The following excerpt is from TORM A/S (NASDAQ: TORM) from the Risk Factors section of Item 3, Key Information, in its fiscal year 2008 20-F filing. The excerpt illustrates debt covenants and their disclosure:

Certain of our loan agreements contain restrictive covenants, which may limit our liquidity and corporate activities and prevent proper service of debt, which could result in the loss of our vessels.

Some loan agreements impose operating and financial restrictions upon us. These restrictions may limit our ability to:

• change the management of our vessels without the lenders’ consent (which they are not entitled to unreasonably withhold); and

• enter into mergers or corporate restructurings, or effect material divestments, if such would be materially adverse to the company.

Our lenders’ interests may be different from ours and we cannot guarantee that we will be able to obtain our lenders’ permission when needed. This may prevent us from taking actions that are in our best interest.

The following excerpt is an additional excerpt from “Note 8: Bonds Payable” of B+H Ocean Carriers that was referenced in Example 6 .

The bond facility contains certain restrictive covenants which restrict the payment of dividends. The facility requires a minimum value adjusted equity ratio (as defined) of 25%. At December 31, 2008, the Company was in compliance with these covenants and is likely to remain in compliance throughout 2009.

However, the bond agreement contains a cross default provision that essentially enables the lender to call the bonds if the Company defaults on a separate loan facility. The Company reclassified its long term debt because of a determination prospectively that certain covenants in certain long term agreements may be breached during 2009. As such, the Company has recorded the entire balance of the bonds as current as of December 31, 2008.

1. Which of the covenants described in the above excerpts is an affirmative covenant?

2. Based on the excerpt from B+H Ocean Carriers, what is the implied consequence of breaching certain covenants?

Data from Example  6

The following excerpts are from the 2008 20-F filing of B+H Ocean Carriers (NYSE Alternext: BHO ). In its statement of cash flows, the company uses the indirect method to reconcile net income with net cash (used in) provided by operations.

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Excerpt from Consolidated Statements of Income For the years ended 31 December 2008, 2007, and 2006 2008 Revenues: I Total revenues 1 Total operating expenses Income from vessel operations Other income (expense): I Gain on debt extinguishment 1 Total other income (expense), net Net income 104,908,915 1 100,279,906 4,629,009 1 2,345,000 I 11,236,107 $15,865,116 2007 112,416,831 I 96,140,562 16,276,269 (14,257,092) $2,019,177 2006 I 96,879,051 I 71,018,929 25,860,122 (7,085,809) $18,774,313