10-Q 1 v355544_10q.htm FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to                
 
Commission File Number        1-6479-1        
 
OVERSEAS SHIPHOLDING GROUP, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
13-2637623
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
1301 Avenue of the Americas, New York, New York 
 
10019
(Address of principal executive offices)
 
(Zip Code)
 
(212) 953-4100
  
  
Registrant's telephone number, including area code
 
 
 
No Change
 
 
Former name, former address and former fiscal year, if changed since last report
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           YES ¨ NO x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       YES   ¨ NO   x 
 
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 “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   ¨
 
Accelerated filer x
 
 
 
Non-accelerated filer      ¨
 
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
 
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. Common Shares outstanding as of October 7, 2013– 30,718,509
 
 
 
Special Note
 
This Quarterly Report on Form 10-Q was delayed pending the completion of an inquiry conducted by the Company at the request and under the direction of the audit committee of the board of directors of the Company (the “Audit Committee”), into the Company’s understatement of its United States (“U.S.”) federal income tax payments and its provision for income taxes. The Company completed its inquiry and an analysis of the consequences in June 2013. On October 19, 2012, the Audit Committee, on the recommendation of management, concluded that the Company’s previously issued financial statements for at least each of the three calendar years in the three year period ended December 31, 2011 (including the interim periods within those years), and for each of the calendar quarters ended March 31, 2012 and June 30, 2012, should no longer be relied upon. Upon completion of the aforementioned inquiry, it was determined that there were errors in the Company’s previously issued financial statements for each of the twelve calendar years in the twelve year period ended December 31, 2011 (including the interim periods within those years), and for each of the calendar quarters ended March 31, 2012 and June 30, 2012, and such financial statements should be restated. Accordingly, the Company restated its previously issued financial statements for the two calendar years ended December 31, 2011 and 2010 and for each of the calendar quarters ended March 31, 2012 and June 30, 2012 in its Annual Report on Form 10-K for 2012. The Company has also provided adjustments to data for each of the calendar years 2000 to 2009 in Item 6, “Selected Financial Data,” in its Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”). The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement.
 
The Company also restated the consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations, comprehensive loss, changes in equity and cash flows for the year ended December 31, 2011 and for each of the calendar quarters ended March 31, 2012 and June 30, 2012 in its 2012 Form 10-K to reflect the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair market valuation of interest rate swap derivative contracts of certain of the Company’s equity method investees.
 
The adjustments made as a result of the restatements and the potential related cash impact of the restatements are discussed in Note 2, “Company Inquiry and Restatement,” to the accompanying condensed consolidated financial statements included in “Financial Statements (unaudited).” For additional discussion of the inquiry and restatement adjustments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Company Inquiry and Restatement” and Note 2, “Company Inquiry and Restatement,” to the accompanying condensed consolidated financial statements. For a description of the material weaknesses identified by management in internal control over financial reporting with respect to income taxes and fair market valuation of interest rate swaps and management’s remediation actions to address the material weaknesses, see “Controls and Procedures” of this Form 10-Q. For more information, see our Annual Report on Form 10-K for the year ended December 31, 2012.
 
 
 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
 
 
 
June 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
586,784
 
$
507,342
 
Voyage receivables, including unbilled of $115,098 and $131,333
 
 
147,674
 
 
179,259
 
Other receivables
 
 
26,499
 
 
28,900
 
Inventories, prepaid expenses and other current assets
 
 
42,026
 
 
55,926
 
Total Current Assets
 
 
802,983
 
 
771,427
 
Vessels and other property, including construction in progress of
    $106,347 and $95,283, less accumulated depreciation of $1,046,445
    and $994,306
 
 
2,775,342
 
 
2,837,288
 
Deferred drydock expenditures, net
 
 
60,879
 
 
74,418
 
Total Vessels, Deferred Drydock and Other Property
 
 
2,836,221
 
 
2,911,706
 
 
 
 
 
 
 
 
 
Investments in Affiliated Companies
 
 
295,697
 
 
252,398
 
Intangible Assets, less accumulated amortization of $33,948 and $31,356
 
 
69,383
 
 
71,975
 
Goodwill
 
 
9,589
 
 
9,589
 
Other Assets
 
 
25,631
 
 
26,440
 
Total Assets
 
$
4,039,504
 
$
4,043,535
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other current liabilities
 
$
95,945
 
$
99,273
 
Deferred income taxes
 
 
23,712
 
 
25,900
 
Income taxes payable, including reserve for uncertain tax positions
    of $326,121 and $326,121
 
 
330,109
 
 
329,799
 
Total Current Liabilities
 
 
449,766
 
 
454,972
 
Reserve for Uncertain Tax Positions
 
 
19,132
 
 
17,067
 
Deferred Gain on Sale and Leaseback of Vessels
 
 
-
 
 
3,839
 
Deferred Income Taxes
 
 
334,156
 
 
343,162
 
Other Liabilities
 
 
36,924
 
 
37,712
 
Liabilities Subject to Compromise
 
 
2,829,607
 
 
2,652,537
 
Total Liabilities
 
 
3,669,585
 
 
3,509,289
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Total Equity
 
 
369,919
 
 
534,246
 
Total Liabilities and Equity
 
$
4,039,504
 
$
4,043,535
 
 
See notes to condensed consolidated financial statements
 
 
Page 3
 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
(As Restated)
 
 
 
 
 
(As Restated)
 
Shipping Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pool revenues, including $22,888, $18,899, $46,155
    and $39,552 received from companies accounted
    for by the equity method
 
$
48,252
 
$
69,858
 
$
104,507
 
$
142,384
 
Time and bareboat charter revenues
 
 
91,616
 
 
69,857
 
 
175,417
 
 
137,842
 
Voyage charter revenues
 
 
88,246
 
 
151,639
 
 
195,628
 
 
303,506
 
 
 
 
228,114
 
 
291,354
 
 
475,552
 
 
583,732
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Voyage expenses
 
 
41,948
 
 
81,353
 
 
93,741
 
 
159,702
 
Vessel expenses
 
 
64,311
 
 
68,920
 
 
130,678
 
 
139,617
 
Charter hire expenses
 
 
49,964
 
 
97,064
 
 
115,424
 
 
192,835
 
Depreciation and amortization
 
 
42,872
 
 
50,351
 
 
86,143
 
 
99,613
 
General and administrative
 
 
26,329
 
 
23,088
 
 
46,055
 
 
44,224
 
Severance and relocation costs
 
 
3,486
 
 
1,302
 
 
3,064
 
 
2,213
 
Gain on disposal of vessels
 
 
(1,228)
 
 
(285)
 
 
(1,206)
 
 
(391)
 
Total Operating Expenses
 
 
227,682
 
 
321,793
 
 
473,899
 
 
637,813
 
Income/(loss) from Vessel Operations
 
 
432
 
 
(30,439)
 
 
1,653
 
 
(54,081)
 
Equity in Income of Affiliated Companies
 
 
10,573
 
 
5,401
 
 
20,863
 
 
12,309
 
Operating Income/(loss)
 
 
11,005
 
 
(25,038)
 
 
22,516
 
 
(41,772)
 
Other Income/(expense)
 
 
483
 
 
(6,484)
 
 
284
 
 
(3,072)
 
Income/(Loss) before Interest Expense,
 
 
 
 
 
 
 
 
 
 
 
 
 
Reorganization Items and Income Taxes
 
 
11,488
 
 
(31,522)
 
 
22,800
 
 
(44,844)
 
Interest Expense
 
 
(31)
 
 
(22,084)
 
 
(319)
 
 
(45,094)
 
Income/(Loss) before Reorganization Items and Income
    Taxes
 
 
11,457
 
 
(53,606)
 
 
22,481
 
 
(89,938)
 
Reorganization Items, net
 
 
(37,503)
 
 
-
 
 
(222,124)
 
 
-
 
Loss before Income Taxes
 
 
(26,046)
 
 
(53,606)
 
 
(199,643)
 
 
(89,938)
 
Income Tax Benefit
 
 
1,899
 
 
911
 
 
7,734
 
 
383
 
Net Loss
 
$
(24,147)
 
$
(52,695)
 
$
(191,909)
 
$
(89,555)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Common Shares
    Outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
30,493,980
 
 
30,314,646
 
 
30,471,469
 
 
30,298,772
 
Diluted
 
 
30,493,980
 
 
30,314,646
 
 
30,471,469
 
 
30,298,772
 
Per Share Amounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net loss
 
$
(0.79)
 
$
(1.74)
 
$
(6.30)
 
$
(2.96)
 
Diluted net loss
 
$
(0.79)
 
$
(1.74)
 
$
(6.30)
 
$
(2.96)
 
 
See notes to condensed consolidated financial statements
 
 
Page 4

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
DOLLARS IN THOUSANDS
(UNAUDITED)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
(As Restated)
 
 
 
 
(As Restated)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
 
$
(24,147)
 
$
(52,695)
 
$
(191,909)
 
$
(89,555)
 
Other Comprehensive (Loss)/Income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized holding losses on available-for-
     sale securities
 
 
-
 
 
(482)
 
 
(49)
 
 
(764)
 
Net change in unrealized losses on cash flow hedges
 
 
20,456
 
 
(12,004)
 
 
28,273
 
 
(1,840)
 
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrecognized prior service costs
 
 
1
 
 
9
 
 
(20)
 
 
(12)
 
Net change in unrecognized actuarial losses
 
 
(19)
 
 
125
 
 
434
 
 
(165)
 
Other Comprehensive (Loss)/Income
 
 
20,438
 
 
(12,352)
 
 
28,638
 
 
(2,781)
 
Comprehensive Loss
 
$
(3,709)
 
$
(65,047)
 
$
(163,271)
 
$
(92,336)
 
 
See notes to condensed consolidated financial statements
 
 
Page 5

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
 
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2013
 
2012
 
 
 
 
 
 
(As Restated)
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
Net loss
 
$
(191,909)
 
$
(89,555)
 
Items included in net loss not affecting cash flows:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
86,143
 
 
99,613
 
Amortization of deferred gain on sale and leasebacks
 
 
42
 
 
(4,535)
 
Amortization of debt discount and other deferred financing costs
 
 
-
 
 
1,928
 
Compensation relating to restricted stock and stock option grants
 
 
(1,014)
 
 
4,042
 
Deferred income tax benefit
 
 
(11,229)
 
 
(11,341)
 
Unrealized losses on forward freight agreements and bunker swaps
 
 
-
 
 
1,920
 
Undistributed earnings of affiliated companies
 
 
(17,292)
 
 
(3,214)
 
Deferred payment obligations on charters-in
 
 
2,769
 
 
2,785
 
Reorganization items, non-cash
 
 
196,092
 
 
-
 
Gain on sublease contracts
 
 
(691)
 
 
-
 
Other – net
 
 
1,193
 
 
4,159
 
Items included in net loss related to investing and financing activities:
 
 
 
 
 
 
 
Loss on sale or write-down of securities and investments – net
 
 
200
 
 
2,350
 
Gain on disposal of vessels – net
 
 
(1,206)
 
 
(391)
 
Payments for drydocking
 
 
(9,017)
 
 
(23,785)
 
Changes in other operating assets and liabilities:
 
 
 
 
 
 
 
Other changes in other operating assets and liabilities
 
 
44,963
 
 
35,620
 
Net cash provided by operating activities
 
 
99,044
 
 
19,596
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
Proceeds from sale of marketable securities and investments
 
 
238
 
 
12,728
 
Expenditures for vessels
 
 
(14,077)
 
 
(38,476)
 
Proceeds from disposal of vessels
 
 
485
 
 
-
 
Expenditures for other property
 
 
(1,441)
 
 
(1,693)
 
Other – net
 
 
2,009
 
 
1,241
 
Net cash used in investing activities
 
 
(12,786)
 
 
(26,200)
 
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
Purchases of treasury stock
 
 
(42)
 
 
(285)
 
Issuance of debt, net of issuance costs and deferred financing costs
 
 
-
 
 
229,000
 
Payments on debt, including adequate protection payments
 
 
(6,774)
 
 
(50,515)
 
Issuance of common stock upon exercise of stock options
 
 
-
 
 
81
 
Net cash (used in)/provided by financing activities
 
 
(6,816)
 
 
178,281
 
Net increase in cash and cash equivalents
 
 
79,442
 
 
171,677
 
Cash and cash equivalents at beginning of year
 
 
507,342
 
 
54,877
 
Cash and cash equivalents at end of period
 
$
586,784
 
$
226,554
 
 
See notes to condensed consolidated financial statements
 
 
Page 6

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
DOLLARS IN THOUSANDS
(UNAUDITED)
 
 
 
 
 
Paid-in
 
 
 
 
 
 
 
 
 
Accumulated Other
 
 
 
 
 
 
Common
 
Additional
 
Retained
 
Treasury Stock
 
Comprehensive
 
 
 
 
 
 
Stock*
 
Capital
 
Earnings
 
Shares
 
Amount
 
Loss**
 
Total
 
Balance at January 1, 2013
 
 
44,291
 
 
414,411
 
 
1,024,480
 
13,396,320
 
 
(835,155)
 
 
(113,781)
 
 
534,246
 
Net Loss
 
 
 
 
 
 
 
 
(191,909)
 
 
 
 
 
 
 
 
 
 
(191,909)
 
Other Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28,638
 
 
28,638
 
Forfeitures of Restricted Stock Awards
 
 
 
 
 
 
 
 
 
 
108,516
 
 
-
 
 
 
 
 
-
 
Compensation Related to Options Granted
 
 
 
 
 
(370)
 
 
 
 
 
 
 
 
 
 
 
 
 
(370)
 
Amortization of Restricted Stock Awards
 
 
 
 
 
(644)
 
 
 
 
 
 
 
 
 
 
 
 
 
(644)
 
Purchases of Treasury Stock
 
 
 
 
 
 
 
 
 
 
40,370
 
 
(42)
 
 
 
 
 
(42)
 
Balance at June 30, 2013
 
$
44,291
 
$
413,397
 
$
832,571
 
13,545,206
 
$
(835,197)
 
$
(85,143)
 
$
369,919
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012 (As Reported)
 
$
44,291
 
$
413,016
 
$
2,040,031
 
13,826,882
 
$
(840,302)
 
$
(101,791)
 
$
1,555,245
 
Restatement Adjustments***
 
 
 
 
 
 
 
 
(535,437)
 
 
 
 
 
 
 
(17,516)
 
 
(552,953)
 
Balance at January 1, 2012 (As Restated)
 
 
44,291
 
 
413,016
 
 
1,504,594
 
13,826,882
 
 
(840,302)
 
 
(119,307)
 
 
1,002,292
 
Net Loss (As Restated)
 
 
 
 
 
 
 
 
(89,555)
 
 
 
 
 
 
 
 
 
 
(89,555)
 
Other Comprehensive Loss (As Restated)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,781)
 
 
(2,781)
 
Issuance of Restricted Stock Awards
 
 
 
 
 
(5,148)
 
 
 
 
(461,481)
 
 
5,355
 
 
 
 
 
207
 
Compensation Related to Options Granted
 
 
 
 
 
854
 
 
 
 
 
 
 
 
 
 
 
 
 
854
 
Amortization of Restricted Stock Awards
 
 
 
 
 
3,188
 
 
 
 
 
 
 
 
 
 
 
 
 
3,188
 
Options Exercised and Employee Stock Purchase Plan
 
 
 
 
 
(57)
 
 
 
 
(11,041)
 
 
138
 
 
 
 
 
81
 
Purchases of Treasury Stock
 
 
 
 
 
 
 
 
 
 
26,792
 
 
(285)
 
 
 
 
 
(285)
 
Balance at June 30, 2012 (As Restated)
 
$
44,291
 
$
411,853
 
$
1,415,039
 
13,381,152
 
$
(835,094)
 
$
(122,088)
 
$
914,001
 
 
*       Par value $1 per share; 120,000,000 shares authorized; 44,290,759 shares issued as of June 30, 2013.
**     Amounts are net of tax.
***   See Note 2, “Company Inquiry and Restatement,” to the accompanying condensed consolidated financial statements for details
 
See notes to condensed consolidated financial statements
 
 
Page 7
 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Note 1 — Basis of Presentation and Significant Accounting Policies:
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles in the U.S.. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
 
The consolidated balance sheet as of December 31, 2012 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
 
Dollar amounts, except per share amounts are in thousands.
 
Pool revenue and voyage expense presentation—For the Company’s vessels operating in pools, revenues and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent (“TCE”) basis in accordance with an agreed-upon formula.  Such TCE revenues are reported as pool revenues in the accompanying condensed consolidated statement of operations. For the pools in which the Company participates, management monitors, among other things, the relative proportion of the Company’s vessels operating in each of the pools to the total number of vessels in each of the respective pools, and assesses whether or not OSG’s participation interest in each of the pools  is sufficiently significant so as to minimize the differentiation for accounting purposes between the vessels OSG operates in that pool   from vessels OSG operates outside of the pools.  Management has determined that as of June 30, 2013, differentiating characteristics no longer exist for one of the pools in which the Company participates. Therefore, effective July 1, 2013, the Company’s condensed consolidated statement of operations will report its allocated TCE revenues for such pool on a gross basis as voyage charter revenues and voyage expenses.
 
Recently Adopted Accounting Standards
 
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified the scope limitations of the guidance issued in ASU No. 2011-11. The adoption of the new accounting guidance did not have any impact on the Company’s consolidated financial statements.
 
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds new disclosure requirements intended to improve the transparency of changes in other comprehensive income and items reclassified out of accumulated other comprehensive income. This guidance, which is to be applied prospectively, became effective for the Company’s annual and interim periods beginning January 1, 2013. Adoption of this new accounting guidance did not have a significant impact on the Company’s consolidated financial statements.
 
 
Page 8
 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Note 2 — Company Inquiry and Restatement
 
As discussed in the 2012 Form 10-K, in October 2012, at the request and under the direction of the audit committee of the board of directors of the Company (the “Audit Committee”) the Company, with the assistance of counsel, conducted an inquiry into the Company’s provision for United States (“U.S.”) federal income taxes in light of certain provisions contained in the Company’s unsecured revolving credit facility scheduled to mature on February 8, 2013 and certain predecessor credit facilities (the “Credit Facilities”). In connection with the inquiry process, on October 19, 2012, the Audit Committee, on the recommendation of management, concluded that the Company’s previously issued financial statements for at least the three years ended December 31, 2011 and associated interim periods, and for each of the quarters ended March 31, 2012 and June 30, 2012, should no longer be relied upon. Upon completion of the inquiry in June 2013, it was determined that there were errors in the Company’s previously issued financial statements for each of the years in the twelve year period ended December 31, 2011 (including the interim periods within those years), and for each of the calendar quarters ended March 31, 2012 and June 30, 2012, and such financial statements should be restated.  
 
Specifically, because OSG International, Inc. (“OIN”), a wholly-owned subsidiary of the Company incorporated in the Marshall Islands, was a co-obligor with OSG and OSG Bulk Ships, Inc. (“OBS”), a wholly-owned subsidiary of the Company incorporated in the U.S., on a joint and several basis for amounts drawn under the Credit Facilities, the Company determined that OIN could be deemed under Section 956 of the U.S. Internal Revenue Code (“Section 956”) to have made taxable distributions to OSG for each taxable year in which such joint and several liability existed. Under the relevant tax rules, the amount of any deemed distributions for any taxable year that would be considered taxable income as a result of this issue generally (and subject to certain complex variables) would be determined by reference to the excess of: (i) the average of the quarter-end outstanding balances under the Credit Facilities for that year, over (ii) the average of the quarter-end balances for prior years, plus any other amounts that might have given rise to deemed distributions for prior years. In the case of OIN and OSG, this calculation could produce an aggregate amount of up to $1,317,500 of earnings deemed repatriated from OIN through the end of 2012 as a result of drawdowns under the Credit Facilities, although the final determination of the amount will depend upon several interrelated issues that have yet to be settled with the Internal Revenue Service (“IRS”). Furthermore, the Company determined that it had not properly accounted for the tax consequences of intercompany balances that have existed between domestic and international entities within the Company. The Company determined that, due to insufficient processes to identify and evaluate adequately the income tax accounting impact of Section 956 to certain intercompany balances, these intercompany balances could be deemed under Section 956 to have been taxable distributions to OSG in the years in which such balances existed. This resulted in the Company recording deemed dividend income aggregating $77,000 for taxable years 2012 and earlier. The Company’s financial statements for years prior to 2012 and for each of the quarters ended March 31, 2012 and June 30, 2012 did not properly take account of these issues and, therefore, these errors caused the financial statements to be misstated. 
 
The IRS has asserted a number of other adjustments to the Company’s taxable income. These adjustments represent an additional $234,853 of asserted taxable income across taxable years 2009 and earlier. The Company disagrees with several of the IRS’s asserted adjustments and intends to dispute them vigorously. In some cases, the asserted adjustments, including certain adjustments resulting from intercompany balances described in the previous paragraph, interrelate with the calculation of any deemed dividends under Section 956 described above in a way that may reduce the amount of deemed dividends if the IRS’s asserted adjustments are sustained.
 
 
Page 9
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
The Company believes, based on its analysis and its interactions with the IRS to date, that the actual amount of tax that the Company ultimately will be required to pay to the IRS in respect of the potential deemed dividends and other adjustments discussed above will be significant and could be as high as $460,000, or potentially higher, for all periods ending on or before December 31, 2012, not taking into account any potential penalties but including interest. However, the Company has several defenses available to mitigate its liability and intends to assert those defenses vigorously. The IRS has filed proofs of claim against the Company in its Chapter 11 proceedings in the aggregate liquidated amount of $463,013 that the Company believes are in respect of these issues, but no agreement has been made in respect of these claims. See Note 11, “Taxes,” of this Quarterly Report on Form 10-Q and Note 14, “Taxes,” of the Annual Report on Form 10-K for 2012, for additional information with respect to amounts reflected in the financial statements as of December 31, 2012.
 
In addition to giving rise to a tax liability, the potential deemed dividends from OIN in connection with the Credit Facilities (which effectively would treat OIN as having already repatriated significant earnings for U.S. tax purposes) have required the Company to reassess its intent and ability to permanently reinvest earnings from foreign shipping operations accumulated through December 31, 2012. As a result, the Company has concluded that, as of December 31, 2000 and at each subsequent year end through December 31, 2012, it could not assert its intent to permanently reinvest OIN’s earnings to the extent these earnings could be deemed repatriated as a result of OIN’s joint and several liability under the Credit Facilities, as discussed above. See Note 11 for information with respect to undistributed earnings that are still considered to be permanently reinvested in foreign operations on which U.S. income taxes have not been recognized.
 
For purposes of its financial statements as of December 31, 2012, the Company has recorded reserves related to the tax effects of the cumulative potential deemed dividends (1) in connection with the Credit Facilities based on a deemed repatriation of $1,194,150 of foreign earnings and (2) related to intercompany balances resulting in the inclusion of $77,000 of foreign earnings in taxable income. The potential deemed repatriation amount of $1,194,150 is derived from the aggregate amount of $1,317,500, discussed above, reduced to take account of certain defenses available to the Company that the Company believes are more-likely-than-not to be successful. The Company also has recorded a deferred tax liability of $103,388 as of December 31, 2012 for the tax effects of unremitted earnings of foreign subsidiaries, which reflects amounts that may be included in taxable income as deemed dividends for taxable year 2013 and future years.   
 
Such tax related errors:
 
understated both the income tax benefit and the comprehensive loss by $2,768 and $893 for the three and six month periods ended June 30, 2012, respectively; and
 
overstated income taxes recoverable (a component of other receivables) by $20,112; understated the noncurrent portion of the reserve for uncertain tax positions by $330,605 and understated noncurrent deferred income taxes by $182,328, each as of June 30, 2012; and
 
overstated total equity by $533,045 as of June 30, 2012.
 
 
Page 10
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
The Company is restating, and also restated in the 2012 Form 10-K, the accompanying condensed consolidated statements of operations and comprehensive loss for the three and six month periods ended June 30, 2012 and the condensed consolidated statements of changes in equity and cash flows for the six months ended June 30, 2012 to reflect the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees. The credit risk valuation adjustments were incorrectly estimated without giving consideration to the credit enhancements that were contractually linked to the obligations under such contracts for the year ended December 31, 2011 and for the quarters ended March 31, 2012 and June 30, 2012. Such error:
 
 
overstated the investments in affiliated companies by $30,007 and retained earnings by $1,808, and understated accumulated other comprehensive loss by $28,199 each as of June 30, 2012; and
 
understated net loss by $137 and $309 and other comprehensive loss by $6,572 and $10,683 for the three and six month periods ended June 30, 2012, respectively.
 
The appropriate estimation of the credit risk valuation adjustments has been applied within the consolidated financial statements as of June 30, 2013 and December 31, 2012.
 
The accompanying condensed consolidated statements of operations and comprehensive loss for the three and six month periods ended June 30, 2012 and the condensed consolidated statements of cash flows and changes in equity for the six months ended June 30, 2012 have been restated to reflect the matters described above.
 
The following tables present the effects of the correction of the errors described above that have been made to the Company’s previously reported condensed consolidated statements of operations and comprehensive loss for the three and six month periods ended June 30, 2012, cash flows from operating activities for the six months ended June 30, 2012, and retained earnings as of January 1, 2012.
 
 
Page 11
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
Three Months Ended
 
 
 
June 30, 2012
 
 
 
As Previously
 
 
 
 
 
 
 
 
 
 
Reported
 
Adjustments
 
 
As Restated
 
Pool revenues
 
$
69,858
 
 
 
 
 
$
69,858
 
Time and bareboat charter revenues
 
 
69,857
 
 
 
 
 
 
69,857
 
Voyage charter revenues
 
 
151,639
 
 
 
 
 
 
151,639
 
 
 
 
291,354
 
 
 
 
 
 
291,354
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Voyage expenses
 
 
81,353
 
 
 
 
 
 
81,353
 
Vessel expenses
 
 
68,920
 
 
 
 
 
 
68,920
 
Charter hire expenses
 
 
97,064
 
 
 
 
 
 
97,064
 
Depreciation and amortization
 
 
50,351
 
 
 
 
 
 
50,351
 
General and administrative
 
 
23,088
 
 
 
 
 
 
23,088
 
Severance and relocation costs
 
 
1,302
 
 
 
 
 
 
1,302
 
Gain on disposal of vessels
 
 
(285)
 
 
 
 
 
 
(285)
 
Total Operating Expenses
 
 
321,793
 
 
 
 
 
 
321,793
 
Loss from Vessel Operations
 
 
(30,439)
 
 
 
 
 
 
(30,439)
 
Equity in Income of Affiliated Companies
 
 
5,538
 
$
(137)
(a)
 
 
5,401
 
Operating Loss
 
 
(24,901)
 
 
(137)
 
 
 
(25,038)
 
Other Income/(Expense)
 
 
(6,484)
 
 
 
 
 
 
(6,484)
 
Loss before Interest Expense and Income Taxes
 
 
(31,385)
 
 
(137)
 
 
 
(31,522)
 
Interest Expense
 
 
(22,084)
 
 
 
 
 
 
(22,084)
 
Loss before Income Taxes
 
 
(53,469)
 
 
(137)
 
 
 
(53,606)
 
Income Tax (Provision)/ Benefit
 
 
(1,857)
 
 
2,768
(b)
 
 
911
 
Net Loss
 
$
(55,326)
 
$
2,631
 
 
$
(52,695)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
30,314,646
 
 
 
 
 
 
30,314,646
 
Diluted
 
 
30,314,646
 
 
 
 
 
 
30,314,646
 
Per Share Amounts:
 
 
 
 
 
 
 
 
 
 
 
Basic net loss
 
$
(1.83)
 
 
0.09
 
 
$
(1.74)
 
Diluted net loss
 
$
(1.83)
 
 
0.09
 
 
$
(1.74)
 
 
(a)
To adjust for the overstatement in equity in income of affiliated companies resulting from the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.
(b)
To adjust for the overstatement in the income tax provision primarily related to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to the reserve for uncertain tax positions.
 
 
Page 12
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
Six Months Ended
 
 
 
June 30, 2012
 
 
 
As Previously
 
 
 
 
 
 
 
 
 
 
Reported
 
Adjustments
 
 
As Restated
 
Pool revenues
 
$
142,384
 
 
 
 
 
$
142,384
 
Time and bareboat charter revenues
 
 
137,842
 
 
 
 
 
 
137,842
 
Voyage charter revenues
 
 
303,506
 
 
 
 
 
 
303,506
 
 
 
 
583,732
 
 
 
 
 
 
583,732
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Voyage expenses
 
 
159,702
 
 
 
 
 
 
159,702
 
Vessel expenses
 
 
139,617
 
 
 
 
 
 
139,617
 
Charter hire expenses
 
 
192,835
 
 
 
 
 
 
192,835
 
Depreciation and amortization
 
 
99,613
 
 
 
 
 
 
99,613
 
General and administrative
 
 
44,224
 
 
 
 
 
 
44,224
 
Severance and relocation costs
 
 
2,213
 
 
 
 
 
 
2,213
 
Gain on disposal of vessels
 
 
(391)
 
 
 
 
 
 
(391)
 
Total Operating Expenses
 
 
637,813
 
 
 
 
 
 
637,813
 
Loss from Vessel Operations
 
 
(54,081)
 
 
 
 
 
 
(54,081)
 
Equity in Income of Affiliated Companies
 
 
12,618
 
$
(309)
(a)
 
 
12,309
 
Operating Loss
 
 
(41,463)
 
 
(309)
 
 
 
(41,772)
 
Other Income/(Expense)
 
 
(3,072)
 
 
 
 
 
 
(3,072)
 
Loss before Interest Expense and Income Taxes
 
 
(44,535)
 
 
(309)
 
 
 
(44,844)
 
Interest Expense
 
 
(45,094)
 
 
 
 
 
 
(45,094)
 
Loss before Income Taxes
 
 
(89,629)
 
 
(309)
 
 
 
(89,938)
 
Income Tax (Provision)/Benefit
 
 
(510)
 
 
893
(b)
 
 
383
 
Net Loss
 
$
(90,139)
 
$
584
 
 
$
(89,555)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
30,298,772
 
 
 
 
 
 
30,298,772
 
Diluted
 
 
30,298,772
 
 
 
 
 
 
30,298,772
 
Per Share Amounts:
 
 
 
 
 
 
 
 
 
 
 
Basic net loss
 
$
(2.98)
 
$
0.02
 
 
$
(2.96)
 
Diluted net loss
 
$
(2.98)
 
$
0.02
 
 
$
(2.96)
 
 
(a)
To adjust for the overstatement in equity in income of affiliated companies resulting from the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.
(b)
To adjust for the overstatement in the income tax provision primarily related to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to the reserve for uncertain tax positions.
 
 
Page 13
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
Three Months Ended
 
 
 
June 30, 2012
 
 
 
As
Previously
 
 
 
 
 
 
 
 
 
 
Reported
 
Adjustments
 
 
As Restated
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
 
$
(55,326)
 
$
2,631
(a)
 
$
(52,695)
 
Other Comprehensive (Loss)/Income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized holding losses on available- for-
    sale securities
 
 
(482)
 
 
 
 
 
 
(482)
 
Net change in unrealized losses on cash flow hedges
 
 
(5,432)
 
 
(6,572)
(b)
 
 
(12,004)
 
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 
 
 
 
 
Net change in unrecognized prior service costs
 
 
9
 
 
 
 
 
 
9
 
Net change in unrecognized actuarial losses
 
 
125
 
 
 
 
 
 
125
 
Other Comprehensive Loss
 
 
(5,780)
 
 
(6,572)
 
 
 
(12,352)
 
Comprehensive Loss
 
$
(61,106)
 
$
(3,941)
 
 
$
(65,047)
 
 
(a)
To adjust for the understatement of the net loss resulting from (1) the $137 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees and (2) the $2,768 understatement in the income tax benefit primarily from the error related to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions.
(b)
To adjust for the understatement of other comprehensive loss resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.
 
 
Page 14
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
Six Months Ended
 
 
 
June 30, 2012
 
 
 
As
Previously
 
 
 
 
 
 
 
 
 
 
Reported
 
Adjustments
 
 
As Restated
 
Net Loss
 
$
(90,139)
 
$
584
(a)
 
$
(89,555)
 
Other Comprehensive (Loss)/Income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized holding losses on available- for-
    sale securities
 
 
(764)
 
 
 
 
 
 
(764)
 
Net change in unrealized losses on cash flow hedges
 
 
8,843
 
 
(10,683)
(b)
 
 
(1,840)
 
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 
 
 
 
 
Net change in unrecognized prior service costs
 
 
(12)
 
 
 
 
 
 
(12)
 
Net change in unrecognized actuarial losses
 
 
(165)
 
 
 
 
 
 
(165)
 
Other Comprehensive Income
 
 
7,902
 
 
(10,683)
 
 
 
2,781
 
Comprehensive Loss
 
$
(82,237)
 
$
(10,099)
 
 
$
(92,336)
 
 
(a)
To adjust for the understatement of the net loss resulting from (1) the $309 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees and (2) the $893 understatement in the income tax benefit primarily from the error related to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions.
(b)
To adjust for the understatement of other comprehensive loss resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.
 
The restatements did not affect total net cash flows from operating, investing or financing activities for the six months ended June 30, 2012. However the following components of total cash flows from operating activities were restated as follows:
 
 
Page 15
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
Six Months Ended
 
 
 
June 30, 2012
 
 
 
As Previously
Reported
 
Adjustments
 
 
As Restated
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(90,139)
 
$
584
(a)
 
$
(89,555)
 
Items included in net loss not affecting cash flows:
 
 
 
 
 
 
 
 
 
 
 
Deferred income tax benefit
 
 
(1,302)
 
 
(10,039)
(b)
 
 
(11,341)
 
Undistributed earnings of affiliated companies
 
 
(3,523)
 
 
309
(c)
 
 
(3,214)
 
Changes in other operating assets and liabilities
 
 
26,474
 
 
9,146
(b)
 
 
35,620
 
 
(a)
To adjust for the overstatement in the net loss resulting from (1) the $309 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuations adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company's equity method investees and (2) the $893 understatement in the tax benefit relating to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions.
(b)
To adjust for the understatement in the deferred tax benefit, the overstatement of income taxes recoverable, which is a component of receivables, and the understatements of income taxes payable and reserve for uncertain tax positions.
(c)
To adjust undistributed earnings of affiliates for the $309 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company's equity method investees.
 
The following table is a reconciliation of the retained earnings and accumulated other comprehensive loss as previously reported and as restated as of December 31, 2011:
 
 
Page 16
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
 
 
 
Accumulated Other
 
 
 
Retained
 
Comprehensive
 
 
 
Earnings
 
Loss
 
December 31, 2011, as previously reported
 
$
2,040,031
 
$
(101,791)
 
 
 
 
 
 
 
 
 
Tax adjustments
 
 
 
 
 
 
 
Year ended December 31, 2000
 
 
(122,500)
 
 
 
 
Year ended December 31, 2001
 
 
(36,364)
 
 
 
 
Year ended December 31, 2002
 
 
12,919
 
 
 
 
Year ended December 31, 2003
 
 
(23,405)
 
 
 
 
Year ended December 31, 2004
 
 
(7,317)
 
 
 
 
Year ended December 31, 2005
 
 
(18,342)
 
 
 
 
Year ended December 31, 2006
 
 
(337,404)
 
 
 
 
Year ended December 31, 2007
 
 
(46,193)
 
 
 
 
Year ended December 31, 2008
 
 
43,130
 
 
 
 
Year ended December 31, 2009
 
 
(3,215)
 
 
 
 
Year ended December 31, 2010
 
 
11,701
 
 
 
 
Year ended December 31, 2011
 
 
(6,948)
 
 
 
 
Credit valuation adjustments
 
 
 
 
 
 
 
Year ended December 31, 2011
 
 
(1,499)
 
 
(17,516)
 
Cumulative adjustment as of December 31, 2011
 
 
(535,437)
 
 
(17,516)
 
December 31, 2011, as restated
 
$
1,504,594
 
$
(119,307)
 

Note 3 — Chapter 11 Filing, Going Concern and Other Related Matters
 
Chapter 11 Filing
 
On November 14, 2012 (the “Petition Date”), the Company and 180 of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). These cases are being jointly administered under the caption In re Overseas Shipholding Group, Inc. et al., Case No. 12 – 20000 (PJW) (the “Chapter 11 Cases”). Certain subsidiaries and affiliates of the Company (collectively, the “Non-Filing Entities”) were not part of the Chapter 11 Cases. The Debtors will continue to operate their businesses as “debtors-in-possession” in the ordinary course under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Non-Filing Entities will continue to operate their businesses in the ordinary course of business.
 
 
Page 17
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Reorganization Plan
 
In order for the Debtors to emerge successfully from Chapter 11, the Debtors must obtain the required votes of creditors accepting a plan of reorganization as well as the Bankruptcy Court’s confirmation of such plan, which will enable the Debtors to transition from Chapter 11 into ordinary course operations outside of bankruptcy.  In connection with a reorganization plan, the Debtors also may require a new credit facility, or “exit financing.”  The Debtors’ ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Chapter 11 Cases.  A reorganization plan determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the reorganization plan is confirmed.
 
The Debtors have not yet prepared or filed a plan of reorganization with the Bankruptcy Court.  The Debtors have the exclusive right to file a plan of reorganization through and including November 30, 2013, subject to the ability of third parties to file motions to terminate the Debtors’ exclusivity period, as well as the Debtors rights to seek further extensions of such period. The Debtors have the right to seek further extensions of such exclusivity periods, subject to the statutory limit of 18 months from the Petition Date in the case of filing a plan of reorganization and 20 months from the Petition Date in the case of soliciting and obtaining acceptances. Any proposed reorganization plan will be subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Debtors’ creditors and other interested parties, and thereafter in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court.  There can be no assurance that the Debtors will be able to secure requisite accepting votes for any proposed reorganization or the confirmation of such plan by the Bankruptcy Court.
   
Going Concern and Financial Reporting
 
The commencement of the Chapter 11 Cases and weak industry conditions have negatively impacted the Company’s results of operations and cash flows and may continue to do so in the future. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
 
 
Page 18
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
The Company’s ability to continue as a going concern is contingent upon, among other things, its ability to (i) develop a plan of reorganization and obtain required creditor acceptance and confirmation under the Bankruptcy Code, (ii) successfully implement such plan of reorganization, (iii) reduce debt and other liabilities through the bankruptcy process, (iv) return to profitability, (v) generate sufficient cash flow from operations, and (vi) obtain financing sources sufficient to meet the Company’s future obligations. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession pursuant to the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the condensed consolidated financial statements. In particular, such financial statements do not purport to show (i) as to assets, the realization value on a liquidation basis or availability to satisfy liabilities, (ii) as to liabilities arising prior to the Petition Date, the amounts that may be allowed for claims or contingencies, or the status and priority thereof, (iii) as to shareholders’ equity accounts, the effect of any changes that may be made in the Company’s capitalization, or (iv) as to operations, the effects of any changes that may be made in the underlying business. A confirmed plan of reorganization (the “Plan”) would likely cause material changes to the amounts currently disclosed in the condensed consolidated financial statements. Further, the Plan could materially change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization. The accompanying condensed consolidated financial statements do not include any direct adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.
 
Effective on November 14, 2012, the Company began to apply Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. It requires that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the consolidated statements of operations beginning in the year ended December 31, 2012. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. As discussed in Note 5, “Debt,” the revolving loan facilities and the Senior Notes are unsecured and the Secured Loan Facilities have priority over the unsecured creditors of the Company. Based upon the uncertainty surrounding the ultimate treatment of the Unsecured Revolving Credit Facility, the Unsecured Senior Notes and the Secured Loan Facilities, which were under collateralized as of the Petition Date, the instruments are classified as Liabilities Subject to Compromise on the Company’s accompanying condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012. The Company will evaluate creditors’ claims relative to priority over other unsecured creditors. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be approved by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors. In addition, cash used by reorganization items is disclosed separately in the consolidated statements of cash flow.
 
As stated in Note 2, “Company Inquiry and Restatement,” the IRS has filed proofs of claim against the Company in its Chapter 11 proceedings in the aggregate liquidated amount of $463,013.
 
 
Page 19
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Liabilities Subject to Compromise
 
As a result of the filing of the Chapter 11 Cases on November 14, 2012, the payment of pre-petition indebtedness is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ businesses and assets. Among other things, the Bankruptcy Court authorized the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical and foreign vendors.
 
The Debtors have been paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Debtors have rejected certain prepetition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims and have been classified as Liabilities Subject to Compromise on the Company’s condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012. The Debtors have notified all known claimants subject to the bar date of their need to file a proof of claim with the Bankruptcy Court. A bar date is the date by which certain claims against the Debtors must be filed if the claimants disagree with the amounts, treatment or classification reflected in the Debtors’ schedule of assets and liabilities or that are not so scheduled and wish to receive any distribution in the bankruptcy filing. A bar date of May 31, 2013 was set by the Bankruptcy Court.
 
Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The amounts currently classified as Liabilities Subject to Compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. The Company cannot reasonably estimate the value of the claims that will ultimately be allowed by the Bankruptcy Court until its evaluation, investigation and reconciliation of the filed claims has been completed. Any resulting changes in classification will be reflected in subsequent financial statements.
 
 
Page 20
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Liabilities Subject to Compromise consist of the following:
 
 
 
June 30,
 
December 31,
 
As of
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Pre-petition accounts payable and other accrued liabilities
 
$
3,126
 
$
2,717
 
Secured long-term debt and accrued interest
 
 
571,182
 
 
577,957
 
Unsecured senior notes
 
 
500,780
 
 
500,780
 
Unsecured revolving credit facility
 
 
1,488,579
 
 
1,488,579
 
Accrued interest and fees on unsecured revolving credit facility
    and senior notes
 
 
10,878
 
 
10,878
 
Derivative liabilities
 
 
3,566
 
 
3,566
 
Accrued liabilities relating to rejected executory contracts
 
 
214,266
 
 
30,539
 
Pension and other postretirement benefit plan liabilities
 
 
37,230
 
 
37,521
 
 
 
$
2,829,607
 
$
2,652,537
 
 
Reorganization Items, net
 
Reorganization items, net represent amounts incurred subsequent to the bankruptcy filing as a direct result of the filing of the Chapter 11 Cases and are comprised of the following for the three and six months ended June 30, 2013:
 
 
 
Three
 
Six
 
 
 
Months Ended
 
Months Ended
 
 
 
June 30, 2013
 
June 30, 2013
 
 
 
 
 
 
 
 
 
Trustee fees
 
$
756
 
$
1,552
 
Professional fees
 
 
13,745
 
 
32,376
 
Provision for estimated claims on rejected executory
    contracts
 
 
21,316
 
 
180,505
 
Expenses incurred on rejected executory contracts
 
 
1,686
 
 
7,691
 
 
 
$
37,503
 
$
222,124
 
 
The Company incurred fees totaling $3,616 and $7,764 during the three and six month periods ended June 30, 2013, respectively, for financial and reorganization services rendered to the Company by Greylock Partners LLC, a company founded and managed by the Company’s Chief Reorganization Officer. Such related party expenses are included in professional fees in the table above.
 
Cash paid for reorganization items was $18,624 and $26,032 for the three and six months ended June 30, 2013.
 
Other Related Matters
 
Refer to Note 18, “Contingencies,” for a description of the SEC investigation against the Company and putative securities class action lawsuits against certain of the Company’s current and former officers and directors.
 
Through April 2013, the Bankruptcy Court has approved the Company’s rejection of leases on 25 chartered-in International Flag vessels and the Company’s corporate office space at 666 Third Avenue, New York, New York effective June 30, 2013. Refer to Note 14, “Leases,” for further discussion regarding these rejected leases.
 
 
Page 21

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Note 4 — Earnings per Common Share:
 
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the exercise of all dilutive stock options and restricted stock units using the treasury stock method. The components of the calculation of basic earnings per share and diluted earnings per share are as follows:
 
 
 
Three Months Ended
 
 
 
 
June 30,
 
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(24,147)
 
$
(52,695)
(1)
 
 
 
 
 
 
 
 
 
 
Common shares outstanding, basic and diluted:
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic and diluted
 
 
30,493,980
 
 
30,314,646
 
 
 
(1)    Net loss has been restated for the three months ended June 30, 2012 as more fully described in Note 2.
 
 
 
Six Months Ended
 
 
 
 
June 30,
 
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(191,909)
 
$
(89,555)
(1)
 
 
 
 
 
 
 
 
 
 
Common shares outstanding, basic and diluted:
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic and diluted
 
 
30,471,469
 
 
30,298,772
 
 
 
(1)    Net loss has been restated for the six months ended June 30, 2012 as more fully described in Note 2.
 
There were no dilutive equity awards outstanding as of June 30, 2013. Awards of 1,186,043 and 2,395,209 shares of common stock for the three months ended June 30, 2013 and 2012, respectively, and 1,219,006 and 2,392,797 shares of common stock for the six months ended June 30, 2013 and 2012, respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.
 
 
Page 22

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Note 5 — Debt:
 
The withdrawal of reliance on the audited financial statements for the three years ended December 31, 2011 and for the quarters ended March 31, 2012 and June 30, 2012 coupled with the Company’s failure to timely file the quarterly report on Form 10-Q for the quarter ended September 30, 2012 and the filing of the Chapter 11 Cases, resulted in an event of default or otherwise triggered repayment obligations under the Company’s Unsecured Revolving Credit Facility, Unsecured Senior Notes due in 2013, 2018 and 2024, Unsecured Forward Start Revolving Credit Agreement and Secured Loan Facilities maturing in 2020 and 2023. Also, as a result of the commencement of the Chapter 11 Cases, the outstanding balances under the Unsecured Revolving Credit Facility, the Unsecured Senior Notes and the Secured Loan Facilities and related accrued interest and unamortized deferred financing costs have been classified as Liabilities Subject to Compromise in the consolidated balance sheets at June 30, 2013 and December 31, 2012, in accordance with ASC 852. Debt included in Liabilities Subject to Compromise will be paid in accordance with the ultimate claims resolution in the Bankruptcy Cases.
 
Additional information with respect to unsecured and secured long-term debt agreements to which the Company is a party follows below:
 
Unsecured Revolving Credit Facility and Unsecured Senior Notes
 
Pursuant to the applicable bankruptcy law, the Company does not expect to make any principal payments on the Unsecured Revolving Credit Facility and the Unsecured Senior Notes during the pendency of the Chapter 11 Cases. Also, as interest on the Company’s unsecured debt subsequent to the Petition Date is not expected to be an allowed claim, the Company ceased accruing interest on the Unsecured Revolving Credit Facility and the Unsecured Senior Notes on November 14, 2012.
 
For the three and six month periods ended June 30, 2013, interest expense of $3,476 and $6,941, including $355 and $710 relating to the amortization of deferred financing costs, which would have been incurred had the Unsecured Revolving Credit Facility not been reclassified as a Liability Subject to Compromise, was not recorded.
 
For the three and six month periods ended June 30, 2013, interest expense of $10,703 and $21,293, including $367 and $734 relating to the amortization of debt discount and deferred financing costs, which would have been incurred had the Unsecured Senior Notes not been reclassified as a Liability Subject to Compromise, was not recorded.
 
Secured Loan Facilities
 
As of June 30, 2013, 15 vessels representing approximately 29% of the net book value of the Company’s vessels are pledged as collateral under certain term loans maturing between 2020 and 2023. As of December 31, 2012, the Company was not in compliance with the loan-to-value covenants under these facilities as the minimum required loan-to-value ratios are 110% for term loans maturing in 2020 and 125% for term loans maturing in 2023 and the loan-to-value ratios approximated 84% and 86%, respectively, for the loans maturing in 2020 and 2023.
 
 
Page 23
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
On February 5, 2013, the Bankruptcy Court issued orders [D.I. 0459 and 0460] granting adequate protection to the secured lenders in consideration for (i) the granting of pari passu liens in the secured lenders’ collateral in connection with the Debtor in Possession loan facilities (the “OIN DIP loans”) issued by OSG International, Inc. (“OIN”), a wholly owned subsidiary of the Company, (ii) the imposition of the automatic stay, (iii) the Company’s use, sale or lease of vessels and other collateral encumbered by the security interest of the secured lenders, and (iv) with respect to the Export-Import Bank of China (“CEXIM”), the Company’s continued use of cash collateral for the ongoing operation and maintenance of the vessels securing the CEXIM term loan agreement. Pursuant to these orders, the Company and certain of its subsidiaries are authorized to make use of the funds generated from the ongoing operation of the encumbered vessels in the following order of priority (i) to reimburse its ship management subsidiaries and other affiliates for voyage expenses, vessel operating expenses, capital expenditures and drydocking expenses incurred on behalf of the encumbered vessels, (ii) to fund a reserve for future drydocking expenses, (iii) to reimburse the secured lenders for certain legal costs, (iv) to pay the secured lenders amounts equal to current interest payments due on the outstanding pre-petition loan balances at the non-default contract rate of interest set forth in the term loan agreements (the “Adequate Protection Interest Payments” and together with amounts described in (iii) the “Adequate Protection Payments”) and (v) to pay any interest outstanding under the OIN DIP Loans. The Debtors and certain other parties in interest preserve the right to challenge the amount, extent, type or characterization of any Adequate Protection Payments or any other costs, fees or expenses, including the right to seek recharacterization of any such payments as payments on the prepetition principal amounts outstanding under the term loan agreements. Adequate Protection Interest Payments disbursed during the three and six months ended June 30, 2013 amounted to $572 and $6,774 respectively, and such amounts were classified as reductions in outstanding principal.
 
In accordance with ASC 852, no interest is accrued and/or paid on secured debt when the fair value of the underlying collateral is below the outstanding principal of the secured debt. For the three and six month periods ended June 30, 2013, interest expense of $3,139 and $6,303, including $137 and $274 relating to the amortization of deferred financing costs, which would have been incurred had the indebtedness not been reclassified as a Liability Subject to Compromise, was not recorded. 
 
OIN Debtor in Possession Loan Facilities
 
Pursuant to the order issued by the Bankruptcy Court on February 5, 2013, OIN was given approval to enter into Debtor in Possession Loan Agreements with the Company’s subsidiaries that own and operate the vessels securing the term loans described above. Under the terms of the order, OIN is allowed to lend up to $10,000 to the Company’s subsidiaries operating the vessels securing term loans maturing in 2020 and $15,000 to the Company’s subsidiaries operating the vessels securing term loans maturing in 2023. The sole purpose of the OIN DIP Loans is to fund any shortfall in the funds available to cover ongoing operations, capital expenditures, drydock repairs and drydock reserves of the secured vessels and the Adequate Protection Payments due to the lenders as described above.
 
 
Page 24
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
Outstanding Letters of Credit
 
The Company has a $9,146 letter of credit outstanding as of June 30, 2013. This letter of credit, which was issued in connection with certain arbitration proceedings the Company is involved in, is fully cash collateralized.
 
Interest paid, excluding interest capitalized, for the three and six months ended June 30, 2012 amounted to $11,869 and $40,992.

Note 6 — Business and Segment Reporting:
 
The Company has three reportable segments: International Crude Tankers, International Product Carriers and U.S. Flag vessels. Segment results are evaluated based on income/(loss) from vessel operations before general and administrative expenses, severance and relocation costs and gain/(loss) on disposal of vessels. The accounting policies followed by the reportable segments are the same as those followed in the preparation of the Company’s consolidated financial statements.
 
The management of the Handysize Product Carriers that were reflagged under the U.S. Flag and entered into the U.S. Maritime Security Program was transferred to the U.S. segment during the fourth quarter of 2012. As such the results of these vessels have been removed from the International Product Carrier segment and presented in the U.S. segment for all periods presented. The U.S. Flag segment also includes an International Flag Product Carrier that exited the U.S. Maritime Security Program in the fourth quarter of 2012 but is still owned by a U.S. domiciled corporation. The joint venture with four LNG Carriers is included in Other International along with one chartered-in Chemical Carrier and one owned Pure Car Carrier which was disposed in October 2012.
 
Information about the Company’s reportable segments as of and for the three and six months ended June 30, 2013 and 2012 follows:
 
 
Page 25
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
International
 
 
 
 
 
 
 
 
 
Crude
 
Product
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Tankers
 
Carriers
 
Other
 
U.S.
 
Totals
 
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shipping revenues
 
$
65,290
 
$
49,940
 
$
966
 
$
111,918
 
$
228,114
 
Time charter equivalent revenues
 
 
47,828
 
 
33,701
 
 
942
 
 
103,695
 
 
186,166
 
Depreciation and amortization
 
 
18,167
 
 
7,320
 
 
800
 
 
16,585
 
 
42,872
 
Gain/(loss) on disposal of vessels
 
 
1
 
 
(1)
 
 
109
 
 
1,119
 
 
1,228
 
Income/(loss) from vessel operations
 
 
(9,515)
 
 
7,655
 
 
(912)
 
 
31,791
 
 
29,019
 
Equity in income of affiliated companies
 
 
8,191
 
 
-
 
 
2,006
 
 
376
 
 
10,573
 
Investments in affiliated companies at
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
257,560
 
 
5,405
 
 
31,944
 
 
788
 
 
295,697
 
Total assets at June 30, 2013
 
 
1,708,652
 
 
586,094
 
 
21,797
 
 
1,090,269
 
 
3,406,812
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shipping revenues
 
 
104,268
 
 
83,721
 
 
3,076
 
 
100,290
 
 
291,354
 
Time charter equivalent revenues
 
 
79,006
 
 
40,905
 
 
3,059
 
 
87,031
 
 
210,001
 
Depreciation and amortization
 
 
20,400
 
 
10,765
 
 
1,592
 
 
17,594
 
 
50,351
 
Gain/(loss) on disposal of vessels
 
 
(200)
 
 
-
 
 
-
 
 
485
 
 
285
 
Income/(loss) from vessel operations
 
 
(5,942)
 
 
(16,139)
 
 
(724)
 
 
16,471
 
 
(6,334)
 
Equity in income of affiliated companies (1)
 
 
3,643
 
 
-
 
 
1,516
 
 
242
 
 
5,401
 
Investments in affiliated companies at
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012(1)
 
 
236,382
 
 
3,855
 
 
(8,169)
 
 
635
 
 
232,703
 
Total assets at June 30, 2012(1)
 
 
1,910,288
 
 
886,074
 
 
(2,243)
 
 
1,028,967
 
 
3,823,086
 
 
(1)
Equity in income of affiliated companies has been restated for the three months ended June 30, 2012 and   investments in affiliated companies and total assets have been restated as of June 30, 2012 as more fully described in Note 2.
 
 
Page 26
 
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
 
 
 
International
 
 
 
 
 
 
 
 
 
Crude
 
Product
 
 
 
 
 
 
 
 
 
 
Six months ended
 
Tankers
 
Carriers
 
Other
 
U.S.
 
Totals
 
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shipping revenues
 
$
132,938
 
$
122,609
 
$
2,043
 
$
217,962
 
$
475,552
 
Time charter equivalent revenues
 
 
100,598
 
 
79,589
 
 
2,006
 
 
199,618
 
 
381,811
 
Depreciation and amortization
 
 
36,465
 
 
14,311
 
 
1,654
 
 
33,713
 
 
86,143
 
Gain/(loss) on disposal of vessels
 
 
1
 
 
(1)
 
 
115
 
 
1,091
 
 
1,206
 
Income/(loss) from vessel operations
 
 
(16,351)
 
 
12,353
 
 
(1,771)