**SECURITIES AND EXCHANGE COMMISSION**

##### **Washington,D.C.  20549**

##### ** **

**FORM 10-Q**

** **

| **x**      | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934.**                                                                                 |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                     |
| ** ** | ** ** | **For the quarterly period ended June 30, 2006.**                                                                                                                        |
|       |       |                                                                                                                                                                     |
| ** ** | ** ** | **OR**                                                                                                                                                                   |
|       |       |                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE  ACT OF 1934.**                                                                             |
|       |       |                                                                                                                                                                     |
| ** ** | ** ** | **For the transition period from           to           ** |
|       |       |                                                                                                                                                                     |
| ** ** | ** ** | **Commission file number 1-14462**                                                                                                                                       |

** **

**AMERIVEST PROPERTIES INC.**

(Exact name of registrant asspecified in its charter)

 

| **Maryland**                                                    | ** ** | **84-1240264**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **1780 South Bellaire Street  Suite 100, Denver, Colorado**     | ** ** | **80222**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

**(303) 297-1800**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  x  No   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (check one)

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o   No  x

 

The number of shares of the registrant’s common stock outstanding as ofJuly 31, 2006 was 24,131,206.

 

 

----

 

**Table of Contents**

** **
| **Part I  Financial Information**     | ** **                                                                                                                                                              |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                 | ** **                                                                                                                                                              | ** ** |
| Item 1.                                    | Financial Statements:                                                                                                                                                   |   |
|                                       | Condensed  Consolidated Statement of Net Assets in Liquidation as of June 30, 2006  (unaudited)                                                                         |   |
|                                       | Condensed  Consolidated Balance Sheet (Going Concern Basis) as of December 31, 2005                                                                                     |   |
|                                       | Condensed  Consolidated Statement of Changes in Net Assets in Liquidation for the period  June 1, 2006 to June 30, 2006 (unaudited)                                     |   |
|                                       | Condensed  Consolidated Statements of Operations (Going Concern Basis) for the two  months ended May 31, 2006 and for the three months ended June 30, 2005  (unaudited) |   |
|                                       | Condensed  Consolidated Statements of Operations (Going Concern Basis) for five months  ended May 31, 2006 and for the six months ended June 30, 2005 (unaudited)       |   |
|                                       | Condensed  Consolidated Statement of Stockholders’ Equity and Comprehensive Income  (Going Concern Basis) for the five months ended May 31, 2006 (unaudited)       |   |
|                                       | Condensed  Consolidated Statements of Cash Flows (Going Concern Basis) for the five  months ended May 31, 2006 and six months ended June 30, 2005 (unaudited)           |   |
|                                       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                                                       |   |
|                                       |                                                                                                                                                                    |   |
| Item 2.                                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                             |   |
|                                       |                                                                                                                                                                    |   |
| Item 3.                                    | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                             |   |
|                                       |                                                                                                                                                                    |   |
| Item 4.                                    | Controls and Procedures                                                                                                                                                 |   |
|                                       |                                                                                                                                                                    |   |
| **Part II    Other Information** | ** **                                                                                                                                                              |
| ** **                                 | ** **                                                                                                                                                              | ** ** |
| Item 1.                                    | Legal Proceedings                                                                                                                                                       |   |
|                                       |                                                                                                                                                                    |   |
| Item 1A.                                   | Risk Factors                                                                                                                                                            |   |
|                                       |                                                                                                                                                                    |   |
| Item 2.                                    | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                            |   |
|                                       |                                                                                                                                                                    |   |
| Item 4.                                    | Submission of Matters to a Vote of Security  Holders                                                                                                                    |   |
|                                       |                                                                                                                                                                    |   |
| Item 5.                                    | Other Information                                                                                                                                                       |   |
|                                       |                                                                                                                                                                    |   |
| Item 6.                                    | Exhibits                                                                                                                                                                |   |

 

----

 

**PART I –FINANCIAL INFORMATION**

**Item1.  Financial Statements**

** **

**AMERIVEST PROPERTIES INC.**

** **

**CondensedConsolidated Statement of Net Assets in Liquidation**

** **
| ** **                                                       | ** ** | **June 30,  2006** | ** **  |
|------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                       | ** ** | **(unaudited)**         | ** **  |
| **ASSETS**                                                       |       |                    |        |
| Real estate assets                                               |       | $                       | 255,936,884 |   |
|                                                             |       |                    |        |
| Cash and cash equivalents                                        |       | 2,110,527               |        |
| Escrow deposits                                                  |       | 3,530,952               |        |
| Accounts receivable                                              |       | 255,887                 |        |
| Prepaid expenses and other assets                                |       | 538,767                 |        |
| Total assets                                                     |       | $                       | 262,373,017 |   |
| **LIABILITIES**                                                  |       |                    |        |
| Secured mortgage loans and notes payable                         |       | $                       | 126,440,168 |   |
| Accounts payable and accrued expenses                            |       | 2,544,637               |        |
| Accrued real estate taxes                                        |       | 2,395,972               |        |
| Prepaid rents and security deposits                              |       | 2,609,261               |        |
| Estimated net liability for costs during  the liquidation period |       | 6,227,674               |        |
| Total liabilities                                                |       | 140,217,712             |        |
| Net assets in liquidation (available to  common stockholders)    |       | $                       | 122,155,305 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

1

----

 

**AMERIVEST PROPERTIES INC.**

** **

**CondensedConsolidated Balance Sheet**

**(Going Concern Basis)**

** **
| ** **                                                                                                     | ** ** | **December 31,  2005** | ** **  |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| **ASSETS**                                                                                                     | ** ** | ** **                  | ** **  |
| Investment in real estate:                                                                                     |       |                        |        |
| Land                                                                                                           |       | $                           | 48,059,765  |   |
| Buildings and improvements                                                                                     |       | 166,431,824                 |        |
| Furniture, fixtures and equipment                                                                              |       | 1,304,879                   |        |
| Tenant improvements                                                                                            |       | 14,245,047                  |        |
| Tenant leasing commissions                                                                                     |       | 3,479,965                   |        |
| Intangible assets                                                                                              |       | 13,371,477                  |        |
| Real estate assets – held-for-sale, net                                                                   |       | 46,930,658                  |        |
| Less: accumulated depreciation and amortization                                                                |       | (24,220,447                 | )           |
| Net investment in real estate                                                                                  |       | 269,603,168                 |        |
| Cash and cash equivalents                                                                                      |       | 988,420                     |        |
| Escrow deposits                                                                                                |       | 4,920,968                   |        |
| Accounts receivable, net                                                                                       |       | 1,310,627                   |        |
| Deferred rents receivable                                                                                      |       | 4,511,512                   |        |
| Deferred financing costs, net                                                                                  |       | 1,421,375                   |        |
| Prepaid expenses and other assets                                                                              |       | 923,928                     |        |
| Other assets – held-for-sale                                                                              |       | 229,792                     |        |
| Total assets                                                                                                   |       | $                           | 283,909,790 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                 |       |                        |        |
| Liabilities:                                                                                                   |       |                        |        |
| Secured mortgage loans and notes payable                                                                       |       | $                           | 127,673,784 |   |
| Unsecured line of credit                                                                                       |       | 29,897,129                  |        |
| Secured mortgage loans – held-for-sale                                                                    |       | 28,232,661                  |        |
| Accounts payable and accrued expenses                                                                          |       | 6,917,224                   |        |
| Accrued real estate taxes                                                                                      |       | 4,195,875                   |        |
| Prepaid rents, deferred revenue and  security deposits                                                         |       | 3,273,861                   |        |
| Dividends payable                                                                                              |       | 302,208                     |        |
| Total liabilities                                                                                              |       | 200,492,742                 |        |
|                                                                                                           |       |                        |        |
| Stockholders’ equity:                                                                                     |       |                        |        |
| Preferred stock, $0.001 par value Authorized:  5,000,000 shares Issued and  outstanding:  none       |       | —                      |        |
| Common stock, $0.001 par value Authorized:  75,000,000 shares Issued and outstanding:   24,121,306 shares |       | 24,121                      |        |
| Capital in excess of par value                                                                                 |       | 133,231,147                 |        |
| Distributions in excess of accumulated  earnings                                                               |       | (49,838,220                 | )           |
| Total stockholders’ equity                                                                                |       | 83,417,048                  |        |
| Total liabilities and stockholders’ equity                                                                |       | $                           | 283,909,790 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

2

----

 

**AMERIVEST PROPERTIES INC.**

** **

**CondensedConsolidated Statement of Changes in Net Assets in Liquidation**

**(unaudited)**

** **
| ** **                                                            | ** ** | **For the period  from  June 1, 2006 to  June 30, 2006** | ** **  |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|-------------|
| ** **                                                            | ** ** | ** **                                                                                  | ** **  |
| Stockholders’  equity at May 31, 2006 – going concern basis |       | $                                                                                           | 95,972,419  |   |
|                                                                  |       |                                                                                        |        |
| Liquidation basis adjustments:                                        |       |                                                                                        |        |
| Adjust assets and liabilities to fair value                           |       | 32,616,423                                                                                  |        |
| Estimated net costs during liquidation                                |       | (6,009,798                                                                                  | )           |
| Net assets in liquidation on June 1, 2006                             |       | 122,579,044                                                                                 |        |
| Change in estimated net assets in  liquidation                        |       | (423,739                                                                                    | )           |
| Net assets in liquidation at June 30, 2006                            |       | $                                                                                           | 122,155,305 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

** **

3

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**AMERIVEST PROPERTIES INC.**

** **

**CondensedConsolidated Statements of Operations**

**(Going Concern Basis)**

**(unaudited)**

** **
| ** **                                      | ** ** | **Two Months  Ended  May 31, 2006** | ** ** | **Three  Months  Ended  June 30, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| Real Estate  Operating Revenue:                 | ** ** | ** **                                         | ** ** | ** **                                        | ** ** |
| Rental revenues                                 |       | $                                                  | 5,655,787  |                                              | $          | 8,621,527 |   |
|                                            |       |                                               |       |                                              |       |
| Real Estate Operating Expenses:                 |       |                                               |       |                                              |       |
| Property operating expenses -                   |       |                                               |       |                                              |       |
| Operating expenses                              |       | 1,746,269                                          |       | 2,408,557                                         |       |
| Real estate taxes                               |       | 618,892                                            |       | 1,282,604                                         |       |
| General and administrative expenses             |       | 748,404                                            |       | 1,445,568                                         |       |
| Interest expense                                |       | 1,358,250                                          |       | 2,907,029                                         |       |
| Depreciation and amortization expense           |       | 2,104,212                                          |       | 3,249,010                                         |       |
| Strategic alternative and liquidation  expenses |       | 122,466                                            |       | 37,219                                            |       |
| Total operating expense                         |       | 6,698,493                                          |       | 11,329,987                                        |       |
|                                            |       |                                               |       |                                              |       |
| Loss from continuing operations                 |       | (1,042,706                                         | )          | (2,708,460                                        | )          |
|                                            |       |                                               |       |                                              |       |
| Other Income:                                   |       |                                               |       |                                              |       |
| Interest income and other                       |       | 33,781                                             |       | 7,265                                             |       |
| Total other income                              |       | 33,781                                             |       | 7,265                                             |       |
|                                            |       |                                               |       |                                              |       |
| Loss before discontinued operations             |       | (1,008,925                                         | )          | (2,701,195                                        | )          |
|                                            |       |                                               |       |                                              |       |
| Net loss from discontinued operations           |       | —                                             |       | (389,630                                          | )          |
|                                            |       |                                               |       |                                              |       |
| Net loss                                        |       | $                                                  | (1,008,925 | )                                                 | $          | (3,090,825 | ) |
|                                            |       |                                               |       |                                              |       |
| Net Loss per Share – Basic and Diluted:    | ** ** | ** **                                         | ** ** | ** **                                        | ** ** |
| Net loss before discontinued operations         |       | $                                                  | (0.04      | )                                                 | $          | (0.11 | ) |
| Discontinued operations, net                    |       | —                                             |       | (0.02                                             | )          |
| Net loss                                        |       | $                                                  | (0.04      | )                                                 | $          | (0.13 | ) |
|                                            |       |                                               |       |                                              |       |
| Weighted Average Common Shares Outstanding:     |       |                                               |       |                                              |       |
| Basic                                           |       | 24,128,206                                         |       | 24,046,982                                        |       |
| Diluted                                         |       | 24,128,206                                         |       | 24,046,982                                        |       |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

4

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**AMERIVEST PROPERTIES INC.**

** **

**CondensedConsolidated Statements of Operations**

**(Going Concern Basis)**

**(unaudited)**

** **
| ** **                                               | ** ** | **Five Months  Ended  May 31, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Real Estate  Operating Revenue:                          | ** ** | ** **                                          | ** ** | ** **                                          | ** ** |
| Rental revenues                                          |       | $                                                   | 14,548,386 |                                                | $          | 17,343,599 |   |
|                                                     |       |                                                |       |                                                |       |
| Real Estate Operating Expenses:                          |       |                                                |       |                                                |       |
| Property operating expenses -                            |       |                                                |       |                                                |       |
| Operating expenses                                       |       | 4,254,952                                           |       | 4,594,392                                           |       |
| Real estate taxes                                        |       | 1,812,772                                           |       | 2,553,060                                           |       |
| General and administrative expenses                      |       | 2,084,652                                           |       | 2,692,010                                           |       |
| Interest expense                                         |       | 3,533,086                                           |       | 5,749,056                                           |       |
| Depreciation and amortization expense                    |       | 5,265,388                                           |       | 6,443,493                                           |       |
| Strategic alternative and liquidation  expenses          |       | 249,435                                             |       | 106,590                                             |       |
| Total operating expense                                  |       | 17,200,285                                          |       | 22,138,601                                          |       |
|                                                     |       |                                                |       |                                                |       |
| Loss from continuing operations                          |       | (2,651,899                                          | )          | (4,795,002                                          | )          |
|                                                     |       |                                                |       |                                                |       |
| Other Income:                                            |       |                                                |       |                                                |       |
| Interest income and other                                |       | 129,747                                             |       | 18,004                                              |       |
| Total other income                                       |       | 129,747                                             |       | 18,004                                              |       |
|                                                     |       |                                                |       |                                                |       |
| Loss before discontinued operations                      |       | (2,522,152                                          | )          | (4,776,998                                          | )          |
|                                                     |       |                                                |       |                                                |       |
| Net earnings/(loss) from discontinued  operations        |       | 15,046,598                                          |       | (897,847                                            | )          |
|                                                     |       |                                                |       |                                                |       |
| Net earnings/(loss)                                      |       | $                                                   | 12,524,446 |                                                | $          | (5,674,845 | ) |
|                                                     |       |                                                |       |                                                |       |
| Net Earnings/(Loss) per Share – Basic and  Diluted: | ** ** | ** **                                          | ** ** | ** **                                          | ** ** |
| Net earnings/(loss) before discontinued  operations      |       | $                                                   | (0.10      | )                                                   | $          | (0.20 | ) |
| Discontinued operations, net                             |       | 0.62                                                |       | (0.04                                               | )          |
| Net earnings/(loss)                                      |       | $                                                   | 0.52       |                                                | $          | (0.24 | ) |
|                                                     |       |                                                |       |                                                |       |
| Weighted Average Common Shares Outstanding:              |       |                                                |       |                                                |       |
| Basic                                                    |       | 24,124,735                                          |       | 24,029,425                                          |       |
| Diluted                                                  |       | 24,128,907                                          |       | 24,029,425                                          |       |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

5

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**AMERIVEST PROPERTIES INC.**

** **

**CondensedConsolidated Statement of Stockholders’ Equity**

**and Comprehensive Income**

**(Going Concern Basis)**

** **

**Five Months Ended May 31, 2006**

**(unaudited)**

 
| ** **                   | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Distributions  in Excess of  Net** | ** ** | ** **   | ** ** |
|------------------------------|------------|-----------------------|------------|------------------------------|------------|------------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **Shares**            | ** ** | **Amount**                   | ** ** | **Capital**                                    | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| Balance at December 31, 2005 |       | 24,121,306            |       | $                            | 24,121     |                                           | $          | 133,231,147  |       | $ |  (49,838,220 | ) | $ | 83,417,048 |   |
|                         |       |                  |       |                         |       |                                           |       |         |       |   |   |
| Net earnings                 |       | —                |       | —                       |       | —                                         |       | 12,524,446   |       | 12,524,446 |   |
| Equity-based compensation    |       | 6,900                 |       | 7                            |       | 30,918                                         |       | —       |       | 30,925 |   |
| Balance at May 31, 2006      |       | 24,128,206            |       | $                            | 24,128     |                                           | $          | 133,262,065  |       | $ | (37,313,774 | ) | $ | 95,972,419 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

6

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**AMERIVEST PROPERTIES INC.**

** **

**Condensed Consolidated Statements of CashFlows**

**(Going Concern Basis)**

**(unaudited)**

 
| ** **                                                                                  | ** ** | **Five Months  Ended May 31,  2006** | ** ** | **Six Months  Ended June 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Cash Flows from Operating Activities:                                                       |       |                                                |       |                                                |       |
| Net earnings/(loss)                                                                         |       | $                                                   | 12,524,446 |                                                | $          | (5,674,845 | ) |
| Adjustments to reconcile net  earnings/(loss) to net cash provided by operating activities- |       |                                                |       |                                                |       |
| Depreciation and amortization expense                                                       |       | 5,314,189                                           |       | 9,597,064                                           |       |
| Loss/(gain) on sale of real estate, net                                                     |       | (15,327,481                                         | )          | 21,804                                              |       |
| Amortization of deferred financing costs                                                    |       | 178,107                                             |       | 682,640                                             |       |
| Write-off of unamortized deferred financing  costs                                          |       | 301,463                                             |       | 215,993                                             |       |
| Minority interest                                                                           |       | —                                              |       | (200,949                                            | )          |
| Equity-based compensation                                                                   |       | 30,925                                              |       | 327,500                                             |       |
| Changes in assets and liabilities-                                                          |       |                                                |       |                                                |       |
| Accounts receivable                                                                         |       | 657,998                                             |       | (241,842                                            | )          |
| Deferred rent receivable                                                                    |       | (153,787                                            | )          | (744,845                                            | )          |
| Prepaid expenses and other assets                                                           |       | 430,378                                             |       | (251,549                                            | )          |
| Accounts payable and accrued expenses                                                       |       | (2,150,251                                          | )          | (1,108,829                                          | )          |
| Other accrued liabilities                                                                   |       | (1,886,216                                          | )          | (1,009,133                                          | )          |
| Net cash flows provided by/(used in)  operating activities                                  |       | (80,229                                             | )          | 1,613,009                                           |       |
|                                                                                        |       |                                                |       |                                                |       |
| Cash Flows from Investing Activities:                                                       |       |                                                |       |                                                |       |
| Capital expenditures                                                                        |       | (203,614                                            | )          | (1,235,915                                          | )          |
| Tenant improvements                                                                         |       | (1,354,519                                          | )          | (2,648,841                                          | )          |
| Leasing commissions                                                                         |       | (877,590                                            | )          | (844,681                                            | )          |
| Proceeds from sales, net of closing costs                                                   |       | 61,704,117                                          |       | —                                              |       |
| Cash paid to complete deed-in-lieu  transaction                                             |       | —                                              |       | (114,600                                            | )          |
| Legal settlement proceeds                                                                   |       | —                                              |       | 450,000                                             |       |
| Net cash flows provided by /(used in)  investing activities                                 |       | 59,268,394                                          |       | (4,394,037                                          | )          |
|                                                                                        |       |                                                |       |                                                |       |
| Cash Flows from Financing Activities:                                                       |       |                                                |       |                                                |       |
| Additions to mortgage loans and lines of  credit                                            |       | —                                              |       | 7,203,233                                           |       |
| Payments of mortgage loans, lines of credit  and notes payable                              |       | (58,073,709                                         | )          | (1,000,000                                          | )          |
| Regularly scheduled principal payments                                                      |       | (1,092,898                                          | )          | (1,546,097                                          | )          |
| Payment of deferred financing costs                                                         |       | (181,387                                            | )          | (255,356                                            | )          |
| Net proceeds from exercising of options and  warrants                                       |       | —                                              |       | 7,501                                               |       |
| Net change in escrow deposits                                                               |       | 1,748,315                                           |       | 1,057,726                                           |       |
| Dividends paid                                                                              |       | —                                              |       | (3,075,074                                          | )          |
| Net cash flows provided by/(used in)  financing activities                                  |       | (57,599,679                                         | )          | 2,391,933                                           |       |
|                                                                                        |       |                                                |       |                                                |       |
| Net change in cash and cash equivalents                                                     |       | 1,588,486                                           |       | (389,095                                            | )          |
| Cash and cash equivalents, beginning of  period                                             |       | 988,420                                             |       | 1,859,660                                           |       |
| Cash and cash equivalents, end of period                                                    |       | $                                                   | 2,576,906  |                                                | $          | 1,470,565 |   |
|                                                                                        |       |                                                |       |                                                |       |
| Supplemental Disclosure of Cash Flow  Information:                                          |       |                                                |       |                                                |       |
| Cash paid for interest                                                                      |       | $                                                   | 3,815,831  |                                                | $          | 7,215,982 |   |
|                                                                                        |       |                                                |       |                                                |       |
| Supplemental Disclosure of Non-Cash  Investing and Financing Activities:                    |       |                                                |       |                                                |       |
| Basis of real estate involved in  deed-in-lieu transaction                                  |       | $                                                   | —     |                                                | $          | 5,160,022 |   |
| Debt extinguishment as part of deed-in-lieu  transaction                                    |       | $                                                   | —     |                                                | $          | 5,565,858 |   |

** **

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

7

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**AMERIVESTPROPERTIES INC.**

** **

**Notes toCondensed Consolidated Financial Statements**

** **

**June 30, 2006**

**(unaudited)**

** **

1 – Organization and Plan ofLiquidation

 

AmeriVest Properties Inc. (the “Company”) is a realestate investment trust (“REIT”) incorporated under the laws of the State ofMaryland.  The Company operatescommercial office buildings in selective markets and leases the commercialoffice buildings to small and medium size tenants.  At June 30, 2006, the Company owned 12 officeproperties located in metropolitan Denver, Dallas and Phoenix, all of which areclassified as held-for-sale and included in net assets in liquidation.

 

On February 9,2006 our Board of Directors approved a plan of liquidation (the “Plan”), whichwas approved by our stockholders at the Annual Meeting of Stockholders on May24, 2006.  As discussed in Note 11, theCompany has entered into a definitive agreement (the “Agreement”) to sell itsentire portfolio of office properties to Koll/PER LLC (“Koll/PER”), a limitedliability company owned by The Koll Company of Newport Beach, California andthe Public Employee Retirement System of Idaho (“PERSI”).   The gross purchase price is $273 million(less a reserve for capital expenditures of approximately $850,000), whichincludes an assumption of existing property level debt of approximately $126million.   The transaction is expected toclose on a property-by-property basis beginning in mid-August 2006 as loanapprovals are received from AmeriVest’s mortgage lenders.  Koll/PER has completed its physical duediligence, however, the agreement is subject to customary closing conditions,including each lender’s approval of the buyer’s assumption of the debt.  There is no assurance that the transactionwill close, or close on the terms described.

 

The Company intends tocomplete the sales under the terms of the agreement with Koll/PER and commencedistributions to stockholders under the Plan as soon as reasonably practicableafter closing of property sales.  Our netassets in liquidation aggregated approximately $122.2 million or $5.06 pershare on June 30, 2006.  This amountrepresents assets at estimated net realizable values on an undiscountedbasis.  The amount also includes an estimatednet liability for future estimated general and administrative expenses andother costs during the liquidation.  Asnone of the property sales have actually closed, these estimates containpotential costs that could change as circumstances dictate.  There can be no assurance that theseestimated values will be realized, nor if the reserve for future estimatedgeneral and administrative expenses is adequate.  This amount should not be taken as anindication of the timing or amount of future distributions to be made by theCompany.  The timing and amount of theinitial and interim liquidating distributions (if any) and the finalliquidating distribution will depend on the timing and amount of proceeds theCompany receives upon the sale of these assets and the extent to which reservesare required.

 

The Company currentlybelieves that subsequent to the disposition of our commercial office buildingsand initial liquidating distributions that any remaining assets and liabilitieswill be transferred to a liquidating trust. The liquidating trust would continue to exist until all liabilities havebeen settled and proceeds from dispositions have been distributed tostockholders.

 

As a result ofthe approval of the Plan by our stockholders, we adopted the liquidation basisof accounting as of June 1, 2006 and for all subsequent periods.  For all periods prior to June 1, 2006, theCompany’s financial statements are presented on the going concern basis ofaccounting.

 

2 – Summary of Significant Accounting Polices

 

*Liquidation Basis of Accounting*

* *

As a result of the approval of the Plan by our stockholders, we adoptedthe liquidation basis of accounting as of June 1, 2006, and for all subsequentperiods.  Accordingly, all assets havebeen adjusted to their estimated net realizable value.  Liabilities, including estimated costsassociated with implementing the Plan, have been adjusted to 

 

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their estimated settlement amounts. The estimates of the Company’s assets and liabilities will beperiodically reviewed and adjusted as appropriate.  The estimates for the valuation of realestate held-for-sale is based on the current agreement with Koll/PER, net ofestimated selling costs and other potential costs relating to the liquidation.  Actual values realized for assets andsettlement of liabilities may differ materially from the amountsestimated.  Estimated future cash flowsfrom property operations were made based on the anticipated sales dates of theassets.  However, due to the uncertaintyin the timing of the anticipated sales dates and the cash flows therefrom,revenues and expenses generated by operations may differ materially fromamounts estimated.  These amounts arepresented in the accompanying statement of net assets.  The net assets represent the estimatedliquidation value of our assets available to our stockholders uponliquidation.  The actual settlementamounts realized for assets and settlement of liabilities may differmaterially, perhaps in adverse ways, from the amounts estimated.  As such, it is not possible to predict theaggregate amount or timing of future distributions to stockholders and noassurance can be given that the eventual amount of distributions to be paid willequal or exceed the estimated net assets in liquidation included in thefinancial statements.

** **

*Basis of Presentation*

* *

The unaudited condensed consolidated financial statements includedherein were prepared from the records of the Company in accordance with U.S.generally accepted accounting principles through May 31, 2006, and under theliquidation basis of accounting effective June 1, 2006, and reflect alladjustments which are, in the opinion of management, necessary to provide afair statement of our financial position including net assets in liquidation,changes in net assets in liquidation, results of operations, stockholders’equity and cash flows for the interim periods. Such financial statements,except for liquidation basis financial statements, generally conform to thepresentation reflected in the Company’s Annual Report on Form 10-K filed withthe Securities and Exchange Commission for the year ended December 31,2005.  Interim results of operations arenot necessarily indicative of the results that may be expected for the year endingDecember 31, 2006.  These financialstatements and notes therein should be read together with the financialstatements and notes included in the Company’s Form 10-K for the year endedDecember 31, 2005.  Certain prior periodbalances have been reclassified to conform to current period presentation.

 

*Use of Estimates*

* *

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States and the liquidation basis ofaccounting requires management to make significant estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the condensed consolidatedfinancial statements. Actual results could differ from those estimates.  Estimates and assumptions are reviewedperiodically and the effects of those revisions are reflected in the periodthey are determined necessary.

 

*Investment in Real Estate*

* *

Prior to June1, 2006, investment in real estate was carried at the lower of cost or fairvalue. Maintenance and repairs were expensed as incurred and improvements werecapitalized. The cost of building and improvements were depreciated on astraight-line basis over the estimated useful lives of the buildings andimprovements, ranging primarily from 20 to 40 years and the lesser of thelease term or useful life, ranging from one to 10 years for tenantimprovements. The cost of assets sold or retired and the related accumulateddepreciation and/or amortization were removed from the accounts and theresulting gain or loss was reflected in operations in the period in which suchsale or retirement occurred.

 

Prior to June1, 2006, operating properties were individually evaluated for impairment whenconditions existed which may have indicated that it was probable that the sumof expected future cash flows (on an undiscounted basis) from a rental propertyover the anticipated holding period was less than its historical net costsbasis based on the probability of the potential property dispositions.  Upon determination that a permanentimpairment

 

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had occurred,rental properties were reduced to their fair value.   For properties to be disposed of, animpairment loss was recognized when the fair value of the property asdetermined through third-party valuations, reduced by the estimated cost tosell, was less than the carrying amount of the property measured at the time wehad a commitment to sell the property that was not subject to any significantcontingencies.  A property to be disposedof was reported at the lower of its carrying amount or its estimated fairvalue, less its cost to sell. Subsequent to the date that a property was heldfor disposition, depreciation expense was not recorded.  We did not record any impairment losses forthe five months ended May 31, 2006 or the three and six months ended June 30,2005.

 

As of June 1, 2006, the operating properties were adjusted to estimatedfair value less estimated costs to sell and other potential costs relating tothe liquidation, through the adjustment of assets and liabilities to fairvalue, to reflect the change to the liquidation basis of accounting.

 

*Other Intangible Assets*

* *

Prior to June 1, 2006, intangible assets were amortized over theremaining life of the in-place leases that generally ranged from 24 to57 months. In accordance with the adoption of the Plan, intangible assetswere adjusted to their net realizable value.

 

*Cash Equivalents*

* *

Cash and cash equivalents consist of cash on hand and short-term,highly liquid investments. For purposes of reporting cash flows, the Companyconsiders as cash equivalents all highly liquid investments with a maturity ofthree months or less at the time of purchase.

 

*Escrow Deposits*

* *

In accordance with the loan agreements for a majority of the Company’sloans, the lenders require the Company to maintain reserves for real estatetaxes, property insurance, capital improvements and/or tenant improvements.

 

*Allowance for Doubtful Accounts*

* *

Prior to June 1, 2006, tenant receivables were carried net of theallowances for uncollectible current tenant receivables.  An allowance was maintained for estimatedlosses resulting from the inability of tenants to make required payments underthe terms of the lease agreement. Management exercised judgment in establishing the allowance andconsidered payment history, personal guarantees and credit status in developingthe estimate.  We had established anallowance for uncollectible accounts of $387,000 at December 31, 2005.  As of June 1, 2006, we have adjusted tenantreceivables and deferred rent receivable to their estimated net realizablevalue.

 

*DeferredLeasing and Financing Costs*

* *

Prior to June 1, 2006, costs incurred for leasing and financing,  including commissions paid to third parties for new leases or the renewal ofleases and fees paid to third parties to obtain long-term financing, werecapitalized as deferred assets. The deferred leasing costs were recorded atcost and amortized over the terms of the respective leases. The deferredfinancing costs were amortized over the term of the respective debt instrumenton a straight-line basis, which approximated the effective yield. The deferredleasing and deferred finance costs were included as a component of totaloperating expenses and interest expense in the accompanying condensedconsolidated statements of operations. In accordance with the adoption of liquidation accounting, deferredleasing costs and deferred financing costs were written off.  Effective June 1, 2006, these costs will beexpensed as incurred.

 

10

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*RevenueRecognition*

* *

Prior to June 1, 2006, the Company recorded rental revenue for the fullterm of each lease on a straight-line basis, which included the effects of rentsteps and rent abatements. Accordingly, the Company recorded a receivable fromtenants for rents that the Company expected to collect over the remaining leaseterm as deferred rents receivable.

 

In accordance with the adoption of the liquidation basis of accountingthese deferred rents receivable balances were written off.  Effective June 1, 2006, the Company will nolonger record straight-line rental revenue. Rental revenue is recorded based on the terms of the lease agreement underthe liquidation basis of accounting.

 

*Concentrations of Credit Risk*

* *

The Company leases office space to commercial businesses in its targetmarkets. The terms of the leases generally require basic rent payments at thebeginning of each month. Credit risk associated with the lease agreements islimited to the amount of rents receivable from tenants less any relatedsecurity deposits.

 

Financial instruments, which potentially subject the Company toconcentrations of credit risk, consist principally of cash and cashequivalents. The Company maintains cash accounts at two financial institutions.The Company periodically evaluates the credit worthiness of these financialinstitutions, and maintains cash accounts only in large high quality financialinstitutions, thereby minimizing exposure for deposits in excess of federallyinsured amounts. On occasion, cash on deposit may exceed federally insuredamounts.

 

*Discontinued Operations*

* *

Prior to June 1, 2006, in accordance withSFAS No. 144, *“Accounting for Impairment orDisposal of Long-Lived Assets,”* the results of operations forproperties sold during the period or classified as held-for-sale at the end ofthe current period were classified as discontinued operations.  The property specific components included asdiscontinued operations include rental revenues, operating expenses, realestate taxes, interest expense, depreciation and amortization expense, and anyrelated impairment and gain/loss on disposition.

 

*Share-Based Compensation*

* *

Prior toJanuary 1, 2006, we accounted for our stock options using the intrinsic valuemethod of accounting provided under Accounting Principles Board Opinion No. 25,*“Accounting for Stock Issued to Employees,”*(“APB 25”) and related interpretations, as permitted by Financial AccountingStandard Board Statement of Financial Accounting Standards No. 123, *“Accounting for Stock-Based Compensation”* (“SFAS 123”).  Applying the intrinsic value method ofaccounting for our stock options, we did not record share-based compensation inour net earnings because the exercise price of our options equaled the marketprice of the underlying stock on the date of the grant.  Accordingly, share-based compensation for ouroptions was included as a proforma disclosure in the financial statementfootnotes and continues to be provided as proforma disclosure in the financialstatement footnotes for periods prior to January 1, 2006.

 

EffectiveJanuary 1, 2003, the Company adopted a long-term incentive plan as a means tocompensate certain employees and directors with equity-based compensation.  The plan provides for grants in the form ofnon-qualified and incentive stock options, stock appreciation rights, bonusstock, stock units, performance shares, performance units, restricted stock andrestricted stock units. There were no option grants under the long-termincentive plan during the six months ended June 30, 2006 or year ended December31, 2005.  During 2005, 12,000 units ofrestricted stock were granted, all of which were vested as of June 30,2006.  We recognized the value of therestricted stock as compensation expense based on the grant fair value of $4.00per share over the one year vesting period. During June 2006, an additional 12,000 restricted shares were granted,all of which are unvested at June 30, 2006. Compensation expense based on the grant fair value of $4.35 will berecognized over the one year vesting period. We assume that all restricted shares will ultimately vest.

 

11

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EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of SFAS No.123R, *“Share-Based Payment”* (“SFAS 123R”),using the modified-prospective transition method.  Under this transition method, the Companyrecognized compensation expense for all unvested options as of January 1, 2006,based on the grant date fair value estimated in accordance with the originalprovisions of SFAS 123.  Compensationexpense for any share-based payments granted subsequent to January 1, 2006 willbe based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R.  Results forperiods prior to January 1, 2006 have not been restated.  As a result of the adoption of SFAS 123R, werecognized approximately $1,700 of compensation expense during the six monthsended June 30, 2006.   The estimatedcompensation on the unvested options is approximately $2,000 and will berecognized over a one year period.  TheCompany has elected to be taxed as a REIT under the Internal Revenue Code of1986, as amended; therefore, we did not recognize a tax impact related to theadoption of SFAS 123R.

 

Hadcompensation cost for the Company’s stock option plan been determined based onthe fair value recognition provisions of SFAS 123, the Company’s net loss andnet loss per share for the three and six months ended June 30, 2005 would havebeen calculated as shown in the following table:

 
| ** **                                                         | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                               |       |                                                  |       |                                                |       |
| Net loss – as reported                                        |       | $                                                     | (3,090,825 | )                                                   | $          | (5,674,845 | ) |
| Plus: Recognized equity-based compensation                         |       | 256,910                                               |       | 327,500                                             |       |
| Less: Total equity-based compensation  expense based on fair value |       | (260,951                                              | )          | (332,439                                            | )          |
| Net loss – pro forma                                          |       | $                                                     | (3,094,866 | )                                                   | $          | (5,679,784 | ) |
|                                                               |       |                                                  |       |                                                |       |
| Loss per basic share – as reported                            |       | $                                                     | (0.13      | )                                                   | $          | (0.24 | ) |
| Loss per diluted share – as reported                          |       | $                                                     | (0.13      | )                                                   | $          | (0.24 | ) |
|                                                               |       |                                                  |       |                                                |       |
| Loss per basic share – pro forma                              |       | $                                                     | (0.13      | )                                                   | $          | (0.24 | ) |
| Loss per diluted share – pro forma                            |       | $                                                     | (0.13      | )                                                   | $          | (0.24 | ) |
|                                                                    |            |                                                       |            |                                                     |            |  |  |  |  |

 

The fair value of each grant is estimated on the dateof grant using the Black-Scholes option-pricing model with the followingweighted-average assumptions (excludes 2005 and 2006 since there were no optiongrants during either year):

 
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Dividend yield        |       | 7.0      | %          | 7.9      | %          |
| Volatility            |       | 9.3      | %          | 27.0     | %          |
| Discount rate         |       | 2.7      | %          | 2.9      | %          |
| Expected life (years) |       | 2.2      |       | 4.6      |       |

 

The status of outstandingoptions granted pursuant to the Company’s options plans, as of June 30, 2006,was as follows:

 
| ** **            | ** ** | **Number of  Options  Outstanding** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Fair Value** | ** ** | **Range of  Exercise  Prices** | ** **        |
|-----------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|-------------------|
| December 31, 2005     |       | 98,000                                   |       | 86,000                                   |       | $                                       | 6.34       |                                    |       |                                | $4.75 - 7.10      |   |
| Granted at fair value |       | —                                   |       |                                     |       | —                                  |       | —                                  |       | —                              |              |
| Exercised             |       | —                                   |       |                                     |       |                                    |       |                                    |       |                                |              |
| Forfeited             |       | (17,000                                  | )          |                                     |       | $                                       | 6.72       |                                    |       |                                | $6.16 – 6.96 |   |
| Expired               |       | (12,000                                  | )          |                                     |       | $                                       | 4.75       |                                    |       |                                | $4.75             |   |
| June 30, 2006         |       | 69,000                                   |       | 61,000                                   |       | $                                       | 6.52       |                                    |       |                                | $5.70 –7.10  |   |

 

The weighted-averagecontractual life of options outstanding at June 30, 2006 was approximately 2years.

 

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*Income Taxes*

* *

We have made an election to be taxed as a REIT under the InternalRevenue Code of 1986, as amended, as we believe we qualify as a REIT and havemade all required distributions of our taxable income.  It is our present intention to continue toadhere to these requirements and maintain our REIT status until the liquidationis complete.

 

3 – Real Estate Assets

 

As of June 1, 2006 the operating properties were adjusted to estimatedfair value less estimated selling costs. The following is a reconciliation of the estimated real estate assets asof June 30, 2006:

 
| Purchase price  per Agreement                                    |   | $          | 273,000,000 |   |
|------------------------------------------------------------------|--------|------------|-------------|--------|
| Less :                                                      |   |       |        |
| Capital improvement escrow                                       |   | (850,000   | )           |
| Estimated capital expenditures and leasing  commissions          |   | (3,438,770 | )           |
| Estimated prepayment penalties if certain  loans are not assumed |   | (4,700,000 | )           |
| Estimated closing costs                                          |   | (3,974,346 | )           |
| Estimated additional costs relating to  disposals                |   | (4,100,000 | )           |
| Real estate assets at June 30, 2006                              |   | $          | 255,936,884 |   |

 

4 – Estimated Costs During the Liquidation Period

 

Under the liquidationbasis of accounting, the Company is required to estimate and accrue the costsassociated with implementing and completing the Plan.  The estimated amounts can be significantlyimpacted due to, among other things, the costs of retaining individuals tooversee the liquidation, professional fees, insurance and other costsassociated with discharging the known and contingent liabilities of theCompany.  As a result, the Company hasrecorded an estimated liability for amounts expected to be incurred during theprojected period required to complete the liquidation of the Company’sassets.  These estimates could changematerially based on the timing of the anticipated sales, the performance of theunderlying assets or modifications to the Agreement.  Periodically, as the facts and circumstancesassociated with the disposition of the Company’s assets change, the estimatedcosts during the liquidation period will be reviewed and adjusted as appropriate.

 

The components of theestimated net liability for costs during the liquidation period as of June 30,2006 are as follows:

 
| Operating  expenses of liquidating trust through dissolution |   | $          | 2,500,000 |   |
|--------------------------------------------------------------|--------|------------|-----------|--------|
| Severance costs                                              |   | 2,350,000  |      |
| Professional fees                                            |   | 700,000    |      |
| Additional estimated costs during  liquidation period        |   | 1,750,000  |      |
| Excess of projected revenues over costs                      |   | (1,072,326 | )         |
| Estimated costs during the liquidation                       |   | $          | 6,227,674 |   |

 

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5 – Net Assets in Liquidation

 

The following is a reconciliation of total stockholders’ equity underthe going concern basis of accounting to net assets in liquidation under theliquidation basis of accounting as of June 30, 2006:

 
| Stockholders’  equity at May 31, 2006 – going concern basis     |   | $           | 95,972,419  |   |
|---------------------------------------------------------------------------|--------|-------------|-------------|--------|
| Increase due to estimated net realizable  value of properties             |   | 40,151,447  |        |
| Decrease due to the write-off of intangible  assets:                      |   |        |        |
| Tenant leasing commissions                                                |   | (2,796,139  | )           |
| Deferred rents receivable                                                 |   | (3,809,145  | )           |
| Deferred financing costs                                                  |   | (1,123,191  | )           |
| Increase due to the write-off of deferred  revenue                        |   | 193,451     |        |
| Decrease due to the estimated net costs  during liquidation               |   | (6,009,798  | )           |
| Adjustments to reflect the change to the  liquidation basis of accounting |   | 26,606,625  |        |
| Estimated value of net assets in  liquidation at June 1, 2006             |   | 122,579,044 |        |
| Change in estimated net assets in  liquidation                            |   | (423,739    | )           |
| Estimated value of net assets in  liquidation at June 30, 2006            |   | $           | 122,155,305 |   |

** **

Based on the shares outstanding on June 30, 2006, the net assets in liquidationat June 30, 2006 would result in liquidation distributions per share ofapproximately $5.06.  These estimates forliquidation distributions per share include projections of costs and expensesexpected to be incurred during the period required to complete the Plan. Theseprojections could change materially based on the timing of any sales, theperformance of the underlying assets and change in the underlying assumptionsof the projected cash flows.

 

6 – Dispositions

 

On January 23, 2006, the Company sold Financial Plaza, a310,838 square foot office property located in Phoenix, for $55.0 million to apublicly traded REIT, recording a net gain on the sale of approximately $15.3million in the first quarter of 2006. The net cash proceeds of approximately $53 million were used to repay anoutstanding first mortgage balance of approximately $23 million andapproximately $30 million of indebtedness under the Company’s Unsecured CreditFacility.

 

On January 24, 2006, the Company sold Keystone Office Park,a 114,980 square foot office property located in Indianapolis, forapproximately $9.4 million to a foreign institutional investor.  Subsequent to recording an impairment of $1.6million on the property in the fourth quarter of 2005, the Company recognized anet gain of approximately $65,000.  Ofthe $8.6 million in net proceeds received from the sale, the Company usedapproximately $4.6 million to pay the outstanding mortgage balances andapproximately $300,000 to repay the remaining balance due on Unsecured CreditFacility leaving the Company with approximately $3.7 million in cash.

 

7 – Discontinued Operations

 

Prior to June 1, 2006, in accordance with SFAS No.144, *“Accounting for Impairment or Disposal ofLong-Lived Assets”*, the operating results of properties sold duringthe period or designated as held-for-sale and any related impairment andgain/loss on the disposition were included in discontinued operations for thefive months ended May 31, 2006 and the three and six months ended June 30,2005.

 

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During the five months ended May 31, 2006, the Companycompleted the disposition of Financial Plaza and Keystone Office Park.  The Company wrote-off unamortized deferredfinancing costs in connection with the dispositions of $301,463 and incurredprepayment penalties of $203,540.   TheCompany recognized net gains of approximately $15.3 million.

 

During 2005, the Company completed the disposition ofPanorama Falls, AmeriVest Plaza at Inverness and Chateau Plaza and completed aDeed-In-Lieu Agreement to return 13 non-core Texas State Buildings to thelender.  During the six months ended June30, 2005, the Company wrote-off unamortized deferred financing costs ofapproximately $215,993, and recognized a loss of approximately $22,000 inconnection with the Texas State Buildings dispositions, both of which arereflected in discontinued operations during the six months ended June 30, 2005.

 

The following is a summary of the operating results of these propertiesincluded in discontinued operations:

 
| ** **                                                                                        | ** ** | **Two Months  Ended  May 31, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Five Months  Ended  May 31, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Rental revenue                                                                                    |       | $                                                  | —     |                                                  | $          | 3,620,453                                           |       | $                                                   | 540,283    |   | $ | 7,800,958 |   |
|                                                                                              |       |                                               |       |                                                  |       |                                                |       |                                                |       |
| Property operating expenses -                                                                     |       |                                               |       |                                                  |       |                                                |       |                                                |       |
| Operating expenses                                                                                |       | —                                             |       | (1,106,941                                            | )          | (133,276                                            | )          | (2,351,751                                          | )          |
| Real estate taxes                                                                                 |       | —                                             |       | (557,683                                              | )          | (59,275                                             | )          | (1,152,055                                          | )          |
| Interest expense                                                                                  |       | —                                             |       | (1,006,557                                            | )          | (123,612                                            | )          | (2,063,093                                          | )          |
| Deferred financing costs and prepayment  penalties associated with the disposition of real estate |       | —                                             |       | —                                                |       | (505,003                                            | )          | (215,993                                            | )          |
| Depreciation and amortization expense                                                             |       | —                                             |       | (1,451,769                                            | )          | —                                              |       | (3,095,058                                          | )          |
| Total expense                                                                                     |       | —                                             |       | (4,122,950                                            | )          | (821,166                                            | )          | (8,877,950                                          | )          |
|                                                                                              |       |                                               |       |                                                  |       |                                                |       |                                                |       |
| Minority interest                                                                                 |       | —                                             |       | 112,867                                               |       | —                                              |       | 200,949                                             |       |
| Gain/(loss) on sale                                                                               |       | —                                             |       | —                                                |       | 15,327,481                                          |       | (21,804                                             | )          |
| Net earnings/(loss) from discontinued  operations                                                 |       | $                                                  | —     |                                                  | $          | (389,630                                            | )          | $                                                   | 15,046,598 |   | $ | (897,847 | ) |

 

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8 – Mortgage Loans, Notes Payable, and Lines ofCredit

 

The Company finances itsproperties with mortgage loans and other debt instruments, such as lines ofcredit.  The following is a summary ofthe Company’s outstanding mortgage loans, notes payable and lines of credit,classified by interest type (fixed or variable) and in order of maturity atJune 30, 2006 and December 31, 2005:

 
| ** **                                                               | ** ** | ** **                                            | ** ** | ** **            | ** ** | **June 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| **Lender**                                                               | ** ** | **Mortgaged Property**                           | ** ** | **Maturity  Date(1)** | ** ** | **Principal  Balance**      | ** **  | **Interest  Rate(2)**           | ** ** | **Principal  Balance** | ** ** | **Interest  Rate(2)** | ** ** |
| ***Fixed  Rate***                                                        |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| GEMSA                                                                    |       | Hampton Court                                         |       | 11/1/2007             |       | $                           | 7,900,000   |                            | 5.48       | % | $ | 7,900,000 |   | 5.48 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Greenwich Capital  Financial Products                                    |       | Parkway Centre II  Centerra  Southwest Gas Building   |       | 10/1/2008             |       | 36,878,836                  |        | 5.13                            | %          | 37,306,859 |   | 5.13 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Metropolitan Life  Insurance Company                                     |       | Parkway Centre III                                    |       | 9/10/2009             |       | 14,637,577                  |        | 4.47                            | %          | 14,813,833 |   | 4.47 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Southern Farm  Bureau Life Insurance Company                             |       | Scottsdale Norte                                      |       | 4/1/2011              |       | 6,474,445                   |        | 7.90                            | %          | 6,507,070 |   | 7.90 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| J.P. Morgan Chase                                                        |       | Hackberry View – 1st                             |       | 9/1/2012              |       | 11,212,258                  |        | 6.57                            | %          | 11,287,282 |   | 6.57 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| J.P. Morgan Chase                                                        |       | Hackberry View – 2nd                             | (3)        | 9/1/2012              |       | 922,106                     |        | 8.00                            | %          | 937,796 |   | 8.00 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Teachers  Insurance and Annuity Association of America                   |       | Sheridan Center  Arrowhead Fountains Kellogg Building |       | 1/1/2013              |       | 28,101,866                  |        | 7.40                            | %          | 28,360,682 |   | 7.40 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Allstate Life  Insurance Company                                         |       | Camelback – 1st                                  |       | 9/5/2014              |       | 15,476,633                  |        | 5.82                            | %          | 15,631,631 |   | 5.82 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Allstate Life  Insurance Company                                         |       | Camelback – 2nd                                  |       | 9/5/2014              |       | 4,836,447                   |        | 5.82                            | %          | 4,884,884 |   | 5.82 | % |
| Subtotal                                                                 |       |                                                  |       |                  |       | 126,440,168                 |        | 5.98                            | %          | 127,630,037 |   | 5.98 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| ***Variable  Rate***                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| KeyBank National  Association – $10 million Secured Credit Facility |       | Greenhill Park                                        |       | 12/28/06              |       | —                      |        | —                          |       | — |   | — |   |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| KeyBank National  Association – Unsecured Credit Facility           |       | Unsecured                                             |       | n/a                   |       | —                      |        | —                          |       | 29,897,129 |   | 6.91 | % |
| Subtotal                                                                 |       |                                                  |       |                  |       | —                      |        | —                          |       | 29,897,129 |   | 6.91 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| ***Other  Notes Payable***                                               |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Lease Capital  Corporation                                               |       | Phone system                                          |       | n/a                   |       | —                      |        | —                          |       | 43,747 |   | 11.11 | % |
| Subtotal,  excluding held-for-sale properties                            |       |                                                  |       |                  |       | 126,440,168                 |        | 5.98                            | %          | 157,570,913 |   | 6.16 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| ***Sold  Properties***                                                   |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Allstate Life  Insurance Company                                         |       | Financial Plaza                                       |       | (4)                   |       | —                      |        | —                          |       | 23,650,188 |   | 5.25 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Security Life of  Denver Insurance Company                               |       | Keystone Office Park – 1st                       |       | (4)                   |       | —                      |        | —                          |       | 4,119,506 |   | 8.00 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Security Life of  Denver Insurance Company                               |       | Keystone Office Park – 2nd                       |       | (4)                   |       | —                      |        | —                          |       | 462,967 |   | 8.63 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Subtotal, sold  properties                                               |       |                                                  |       |                  |       | —                      |        | —                          |       | 28,232,661 |   | 5.71 | % |
|                                                                     |       |                                                  |       |                  |       |                        |        |                            |       |   |   |   |   |
| Total                                                                    |       |                                                  |       |                  |       | $                           | 126,440,168 |                            | 5.98       | % | $ | 185,803,574 |   | 6.09 | % |

 

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(1)   The Agreement specifies thatthe buyer will assume all mortgages, subject to lender approval.

(2)   Interest only, does notinclude amortization of deferred financing costs or any fees.

(3)   The amount recorded reflectsa net present value calculation based on a fair value rate of 8%.  The actual loan balance assumed wasapproximately $698,000 at an interest rate of 15%.

(4)   Property was sold in January2006.

 

16

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The followingtable details the scheduled maturities of debt outstanding at June 30, 2006(based on debt outstanding without taking into consideration the disposition ofproperties and assumption of debt):

 

| 2006       |   | $          | 1,178,772   |   |
|------------|--------|------------|-------------|--------|
| 2007       |   | 10,412,770 |        |
| 2008       |   | 37,279,930 |        |
| 2009       |   | 15,158,612 |        |
| 2010       |   | 1,537,734  |        |
| Thereafter |   | 60,872,350 |        |
| Total      |   | $          | 126,440,168 |   |

 

The change in debt duringthe six months ended June 30, 2006 consisted of the following:

 

| ** **                                       | ** ** | **2006**    | ** **  |
|--------------------------------------------------|------------|-------------|-------------|
| Balance at January 1                             |       | $           | 185,803,574 |   |
| Additions                                        |       | —      |        |
| Repayments, including repayments at  disposition |       | (58,073,709 | )           |
| Scheduled principal payments                     |       | (1,289,697  | )           |
| Balance at June 30                               |       | $           | 126,440,168 |   |

* *

*Secured Line of Credit*

* *

On January 23,2006, the Company completed a loan agreement with its primary bank group whichamended its unsecured revolving credit agreement and reinstated a revolvingcredit facility of up to $10 million to be used for working capital and otherlimited corporate purposes.  The revolveris secured by the Company’s Greenhill Park property and matures December 28,2006.  The amendment also modifiedcertain covenant requirements and collateral provisions and required theCompany to extend the employment agreement with its Chief Executive Officerthrough the maturity of the loan. This facility has an interest rate of LIBORplus 250 basis points.  There were noborrowings on this facility during the six months ended June 30, 2006.

 

*Other*

* *

Our debtinstruments generally contain certain covenants common to the type of facilityor borrowing, including financial covenants establishing minimum debt servicecoverage ratios and maximum leverage ratios. We were in compliance with allfinancial covenants pertaining to our debt instruments at and during the sixmonths ended June 30, 2006.

 

9 – Per Share Information

 

For the five months ended May 31, 2006, the only adjustment necessaryto the basic weighted average common shares outstanding to arrive at thediluted average common shares was the weighted-average effect of the 3,000unvested restricted shares.  Theoutstanding options were excluded from the diluted weighted-average shares dueto their anti-dilutive effect, as the option exercise price exceeds the stockfair value and would result in a reduction to the number of shares outstandingutilizing the treasury stock method. There are no adjustments necessary for the two months ended May 31, 2006or the three or six months ended June 30, 2005 as the Company recognized a netloss and the impact would be anti-dilutive.

 

17

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10 – Other Comprehensive Income

 

In May 2003, the Company filed a bankruptcy claim of $478,700 againstUAL Corporation, a former tenant, related to unpaid rent.  During March 2006, the Company received 2,084shares of UAL common stock as payment for the claim.  The shares were accounted for utilizing theguidance in SFAS No. 115, *“Accounting for CertainInvestments in Debt and Equity Securities,”* and were deemed asavailable-for-sale.  At the time ofreceipt, the value of the shares was approximately $73,924, which was includedin “Other income”.  During May 2006, theshares were sold for $75,845, and $1,921 of additional other income wasrecognized.

 

11 – Subsequent Events

 

On July 18, 2006, the Company announced that it entered intoan Agreement to sell its entire portfolio of office properties to Koll/PER, alimited liability company owned by The Koll Company of Newport Beach,California and the Public Employee Retirement System of Idaho.   Thegross purchase price is $273 million (less a reserve for capital expendituresof approximately $850,000), which includes an assumption of existing propertylevel debt of approximately $126 million.  The sale is being made pursuant to the Plan previously adopted byAmeriVest and approved by its stockholders on May 24, 2006.  The transaction is expected to close on aproperty by property basis beginning in mid-August 2006 as loan approvals arereceived from AmeriVest’s mortgage lenders. Koll/PER has completed its physical due diligence, however, theAgreement is subject to customary closing conditions, including each lender’sapproval of the buyer’s assumption of the debt. There is no assurance that the transaction will close on the termsdescribed or on any terms.

 

Koll/PER wasrequired, upon execution of the Agreement, to deposit $4 million as earnestmoney, which is nonrefundable except in the case of (1) default by AmeriVestunder the Agreement; (2) a casualty or condemnation event; (3) certain failuresof loan assumption and (4) failure of AmeriVest to deliver the requiredestoppel certificates. The earnest money, which has been paid, will be appliedas a credit against the purchase price for each office property on a pro ratabasis based on the allocations set forth in the Agreement.

 

The Company intends tocomplete these sales under the terms of the Agreement with Koll/PER andcommence distributions to stockholders under the Plan as soon as reasonablypracticable after closing of property sales. The Company’s net assets in liquidation aggregated $122.2 million or$5.06 per share on June 30, 2006.  Thisamount represents assets at estimated net realizable value on an undiscountedbasis after reduction for liabilities at their estimated settlement amounts.  The amount also includes an estimate forfuture general and administrative expenses and other costs during theliquidation.  As none of the propertieshave actually closed, these estimates could change materially as circumstancesdictate.  There can be no assurance thatthese estimated values will be realized, nor if the reserve for futureestimated general and administrative expenses is adequate.  Such amount should not be taken as anindication of the timing or amount of future distributions to be made by theCompany.

 

The timing and amount ofthe initial and interim liquidating distributions (if any) and the finalliquidating distribution will depend on the timing and amount of proceeds theCompany will receive upon the sale of these assets.

 

18

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**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

The discussion and analysis of the Company’s financial condition andresults of operations are based upon its condensed consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States as to the liquidation basis for theperiod June 1, 2006 to June 30, 2006 and on the going concern basis for allprior periods. The preparation of these financial statements requiresmanagement to make significant estimates and judgments that affect the reportedamounts of assets and liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities at the date of the financialstatements. Actual results may differ from these estimates under differentassumptions or conditions.

 

The following discussion and analysis of the condensed consolidated netassets in liquidation, changes in net assets in liquidation, financialcondition and results of operations should be read in conjunction with thecondensed consolidated financial statements and notes thereto included in thisForm 10-Q and elsewhere.

 

Forward-LookingStatements

 

Certain statementsin this Form 10-Q that are not historical facts are “forward-lookingstatements” as that term is defined under the Private Securities LitigationReform Act of 1995.  Theseforward-looking statements are based on the Company’s current expectations, beliefs,assumptions, estimates and projections about the industry and markets in whichthe Company operates.  Words such as“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”and variations of such words and similar expressions are intended to identifysuch forward-looking statements. Information concerning anticipated asset sales, expected investmentbalances, expected funding sources, planned investments, forecasted dates andrevenue and expense growth assumptions are examples of forward-lookingstatements.  These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions, which are difficult to predict and many of which are beyond theCompany’s control.  Therefore, actualoutcomes and results may differ materially from what is expressed, forecastedor implied in such forward-looking statements. The Company undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, future eventsor otherwise, except as required by applicable law.

 

The Company’soperating results depend primarily on income from its properties, which aresubstantially influenced by supply and demand for such properties, operatingexpense levels, property level operations and the pace and price at which theCompany can develop or dispose of such properties.  Capital and credit market conditions, whichaffect the Company’s cost of capital, also influence operating results.  See “Item 1. Description of Business” in theCompany’s Annual Report on Form 10-K for the period ending December 31, 2005and Item 1A. of this report on Form 10-Q for the period ending June 30, 2006for a more complete discussion of risk factors that could impact the Company’sfuture financial performance.

 

Organization, Business, andPlan of Liquidation

 

As used herein, “we”, “us”, “our” and “the Company” refer to AmeriVestProperties Inc., a Maryland corporation. We were incorporated in the Stateof Maryland in 1999. We are a REIT investing in, operating and leasingcommercial office buildings primarily to small and medium size tenants. At June30, 2006, we owned 12 properties, which included an aggregate of approximately1,740,000 rentable square feet located in metropolitan Denver, Dallas andPhoenix. At June 30, 2005, we owned, in whole or in part, 17 properties, whichincluded an aggregate of approximately 2,508,000 rentable square feet.

 

On February 9, 2006 ourBoard of Directors approved a Plan that was approved by our stockholders at theAnnual Meeting of Stockholders on May 24, 2006.  TheCompany has entered into the Agreement to sell its entire portfolio ofoffice properties to Koll/PER, a limited liability company owned by The KollCompany of Newport Beach, California and the Public Employee Retirement Systemof Idaho.   The gross purchase price is$273 million (less a reserve for capital expenditures of approximately$850,000), which includes an assumption of existing property level debt ofapproximately $126 million.   Thetransaction is expected to close on a property by property basis beginning inmid-August 2006 as loan approvals are received from AmeriVest’s mortgagelenders.  Koll/PER has completed itsphysical due diligence, however, the agreement is subject to customary closingconditions, including each lender’s approval of the buyer’s assumption of thedebt.  There is no assurance that thetransaction will close, or close on the terms described.

 

19

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The Company intends tocomplete the sales under the terms of the Agreement with Koll/PER and commencedistributions to stockholders under the Plan as soon as reasonably practicableafter closing of property sales.  Our netassets in liquidation aggregated to approximately $122.2 million or $5.06 pershare on June 30, 2006.  This amountrepresents assets at estimated net realizable value on an undiscountedbasis.  The amount also includes anestimate for future general and administrative expenses and other costs duringthe liquidation.  As none of theproperties have actually closed, these estimates contain reserves andallowances that could change as circumstances dictate.  There can be no assurance that theseestimated values will be realized, nor if the reserve for future estimated generaland administrative expenses is adequate. Such amount should not be taken as an indication of the timing or amountof future distributions to be made by the Company.  The timing and amount of the initial andinterim liquidating distributions (if any) and the final liquidatingdistribution will depend on the timing and amount of proceeds the Company willreceive upon the sale of these assets and the extent to which reserves arerequired.

 

We have elected to be taxed as a REIT for federal income tax purposesand generally will not be subject to federal income tax if we distribute atleast 90% of our taxable income and comply with a number of organizational andoperational requirements.  Although weexpect to continue to qualify as a REIT until our dissolution, no assurance canbe given that we will not lose or terminate our status as a REIT.

 

Net Assets in Liquidation

 

The following is a reconciliation of total stockholders’ equity underthe going concern basis of accounting to net assets in liquidation under theliquidation basis of accounting as of June 30, 2006:

 
| Stockholders’  equity at May 31, 2006 – going concern basis     |   | $           | 95,972,419  |   |
|---------------------------------------------------------------------------|--------|-------------|-------------|--------|
| Increase due to estimated net realizable  value of properties             |   | 40,151,447  |        |
| Decrease due to the write-off of intangible  assets:                      |   |        |        |
| Tenant leasing commissions                                                |   | (2,796,139  | )           |
| Deferred rents receivable                                                 |   | (3,809,145  | )           |
| Deferred financing costs                                                  |   | (1,123,191  | )           |
| Increase due to the write-off of deferred  revenue                        |   | 193,451     |        |
| Decrease due to the estimated net costs  during liquidation               |   | (6,009,798  | )           |
| Adjustments to reflect the change to the  liquidation basis of accounting |   | 26,606,625  |        |
| Estimated value of net assets in  liquidation at June 1, 2006             |   | 122,579,044 |        |
| Change in estimated net assets in  liquidation                            |   | (423,739    | )           |
| Estimated value of net assets in  liquidation at June 30, 2006            |   | $           | 122,155,305 |   |

 

*Factors Which May Influence Future Changes in Net Assets in Liquidation*

* *

*Rental Income*

 

The amount of rental income generated by our properties dependsprincipally on our ability to maintain the occupancy rates of currently leasedspace, to lease currently available space and space available from unscheduledlease terminations at the existing rental rates and the timing of thedisposition of the properties. Negative trends in one or more of these factorscould adversely affect our rental income in future periods.

 

*Uses of Estimates*

* *

Management has estimatedthe net realizable value of the properties based on the current Agreement withKoll/PER.  These estimates includeclosing costs, prepayment penalties if our loans are not assumed by Koll/PER,and expenditures for leasing commissions, tenant improvements, and capitalexpenditures until we sell the properties. As none of the properties haveactually closed, our estimates for potential disbursements could change ascircumstances dictate.  Management hasalso estimated and reserved for estimated future general and administrativeexpenses and other costs to be incurred during the liquidation period.  There can be no assurance that the estimatednet realizable values will be realized, nor that the reserve for futureestimated general and administrative expense is adequate.

 

20

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Changes in Net Assets inLiquidation 

 

*One month ended June 30, 2006*

 

Net assets in liquidationdecreased approximately $424,000 during the one month ended June 30, 2006.  This was primarily due to the excess of costsover revenues of $218,000 for the month, which included $361,000 of leasingcommission expenses which were expensed as incurred since there would be no netrealizable value associated with this expenditure under the liquidation basisof accounting.   Previously, under goingconcern accounting, leasing commissions were capitalized and depreciated overthe term of the related lease.  Inaddition, the change in estimated net costs of liquidation was a $206,000decrease for the month ended June 30, 2006 primarily due to $692,000 in capitalexpenditures and tenant improvements and $197,000 in mortgage principalpayments, partially offset by a $534,000 reduction in accounts receivable and a$232,000 increase in accounts payable.

 

Going Concern Basis Analysis

 

Prior to the adoption ofthe liquidation basis of accounting on June 1, 2006, the Company’s financialposition, results from operations and cash flows are presented on the goingconcern basis of accounting.  The goingconcern periods are the five months ended May 31, 2006 compared to the sixmonths ended June 30, 2005 and the two months ended May 31, 2006 compared tothe three months ended June 30, 2005.

 

Rental revenuefor the two and five months ended May 31, 2006 compared to the three and sixmonths ended June 30, 2005 was negatively impacted by a slight decline inoccupancy and average rent per square foot during 2006.  The decline in occupancy was primarily due tothe expiration of approximately 30,000 square feet at Camelback Lakes on March31, 2006.  At May 31, 2006, the Companyhad approximately 16,800 square feet of leases that were signed and  scheduled to commence during the third andfourth quarters of 2006.  Propertyoperating expenses on a monthly basis remained relatively consistent betweenall periods.  General and administrativeexpenses includes audit fees of $293,500 and $428,500 during the two and five monthsended May 31, 2006, respectively, and severance costs of $191,875 for the fivemonths ended May 31, 2006, which were partially offset by lower compensationcosts due to a reduction in headcount as compared to the prior year. Interestexpense decreased for the two and five months ended May 31, 2006 due to theCompany utilizing disposition proceeds to reduce its debt obligations.  Strategic alternative and liquidationexpenses of approximately $122,000 and $249,000 during the two and five monthsended May 31, 2006, respectively, were primarily due to legal costs incurred inconnection with the Company’s strategic alternative review and plan ofliquidation.

 

Under thegoing concern basis of accounting, the results of operations for propertiessold during the period or designated as held-for-sale at the end of the periodare required to be classified as discontinued operations.  During January 2006, the Company sold theKeystone property in Indianapolis and the Financial Plaza property in Mesa,Arizona, both of which had previously been classified as held-for-sale underthe provisions of SFAS 144 and recognized a gain on disposition ofapproximately $15.3 million. Accordingly, we have classified the operating earnings and gain ondisposition from these properties within discontinued operations for the fivemonths ended May 31, 2006 and three and six months ended June 30, 2005.  In December 2005, the Company completed thedisposition of AmeriVest Plaza at Inverness in Denver and the Chateau Plazaproperty in Dallas, both of which were previously classified asheld-for-sale.  In addition, the Companysold its 20% equity interest in its joint venture (Panorama Falls) in asubmarket of Denver in September 2005 and completed a Deed-in-Lieu Agreement toreturn its 13 non-core Texas State Buildings to the lender in March 2005.  The results of operations for theseproperties and the loss on disposition for the Texas State Buildings are alsoincluded as discontinued operations for the three and six months ended June 30,2005.

 

As a result ofthe items discussed above, the net loss was approximately $1.0 million for thetwo months ended May 31, 2006 compared to a net loss of approximately $3.1million for the three months ended June 30, 2005 and the net earnings was approximately$12.5 million for the five months ended May 31, 2006 compared to a loss ofapproximately $5.7 million the six months ended June 30, 2005.

 

21

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Liquidity and Capital Resources

 

At June 30, 2006, our total assets and net assets in liquidation wereapproximately $262.4 million and $122.2 million, respectively. Our ability tomeet our obligations is contingent upon the disposition of our assets inaccordance with the Plan. Management estimates that the net proceeds from thesale of assets pursuant to the Plan will be adequate to pay our obligations;however, we cannot provide any assurance that the agreement with Koll/PER willclose on the terms previously described or on any terms.  As such, it is not possible to predict theaggregate amount or timing of future distributions to stockholders and noassurance can be given that the eventual amount of distributions to be paidwill equal or exceed the estimated net assets in liquidation included in thefinancial statements.

 

*Current Sources of Capital and Liquidity*

* *

We anticipate, but can not assure, that our cash flow from operationsand sales of property will be sufficient during the liquidation period to fundour cash needs for payment of expenses, capital expenditures, recurring debtservice payments and repayment of debt maturities.

 

The Plan gives our Boardof Directors the power to sell any and all of our assets without furtherapproval by our stockholders and provides that liquidating distributions be madeto our stockholders as determined at the discretion of our Board ofDirectors.  The timing and amount of theinitial and interim liquidating distributions (if any) and the finalliquidating distribution will depend on the timing and amount of proceeds theCompany will receive upon the sale of these assets and the extent to whichreserves for current or future liabilities are required.

 

*Other Liquidity Needs*

 

We are required to distribute 90% of our REIT taxable income (excludingcapital gains) on an annual basis in order to qualify as a REIT for federalincome tax purposes. Effective March 9, 2005, we suspended regular quarterlydistributions. Future liquidating distributions from proceeds received from thesales of assets will be determined at the discretion of our Board of Directors.We have historically distributed amounts in excess of our taxable incomeresulting in a return of capital to our stockholders. We anticipate that wewill meet our REIT requirements for 2006.

 

We believe that we will have sufficient capital resources to satisfyour liquidity needs during the liquidation period.   As ofJune 30, 2006 we estimate that we will have $6.2 million of commitmentsand expenditures during the liquidation period comprised of the following: $2.5million of estimated costs to operate the liquidating trust untildissolution,  $2.350 million forestimated severance costs, $700,000 for estimated professional fees, $1.750million for estimated additional costs, offset by estimated excess revenue overoperating costs of $1.1 million. However, there can be no assurance that wewill not exceed the amounts of these estimated expenditures.  A material adverse change in the net cashprovided by operating activities or net proceeds expected from the liquidationof real estate assets may affect our ability to fund these items.

 

Liquidatingdistributions will be determined by our Board of Directors in their solediscretion and are dependent on a number of factors, including the amount offunds available for distribution, our financial condition, our capitalexpenditures, the annual distribution required to maintain REIT status underthe Code and other factors the Board of Directors may deem relevant.Distributions in the liquidation should first reduce the basis of a U.S.stockholder’s shares of common stock, with any excess constituting a capitalgain if such U.S. stockholder holds his shares of common stock as a capitalasset. If the sum of all liquidating distributions is less than a U.S.stockholder’s basis in his shares of common stock, the difference willconstitute a capital loss that is recognized at the time such U.S. stockholderreceives his final liquidating distribution, which includes the transfer ofassets to a liquidating trust.

 

The stated range of stockholder distributions disclosed in the Plan areestimates only and actual results may be higher or lower than estimated. Thepotential for variance on either end of the range could occur for reasonsincluding, but not limited to: (i) unanticipated costs could reduce netasset values actually realized; (ii) if we wind up our businesssignificantly faster than anticipated, some of the anticipated costs may not benecessary and net liquidation proceeds could be higher; (iii) if wecomplete all loan assumptions as planned and incur no prepayment 

 

22

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penalties orother costs, net liquidation proceeds could be higher; (iv) a delay in ourliquidation could result in higher than anticipated costs and net liquidationproceeds could be lower; and (v) circumstances may change and the actualnet proceeds realized from the sale of some of the assets might be less, orsignificantly less, than currently estimated.

 

*FutureSources of Capital*

 

On January 23,2006, the Company completed a loan agreement with its primary bank group thatamended its unsecured revolving credit agreement and reinstated a revolvingcredit facility of up to $10 million to be used for working capital and otherlimited corporate purposes.  The revolveris secured by the Company’s Greenhill Park property and matures December 28,2006.  The Company believes this creditfacility and proceeds from the sale of properties under contract will beadequate to fund anticipated capital needs through the anticipated distributiondates.  There were no borrowingsoutstanding in this facility on June 30, 2006.

 

CriticalAccounting Policies

 

Critical accounting policies are defined as those that are reflectiveof significant judgments and uncertainties, which would potentially result inmaterially different results under different assumptions and conditions. Setforth below is a summary of the accounting policies management believes arecritical to the preparation of the condensed consolidated financial statements.The summary should be read in conjunction with the more complete discussion ofthe Company’s accounting policies included in Note 2 to the consolidatedfinancial statements in the Company’s 2005 Annual Report on Form 10-K.

 

*Liquidation Basis of Accounting*

* *

As a result of the approval of the Plan by our stockholders, we adoptedthe liquidation basis of accounting as of June 1, 2006 and for all subsequentperiods.  Accordingly, all assets havebeen adjusted to their estimated fair value on an undiscounted basis.  Liabilities, including estimated costsassociated with implementing the Plan, have been adjusted to their estimatedsettlement amounts.  The estimate of thevaluation of real estate held for sale is based on current contracts, estimatesand other indications of sales value net of estimated selling costs.  Actual values realized for assets andsettlement of liabilities may differ materially from the amountsestimated.  Estimated future cash flowsfrom property operations were made based on the anticipated sales dates of theassets.  Due to the uncertainty in thetiming of the anticipated sales dates and the cash flows there from, results ofoperations may differ materially from amounts estimated.  These amounts are presented in theaccompanying statement of net assets. The net assets represent the estimated liquidation value of our assetsavailable to our stockholders upon liquidation. The actual settlement amounts realized for assets and settlement ofliabilities may differ materially, perhaps in adverse ways, from the amountsestimated.

 

*Investment in Real Estate*

* *

Prior to June 1, 2006, upon acquisition, the purchase price of aproperty is allocated to land, building and improvements and other intangibleassets and associated liabilities as required by SFAS No. 141 *“Business**Combinations.”*(SFAS 141) The allocation to land was based on an estimate of its fair valuebased on all available information including appraisals. The allocation toother intangible assets represented the value associated with the in-place leases,including leasing commission, legal and other related costs. Also required bySFAS 141, is the creation of an intangible asset or liability resulting fromin-place leases being above or below the market rental rates on the date ofacquisition. This asset or liability was amortized over the life of the relatedin-place leases as an adjustment to revenue.

 

Investment in real estate is stated at cost, unless adjusted forimpairment. Depreciation and amortization are computed on a straight-line basisover the estimated useful lives as follows:

 
| **Description**                                                                   | ** ** | **Estimated Useful Lives**                    |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------|
| Land                                                                              |       | Not depreciated                                         |
| Buildings and improvements                                                        |       | 20 to 40 years                                          |
| Furniture, fixtures and equipment                                                 |       | 5 to 7 years                                            |
| Tenant improvements, tenant leasing  commissions and other intangible assets |       | Lesser of term of related lease of useful life of asset |

 

23

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Maintenance and repairs are expensed as incurred and improvements arecapitalized. The cost of assets sold or retired and the related accumulateddepreciation and/or amortization are removed from the accounts and theresulting gain or loss is reflected in operations in the period in which suchsale or retirement occurs. Allocating the purchase price of a property to thedifferent components of investment in real estate, determining whetherexpenditures meet the criteria for capitalization and assigning depreciablelives is considered to be critical because it requires management to exercisesignificant judgment.

 

*Valuation of Real Estate Assets*

* *

Under goingconcern accounting, long-lived assets to be held and used are carried at cost,unless adjusted for impairment, and evaluated for impairment when events orchanges in circumstances indicate such an evaluation is warranted.  We also evaluate assets for potentialimpairment when we deem them to be held-for-sale.  Valuation of real estate is considered a“critical accounting estimate” because the evaluation of impairment and thedetermination of fair values involve a number of management assumptionsrelating to future economic events that could materially affect thedetermination of the ultimate value, and therefore, the carrying amounts of ourreal estate. Furthermore, decisions regarding when a property should beclassified as held-for-sale under SFAS No. 144, *“Accounting for Impairment or Disposal of Long-Lived Assets,”*requiressignificant management judgment. There are many phases to the dispositionprocess ranging from the initial market research to being under contract withnon-refundable earnest money. Deciding when management is committed to sellingan asset is therefore highly subjective.

 

                                              Whendetermining if there is an indication of impairment, we estimate the asset’srental revenues less operating expenses over the anticipated holding period onan undiscounted cash flow basis and compare this amount to its carrying value.Estimating the expected rental revenues less operating expenses and holdingperiod requires significant management judgment. If it is determined that thereis an indication of impairment for assets to be held and used, or if an assetis deemed to be held-for-sale, we then determine the fair value of the asset.

 

The realestate industry uses capitalization rates as the primary measure of fair value.Specifically, annual rental revenues less operating expenses for a property isdivided by an estimated capitalization rate to determine the fair value of theproperty. Determining the appropriate capitalization rate requires significantjudgment and is typically based on many factors including the prevailing ratefor the market or submarket, as well as the quality and location of theproperties. Further, capitalization rates can fluctuate up or down due to avariety of factors in the overall economy or within local markets. If theactual capitalization rate for a property is significantly different from ourestimated rate, the impairment evaluation for an individual asset could bematerially affected.

 

*Revenue Recognition*

* *

Certain leasesprovide for tenant occupancy during periods for which no rent is due or whereminimum rent payments increase during the term of the lease.  Prior to June 1, 2006, rental revenue wasrecorded for the full term of each lease on a straight-line basis.  Accordingly, the Company recorded a receivablefrom tenants for rents that it expected to collect over the remaining leaseterm as deferred rents receivable.  Whenthe Company acquired a property, the term of the existing leases was consideredto commence as of the acquisition date for the purposes of thiscalculation.  Upon the adoption of theliquidation basis of accounting, all deferred rental revenue was written off.

 

*Income Taxes*

* *

The Companyoperates in a manner intended to enable it to continue to qualify as a REITunder Sections 856-860 of the Internal Revenue Code of 1986, as amended. Withrespect to a REIT that is liquidating within 24 months of adopting a plan ofliquidation a dividend paid deduction is allowed to the extent the distributionis attributable to accumulated earnings and profits or, to the extent anydistribution within such period does not exceed earnings and profits (computedwithout regard to capital losses) for the year of distribution. The Companyintends to distribute it earnings and profit. Therefore, no provision forFederal income taxes is required. If the Company fails to distribute therequired amount of income to our stockholders, or fails to meet other REITrequirements, we may fail to qualify as a REIT and substantial adverse taxconsequences may result.

 

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Uses of Capital, Contractual Commitments and Off-Balance SheetArrangements

 

The following tabledetails the contractual obligations at June 30, 2006 (based on debt outstandingwithout taking into consideration the disposition of properties and assumptionof debt):

 
| **For the years  ended December 31,** | ** ** | **Scheduled Debt  Maturities** | ** **  | **Interest Payments  on Secured  Mortgage Loans** | ** ** | **Tenant  Improvements,  Capital  Expenditures and  Leasing  Commissions** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------|-------------|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------|------------|
| 2006                                                      |       | $                                   | 1,178,772   |                                                             | $          | 3,836,781                                                                       |       | $          | 3,439,000  |   | $ | 8,454,553 |   |
| 2007                                                      |       | 10,412,770                          |        | 8,058,070                                                        |       | —                                                                          |       | 18,470,840 |       |
| 2008                                                      |       | 37,279,930                          |        | 7,102,585                                                        |       | —                                                                          |       | 44,382,515 |       |
| 2009                                                      |       | 15,158,612                          |        | 5,662,981                                                        |       | —                                                                          |       | 20,821,593 |       |
| 2010                                                      |       | 1,537,734                           |        | 5,596,329                                                        |       | —                                                                          |       | 7,134,063  |       |
| Thereafter                                                |       | 60,872,350                          |        | 24,584,228                                                       |       | —                                                                          |       | 85,456,578 |       |
| Total                                                     |       | $                                   | 126,440,168 |                                                             | $          | 54,840,974                                                                      |       | $          | 3,439,000  |   | $ | 184,720,142 |   |

 

*InterestRate Information*

* *

As of June 30,2006, all of our outstanding mortgage debt are fixed rate loans with aweighted-average interest rate of 5.98%.

 

*DebtCovenants*

* *

Certain of theCompany’s debt instruments contain covenants common to that type of facility orborrowing, including financial covenants establishing minimum debt servicecoverage and maximum leverage ratios. The Company was in compliance with all financial covenants pertaining toits debt instruments at and during the three and six months ended June 30,2006.

 

**Item 3.****        Quantitativeand Qualitative Disclosures About Market Risk**

 

Our futureearnings, cash flows and fair values relevant to financial instruments dependupon prevalent market rates for those financial instruments.  Market risk is the risk of loss from adversechanges in market prices and interest rates. We manage our market risk by matching projected cash inflows fromoperating, investing and financing activities with projected cash outflows tofund debt service, capital expenditures, dividends and other cashrequirements.  At June 30, 2006, all ofour outstanding debt obligations have fixed interest rates that limit the riskof fluctuating interest rates.   See“Item 7a.  Quantitative and QualitativeDisclosure about Market Risk” in our 2005 Annual Report on Form 10-K fordetailed information about the qualitative and quantitative disclosures aboutour market risk.

 

**Item 4.****           Controls andProcedures**

 

The Company carried out an evaluation as of June 30, 2006, under thesupervision and with participation of the Company’s management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934.  Basedon their evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that disclosure controls and procedures were effective as of theend of the period covered by this report to ensure that information required tobe disclosed by the Company in its reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commissionsrules and forms.  Subsequent to June 30,2006, there have been no significant changes in the Company’s internal controlsover financial reporting that occurred during the period covered by this reportthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

25

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**Part II.   Other Information**

** **

Item 1.           LegalProceedings

 

No changes.

 

Item 1A.   Risk Factors

 

The RiskFactors identified in our Annual Report on Form 10-K for the year endedDecember 31, 2005 (“2005 Form 10-K”) are supplemented and revised by thefollowing risks and uncertainties associated with the disposition of our assetspursuant to the Plan of Liquidation approved by our stockholders on May 24,2006.

 

1) Allreferences in Item 1a of the 2005 Form 10-K to our Plan of Liquidation beingsubject to stockholder approval, including but limited to the risk factorentitled “Our stockholders could vote against the Plan,” are deleted based onthe stockholder approval obtained on May 24, 2006.  All references to an estimated liquidatingdistribution range of $4.20 to $4.80 per share are replaced by a range of $5.05to $5.35 per share.

 

2) Thefollowing risk factor supplements the risk factors in the section entitled“Risks Related to Plan of Liquidation,” previously identified under Item 1a inour 2005 Form 10-K:

 

****We may be unable to complete the sale of ourproperties**** ****under the Purchase andSale Agreement*********.*****

***** *****

The sales ofour properties under the Purchase and Sale Agreement with Koll/PER, LLCare scheduled to occur on a property-by-property basis. Each closing is subjectto the satisfaction of various conditions, including loan assumption byKoll/PER.  We cannot guarantee that theseconditions will be satisfied with respect to all or any of the properties.  If we are unable to satisfy these conditions,Koll/PER will not be obligated to complete the transaction, and there can be noassurance that we will be able to find an alternate buyer on similar terms orany terms.

 

3) Thefollowing risk factor replaces in its entirety the third risk factor in thesection entitled “Risks Related to Plan of Liquidation,” identified on page 21under Item 1a in our 2005 Form 10-K:

 

****Distributions under the Plan may be lower orhigher than estimated and may be delayed.****

**** ****

The amount andtiming of liquidating distributions payable to our stockholders willdepend on a number of factors, including the timing of theproperty-by-property sales under the Purchase and Sale Agreementwith Koll/PER, LLC and the amount of net proceeds from the sales of ourproperties, including loan assumption and prepayment fees, if any, legalfees and expenses, and estimates for the total costs and the timing ofcompleting the liquidation and winding up of the Company.  Management hasmade assumptions regarding each of these factors in estimating the range ofdistributions, which they and our Board of Directors believe are reasonable.However, the assumptions may prove to be inaccurate and the ultimate amount ofliquidating distributions to our stockholders may be reduced, increased, ordelayed as a result.

 

4) Thefollowing risk factor replaces in its entirety the risk factor on the bottom ofpage 23 and the top of page 24 identified on page 21 under Item 1a in our 2005Form 10-K:

 

***Liquidationbasis of accounting affects our reporting methodology, and may require us to adjustthe net carrying value of our assets from time to time.***

*** ***

We have changed our basis of accounting from thegoing-concern basis to that of the liquidation basis of accounting.  In order for our financial statements to bein accordance with generally accepted accounting principles under the liquidationbasis of accounting, all of our assets must be stated at their estimated netrealizable value, and all of our liabilities (including those related tocommitments under employment agreements) must be recorded at the estimatedamounts at which the liabilities are expected to be settled.  We may also be required to make write downsof our assets in the future based on estimated net realizable value of ourassets at that time. Such write downs could reduce our stock price.

 

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Item 2.         Unregistered Sales ofEquity Securities and Use of Proceeds 

 
| **Period**                  | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  part of publicly  announced plans or  programs** | ** ** | **Maximum number  of shares that may  yet be purchased  under the plans or  programs** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 – 30, 2006 (1) |       | 22,040                                           |       | $                                                | 4.45       |                                                                                                                             | None       |                                                                                                                                | N/A        |   |
|                             |            |                                                  |            |                                                  |            |                                                                                                                                  |            |                                                                                                                                     |            |  |

 

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(1)                                  Underthe AmeriVest 401(k) plan (“401(k) Plan”), withdrawing plan participants areentitled to cash equal to the value of their accounts, including the vestedshares of AmeriVest stock in their accounts. In February and March 2006, withdrawing participant requests fordistributions from the 401(k) Plan exceeded the available cash in the 401(k)Plan.  Based on the advice of the Planconsultant, the 401(k) Plan sold the vested 18,240 shares of AmeriVest stockattributable to the withdrawing plan participants, at a price of $4.41 pershare, to fulfill the cash requirements of the withdrawing plan participantsseeking distributions in March 2006. Inadvertently, an additional 22,040 sharesof AmeriVest stock were concurrently sold at the same average price,representing the remaining balance of the shares in the 401(k) Plan.

 

On April 4, 2006, the 401(k) Plan acquired22,040 shares, at an average price per share of $4.45 to offset the inadvertentsale.  Commissions and any differencesbetween the sale and repurchase price of the shares were paid with 401(k) Planforfeitures, to the extent permitted under the 401(k) Plan.  Any excess costs were paid by the AmeriVest.

 

Item 4.  Submission of Mattersto a Vote of Security Holders

 

At the annualmeeting of stockholders held May 24, 2006, stockholders elected the followingindividuals to serve on the Board of Directors of the Company:

 
| **Name**         | ** ** | **Shares Voted in  Favor** | ** ** | **Abstentions and  Non-Votes** | ** ** |
|------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| Robert W. Holman |       | 19,124,016                           |       | 4,560,885                           |       |
| John A. Labate   |       | 18,189,704                           |       | 5,495,196                           |       |
| Jerry J. Tepper  |       | 18,114,215                           |       | 5,570,685                           |       |

 

Additionally,at the annual meeting the stockholders voted to approve the Plan ofLiquidation, previously approved by the Company’s Board of Directors onFebruary 9, 2006 with 15,095,934 shares voted in favor of the Plan; 292,943shares voted against; and 2,139,728 shares recorded as abstentions.

 

Item 5.             OtherInformation

 

None.

 

Item 6.  Exhibits 

 

2.1                                 Purchase and Sale Agreement, amongAmeriVest Properties Inc., certain subsidiaries of AmeriVest Properties Inc.and Koll/PER, LLC, dated July 17, 2006.*

 

31.1                         Certificationof Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of2002.

31.2                           Certificationof Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of2002.

32.1                         Certificationof Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

32.2                           Certificationof Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

 

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*Pursuant toItem 601(b) (2) of Regulation S-K, Schedule 3 and the exhibits to the Purchaseand Sale Agreement have been omitted. They include, among other things, capitalrepairs expenses and legal descriptions and rent rolls for each of theProperties.  AmeriVest will furnish supplementally a copy of any omittedschedule or exhibit to the SEC upon request.

 

27

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###### SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                | AMERIVEST PROPERTIES INC. |
|---------------------|---------------------------|
|                |                      |
|                |                      |
| August 8, 2006 |                      |
|                |                      |
|                | By:                       |   | /s/ | Charles K. Knight |
|                |                      |   | Charles K. Knight |
|                |                      |   | Chief Executive Officer |
|                |                      |   |   |
|                |                      |   |   |
|                | By:                       |   | /s/ | Sheri D. Henry |
|                |                      |   | Sheri D. Henry |
|                |                      |   | Chief Financial Officer |
|                |                      |   | (Principal Financial Officer and |
|                |                      |   | Principal Accounting Officer) |

 

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