f

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES****EXCHANGE ACT OF 1934.**                                                                                                                           |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                      |
| ** ** | **For the quarterly period ended  June 30, 2004.**                                                                                                                                                                   |
|       |                                                                                                                                                                                                                      |
| ** ** | **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 as specified in itscharter)

 
| **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, including area code)       |

 

Indicate by check mark whether the registrant(1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes   ý   No   o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes   ý   No   o

 

The number of shares of the registrant’scommon stock outstanding as of August 5, 2004 was 23,932,392.

 

 

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**Table of Contents**

 
| **Part I**  | **Financial Information**                                                                                                    | ** ** |
|-------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **  | ** **                                                                                                                   |
| Item 1.     | Financial Statements:                                                                                                        |       |
|        |                                                                                                                         |       |
|        | Condensed Consolidated Balance Sheets as of June 30, 2004  (unaudited)  and December 31, 2003                      | 1          |
|        | Condensed Consolidated Statements of  Operations for the three and six months  ended June 30, 2004 and 2003 (unaudited) | 2          |
|        | Condensed Consolidated Statement of  Stockholders’ Equity for the six months  ended June 30, 2004 (unaudited)      | 3          |
|        | Condensed Consolidated Statements of Cash  Flows for the six months  ended June, 2004 and 2003 (unaudited)                   | 4          |
|        | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                            | 6          |
|        |                                                                                                                         |       |
| Item 2.     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  | 10         |
|        |                                                                                                                         |       |
| Item 3.     | Quantitative and Qualitative Disclosures  About Market Risk                                                                  | 16         |
|        |                                                                                                                         |       |
| Item 4.     | Controls and Procedures                                                                                                      | 17         |
|        |                                                                                                                         |       |
| **Part II** | **Other Information**                                                                                                        | ** ** |
|        |                                                                                                                         |
| Item 1.     | Legal Proceedings                                                                                                            | 18         |
|        |                                                                                                                         |       |
| Item 2.     | Changes in Securities and Use of Proceeds                                                                                    | 18         |
|        |                                                                                                                         |       |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                                                         | 18         |
|        |                                                                                                                         |       |
| Item 6.     | Exhibits and Reports on Form 8-K                                                                                             | 19         |
|             |                                                                                                                              |            |  |

 

i

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**PARTI  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

** **

** **

**AMERIVEST PROPERTIES INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                       | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(unaudited)**         | ** **  | ** **                  | ** ** |
| ASSETS                                                                                                                                           |       |                    |        |                        |       |
| Investment in real estate                                                                                                                        |       |                    |        |                        |       |
| Land                                                                                                                                             |       | $                       | 37,607,272  |                        | $          | 28,838,214 |   |
| Buildings and improvements                                                                                                                       |       | 226,587,118             |        | 184,519,890                 |       |
| Furniture, fixtures and equipment                                                                                                                |       | 1,144,438               |        | 799,730                     |       |
| Tenant  improvements                                                                                                                             |       | 11,161,115              |        | 6,144,440                   |       |
| Tenant leasing commissions                                                                                                                       |       | 2,097,777               |        | 1,061,160                   |       |
| Intangible assets                                                                                                                                |       | 17,657,776              |        | 11,468,120                  |       |
| Less: accumulated depreciation and  amortization                                                                                                 |       | (18,686,505             | )           | (12,134,025                 | )          |
| Net investment in real estate                                                                                                                    |       | 277,568,991             |        | 220,697,529                 |       |
|                                                                                                                                             |       |                    |        |                        |       |
| Cash and cash equivalents                                                                                                                        |       | 2,828,615               |        | 1,477,585                   |       |
| Escrow deposits                                                                                                                                  |       | 8,579,577               |        | 5,778,427                   |       |
| Assets – held  for sale                                                                                                                     |       | —                  |        | 3,196,877                   |       |
| Investment in  affiliate                                                                                                                         |       | —                  |        | 1,364,032                   |       |
| Due from related party                                                                                                                           |       | —                  |        | 3,371,526                   |       |
| Due from affiliate                                                                                                                               |       | —                  |        | 262,347                     |       |
| Accounts receivable                                                                                                                              |       | 798,768                 |        | 296,377                     |       |
| Deferred rents receivable                                                                                                                        |       | 2,084,806               |        | 1,401,455                   |       |
| Deferred financing costs, net                                                                                                                    |       | 2,186,199               |        | 2,301,043                   |       |
| Prepaid expenses and other assets                                                                                                                |       | 829,542                 |        | 353,264                     |       |
|                                                                                                                                             |       |                    |        |                        |       |
| Total assets                                                                                                                                     |       | $                       | 294,876,498 |                        | $          | 240,500,462 |   |
|                                                                                                                                             |       |                    |        |                        |       |
| LIABILITIES                                                                                                                                      |       |                    |        |                        |       |
| Mortgage loans and notes payable                                                                                                                 |       | $                       | 176,637,287 |                        | $          | 158,237,661 |   |
| Liabilities –  held for sale                                                                                                                |       | —                  |        | 1,296,049                   |       |
| Accounts  payable and accrued expenses                                                                                                           |       | 2,796,019               |        | 2,736,657                   |       |
| Accrued real estate taxes                                                                                                                        |       | 3,034,605               |        | 3,169,183                   |       |
| Prepaid rents, deferred revenue and  security deposits                                                                                           |       | 3,244,960               |        | 2,694,335                   |       |
| Dividends payable                                                                                                                                |       | 3,110,750               |        | 2,262,170                   |       |
|                                                                                                                                             |       |                    |        |                        |       |
| Total liabilities                                                                                                                                |       | 188,823,621             |        | 170,396,055                 |       |
|                                                                                                                                             |       |                    |        |                        |       |
| MINORITY INTEREST                                                                                                                                |       | 1,775,186               |        | —                      |       |
|                                                                                                                                             |       |                    |        |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |                    |        |                        |       |
| Preferred stock, $.001 par value  Authorized – 5,000,000 shares  Issued and outstanding – none                                         |       | —                  |        | —                      |       |
| Common stock, $.001 par value  Authorized – 75,000,000 shares  Issued and outstanding – 23,928,849 and 17,401,309 shares, respectively |       | 23,929                  |        | 17,401                      |       |
| Capital in excess of par value                                                                                                                   |       | 132,184,673             |        | 91,706,371                  |       |
| Distributions in excess of accumulated  earnings                                                                                                 |       | (27,930,911             | )           | (21,619,365                 | )          |
|                                                                                                                                             |       |                    |        |                        |       |
| Total stockholders’ equity                                                                                                                  |       | 104,277,691             |        | 70,104,407                  |       |
|                                                                                                                                             |       |                    |        |                        |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                       | 294,876,498 |                        | $          | 240,500,462 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

1

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**AMERIVEST PROPERTIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                  | ** ** | **For the three months ended  June 30,** | ** ** | **For the six months ended  June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| REAL  ESTATE OPERATING REVENUE              |       |                                          |       |                                        |       |   |   |   |   |
| Rental  revenue                             |       | $                                             | 11,402,649 |                                        | $          | 6,680,723 |   | $ | 20,996,544 |   | $ | 13,229,350 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| REAL  ESTATE OPERATING EXPENSES             |       |                                          |       |                                        |       |   |   |   |   |
| Property  operating expenses-               |       |                                          |       |                                        |       |   |   |   |   |
| Operating  expenses                         |       | 3,105,339                                     |       | 1,660,895                                   |       | 5,911,233 |   | 3,209,600 |   |
| Real  estate taxes                          |       | 1,477,758                                     |       | 762,939                                     |       | 2,715,622 |   | 1,514,777 |   |
| Management  fees                            |       | 17,428                                        |       | 33,297                                      |       | 34,750 |   | 67,174 |   |
| General  and administrative expenses        |       | 984,265                                       |       | 742,773                                     |       | 1,916,814 |   | 1,579,853 |   |
| Ground  rent expense                        |       | 160,542                                       |       | —                                      |       | 321,683 |   | — |   |
| Interest  expense                           |       | 2,831,282                                     |       | 1,781,535                                   |       | 5,553,349 |   | 3,506,970 |   |
| Depreciation  and amortization expense      |       | 3,445,634                                     |       | 1,414,553                                   |       | 6,222,725 |   | 2,742,519 |   |
| Impairment  of investment in real estate    |       | —                                        |       | 1,465,932                                   |       | — |   | 1,465,932 |   |
| Total operating expenses                    |       | 12,022,248                                    |       | 7,861,924                                   |       | 22,676,176 |   | 14,086,825 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| LOSS FROM  CONTINUING OPERATIONS            |       | (619,599                                      | )          | (1,181,201                                  | )          | (1,679,632 | ) | (857,475 | ) |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| OTHER  INCOME/(LOSS)                        |       |                                          |       |                                        |       |   |   |   |   |
| Interest  income                            |       | 10,893                                        |       | 11,936                                      |       | 26,256 |   | 17,753 |   |
| Equity in  loss of affiliate                |       | —                                        |       | (13,312                                     | )          | (18,076 | ) | (23,914 | ) |
| Minority  interest                          |       | 61,118                                        |       | —                                      |       | 61,118 |   | — |   |
| Total other income/(loss)                   |       | 72,011                                        |       | (1,376                                      | )          | 69,298 |   | (6,161 | ) |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| LOSS  BEFORE DISCONTINUED OPERATIONS        |       | (547,588                                      | )          | (1,182,577                                  | )          | (1,610,334 | ) | (863,636 | ) |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| DISCONTINUED  OPERATIONS                    |       | —                                        |       | 72,526                                      |       | 687,735 |   | 158,549 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| NET LOSS                                    |       | $                                             | (547,588   | )                                           | $          | (1,110,051 | ) | $ | (922,599 | ) | $ | (705,087 | ) |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| LOSS PER  SHARE                             |       |                                          |       |                                        |       |   |   |   |   |
| Basic                                       |       | $                                             | (0.02      | )                                           | $          | (0.09 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
| Diluted                                     |       | $                                             | (0.02      | )                                           | $          | (0.09 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING |       |                                          |       |                                        |       |   |   |   |   |
| Basic                                       |       | 23,898,957                                    |       | 12,806,389                                  |       | 20,733,185 |   | 11,958,053 |   |
| Diluted                                     |       | 23,898,957                                    |       | 12,806,389                                  |       | 20,733,185 |   | 11,958,053 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

2

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**AMERIVEST PROPERTIES INC.**

**CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**For the sixmonths ended June 30, 2004**

**(unaudited)**

 
|                                                        |   | **Common Stock** |   | **Capital in  Excess of  Par Value** |   | **Distributions  in Excess of  Accumulated  Earnings** |   | **Total**   |   |
|-------------------------------------------------------------|--------|------------------|--------|--------------------------------------|--------|--------------------------------------------------------|--------|-------------|--------|
|                                                        |   |             |   |                                 |   |
|                                                        |   |             |   |                                 |   |
|                                                        |   | **Shares**       |   | **Amount**                           |   |                                                   |   |        |
| Balance at December 31, 2003                           |   | 17,401,309       |   | $                                    | 17,401 |                                                   | $      | 91,706,371  |   | $ | (21,619,365 | ) | $ | 70,104,407 |   |
| Issuance of common stock                                    |   |             |   |                                 |   |                                                   |   |        |   |   |   |
| Public offering, net of offering costs                      |   | 6,325,000        |   | 6,325                                |   | 39,889,104                                             |   | —      |   | 39,895,429 |   |
| Warrants exercised                                          |   | 92,962           |   | 93                                   |   | 63,457                                                 |   | —      |   | 63,550 |   |
| Stock options exercised                                     |   | 70,753           |   | 71                                   |   | 355,528                                                |   | —      |   | 355,599 |   |
| Dividend Reinvestment Plan (DRIP), net of  purchased shares |   | 5,570            |   | 6                                    |   | 38,549                                                 |   | —      |   | 38,555 |   |
| Equity-based compensation                                   |   | 33,255           |   | 33                                   |   | 131,664                                                |   | —      |   | 131,697 |   |
| Dividends declared                                          |   | —           |   | —                               |   | —                                                 |   | (5,388,947  | )      | (5,388,947 | ) |
| Net loss                                                    |   | —           |   | —                               |   | —                                                 |   | (922,599    | )      | (922,599 | ) |
| Balance at June 30, 2004                               |   | 23,928,849       |   | $                                    | 23,929 |                                                   | $      | 132,184,673 |   | $ | (27,930,911 | ) | $ | 104,277,691 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

3

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**AMERIVESTPROPERTIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 
| ** **                                                                       | ** ** | **For the six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                            |       |                                        |       |   |   |
| Net loss                                                                         |       | $                                           | (922,599   | ) | $ | (705,087 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities- |       |                                        |       |   |   |
| Depreciation and amortization expense                                            |       | 6,250,295                                   |       | 2,808,139 |   |
| Impairment of investment in real estate                                          |       | —                                      |       | 1,465,932 |   |
| Gain on sale                                                                     |       | (574,276                                    | )          | — |   |
| Amortization of deferred financing costs                                         |       | 351,342                                     |       | 248,502 |   |
| Equity in loss of affiliate                                                      |       | 18,076                                      |       | 23,914 |   |
| Minority interest                                                                |       | (61,118                                     | )          | — |   |
| Equity-based compensation                                                        |       | 131,697                                     |       | 36,505 |   |
| Changes in assets and liabilities-                                               |       |                                        |       |   |   |
| Accounts receivable                                                              |       | (484,572                                    | )          | (5,607 | ) |
| Deferred rents receivable                                                        |       | (809,453                                    | )          | (298,297 | ) |
| Prepaid expenses and other assets                                                |       | (24,778                                     | )          | 123,115 |   |
| Accounts payable and accrued expenses                                            |       | (63,597                                     | )          | 897,850 |   |
| Other accrued liabilities                                                        |       | 277,994                                     |       | (21,169 | ) |
| Net cash flows  provided by operating activities                                 |       | 4,089,011                                   |       | 4,573,797 |   |
|                                                                             |       |                                        |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                             |       |                                        |       |   |   |
| Acquisitions  of real estate, net                                                |       | (36,638,928                                 | )          | (17,039,573 | ) |
| Capital  expenditures                                                            |       | (2,263,867                                  | )          | (2,135,050 | ) |
| Tenant  improvements                                                             |       | (4,261,393                                  | )          | (712,373 | ) |
| Leasing  commissions                                                             |       | (880,062                                    | )          | (322,239 | ) |
| Deposits  on pending real estate acquisitions                                    |       | (226,500                                    | )          | (510,000 | ) |
| Proceeds  from sale, net of closing costs                                        |       | 4,049,229                                   |       | — |   |
| Proceeds  held in escrow for Section 1031 exchange                          |       | (2,700,274                                  | )          | — |   |
| Ending  cash balance of newly consolidated affiliate                             |       | 92,732                                      |       | — |   |
| Amounts  (paid to)/received from affiliate                                       |       | (94,707                                     | )          | 52,522 |   |
| Net cash flows used in investing activities                                      |       | (42,923,770                                 | )          | (20,666,713 | ) |
|                                                                             |       |                                        |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                             |       |                                        |       |   |   |
| Proceeds  from mortgage loans and notes payable                                  |       | 46,305,894                                  |       | 17,000,000 |   |
| Payments  on mortgage loans and notes payable                                    |       | (41,406,270                                 | )          | (25,344,682 | ) |
| Payment of  deferred financing costs                                             |       | (200,724                                    | )          | (345,567 | ) |
| Deposits  for pending refinance                                                  |       | (225,000                                    | )          | (130,000 | ) |
| Net  proceeds from common stock offering                                         |       | 39,895,429                                  |       | 33,326,741 |   |
| Net  proceeds from exercising of options and warrants                            |       | 419,149                                     |       | 1,408,046 |   |
| Net change  in escrow deposits                                                   |       | (100,876                                    | )          | (977,254 | ) |
| Dividends  paid                                                                  |       | (4,501,813                                  | )          | (2,706,046 | ) |
| Net cash flows provided by financing activities                                  |       | 40,185,789                                  |       | 22,231,238 |   |
|                                                                             |       |                                        |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                          |       | 1,351,030                                   |       | 6,138,322 |   |
|                                                                             |       |                                        |       |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                  |       | 1,477,585                                   |       | 2,318,566 |   |
|                                                                             |       |                                        |       |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                         |       | $                                           | 2,828,615  |   | $ | 8,456,888 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                |       |                                        |       |   |   |
| Cash paid for interest                                                           |       | $                                           | 4,861,853  |   | $ | 3,121,237 |   |
|                                                                             |       |                                        |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES          |       |                                        |       |   |   |
| Mortgage loans assumed and related real  estate acquired                         |       | $                                           | 12,207,253 |   | $ | — |   |
| Stock issued to the DRIP                                                         |       | $                                           | 38,555     |   | $ | 232,341 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

4

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SUPPLEMENTAL INFORMATION

Due to the Company’s adoption of FinancialAccounting Standards Board (FASB) Interpretation (FIN) No. 46 (Revised),“Consolidation of Variable Interest Entities”, the assets and liabilities ofPanorama Falls have been consolidated with those of the Company sinceMarch 31, 2004 (See note 5 to the condensed consolidated financialstatements).  The following table detailsthe asset and liability amounts related to the Panorama Falls property as ofJune 30, 2004:

 
| Assets                                                 | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| Investment in real estate                              | ** ** | ** ** | ** ** |
| Land                                                   |       | $          | 1,051,372  |   |
| Buildings and improvements                             |       | 5,376,313  |       |
| Furniture, fixtures and equipment                      |       | 29,426     |       |
| Tenant  improvements                                   |       | 965,714    |       |
| Tenant leasing commissions                             |       | 194,114    |       |
| Less: accumulated depreciation and amortization        |       | (848,572   | )          |
| Net investment in real estate                          |       | 6,768,367  |       |
|                                                   |       |       |       |
| Cash and cash equivalents                              |       | 41,081     |       |
| Accounts receivable                                    |       | 21,184     |       |
| Deferred rents receivable                              |       | 160,042    |       |
| Deferred financing costs, net                          |       | 30,126     |       |
| Total assets                                           |       | $          | 7,020,800  |   |
|                                                   |       |       |       |
| Liabilities                                            |       |       |       |
| Accounts  payable and accrued expenses                 |       | $          | 38,566     |   |
| Accrued real estate taxes                              |       | 72,348     |       |
| Prepaid rents, deferred revenue and security  deposits |       | 75,444     |       |
| Total liabilities                                      |       | $          | 186,358    |   |
| ** **                                             |       |       |       |
| Minority Interest                                      |       | $          | 1,775,186  |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

5

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**AMERIVEST PROPERTIES INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2004**

**(unaudited)**

 

1 – Organization

AmeriVestProperties Inc. (the Company) is incorporated under the laws of the State ofMaryland and operates as a self-administered and self-managed real estateinvestment trust (REIT).  The Companyprimarily invests in and operates commercial office buildings in selectivemarkets and leases the commercial office buildings to small and medium sizetenants.  At June 30, 2004, theCompany owned, through its wholly-owned subsidiaries, 28 office propertieslocated in metropolitan Denver, Dallas, Phoenix and Indianapolis and severalsmall cities in Texas.

 

2 – Interim Financial Reporting

The unauditedcondensed consolidated financial statements included herein were prepared fromthe records of the Company in accordance with accounting principles generallyaccepted in the United States of America and reflect all adjustments which are,in the opinion of management, necessary to provide a fair statement of theresults of operations and financial position for the interim periods.  While the Company believes that thedisclosures presented are adequate for interim financial reporting, theseinterim financial statements should be read in conjunction with the financialstatements and notes included in the Company’s 2003 Form 10-KSB filed with theSecurities and Exchange Commission.  Theresults of operations for the six months ended June 30, 2004 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2004.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

Certain priorperiod balances have been reclassified to conform to current periodpresentation.

 

3 – Equity-Based Compensation

The Company applies Accounting PrinciplesBoard (APB) Opinion No. 25 and related interpretations in accounting for itsequity-based compensation.  Accordingly,the Company does not recognize compensation cost for options granted toemployees whose exercise price is equal to or exceeds the fair value of theunderlying stock as of the grant date and which qualify for fixed planaccounting.

 

Equity-based compensation issued tonon-employees is accounted for based on the fair value of the equityinstruments issued and is recorded as a general and administrative expense,which is amortized by the Company over the instruments’ vesting period.  The measurement date is considered to be theissuance date, or if there are performance vesting provisions, when earned.

 

6

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The Company has adopted the disclosure-onlyprovisions of Statement of Financial Accounting Standards (SFAS) No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123.”  Had compensation cost for the Company’s stockoption plan been determined based on the fair value at the grant dateconsistent with the provisions of SFAS No. 148, the Company’s net loss and lossper share for the three and six months ended June 30, 2004 and 2003 wouldhave been changed to the pro forma amounts indicated below:

 
| ** **                                                           | ** ** | **For the three  months ended  June 30,** | ** ** | **For the six  months ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                                       | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Net loss  – as reported                                         |       | $                                              | (547,588   | )                                            | $          | (1,110,051 | ) | $ | (922,599 | ) | $ | (705,087 | ) |
| Add:  Recognized equity-based compensation                           |       | 43,371                                         |       | 27,318                                       |       | 131,697 |   | 36,505 |   |
| Deduct:  Total equity-based compensation expense based on fair value |       | (37,423                                        | )          | (3,360                                       | )          | (74,846 | ) | (27,084 | ) |
| Net loss  – pro forma                                           |       | $                                              | (541,640   | )                                            | $          | (1,086,093 | ) | $ | (865,748 | ) | $ | (695,666 | ) |
| Loss per  basic share – as reported                             |       | $                                              | (0.02      | )                                            | $          | (0.09 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
| Loss per  diluted share – as reported                           |       | $                                              | (0.02      | )                                            | $          | (0.09 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
| Loss per  basic share – pro forma                               |       | $                                              | (0.02      | )                                            | $          | (0.08 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
| Loss per  diluted share – pro forma                             |       | $                                              | (0.02      | )                                            | $          | (0.08 | ) | $ | (0.04 | ) | $ | (0.06 | ) |

 

Thefair value of each grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:

 
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Dividend yield         |       | 7.5      | %          | 7.9      | %          |
| Volatility             |       | 27.0     | %          | 27.0     | %          |
| Discount rate          |       | 2.7      | %          | 2.9      | %          |
| Expected life in years |       | 5.0      |       | 4.6      |       |

 

4 – Transactions

*CamelbackLakes acquisition*

OnMarch 16, 2004, the Company acquired the Camelback Lakes office complexlocated in Phoenix, Arizona.  Thepurchase price for Camelback Lakes was $31,980,000, which was paid with$21,000,000 from the $42,000,000 senior secured revolving line of credit withFleet National Bank (the Secured Fleet Facility) and the balance in cash.

 

*TexasBank Buildings sale*

OnMarch 16, 2004, the Company sold its Texas Bank Buildings for$4,100,000.  The four properties arelocated in Clifton, Georgetown, Henderson and Mineral Wells, Texas.  The sale resulted in a gain of $574,276 whichis included in discontinued operations on the accompanying consolidatedstatements of operations.  See Note 7 –Discontinued Operations for additional information.

 

*HackberryView acquisition*

OnMay 7, 2004, the Company acquired the Hackberry View office property located inIrving, Texas.  The purchase price forHackberry View was $16,800,000, which was paid with approximately $12,200,000from the assumption of the existing first and second mortgage loans and thebalance in cash.

 

*PropertiesUnder Contract*

Duringthe quarter, the Company entered into a contract to acquire an office propertyin a submarket of Dallas.  In July, 2004,the Company entered into a contract to acquire an office property, also in theDallas area.  Both contracts are subjectto a number of contingencies and there is no assurance that either of theseacquisitions will occur.

 

7

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5 – Variable Interest Entity

The Company has adopted Financial AccountingStandards Board (FASB) Interpretation (FIN) No.46 (Revised).  Under FIN 46R guidelines, qualifying entitiesshould be consolidated as Variable Interest Entities (“VIE’s”) based on certainrisk and control factors.  Because theCompany currently finances the Panorama Falls joint venture through itsUnsecured Credit Facility and manages the property on a day-to-day basis, it ismanagement’s determination that the Panorama Falls property does qualify as aVIE, with the company being the primary beneficiary of the VIE, and, as such,has been consolidated as of and since March 31, 2004.  Prior to this date, the venture was accountedfor using the equity method.  The statusof the venture as a VIE is reviewed by management on a quarterly basis.

 

6 -  Long-TermDebt

As part of the acquisition of the HackberryView property, the Company assumed a first mortgage of approximately$11,500,000 with an interest rate of 6.57% and a second mortgage ofapproximately $700,000 with an interest rate of 15%.  The second mortgage has been revalued to recorda basis of approximately $990,000 at 8%, based on the estimated currentinterest rate for second mortgages with similar maturities.  The resulting $290,000 adjustment to the debtbalance has been recorded as an increase in the gross book value of the acquiredproperty.

 

7 – Common Stock Offering

During March 2004, the Company completedan offering of 6,325,000 shares of common stock, including 825,000 shares tocover over-allotments, at a price of $6.75 per share.  The Company received approximately $39,895,000,net of underwriting commissions and expenses. The proceeds were used to repay the outstanding balance on the UnsecuredFleet Facility and a portion of the outstanding balance on the Secured FleetFacility.  The Company intends to useavailable amounts under these facilities to fund future property acquisitionsand other working capital and cash needs of the business.

 

8– Discontinued Operations

OnMarch 16, 2004, the Company sold its Texas Bank Buildings for$4,100,000.  The net cash proceeds ofapproximately $2,700,000 are being held in escrow as the Company is consideringusing them to complete a tax deferred exchange under Section 1031 of theInternal Revenue Code.  In accordancewith SFAS No. 144, the Company has classified the operations of theseproperties as discontinued operations for the three and six months endedJune 30, 2004 and 2003, and the Company has shown these properties asavailable for sale as of December 31, 2003 as if the properties wereavailable for sale at that date.  Thefollowing is a summary of the operating results of these properties:

 
| ** **                             | ** ** | **For the three  months ended  June 30,** | ** ** | **For the six  months ended  June 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **2004**                                       | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Rental  revenue                        |       | $                                              | —     |                                         | $          | 266,994 |   | $ | 272,003 |   | $ | 532,895 |   |
|                                   |       |                                           |       |                                         |       |   |   |   |   |
| Property  operating expenses-          |       |                                           |       |                                         |       |   |   |   |   |
| Operating  expenses                    |       | —                                         |       | 100,920                                      |       | 82,141 |   | 187,693 |   |
| Real  estate taxes                     |       | —                                         |       | 20,703                                       |       | 16,373 |   | 40,626 |   |
| Management  fees                       |       | —                                         |       | 9,600                                        |       | 8,335 |   | 19,200 |   |
| Interest  expense                      |       | —                                         |       | 30,372                                       |       | 24,125 |   | 61,207 |   |
| Depreciation  and amortization expense |       | —                                         |       | 32,873                                       |       | 27,570 |   | 65,620 |   |
|                                   |       | —                                         |       | 194,468                                      |       | 158,544 |   | 374,346 |   |
|                                   |       |                                           |       |                                         |       |   |   |   |   |
| Gain on  sale                          |       | —                                         |       | —                                       |       | 574,276 |   | — |   |
|                                   |       |                                           |       |                                         |       |   |   |   |   |
| Net income                             |       | $                                              | —     |                                         | $          | 72,526 |   | $ | 687,735 |   | $ | 158,549 |   |

 

8

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9 – Loss Per Share

There are no adjustments necessary to thebasic weighted average common shares outstanding to arrive at the dilutedweighted average common shares outstanding for the three and six months endedJune 30, 2004 and 2003 as the Company recognized a net loss and the impactwould be anti-dilutive.

 

9

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Item 2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations

The following discussion and analysis of theconsolidated financial condition and results of operations should be read inconjunction with the condensed consolidated financial statements and notesthereto included in this Form 10-Q and elsewhere.

 

The Company

AmeriVestProperties is a Real Estate Investment Trust which owns and operates commercialoffice buildings in select markets catering to small and medium sizebusinesses.   At June 30, 2003, theCompany owned 27 properties totaling 1,563,063 square feet.  In the subsequent twelve month period, theCompany acquired an additional five properties and sold its four non-core TexasBank Buildings.  At June 30, 2004,it owned 28 properties totaling 2,480,232 square feet.  We generate revenue primarily through therental of office space at our properties. The demand for our products is correlated, in general, to the nationaleconomy, and more specifically, to the demand for office space by small andmedium size tenants in metropolitan Denver, Dallas, Phoenix and Indianapolis.

 

Due to the sale of the TexasBank Buildings, the operations of these properties, including the gain on sale,have been classified as discontinued operations for the periods presented inaccordance with SFAS No. 144.

 

Forward-Looking Statements

Certain statements in this Form 10-Q that arenot historical facts are “forward-looking statements” as that term is definedunder the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based onthe Company’s current expectations, beliefs, assumptions, estimates andprojections about the industry and markets in which the Company operates.  Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates” and variations of suchwords and similar expressions are intended to identify such forward-lookingstatements.  Information concerningexpected investment balances, expected funding sources, planned investments,forecasted dates and revenue and expense growth assumptions are examples offorward-looking statements.  Thesestatements are not guarantees of future performance and involve certain risks,uncertainties and assumptions, which are difficult to predict and many of whichare beyond the Company’s control. Therefore, actual outcomes and results may differ materially from whatis expressed, forecasted or implied in such forward-looking statements.  The Company undertakes no obligation toupdate publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise, except as required by applicable law.

 

10

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Results Of Operations

*Comparison of the three months endedJune 30, 2004 to June 30, 2003:*

 
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **2004**                              | ** ** | **2003**   | ** ** | **Change** | ** ** |
|                                     |       |                                  |       |       |       |   |   |
| REAL  ESTATE OPERATING REVENUE           |       |                                  |       |       |       |   |   |
| Rental  revenue                          |       | $                                     | 11,402,649 |       | $          | 6,680,723 |   | $ | 4,721,926 |   |
|                                     |       |                                  |       |       |       |   |   |
| REAL ESTATE OPERATING EXPENSES           |       |                                  |       |       |       |   |   |
| Property  operating expenses-            |       |                                  |       |       |       |   |   |
| Operating  expenses                      |       | 3,105,339                             |       | 1,660,895  |       | 1,444,444 |   |
| Real  estate taxes                       |       | 1,477,758                             |       | 762,939    |       | 714,819 |   |
| Management  fees                         |       | 17,428                                |       | 33,297     |       | (15,869 | ) |
| General  and administrative expenses     |       | 984,265                               |       | 742,773    |       | 241,492 |   |
| Ground  rent expense                     |       | 160,542                               |       | —     |       | 160,542 |   |
| Interest  expense                        |       | 2,831,282                             |       | 1,781,535  |       | 1,049,747 |   |
| Depreciation  and amortization expense   |       | 3,445,634                             |       | 1,414,553  |       | 2,031,081 |   |
| Impairment  of investment in real estate |       | —                                |       | 1,465,932  |       | (1,465,932 | ) |
| Total operating expenses                 |       | 12,022,248                            |       | 7,861,924  |       | 4,160,324 |   |
|                                     |       |                                  |       |       |       |   |   |
| LOSS FROM CONTINUING OPERATIONS          |       | (619,599                              | )          | (1,181,201 | )          | 561,602 |   |
|                                     |       |                                  |       |       |       |   |   |
| OTHER INCOME/(LOSS)                      |       |                                  |       |       |       |   |   |
| Interest  income                         |       | 10,893                                |       | 11,936     |       | (1,043 | ) |
| Equity in  loss of affiliate             |       | —                                |       | (13,312    | )          | 13,312 |   |
| Minority  interest                       |       | 61,118                                |       | —     |       | 61,118 |   |
| Total other income/(loss)                |       | 72,011                                |       | (1,376     | )          | 73,387 |   |
|                                     |       |                                  |       |       |       |   |   |
| LOSS BEFORE DISCONTINUED OPERATIONS      |       | (547,588                              | )          | (1,182,577 | )          | 634,989 |   |
|                                     |       |                                  |       |       |       |   |   |
| DISCONTINUED OPERATIONS                  |       | —                                |       | 72,526     |       | (72,526 | ) |
|                                     |       |                                  |       |       |       |   |   |
| NET LOSS                                 |       | $                                     | (547,588   | )          | $          | (1,110,051 | ) | $ | 562,463 |   |

 

Rental revenue increased by $4,721,926, or 71%,from the second quarter of 2003 to the same period of 2004.  Approximately $2,817,000 of the increase isdue to the inclusion of the operating results from the late-2003 acquisitions(Financial Plaza, Scottsdale Norte and Greenhill Park) and $1,667,000 is due tothe inclusion of the 2004 acquisitions (Camelback Lakes for a full quarter andHackberry View for a partial quarter). Additionally, $223,000 of the increase is due to the inclusion ofPanorama Falls due to the adoption of FIN 46R whereby its operations are consolidatedwith those of the Company beginning March 31, 2004.

 

Property operating expenses increased by$2,143,394, or 87%, from the second quarter of 2003 to the same period of2004.  Approximately $1,273,000 of theincrease is due to the inclusion of the late-2003 acquisitions, $544,000 is dueto the 2004 acquisitions and $112,000 is due to the consolidation of PanoramaFalls.  The remainder of the increase wasexperienced in our existing portfolio (properties owned for the full quarter ofboth years).  The main components of theadditional expense consisted of increases in property tax accruals, utilitiesand regional property management personnel. Property taxes for the second quarter increased from $763,000, or 11% ofrevenue, in 2003 to $1,478,000, or 13% of revenue, in 2004.  Currently, nine of the fourteen coreproperties have been acquired in the past two years.  Upon acquisition, the properties are oftenreassessed by the local municipalities at the purchase price and real estatetaxes increase accordingly.  While theCompany utilizes outside property tax consulting firms to protest thevaluations of any properties that are deemed to be overvalued, it accrues theexpense based on the most recent property tax bills with any amounts refundedto the Company

 

11

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through this process recorded when realized.  The Company focuses on the control ofoperating expenses as a percent of revenue and as it continues to grow and gainscale in each of its markets, believes that it will be able to maintain orincrease its operating margins.

 

General and administrative expenses increased by$241,492, or 33% from $742,773,  11% ofrevenue, for the second quarter of 2003 to $984,265, 9% of revenue, for thesame period in 2004.  This increase inoverall general and administrative expense is primarily due to the addition ofcorporate personnel hired during the latter half of 2003 to support thecontinued growth of the Company. Further, we expect to incur, in excess of $150,000 in additional costover the last six months of 2004 solely related to the cost of compliance withthe Sarbanes Oxley Act of 2002.

 

Theground rent expense recognized in 2004 relates to the ground lease forGreenhill Park, acquired in December 2003. The annual rent under this lease increases, and is determined every tenyears; the next increase will be effective January 1, 2006, and the leaseexpires on December 1, 2083.  TheCompany accounts for this lease as an operating lease.

 

Interest expense increased by $1,049,747, or 59%from the second quarter of 2003 to the same period of 2004.  This increase is due to the additional debtused to acquire the above-mentioned properties. The average outstanding debt balance increased by approximately 42% fromthe second quarter of 2003 to the same period of 2004 and the weighted averageinterest rate on this debt was flat from 2003 to 2004.  The increase in interest expense is also attributable to the feesrelated to the Unsecured Credit Facility. This facility provides the Company with more flexibility and a readilyavailable vehicle for financing acquisitions and other capital needs.

 

The increase in depreciation andamortization expense of $2,031,081, or 144% is due to the increase indepreciable assets resulting from the above-mentioned acquisitions.

 

The impairment chargesrecognized in 2003 related to two of the properties in the Texas State Buildingportfolio.

 

The minority interest componentrepresents 80% of the net loss of Panorama Falls which is attributable to themajority shareholder.  The Companycontinues to own a 20% interest in the property.

 

Included in discontinued operations are theoperations of the Texas Bank Buildings which were sold on March 16, 2004.

 

12

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*Comparison of the six months endedJune 30, 2004 to June 30, 2003:*

 
| ** **                               | ** ** | **Six months ended  June 30,** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **2004**                            | ** ** | **2003**   | ** ** | **Change** | ** ** |
|                                     |       |                                |       |       |       |   |   |
| REAL  ESTATE OPERATING REVENUE           |       |                                |       |       |       |   |   |
| Rental  revenue                          |       | $                                   | 20,996,544 |       | $          | 13,229,350 |   | $ | 7,767,194 |   |
|                                     |       |                                |       |       |       |   |   |
| REAL  ESTATE OPERATING EXPENSES          |       |                                |       |       |       |   |   |
| Property  operating expenses-            |       |                                |       |       |       |   |   |
| Operating  expenses                      |       | 5,911,233                           |       | 3,209,600  |       | 2,701,633 |   |
| Real  estate taxes                       |       | 2,715,622                           |       | 1,514,777  |       | 1,200,845 |   |
| Management  fees                         |       | 34,750                              |       | 67,174     |       | (32,424 | ) |
| General  and administrative expenses     |       | 1,916,814                           |       | 1,579,853  |       | 336,961 |   |
| Ground  rent expense                     |       | 321,683                             |       | —     |       | 321,683 |   |
| Interest  expense                        |       | 5,553,349                           |       | 3,506,970  |       | 2,046,379 |   |
| Depreciation  and amortization expense   |       | 6,222,725                           |       | 2,742,519  |       | 3,480,206 |   |
| Impairment  of investment in real estate |       | —                              |       | 1,465,932  |       | (1,465,932 | ) |
| Total operating expenses                 |       | 22,676,176                          |       | 14,086,825 |       | 8,589,351 |   |
|                                     |       |                                |       |       |       |   |   |
| LOSS FROM  CONTINUING OPERATIONS         |       | (1,679,632                          | )          | (857,475   | )          | (822,157 | ) |
|                                     |       |                                |       |       |       |   |   |
| OTHER  INCOME/(LOSS)                     |       |                                |       |       |       |   |   |
| Interest  income                         |       | 26,256                              |       | 17,753     |       | 8,503 |   |
| Equity in  loss of affiliate             |       | (18,076                             | )          | (23,914    | )          | 5,838 |   |
| Minority  interest                       |       | 61,118                              |       | —     |       | 61,118 |   |
| Total other income/(loss)                |       | 69,298                              |       | (6,161     | )          | 75,459 |   |
|                                     |       |                                |       |       |       |   |   |
| LOSS  BEFORE DISCONTINUED OPERATIONS     |       | (1,610,334                          | )          | (863,636   | )          | (746,698 | ) |
|                                     |       |                                |       |       |       |   |   |
| DISCONTINUED  OPERATIONS                 |       | 687,735                             |       | 158,549    |       | 529,186 |   |
|                                     |       |                                |       |       |       |   |   |
| NET LOSS                                 |       | $                                   | (922,599   | )          | $          | (705,087 | ) | $ | (217,512 | ) |

 

Rental revenue for the six months endedJune 30 increased by $7,767,194, or 59%, from 2003 to 2004.  Approximately $5,613,000 of the increase isdue to the inclusion of the operating results from the late-2003 acquisitions,$1,830,000 is due to the inclusion of the 2004 acquisitions and $223,000 is dueto the consolidation of Panorama Falls.

 

Property operating expenses for the six monthsended June 30 increased by $3,870,054, or 81%, from 2003 to 2004.  Approximately $2,565,000 of the increase isdue to the inclusion of the late-2003 acquisitions, $609,000 is due to the 2004acquisitions and $112,000 is due to the consolidation of Panorama Falls.  The remainder of the increase was experiencedin our existing portfolio with the main components of the additional expenseconsisting of increases in property tax accruals, to be consistent withquarterly analysis, utilities and regional property management personnel.

 

General and administrative expenses increased by$336,961 or 21% from $1,579,853, or 12% of revenue, for the six months endedJune 30, 2003 to $1,916,814, or 9% of revenue, for the same period in2004.  This increase in overall generaland administrative expense is primarily due to the addition of corporatepersonnel hired during the latter half of 2003 to support the continued growthof the Company.

 

Theground rent expense recognized in 2004 relates to the ground lease forGreenhill Park, acquired in December 2003.

 

13

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Interest expense increased by $2,046,379, or 58%from the six months ended June 30, 2003 to the same period of 2004.  This increase is due to the additional debtused to acquire the above-mentioned properties.

 

The increase in depreciation andamortization expense by $3,480,206, or 127% is due to the increase indepreciable assets resulting from the above-mentioned acquisitions.

 

The impairment chargesrecognized in 2003 related to two of the properties in the Texas State Buildingportfolio.

 

The minority interest component represents80% of the net loss of Panorama Falls which is attributable to the majorityshareholder.  The Company continues toown a 20% interest in the property.

 

Included in discontinued operations are theoperations of the Texas Bank Buildings. These properties were sold on March 16, 2004 for $4,100,000.  This sale resulted in a gain of $574,276,which is reflected in the 2004 amount.

 

Liquidity and Capital Resources

*Operating Activities*

Net cash flows provided by operations were approximately $4,089,000 forthe six months ended June 30, 2004. This results primarily from the Company’s operating results adjusted fornon-cash expenses and a general increase in our receivables in excess of theprior year period.  Cash flow fromoperations is the primary source to fund dividend payments, debt service andcapital expenditures.  See Results ofOperations for a more complete discussion on the factors impacting the Company’soperating performance.

 

*Investing Activities*

Net cash flows used in investing activities were approximately$42,924,000 for the six months ended June 30, 2004, of which approximately$36,639,000 was used to acquire the Camelback Lakes and Hackberry Viewproperties, net of debt assumed.  Theremainder is primarily composed of capital improvement, tenant improvement andleasing commission costs offset by the net proceeds from the sale of the TexasBank Buildings of approximately $4,049,000.

 

*Financing Activities*

Net cash flows provided by financing activities were approximately$40,186,000 for the six months ended June 30, 2004.  Included in this amount is approximately$39,895,000 which represents the net proceeds from the March 2004 commonstock offering;  of this amount,approximately $39,000,000 was immediately used to pay down the Company’ssecured and unsecured credit facilities. The Company subsequently recorded additions to mortgage loans and notespayable of approximately $46,300,000 related to the acquisitions of theCamelback Lakes and Hackberry View properties. The remainder of the change is primarily composed of scheduled principalpayments on mortgage loans, dividend payments and payments into escrow accountsas required by certain lenders.

 

*Future Sources of Capital*

The Company receives base rent undernon-cancelable tenant leases and most leases provide for additional rent basedon increases in operating expenses.

 

The Company desires to acquire additionalproperties.  In order to do so, it willutilize current sources of debt financing and possibly incur additional debtand/or obtain additional equity capital. The Company also intends to obtain credit facilities for short andlong-term borrowing with commercial banks or other financial institutions.  The issuance of such securities or increasein debt to acquire additional properties, of which there is no assurance, couldadversely affect the amount of cash available to pay dividends to stockholders.

 

The Company has two credit facilities withFleet National Bank.  At June 30,2004, there was $40,650,000 outstanding with $1,350,000 available under theSecured Fleet Facility and there was no outstanding balance with $30,000,000available under the Unsecured Fleet Facility. Available amounts under these facilities will be used to acquire andimprove new and existing properties, as well as for

 

14

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workingcapital.

 

*Future Uses of Capital, Contractual Commitments andOff-Balance Sheet Arrangements*

 

The following table details thecontractual obligations at June 30, 2004. These include scheduled maturities of mortgage loans and notes payableas well as estimated amounts on the ground lease for Greenhill Park that resetsthe payment amount every ten years based on the appraised value and expires onDecember 1, 2083:

 
| **For  the years  ended December 31,** | ** ** | **Mortgage  Loans and  Notes Payable** | ** **  | **Ground Lease** | ** ** | **Total**   |
|---------------------------------------------|------------|----------------------------------------|-------------|------------------|------------|-------------|
| 2004                                        |       | $                                      | 1,119,300   |             | $          | 321,082     |   | $ | 1,425,209 |
| 2005                                        |       | 43,113,577                             |        | 642,165          |       | 43,727,899  |
| 2006                                        |       | 16,674,529                             |        | 863,016          |       | 17,507,534  |
| 2007                                        |       | 2,587,128                              |        | 863,016          |       | 3,417,809   |
| 2008                                        |       | 37,348,319                             |        | 863,016          |       | 38,176,509  |
| Thereafter                                  |       | 75,794,434                             |        | 225,671,046      |       | 301,317,236 |
| Total                                       |       | $                                      | 176,637,287 |             | $          | 229,223,341 |   | $ | 405,572,196 |

 

*Interest Rate Information*

As of June 30, 2004, approximately 77% of the total mortgage loansoutstanding are fixed rate loans with a weighted-average interest rate of 6.5%and 23% are variable rate loans with a weighted-average interest rate of 3.9%.

 

*Debt Covenants*

Certain of the Company’s debt instruments contain covenants common tothat type of facility or borrowing, including financial covenants establishingminimum debt service coverage and maximum leverage ratios.  The Company was in compliance with allfinancial covenants pertaining to its debt instruments during the three and sixmonths ended June 30, 2004.

 

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition andresults of operations are based upon its consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of these financial statements require management to make estimatesand judgments that affect the reported amounts of assets and liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities at the date of the financial statements.  Actual results may differ from theseestimates under different assumptions or conditions.

 

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.  The Company believes that its critical accountingpolicies include those items described below.

 

*Investment in Real Estate*

Upon acquisition, the purchase price of a property is allocated toland, building and improvements and other intangible assets and associatedliabilities as required by SFAS No. 141 “Business Combinations.”  The allocation to land is based on anestimate of its fair value based on all available information includingappraisals.  The allocation to otherintangible assets represents the value associated with the in-place leases, includingleasing commission, legal and other related costs.  Also required by SFAS No. 141, is thecreation of an intangible asset or liability resulting from in-place leasesbeing above or below the market rental rates on the date of acquisition.  This asset or liability is amortized over thelife of the related in-place leases as an adjustment to revenue.

 

Investment in real estate is stated at cost.  Depreciation and amortization are computed ona straight-line basis over the estimated useful lives as follows:

 

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| **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 |       | Term of related lease      |

 

Maintenance and repairs are expensed as incurred and improvements arecapitalized.  The cost of assets sold orretired and the related accumulated depreciation and/or amortization areremoved from the accounts and the resulting gain or loss is reflected inoperations in the period in which such sale or retirement occurs.  Allocating the purchase price of a propertyto the different 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*

Long-lived assets to be held and used by the Company are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. The Company continuallyevaluates the recoverability of its long-lived assets based on estimated futurecash flows from and the estimated liquidation value of such long-lived assets,and provides for impairment if such undiscounted cash flows are insufficient torecover the carrying amount of the long-lived asset.  Valuation of real estate assets is consideredto be critical because the evaluation of impairment and the determination offair values involve management’s assumptions relating to future economic eventsthat could materially affect the determination of the fair value, and thereforethe carrying value of real estate.

 

*Revenue Recognition*

Certain leases provide for tenant occupancy during periods for which norent is due or where minimum rent payments increase during the term of thelease.  Rental revenue is recorded forthe full term of each lease on a straight-line basis.  Accordingly, the Company records a receivablefrom tenants for rents that it expects to collect over the remaining lease termas deferred rents receivable.  When theCompany acquires a property, the term of the existing leases is considered to commenceas of the acquisition date for the purposes of this calculation.  Revenue recognition is considered to becritical because the evaluation of the realizability of such deferred rentsreceivable involves management’s assumptions relating to such tenant’sviability.

 

*Inflation*

Management believes that inflation should not have a material adverseeffect on the Company. The Company’s office leases generally require thetenants to pay increases in operating expenses should any inflationarypressures materialize.

 

 

Item 3.    Quantitative and QualitativeDisclosures About Market Risk

Our future earnings, cash flows and fair values relevant to financialinstruments depend upon prevalent market rates for those financialinstruments.  Market risk is the risk ofloss from adverse changes in market prices and interest rates.  We manage our market risk by matchingprojected cash inflows from operating, investing and financing activities withprojected cash outflows to fund debt service, acquisitions, capital expenditures,dividends and other cash requirements. The majority of our outstanding debt obligations have fixed interestrates which limit the risk of fluctuating interest rates.  At June 30, 2004, our interest rate riskonly related to our $42,000,000 Secured Fleet Facility and our $30,000,000Unsecured Fleet Facility, of which there was $40,650,000 and $0 outstanding,respectively.  Based on the amountsoutstanding at June 30, 2004, the annual impact of a 1% change in interestrates would be approximately $407,000.

 

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The Company’s operating results dependprimarily on income from its properties, which are substantially influenced bysupply and demand for such properties, operating expense levels, property leveloperations and the pace and price at which the Company can develop, acquire ordispose of such properties.  Capital andcredit market conditions, which affect the Company’s cost of capital, alsoinfluence operating results.  See theCompany’s 2003 Form 10-KSB “Item 1. Description of Business” for a morecomplete discussion of risk factors that could impact the Company’s futurefinancial performance.

 

Item 4.    Controlsand Procedures

The Company carried out an evaluation underthe supervision and with participation of the Company’s management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the Company’s disclosure controls and procedures pursuant to Rule 13a-15under the Securities Exchange Act of 1934 as of June 30, 2004.  Based on their evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that disclosurecontrols and procedures were effective as of the end of the period covered bythis report to ensure that information required to be disclosed by the Companyin its reports that it files or submits under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commissions rules and forms.  There was no change in the Company’s internalcontrols over financial reporting that occurred during the period covered bythis report that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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Part II.    Other Information

 

Item 1.    Legal Proceedings

No changes.

 

Item 2.    Changes in Securities and Use of Proceeds

                Issuance ofEquity Securities Upon Exercise of Warrants

During the three month period ended June 30, 2004, the Companyissued 5,210 shares of common stock upon exercise of previously issuedwarrants.  The issuance of the shares ofcommon stock was made pursuant to an exemption from registration in accordancewith Section 4(2) of the Securities Act based on a representation to usfrom the entity receiving the shares that such entity was a sophisticatedinvestor who was knowledgeable about our operations and financial condition andwas able to evaluate the risks and merits of receipt of the shares.

 

Purchases of Equity Securities

Certain information regarding purchases made by or on behalf of theCompany or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under theSecurities Exchange Act of 1934, as amended) of our common stock during thethree months ended June 30, 2004 is provided below:

 
| **Period**  | ** ** | **Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans (1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  Under the Plan (2)** |
|-------------|------------|----------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|
|        |       |                             |       |                               |       |                                                                            |       |                                                                         |
| April, 2004 |       | 6,690                            |       | $                                  | 6.10       |                                                                            | 6,690      |                                                                         | N/A |
|             |            |                                  |            |                                    |            |                                                                                 |            |                                                                              |  |

 

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(1)     On August 11, 2000, theCompany’s Board of Directors approved adoption of the Dividend ReinvestmentPlan (the “Plan”).  Under the Plan, theCompany is authorized to instruct the plan administrator to repurchase sharesof its common stock from time to time, either directly or through agents, inthe open market at prices and on terms satisfactory to the Company in order tooffset some or all such shares issued pursuant to the Plan.  The Company announced the Plan in September,2000.  The Plan has no expiration date.

(2)     One million shares of Companycommon stock are registered for sale by the Company under the plan.  The Plan has no limits as to the number ofshares or dollar value that may be repurchased by the Company to satisfy theshares needed under the Plan.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

Atthe annual meeting of stockholders held June 2, 2004, stockholders electedthe following individuals to serve on the Board of Directors of the Company,each as a Class 2 Director:

 
| **Name**            | ** ** | **Shares  Vote in Favor** | ** ** | **Abstentions and  Non-Votes** | ** ** |
|---------------------|------------|---------------------------|------------|--------------------------------|------------|
| Alexander S. Hewitt |       | 21,527,567                |       | 199,271                        |       |
| Charles K. Knight   |       | 21,521,167                |       | 205,671                        |       |
| Jerry J. Tepper     |       | 21,508,517                |       | 218,321                        |       |

 

Additionally,at the annual meeting the stockholders voted to approve Articles of Amendmentto the Company’s Amended and Restated Articles of Incorporation (the“Amendment”) for the purposes of declassifying the Company’s Board ofDirectors.  At the annual meeting21,220,502 shares of common stock voted in favor of the Amendment; 305,174shares of common stock voted against; and 201,162 shares of common stock wererecorded as abstentions or broker non-votes.

 

Followingthe meeting, William T. Atkins, Patrice Derrington, Harry P. Gelles, Robert W.Holman, Jr.  and John A. Labate continuedas Directors.

 

Theterm of each Director, including those elected at the June 2, 2004meeting, will end at the 2005 annual meeting of the stockholders or until suchDirector’s successor is duly elected and qualified.

 

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Item 6.    Exhibits and Reports on Form 8-K

(a)   Exhibits

3.1B Articles of Amendment to Amended andRestated Articles of Incorporation dated June 8, 2004.

31. Certifications of Chief Executive Officer and Chief FinancialOfficer pursuant to section

302 of the Sarbanes-Oxley Act of 2002.

32. Certification of Chief Executive Officer and Chief FinancialOfficer pursuant to section

906 of the Sarbanes-Oxley Act of 2002.

 

(b)   Reportson Form 8-K

None.

 

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###### SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                |   | AMERIVEST PROPERTIES INC. |
|---------------------|--------|---------------------------|
|                |   |                      |
|                |   |                      |
| August 9, 2004 |   |                      |
|                |   | By:                       |     /s/ Kathryn L. Hale |
|                |   |                      | Kathryn L. Hale |
|                |   |                      | Chief Financial Officer |
|                |   |                      | (Principal Financial Officer and  Principal Accounting Officer) |
|                     |        |                           |  |  |

 

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