March 2001 is recognized as the peak period prior to the beginning of the last recession. It is during these peaks (prior to an economic downturn) that we see significant increases in Chapter 11 bankruptcy filings. To the best of our knowledge, recessions have not been repealed and we are well past the average post-World War II peak-to-peak market cycle. NetGain believes a recession has already started, or it is about start. During these periods the balance sheet plays a vital role. It will determine the staying power or survival of a business enterprise, and that’s what income property is – a business enterprise. All of the following analyses concerning bankruptcies and the Balance Sheet apply to each income property.

During 1997, 82 public companies with total assets of $17.2 billion filed for Chapter 11 protection. In 2000 this increased to 176 public companies filing for bankruptcy protection. Their combined pre-petition assets were a record $94 billion. The combination of 2001, 2002 and 2003 included the top of an economic cycle, the beginning of a recession and the 9/11 attack. During that period, there were a total of 626 public companies with combined assets of approximately 3/4 of a trillion dollars that filed for Chapter 11 protection.

The number of publicly traded companies filing for bankruptcy in 2006 declined to 66. The total pre-petition assets in bankruptcy declined in 2006 to $22 billion, making 2006 the lowest asset filing year since 1997. We may be looking at another 2001-2003 (hopefully without a 9/11) type period.

It would be naive to presume that the amalgam of subprime mortgage problems, consumer spending slowdown, and energy costs won’t result in more companies having credit problems and more companies filing for bankruptcy protection. But there is one financial document that can anticipate this problem – the Balance Sheet.

A Balance Sheet is an itemized statement that lists the total assets and the total liabilities of a given business to show its Net Worth at a given moment of time. It’s this Net Worth number that is critical for determining the near-term and long-term financial viability of a company.

Prior to analyzing a Net Worth number, there are several questions that have to be answered. They are:

• Is there sufficient liquidity to meet near-term operating needs?
• What is the current state of borrowing ability as related to amounts and costs?
• Are capital costs accounted for?
• Are all liabilities identified?
• Are all assets and liabilities reasonably marked to market?
• What is the plan for debt that is coming due?

Certain amounts shown on a Balance Sheet may be the historic cost of items and not their current values. With this sort of accounting methodology, these numbers need to be identified and compared to the current market.

Presumably, the issues that have been generated from the questions above are being managed. We can then look at a true Net Worth, which is the most important dollar number amount on the Balance Sheet. The value of the Net Worth number is predicated on the premise that the Balance Sheet follows standard accounting principles and the numbers being used in the Balance Sheet are real and valid.

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