**SECURITIESAND 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, 2005.**                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **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**                                                                                                                                                                                                                                                                                                   |

 

**AMERIVESTPROPERTIES 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 allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

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

 

The number of shares of the registrant’s common stock outstanding as ofJuly 31, 2005 was approximately 24,062,600.

 

 

----

 

**Table of Contents**

 
| **Part I**  | **Financial Information**                                                                                                    |   |
|------------------|------------------------------------------------------------------------------------------------------------------------------|--------|
|             |                                                                                                                         |   |
| Item 1.          | Financial Statements:                                                                                                        |   |
|             | Condensed Consolidated Balance Sheets as of  June 30, 2005 (unaudited) and December 31, 2004                       |   |
|             | Condensed Consolidated Statements of  Operations for the three and six months ended June 30, 2005 and 2004  (unaudited) |   |
|             | Condensed Consolidated Statement of  Shareholders’ Equity for the six months ended June 30, 2005 (unaudited)       |   |
|             | Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2005 and 2004 (unaudited)            |   |
|             | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                            |   |
|             |                                                                                                                         |   |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |   |
|             |                                                                                                                         |   |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                  |   |
|             |                                                                                                                         |   |
| Item 4.          | Controls  and Procedures                                                                                                     |   |
|             |                                                                                                                         |   |
| **Part II** | **Other  Information**                                                                                                       |   |
|             |                                                                                                                         |   |
| Item 1.          | Legal Proceedings                                                                                                            |   |
|             |                                                                                                                         |   |
| Item 2.          | Changes in Securities and Use of Proceeds                                                                                    |   |
|             |                                                                                                                         |   |
| Item 4.          | Submission of Matters to a Vote of Security  Holders                                                                         |   |
|             |                                                                                                                         |   |
| Item 6.          | Exhibits                                                                                                                     |   |

 

----

 

**PART I****– FINANCIALINFORMATION**

**Item 1****.  Financial Statements**

 

**AMERIVEST PROPERTIES INC.**

 

**Condensed Consolidated Balance Sheets**

 
| ** **                                                                                                                            | ** ** | **June 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                            | ** ** | **(unaudited)**         | ** **  | ** **                  | ** ** |
| **ASSETS**                                                                                                                            | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Investment in real estate:                                                                                                            |       |                    |        |                        |       |
| Land                                                                                                                                  |       | $                       | 57,228,891  |                        | $          | 58,338,781 |   |
| Buildings and improvements                                                                                                            |       | 252,073,246             |        | 256,128,341                 |       |
| Furniture, fixtures and equipment                                                                                                     |       | 1,490,560               |        | 1,451,152                   |       |
| Tenant improvements                                                                                                                   |       | 17,613,756              |        | 15,157,570                  |       |
| Tenant leasing commissions                                                                                                            |       | 4,803,677               |        | 3,101,178                   |       |
| Intangible assets                                                                                                                     |       | 22,961,203              |        | 23,019,763                  |       |
| Less: accumulated depreciation and  amortization                                                                                      |       | (33,287,211             | )           | (26,383,036                 | )          |
| Net investment in real estate                                                                                                         |       | 322,884,122             |        | 330,813,749                 |       |
|                                                                                                                                  |       |                    |        |                        |       |
| Cash and cash equivalents                                                                                                             |       | 1,470,565               |        | 1,859,660                   |       |
| Escrow deposits                                                                                                                       |       | 6,239,446               |        | 7,726,652                   |       |
| Accounts receivable, net                                                                                                              |       | 913,093                 |        | 671,251                     |       |
| Deferred rents receivable                                                                                                             |       | 4,175,454               |        | 3,430,609                   |       |
| Deferred financing costs, net                                                                                                         |       | 2,284,419               |        | 2,927,696                   |       |
| Prepaid expenses and other assets                                                                                                     |       | 775,621                 |        | 524,072                     |       |
| Total assets                                                                                                                          |       | $                       | 338,742,720 |                        | $          | 347,953,689 |   |
|                                                                                                                                  |       |                    |        |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                         |       |                    |        |                        |       |
|                                                                                                                                  |       |                    |        |                        |       |
| Liabilities:                                                                                                                          |       |                    |        |                        |       |
| Secured mortgage loans and notes payable                                                                                              |       | $                       | 204,617,372 |                        | $          | 211,729,328 |   |
| Unsecured line of credit                                                                                                              |       | 31,060,296              |        | 24,857,063                  |       |
| Accounts payable and accrued expenses                                                                                                 |       | 5,945,051               |        | 4,524,282                   |       |
| Accrued real estate taxes                                                                                                             |       | 3,626,552               |        | 4,486,712                   |       |
| Prepaid rents, deferred revenue and  security deposits                                                                                |       | 3,943,214               |        | 4,190,202                   |       |
| Dividends payable                                                                                                                     |       | —                  |        | 3,116,130                   |       |
| Total liabilities                                                                                                                     |       | 249,192,485             |        | 252,903,717                 |       |
|                                                                                                                                  |       |                    |        |                        |       |
| Minority interest                                                                                                                     |       | 1,379,108               |        | 1,580,057                   |       |
|                                                                                                                                  |       |                    |        |                        |       |
| Shareholders’ equity:                                                                                                            |       |                    |        |                        |       |
| Preferred stock, $0.001 par value  Authorized: 5,000,000 shares Issued and outstanding: none                                          |       | —                  |        | —                      |       |
| Common stock, $0.001 par value Authorized:  75,000,000 shares Issued and outstanding: 24,062,639 and 23,982,233 shares,  respectively |       | 24,063                  |        | 23,982                      |       |
| Capital in excess of par value                                                                                                        |       | 132,961,816             |        | 132,585,840                 |       |
| Distributions in excess of accumulated  earnings                                                                                      |       | (44,814,752             | )           | (39,139,907                 | )          |
| Total shareholders’ equity                                                                                                       |       | 88,171,127              |        | 93,469,915                  |       |
| Total liabilities and shareholders’ equity                                                                                       |       | $                       | 338,742,720 |                        | $          | 347,953,689 |   |

 

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

 

1

----

 

**AMERIVEST PROPERTIES INC.**

 

**Condensed Consolidated Statements ofOperations**

**(unaudited)**

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended****June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2005**                              | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Real  Estate Operating Revenue:                   |       |                                  |       |                                  |       |   |   |   |   |
| Rental  revenues                                  |       | $                                     | 12,241,980 |                                  | $          | 11,015,384 |   | $ | 24,881,200 |   | $ | 20,224,258 |   |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Real Estate Operating Expenses:                   |       |                                  |       |                                  |       |   |   |   |   |
| Property operating expenses -                     |       |                                  |       |                                  |       |   |   |   |   |
| Operating expenses                                |       | 3,515,498                             |       | 3,102,386                             |       | 6,824,423 |   | 5,936,053 |   |
| Real estate taxes                                 |       | 1,840,287                             |       | 1,419,762                             |       | 3,664,361 |   | 2,599,630 |   |
| General and administrative expenses               |       | 1,482,787                             |       | 984,265                               |       | 2,798,600 |   | 1,916,814 |   |
| Interest expense                                  |       | 3,913,586                             |       | 2,722,646                             |       | 7,739,673 |   | 5,334,900 |   |
| Depreciation and amortization expense             |       | 4,700,779                             |       | 3,364,817                             |       | 9,484,768 |   | 6,061,913 |   |
| Total operating expense                           |       | 15,452,937                            |       | 11,593,876                            |       | 30,511,825 |   | 21,849,310 |   |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Loss from continuing operations                   |       | (3,210,957                            | )          | (578,492                              | )          | (5,630,625 | ) | (1,625,052 | ) |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Other Income/(Loss):                              |       |                                  |       |                                  |       |   |   |   |   |
| Interest income                                   |       | 7,265                                 |       | 10,893                                |       | 18,004 |   | 26,256 |   |
| Equity in loss of affiliate                       |       | —                                |       | —                                |       | — |   | (18,076 | ) |
| Minority interest                                 |       | 112,867                               |       | 61,118                                |       | 200,949 |   | 61,118 |   |
| Total other income                                |       | 120,132                               |       | 72,011                                |       | 218,953 |   | 69,298 |   |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Loss before discontinued operations               |       | (3,090,825                            | )          | (506,481                              | )          | (5,411,672 | ) | (1,555,754 | ) |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Net earnings/(loss) from discontinued  operations |       | —                                |       | (41,107                               | )          | (263,173 | ) | 633,155 |   |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Net loss                                          |       | $                                     | (3,090,825 | )                                     | $          | (547,588 | ) | $ | (5,674,845 | ) | $ | (922,599 | ) |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Loss per Share:                                   |       |                                  |       |                                  |       |   |   |   |   |
| Basic                                             |       | $                                     | (0.13      | )                                     | $          | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) |
| Diluted                                           |       | $                                     | (0.13      | )                                     | $          | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) |
|                                              |       |                                  |       |                                  |       |   |   |   |   |
| Weighted Average Common Shares Outstanding:       |       |                                  |       |                                  |       |   |   |   |   |
| Basic                                             |       | 24,046,982                            |       | 23,898,957                            |       | 24,029,425 |   | 20,733,185 |   |
| Diluted                                           |       | 24,046,982                            |       | 23,898,957                            |       | 24,029,425 |   | 20,733,185 |   |

 

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

 

2

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**AMERIVEST PROPERTIES INC.**

 

**Condensed Consolidated Statement ofShareholders’ Equity**

 

**Six Months Ended June 30, 2005**

**(unaudited)**

 
| ** **                        | ** ** | **Common Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Distributions  in Excess of  Accumulated  Earnings** | ** ** | **Total**   | ** ** |
|-----------------------------------|------------|------------------|------------|--------------------------------------|------------|--------------------------------------------------------|------------|-------------|------------|
| ** **                        | ** ** | **Shares**       | ** ** | **Amount**                           | ** ** | ** **                                             | ** ** | ** **  |
| Balance at December 31, 2004 |       | 23,982,233       |       | $                                    | 23,982     |                                                   | $          | 132,585,840 |       | $ | (39,139,907 | ) | $ | 93,469,915 |   |
|                              |       |             |       |                                 |       |                                                   |       |        |       |   |   |
| Issuance of common stock:         |       |             |       |                                 |       |                                                   |       |        |       |   |   |
| Warrants exercised                |       | 1,500            |       | 2                                    |       | 7,499                                                  |       | —      |       | 7,501 |   |
| Dividend Re-Investment Plan       |       | 6,609            |       | 7                                    |       | 41,049                                                 |       | —      |       | 41,056 |   |
| Equity-based compensation         |       | 72,297           |       | 72                                   |       | 327,428                                                |       | —      |       | 327,500 |   |
| Net loss                          |       | —           |       | —                               |       | —                                                 |       | (5,674,845  | )          | (5,674,845 | ) |
| Balance at June 30, 2005     |       | 24,062,639       |       | $                                    | 24,063     |                                                   | $          | 132,961,816 |       | $ | (44,814,752 | ) | $ | 88,171,127 |   |

 

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

 

3

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**AMERIVEST PROPERTIES INC.**

 

**Condensed Consolidated Statements of CashFlows**

**(unaudited)**

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Operating activities:                                                            |       |                               |       |   |   |
| Net loss                                                                         |       | $                                  | (5,674,845 | ) | $ | (922,599 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities- |       |                               |       |   |   |
| Depreciation and amortization expense                                            |       | 9,597,064                          |       | 6,250,295 |   |
| Loss/(gain) on sale                                                              |       | 21,804                             |       | (574,276 | ) |
| Amortization of deferred financing costs                                         |       | 682,640                            |       | 351,342 |   |
| Write-off of unamortized deferred financing  costs                               |       | 215,993                            |       | — |   |
| Equity in loss of affiliate                                                      |       | —                             |       | 18,076 |   |
| Minority interest                                                                |       | (200,949                           | )          | (61,118 | ) |
| Equity-based compensation                                                        |       | 327,500                            |       | 131,697 |   |
| Changes in assets and liabilities-                                               |       |                               |       |   |   |
| Accounts receivable                                                              |       | (241,842                           | )          | (484,572 | ) |
| Deferred rents receivable                                                        |       | (744,845                           | )          | (809,453 | ) |
| Prepaid expenses and other assets                                                |       | (251,549                           | )          | (24,778 | ) |
| Accounts payable and accrued expenses                                            |       | (1,108,829                         | )          | (63,597 | ) |
| Other accrued liabilities                                                        |       | (1,009,133                         | )          | 277,994 |   |
| Net cash flows provided by operating  activities                                 |       | 1,613,009                          |       | 4,089,011 |   |
|                                                                             |       |                               |       |   |   |
| Investing activities:                                                            |       |                               |       |   |   |
| Acquisitions of real estate, net                                                 |       | —                             |       | (36,638,928 | ) |
| Capital expenditures                                                             |       | (1,235,915                         | )          | (2,263,867 | ) |
| Tenant improvements                                                              |       | (2,648,841                         | )          | (4,261,393 | ) |
| Leasing commissions paid                                                         |       | (844,681                           | )          | (880,062 | ) |
| Deposits on pending real estate  acquisitions                                    |       | —                             |       | (226,500 | ) |
| Proceeds from sale, net of closing costs                                         |       | —                             |       | 4,049,229 |   |
| Cash paid to complete deed-in-lieu  transaction                                  |       | (114,600                           | )          | — |   |
| Legal settlement proceeds                                                        |       | 450,000                            |       | — |   |
| Proceeds held in escrow for  Section 1031 exchange                          |       | —                             |       | (2,700,274 | ) |
| Other, net                                                                       |       | —                             |       | (1,975 | ) |
| Net cash flows used in investing activities                                      |       | (4,394,037                         | )          | (42,923,770 | ) |
|                                                                             |       |                               |       |   |   |
| Financing activities:                                                            |       |                               |       |   |   |
| Additions to mortgage loans and lines of  credit                                 |       | 7,203,233                          |       | 46,305,894 |   |
| Payments on mortgage loans, notes payable  and line of credit                    |       | (2,546,097                         | )          | (41,406,270 | ) |
| Payment of deferred financing costs                                              |       | (255,356                           | )          | (200,724 | ) |
| Deposits for pending refinance                                                   |       | —                             |       | (225,000 | ) |
| Net proceeds from common stock offering                                          |       | —                             |       | 39,895,429 |   |
| Net proceeds from exercising of options and  warrants                            |       | 7,501                              |       | 419,149 |   |
| Net change in escrow deposits                                                    |       | 1,057,726                          |       | (100,876 | ) |
| Dividends paid                                                                   |       | (3,075,074                         | )          | (4,501,813 | ) |
| Net cash flows provided by financing  activities                                 |       | 2,391,933                          |       | 40,185,789 |   |
|                                                                             |       |                               |       |   |   |
| Net change in cash and cash equivalents                                          |       | (389,095                           | )          | 1,351,030 |   |
| Cash and cash equivalents at beginning of  period                                |       | 1,859,660                          |       | 1,477,585 |   |
| Cash and cash equivalents at end of period                                       |       | $                                  | 1,470,565  |   | $ | 2,828,615 |   |
|                                                                             |       |                               |       |   |   |
| Supplemental disclosure of cash flow  information:                               |       |                               |       |   |   |
| Cash paid for interest                                                           |       | $                                  | 7,215,982  |   | $ | 4,861,853 |   |
|                                                                             |       |                               |       |   |   |
| Significant non-cash investing and  financing activities:                        |       |                               |       |   |   |
| Basis of real estate involved in  dead-in-lieu transaction                       |       | $                                  | 5,160,022  |   | — |   |
| Debt extinguishment as part of deed-in-lieu  transaction                         |       | $                                  | 5,565,858  |   | — |   |
| Mortgage loans assumed and related real  estate acquired                         |       | —                             |       | $ | 12,207,253 |   |

 

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

 

4

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**AMERIVESTPROPERTIES INC.**

 

**Notes to Condensed Consolidated FinancialStatements**

 

**June 30, 2005**

**(unaudited)**

 

1 – Organization

 

AmeriVest Properties Inc. (the Company) isincorporated under the laws of the State of Maryland and operates as aself-administered and self-managed real estate investment trust (REIT).  The Company primarily invests in and operatescommercial office buildings in selective markets and leases the commercialoffice buildings to small and medium size tenants.  At June 30, 2005, the Company owned, orhad an ownership interest in, 17 office properties located in metropolitanDenver, Dallas, Phoenix and Indianapolis.

 

2 – Interim Financial Statements

 

The unaudited consolidated financial statements included herein wereprepared from the records of the Company in accordance with U.S. generallyaccepted accounting principles and reflect all adjustments which are, in theopinion of management, necessary to provide a fair statement of the results ofoperations and financial position for the interim periods.  Such financial statements generally conformto the presentation reflected in the Company’s Form 10-K filed with theSecurities and Exchange Commission for the year ended December 31,2004.  The consolidated results ofoperations for the three and six months ended June 30, 2005 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2005.  These financialstatements and notes therein should be read together with the financialstatements and notes included in the Company’s Form 10-K for the yearended December 31, 2004.

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions 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 prior period balances have been reclassified to conform tocurrent period presentation.

 

3 – Recent Pronouncements

 

In June 2005, theEmerging Issues Task Force issued EITF No. 04-5, *“DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights.”*(EITF No. 04-5) This Issue provides a framework for evaluating whether a general partneror group of general partners or managing members controls a limited partnershipor limited liability company and therefore should consolidate the entity.  EITF No. 04-5 is effective for generalpartners or managing members of all new limited partnerships formed and forexisting limited partnerships for which the partnership agreements aremodified, the guidance in this Issue is effective after June 29, 2005. Forgeneral partners or managing members in all other limited partnerships, theguidance in this Issue is effective no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005.  We do not believe that the adoption of EITFNo. 04-5 will have a material impact on our financial position, netearnings or cash flows.

 

4 – Equity-Based Compensation

 

The Company applies Accounting Principles Board (APB) OpinionNo. 25 and related interpretations in accounting for its equity-basedcompensation.  Accordingly, the Companydoes not recognize compensation cost for options granted to employees whoseexercise price is equal to or exceeds the fair value of the underlying stock asof the grant date and which qualify for fixed plan accounting.

 

Equity-based compensation issued to non-employees is accounted forbased on the fair value of the equity instruments issued.  The measurement date is considered to be theissuance date, or if there are performance vesting provisions, when earned.

 

5

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The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards (SFAS) No. 148, “*Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123.”*  Hadcompensation cost for the Company’s stock option plan been determined based onthe fair value at the grant date consistent with the provisions of SFASNo. 148, the Company’s net loss and loss per share for the three and sixmonths ended June 30, 2005 and 2004 would have been changed to the proforma amounts as indicated in the following table:

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net loss – as reported                                        |       | $                                     | (3,090,825 | )                                   | $          | (547,588 | ) | $ | (5,674,845 | ) | $ | (922,599 | ) |
| Plus: Recognized equity-based compensation                         |       | 256,910                               |       | 43,371                              |       | 327,500 |   | 131,697 |   |
| Less: Total equity-based compensation  expense based on fair value |       | (260,951                              | )          | (44,268                             | )          | (332,439 | ) | (133,491 | ) |
| Net loss – pro forma                                          |       | $                                     | (3,094,866 | )                                   | $          | (548,485 | ) | $ | (5,679,784 | ) | $ | (924,393 | ) |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Loss per basic share – as reported                            |       | $                                     | (0.13      | )                                   | $          | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) |
| Loss per diluted share – as reported                          |       | $                                     | (0.13      | )                                   | $          | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Loss per basic share – pro forma                              |       | $                                     | (0.13      | )                                   | $          | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) |
| Loss per diluted share – pro forma                            |       | $                                     | (0.13      | )                                   | $          | (0.02 | ) | $ | (0.24 | ) | $ | (0.04 | ) |

 

The fair value of each grant is estimated on the dateof grant using the Black-Scholes option-pricing model with the followingweighted-average assumptions:

 

| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Dividend yield        |       | 0.0      | %          | 7.5      | %          |
| Volatility            |       | 10.3     | %          | 27.0     | %          |
| Discount rate         |       | 2.7      | %          | 2.7      | %          |
| Expected life (years) |       | 1.9      |       | 5.0      |       |

 

5 – Significant Transaction

 

*Dean Foods Lease – Chateau Plaza*

On March 22,2005, the Company amended and extended its existing lease with Dean FoodsCompany for 120,607 rentable square feet in the Chateau Plaza building inDallas, Texas.  Under the terms of theamendment, the lease was extended for a one-year term commencing January 1,2006.  On June 30, 2005, Dean Foodsexercised its one-time right to further extend its lease for an additional fouryears, until December 31, 2010.  The baserental rate for the extended term commencing January 1, 2006 is now $17.75 perrentable square foot throughout the term of the extension, plus electricity andparking.

 

6

----

 

6 – Discontinued Operations

 

On March 2, 2005,the Company completed a Deed-In-Lieu Agreement to return our 13 non-core TexasState Buildings to the lender.  Theproperties, consisting of 222,542 square feet, were leased primarily to variousagencies of the State of Texas and are located in Temple, Clint, El Paso,Hempstead, Lubbock, Marshall, Columbus, Paris, Mission, Arlington, Bellvilleand Amarillo, Texas.  The buildingssecured a loan in the amount of $5.6 million, and had a net book value of $5.2million (excluding approximately $383,000 in escrow deposits which wereincluded as part of the transaction), subsequent to an impairment charge of$1.2 million recognized during the fourth quarter of 2004.  In 2005, the Company recognized a net loss ofapproximately $21,800 and wrote-off unamortized deferred financing costs inconnection with the disposition of approximately $216,000, which are reflectedin discontinued operations.  Inaccordance with SFAS 144, these properties were considered to have beenabandoned and were not classified as held for sale prior to the disposition.

 

During the six monthsended June 30, 2004, the Company sold its Texas Bank Buildings, whichconsisted of approximately 60,100 square feet and had a net book value of $3.2million at disposition.  In accordancewith SFAS No. 144, the operating results of these properties and therelated gain/(loss) on the sale are included in discontinued operations for thethree and six months ended June 30, 2005 and 2004.  The Company does not have any propertiesdeemed as held for sale as of June 30, 2005.

 

The following is asummary of the net earnings/(loss) of the properties which comprisediscontinued operations:

 
| ** **                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Rental revenue                                                           |       | $                                     | —     |                                | $          | 387,265 |   | $ | 263,357 |   | $ | 1,044,289 |   |
|                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Property operating expenses -                                            |       |                                  |       |                                |       |   |   |   |   |
| Operating expenses                                                       |       | —                                |       | 180,923                             |       | 121,720 |   | 422,089 |   |
| Real estate taxes                                                        |       | —                                |       | 57,996                              |       | 40,754 |   | 132,365 |   |
| Interest expense                                                         |       | —                                |       | 108,636                             |       | 72,476 |   | 242,574 |   |
| Deferred financing costs associated with  the disposition of real estate |       | —                                |       | —                              |       | 215,993 |   | — |   |
| Depreciation and amortization expense                                    |       | —                                |       | 80,817                              |       | 53,783 |   | 188,382 |   |
| Total expenses                                                           |       | —                                |       | 428,372                             |       | 504,726 |   | 985,410 |   |
|                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Gain/(loss) on sale                                                      |       | —                                |       | —                              |       | (21,804 | ) | 574,276 |   |
|                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Net earnings/(loss) from discontinued  operations                        |       | $                                     | —     |                                | $          | (41,107 | ) | $ | (263,173 | ) | $ | 633,155 |   |

 

7

----

 

7 – Variable Interest Entity

 

Effective March 31, 2004, the Company adopted FIN 46R *“Consolidation of Variable Interest Entities (revised)”* andapplied it to its investment in Panorama Falls, located in Englewood,Colorado.  The Company owns 20% ofPanorama Falls as a tenant-in-common with the majority investor.  The Company financed the property through itsUnsecured Facility.  Panorama Falls isdeemed to be a variable interest entity (VIE) as defined by FIN 46R.  In accordance with FIN 46R, the Companydetermined it is subject to the majority of the variability in the variableinterests in the entity and has consolidated the assets and liabilities ofPanorama Falls effective March 31, 2004. With respect to the consolidated statements of operations, theinvestment was accounted for under the consolidation method of accountingbeginning April 1, 2004 and under the equity method of accounting forprior periods.  The following tabledetails the asset and liability amounts related to Panorama Falls property atJune 30, 2005:

 

| Assets                                           | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| Investment in real estate                        | ** ** | ** ** | ** ** |
| Land                                             |       | $          | 1,051,372  |   |
| Buildings and improvements                       |       | 5,431,736  |       |
| Furniture, fixtures and equipment                |       | 32,216     |       |
| Tenant improvements                              |       | 1,102,097  |       |
| Tenant leasing commissions                       |       | 247,589    |       |
| Less: accumulated depreciation and  amortization |       | (1,311,495 | )          |
| Net investment in real estate                    |       | 6,553,515  |       |
|                                             |       |       |       |
| Cash and cash equivalents                        |       | 23,633     |       |
| Other assets, net                                |       | 105,514    |       |
| Total assets                                     |       | $          | 6,682,662  |   |
|                                             |       |       |       |
| Liabilities                                      |       |       |       |
| Mortgage loans and notes payable                 |       | $          | 4,214,408  |   |
| Accrued real estate taxes                        |       | 72,060     |       |
| Other liabilities                                |       | 97,488     |       |
| Total liabilities                                |       | $          | 4,383,956  |   |
|                                             |       |       |       |
| Minority interest                                |       | $          | 1,379,108  |   |

 

8

----

 

8 – Mortgage Loans, Notes Payable, and Lines ofCredit

 

The Company finances itsproperties with mortgage loans and other debt instruments, such as lines ofcredit.  The following is a summary ofthe Company’s outstanding mortgage loans, notes payable and lines of credit,classified by interest type (fixed or variable) and in order of maturity atJune 30, 2005 and December 31, 2004:

 
| ** **                                                         | ** ** | ** **                                            | ** ** | ** **   | ** ** | **June 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                         | ** ** | **Mortgaged  Property at**                            | ** ** | **Maturity** | ** ** | **Principal**           | ** **  | **Interest**                | ** ** | **Principal** | ** ** | **Interest** | ** ** |
| **Lender**                                                         | ** ** | **June 30,  2005**                               | ** ** | **Date**     | ** ** | **Balance**             | ** **  | **Rate(1)**                 | ** ** | **Balance** | ** ** | **Rate(1)** | ** ** |
| ***Fixed Rate***                                                   |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Teachers  Insurance and Annuity Association of America             |       | AmeriVest Plaza  at Inverness                         |       | 1/10/2006    |       | $                       | 14,327,209  |                        | 7.90       | % | $ | 14,412,347 |   | 7.90 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| GEMSA                                                              |       | Hampton Court                                         |       | 11/1/2007    |       | 7,900,000               |        | 5.48                        | %          | 7,900,000 |   | 5.48 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Greenwich  Capital Financial Products                              |       | Parkway Centre II  Centerra Southwest Gas Building    |       | 10/1/2008    |       | 37,713,488              |        | 5.13                        | %          | 38,115,018 |   | 5.13 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Metropolitan  Life Insurance Company                               |       | Parkway Centre  III                                   |       | 9/10/2009    |       | 14,986,192              |        | 4.47                        | %          | 15,154,645 |   | 4.47 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Allstate  Life Insurance Company                                   |       | Financial Plaza                                       |       | 10/5/2010    |       | 23,915,182              |        | 5.25                        | %          | 24,173,324 |   | 5.25 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Southern  Farm Bureau Life Insurance Company                       |       | Scottsdale Norte                                      |       | 4/1/2011     |       | 6,538,472               |        | 7.90                        | %          | 6,568,596 |   | 7.90 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| J.P.  Morgan Chase                                                 |       | Hackberry View –  1st                            |       | 9/1/2012     |       | 11,355,914              |        | 6.57                        | %          | 11,424,345 |   | 6.57 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| J.P.  Morgan Chase                                                 |       | Hackberry View –  2nd                            | (2)        | 9/1/2012     |       | 953,020                 |        | 8.00                        | %          | 967,654 |   | 8.00 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Teachers  Insurance and Annuity Association of America             |       | Sheridan Center  Arrowhead Fountains Kellogg Building |       | 1/1/2013     |       | 28,611,217              |        | 7.40                        | %          | 28,852,678 |   | 7.40 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Allstate  Life Insurance Company                                   |       | Camelback – 1st                                  |       | 9/5/2014     |       | 15,782,194              |        | 5.82                        | %          | 15,928,449 |   | 5.82 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Allstate  Life Insurance Company                                   |       | Camelback – 2nd                                  |       | 9/5/2014     |       | 4,931,936               |        | 5.82                        | %          | 4,977,640 |   | 5.82 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Security  Life of Denver Insurance Company                         |       | Keystone Office  Park – 1st                      |       | 5/1/2022     |       | 4,179,084               |        | 8.00                        | %          | 4,236,333 |   | 8.00 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Security  Life of Denver Insurance Company                         |       | Keystone Office  Park – 2nd                      |       | 5/1/2022     |       | 469,246                 |        | 8.63                        | %          | 474,284 |   | 8.63 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Transatlantic  Capital Company, LLC (3)                            |       | Texas State  Buildings                                |       | 8/1/2028     |       | —                  |        | —                      |       | 5,579,891 |   | 7.66 | % |
| Subtotal                                                           |       |                                                  |       |         |       | $                       | 171,663,154 |                        | 6.09       | % | $ | 178,765,204 |   | 6.14 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| ***Variable Rate***                                                |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| KeyBank  National Association – Senior Secured Line of Credit |       | Chateau Plaza  Greenhill Park                         |       |         | (4)        | $                       | 32,900,000  |                        | 5.64       | % | $ | 32,900,000 |   | 4.96 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| KeyBank  National Association – Unsecured Line of Credit      |       | Unsecured                                             |       |         | (5)        | 31,060,296              |        | 6.39                        | %          | 24,857,063 |   | 5.63 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Subtotal                                                           |       |                                                  |       |         |       | $                       | 63,960,296  |                        | 6.00       | % | $ | 57,757,063 |   | 5.25 | % |
|                                                               |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| ***Other Notes Payable***                                          |       |                                                  |       |         |       |                    |        |                        |       |   |   |   |   |
| Lease  Capital Corporation                                         |       | Phone system                                          |       | 10/31/2007   |       | $                       | 54,218      |                        | 11.11      | % | $ | 64,124 |   | 11.11 | % |
| Subtotal                                                           |       |                                                  |       |         |       | $                       | 54,218      |                        | 11.11      | % | $ | 64,124 |   | 11.11 | % |
| Total                                                              |       |                                                  |       |         |       | $                       | 235,677,668 |                        | 6.07       | % | $ | 236,586,391 |   | 5.92 | % |

 

----

| (1). | Interest  only, does not include amortization of deferred financing costs or any fees.                                                                                                                 |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2). | The  amount recorded reflects a net present value calculation based on a fair  value rate of 8%. The actual loan balance assumed was approximately $698,000  at an interest rate of 15%.               |
| (3). | On  March 2, 2005, the Company completed a Deed-in-Lieu Agreement to return  these properties to the lender.                                                                                      |
| (4). | The Secured Line of Credit has mandatory repayments of  at least $10.0 million by September 1, 2005. The line matures on  January 31, 2006.                                                  |
| (5). | The Unsecured Line of Credit has mandatory repayments  of at least $5.0 million by September 1, 2005 and at least $10.0 million  by January 3, 2006. The line matures on April 1, 2006. |

 

9

----

 

The following tabledetails the scheduled maturities of debt outstanding at June 30, 2005:

 

| 2005       |   | $          | 16,542,457  |   |
|------------|--------|------------|-------------|--------|
| 2006       |   | 66,282,483 |        |
| 2007       |   | 11,167,321 |        |
| 2008       |   | 38,057,259 |        |
| 2009       |   | 15,526,679 |        |
| Thereafter |   | 88,101,469 |        |
| Total      |   | $          | 235,677,668 |   |

 

The change in debt duringthe six months ended June 30, 2005 consisted of the following:

 
| ** **                   | ** ** | **2005**   | ** **  |
|------------------------------|------------|------------|-------------|
| Balance at January 1    |       | $          | 236,586,391 |   |
| Additions                    |       | 7,203,233  |        |
| Repayments                   |       | (6,565,859 | )           |
| Scheduled principal payments |       | (1,546,097 | )           |
| Balance at June 30      |       | $          | 235,677,668 |   |

 

*Debt Covenants*

Our debtinstruments generally contain certain covenants common to the type of facilityor borrowing, including financial covenants establishing minimum debt servicecoverage ratios and maximum leverage ratios. We were in compliance with allfinancial covenants pertaining to our debt instruments during the six months endedJune 30, 2005.

 

On March 15,2005, the Company amended its Secured Facility and Unsecured Facility withKeyBank due to the Company not being in compliance with its leverage, interestcoverage and fixed charge coverage covenants required by the Secured Facility.The amendment to the Secured Facility involved: (i) a waiver for the events ofnon-compliance as of December 31, 2004, (ii) changes to the debt covenantcalculations to set them at the same levels as those previously established forthe Unsecured Facility, (iii) mandatory repayments of at least $2.5 million byJuly 1, 2005 and at least $10.0 million by September 1, 2005, (iv) removal ofthe revolving feature of the Secured Facility, and (v) the elimination of theobligation of the lender to make any further loans under the Secured Facility.The amendment to the Unsecured Facility involved: (i) a waiver for the eventsof non-compliance as of December 31, 2004 due to cross default provisions withthe Secured Facility (ii) moving up the maturity date from November 12, 2007 toApril 1, 2006, (iii) mandatory repayments of at least $5.0 million by September1, 2005 and at least $10.0 million by January 3, 2006, (iv) removal of therevolving feature of the Unsecured Facility, (v) a requirement that any furtherborrowings, including borrowings to pay dividends, be subject to the approvalof the lender in its sole and absolute discretion, (vi) a limitation on theincurrence of any other indebtedness by the Company without the prior writtenconsent of the lender and (vii) a requirement that all net proceeds from aproperty sale, refinancing or other capital transaction be used to pay down anyamounts outstanding.  On June 6, 2005,the Secured Facility was further amended to eliminate the July 1, 2005 mandatoryrepayment and to extend the maturity date from November 12, 2005 to January 31,2006.

 

As mentionedabove, on September 1, 2005, the Company is scheduled to repay $15 million onour Secured and Unsecured Facilities.  Weare actively involved in negotiations with our bank group to further amend ourloan agreement to give us time to complete a strategic transaction, oralternatively, to sell certain assets and/or raise additional debt or equitycapital and restructure our loan agreement. There is no assurance that we willget an amendment completed with our bank group in time to meet the September 1,2005 mandatory repayment, which would result in the Company being in defaultunder the terms of both the Secured and Unsecured Facilities.

 

10

----

 

9 – Loss Per Share

 

There are no adjustments necessary to the basic weighted average commonshares outstanding to arrive at the diluted weighted average common sharesoutstanding for the three or six months ended June 30, 2005 and 2004 asthe Company recognized a net loss and the impact would be anti-dilutive.

 

 

11

----

 

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

 

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

 

Forward-Looking Statements

 

Certain statements in this Form 10-Q that are not historical factsare “forward-looking statements” as that term is defined under the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements are based on the Company’s current expectations,beliefs, assumptions, estimates and projections about the industry and marketsin which the Company operates.  Wordssuch as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”“estimates” and variations of such words and similar expressions are intendedto identify such forward-looking statements. Information concerning expected investment balances, expected fundingsources, planned investments, forecasted dates and revenue and expense growthassumptions are examples of forward-looking statements.  These statements are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions, which aredifficult to predict and many of which are beyond the Company’s control.  Therefore, actual outcomes and results maydiffer materially from what is expressed, forecasted or implied in suchforward-looking statements.  The Companyundertakes no obligation to update publicly any forward-looking statements,whether as a result of new information, future events or otherwise, except asrequired by applicable law.

 

The Company’s operating results depend primarily on income from itsproperties, which are substantially influenced by supply and demand for suchproperties, operating expense levels, property level operations and the paceand price at which the Company can develop, acquire or dispose of suchproperties.  Capital and credit marketconditions, which affect the Company’s cost of capital, also influenceoperating results.  See “Item 1.Description of Business” in the Company’s Annual Report on Form 10-K forthe period ending December 31, 2004 for a more complete discussion of riskfactors that could impact the Company’s future financial performance.

 

Overview

 

As used herein, “we”, “us”, “our” and “the Company” refer to AmeriVestProperties Inc., a Maryland corporation. We were incorporated in the State ofMaryland in 1999. We are a fully-integrated, self-administered and self-managedREIT and primarily invest in and operate commercial office buildings in select marketsand lease the commercial office buildings to small and medium size tenants. AtJune 30, 2005, we owned, in whole or in part, 17 properties, whichincluded an aggregate of 2,508,066 square feet compared to 28 propertiestotaling 2,480,232 square feet at June 30, 2004.  Wegenerate revenue primarily through the rental of office space at ourproperties.  The demand for our productsis correlated, in general, to the national economy, and more specifically, tothe demand for office space by small and medium size tenants in metropolitanDenver, Dallas, Phoenix and Indianapolis. We have elected to be taxed as a REIT for federal income taxpurposes and generally will not be subject to federal income tax if wedistribute at least 90% of our taxable income and comply with a number oforganizational and operational requirements.

 

12

----

 

Results Of Operations

***Comparison of the three months endedJune 30, 2005 to June 30, 2004:***

 
| ** **                            | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                  |       |       |       |       |       |       |       |
| Real estate operating revenue:        |       |       |       |       |       |       |       |
| Rental revenue                        |       | $          | 12,241,980 |       | $          | 11,015,384 |       | $ | 1,226,596 |   |
|                                  |       |       |       |       |       |       |       |
| Real estate operating expenses:       |       |       |       |       |       |       |       |
| Property operating expenses-          |       |       |       |       |       |       |       |
| Operating expenses                    |       | 3,515,498  |       | 3,102,386  |       | 413,112    |       |
| Real estate taxes                     |       | 1,840,287  |       | 1,419,762  |       | 420,525    |       |
| General and administrative expenses   |       | 1,482,787  |       | 984,265    |       | 498,522    |       |
| Interest expense                      |       | 3,913,586  |       | 2,722,646  |       | 1,190,940  |       |
| Depreciation and amortization expense |       | 4,700,779  |       | 3,364,817  |       | 1,335,962  |       |
| Total operating expense               |       | 15,452,937 |       | 11,593,876 |       | 3,859,061  |       |
|                                  |       |       |       |       |       |       |       |
| Loss from continuing operations       |       | (3,210,957 | )          | (578,492   | )          | (2,632,465 | )          |
|                                  |       |       |       |       |       |       |       |
| Other income:                         |       |       |       |       |       |       |       |
| Interest income                       |       | 7,265      |       | 10,893     |       | (3,628     | )          |
| Minority interest                     |       | 112,867    |       | 61,118     |       | 51,749     |       |
| Total other income                    |       | 120,132    |       | 72,011     |       | 48,121     |       |
|                                  |       |       |       |       |       |       |       |
| Loss before discontinued operations   |       | (3,090,825 | )          | (506,481   | )          | (2,584,344 | )          |
|                                  |       |       |       |       |       |       |       |
| Net loss from discontinued operations |       | —     |       | (41,107    | )          | 41,107     |       |
|                                  |       |       |       |       |       |       |       |
| Net loss                              |       | $          | (3,090,825 | )          | $          | (547,588   | )          | $ | (2,543,237 | ) |

 

*Rentalrevenue* – Rentalrevenue increased approximately $1.2 million, or 11.1%, during the three monthsended June 30, 2005 as compared to the same period of 2004.  Approximately $1.6 million of the increase isdue to the inclusion of the operating results of the post-March 31, 2004acquisitions (Hackberry View, Parkway Center III and Hampton Court).  The increase from the 2004 acquisitions ispartially offset by a decline in revenues from our properties that were fullyoperational during the entire second quarter of 2004 and 2005.  At June 30, 2005, the Company hasapproximately 66,000 square feet of leases that are signed and are scheduled tocommence during the third and fourth quarters of 2005.  The rental revenue from these commencementswill be partially offset by the negative impact of a continuing roll-down ineffective rental rates from expiring leases and the straight-line adjustmentrelated to the Dean Foods lease amendment, which was executed June 30,2005.  This adjustment is currentlyestimated to be approximately $150,000 per quarter for the remainder of 2005.

 

*Propertyoperating expenses* –Total property operating expenses (operating expenses and real estate taxes)increased approximately $833,000, or 18.4%, during the second quarter of 2005as compared to the same period of 2004. This increase is comprised of a $413,000 increase in operating expensesand a $421,000 increase in real estate taxes. Approximately $512,000 of the increase in operating expenses is due tothe inclusion of the post-March 31, 2004 acquisitions, which is partiallyoffset by a $161,000 decrease in ground lease expense due to the acquisition inOctober 2004 of the Greenhill Park land that was subject to a groundlease. Real estate taxes, which are the largest component of property operatingexpenses, increased approximately $421,000; approximately $336,000 of thisincrease is due to the post-March 31, 2004 acquisitions.  The remainder of the increase in real estatetaxes is due to increases in assessed property values and rates.  The Company has focused, and will continue tofocus, on the ongoing management of controllable operating expenses, includingaggressively challenging increased real estate tax assessments.

 

13

----

 

*Generaland administrative expenses* – General and administrative expenses increased approximately$499,000, or 50.6%, during the second quarter of 2005 as compared to the sameperiod of 2004.  Approximately $285,400of the increase is due to the one-time severance for the Company’s former ChiefExecutive Officer, who resigned on April 30, 2005.  In addition, approximately $153,000 of theremaining increase is related to audit and consulting fees primarily incurredby the Company’s efforts to comply with the Sarbanes-Oxley Act of 2002.  The Company also expensed approximately$124,000 of costs related to the evaluation of strategic alternatives duringthe second quarter of 2005.

 

*Interestexpense –* Interestexpense increased by approximately $1.2 million, or 43.7%, during the secondquarter of 2005 as compared to the same period of 2004.  This increase is primarily due to theborrowings the Company incurred for acquisitions and dividend payments during2004 and working capital during 2004 and 2005. The remainder of the increase is primarily due to the acquisitionof the land underlying the Greenhill Park building, which was previouslysubject to a ground lease, and higher interest rates on our variable rate debt,which has increased since 2004.  TheCompany anticipates a continued increase in interest expense during theremainder of 2005 due to the accelerated maturity date of our UnsecuredFacility, which increased the amortization of deferred financing costs relativeto the prior year.

 

*Depreciation and amortization*– Depreciation and amortization expense increased approximately $1.3 million,or 39.7%, during the second quarter of 2005 as compared to the same period of2004.  This increase is primarily due tothe post-March 31, 2004 acquisitions and additional capital improvements,tenant improvements and leasing commissions on our current real estateinvestments.

 

*Discontinued operations –*In March 2005, the Companycompleted a Deed-In-Lieu Agreement to return our 13 non-core Texas StateBuildings to the lender.  The propertieshad a net book value of $5.2 million (excluding certain deposits maintain bythe lender).  We recognized a net loss ofapproximately $21,800 and wrote-off unamortized deferred financing costs inconnection with the disposition of approximately $216,000.  In March 2004, the Company sold itsTexas Bank Buildings for $4.1 million and recognized a net gain ofapproximately $574,000. In accordance with SFAS No. 144, the Company hasclassified the operations of these properties, as well as the gain/(loss) ondisposition, as discontinued operations.

 

14

----

 

***Comparison of the six months endedJune 30, 2005 to June 30, 2004:***

 
| ** **                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                              |       |       |       |       |       |       |       |
| Real estate operating revenue:                    |       |       |       |       |       |       |       |
| Rental revenue                                    |       | $          | 24,881,200 |       | $          | 20,224,258 |       | $ | 4,656,942 |   |
|                                              |       |       |       |       |       |       |       |
| Real estate operating expenses:                   |       |       |       |       |       |       |       |
| Property operating expenses-                      |       |       |       |       |       |       |       |
| Operating expenses                                |       | 6,824,423  |       | 5,936,053  |       | 888,370    |       |
| Real estate taxes                                 |       | 3,664,361  |       | 2,599,630  |       | 1,064,731  |       |
| General and administrative expenses               |       | 2,798,600  |       | 1,916,814  |       | 881,786    |       |
| Interest expense                                  |       | 7,739,673  |       | 5,334,900  |       | 2,404,773  |       |
| Depreciation and amortization expense             |       | 9,484,768  |       | 6,061,913  |       | 3,422,855  |       |
| Total operating expense                           |       | 30,511,825 |       | 21,849,310 |       | 8,662,515  |       |
|                                              |       |       |       |       |       |       |       |
| Loss from continuing operations                   |       | (5,630,625 | )          | (1,625,052 | )          | (4,005,573 | )          |
|                                              |       |       |       |       |       |       |       |
| Other income/(loss):                              |       |       |       |       |       |       |       |
| Interest income                                   |       | 18,004     |       | 26,256     |       | (8,252     | )          |
| Equity in loss of affiliate                       |       | —     |       | (18,076    | )          | 18,076     |       |
| Minority interest                                 |       | 200,949    |       | 61,118     |       | 139,831    |       |
| Total other income/(loss)                         |       | 218,953    |       | 69,298     |       | 149,655    |       |
|                                              |       |       |       |       |       |       |       |
| Loss before discontinued operations               |       | (5,411,672 | )          | (1,555,754 | )          | (3,855,918 | )          |
|                                              |       |       |       |       |       |       |       |
| Net earnings/(loss) from discontinued  operations |       | (263,173   | )          | 633,155    |       | (896,328   | )          |
|                                              |       |       |       |       |       |       |       |
| Net loss                                          |       | $          | (5,674,845 | )          | $          | (922,599   | )          | $ | (4,752,246 | ) |

 

*Rentalrevenue* – Rentalrevenue increased approximately $4.7 million, or 23.0%, during the six monthsended June 30, 2005 as compared to the same period of 2004.  Approximately $4.9 million of the increase isdue to the inclusion of the operating results of the properties acquired during2004 (Camelback Lakes, Hackberry View, Parkway Center III and HamptonCourt).  The increase from the 2004 acquisitionsis partially offset by the decrease in rental revenues from our properties thatwere fully operational during the entire six months ended June 30, 2004and 2005. At June 30, 2005, the Company has approximately 66,000 squarefeet of leases that are signed and are scheduled to commence during 2005.  The rental revenue from these commencementswill be partially offset by the negative impact of the roll-down in rentalrates on expiring leases and the straight-line adjustment related to the DeanFoods lease amendment, which was executed on June 30, 2005.  This adjustment is currently estimated to beapproximately $150,000 per quarter for the remainder of 2005.

 

*Propertyoperating expenses* –Total property operating expenses (operating expenses and real estate taxes)increased approximately $2.0 million, or 22.9%, during the six months endedJune 30, 2005 as compared to the same period of 2004.  This increase is comprised of an $888,000increase in operating expenses and a $1.1 million increase in real estatetaxes.  The increase in operatingexpenses is primarily attributable to the 2004 acquisitions, which represent$1.2 million of the increase.  Theincrease is partially offset by a $321,000 decrease in ground lease expense dueto the acquisition in October 2004 of the Greenhill Park land that wassubject to a ground lease. Real estate taxes, which are the largest componentof operating expenses, increased approximately $1.1 million; approximately$883,000 of this increase is due to the 2004 acquisitions.  The remainder of the increase in real estatetaxes is due to increases in assessed property values and rates.  The Company has focused, and will continue tofocus, on the ongoing management of controllable operating expenses, includingaggressively challenging increased real estate tax assessments.

 

15

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*Generaland administrative expenses* – General and administrative expenses increased approximately$882,000, or 46.0%, during the six months ended June 30, 2005 as comparedto the same period of 2004. Approximately $285,400 of the increase is due to the one-time severancefor the Company’s former Chief Executive Officer, who resigned onApril 30, 2005.  In addition,approximately $488,000 of the remaining increase is related to audit andconsulting fees primarily incurred by the Company’s efforts to comply with theSarbanes-Oxley Act of 2002.  The Companyalso expensed approximately $268,000 of costs related to the evaluation ofstrategic alternatives during the six month ended June 30, 2005.

 

*Interestexpense –* Interestexpense increased by approximately $2.4 million, or 45.1%, during the sixmonths ended June 30, 2005 as compared to the same period of 2004.  This increase is primarily due to theborrowings the Company incurred for acquisitions and dividend payments during2004 and working capital during 2004 and 2005. The remainder of the increase is primarily due to the acquisitionof the land underlying the Greenhill Park building, which was previously subjectto a ground lease, and higher interest rates on our variable rate debt.  The Company anticipates a continued increasein interest expense during the remainder of 2005 due to the acceleratedmaturity date of our Unsecured Facility, which increased the amortization ofdeferred financing costs relative to the prior year.

 

*Depreciation and amortization*– Depreciation and amortization expense increased approximately $3.4 million,or 56.5%, during the six months ended June 30, 2005 as compared to thesame period of 2004.  This increase isprimarily due to the 2004 acquisitions and additional capital improvements,tenant improvements and leasing commissions on our current real estateinvestments.

 

*Discontinued operations –*In March 2005, the Companycompleted a Deed-In-Lieu Agreement to return our 13 non-core Texas StateBuildings to the lender.  InMarch 2004, the Company sold its Texas Bank Buildings.  In accordance with SFAS No. 144, theCompany has classified the operations of these properties, as well as thegain/(loss) on disposition, as discontinued operations.

 

Liquidity and Capital Resources

Our net cashprovided by operating activities is primarily dependent upon the occupancylevel of our properties, the rental rates on our leases, our ability to collectrent from our tenants, and the level of operating and other expenses. Our netcash provided by operating activities has been a significant source ofliquidity to help fund debt service, capital improvements, tenant improvementsand leasing costs for operating properties as well as distributions to ourshareholders. Until our evaluation of strategic alternatives is competed, we donot plan to make any new acquisitions.

 

On March 15,2005, the Company amended its Secured Facility and Unsecured Facility withKeyBank due to the Company not being in compliance with its leverage, interestcoverage and fixed charge coverage covenants required by the Secured Facility.The amendment to the Secured Facility involved: (i) a waiver for the events ofnon-compliance as of December 31, 2004, (ii) changes to the debt covenantcalculations to set them at the same levels as those previously established forthe Unsecured Facility, (iii) mandatory repayments of at least $2.5 million byJuly 1, 2005 and at least $10.0 million by September 1, 2005, (iv) removal ofthe revolving feature of the Secured Facility, and (v) the elimination of theobligation of the lender to make any further loans under the Secured Facility.The amendment to the Unsecured Facility involved: (i) a waiver for the eventsof non-compliance as of December 31, 2004 due to cross default provisions withthe Secured Facility (ii) moving up the maturity date from November 12, 2007 toApril 1, 2006, (iii) mandatory repayments of at least $5.0 million by September1, 2005 and at least $10.0 million by January 3, 2006, (iv) removal of therevolving feature of the Unsecured Facility, (v) a requirement that any furtherborrowings, including borrowings to pay dividends, be subject to the approvalof the lender in its sole and absolute discretion, (vi) a limitation on theincurrence of any other indebtedness by the Company without the prior writtenconsent of the lender and (vii) a requirement that all net proceeds from aproperty sale, refinancing or other capital transaction be used to pay down anyamounts outstanding. On June 6, 2005, the Secured Facility was further amendedto eliminate the July 1, 2005 mandatory repayment and to extend the maturitydate from November 12, 2005 to January 31, 2006.

 

16

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As mentioned above, on September 1, 2005, the Company is scheduled torepay $15 million on our Secured and Unsecured Facilities.  We are actively involved in negotiations withour bank group to further amend our loan agreement to give us time to complete astrategic transaction, or alternatively, to sell certain assets and/or raiseadditional debt or equity capital and restructure our loan agreement. There isno assurance that we will get an amendment completed with our bank group intime to meet the September 1, 2005 mandatory repayment, which would result inthe Company being in default under the terms of both the Secured and UnsecuredFacilities.  Within 30 days of an event of default, thebank can implement certain remedies, including, but not limited to: restrictingthe Company from making any additional borrowings under the Facilities,requiring payment of the balance due under the Facilities, and/or institutingthe foreclosure process on the properties collateralizing the Secured Facility.

 

On March 9,2005, our Board suspended the payment of the common stock dividend for thefirst quarter of 2005. On June 27, 2005, the Board announced that it hadcontinued the suspension of the dividend for the second quarter.  The Board determined that suspension of thedividend would maximize the Company’s ability to complete a strategictransaction in a timely manner. The Board intends to review and consider theresumption of a dividend in subsequent quarters based on a number of factors,including: (i) the completion of a strategic transaction or other significantcapital event, such as refinancing or asset sales; and (ii) the Company’sfinancial results, capital resources and liquidity needs at that time.

 

A materialadverse change in our net cash provided by operating activities may affect ourability to fund the items listed above and may affect the financial performancecovenants under our lines of credit. If we fail to meet our financialperformance covenants and to reach a satisfactory resolution with our lenders,our lines of credit could become unavailable to us or the interest charged onthe line of credit could increase. Any of these circumstances could adverselyaffect our ability to fund working capital and unanticipated cash needs anddevelopment costs.

 

*Operating Activities*

Net cash flowsprovided by operations decreased approximately $2.5 million, or 60.6%, for thesix months ended June 30, 2005 as compared to the same period in2004.  The decrease is primarily due tochanges in assets and liabilities primarily due to the timing of payments forreal estate taxes and other accounts payable, partially offset by the inclusionof the operations from property acquisitions made during 2004.

 

*Investing Activities*

Net cash flows used in investing activities decreased approximately$38.5 million, or 89.8%, for the six months ended June 30, 2005 ascompared to the same period in 2004. This decrease is primarily due to the $36.6 million in acquisitions inthe six months ended June 30, 2004, which was partially offset by the netproceeds from the sale of the Texas Bank Buildings of $4.0 million.  In addition, there was a $2.6 milliondecrease in cash used for capital expenditures and tenant improvements duringthe six months ended June 30, 2005 as compared to the same period in 2004.

 

*Financing Activities*

Net cash flows provided by financing activitiesdecreased approximately $37.8 million, or 94.0%, for the six months endedJune 30, 2005 as compared to the same period of 2004.  This decrease is primarily due to the netproceeds of $39.9 million from the 2004 common stock offering, which were usedto pay down the Company’s secured and unsecured credit facilities.  The remainder of the change is primarilycomposed of scheduled principal payments on mortgage loans, dividend paymentsand payments into escrow accounts as required by certain lenders.

 

*Future Sources of Capital*

The Company receives base rent under non-cancelable tenant leases andmost leases provide for additional rent based on increases in operatingexpenses.

 

The Company has two credit facilities: the Secured Facility and theUnsecured Facility.  At June 30,2005, there was $32.9 million outstanding under the Secured Facility and $31.1million outstanding under the Unsecured Facility.

 

17

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As noted above, as a result of the amendments to our Secured Facilityand Unsecured Facility, our ability to borrow additional amounts under theSecured Facility has been terminated and our ability to incur additionalborrowings under the Unsecured Facility is subject to the approval of thelender in its sole and absolute discretion. Moreover, the amendments to theUnsecured Facility restrict our ability to incur any additional indebtedness fromany other party without the prior written consent of the lender. To the extentthat we are unable to borrow additional funds, we may be unable to make anyadditional acquisitions of office properties and could be limited in ourability to fund tenant improvements or make other necessary or desirableportfolio capital expenditures unless we issue additional equity in the Companyor sell one or more of our existing properties. In addition, we would bedependent upon cash flow from our operations to cover these capitalexpenditures and our corporate operating expenses. As a result, there can be noassurance that we will be able to execute our business plan, and our limitedaccess to capital could have a material adverse effect on our financialcondition and our operations.

 

Subject to the results of our strategic alternatives review and theavailability of capital, the Company may seek to acquire additional properties.In order to do so, we will try to utilize current sources of debt financing andpossibly incur additional debt and/or obtain additional equity capital. Theissuance of such securities or increase in debt to acquire additionalproperties, of which there is no assurance, could adversely affect the amountof cash available to pay dividends to shareholders. Due to the unknown outcomeof the Company’s review of strategic alternatives, it is unclear whether wewill be able to effectively access the public equity markets or incuradditional debt at attractive rates.  Ifa strategic transaction is completed, the Company could pay Bear Stearns atransaction fee that would vary based on the type of arrangement entered intoby the Company, which could be substantial.

 

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

The following table details the contractual obligations for scheduleddebt maturities at June 30, 2005.

 

| **For  the years  ended December 31,** | ** ** | ** ** | ** **  |
|---------------------------------------------|------------|------------|-------------|
| 2005                                        |       | $          | 16,542,457  |   |
| 2006                                        |       | 66,282,483 |        |
| 2007                                        |       | 11,167,321 |        |
| 2008                                        |       | 38,057,259 |        |
| 2009                                        |       | 15,526,679 |        |
| Thereafter                                  |       | 88,101,469 |        |
| Total                                       |       | $          | 235,677,668 |   |

 

*Interest Rate Information*

As of June 30, 2005, approximately 73% of the total mortgage loansoutstanding are fixed rate loans with a weighted-average interest rate of 6.1%and 27% are variable rate loans with a weighted-average interest rate of 6.0%.

 

*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 six monthsended June 30, 2005.

 

As mentioned above, on September 1, 2005, the Company is scheduled torepay $15 million on our Secured and Unsecured Facilities.  We are actively involved in negotiations withour bank group to further amend our loan agreement to give us time to completea strategic transaction, or alternatively, to sell certain assets and/or raiseadditional debt or equity capital and restructure our loan agreement. There isno assurance that we will get an amendment completed with our bank group intime to meet the September 1, 2005 mandatory repayment, which would result inthe Company being in default under the terms of both the Secured and UnsecuredFacilities.

 

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Critical Accounting Policies

The discussion and analysis of the Company’s financial condition andresults of operations are based upon our unaudited condensed consolidatedfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles. The preparation of these financial statements require management to makeestimates and judgments that affect the reported amounts of assets andliabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities 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 criticalaccounting policies 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,including leasing 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:

 
| **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.

 

The Company capitalizes incremental internal project costs, primarilypayroll and payroll related costs, associated with development, renovation,rehabilitation and tenant improvements if such costs are incremental andidentifiable to a specific activity. Capitalized costs are included in the investment basis of the realestate assets and are depreciated over their estimated useful lives.

 

*Valuation of Real Estate Assets*

Long-lived assets to be held and used by the Company are reviewed forimpairment at least quarterly and whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. TheCompany continually evaluates the recoverability of its long-lived assets basedon estimated future cash flows from and the estimated liquidation value of suchlong-lived assets, and provides for impairment if such undiscounted cash flowsare insufficient to recover 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.

 

19

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*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 tocommence as 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.

 

*Income Taxes*

The Companyoperates in a manner intended to enable it to continue to qualify as a REITunder Sections 856-860 of the Internal Revenue Code of 1986, as amended. Underthose sections, a REIT which distributes at least 90% of its REIT taxableincome as a dividend to its shareholders each year and which meets certainother conditions will not be taxed on that portion of its taxable income whichis distributed to its shareholders. The Company intends to distribute to ourshareholders 90% of our taxable income. Therefore, no provision for Federalincome taxes is required. If the Company fails to distribute the requiredamount of income to our shareholders, or fails to meet other REIT requirements,we may fail to qualify as a REIT and substantial adverse tax consequences mayresult.

 

Contractual Commitments

At June 30, 2005, the Company had contractual commitments ofapproximately $560,000, $1.0 million, and $955,000 for tenant improvements,capital expenditures, and leasing commissions, respectively.  The Company anticipates that a majority ofthese commitments will be relieved during the third and fourth quarters of2005.

 

Item 3.    Quantitativeand Qualitative Disclosures 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, 2005, our interest rate riskonly related to our Secured Facility and our Unsecured Facility, of which therewas $32.9 million and $31.1 million outstanding, respectively.  Based on the amounts outstanding atJune 30, 2005, the annual impact of a 1% change in interest rates would beapproximately $639,600.  There have beenno material changes to our market risk profile since December 31,2004.  See “Item 7a.  Quantitative and Qualitative Disclosure aboutMarket Risk” in our 2004 Annual Report on Form 10-K for detailedinformation about the qualitative and quantitative disclosures about our marketrisk.

 

Item 4.    Controls andProcedures

The Company carried out an evaluation under the supervision and withparticipation of the Company’s management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934 as of June 30, 2005.  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.  Subsequent to June 30, 2005, there havebeen no significant changes in the Company’s internal controls over financial reportingthat occurred during the period covered by this report that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

20

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**Part II.****   Other Information**

 

Item 1.    Legal Proceedings

Except as described below, we are not presently subject to materiallitigation, nor to our knowledge is any material litigation threatened againstus.

 

On June 14, 2001, a lawsuit was filed in the District Court,Hidalgo County, Texas against Innerarity Austin, Inc., a Nevadacorporation, and our AmeriVest Properties Texas, Inc. subsidiary, by LauraSmith and 21 other plaintiffs alleging that the defendants werenegligent and breached various duties in allowing our Mission, Texas buildingto be contaminated with airborne contaminants while leasing the premises to theplaintiff’s employer, the Texas Department of Human Services.  Innerarity Austin, Inc. was the previousowner of the property.  The plaintiff allegesthat due to the acts and omissions of the defendants, she has suffered seriousand some permanent injuries and severe physical and mental pain.  The plaintiff seeks monetary and otherrelief, including exemplary damages, and pre-judgment and post-judgmentinterest as provided by law, costs of the lawsuit and such other relief towhich the plaintiff may be justly entitled.  A trial date in this matterwas set for May 2005 and then cancelled.  No new trial date has yetbeen set.  We have asserted a general denial of the material allegationsand our insurance company is defending us in this lawsuit and isresponsible for all costs.  We believethat this lawsuit will not be adversely determined and will not have anymaterial adverse effect on our business and financial condition.

 

Item 2.    Changes in Securities andUse of Proceeds

No changes.

 

Item 3.    Defaults Upon SeniorSecurities

None.

 

Item 4.    Submission of Matters to aVote of Security Holders

At the annual meeting of shareholders held June 16, 2005, shareholderselected the following individuals to serve on the Board of Directors of theCompany:

 

| **Name**            | ** ** | **Shares Voted in  Favor** | ** ** | **Abstentions and  Non-Votes** | ** ** |
|---------------------|------------|----------------------------|------------|--------------------------------|------------|
| William T. Atkins   |       | 21,189,269                 |       | 510,129                        |       |
| Patrice Derrington  |       | 21,230,848                 |       | 468,550                        |       |
| Harry P. Gelles     |       | 20,046,556                 |       | 1,652,842                      |       |
| Alexander S. Hewitt |       | 21,233,901                 |       | 465,497                        |       |
| Robert W. Holman    |       | 21,231,647                 |       | 467,751                        |       |
| Charles K. Knight   |       | 21,228,739                 |       | 470,659                        |       |
| John A. Labate      |       | 21,234,799                 |       | 464,599                        |       |
| Jerry J. Tepper     |       | 21,289,777                 |       | 409,621                        |       |

 

Item 5.    Other Information

None.

 

Item 6.    Exhibits
| 31.1 | Certifications of Chief Executive Officer pursuant to  section 302 of the Sarbanes-Oxley Act of 2002. |
|------|------------------------------------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial Officer pursuant to section 302  of the Sarbanes-Oxley Act of 2002   |
| 32.1 | Certification of Chief Executive Officer pursuant to section 906  of the Sarbanes-Oxley Act of 2002.  |
| 32.2 | Certification of Chief Financial Officer pursuant to section 906  of the Sarbanes-Oxley Act of 2002   |

 

21

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SIGNATURES

 

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

 
|                | AMERIVEST PROPERTIES INC. |
|---------------------|---------------------------|
|                |                      |
|                |                      |
| August 5, 2005 |                      |
|                |                      |
|                | By:                       | /s/ Charles K. Knight |
|                |                      | Charles K. Knight |
|                |                      | Chief Executive Officer |
|                |                      |
|                |                      |
|                | By:                       | /s/ Kathryn L. Hale |
|                |                      | Kathryn L. Hale |
|                |                      | Chief Financial Officer |
|                |                      | (Principal Financial Officer and |
| *** ***        | *** ***              | ***Principal Accounting Officer)*** |
|                     |                           |  |  |

 

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