts of interest in
determining to which entity a particular business opportunity should be
presented.
Capital expenditures and other costs necessary to operate and maintain Lower
Lakes' vessels tend to increase with the age of the vessel and may also increase
due to changes in governmental regulations, safety or other equipment standards.
Capital expenditures and other costs necessary to operate and maintain
Lower Lakes' vessels tend to increase with the age of each vessel. Accordingly,
it is likely that the operating costs of Lower Lakes' older vessels will
increase. In addition, changes in governmental regulations, safety or other
equipment standards, as well as compliance with standards imposed by maritime
self-regulatory organizations and customer requirements or competition, may
require Lower Lakes to make additional expenditures. For example, if the U.S.
Coast Guard, Transport Canada or the American Bureau of Shipping (an independent
classification society that inspects the hull and machinery of commercial ships
to assess compliance with minimum criteria as set by U.S., Canadian and
international regulations) enact new standards, Lower Lakes may be required to
incur significant costs for alterations to its fleet or the addition of new
equipment. In order to satisfy any such requirement, Lower Lakes may be required
to take its vessels out of service for extended periods of time, with
corresponding losses of revenues. In the future, market conditions may not
justify these expenditures or enable Lower Lakes to operate its older vessels
profitably during the remainder of their anticipated economic lives.
If Lower Lakes is unable to fund its capital expenditures and winter work
expenses, Lower Lakes may not be able to continue to operate some of its
vessels, which would have a material adverse effect on our business.
In order to fund Lower Lakes' capital expenditures and winter work
expenses, we may be required to incur borrowings or raise capital through the
sale of debt or equity securities. Our ability to access the capital markets for
future offerings may be limited by our financial condition at the time of any
such offering as well as by adverse market conditions resulting from, among
other things, general economic conditions and contingencies and uncertainties
that are beyond its control. Our failure to obtain the funds for necessary
future capital expenditures and winter work expenses would limit its ability to
continue to operate some of its vessels and could have a material adverse effect
on our business, results of operations and financial condition.
The climate in the Great Lakes region limits Lower Lakes' vessel operations to
approximately nine months per year.
Lower Lakes' operating business is seasonal, meaning that it experiences
higher levels of activity in some periods of the year than in others.
Ordinarily, Lower Lakes is able to operate its vessels on the Great Lakes for
approximately nine months per year beginning in late March or April and
continuing through December or mid-January. However, weather conditions and
customer demand cause increases and decreases in the number of days Lower Lakes
actually operates.
The shipping industry has inherent operational risks that may not be adequately
covered by Lower Lakes' insurance.
Lower Lakes maintains insurance on its fleet for risks commonly insured
against by vessel owners and operators, including hull and machinery insurance,
war risks insurance and protection and indemnity insurance (which includes
environmental damage and pollution insurance). We can give no assurance that
Lower Lakes will be adequately insured against all risks or that its insurers
will pay a particular claim. Even if its insurance coverage is adequate to cover
its losses, Lower Lakes may not be able to timely obtain a replacement vessel in
the event of a loss. Furthermore, in the future, Lower Lakes may not be able to
obtain adequate insurance coverage at reasonable rates for Lower Lakes' fleet.
Lower Lakes may also be subject to calls, or premiums, in amounts based not only
on its own claim record but also the claims record of all other members of the
protection and indemnity associations through which Lower Lakes may receive
indemnity insurance coverage. Lower Lakes' insurance policies will also contain
deductibles, limitations and exclusions which, although we believe are standard
in the shipping industry, may nevertheless increase its costs.
4
Lower Lakes is subject to certain credit risks with respect to its
counterparties on contracts and failure of such counterparties to meet their
obligations could cause us to suffer losses on such contracts decreasing
revenues and earnings.
Lower Lakes enters into Contracts of Affreightment (COAs) pursuant to
which Lower Lakes agrees to carry cargoes, typically for industrial customers,
who export or import dry bulk cargoes. Lower Lakes also enters into spot market
voyage contracts, where Lower Lakes is paid a rate per ton to carry a specified
cargo from point A to point B. All of these contracts subject Lower Lakes to
counterparty credit risk. As a result, we are subject to credit risks at various
levels, including with charterers, cargo interests, or terminal customers. If
the counterparties fail to meet their obligations, Lower Lakes could suffer
losses on such contracts which would decrease our revenues and earnings.
Lower Lakes may not be able to generate sufficient cash flows to meet its debt
service obligations.
Lower Lakes' ability to make payments on its indebtedness will depend on
its ability to generate cash from its future operations. Lower Lakes business
may not generate sufficient cash flow from operations or from other sources
sufficient to enable it to repay its indebtedness and to fund its other
liquidity needs, including capital expenditures and winter work expenses. The
indebtedness of Lower Lakes under its new senior credit facility bears interest
at floating rates, and therefore, if interest rates increase, Lower Lakes' debt
service requirements will increase. Lower Lakes may need to refinance or
restructure all or a portion of its indebtedness on or before maturity. Lower
Lakes may not be able to refinance any of its indebtedness, including the new
senior credit facility, on commercially reasonable terms, or at all. If Lower
Lakes cannot service or refinance its indebtedness, it may have to take actions
such as selling assets, seeking additional equity or reducing or delaying
capital expenditures, any of which could have a material adverse effect on our
operations. Additionally, Lower Lakes may not be able to effect such actions, if
necessary, on commercially reasonable terms, or at all.
A default under Lower Lakes' indebtedness may have a material adverse effect on
our financial condition.
In the event of a default under Lower Lakes' indebtedness, including the
indebtedness under its existing senior credit facility, the holders of the
indebtedness generally would be able to declare all of such indebtedness,
together with accrued interest, to be due and payable. In addition, borrowings
under the existing senior credit facility are secured by a first priority lien
on all of the assets of Lower Lakes, Lower Lakes Transportation and Grand River
and, in the event of a default under that facility, the lenders generally would
be entitled to seize the collateral. In addition, default under one debt
instrument could in turn permit lenders under other debt instruments to declare
borrowings outstanding under those other instruments to be due and payable
pursuant to cross default clauses. Moreover, upon the occurrence of an event of
default under the existing senior credit facility, the commitment of the lenders
to make any further loans to us would be terminated. Accordingly, the occurrence
of a default under any debt instrument, unless cured or waived, would likely
have a material adverse effect on our results of operations.
Servicing debt could limit funds available for other purposes, such as the
payment of dividends.
Lower Lakes will use cash to pay the principal and interest on its debt,
and to fund required reserves for future capital expenditures and winter work
expenses. These payments limit funds that would otherwise be available for other
purposes, including distributions of cash to our stockholders.
Lower Lakes' loan agreements contain restrictive covenants that will limit its
liquidity and corporate activities.
Lower Lakes' loan agreements impose operating and financial restrictions
that limit Lower Lakes' ability to:
o incur additional indebtedness;
o create additional liens on its assets;
o make investments;
o engage in mergers or acquisitions;
o pay dividends; and
o sell any of Lower Lakes' vessels or any other assets outside the
ordinary course of business.
5
Therefore, Lower Lakes will need to seek permission from its lender in
order for Lower Lakes to engage in some corporate actions. Lower Lakes' lender's
interests may be different from those of Lower Lakes, and no assurance can be
given that Lower Lakes will be able to obtain its lender's permission when
needed. This may prevent Lower Lakes from taking actions that are in its best
interest.
Because Lower Lakes generates approximately 60% of its revenues, and incurs
approximately 60% of its expenses, in Canadian dollars, exchange rate
fluctuations could cause us to suffer exchange rate losses thereby increasing
expenses and reducing income.
Lower Lakes generates a portion of its revenues in Canadian dollars.
Similarly, Lower Lakes incurs a portion of its expenses in Canadian dollars.
This could lead to fluctuations in our net income due to changes in the value of
the U.S. Dollar relative to the Canadian Dollar.
Lower Lakes depends upon unionized labor for its U.S. operations. Any work
stoppages or labor disturbances could disrupt its business.
Substantially all of Grand River's employees are unionized with the
International Organization of Masters, Mates and Pilots, AFL-CIO. Any work
stoppages or other labor disturbances could have a material adverse effect on
our business, results of operations and financial condition.
A labor union has attempted to unionize Lower Lakes' Canadian employees.
The Seafarers International Union of Canada, or SIU, has attempted without
success to organize Lower Lakes' unlicensed employees periodically over the past
several years. Although we believe that support for this union is low, if SIU is
successful in organizing a union among Lower Lakes' Canadian employees, it could
result in increased labor costs for Lower Lakes, which could have a material
adverse effect on our results of operations.
Lower Lakes employees are covered by U.S. Federal laws that may subject it to
job-related claims in addition to those provided by state laws.
All of Lower Lakes' U.S. seagoing employees are covered by provisions of
the Shipping Act, 1916, and the Merchant Marine Act, 1920, commonly referred to
as the Jones Act, and general maritime law. These laws typically operate to make
liability limits established by state workers' compensation laws inapplicable to
these employees and to permit these employees and their representatives to
pursue actions against employers for job-related injuries in Federal courts.
Because Lower Lakes is not generally protected by the limits imposed by state
workers' compensation statutes, Lower Lakes has greater exposure for claims made
by these employees as compared to employers whose employees are not covered by
these provisions.
Restriction on foreign ownership and possible required divestiture of stock.
Under U.S. maritime laws, in order for us to maintain our eligibility to
own and operate vessels in the U.S. domestic trade, 75% of our outstanding
capital stock and voting power is required to be held by U.S. citizens. Although
our amended and restated certificate of incorporation contains provisions
limiting non-citizenship ownership of our capital stock, we could lose its
ability to conduct operations in the U.S. domestic trade if such provisions
prove unsuccessful in maintaining the required level of citizen ownership. Such
loss would have a material adverse effect on our results of operations. If our
board of directors determines that persons who are not citizens of the U.S. own
more than 23% of our outstanding capital stock or more than 23% of our voting
power, we may redeem such stock or, if redemption is not permitted by applicable
law or if our board of directors, in its discretion, elects not to make such
redemption, we may require the non-citizens who most recently acquired shares to
divest such excess shares to persons who are U.S. citizens in such manner as our
board of directors directs. The required redemption would be at a price equal to
the average closing price during the preceding 30 trading days, which price
could be materially different from the current price of the common stock or the
price at which the non-citizen acquired the common stock. If a non-citizen
purchases the common stock, there can be no assurance that he will not be
required to divest the shares and such divestiture could result in a material
loss. Such restrictions and redemption rights may make Rand's equity securities
less attractive to potential investors, which may result in Rand's publicly
traded common stock having a lower market price than it might have in the
absence of such restrictions and redemption rights.
6
Our outstanding warrants may have an adverse effect on the market price of
common stock and make it more difficult to obtain future public financing.
We currently have outstanding warrants to purchase approximately 5,231,215
shares of common stock and an option to purchase 300,000 shares of common stock
and warrants to purchase an additional 600,000 shares of common stock. The sale,
or even the possibility of sale, of the shares underlying the warrants and
options could have an adverse effect on the market price for our securities or
on our ability to obtain future public financing. If and to the extent these
warrants and options are exercised, you may experience dilution to your
holdings.
The conversion of our series A convertible preferred stock will result in
significant and immediate dilution of our existing stockholders and the book
value of their common stock.
The shares of series A convertible preferred stock issued in connection
with the acquisition of Lower Lakes are convertible into 2,419,355 shares of our
common stock, which, on an "as converted" basis, represents approximately 20% of
our aggregate outstanding common stock. The registration statement of which this
prospectus forms a part registers the resale of these 2,419,355 shares of common
stock. The conversion price of our series A convertible preferred stock is
subject to weighted average anti-dilution provisions whereby, if Rand issues
shares in the future for consideration below the existing conversion price of
$6.20, then the conversion price of the series A convertible preferred stock
would automatically be decreased, allowing the holders of the series A
convertible preferred stock to receive additional shares of common stock upon
conversion. Upon any conversion of the series A convertible preferred stock, the
equity interests of our existing common stockholders, as a percentage of the
total number of the outstanding shares of our common stock, and the net book
value of the shares of our common stock will be significantly diluted.
If our founding officers and directors exercise their registration rights, it
may have an adverse effect on the market price of our common stock.
Our founding officers and directors and their affiliates and associates to
whom shares of our common stock were issued prior to our initial public offering
are entitled to demand that we register the resale of their shares of common
stock at any time after October 27, 2007, although they have not yet done so. If
our founders exercise their registration rights with respect to all of their
shares of common stock, then there will be an additional 1,000,000 shares of
common stock eligible for trading in the public market. The presence of this
additional number of shares of common stock eligible for trading in the public
market may have an adverse effect on the market price of our common stock.
Future acquisitions of vessels or businesses by Rand or Lower Lakes would
subject Rand and Lower Lakes to additional business, operating and industry
risks, the impact of which cannot presently be evaluated, and could adversely
impact Rand's or Lower Lakes' capital structure.
Rand intends to pursue other acquisition opportunities in an effort to
diversify its investments and/or grow Lower Lakes' business. While neither Rand
nor Lower Lakes is presently committed to any additional acquisition, Rand is
currently actively pursuing one or more potential acquisition opportunities.
Acquisitions may be of individual or groups of vessels or of businesses
operating in the shipping or other industries. Following the acquisition of
Lower Lakes, Rand will not be limited to any particular industry or type of
business that it may acquire. Accordingly, there is no current basis for you to
evaluate the possible merits or risks of the particular business or assets that
Rand may acquire, or of the industry in which such business operates. To the
extent Rand acquires a financially unstable business, we may be affected by
numerous risks inherent in the acquired business's operations. If Rand acquires
a business in an industry characterized by a high level of risk, we may be
affected by the currently unascertainable risks of that industry. Although
Rand's management will endeavor to evaluate the risks inherent in a particular
industry or target business, we cannot assure you that we will properly
ascertain or assess all of the significant risk factors.
In addition, the financing of any acquisition completed by Rand could
adversely impact Rand's capital structure as any such financing would likely
include the issuance of additional equity securities and/or the borrowing of
additional funds. The issuance of additional equity securities may significantly
reduce the equity interest of existing stockholders and/or adversely affect
prevailing market prices for Rand's common stock. Increasing Rand's indebtedness
could increase the risk of a default that would entitle the holder to declare
all of such indebtedness due and payable and/or to seize any collateral securing
the indebtedness. In addition, default under one debt instrument could in turn
permit lenders under other debt instruments to declare borrowings outstanding
under those other instruments to be due and payable pursuant to cross default
clauses. Accordingly, the financing of future acquisitions could adversely
impact our capital structure and your equity interest in Rand.
7
Except as required by law or the rules of any securities exchange on which
our securities might be listed at the time we seek to consummate an acquisition,
you will not be asked to vote on any proposed acquisition and you will not be
entitled to exercise conversion rights in connection with any such acquisition.
Risks Associated with the Shipping Industry
The cyclical nature of the Great Lakes dry bulk shipping industry may lead to
decreases in shipping rates, which may reduce Lower Lakes' revenue and earnings.
The shipping business, including the dry cargo market, has been cyclical
in varying degrees, experiencing fluctuations in charter rates, profitability
and, consequently, vessel values. Rand anticipates that the future demand for
Lower Lakes' dry bulk carriers and dry bulk charter rates will be dependent upon
continued demand for imported commodities, economic growth in the United States
and Canada, seasonal and regional changes in demand, and changes to the capacity
of the Great Lakes fleet which cannot be predicted. Adverse economic, political,
social or other developments could decrease demand and growth in the shipping
industry and thereby reduce revenue and earnings. Fluctuations, and the demand
for vessels, in general, have been influenced by, among other factors:
o global and regional economic conditions;
o developments in international and Great Lakes trade;
o changes in seaborne and other transportation patterns, such as port
congestion and canal closures;
o weather and crop yields;
o political developments; and
o embargoes and strikes.
The market values of Lower Lakes' vessels may decrease, which could cause Lower
Lakes to breach covenants in its credit facility and which could reduce earnings
and revenues as a result of potential foreclosures.
Vessel values are influenced by several factors, including:
o changes in environmental and other regulations that may limit the
useful life of vessels;
o changes in Great Lakes dry bulk commodity supply and demand;
o types and sizes of vessels;
o development of and increase in use of other modes of transportation;
o governmental or other regulations; and
o prevailing level of charter rates.
If the market values of Lower Lakes' owned vessels decrease, Lower Lakes
may breach some of the covenants contained in its new credit facility. If Lower
Lakes does breach such covenants and Lower Lakes is unable to remedy the
relevant breach, its lenders could accelerate its debt and foreclose on the
collateral, including Lower Lakes' vessels. Any loss of vessels would
significantly decrease the ability of Rand to generate revenue and income. In
addition, if the book value of a vessel is impaired due to unfavorable market
conditions, or a vessel is sold at a price below its book value, Rand would
incur a loss that would reduce earnings.
8
A failure to pass inspection by classification societies and regulators could
result in one or more vessels being unemployable unless and until they pass
inspection, resulting in a loss of revenues from such vessels for that period
and a corresponding decrease in earnings, which may be material.
The hull and machinery of every commercial vessel must be classed by a
classification society authorized by its country of registry, as well as being
subject to inspection by shipping regulatory bodies such as Transport Canada.
The classification society certifies that a vessel is safe and seaworthy in
accordance with the applicable rules and regulations of the country of registry
of the vessel and the United Nations Safety of Life at Sea Convention. Lower
Lakes' owned fleet is currently enrolled with the American Bureau of Shipping.
A vessel must undergo Annual Surveys, Intermediate Surveys, and Special
Surveys by its classification society, as well as periodic inspections by
shipping regulators. As regards classification surveys, in lieu of a Special
Survey, a vessel's machinery may be on a continuous survey cycle, under which
the machinery would be surveyed periodically over a five-year period. Lower
Lakes' vessels are on Special Survey cycles for hull inspection and continuous
survey cycles for machinery inspection. Every vessel is also required to be
drydocked every four to five years for inspection of the underwater parts of
such vessel.
Due to the age of several of the vessels, the repairs and remediations
required in connection with such classification society surveys and other
inspections may be extensive and require significant expenditures. Additionally,
until such time as certain repairs and remediations required in connection with
such surveys and inspections are completed (or if any vessel fails such a survey
or inspection), the vessel may be unable to trade between ports and, therefore,
would be unemployable. Any such loss of the use of a vessel could have an
adverse impact on Rand's revenues, results of operations and liquidity, and any
such impact may be material.
Lower Lakes' business would be adversely affected if Lower Lakes failed to
comply with U.S. maritime laws or the Coasting Trade Act (Canada) provisions on
coastwise trade, or if those provisions were modified or repealed.
Rand is subject to the Shipping Act, 1916, and the Merchant Marine Act,
1920, commonly referred to as the Jones Act, and other U.S. laws and the
Coasting Trade Act (Canada) that restrict domestic maritime transportation to
vessels operating under the flag of the subject state. In the case of the United
States, in addition, the vessels must have been built in the United States, be
at least 75% owned and operated by U.S. citizens and manned by U.S. crews.
Compliance with the foregoing legislation increases the operating costs of the
vessels. With respect to its U.S. flagged vessels, Rand will be responsible for
monitoring the ownership of its capital stock to ensure compliance with U.S.
maritime laws. If Rand does not comply with these restrictions, Rand will be
prohibited from operating its vessels in U.S. coastwise trade, and under certain
circumstances Rand will be deemed to have undertaken an unapproved foreign
transfer, resulting in severe penalties, including permanent loss of U.S.
coastwise trading rights for its vessels, and fines or forfeiture of the
vessels.
Over the past decade, interest groups have lobbied Congress to modify or
repeal U.S. maritime laws so as to facilitate foreign flag competition. Foreign
vessels generally have lower construction costs and generally operate at
significantly lower costs than vessels in the U.S. markets, which would likely
result in reduced charter rates. Rand believes that continued efforts will be
made to modify or repeal these laws. If these efforts are successful, it could
result in significantly increased competition and have a material adverse effect
on our business, results of operations and financial condition.
We may be unable to maintain or replace our vessels as they age.
As of March 31, 2008, the average age of the vessels operated by Lower
Lakes was approximately 50 years. The expense of maintaining, repairing and
upgrading Lower Lakes' vessels typically increases with age, and after a period
of time the cost necessary to satisfy required marine certification standards
may not be economically justifiable. There can be no assurance that Lower Lakes
will be able to maintain its fleet by extending the economic life of existing
vessels, or that our financial resources will be sufficient to enable us to make
expenditures necessary for these purposes. In addition, the supply of
replacement vessels is very limited and the costs associated with acquiring a
newly constructed vessel are prohibitively high. In the event that Lower Lakes
were to lose the use of any its vessels, our financial performance would be
adversely affected.
9
Lower Lakes is subject to environmental laws that could require significant
expenditures both to maintain compliance with such laws and to pay for any
uninsured environmental liabilities resulting from a spill or other
environmental disaster.
The shipping business and vessel operation are materially affected by
government regulation in the form of international conventions, United States
and Canadian treaties, national, state, provincial, and local laws, and
regulations in force in the jurisdictions in which vessels operate. Because such
conventions, treaties, laws and regulations are often revised, Rand cannot
predict the ultimate cost of compliance or its impact on the resale price or
useful life of Lower Lakes' vessels. Additional conventions, treaties, laws and
regulations may be adopted which could limit Rand's ability to do business or
increase the cost of its doing business, which may materially adversely affect
its operations, as well as the shipping industry generally. Lower Lakes is
required by various governmental and quasi-governmental agencies to obtain
certain permits, licenses, and certificates with respect to its operations and
any increased cost in connection with obtaining such permits, licenses and
certificates, or the imposition on Lower Lakes of the obligation to obtain
additional permits, licenses and certificates, could adversely affect Rand's
results of operations.
Canada has adopted a regime of strict liability for oil pollution damage
coming out of ships (Part 6 of the Marine Liability Act). In case of non-tanker
vessels, such as Lower Lakes' vessels, a vessel's registered owner is strictly
liable for pollution damage caused on the Canadian territory, in Canadian
territorial waters or in Canada's exclusive economic zone by oil of any kind or
in any form including petroleum, fuel oil, sludge, oil refuse and oil mixed with
wastes, subject to certain defenses. The liability of the shipowner is, however,
limited in accordance with the provisions of the Convention on Limitation of
Liability for Maritime Claims, 1976, as amended by the Protocol of 1996.
Pursuant to this Convention, the shipowner can limit its liability to (i) 1
million Special Drawing Right, or SDR, as defined by the International Monetary
Fund for the first 2,000 tons of tonnage, (ii) 400 SDR for each additional ton
up to 30,000 tons of tonnage, (iii) 300 SDR for each additional ton up to 70,000
tons of tonnage and (iv) 200 SDR for each additional ton of tonnage. In addition
to the Marine Liability Act, Lower Lakes' vessels are also subject to other
Canadian laws and regulations that contain significant fine and penalty
provisions relating to the marine environment, pollution and discharges of
hazardous substances, including the Migratory Birds Convention Act, the Canadian
Environmental Protection Act, 1999, and the Fisheries Act.
The United States Oil Pollution Act of 1990, or OPA, established an
extensive regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in United States waters, which includes the Great Lakes and their
connecting and tributary waterways. Under OPA, vessel owners, operators and
bareboat charterers are "responsible parties" and are jointly, severally and
strictly liable (unless the spill results solely from the act or omission of a
third party, an act of God or an act of war) for all containment and clean-up
costs and other damages arising from vessel discharges of oil of any kind or in
any form.
Lower Lakes currently maintains pollution liability coverage insurance.
However, if the damages from a catastrophic incident exceed this insurance
coverage, it could have a significant adverse impact on Rand's cash flow,
profitability and financial position.
Lower Lakes is subject to vessel security regulations and will incur costs to
comply with recently adopted regulations and may be subject to costs to comply
with similar regulations which may be adopted in the future in response to
terrorism.
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the Maritime Transportation Security Act of 2002, or MTSA, came into
effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast
Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea, or SOLAS, created a new chapter of the
convention dealing specifically with maritime security. The new chapter went
into effect in July 2004, and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created
ISPS Code. Among the various requirements are:
o on-board installation of automatic information systems, or AIS, to
enhance vessel-to-vessel and vessel-to-shore communications;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The U.S. Coast Guard regulations are intended to be aligned with these
international maritime security standards. Although Rand does not believe these
additional requirements will have a material financial impact on Lower Lakes'
operations, Rand cannot assure you that there will be no interruption in
operations to bring vessels into compliance with the applicable requirements and
any such interruption could cause a decrease in revenues.
10
The operation of Lower Lakes' vessels is dependent on the price and availability
of fuel. Continued periods of historically high fuel costs may materially
adversely affect Rand's operating results.
Rand's operating results may be significantly impacted by changes in the
availability or price of fuel for Lower Lakes' vessels. Fuel prices have
increased substantially since 2004. Although price escalation clauses form part
of substantially all of Lower Lakes' contracts of affreightment, which enable
Lower Lakes to pass the majority of its increased fuel costs on to its
customers, these measures may not be sufficient to enable Lower Lakes to fully
recoup increased fuel costs or assure the continued availability of its fuel
supplies. Although we are currently able to obtain adequate supplies of fuel, it
is impossible to predict the price of fuel. Political disruptions or wars
involving oil-producing countries, changes in government policy, changes in fuel
production capacity, environmental concerns and other unpredictable events may
result in fuel supply shortages and additional fuel price increases in the
future. There can be no assurance that Lower Lakes will be able to fully recover
its increased fuel costs by passing these costs on to its customers. In the
event that Lower Lakes is unable to do so, Rand's operating results will be
adversely affected.
Governments could requisition Lower Lakes' vessels during a period of war or
emergency, resulting in loss of revenues and earnings from such requisitioned
vessels.
The United States or Canada could requisition title or seize Lower Lakes'
vessels during a war or national emergency. Requisition of title occurs when a
government takes a vessel and becomes the owner. A government could also
requisition Lower Lakes vessels for hire, which would result in the government's
taking control of a vessel and effectively becoming the charterer at a dictated
charter rate. Requisition of one or more of Lower Lakes' vessels would have a
substantial negative effect on Rand, as Rand would potentially lose all or
substantially all revenues and earnings from the requisitioned vessels and
permanently lose the vessels. Such losses might be partially offset if the
requisitioning government compensated Rand for the requisition.
The operation of Great Lakes-going vessels entails the possibility of marine
disasters including damage or destruction of the vessel due to accident, the
loss of a vessel due to piracy or terrorism, damage or destruction of cargo and
similar events that may cause a loss of revenue from affected vessels and damage
Lower Lakes' business reputation, which may in turn, lead to loss of business.
The operation of Great Lakes-going vessels entails certain inherent risks
that may adversely affect Lower Lakes' business and reputation, including:
o damage or destruction of vessel due to marine disaster such as a
collision;
o the loss of a vessel due to piracy and terrorism;
o cargo and property losses or damage as a result of the foregoing or
less drastic causes such as human error, mechanical failure and bad
weather;
o environmental accidents as a result of the foregoing; and
o business interruptions and delivery delays caused by mechanical
failure, human error, war, terrorism, political action in various
countries, labor strikes or adverse weather conditions.
Any of these circumstances or events could substantially increase Lower
Lakes' costs, as for example, the costs of replacing a vessel or cleaning up a
spill, or lower its revenues by taking vessels out of operation permanently or
for periods of time. The involvement of Lower Lakes' vessels in a disaster or
delays in delivery or damages or loss of cargo may harm its reputation as a safe
and reliable vessel operator and cause it to lose business.
If Lower Lakes' vessels suffer damage, they may need to be repaired at
Lower Lakes' cost at a drydocking facility. The costs of drydock repairs are
unpredictable and can be substantial. Lower Lakes may have to pay drydocking
costs that insurance does not cover. The loss of earnings while these vessels
are being repaired and repositioned, as well as the actual cost of these
repairs, could decrease its revenues and earnings substantially, particularly if
a number of vessels are damaged or drydocked at the same time.
11
Maritime claimants could arrest Lower Lakes' vessels, which could interrupt its
cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of
cargo, and other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages against such vessel. In many jurisdictions,
a maritime lienholder may enforce its lien by arresting a vessel through
foreclosure proceedings. The arrest or attachment of one or more of Lower Lakes'
vessels could interrupt its cash flow and require it to pay large sums of funds
to have the arrest lifted.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We maintain our executive offices at 461 Fifth Avenue, 25th Floor, New
York, New York 10017 pursuant to an agreement with ProChannel Management LLC, an
affiliate of Laurence S. Levy, our chairman of the board and chief executive
officer. We currently lease the following properties:
o Lower Lakes Towing leases approximately 4,500 square feet of
warehouse space at 207 Greenock Street, Port Dover, Ontario under a
lease that expires October 2012.
o Lower Lakes Towing leases approximately 3,075 square feet of office
space at 517 Main Street, Port Dover, Ontario under a lease that
expires March 2013.
o Grand River leases approximately 1,000 square feet of space at 515
Moore Road, Suite 2, Avon Lake, Ohio under a lease that expires July
31, 2008.
o Grand River leases approximately 300 square feet at 3301 Veterans
Drive. Suite 210, Traverse City, Michigan under a lease that expires
September 30, 2008.
o Rand Finance leases approximately 175 square feet at 17 Wilson Road,
Chelmsford, Massachusetts under a lease that expires on April 30,
2009.
We consider our current office space adequate for our current operations.
Item 3. Legal Proceedings
The nature of our business exposes us to the potential for legal
proceedings related to labor and employment, personal injury, property damage,
and environmental matters. Although the ultimate outcome of any legal matter
cannot be predicted with certainty, based on present information, including our
assessment of the merits of each particular claim, as well as our current
reserves and insurance coverage, we do not expect that any known legal
proceeding will in the foreseeable future have a material adverse impact on our
financial condition or the results of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our units, common stock and warrants are currently traded on the NASDAQ
Capital Market under the symbols RLOGU, RLOG and RLOGW, respectively. Prior to
March 7, 2007, our units, common stock and warrants were traded on the OTC
12
Bulletin Board. The following table sets forth the range of high and low closing
bid prices for the units, common stock and warrants for the periods where such
securities were listed on the OTC Bulletin Board, and the high and low sales
prices for each period where such securities were listed on the NASDAQ Capital
Market. The over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily reflect
actual transactions.
Common Stock Warrants Units
------------ -------- -----
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
June 30, 2006 $6.25 $5.40 $1.27 $0.70 $ 8.70 $ 7.40
September 30, 2006 $5.88 $5.30 $1.01 $0.70 $ 8.00 $ 6.90
December 31, 2006 $7.10 $5.40 $2.18 $0.76 $11.75 $ 7.00
March 31, 2007* $7.20 $6.60 $2.30 $1.50 $11.47 $10.05
June 30, 2007 $7.35 $5.00 $2.76 $1.70 $11.90 $11.65
September 30, 2007 $6.50 $5.17 $2.13 $1.05 $** $**
December 31, 2007 $6.50 $5.11 $2.48 $1.45 $11.50 $ 6.00
March 31, 2008 $6.45 $4.90 $1.89 $0.30 $10.50 $ 5.00
*Effective March 7, 2007, the Company's units, common stock and warrants
ceased trading on the OTC Bulletin Board and began trading on the NASDAQ Capital
Market.
**No trades of the Company's Units were made during the quarter ended
September 30, 2007.
Holders
As of June 24, 2008, there was one holder of record of our units, 33
holders of record of our common stock and two holders of record of our warrants.
Dividends
We have not paid any dividends on our common stock to date and do not
intend to pay dividends on our common stock in the near future. The payment of
dividends in the future will be contingent upon our revenues, earnings, capital
requirements and general financial condition. The payment of dividends is within
the discretion of our board of directors. Other than dividends which our board
of directors may determine to pay on our preferred stock, it is the present
intention of our board of directors to retain all earnings for future investment
and use in our business operations. Accordingly, our board of directors does not
anticipate declaring any dividends in the foreseeable future on our common
stock. In addition, no dividends may be declared or paid on our common stock
unless all accrued dividends on our preferred stock have been paid.
Item 6. Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the information
under this item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations Introduction
All dollar amounts below $500,000 presented herein are in thousands,
values greater than $500,000 are presented in millions except share and per
share amounts.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements involve certain
risks and uncertainties, including statements regarding our strategic direction,
prospects and future results. Certain factors, including factors outside of our
control, may cause actual results to differ materially from those contained in
the forward-looking statements. All forward looking statements included in this
report are based on information available to us as of the date hereof, and we
assume no obligation to update or revise such forward-looking statements to
reflect events or circumstances that occur after such statements are made. Such
uncertainties include, among others, the following factors:
13
Overview
Business
Rand Logistics, Inc. (formerly Rand Acquisition Corporation) was
incorporated in the State of Delaware on June 2, 2004 as a blank check company
to effect a merger, capital stock exchange, asset acquisition or other similar
business combination with an operating business.
On March 3, 2006, we acquired all of the outstanding shares of capital
stock of Lower Lakes Towing Ltd., a Canadian corporation which, with its
subsidiary Lower Lakes Transportation Company, provides bulk freight shipping
services throughout the Great Lakes region. As part of the acquisition of Lower
Lakes, we also acquired Lower Lakes' affiliate, Grand River Navigation Company,
Inc. Prior to the acquisition, we did not conduct, or have any investment in,
any operating business. In this discussion of Rand's business, unless the
context otherwise requires, references to Rand include Rand and its direct and
indirect subsidiaries, and references to Lower Lakes' business or the business
of Lower Lakes mean the combined businesses of Lower Lakes Towing, Lower Lakes
Transportation and Grand River.
Rand's shipping business is operated in Canada by Lower Lakes Towing and
in the United States by Lower Lakes Transportation. Lower Lakes Towing was
organized in March 1994 under the laws of Canada to provide marine
transportation services to dry bulk goods suppliers and purchasers operating in
ports in the Great Lakes that were restricted in their ability to receive larger
vessels. Lower Lakes has grown from its origin as a small tug and barge operator
to a full service shipping company with a fleet of thirteen cargo-carrying
vessels, including one vessel is operated under a contract of affreightment.
From its exclusively Canadian beginnings, Lower Lakes has also grown to offer
domestic services to both Canadian and U.S. customers as well as cross-border
routes. Lower Lakes services the construction, electric utility and integrated
steel industries through the transportation of limestone, coal, iron ore, salt,
grain and other dry bulk commodities.
We believe that Lower Lakes is the only company providing significant
domestic port-to-port services to both Canada and the United States in the Great
Lakes region. Lower Lakes maintains this operating flexibility by operating both
U.S. and Canadian flagged vessels in compliance with the Shipping Act, 1916, and
the Merchant Marine Act, 1920, commonly referred to as the Jones Act, in the
U.S. and the Coasting Trade Act (Canada) in Canada.
Results of Operations
Year ended March 31, 2008.
The fiscal year ended March 31, 2008 was highlighted by several
significant events:
(1) The three WMS vessels did not sail from May through August of 2007 due to
a strike by its licensed officers. After WMS negotiated a contract
extension with its unlicensed officers and hired new licensed officers,
the three WMS vessels sailed over the last few months of the season with
reduced overall productivity due to new licensed officers operating the
vessels.
(2) As a result of the strike on the WMS vessels, we were required to voyage
charter some of our customer deliveries to other third party carriers, for
which we receive very small margins. In addition, the strike caused
inefficiencies in delivery routes and cargo carried by our Core Vessels
which negatively impacted our revenues and margins.
(3) We acquired two bulk carriers on August 27, 2007 which provided just over
four months of revenue for the company but required a full season of
winter work expense.
(4) We exercised our option to buy the three WMS vessels at the end of the
sailing season, which we believe will result in substantially increased
cash flow in future years. We transferred one of these vessels to our
Canadian subsidiary and the other two vessels will be operated by our U.S.
subsidiary.
14
(5) We retired and scrapped our oldest and smallest vessel at the end of the
season, which will result in a modest reduction of earnings in future
years.
(6) Increases in our fuel costs through the year were passed on to customers
through fuel surcharges which reduced our margin percentages, but not our
margin dollars.
(7) We experienced increased general and administrative costs stemming from
consulting, outsourcing, and staffing upgrades to our management
infrastructure and controls, particularly in the finance and IT functions.
The strengthening Canadian dollar and acquisition integration also
increased general and administrative expenses.
15
Year ended March 31, 2008 compared to year ended March 31, 2007.
The following table summarizes our Results of Operations in 2008 and 2007
Reconciliation of GAAP to
Non-GAAP Measures
($ in 000's)
Year ended March 31, 2008 Year ended March 31, 2007
Rand Rand
Logistics Impact of Logistics Impact of
Inc. FIN-46R* Consolidated Inc. FIN-46R* Consolidated
============================================================================================
Revenue 94,769 -- 94,769 79,186 -- 79,186
Expenses
Outside voyage charter fees 9,436 0 9,436 4,935 0 4,935
Charter Hire 11,757 (11,757) 0 10,546 (10,546) 0
Vessel operating expenses 60,973 8,144 69,117 49,907 7,567 57,474
Repairs and maintenance 3,834 10 3,844 2,575 807 3,382
================================================================================== ============================================
86,000 (3,603) 82,397 67,963 (2,172) 65,791
================================================================================== ============================================
Income before general and 8,769 3,603 12,372 11,223 2,172 13,395
administrative, depreciation,
amortization of drydock costs and
intangibles, other income and
expenses and income taxes
("Vessel Margin")
================================================================================== ============================================
General and administrative 9,968 710 10,678 7,628 441 8,069
- ----------------------------------------------------------------------------------------------------------------------------------
EBITDA (Vessel Margin less
General and Administrative) (1,199) 2,893 1,694 3,595 1,731 5,326
Depreciation and amortization
of drydock costs, intangibles and
charter hire 9,101 1,052 10,153 6,456 651 7,107
Gain on sale of vessels by
variable interest entity 0 (667) (667) 0 0 0
Loss on retirement of owned
vessel 1,735 0 1,735 0 0 0
Loss (gain) on foreign exchange (163) 0 (163) 128 0 128
================================================================================== ============================================
================================================================================== ============================================
Income (loss) before other income
and expenses and income taxes (11,872) 2,508 (9,364) (2,989) 1,080 (1,909)
================================================================================== ============================================
*For a discussion of FIN 46-R, see Note 2 to our Financial Statements.
Revenues for the year ended March 31, 2008 were $94.8 million, an increase
of 19.7% from $79.2 million during the year ended March 31, 2007. This increase
was primarily attributable to the acquisition of the Voyageur vessels and
increased revenues from our Core Vessels. In addition, revenues from the WMS
vessels declined from the prior year due to WMS' officers' strike, but were
offset by increased revenues from voyage chartered vessels.
In 2008, Sailing Days, defined as "vessels crewed and available for
sailing," increased 169 days to 2,883 days, including 285 days from the acquired
Voyageur vessels from 2,714 days in the year ended March 31, 2007. Excluding the
acquired Voyageur vessels, Sailing Days dropped 116 days from 2007, which
included 56 days lost from the strike-impacted WMS vessels, and 60 days lost
from the Core Vessels due to certain vessel incidents and sailing-season
repairs. Management believes that each of our vessels should achieve
approximately 275 sailing days per year in an average Great Lakes season,
assuming average winter weather and ice, as average winterwork, capital
expenditures and dry-docking cycle times performed during the winter lay-up
period.
Vessel Margins, which is revenue reduced for voyage charters, charter
hire, vessel operating expenses, and repairs and maintenance, decreased $1.0
million to $12.4 million in the year ended March 31, 2008 from $13.4 million in
the year ended March 31, 2007 . Vessel Margins, excluding the consolidated VIE,
decreased $2.4 million, or 21.4%, from $11.2 million in the year ended March 31,
2007 to $8.8 million in the year ended March 31, 2008. The decrease was
attributable to the $4.7 million increase in the loss from the strike-impacted
16
WMS vessels offset by increased Vessel Margins from our other vessels. The newly
acquired Voyageur vessels generated approximately $340 of Vessel Margins from
approximately four months of operations, but were offset by a full season of
winterwork expense. Vessel Margins on our Core Vessels increased approximately
$2.0 million, or 18%, to $13.8 million in the year ended March 31, 2008 from
$11.8 million in the year ended March 31, 2007. Vessel Margins for the
consolidated VIE increased $1.4 million to $3.6 million, which reflected a full
season of operating under the time charter contract. Management believes that
Vessel Margins are an important measure of the cashflow generated by individual
vessels to evaluate performance and to make investment decisions.
Repairs and maintenance expenses, which consist of expensed winterwork,
are a component of vessel operating cost and increased $462 to $3,844 in the
year ended March 31, 2008 compared to $3,382 in the year ended March 31, 2007.
The increase was primarily due to the acquisition of the two Voyageur vessels.
General and administrative expenses increased $2.6 million to $10.7
million in the year ended March 31, 2008 from $8.1 million in the year ended
March 31, 2007. The increase included $1.3 million of higher cash expenses, $0.6
million related to the increase in the Canadian dollar, $392 due to higher
non-cash equity compensation and $269 due to higher general and administrative
cost in the VIE. Most of the higher cash expenses were related to upgrading our
finance and IT infrastructure, as well as expensed legal costs related to the
Voyageur vessel acquisition.
General and Administrative expense represented 11.3% of revenues in the
year ended March 31, 2008, an increase from 10.2% of revenues in the year ended
March 31, 2007. Excluding the VIE, general and administrative expenses were
10.5% of revenues in the year ended March 31, 2008, compared to 9.6% in the year
ended March 31, 2007.
Depreciation expense rose $1.3 million to $6.4 million in the year ended
March 31, 2008 due to a stronger Canadian dollar, the acquisition of the two
Voyageur vessels, certain capital expenditures and the full year effect of
depreciation of the WMS vessels at the VIE.
Amortization of dry-dock costs increased $1.1 million to $1.5 million in
the year ended March 31, 2008, due to the amortization in the year ended March
31, 2008 of those dry-dockings completed for the winter 2007 season. Dry-docking
costs prior to March 3, 2006 were considered in the fair value valuation of the
vessels on the date of our acquisition of Lower Lakes. Amortization of
intangibles increased $0.5 million to $1.9 million in the year ended March 31,
2008, due to the acquisition of the Voyageur vessels and the conversion of
values amortized in Canadian dollars.
In the year ended March 31, 2008, we incurred a loss of $1.7 million with
the net book value write-off of our oldest vessel, which was retired at the end
the fiscal 2008 sailing season. The VIE recorded a gain of $0.7 million on the
sale of the WMS vessels to Rand in February 2008, which is consolidated under
FIN-46R.
As a result of the items listed above in the year ended March 31, 2008,
the Loss Before Other Income and Expenses and Income Taxes increased $7.5
million to a loss of $9.4 million as compared to a loss of $1.9 million for the
year ended March 31, 2007.
Interest expense increased $1.1 million to $4.9 million in the year ended
March 31, 2008 from $38 million in the year ended March 31, 2007 as a result of
the increase in term loans arising from financing the acquisitions of the
Voyager and WMS vessels, as well as the full year effect of loans to the VIE. We
wrote off $0.8 million in of deferred financing costs in fiscal 2008 as a result
of entering into a new Amended and Restated Credit Agreement with our lender.
We recorded a loss on interest rate swap contracts of $1.3 million in
fiscal 2008 as a result of writing such swap contracts down to fair value as of
March 31, 2008. Such swap contracts were entered in connection with the new term
loans in our Amended and Restated Credit Agreement.
The VIE was deconsolidated from Rand's financial statements effective
February 13, 2008 after the acquisition of the WMS vessels, which resulted in a
$302 loss.
The Loss before Income Taxes and Minority Interest was $16.4 million in
the year ended March 31, 2008 compared to a loss of $5.5 million in the year
ended March 31, 2007.
17
Our recovery from income tax represented a negative provision (income) of
$5.0 million in the year ended March 31, 2008 and $2.2 million in the year ended
March 31, 2007.
Our Net Loss increased $8.1 million to $11.2 million in the year ended
March 31, 2008 from a loss of $3.1 million in the year ended March 31, 2007.
We accrued $1.3 million for cash dividends on our preferred stock in the
year ended March 31, 2008 compared to $1.2 million in the year ended March 31,
2007. The VIE paid a cash dividend on its common stock of $250 in the year ended
March 31, 2007. We also recorded $2.0 million of Stock Warrant Inducement
Discount in connection with the $0.50 per warrant discount on the 3,964,965
warrants which were exercised during the 2008 fiscal year.
As a result of the items above, Rand's Net Loss Applicable to Common
Shareholders increased $10 million to $14.5 million in the year ended March 31,
2008 from $4.5 million in the year ended March 31, 2007.
Impact of Inflation and Changing Prices
For the fiscal year ended March 31, 2008 and March 31, 2007, the annual
inflation rates in Canada were 1.3% and 2.3%, respectively, based on the "Core
CPI" rate calculated by the Bank of Canada. During the same two years, the U.S.
key inflation rates were 4.0% and 2.8%, respectively, based on the "CPI-U" rate
calculated by the U.S. Department of Labor. During these periods, Rand sought
and achieved revenue increases from renewing customer contracts, which were
typically 3 to 5 years in length. Lower Lakes estimates that price increases
averaged at least 2.5% to 3% per year during these two periods as a result of
inflation. During the past two years, the impact of inflation on income from
continuing operations is estimated by Lower Lakes to be between 2.5% to 3% per
year, as both revenues and costs increased proportionately due to inflation
during such period.
Liquidity and Capital Resources
Rand's primary sources of liquidity are provided by operations, our Credit
Facility, the exercise of our outstanding warrants and the issuance of common
stock. Principal uses of cash are vessel acquisitions, capital expenditures,
drydock expenditures, operations, and principal payments on our Amended and
Restated Credit Facility. Information on Rand's consolidated cash flow is
presented in the consolidated statement of cash flows (categorized by operating,
financing and investing activities) which is included in Rand's audited
consolidated financial statements for the years ended March 31, 2007 and March
31, 2008. We believe cash generated from our operations and availability of
borrowing under our Amended and Restated Credit Facility will provide sufficient
cash availability to cover our anticipated working capital needs, capital
expenditures and debt service requirements for the next twelve months.
Investments in Capital Expenditures and Dry-Dockings
Rand expended $34.9 million in capital expenditures in fiscal 2008,
including $20.6 million related to the WMS acquisition and $14.3 million in
vessel upgrades. These fiscal 2008 vessel projects included repowering and
upgrading the Saginaw vessel in our Canadian fleet, upgrades associated with
reflagging a former WMS vessel in Canada, and investments in communications and
IT infrastructure and software. Total vessel capital expenditures related to the
winter 2008 season are estimated at approximately $20.5 million, including $6.2
million estimated to be incurred in the first quarter of fiscal 2009. Rand
invested $4.4 million in dry-docking expenses in fiscal 2008. Total vessel
dry-docking expenditures for fiscal 2008 and the first quarter of fiscal 2009
are estimated to be $5.1 million. These expenses include substantial one-time
steel work on one of the acquired Voyageur vessels which was exposed to salt
water and $0.7 million of winter 2007 carryover costs incurred in the first
quarter of fiscal 2008.
Rand invested $4.4 million in dry-docking expenses in fiscal 2008. Total
vessel dry-docking expenditures for winter 2008 are estimated to be $5.1
million. These expenses include substantial one-time steel work on one of the
acquired Voyageur vessels which was exposed to salt water and $0.7 million of
winter 2007 carryover costs incurred in the first quarter of fiscal 2008.
18
Warrant Exercises
To further ensure adequate liquidity, 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 $6.8 million 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.
Following the Agreement with the Knott Entities, on May 4, 2007, the
Company announced a program by which the exercise price of its outstanding,
publicly traded warrants was reduced to $4.50 (from the $5.00 exercise price
provided by the original terms of the warrants). The reduced exercise price
under the program was in effect through July 13, 2007, as of which date
2,460,965 warrants were exercised under the program, generating cash of $11.0
million for the Company. None of the 1,571,349 warrants owned by our officers
and directors were exercised under the program. Following expiration of the
reduced exercise price period under the program, the original exercised price of
$5.00 was reinstituted for all remaining unexercised warrants. As of June 26,
2008, 5,231,215 warrants remain outstanding.
Credit Facility
On February 13, 2008, Lower Lakes Towing Ltd, Lower Lakes Transportation
and Grand River, as borrowers, Rand LL Holdings, Rand Finance and the Rand, as
guarantors, General Electric Capital Corporation, as agent and lender, and
certain other lenders, entered into an Amended and Restated Credit Agreement
which (i) amends and restates the Credit Agreement to which the borrowers are a
party, dated as of March 3, 2006, in its entirety, (ii) restructures the
tranches of loans provided for under the 2006 Credit Agreement and advances
certain new loans, (iii) finances, in part, the acquisition of the three vessels
by Grand River from WMS, and (iv) provides working capital financing, funds for
other general corporate purposes and funds for other permitted purposes. The
Amended and Restated Credit Agreement provides for (i) a revolving credit
facility under which Lower Lakes Towing may borrow up to CDN $13.5 million with
a seasonal overadvance facility of US $8.0 million (US $10.0 million for
calendar year 2008 only) and a swing line facility of CDN $4.0 million subject
to limitations, (ii) a revolving credit facility under which Lower Lakes
Transportation may borrow up to US $13.0 million with a seasonal over advance
facility of US $8.0 million (US $10.0 million for calendar year 2008 only) and a
swing line facility of US $4.0 million, subject to limitations, (iii) a Canadian
dollar denominated term loan facility under which Lower Lakes Towing may borrow
CDN $41.7 million, (iv) a US dollar denominated term loan facility under which
Grand River may borrow US $22.0 million and (v) a Canadian dollar denominated
"Engine" term loan facility under which Lower Lakes Towing may borrow CDN $8.0
million.
Under the Amended and Restated Credit Agreement, the revolving credit
facilities and swing line loans expire on April 1, 2013. The outstanding
principal amount of the Canadian term loan borrowings will be repayable as
follows: (i) quarterly payments of CDN $0.695 million commencing September 1,
2008 and ending March 1, 2013 and (ii) a final payment in the outstanding
principal amount of the Canadian term loan shall be payable upon the Canadian
term loan facility's maturity on April 1, 2013. The outstanding principal amount
of the US term loan borrowings will be repayable as follows: (i) quarterly
payments of US $367 commencing September 1, 2008 and ending on March 1, 2013 and
(iii) a final payment in the outstanding principal amount of the US term loan
shall be payable upon the US term loan facility's maturity on April 1, 2013. The
outstanding principal amount of the Canadian "Engine" term loan borrowings will
be repayable as follows: (i) quarterly payments of CDN $133 commencing Quarterly
September 1, 2008 and ending March 1, 2013, and (iii) a final payment in the
outstanding principal amount of the Engine term loan shall be payable upon the
Engine term loan facility's maturity on April 1, 2013.
Borrowings under the Canadian revolving credit facility and the Canadian
term loan will bear an interest rate per annum, at the borrowers' option, equal
to (i) the Canadian Prime Rate (as defined in the Amended and Restated Credit
Agreement), plus 2.75% per annum or (ii) the BA Rate (as defined in the Amended
and Restated Credit Agreement) plus 3.75% per annum. Borrowings under the
Canadian swing line facility will bear an interest rate per annum equal to the
Canadian Prime Rate (as defined in the Amended and Restated Credit Agreement),
plus 2.75% per annum. Borrowings under the US revolving credit facility and the
US term loan will bear interest, at the borrowers' option equal to (i) LIBOR (as
defined in the Amended and Restated Credit Agreement) plus 3.75% per annum, or
(ii) the US Base Rate (as defined in the Amended and Restated Credit Agreement),
plus 2.75% per annum. Borrowings under the US swing line facility will bear an
interest rate per annum equal to the US Base Rate (as defined in the Amended and
Restated Credit Agreement), plus 2.75% per annum. Borrowings under the Canadian
"Engine" term loan will bear an interest rate per annum, at the borrowers'
option, equal to (i) the Canadian Prime Rate (as defined in the Amended and
Restated Credit Agreement), plus 4.00% per annum or (ii) the BA Rate (as defined
in the Amended and Restated Credit Agreement) plus 5.00% per annum. The interest
rates shall be adjusted quarterly commencing on the second quarter of fiscal
year 2009 based upon the borrowers' senior debt to EBITDA ratio as calculated in
accordance with the Amended and Restated Credit Agreement.
19
Obligations under the Amended and Restated Credit Agreement are secured by
(i) a first priority lien and security interest on all of the borrowers' and
guarantors' assets, tangible or intangible, real, personal or mixed, existing
and newly acquired, (ii) a pledge by Rand LL Holdings of all of the outstanding
capital stock of the borrowers; and (iii) a pledge by the Registrant of all of
the outstanding capital stock of Rand LL Holdings and Rand Finance. The
indebtedness of each borrower under the Amended and Restated Credit Agreement is
unconditionally guarantied by each other borrower and by the guarantors, and
such guaranty is secured by a lien on substantially all of the assets of each
borrower and each guarantor.
Under the Amended and Restated Credit Agreement, 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 Amended and Restated Credit Agreement contains certain covenants,
including those limiting the guarantors, the borrowers, and their subsidiaries'
ability to incur indebtedness, incur liens, sell or acquire assets or
businesses, change the nature of their businesses, engage in transactions with
related parties, make certain investments or pay dividends. In addition, the
Amended and Restated Credit Agreement requires the borrowers to maintain certain
financial ratios. Failure of the borrowers or the guarantors to comply with any
of these covenants or financial ratios could result in the loans under the
Amended and Restated Credit Agreement being accelerated.
Seasonality
Lower Lakes is subject to a cyclical industry, primarily due to the
typical cold weather patterns on the Great Lakes from December through March
which cause lock closures, waterway ice, and customer facility closings, which
typically shut down shipping for a period of up to 90 days commencing from late
December to mid-January, and continuing until late March to early April. Lower
Lakes also experiences a cyclical pattern for its capital spending cycle,
typically off-season from the shipping revenues, to permit annual maintenance
and investment in the vessels. This places additional adverse pressures on Lower
Lakes' liquidity and capital resources. Such winterwork, capital expenditure,
and dry-docking costs are incurred during a period when customer collections
have ended from the prior season, and fit-out and vessel operating costs will be
incurred at the beginning of the season as much as 45 to 60 days prior to the
receipt of significant customer collections. To counter these negative working
capital cycles, Lower Lakes' Amended and Restated Credit Facility includes a
revolver feature with a seasonal overadvance facility which provides working
capital from the March through June period, after which customer collections
typically exceed cash disbursements.
Foreign Exchange Rate Risk
Rand has foreign currency exposure related to the currency related
remeasurements of its various financial instruments denominated in the Canadian
dollar (fair value risk) and operating cash flows denominated in the Canadian
dollar (cash flow risk). These exposures are associated with period to period
changes in the exchange rate between the U.S. Dollar and the Canadian dollar. At
March 31, 2008, Rand's liability for financial instruments with exposure to
foreign currency risk was approximately CDN $49.7 million of Term Loans in
Canada, compared to a liability of CDN $19.5 million in Term Loans and CDN $2.5
million of Revolver borrowings in Canada at March 31, 2007. Although Rand has
tried to match its indebtedness by country with its cashflows, the sudden change
in exchange rates can increase the indebtedness converted to US dollars before
the operating cashflows can make up for such a currency conversion change.
From a cash flow perspective, Rand's operations are insulated against
changes in currency rates as operations in Canada and the United States have
revenues and expenditures denominated in local currencies and the operations are
cash flow positive. However, as stated above, the majority of the Rand's
financial liabilities are denominated in Canadian dollars which exposes the
Company to currency risks related to principal payments and interest payments on
such financial liability instruments.
20
Interest Rate Risk
Rand is subject to market risk from exposure to changes in interest rates
associated with its revolver debt. Lower Lakes' Amended and Restated Credit
Agreement carries interest rates which vary with Canadian Prime Rates and B.A.
Rates for Canadian borrowings, and US Prime Rates and Libor Rates on US
borrowings.
Rand has entered into two interest rate swap contracts for all of its term
loans for the full term of such term loans based on three month BA rates for the
Canadian term Loans and three month US Libor rates for the US Term Loans. The
rates on these instruments, prior to the addition of the Lender's margin, are
4.09% on the Canadian Term Loans, and 3.65% on the US Term Loans. Rand will be
exposed to risk under these contracts if they are required to be amended or
terminated earlier than contracted.
Off-Balance Sheet Arrangements
Options and warrants issued in conjunction with our 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. See the notes
to the March 31, 2008 financial statements for a discussion of outstanding
options and warrants.
On August 27, 2007, in connection with the COA and Option Agreement, Lower
Lakes entered into a Guarantee with GE Canada (the "Guarantee"), pursuant to
which Lower Lakes agreed to guarantee up to CDN $1.25 million (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 $0.6 million letter of credit provided
to Lower Lakes.
Voyageur has been determined to be a variable interest entity of the
Company under U.S. GAAP. Rand has determined that it is not a "Primary
Beneficiary" of Voyageur's remaining business and therefore Rand is not required
to consolidate Voyageur's financial statements.
Critical Accounting Policies
Rand's significant accounting policies are presented in Note 2 to its
fiscal 2008 audited consolidated financial statements, and the following
summaries should be read in conjunction with the financial statements and the
related notes included in this proxy statement. While all accounting policies
affect the financial statements, certain policies may be viewed as critical.
Critical accounting policies are those that are both most important to the
portrayal of the financial statements and results of operations and that require
management's most subjective or complex judgments and estimates.
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
21
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 Emerging Issues Task Force 99-19
(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.
Intangible assets and goodwill
The Company adopted Statements of Financial Accounting Standards (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 were amortized over the term of the time chartering agreement, and
related debt. Other intangibles are amortized as follows:
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 Term of Chartering agreement
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:
Vessels 4 - 25 years straight-line
Leasehold improvements 7 - 11 years straight-line
Furniture and equipment 20% declining-balance
Computer equipment 45% declining-balance
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 repairs 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.
22
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.
Income taxes
The Company accounts for income taxes in accordance with 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. Rand believes that such tax benefits 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, 2008 did not result in a cumulative effect
adjustment to accumulated deficit. At April 1, 2007, the Company had no
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.
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 all newly granted awards and awards modified, repurchased, or
cancelled after April 1, 2007. Compensation expense for the unvested portion of
the awards that was outstanding on April 1, 2007 is recognized ratably over the
remaining vesting period based on the fair value at date of grant as calculated
under the Black-Scholes option pricing model.
23
Variable interest entities
The Company uses FASB Interpretation ("FIN") 46R, which requires the
Company to consolidate certain entities on the basis other than through
ownership of a voting interest of the entity . Two VIE's have been identified
and WMS had been consolidated in accordance with FIN 46R through the
deconsolidation date of February 13, 2008. Though the Voyageur group of
companies is a variable interest entity for Rand, it does not meet criteria for
consolidation and hence is not consolidated.
On February 13, 2008, the Company entered into an asset purchase agreement
with WMS (a VIE until that date) to buy the entire remaining assets of the VIE.
Based on this reconsideration event, the Company is no longer the primary
beneficiary under FIN 46R and is no longer required to consolidate WMS financial
statements. The March 31, 2008, statement of operations includes the results of
WMS through February 13, 2008, at which point WMS was deconsolidated from the
Company's balance sheet.
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 ending 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 SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No. 151.
SFAS 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 ending
March 31, 2009 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 SFAS 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 ending March 31, 2009. The Company is presently evaluating the
impact of adopting this standard on its consolidated financial statements.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). FAS 161 amends SFAS 133 to
provide enhanced disclosure requirements surrounding how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS 133 and how derivative instruments and related hedged
items affect an entity's financial position, financial performance and cash
flows. SFAS 161 is effective for the Company as of the beginning of Fiscal 2010,
including interim periods thereafter. The implementation of SFAS 161 is not
expected to have a material impact on the Company's consolidated financial
statements.
24
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS 162"). The new standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles ("GAAP") for nongovernmental entities. SFAS 162 is effective 60 days
following SEC approval of the Public Company Accounting Oversight Board Auditing
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. We are currently evaluating the
impact, if any, of the adopting the SFAS 162, on our consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the information
under this item.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of Rand Logistics, Inc.
required by this Item are described in Item 15 of this Annual Report on Form
10-K and are presented beginning on page F-1.
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial
Disclosure
None.
Item 9A(T). Controls and Procedures
As of March 31, 2008 (the end of the period covered by this report), our
management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
In designing and evaluating our disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934),
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We believe that our disclosure
controls and procedures provide such reasonable assurance.
Our senior management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
and Rule 15d-15(f) under the Securities Exchange Act of 1934), designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms.
Because of inherent limitations, a system of internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of its internal control over
financial reporting as of March 31, 2008 based on the criteria set forth in a
report entitled Internal Control--Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, we have concluded that, as of March 31, 2008, our internal control
over financial reporting is effective based on those criteria.
This annual report on Form 10-K does not include an attestation report of
our registered public accounting firm regarding internal control over financial
reporting of the Company. Our management report was not subject to attestation
by our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only management's report in this annual report.
25
No change occurred in our internal controls concerning financial reporting
during the fourth quarter ended March 31, 2008 that has materially affected, or
is reasonably likely to materially affect, our internal controls over financial
reporting.
Item 9B. Other Information
On June 24, 2008, Lower Lakes Towing Ltd., Lower Lakes Transportation
Company, Grand River Navigation Company and the other Credit Parties thereto
entered into a First Amendment (the "Amendment") to the Amended and Restated
Credit Agreement, dated as of February 13, 2008, with the Lenders signatory
thereto and General Electric Capital Corporation, as Agent. Under the Amendment,
the borrowers amended the definition of "Fixed Charge Coverage Ratio", modified
the maximum amounts outstanding under the Canadian and US Revolving Credit
Facilities and modified the measurement dates of the Maximum Capital
Expenditures (as defined therein). A copy of the Amendment is attached hereto as
Exhibit 10.36 and is incorporated by reference herein.
PART III
Item 10. Directors, Executive Officers and Corporate Governance of the
Registrant
Information with respect to this item is incorporated by reference from
our definitive Proxy Statement to be filed with the SEC not later than 120 days
after the end of our fiscal year.
26
Item 11. Executive Compensation
Information with respect to this item is incorporated by reference from
our definitive Proxy Statement to be filed with the SEC not later than 120 days
after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
The following table provides certain information, as of June 25, 2008,
about our common stock that may be issued upon the exercise of options, warrants
and rights, as well as the issuance of restricted shares granted to employees,
consultants or members of our Board of Directors, under our existing equity
compensation plan, the Rand Logistics, Inc. 2007 Long-Term Incentive Plan.
Number of Securities
Number of Securities to Weighted-Average Remaining Available
be Issued Upon Exercise Exercise Price of for Future Issuance
of Outstanding Options, Outstanding Options, Under Equity
Plan Category Warrants and Rights Warrants and Rights Compensation Plan
- ------------- ----------------------- -------------------- --------------------
Equity compensation plans approved by security holders........... 243,199 $5.81 2,243,892
Equity compensation plans not approved by security holders....... -- -- --
Total............................................................ 243,199 $5.81 2,243,892
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Information with respect to this item is incorporated by reference from
our definitive Proxy Statement to be filed with the SEC not later than 120 days
after the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
Information with respect to this item is incorporated by reference from
our definitive Proxy Statement to be filed with the SEC not later than 120 days
after the end of our fiscal year.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. The financial statements listed in the "Index to Consolidated
Financial Statements" at page F-1 are filed as a part of this Annual
Report on Form 10-K.
2. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits included or incorporated herein:
See Exhibit Index.
27
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
2.1 Stock Purchase Agreement, dated as of September 2, 2005, among Rand
Acquisition Corporation, LL Acquisition Corp. and the stockholders
of Lower Lakes Towing Ltd. (Omitted: Appendices-Seller Disclosure
Schedule and Purchase Seller Disclosure Schedule; Exhibits - 1)
Allocation among Sellers, 2) Employment Agreement, 3) Escrow
Agreement, 4) Release, 5) Opinion of Sellers' Counsel, 6) Opinion of
Rand's and Purchaser's Counsel, 7) Section 116 Escrow Agreement, 8)
Company Indebtedness, 9) Seller's Addresses, 10) Working Capital
Statement, 11) Management Bonus Program, 12) Sellers Several
Liability Allocation, 13) Financing Commitments (filed separately),
14) Bonus Program Participant Agreement and 15) Redemption
Agreement). (1)
2.2 Amendment to Stock Purchase Agreement, dated December 29, 2005. (2)
2.3 Amendment to Stock Purchase Agreement, dated January 27, 2006. (3)
2.4 Amendment to Stock Purchase Agreement, dated February 27, 2006. (4)
3.1 Amended and Restated Certificate of Incorporation, filed with the
Secretary of State of the State of Delaware on March 3, 2006. (7)
3.1.1 Amended and Restated Certificate of Designations, filed with the
Secretary of State of the State of Delaware on August 8, 2006. (9)
3.2.1 Second Amended and Restated By-laws. (17)
4.1 Specimen Unit Certificate. (5)
4.2 Specimen Common Stock Certificate. (5)
4.3 Specimen Warrant Certificate. (5)
4.4 Form of Unit Purchase Option granted to EarlyBirdCapital, Inc. (5)
4.5 Form of Warrant Agreement between Continental Stock Transfer & Trust
Company and the Registrant. (5)
10.1 Registration Rights Agreement among the Registrant and the Founders.
(5)
10.2 Form of Warrant Purchase Agreements among each of Laurence S. Levy,
Isaac Kier and Sandeep D. Alva and EarlyBirdCapital, Inc. (5)
10.3 Preferred Stock Purchase Agreement, dated September 2, 2005, by and
between Knott Partners LP, Matterhorn Offshore Fund Ltd., Anno LP,
Good Steward Fund Ltd., Bay II Resources Partners, Bay Resource
Partners L.P., Bay Resource Partners Offshore Fund Ltd., Thomas E.
Claugus and Rand Acquisition Corporation. (1)
10.4 Employment Agreement, dated March 3, 2006, between Scott Bravener
and Lower Lakes Towing Ltd. (6)
10.5 Employment Agreement, dated March 3, 2006, between James Siddall and
Lower Lakes Towing Ltd. (6)
10.6 Management Bonus Plan, dated March 3, 2006. (6)
10.7 Stock Purchase Agreement, dated July 20, 2006, by and among Rand
Logistics, Inc. and Islandia L.P., Knott Partners L.P., Matterhorn
Offshore Fund Ltd., CommonFund Hedged Equity Company, Shoshone
Partners, LP, Finderne, LLC, Good Steward Trading Company SPC,
Mulsanne LP, The Hummingbird Value Fund LP, The Hummingbird Microcap
Value Fund LP, Terrier Partners L.P., Performance Partners, LP,
Performance Partners, Ltd., WTC-CIF Micro Cap Equity Portfolio,
WTC-CTF Micro Cap Equity Portfolio, WTC-CIF Global Infrastructure
Portfolio, Ratheon Master Pension Trust, Clariden-LUX Infrastructure
Fund, Wynnefield Partners Small Cap Value, LP, Wynnefield Partners
Small Cap Value, LP I, and Wynnefield Small Cap Value Offshore Fund,
Ltd. (7)
10.8 Time Charter Agreement, dated as of August 1, 2006, between Lower
Lakes Transportation Company and Wisconsin & Michigan Steamship
Company. (7)
10.9 Guaranty, dated as of August 1, 2006, by Rand Logistics, Inc. in
favor of Wisconsin & Michigan Steamship Company. (7)
10.10 Time Charter Guaranty, dated as of August 1, 2006, by Rand LL
Holdings Corp. in favor of Wisconsin & Michigan Steamship Company.
(7)
10.11 Senior Subordinated Note Purchase Agreement, dated August 1, 2006,
by and among Wisconsin & Michigan Steamship Company, Rand Finance
Corp. and Oglebay Norton Marine Services Company, LLC.(7)
10.12 Award Agreement, dated October 11, 2006, between Rand Logistics,
Inc. and Edward Levy. (9)
10.13 Award Agreement, dated October 11, 2006, between Rand Logistics,
Inc. and Edward Levy. (9)
28
10.14 Award Agreement, dated October 11, 2006, between Rand Logistics,
Inc. and Laurence S. Levy. (9)
10.15 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and Scott F. Bravener. (9)
10.16 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and Joseph W. McHugh, Jr. (9)
10.17 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and James W. Siddall. (9)
10.18 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and Jeffrey P. Botham. (9)
10.19 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and Isaac Kier. (9)
10.20 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and Jonathan Brodie. (9)
10.21 Award Agreement, dated October 18, 2006, between Rand Logistics,
Inc. and H. Cabot Lodge III. (9)
10.22 Restricted Share Award Agreement, dated January 17, 2007 between
Rand Logistics, Inc. and Laurence S. Levy. (10)
10.23 Restricted Share Award Agreement, dated January 17, 2007 between
Rand Logistics, Inc. and Edward Levy. (10)
10.24 Vessel Sale Agreement, dated as of March 23, 2007, between Grand
River Navigation Company, Inc. and Lake Service Shipping Co. (11)
10.25 Warrant Exercise Agreement, dated April 30, 2007, among Rand
Logistics, Inc. and 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. (12)
10.26 First Amendment Agreement to Time Charter Guaranty, dated as of June
27, 2007, between Rand LL Holdings Corp. and Wisconsin & Michigan
Steamship Company. (14)
10.27 Rand Logistics, Inc. 2007 Long-Term Incentive Plan, dated July 26,
2007. (17)
10.28 Crew Manning Agreement, dated August 27, 2007, between Lower Lakes
Towing Ltd. and Voyageur Marine Transport Ltd. (14)
10.29 Contract of Affreightment, dated August 27, 2007, between Voyageur
Marine Transport Ltd., Voyageur Maritime Trading Inc. and Lower
Lakes Towing Ltd. (14)
10.30 Option Agreement, dated August 27, 2007, between Lower Lakes Towing
Ltd. and Voyageur Maritime Trading Inc. (14)
10.31 Memorandum of Agreement, dated August 27, 2007, between Voyageur
Marine Transport Ltd., Voyageur Pioneer Marine Inc. and Lower Lakes
Towing Ltd. (14)
10.32 Guarantee, dated August 27, 2007, between Lower Lakes Towing Ltd.
And GE Canada Finance Holding Company. (14)
10.33 Letter of Credit Agreement, dated August 27, 2007, between Lower
Lakes Towing Ltd. and Heddle Marine Service Inc. (14)
10.34 Vessel Purchase Agreement, dated as of February 13, 2008 among
Wisconsin & Michigan Steamship Company and Grand River Navigation
Company, Inc and Rand LL Holdings Corp. (16)
10.35 Amended and Restated Credit Agreement, dated as of February 13,
2008, among Lower Lakes Towing Ltd., Lower Lakes Transportation
Company, Grand River Navigation Company, Inc., the other credit
parties signatory thereto, General Electric Capital Corporation, as
Agent, National City Bank, as a Lender and as Co-Syndication Agent
and the other Lenders signatory thereto from time to time. (16)
10.36 First Amendment to Amended and Restated Credit Agreement, dated as
of June 24, 2008, by and among Lower Lakes Towing Ltd., Lower Lakes
Transportation Company, Grand River Navigation Company, Inc., the
other Credit Parties signatory thereto, the other Lenders signatory
thereto and General Electric Capital Corporation, as Agent. (18)
21 Subsidiaries of Rand. (18)
23 Consent of Grant Thornton LLP, independent registered chartered
accounting firm. (18)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (18)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (18)
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (18)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (18)
29
- ----------
(1) Incorporated by reference to the Registrant's Amended Quarterly Report on
Form 10-QSB/A, filed with the Securities and Exchange Commission on
January 20, 2006.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 3, 2006.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 31, 2006.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 1, 2006.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (SEC File No. 333-117051).
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 9, 2006.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on August 2, 2006.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on August 10, 2006.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on August 19, 2006.
(10) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 18, 2007.
(11) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 26, 2007.
(12) Incorporated by reference to the Registrant's Current Report on Form
8-K/A, filed with the Securities and Exchange Commission on May 10, 2007.
(13) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission on June 29,
2007.
(14) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on August 31, 2007.
(15) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on December 17, 2007.
(16) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB, filed with the Securities and Exchange Commission on February 14,
2007.
(17) Incorporated by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders held on September 11, 2007, filed with the
Securities and Exchange Commission on July 30, 2007.
(18) Filed herewith.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAND LOGISTICS, INC.
By: /s/ Laurence S. Levy
-------------------------------------------------
Laurence S. Levy
Chairman of the Board and Chief Executive Officer
Date: June 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant, and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Laurence S. Levy Chairman of the Board and June 26, 2008
- -------------------------------------------------- Chief Executive Officer
Laurence S. Levy (Principal Executive Officer)
/s/ Edward Levy President June 26, 2008
- --------------------------------------------------
Edward Levy
/s/ Joseph W. McHugh, Jr. Vice President June 26, 2008
- -------------------------------------------------- and Chief Financial Officer
Joseph W. McHugh, Jr. (Principal Financial and Accounting Officer)
/s/ Isaac Kier Director June 26, 2008
- --------------------------------------------------
Isaac Kier
/s/ Scott Bravener Director June 26, 2008
- --------------------------------------------------
Scott Bravener
/s/ H. Cabot Lodge, III Director June 26, 2008
- --------------------------------------------------
H. Cabot Lodge, III
/s/ Jonathan Brodie Director June 26, 2008
- --------------------------------------------------
Jonathan Brodie
/s/ Michael D. Lundin Director June 26, 2008
- --------------------------------------------------
Michael D. Lundin
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTING FIRM
Board of Directors and
Stockholders of Rand Logistics, Inc.
We have audited the accompanying consolidated balance sheets of Rand Logistics,
Inc. (a Delaware corporation) and its subsidiaries as of March 31, 2008 and
March 31, 2007, and the related consolidated statements of operations,
stockholders' equity and other comprehensive income (loss), and cash flows for
the years ended March 31, 2008 and March 31, 2007. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rand Logistics, Inc.
and its subsidiaries as of March 31, 2008 and March 31, 2007, and the results of
its operations and its cash flows for the years ended March 31, 2008 and March
31, 2007 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Hamilton, Canada
June 23, 2008
F-1
RAND LOGISTICS, INC.
Consolidated Balance Sheets
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
March 31, March 31,
2008 2007
ASSETS
-----------------------
CURRENT
Cash and cash equivalents $ 5,626 $ 7,207
Accounts receivable (Note 5) 3,468 2,702
Prepaid expenses and other current assets (Note 6) 3,122 3,122
Income taxes receivable 193 263
Deferred income taxes (Note 7) 1,355 1,219
- ----------------------------------------------------------------------------------------------
Total current assets 13,764 14,513
BLOCKED ACCOUNT (Note 4) -- 2,700
PROPERTY AND EQUIPMENT, NET (Note 8) 96,349 66,859
DEFERRED INCOME TAXES (Note 7) 20,318 13,574
DEFERRED DRYDOCK COSTS, NET (Note 9) 9,082 5,895
INTANGIBLE ASSETS, NET (Note 10) 17,979 13,334
GOODWILL (Note 10) 10,193 6,363
- ----------------------------------------------------------------------------------------------
Total assets $ 167,685 $ 123,238
==============================================================================================
LIABILITIES
CURRENT
Bank indebtedness (Note 12) $ 269 $ 5,097
Accounts payable 14,985 11,445
Accrued liabilities (Note 13) 7,243 3,237
Acquired Management Bonus Program (Note 23) 3,000 --
Interest rate swap contract (Note 21) 1,274 135
Income taxes payable 422 385
Deferred income taxes (Note 7) 1,508 589
Current portion of long-term debt (Note 14) 3,521 4,398
- ----------------------------------------------------------------------------------------------
Total current liabilities 32,222 25,286
LONG-TERM DEBT (Note 14) 66,896 34,864
ACQUIRED MANAGEMENT BONUS PROGRAM (Note 23) -- 3,000
DEFERRED INCOME TAXES (Note 7) 14,703 13,624
- ----------------------------------------------------------------------------------------------
Total liabilities 113,821 76,774
==============================================================================================
COMMITMENTS AND CONTINGENCIES (Notes 15 and 16)
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value, 14,900 14,900
Authorized 1,000,000 shares, Issued and outstanding 300,000
shares (Note 17)
Common stock, $.0001 par value 1 1
Authorized 50,000,000 shares, Issued and outstanding
12,105,051 shares (Note 17)
Additional paid-in capital 58,350 38,407
Accumulated deficit (20,465) (5,947)
Accumulated other comprehensive income (loss) (Note 27) 1,078 (1,073)
Minority interest of variable interest entity (Note 24) -- 176
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 53,864 46,464
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 167,685 $ 123,238
==============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-2
RAND LOGISTICS, INC.
Consolidated Statements of Operations
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
Year ended Year ended
March 31, 2008 March 31, 2007
=================================
REVENUE $ 94,769 $ 79,186
- ----------------------------------------------------------------------------------------------------
EXPENSES
Outside voyage charter fees (Note 18) 9,436 4,935
Vessel operating expenses 69,117 57,474
Repairs and maintenance 3,844 3,382
General and administrative 10,678 8,069
Depreciation 6,428 5,142
Amortization of drydock costs 1,476 388
Amortization of intangibles 1,912 1,433
Amortization of chartering agreement costs 337 144
Gain on sale of vessels by variable interest entity (667) --
Loss on retirement of owned vessel 1,735 --
(Gain) loss on foreign exchange (163) 128
- ----------------------------------------------------------------------------------------------------
104,133 81,095
- ----------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER INCOME AND EXPENSES AND INCOME TAXES (9,364) (1,909)
- ----------------------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSES
Interest expense (Note 19) 4,883 3,778
Interest income (235) (349)
Loss on interest rate swap contract 1,338 135
Write off of deferred financing cost on refinanced indebtedness 753 --
(Note 14)
Loss on deconsolidation of VIE (Note 24) 302 --
- ----------------------------------------------------------------------------------------------------
7,041 3,564
- ----------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (16,405) (5,473)
====================================================================================================
PROVISION (RECOVERY) FOR INCOME TAXES (Note 7)
Current 372 277
Deferred (5,360) (2,437)
- ----------------------------------------------------------------------------------------------------
NET LOSS BEFORE MINORITY INTEREST (11,417) (3,313)
MINORITY INTEREST (Note 24) (176) (224)
====================================================================================================
NET LOSS (11,241) (3,089)
====================================================================================================
PREFERRED STOCK DIVIDENDS 1,295 1,182
COMMON STOCK DIVIDEND OF VIE -- 250
STOCK WARRANT INDUCEMENT DISCOUNT (Note 17(b)) 1,982 --
====================================================================================================
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (14,518) $ (4,521)
====================================================================================================
Net loss per share basic (Note 22) $ (1.28) $ (0.63)
Net loss per share diluted $ (1.28) $ (0.63)
Weighted average shares basic 11,355,068 7,225,083
Weighted average shares diluted 11,355,068 7,225,083
The accompanying notes are an integral part of these consolidated financial
statements
F-3
RAND LOGISTICS, INC.
Consolidated Statements of Stockholders' Equity
and Other Comprehensive Income (Loss)
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
Additional
Common Stock Preferred Stock Paid-In
Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2006 5,600,000 $ 1 300,000 $ 14,900 $ 24,629
Net loss before minority interest -- -- -- -- --
Minority interest -- -- -- -- --
Preferred dividend -- -- -- -- --
Common stock dividend -- -- -- -- --
Warrant conversion (Note 17 (b)) 3,820 -- -- -- 19
Shares issued, net of issuance
cost of $50 (Note 17) 2,402,957 -- -- -- 12,950
Restricted stock issued (Note 17) 120,400 -- -- -- 809
Translation adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2007 8,127,177 $ 1 300,000 $ 14,900 $ 38,407
====================================================================================================================================
Net loss before minority interest -- -- -- -- --
Minority interest -- -- -- -- --
Preferred dividend -- -- -- -- --
Warrant conversion, net of stock warrant
inducement discount (Note 17 (b)) 3,964,965 -- -- -- 19,825
Restricted stock issued (Note 17) 12,909 75
Stock options issued (Note 17) 43
Translation adjustment -- -- -- -- --
Comprehensive income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2008 12,105,051 $ 1 300,000 $ 14,900 $ 58,350
====================================================================================================================================
Accumulated Minority Other Total
Surplus Interest Comprehensive Stockholders'
(Deficit) VIE Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2006 $ (1,426) $ -- $ (1,347) $ 36,757
Net loss before minority interest (3,313) -- -- (3,313)
Minority interest 224 176 -- 400
Preferred dividend (1,182) -- -- (1,182)
Common stock dividend (250) -- -- (250)
Warrant conversion (Note 17 (b)) -- -- -- 19
Shares issued, net of issuance
cost of $50 (Note 17) -- -- -- 12,950
Restricted stock issued (Note 17) -- -- -- 809
Translation adjustment -- -- 274 274
Comprehensive loss -- -- -- (3,039)
- ----------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2007 $ (5,947) $ 176 $ (1,073) $ 46,464
======================================================================================================================
Net loss before minority interest (11,417) -- -- (11,417)
Minority interest 176 (176) -- --
Preferred dividend (1,295) -- -- (1,295)
Warrant conversion, net of stock warrant
inducement discount (Note 17 (b)) (1,982) -- -- 17,843
Restricted stock issued (Note 17) 75
Stock options issued (Note 17) 43
Translation adjustment -- -- 2,151 2,151
Comprehensive income -- -- -- (9,266)
- ----------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2008 $ (20,465) $ -- $ 1,078 $ 53,864
======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-4
RAND LOGISTICS, INC.
Consolidated Statements of Cash Flows
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
Year ended Year ended
March 31, 2008 March 31, 2007
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (11,417) $ (3,313)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization of 7,904 5,530
drydock costs
Amortization of intangibles and deferred financing 2,666 1,814
costs
Deferred income taxes (5,239) (2,502)
Loss on interest rate swap 1,338 135
Loss on extinguishment of debt 753 --
VIE deconsolidation 302 --
Equity compensation 480 722
Gain on sale of vessels by VIE (667) --
Loss on retirement of owned vessel 1,688 --
Changes in non cash operating working capital:
Accounts receivable (1,487) (595)
Prepaid expenses and other current assets (32) (1,575)
Accounts payable and accrued liabilities 8,642 4,396
Income taxes payable 250 71
- -------------------------------------------------------------------------------------------------------
5,181 4,683
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (34,863) (23,481)
Acquisition of business (24,520) --
Sale of vessels by VIE 17,542 --
Deferred drydock costs (4,415) (4,665)
Chartering agreement costs -- (481)
- -------------------------------------------------------------------------------------------------------
(46,256) (28,627)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of warrants 17,843 19
Proceeds from sale of shares of common stock -- 13,000
Stock issuance costs -- (50)
Proceeds from long-term debt 88,841 16,700
Proceeds from issuance of subordinated debt -- 2,200
Long-term debt repayment (43,372) (2,170)
Long-term debt repayment by VIE (16,489) --
Proceeds (payments) of blocked account 2,700 (2,700)
Debt financing costs (2,519) (600)
Capital lease repayment -- (2,108)
Proceeds from bank indebtedness 4,284 13,652
Repayment of bank indebtedness (9,866) (8,555)
Dividend paid -- (1,227)
- -------------------------------------------------------------------------------------------------------
41,422 28,161
- -------------------------------------------------------------------------------------------------------
EFFECT OF FOREIGN EXCHANGE RATES ON CASH (50) 240
MINORITY INTEREST 294 176
=======================================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 591 4,633
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,207 2,574
ELIMINATION OF VIE CASH BALANCE ON DECONSOLIDATION (2,172) --
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,626 $ 7,207
=======================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Payments for interest $ 4,038 $ 3,389
Payment of income taxes $ 132 $ 309
The accompanying notes are an integral part of these consolidated financial
statements
F-5
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
1. DESCRIPTION OF BUSINESS
Rand Logistics, Inc. (the "Company") is a shipping company engaged in the
operation of bulk carriers on the Great Lakes. Rand Acquisition
Corporation was incorporated in Delaware on June 2, 2004 as a blank check
company whose objective was to acquire an operating business. On March 3,
2006, the Company, through its wholly-owned subsidiary, LL Acquisition
Corp., acquired all of the outstanding shares of capital stock of Lower
Lakes Towing Ltd. from the shareholders of Lower Lakes, in accordance with
the terms of the Stock Purchase Agreement, dated September 2, 2005, by and
among the Company, LL Acquisition Corp. and the stockholders of Lower
Lakes, as amended. Immediately following completion of the acquisition,
and in conjunction therewith, LL Acquisition Corp. and Lower Lakes were
amalgamated under Canadian law and the shares of capital stock of Grand
River Navigation Company, Inc. and Lower Lakes Transportation Company
owned by Lower Lakes Towing Ltd. at the time of the amalgamation were
transferred to the Company's wholly-owned subsidiary, Rand LL Holdings
Corp. Upon completion of such transfer, the outstanding shares of Grand
River not owned by Rand LL Holdings Corp. were redeemed in accordance with
the terms of the Redemption Agreement, dated September 2, 2005, between
Grand River and GR Holdings, Inc. Following completion of the foregoing
transactions, as of March 3, 2006, each of Lower Lakes, Grand River and
Lower Lakes Transportation became indirect, wholly-owned subsidiaries of
the Company. In conjunction with the foregoing transactions, as of March
3, 2006, the Company, formerly known as Rand Acquisition Corporation,
changed its name to Rand Logistics, Inc.
The Company changed its fiscal year end from December 31 to March 31,
effective March 3, 2006. This report includes operations for the years
ended March 31, 2008 and March 31, 2007 of Rand Logistics, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
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 ("VIE") as discussed in Note 24, through February
13, 2008. 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 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 intercompany
transactions and balances have been eliminated. The assets of the acquired
subsidiaries and businesses have been adjusted to fair values as of the
date of acquisition and goodwill has been recognized for the difference
between the purchase price and fair value of the assets for the acquired
subsidiaries and businesses.
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 March 31, 2008
and March 31, 2007. The company has historically had no significant bad
debts. Interest is not accrued on outstanding receivables.
The Company had two major customers in excess of 10% of revenue in 2008
and 2007. The customers in excess of 10% of revenue accounted for 31% in
2008 and 38% in 2007 of net sales.
F-6
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Emerging Issues Task Force 99-19 (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.
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
and fuel 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 Statements of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" 141 ("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 were
amortized over the term of the time chartering agreement, and related
debt. Other intangibles are amortized as follows:
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 Term of Chartering agreement
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:
Vessels 4 - 25 years straight-line
Leasehold improvements 7 - 11 years straight-line
Furniture and equipment 20% declining-balance
Computer equipment 45% declining-balance
F-7
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 repairs 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.
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, Financial Accounting Standards Board (FASB) ratified the
consensus reached by the EITF 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 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.
F-8
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2008 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.
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 (USA) 2004 - 2008
Michigan 2004 - 2008
Ohio 2004 - 2008
New York 2004 - 2008
Federal (Canada) 2003 - 2008
Ontario 2003 - 2008
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 income or 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.
F-9
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Benefit plans
The Company contributes to employee Registered Retirement Savings Plans in
Canada and 401K plans in the United States. Contributions are expensed in
operating expenses when incurred. The Company made contributions of $751
in 2008 and $266 in 2007.
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 all newly granted awards and awards
modified, repurchased or cancelled after April 1, 2007. Compensation
expense for the unvested portion of awards that were outstanding at April
1, 2007 is recognized ratably over the remaining vesting period based on
the fair value at date of grant as calculated under the Black-Scholes
option pricing model.
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 24). Two VIE's have
been identified and one has been consolidated in accordance with FIN 46R.
Though the Voyageur group of companies (see Note 11) is a variable
interest entity for Rand, it does not meet criteria for consolidation and
hence is not consolidated.
On February 13, 2008, the Company entered into an asset purchase agreement
with WMS (a VIE until that date) to buy the entire remaining assets of the
VIE. Based on this reconsideration event, the Company is no longer the
primary beneficiary under FIN 46R and is no longer required to consolidate
WMS financial statements. The March 31, 2008, statement of operations
includes the results of WMS through February 13, 2008, at which point WMS
was deconsolidated from the Company's balance sheet. As a result of the
deconsolidation process a loss of $302 was recorded on the books of the
Company.
3. RECENTLY ISSUED PRONOUNCEMENTS
Fair value measurement
In September 2006, the FASB issued SFAS 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 ending 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 SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51. SFAS 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 ending March 31, 2009 and is presently evaluating the impact
of adopting this standard on its consolidated financial statements.
F-10
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
3. RECENTLY ISSUED PRONOUNCEMENTS (continued)
Business Combinations
On December 4, 2007, the FASB also issued SFAS 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 ending March 31, 2009. The Company is
presently evaluating the impact of adopting this standard on its
consolidated financial statements.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("FAS 161"). SFAS 161 amends SFAS 133
to provide enhanced disclosure requirements surrounding how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS 133 and how derivative
instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. SFAS 161 is effective for
the Company as of the beginning of Fiscal 2010, including interim periods
thereafter. The implementation of SFAS 161 is not expected to have a
material impact on the Company's consolidated financial statements.
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). The new standard is intended
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. generally
accepted accounting principles ("GAAP") for nongovernmental entities. SFAS
162 is effective 60 days following SEC approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The adoption of SFAS 162 is not anticipated to have an effect
on the Company's consolidated financial statements.
4. 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. The deposit in the blocked account was released on purchase
of the remaining vessels from WMS on February 13, 2008.
5. ACCOUNTS RECEIVABLE
Trade receivables are presented net of an allowance for doubtful accounts.
The allowance was $50 as of March 31, 2008 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.
F-11
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are comprised of the following:
March 31, March 31,
2008 2007
--------- ---------
Prepaid insurance $ 605 $ 207
Fuel and lubricants 1,966 1,364
Deposits and other prepaids 551 1,551
--------------------------------------------------------------------------
$ 3,122 $ 3,122
==========================================================================
7. INCOME TAXES
The components of the provision for (recovery of) income taxes are as
follows:
Year ended Year ended
March 31, 2008 March 31, 2007
-------------- --------------
Current
Federal $ 325 $ --
State and Local 47 (76)
Foreign -- 353
Deferred:
Federal (3,665) (2,670)
State and Local (516) (290)
Foreign (1,179) 523
=========================================================================
$ (4,988) $ (2,160)
=========================================================================
The total provision for income taxes differs from that amount which would
be computed by applying the Canadian and U.S. Federal income tax rate to
income before provision for income taxes as follows:
Year ended Year ended
March 31, 2008 March 31, 2007
-------------- --------------
Statutory federal income tax rate 34.0% 34.0%
State and foreign income taxes 4.9% 8.6%
Other permanent differences
and adjustments (7.5%) (3.1%)
------------------------------------------------------------------------
Effective income tax rate 31.4% 39.5%
========================================================================
F-12
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
7. INCOME TAXES (continued)
The significant components of current deferred tax assets and liabilities
are as follows:
March 31, 2008 March 31, 2007
-------------- --------------
Current asset:
Accrued liabilities not yet
deductible for tax $ 1,355 $ 1,219
==========================================================================
Total current deferred tax asset $ 1,355 $ 1,219
Current liability:
Drydock tax reserve 1,508 589
--------------------------------------------------------------------------
Total current deferred tax
liability $ 1,508 $ 589
==========================================================================
Total deferred tax
asset/(liability) $ (153) $ 630
==========================================================================
The significant components of long-term deferred tax assets and
liabilities are as follows:
March 31, 2008 March 31, 2007
-------------- --------------
Long-term deferred tax assets
Operating loss carry forwards $ 20,119 $ 13,574
Other 199 --
-------------------------------------------------------------------------
Net long-term deferred tax asset $ 20,318 $ 13,574
=========================================================================
Long-term deferred tax liabilities
Separately identifiable
Intangibles $ 3,596 $ 3,711
Deferred foreign exchange gain 311 --
Depreciation and drydock
expenses 10,796 9,913
-------------------------------------------------------------------------
Total deferred tax liability $ 14,703 $ 13,624
=========================================================================
Net deferred tax asset/(liability) $ 5,615 $ (50)
=========================================================================
The measurement of the aggregate deferred tax assets is adjusted by a
valuation allowance to recognize tax benefits to the extent that, based on
available evidence, it is more likely than not that they will be realized.
Based on the weight of evidence regarding recoverability of the Company's
tax assets, no valuation allowance is provided for 2008 or 2007, as the
Company believes that it is more likely than not that the deferred income
tax assets will be realized based on performance of the entities prior to
acquisitions, and based on future projections.
F-13
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
7. INCOME TAXES (continued)
The Company has combined income tax loss carry forwards of approximately
$61,736 which expire as follows:
-----------------------------------------------
Expiry year Canada United States Total
-----------------------------------------------
2009 $ 2,453 $ - $ 2,453
2010 5,548 - 5,548
2014 4,439 - 4,439
2015 571 - 571
2020 - 343 343
2021 - - -
2023 - 450 450
2024 - 891 891
2025 - 2,093 2,093
2026 4,905 2,531 7,436
2027 381 11,212 11,593
2028 13,634 10,226 23,860
2029 2,059 - 2,059
--------------------------------------------------------------------------
TOTAL $ 33,990 $ 27,746 $ 61,736
==========================================================================
8. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
March 31, 2008 March 31, 2007
-------------- --------------
Cost
Vessels $ 100,628 $ 70,543
Leasehold improvements 1,865 1,397
Furniture and equipment 1,013 116
Computer equipment and purchased software 1,592 229
---------------------------------------------------------------------------------
$ 105,098 $ 72,285
=================================================================================
Accumulated depreciation
Vessels $ 8,301 $ 5,204
Leasehold improvements 250 125
Furniture and equipment 35 24
Computer equipment and purchased software 163 73
---------------------------------------------------------------------------------
8,749 5,426
---------------------------------------------------------------------------------
$ 96,349 $ 66,859
=================================================================================
F-14
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
9. DEFERRED DRYDOCK COSTS
Deferred drydock costs are comprised of the following:
March 31, 2008 March 31, 2007
-------------- --------------
Drydock expenditures $ 10,991 $ 6,279
Accumulated amortization 1,909 384
-------------------------------
$ 9,082 $ 5,895
==========================================================================
10. INTANGIBLE ASSETS AND GOODWILL
Intangibles are comprised of the following:
March 31, 2008 March 31, 2007
-------------- --------------
Intangible assets
Deferred financing costs $ 2,134 $ 1,172
Trademarks, trade names 1,003 922
Non-competition agreements 2,298 2,114
Customer relationships and contracts 15,959 10,563
Chartering agreement costs -- 481
--------------------------------------------------------------------------
Total identifiable intangibles $ 21,394 $ 15,252
--------------------------------------------------------------------------
Accumulated amortization
Deferred financing costs $ 71 $ 270
Trademarks, trade names 208 99
Non-competition agreements 1,326 632
Customer relationships and contracts 1,810 773
Chartering agreement costs -- 144
--------------------------------------------------------------------------
3,415 1,918
--------------------------------------------------------------------------
Total intangible assets $ 17,979 $ 13,334
==========================================================================
Goodwill $ 10,193 $ 6,363
==========================================================================
Intangible asset amortization over the next five years is estimated as
follows:
2009 $ 2,229
2010 1,925
2011 1,591
2012 1,591
2013 1,521
-----------------------------------------
$ 8,857
=========================================
F-15
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
11. ACQUISITIONS
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 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 4,027 3,831
Other identifiable intangible assets 4,797 4,571
---------------------------
25,774 24,520
---------------------------
Certain customer contracts were also assigned to the Company under the
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. The Company terminated the Crew Manning Agreement in
March 2008.
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 February 13, 2008, Grand River and Rand LL Holdings entered into and
consummated a Vessel Purchase Agreement with WMS providing for the
purchase by Grand River of three United States flagged vessels, the DAVID
Z. NORTON, the EARL W. OGLEBAY and the WOLVERINE, for an aggregate
purchase price of $20,019 plus purchase expenses. Lower Lakes
Transportation, had time chartered the acquired vessels since August 1,
2006 pursuant to the terms of a Time Charter Agreement between Lower Lakes
Transportation and WMS, which also provided for an option to purchase the
vessels.
Prior to commencement of the 2008 sailing season, the Company transferred
one of the vessels acquired from WMS to Canadian registry for deployment
as part of the Company's Canadian fleet.
F-16
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
11. ACQUISITIONS (continued)
In connection with the sale of vessels under the Vessel Purchase
Agreement:
- WMS repaid all amounts owed to Rand Finance Corp., a wholly owned
subsidiary of Rand Logistics Inc., under that certain Note Purchase
Agreement, dated as of August 1, 2006 as well as a subordinated note
payable to a third party.
- WMS repaid all of its obligations due to National City Commercial
Capital Company, LLC under WMS' financing arrangements with National
City, the principal and interest amounts of which were included in the
hire payable by Lower Lakes Transportation under the Time Charter
Agreement and in parts guaranteed by Rand LL Holdings and
- Grand River and Rand LL Holdings agreed to bear certain wind-down
costs of the sale transaction and time charter agreement.
As discussed in Note 14 the credit agreement was also amended and
restated. The estimated purchase price allocation to the fair values of
assets acquired is as follows:
US $
--------------------------------------------------------------
Purchase price 20,602
--------------------------------------------------------------
Vessels 20,602
----------------
As discussed in Note 24, WMS was identified as VIE and WMS financial
statements were consolidated for the period from August 1, 2006 to
February 13, 2008. After this deconsolidation event the Company is not a
primary beneficiary of WMS. The WMS financials were deconsolidated on
February 13, 2008.
12. BANK INDEBTEDNESS
As discussed in detail in Note 14, the Company amended and restated the
credit agreement with its senior lender on February 13, 2008. At March 31,
2008, the Company had authorized operating lines of credit under this
restated credit agreement in the amounts of CDN $13,500 and US $13,500
(March 31, 2007 - CDN $3,000 and US $6,500) with its senior lender, and
was utilizing $269 at March 31, 2008 ($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 2.75% or Canadian 30 day BA rate plus
3.75% on Canadian dollar borrowings and U.S. Base rate plus 2.75% or LIBOR
plus 3.75% on U.S. Dollar borrowings and is secured under the same terms
and has the same financial covenants as described in Note 14. The
effective interest rates on the operating lines of credit at March 31,
2008 were 8.11% on the Canadian line of credit and 8% on the U.S.
operating line of credit.
F-17
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
13. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
March 31, March 31,
2008 2007
---------------- -----------------
Transaction costs $ 244 $ --
Payroll 1,832 2,097
Preferred stock dividends 1,592 296
Professional fees 522 689
Interest 428 99
Winter work accrual 1,330 --
Other 1,295 56
------------------------------------
$ 7,243 $ 3,237
------------------------------------------------------------------------
14. LONG-TERM DEBT
On February 13, 2008, Lower Lakes Towing Ltd., Lower Lakes Transportation
and Grand River, as borrowers, Rand LL Holdings, Rand Finance and Rand
Logistics, Inc., as guarantors, General Electric Capital Corporation, as
agent and lender, and certain other lenders, entered into an Amended and
Restated Credit Agreement which (i) amends and restates the Credit
Agreement to which the borrowers are a party, dated as of March 3, 2006,
in its entirety, (ii) restructures the tranches of loans provided for
under the 2006 Credit Agreement and advances certain new loans, (iii)
finances, in part, the acquisition of the three vessels by Grand River
from WMS, and (iv) provides working capital financing, funds for other
general corporate purposes and funds for other permitted purposes. The
Amended and Restated Credit Agreement provides for (i) a revolving credit
facility under which Lower Lakes Towing may borrow up to CDN $13,500 with
a seasonal overadvance facility of US $8,000 (US $10,000 for calendar year
2008 only), and a swing line facility of CDN $4,000 subject to
limitations, (ii) a revolving credit facility under which Lower Lakes
Transportation may borrow up to US $13,500 with a seasonal over advance
facility of US $8,000 (US $10,000 for calendar year 2008 only), and a
swing line facility of US $4,000 subject to limitations, (iii) a Canadian
dollar denominated term loan facility under which Lower Lakes Towing may
borrow CDN $41,700 (iv) a US dollar denominated term loan facility under
which Grand River may borrow US $22,000 (v) a Canadian dollar denominated
"Engine" term loan facility under which Lower Lakes Towing may borrow CDN
$8,000.
Under the Amended and Restated Credit Agreement, the revolving credit
facilities and swing line loans expire on April 1, 2013. The outstanding
principal amount of the Canadian term loan borrowings are repayable as
follows: (i) quarterly payments of CDN $695 commencing September 1, 2008
and ending March 1, 2013 and (ii) a final payment in the outstanding
principal amount of the Canadian term loan shall be payable upon the
Canadian term loan facility's maturity on April 1, 2013. The outstanding
principal amount of the US term loan borrowings are repayable as follows:
(i) quarterly payments of US $367 commencing September 1, 2008 and ending
on March 1, 2013 and (iii) a final payment in the outstanding principal
amount of the US term loan shall be payable upon the US term loan
facility's maturity on April 1, 2013. The outstanding principal amount of
the Canadian "Engine" term loan borrowings are repayable as follows: (i)
quarterly payments of CDN $133 commencing quarterly September 1, 2008 and
ending March 1, 2013 and (iii) a final payment in the outstanding
principal amount of the Engine term loan shall be payable upon the Engine
term loan facility's maturity on April 1, 2013.
F-18
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
14. LONG-TERM DEBT (continued)
Borrowings under the Canadian revolving credit facility, the Canadian term
loan and the Canadian swing line facility bear an interest rate per annum,
at the borrowers' option, equal to (i) the Canadian Prime Rate (as defined
in the Amended and Restated Credit Agreement), plus 2.75% per annum or
(ii) the BA Rate (as defined in the Amended and Restated Credit Agreement)
plus 3.75% per annum. The US revolving credit facility, the US term loan
and the US swing line facility bear interest, at the borrower's option
equal to (i) LIBOR (as defined in the Amended and Restated Credit
Agreement) plus 3.75% per annum, or (ii) the US Base Rate (as defined in
the Amended and Restated Credit Agreement), plus 2.75% per annum.
Borrowings under the Canadian "Engine" term loan bear an interest rate per
annum, at the borrowers' option, equal to (i) the Canadian Prime Rate (as
defined in the Amended and Restated Credit Agreement), plus 4.00% per
annum or (ii) the BA Rate (as defined in the Amended and Restated Credit
Agreement) plus 5.00% per annum. The interest rates shall be adjusted
quarterly commencing on the second quarter of fiscal year 2009 based upon
the borrowers' senior debt to EBITDA ratio as calculated in accordance
with the Amended and Restated Credit Agreement.
Obligations under the Amended and Restated Credit Agreement are secured by
(i) a first priority lien and security interest on all of the borrowers'
and guarantors' assets, tangible or intangible, real, personal or mixed,
existing and newly acquired, (ii) a pledge by Rand LL Holdings of all of
the outstanding capital stock of the borrowers; (iii) a pledge the
Registrant of all of the outstanding capital stock of Rand LL Holdings and
Rand Finance. The indebtedness of each borrower under the Amended and
Restated Credit Agreement is unconditionally guarantied by each other
borrower and by the guarantors, and such guaranty is secured by a lien on
substantially all of the assets of each borrower and each guarantor.
Under the Amended and Restated Credit Agreement, 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 Amended and Restated Credit Agreement contains certain covenants,
including those limiting the guarantors, the borrowers, and their
subsidiaries' ability to incur indebtedness, incur liens, sell or acquire
assets or businesses, change the nature of their businesses, engage in
transactions with related parties, make certain investments or pay
dividends. In addition, the Amended and Restated Credit Agreement requires
the borrowers to maintain certain financial ratios. Failure of the
borrowers or the guarantors to comply with any of these covenants or
financial ratios could result in the loans under the Amended and Restated
Credit Agreement being accelerated. The Company is in compliance with
those covenants as of March 31, 2008.
The Amended and Restated Credit Agreement was amended on June 24, 2008 as
discussed in Note 28.
The effective interest rates on the term loans at March 31, 2008 including
the effect from interest rate swap contracts were 7.84% (7.35% at March
31, 2007) on the Canadian term loan, 9.09% on the Canadian engine loan and
7.40% (8.32% at March 31, 2007) on the US term loan.
F-19
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
14. LONG-TERM DEBT (continued)
March 31, 2008 March 31, 2007
-------------- --------------
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. $ -- $ 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. -- 5,880
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. -- 2,352
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. -- 14,138
e) Canadian term loan bearing interest
at Canadian Prime rate plus 2.75% or
Canadian BA rate plus 3.75% at the
Company's option. The loan is
repayable over a six year term until
April 1, 2013 with current quarterly
payments of CDN $695 commencing
September 1, 2008 until March 1, 2013
and the balance due April 1, 2013.
The term loan is collateralized by
the existing and newly acquired
assets of the company. 40,624 --
f) Canadian engine term loan bearing
interest at Canadian Prime rate plus
4% or Canadian BA rate plus 5% at the
Company's option. The loan is
repayable over a six year term until
April 1, 2013 with current quarterly
payments of CDN $133 commencing
September 1, 2008 until March 1, 2013
and the balance due April 1, 2013.
The term loan is collateralized by
the existing and newly acquired
assets of the company. 7,793 --
g) US term loan bearing interest at
LIBOR rate plus 3.75% or US base rate
plus 2.75% at the Company's option.
The loan is repayable over a six year
term until April 1, 2013 with current
quarterly payments of US $367
commencing September 1, 2008 until
March 1, 2013 and the balance due
April 1, 2013. The term loan is
collateralized by the existing and
newly acquired assets of the company. 22,000 --
----------------------------------------------------------------------------
$ 70,417 $ 39,262
Less amounts due within 12 months 3,521 4,398
----------------------------------------------------------------------------
$ 66,896 $ 34,864
============================================================================
F-20
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
14. LONG-TERM DEBT (continued)
Principal payments are due as follows:
2009 $ 3,521
2010 4,694
2011 4,695
2012 4,694
2013 4,695
2014 48,118
----------------------------------------------------------------------
$ 70,417
======================================================================
15. COMMITMENTS
The Company entered into a bareboat charter agreement for the McKee Sons
barge which expires in 2018. The lease was amended on February 18, 2008 to
provide a lease payment deferment in return for leasehold improvements.
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%.
2009 $ 464
2010 695
2011 695
2012 695
2013 695
Thereafter 4,181
--------------------------------------------------------------
$ 7,425
--------------------------------------------------------------
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
$2,150 as of March 31, 2008. The repowered engine will be completed during
the first quarter of fiscal 2009.
F-21
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
16. CONTINGENCIES
Rand is not involved in any legal proceedings which are expected to have a
significant effect on its business, financial position, results of
operations or liquidity, nor is the Company aware of any proceedings that
are pending or threatened which may have a significant effect on the
Company's business, financial position, and 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 $363 as of March 31,
2008 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 11) with Voyageur, 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.
F-22
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
17. STOCKHOLDERS' EQUITY
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 SFAS 133 and are accordingly not accounted
for as derivatives for purposes of SFAS 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 fractional shares will be issued upon exercise of the warrants.
However, if a warrant holder exercises all warrants then owned on 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 had agreed not to exercise their warrants prior to the
Expiration Time. As of March 31, 2008, 2,460,965 warrants had been
exercised, pursuant to the program, generating proceeds of $11,075 net of
stock warrant inducement discount.
F-23
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
17. STOCKHOLDERS' EQUITY (continued)
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 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.
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.
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 March 31, 2008 was $ 1,592 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 March 31, 2008 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.
F-24
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
17. 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, 2008
of $6.72 per share. The Company has recorded expense of $361 in 2008 ($722
in 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 vested 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.
(d) Since January 2007, share-based compensation has been granted to
Management and directors from time to time. The Company had no surviving,
outstanding share-based compensation agreements with employees or
directors prior to that date except as described above. The Company has
reserved 2,500,000 shares for grants to management and directors under the
2007 Long Term Incentive Plan ("LTIP") for Employees, Officers, Directors
and Consultants. At March 31, 2008, a total of 2,243,892 shares were
available under the Plans for future awards.
For all share-based compensation, as employees and directors render
service over the vesting periods, expense is recorded to the same line
items used for cash compensation. Generally this expense is for the
straight-line amortization of the grant date fair market value adjusted
for expected forfeitures. Other capital is correspondingly increased as
the compensation is recorded. Grant date fair market value for all
non-option share-based compensation is the closing market value on the
date of grant.
The general characteristics of issued types of share-based awards granted
under the Plans through March 31, 2008 are as follows.
Restricted Shares -- All of the restricted shares granted to date
generally vest over three years. No new grants of restricted shares have
been issued to Management since January 2007. All of the vested shares
issued to non-employee outside directors vest immediately. The first award
to non-employee outside directors in the amount of 12,909 shares was made
on February 13, 2008 for services through March 31, 2008.
Stock Options -- Stock options granted to management employees vest over
three years in equal annual installments. All options issued through March
31, 2008, expire ten years from the date of grant. Stock option grant date
fair values are determined at the date of grant using a Black-Scholes
option pricing model, a closed-form fair value model, based on market
prices at the date of grant. At each grant date the Company has estimated
a dividend yield of 0%. The weighted average risk free interest rate
within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of the grant. This was 3.76% for the
2008 grants. The expected term represents the period of time the grants
are expected to be outstanding, generally six years and has been computed
using the short-cut method per the Securities and Exchange Commission
Staff Accounting Bulletin 107. Expected volatility for grants is based on
implied volatility of the Company's closing stock price in the period of
time from the registration and listing of the stock until the time of each
grant since that period is currently shorter than the expected life of the
options. Expected volatility was 36.99% for the 2008 grants. Options
outstanding (243,199) at March 31, 2008, had a remaining weighted average
contractual life of approximately nine years and ten months.
F-25
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
17. STOCKHOLDERS' EQUITY (continued)
Information relating to grants, forfeitures, vesting, exercise, expense
and tax effects are contained in the following tables.
2008
Weighted
Average
Exercise
Number of Price per
Options Share
--------- ---------
Stock Options:
Outstanding - beginning of year at March 31, 2006 and 2007 -- $ --
Granted 243,199 5.81
Exercised -- --
Cancelled -- --
Expired -- --
Outstanding-end of year 243,199 5.81
Exercisable at end of year -- $ --
Other data (In thousands except weighted average fair value): 2008 2007
- --------------------------------------------------------------------- --------- ---------
Weighted average grant date fair value of options granted during year $ 3.22 $ --
Compensation expense 43 --
Unrecognized compensation cost at March 31 $ 740 --
Weighted average remaining life for unrecognized compensation 2.9 years --
The fair value of each option was determined using the Black-Scholes option
pricing model. The key input variables used in valuing the options during the
years ended March 31, 2008 were as follows:
2008
- ---------------------------------------------------------- ----------
Dividend yield None
Risk-free interest rate 3.75%
Stock price volatility 37%
Estimated option term 10 years
2008 2007
Weighted Weighted
Average Average
Fair Fair
Value at Value at
Number of Grant Number of Grant
Restricted Stock: Shares Date Shares Date
- -------------------------------------------------------------------------------------------------------------------
Unvested - beginning of year 107,500 $ 6.72 -- $ --
Granted 12,909 5.81 120,400 6.72
Vested (66,659) 6.54 (12,900) 6.72
Cancelled -- -- --
===================================================================================================================
Unvested-end of year 53,750 $ 6.72 107,500 $ 6.72
- -------------------------------------------------------------------------------------------------------------------
2008 2007
--------- ---------
Other data (In thousands):
Compensation expense $ 436 $ 87
Unrecognized compensation cost at March 31 $ 361 722
Weighted average remaining life for unrecognized compensation 1.0 year 2.0 years
F-26
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
17. STOCKHOLDERS' EQUITY (continued)
The following continuity schedule summarizes outstanding share purchase
warrants:
Cumulative
proceeds from
Exercise exercise of
Outstanding warrants Price warrants
---------------------------------------------------
Balance March 31, 2006 9,200,000
Issued --
Exercised (3,820) $ 5.00 19
- --------------------------------------------------------------------------------
Balance March 31, 2007 9,196,180 $ 19
================================================================================
Issued --
Exercised (3,964,965) $ 4.50 17,843
- --------------------------------------------------------------------------------
Balance March 31, 2008 5,231,215 $ 17,862
================================================================================
Exercise price of $4.50 is net of $0.50 stock warrant inducement discount
per stock warrant. The total stock warrant inducement discount was $1,982
for the year ended March 31, 2008 ($Nil for year ended March 31, 2007).
18. 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.
19. INTEREST EXPENSE
Interest expense is comprised of the following:
Year ended March Year ended March
31, 2008 31, 2007
-------------------------------------
Bank indebtedness $ 306 $ 448
Amortization of deferred finance 417 237
costs
Long-term debt - senior 3,937 2,627
Long-term debt - subordinated 215 152
Long-term debt - capital lease -- 314
Interest rate swap 8 --
--------------------------------------------------------------------------
$ 4,883 $ 3,778
==========================================================================
F-27
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
20. 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:
Year ended Year ended
March 31, 2008 March 31, 2007
---------------------------------
Revenues by country
Canada $ 53,645 $ 38,869
United States 41,124 40,317
------------------------------------------------------------------------
$ 94,769 $ 79,186
========================================================================
Net income (loss) by country
Canada $ (4,132) $ 2,061
United States (10,386) (6,582)
------------------------------------------------------------------------
$ (14,518) $ (4,521)
========================================================================
Revenues from external customers are allocated based on the country of the
legal entity of the Company in which the revenues were recognized.
March 31, 2008 March 31, 2007
-------------- --------------
Property and equipment by
country
Canada $ 66,214 $ 30,612
United States 30,135 36,247
------------------------------------------------------------------------
$ 96,349 $ 66,859
========================================================================
Intangible assets by country
Canada $ 13,954 8,791
United States 4,025 4,543
------------------------------------------------------------------------
$ 17,979 13,334
========================================================================
Goodwill by country
Canada $ 8,284 4,454
United States 1,909 1,909
------------------------------------------------------------------------
$ 10,193 6,363
========================================================================
Total assets by country
Canada $ 114,023 $ 56,652
United States 53,662 66,586
------------------------------------------------------------------------
$ 167,685 $ 123,238
========================================================================
F-28
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
21. 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 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, which are based on rates for similar
debt with similar credit rates in the open market. The Company has
recorded a liability of $1,274 as of March 31, 2008 for two interest rate
swap contracts on the Company's term debt, ($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.
F-29
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
22. EARNINGS PER SHARE
The Company has a total of 12,105,051 common shares issued and
outstanding, out of an authorized total of 50,000,000 shares. The fully
diluted calculation utilizes a total of 14,798,989 for the year ended
March 31, 2008 and 11,430,623 shares for the year ended March 31, 2007
based on the following calculations. Since the calculation is
anti-dilutive, the basic and fully diluted weighted average shares
outstanding are 11,355,068 and 7,225,083 for 2008 and 2007. Warrants
issued from the initial prospectus and over allotment converts to
1,022,581 based on the average yearly share price as of March 31, 2008 of
$6.21 and 1,785,903 based on the average yearly share price of $6.21 as of
March 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.
Year ended Year ended
March 31, 2008 March 31, 2007
=============================================================================================
Numerator:
Net loss before minority interest $ (11,417) $ (3,313)
Preferred stock dividends (1,295) (1,182)
Common stock dividend of VIE -- (250)
Minority interest 176 224
Stock warrant inducement discount (1,982) --
=============================================================================================
Loss available to common shareholders $ (14,518) $ (4,521)
=============================================================================================
Denominator:
Weighted average common shares for basic EPS 11,355,068 7,225,083
---------------------------------------------------------------------------------------------
Effect of dilutive securities:
Total outstanding warrants 5,231,215 9,196,180
Average exercise price 5.00 5.00
Average price during period 6.21 6.21
Shares that could be acquired with the proceeds of
warrants 4,208,634 7,410,277
Dilutive share due to warrants 1,022,581 1,785,903
Long term incentive stock option plan 30,483 --
Average exercise price of stock options 5.81 --
Share that could be acquired with the proceeds of
options 28,497 --
Dilutive shares due to options 1,986 --
Weighted average convertible preferred shares at
$6.20 2,419,355 2,419,355
Weighted average common shares for diluted EPS 11,355,068 7,225,083
---------------------------------------------------------------------------------------------
Basic EPS $ (1.28) $ (0.63)
Diluted EPS $ (1.28) $ (0.63)
=============================================================================================
F-30
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
23. 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 vested 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 was
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, was forfeited, and such participant no longer had any
rights in or to its plan account balance or under the Management Bonus
Program.
If a participant incurred a voluntary separation from service with the
Company or its affiliate (other than for good reason) and who provide
appropriate notice to the Company of such separation, the participant
retained 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, ceased 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 was 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 was
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 was 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 $439 to date
for this program.
F-31
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
24. 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 FIN46R. WMS was determined to be a type of VIE,
which must be consolidated in accordance with FIN-46R from August 1, 2006
to February 13, 2008.
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 made 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 would
have expired on December 31, 2008, and LLTC had the option to extend the
charter period through December 31, 2013. The Time Charter Agreement also
provided 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 27, 2007, Rand LL Holdings Corp.
and WMS 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 February 13, 2008 the Company exercised its purchase option and entered
into an asset purchase agreement with WMS (a VIE until that date) to buy
the vessel assets of the VIE. Based on this reconsideration event, the
Company is no longer the primary beneficiary under FIN46R and are no
longer required to consolidate WMS financial statements. The statement of
operations as of March 31, 2008 includes the results of WMS through
February 13, 2008, at which point WMS was deconsolidated from the balance
sheet. As a result of the deconsolidation process, a loss of $302 was
recorded in the books of the company.
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 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's
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 was obligated to pay Voyageur an
annual fee of $175 and pay or reimburse Voyageur for its reasonable crew
payroll expenses. The Company terminated the Crew Manning Agreement in
March 2008.
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.
F-32
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
24. VARIABLE INTEREST ENTITIES (continued)
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.
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 default is CDN $845, which represents (1) Half of the CDN $1,250
guarantee of Voyageur's indebtedness to GE Canada, unless the Company
exercises its purchase option and (2) A guarantee of Voyageur's account
with The St. Lawrence Seaway Management Corporation, which is offset by a
set-off agreement under the Contract of Affreightment.
The impact of the WMS VIE on the balance sheet as of March 31, 2008 and
statement of operations for the period ending March 31, 2008 and the
comparable prior year figures are shown below.
F-33
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
24. VARIABLE INTEREST ENTITIES (continued)
Rand Logistics, Impact of Consolidated
Inc. FIN March 31, 2008
March 31, 2008 46R
ASSETS presentation
---------------------------------------------
CURRENT
Cash and cash equivalents $ 5,626 -- $ 5,626
Accounts receivable (Note 5) 3,468 -- 3,468
Prepaid expenses and other current assets (Note 6) 3,122 -- 3,122
Income tax receivable 193 -- 193
Deferred income taxes (Note 7) 1,355 -- 1,355
- -------------------------------------------------------------------------------------------------------------
Total current assets 13,764 -- 13,764
BLOCKED ACCOUNT (Note 4) -- -- --
PROPERTY AND EQUIPMENT, NET (Note 8) 96,349 -- 96,349
DUE FROM RELATED COMPANY -- -- --
DEFERRED INCOME TAXES (Note 7) 20,318 -- 20,318
DEFERRED DRYDOCK COSTS, NET (Note 9) 9,082 -- 9,082
INTANGIBLE ASSETS, NET (Note 10) 17,979 -- 17,979
NOTE RECEIVABLE WMS -- -- --
GOODWILL (Note 10) 10,193 -- 10,193
- -------------------------------------------------------------------------------------------------------------
Total assets $ 167,685 -- $ 167,685
=============================================================================================================
LIABILITIES
CURRENT
Bank indebtedness (Note 12) $ 269 -- $ 269
Accounts payable 14,985 -- 14,985
Accrued liabilities (Note 13) 7,243 -- 7,243
Acquired Management Bonus Program (Note 23) 3,000 -- 3,000
Interest rate swap contract (Note 21) 1,274 -- 1,274
Income taxes payable 422 -- 422
Deferred income taxes (Note 7) 1,508 -- 1,508
Current portion of long-term debt (Note 14) 3,521 -- 3,521
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 32,222 -- 32,222
LONG-TERM DEBT (Note 14) 66,896 -- 66,896
ACQUIRED MANAGEMENT BONUS PROGRAM (Note 23) -- -- --
DEFERRED INCOME TAXES (Note 7) 14,703 -- 14,703
- -------------------------------------------------------------------------------------------------------------
Total liabilities 113,821 -- 113,821
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value (Note 17) 14,900 -- 14,900
Common stock, $.0001 par value (Note 17) 1 -- 1
Additional paid-in capital 58,350 -- 58,350
Accumulated deficit (20,465) -- (20,465)
Minority interest of variable interest entity -- -- --
Accumulated other comprehensive income (loss)
(Note 27) 1,078 -- 1,078
=============================================================================================================
Total stockholders' equity 53,864 -- 53,864
=============================================================================================================
Total liabilities and stockholders' equity $ 167,685 -- $ 167,685
=============================================================================================================
Rand Logistics, Impact of Consolidated
Inc. FIN March 31, 2007
March 31, 2007 46R
ASSETS presentation
----------------------------------------------
CURRENT
Cash and cash equivalents $ 6,646 $ 561 $ 7,207
Accounts receivable (Note 5) 2,632 70 2,702
Prepaid expenses and other current assets (Note 6) 3,125 (3) 3,122
Income tax receivable 263 -- 263
Deferred income taxes (Note 7) 1,116 103 1,219
- --------------------------------------------------------------------------------------------------------------
Total current assets 13,782 731 14,513
BLOCKED ACCOUNT (Note 4) 2,700 -- 2,700
PROPERTY AND EQUIPMENT, NET (Note 8) 48,978 17,881 66,859
DUE FROM RELATED COMPANY (1,657) 1,657 --
DEFERRED INCOME TAXES (Note 7) 12,986 588 13,574
DEFERRED DRYDOCK COSTS, NET (Note 9) 5,895 -- 5,895
INTANGIBLE ASSETS, NET (Note 10) 12,936 398 13,334
NOTE RECEIVABLE WMS 2,298 (2,298) --
GOODWILL (Note 10) 6,363 -- 6,363
- --------------------------------------------------------------------------------------------------------------
Total assets $ 104,281 $ 18,957 $ 123,238
==============================================================================================================
LIABILITIES
CURRENT
Bank indebtedness (Note 12) $ 5,097 $ -- $ 5,097
Accounts payable 10,312 1,133 11,445
Accrued liabilities (Note 13) 2,491 746 3,237
Acquired Management Bonus Program (Note 23) -- -- --
Interest rate swap contract (Note 21) -- 135 135
Income taxes payable 385 -- 385
Deferred income taxes (Note 7) 589 -- 589
Current portion of long-term debt (Note 14) 2,948 1,450 4,398
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 21,822 3,464 25,286
LONG-TERM DEBT (Note 14) 19,825 15,039 34,864
ACQUIRED MANAGEMENT BONUS PROGRAM (Note 23) 3,000 -- 3,000
DEFERRED INCOME TAXES (Note 7) 13,031 593 13,624
- --------------------------------------------------------------------------------------------------------------
Total liabilities 57,678 19,096 76,774
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value (Note 17) 14,900 -- 14,900
Common stock, $.0001 par value (Note 17) 1 -- 1
Additional paid-in capital 38,407 -- 38,407
Accumulated deficit (5,537) (410) (5,947)
Minority interest of variable interest entity -- 176 176
Accumulated other comprehensive income (loss)
(Note 27) (1,168) 95 (1,073)
==============================================================================================================
Total stockholders' equity 46,603 (139) 46,464
==============================================================================================================
Total liabilities and stockholders' equity $ 104,281 $ 18,957 $ 123,238
==============================================================================================================
F-34
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
24. VARIABLE INTEREST ENTITIES (continued)
Year ended March 31, 2008
Rand Logistics, Impact of
Inc. Fin46R Consolidated
========================================================
REVENUE $ 94,769 $ -- $ 94,769
EXPENSES
Outside voyage charter fees (Note 18) 9,436 -- 9,436
Charter hire 11,757 (11,757) --
Vessel operating expenses 60,973 8,144 69,117
Repairs and maintenance 3,834 10 3,844
General and administrative 9,968 710 10,678
Depreciation 5,376 1,052 6,428
Amortization of drydock costs 1,476 -- 1,476
Amortization of intangibles 1,912 -- 1,912
Amortization of chartering agreement costs 337 -- 337
Gain on sale of VIE Vessels -- (667) (667)
Loss on retirement of owned vessel 1,735 -- 1,735
Loss (Gain) on foreign exchange (163) -- (163)
- ----------------------------------------------------------------------------------------------------------
106,641 (2,508) 104,133
INCOME (LOSS) BEFORE OTHER INCOME AND EXPENSES
AND INCOME TAXES (11,872) 2,508 (9,364)
- ----------------------------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSES
Interest expense (Note 19) 3,392 1,491 4,883
Interest income (446) 211 (235)
Loss on interest rate swap contract 1,294 44 1,338
Write off of deferred financing cost on
refinanced indebtedness (Note 14) 753 -- 753
Loss on deconsolidation of VIE -- 302 302
- ----------------------------------------------------------------------------------------------------------
4,993 2,048 7,041
INCOME (LOSS) BEFORE INCOME TAXES (16,865) 460 (16,405)
PROVISION (RECOVERY) FOR INCOME TAXES (5,214) 226 (4,988)
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST (11,651) 234 (11,417)
MINORITY INTEREST (Note 24) -- (176) (176)
NET INCOME (LOSS) (11,651) 410 (11,241)
==========================================================================================================
PREFERRED STOCK DIVIDENDS 1,295 -- 1,295
COMMON STOCK DIVIDEND OF VIE -- -- --
STOCK WARRANT INDUCEMENT DISCOUNT (Note 17) 1,982 -- 1,982
==========================================================================================================
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ ( 14,928) $ 410 $ (14,518)
==========================================================================================================
Net income (loss) per share basic (Note 22) $ ( 1.31) $ 0.03 $ ( 1.28)
Net income (loss) per share diluted (Note 22) $ ( 1.31) $ 0.03 $ ( 1.28)
Year ended March 31, 2007
Rand Logistics, Impact of
Inc. Fin46R Consolidated
=======================================================
REVENUE $ 79,186 $ -- $ 79,186
EXPENSES
Outside voyage charter fees (Note 18) 4,935 -- 4,935
Charter hire 10,546 (10,546) --
Vessel operating expenses 49,907 7,567 57,474
Repairs and maintenance 2,575 807 3,382
General and administrative 7,628 441 8,069
Depreciation 4,294 848 5,142
Amortization of drydock costs 388 -- 388
Amortization of intangibles 1,630 (197) 1,433
Amortization of chartering agreement costs 144 -- 144
Gain on sale of VIE Vessels -- -- --
Loss on retirement of owned vessel -- -- --
Loss (Gain) on foreign exchange 128 -- 128
- ---------------------------------------------------------------------------------------------------------
82,175 (1,080) 81,095
INCOME (LOSS) BEFORE OTHER INCOME AND EXPENSES
AND INCOME TAXES (2,989) 1,080 (1,909)
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSES
Interest expense (Note 19) 2,594 1,184 3,778
Interest income (497) 148 (349)
Loss on interest rate swap contract -- 135 135
Write off of deferred financing cost on
refinanced indebtedness (Note 14) -- -- --
Loss on deconsolidation of VIE -- -- --
- ---------------------------------------------------------------------------------------------------------
2,097 1,467 3,564
INCOME (LOSS) BEFORE INCOME TAXES (5,086) (387) (5,473)
PROVISION (RECOVERY) FOR INCOME TAXES (2,019) (141) (2,160)
- ---------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST (3,067) (246) (3,313)
MINORITY INTEREST (Note 24) -- (224) (224)
NET INCOME (LOSS) (3,067) (22) (3,089)
=========================================================================================================
PREFERRED STOCK DIVIDENDS 1,182 -- 1,182
COMMON STOCK DIVIDEND OF VIE -- 250 250
STOCK WARRANT INDUCEMENT DISCOUNT (Note 17) -- -- --
=========================================================================================================
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ (4,249) $ (272) $ (4,521)
=========================================================================================================
Net income (loss) per share basic (Note 22) $ (0.59) $ (0.04) $ (0.63)
Net income (loss) per share diluted (Note 22) $ (0.59) $ (0.04) $ (0.63)
F-36
RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements
(U.S. Dollars 000's except for Earnings Per Share figures)
================================================================================
25. RELATED PARTY TRANSACTIONS
The Company presently occupies office space provided by companies
controlled by either our chief executive officer or our president. Such
related parties have agreed that it will make such office space, as well
as certain office and secretarial services, available to the Company, as
may be required by the Company from time to time. The Company had agreed
to pay such affiliates $7.5 per month for such services commencing on the
effective date of the initial public offering until such executive offices
were moved to another office in October 2006. The Company agreed to pay
such affiliates $12 per month effective October 16, 2006, such that total
lease expense for the year paid to such affiliates was $144 in 2008 and
$115 in 2007. Deposits relating to the rental of the new location
amounting to $62 were paid during 2007. The Company reimbursed such
affiliates for certain out of pocket costs of $15 in 2008 for office
expenses and $17 relating to the move, certain operating expense, and
certain legal costs of the lease and license agreements in 2007. The
statement of operations for the year ended March 31, 2008 and 2007 include
$144 and $ 133 respectively, related to this agreement.
26. ECONOMIC DEPENDENCE
The Company had two major customers in excess of 10% of revenue in 2008
and 2007. The customers in excess of 10% of revenues accounted for 31% in
2008 and 38% in 2007 of net revenues.
27. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
the reporting and display of comprehensive income (loss), which is defined
as the change in equity arising from non-owner sources. Comprehensive
income (loss) is reflected in the consolidated statement of changes in
shareholders' deficiency. The components of, and changes in, comprehensive
income (loss) and accumulated other comprehensive income (loss) consist of
translation adjustments arising from the translation of the parent Company
accounts from Canadian dollar functional currency to U.S. Dollar reporting
currency. Included in comprehensive income (loss) and accumulated other
comprehensive income (loss) are the effects of foreign currency
translation adjustments of $2,151 income (2007 - $274 income).
28. SUBSEQUENT EVENTS
On June 24, 2008, Lower Lakes Towing Ltd., Lower Lakes Transportation
Company, Grand River Navigation Company and the other Credit Parties
thereto entered into a First Amendment (the "Amendment") to the Amended
and Restated Credit Agreement, dated February 13, 2008, with the lenders
signatory thereto and General Electric Capital Corporation, as Agent (the
"Credit Agreement"). Under the Amendment, the borrowers amended the
definition of "Fixed Charge Coverage Ratio", modified the maximum amounts
outstanding under the Canadian and US Revolving Credit Facilities and
modified the measurement dates of the Maximum Capital Expenditures (as
defined therein).