**SECURITIES AND EXCHANGE COMMISSION**

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

 

**FORM10-Q**

 

 

**ý****                                ****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934.**

 

**For the quarterly period ended March 31, 2005.**

 

                **OR**

 

**o****                                ****TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934.**

 

**                For the transitionperiod from                                     to                                     **

 

                **Commission file number 1-14462**

 

**AMERIVEST PROPERTIES INC.**

(Exact name of registrant as specified in its charter)

 

| **Maryland**                                                      | ** ** | **84-1240264**                       |
|-------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)   |       | (I.R.S. Employer Identification No.) |
| **1780 South Bellaire Street********Suite 100, Denver, Colorado** | ** ** | **80222**                            |
| (Address of principal executive offices)                          |       | (Zip Code)                           |
| **(303) 297-1800**                                                |
| (Registrant’s telephone number, including area code)         |

 

                Indicate by check mark whetherthe registrant (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

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

 

                The number of shares of theregistrant’s common stock outstanding as of April 30, 2005 was approximately24,023,000.

 

 

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**Table of Contents**

 
|        |                                                                                                                  |       |
|-------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| **Part I**  | ** Financial  Information**                                                                                      | ** ** |
|        |                                                                                                                  |       |
| Item 1.     | Financial Statements:                                                                                                 |       |
|        | Condensed  Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31,  2004                        |       |
|        | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2005 and 2004 (unaudited)      |       |
|        | Condensed  Consolidated Statement of Stockholders’ Equity for the three months ended March  31, 2005 (unaudited) |       |
|        | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 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****— FINANCIAL INFORMATION**

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

 

**AMERIVEST PROPERTIES INC.**

 

**CondensedConsolidated Balance Sheets**

** **
| ** **                                                                                                                              | ** ** | **March 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|-------------|------------------------|------------|
| ** **                                                                                                                              | ** ** | **(unaudited)**     | ** **  | ** **             | ** ** |
| **ASSETS**                                                                                                                              |       |                |        |                   |       |
|                                                                                                                                    |       |                |        |                   |       |
| Investment in real estate                                                                                                               |       |                |        |                   |       |
| Land                                                                                                                                    |       | $                   | 57,228,891  |                   | $          | 58,338,781 |   |
| Buildings and improvements                                                                                                              |       | 250,995,920         |        | 256,128,341            |       |
| Furniture, fixtures and equipment                                                                                                       |       | 1,479,252           |        | 1,451,152              |       |
| Tenant improvements                                                                                                                     |       | 15,157,255          |        | 15,157,570             |       |
| Tenant leasing commissions                                                                                                              |       | 3,460,141           |        | 3,101,178              |       |
| Intangible assets                                                                                                                       |       | 22,990,483          |        | 23,019,763             |       |
| Less: accumulated depreciation and amortization                                                                                         |       | (28,706,186         | )           | (26,383,036            | )          |
| Net investment in real estate                                                                                                           |       | 322,605,756         |        | 330,813,749            |       |
|                                                                                                                                    |       |                |        |                   |       |
| Cash and cash equivalents                                                                                                               |       | 789,177             |        | 1,859,660              |       |
| Escrow deposits                                                                                                                         |       | 7,391,244           |        | 7,726,652              |       |
| Accounts receivable, net                                                                                                                |       | 697,759             |        | 671,251                |       |
| Deferred rents receivable                                                                                                               |       | 3,886,484           |        | 3,430,609              |       |
| Deferred financing costs, net                                                                                                           |       | 2,658,246           |        | 2,927,696              |       |
| Prepaid expenses and other assets                                                                                                       |       | 676,479             |        | 524,072                |       |
| Total assets                                                                                                                            |       | $                   | 338,705,145 |                   | $          | 347,953,689 |   |
|                                                                                                                                    |       |                |        |                   |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                          |       |                |        |                   |       |
|                                                                                                                                    |       |                |        |                   |       |
| Liabilities:                                                                                                                            |       |                |        |                   |       |
| Secured mortgage loans and notes payable                                                                                                |       | $                   | 205,382,327 |                   | $          | 211,729,328 |   |
| Unsecured line of credit                                                                                                                |       | 29,060,296          |        | 24,857,063             |       |
| Accounts payable and accrued expenses                                                                                                   |       | 3,891,671           |        | 4,524,282              |       |
| Accrued real estate taxes                                                                                                               |       | 3,887,197           |        | 4,486,712              |       |
| Prepaid rents, deferred revenue and security deposits                                                                                   |       | 3,986,636           |        | 4,190,202              |       |
| Dividends payable                                                                                                                       |       | —              |        | 3,116,130              |       |
| Total liabilities                                                                                                                       |       | 246,208,127         |        | 252,903,717            |       |
|                                                                                                                                    |       |                |        |                   |       |
| Minority interest                                                                                                                       |       | 1,491,976           |        | 1,580,057              |       |
|                                                                                                                                    |       |                |        |                   |       |
| Shareholders’ equity:                                                                                                              |       |                |        |                   |       |
| Preferred stock, $0.001par value   Authorized: 5,000,000 shares  Issued and outstanding: none                                           |       | —              |        | —                 |       |
| Common stock, $0.001 par value   Authorized: 75,000,000 shares

Issued and outstanding: 24,022,597 and 23,982,233 shares,  respectively |       | 24,023              |        | 23,982                 |       |
| Capital in excess of par value                                                                                                          |       | 132,704,946         |        | 132,585,840            |       |
| Distributions in excess of accumulated earnings                                                                                         |       | (41,723,927         | )           | (39,139,907            | )          |
| Total shareholders’ equity                                                                                                         |       | 91,005,042          |        | 93,469,915             |       |
| Total liabilities and shareholders’ equity                                                                                         |       | $                   | 338,705,145 |                   | $          | 347,953,689 |   |

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

1

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**AMERIVESTPROPERTIES INC.**

 

**CondensedConsolidated Statements of Operations**

**(unaudited)**

** **
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Real Estate Operating  Revenue:                  | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Rental revenues                                  |       | $                                 | 12,639,220 |   | $ | 9,208,874 |   |
|                                             |       |                              |       |   |   |
| Real Estate Operating Expenses:                  |       |                              |       |   |   |
| Property operating expenses -                    |       |                              |       |   |   |
| Operating expenses                               |       | 3,308,925                         |       | 2,833,667 |   |
| Real estate taxes                                |       | 1,824,074                         |       | 1,179,868 |   |
| General and administrative expenses              |       | 1,315,813                         |       | 932,549 |   |
| Interest expense                                 |       | 3,826,087                         |       | 2,612,254 |   |
| Depreciation and amortization expense            |       | 4,783,989                         |       | 2,697,096 |   |
| Total operating expense                          |       | 15,058,888                        |       | 10,255,434 |   |
|                                             |       |                              |       |   |   |
| Loss from continuing operations                  |       | (2,419,668                        | )          | (1,046,560 | ) |
|                                             |       |                              |       |   |   |
| Other Income/(Loss):                             |       |                              |       |   |   |
| Interest income                                  |       | 10,739                            |       | 15,363 |   |
| Equity in loss of affiliate                      |       | —                            |       | (18,076 | ) |
| Minority interest                                |       | 88,082                            |       | — |   |
| Total other income/(loss)                        |       | 98,821                            |       | (2,713 | ) |
|                                             |       |                              |       |   |   |
| Loss before discontinued operations              |       | (2,320,847                        | )          | (1,049,273 | ) |
|                                             |       |                              |       |   |   |
| Net earnings/(loss) from discontinued operations |       | (263,173                          | )          | 674,262 |   |
|                                             |       |                              |       |   |   |
| Net loss                                         |       | $                                 | (2,584,020 | ) | $ | (375,011 | ) |
|                                             |       |                              |       |   |   |
| Loss per Share:                                  | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Basic                                            |       | $                                 | (0.11      | ) | $ | (0.02 | ) |
| Diluted                                          |       | $                                 | (0.11      | ) | $ | (0.02 | ) |
|                                             |       |                              |       |   |   |
| Weighted Average Common Shares Outstanding:      |       |                              |       |   |   |
| Basic                                            |       | 24,011,672                        |       | 17,567,414 |   |
| Diluted                                          |       | 24,011,672                        |       | 17,567,414 |   |
|                                             |       |                              |       |   |   |
| Cash dividends paid per common share             |       | $                                 | —     |   | $ | 0.13 |   |

 

 

 

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

2

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**AMERIVEST PROPERTIES INC.**

 

**Condensed Consolidated Statement ofStockholders’ Equity**

 

**Three Months Ended March 31, 2005**

**(unaudited)**

 

 

 

 
| ** **                   | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Distributions** | ** ** | ** **       | ** ** |
|------------------------------|------------|------------------|------------|------------|------------|-------------------|------------|------------------|------------|
| ** **                   | ** ** | ** **       | ** ** | ** ** | ** ** | **Capital in**    | ** ** | **in Excess of** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **       | ** ** | ** ** | ** ** | **Excess of**     | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Par Value**     | ** ** | **Earnings**     | ** ** | **Total** | ** ** |
| 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    |       | 32,255           |       | 32         |       | 70,558            |       | —           |       | 70,590 |   |
| Net loss                     |       | —           |       | —     |       | —            |       | (2,584,020       | )          | (2,584,020 | ) |
| Balance at March 31, 2005    |       | 24,022,597       |       | $          | 24,023     |              | $          | 132,704,946      |       | $ | (41,723,927 | ) | $ | 91,005,042 |   |

 

 

 

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

3

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**AMERIVESTPROPERTIES INC.**

 

**Condensed Consolidated Statements of CashFlows**

**(unaudited)**
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**          | ** ** |
| ** **                                                                       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Operating activities:                                                            |       |                   |       |   |   |
| Net loss                                                                         |       | $                      | (2,584,020 | ) | $ | (375,011 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities- |       |                   |       |   |   |
| Depreciation and amortization expense                                            |       | 4,867,056              |       | 2,804,661 |   |
| Loss/(gain) on sale                                                              |       | 21,804                 |       | (574,276 | ) |
| Amortization of deferred financing costs                                         |       | 290,065                |       | 166,114 |   |
| Write-off of unamortized deferred financing costs                                |       | 215,993                |       | — |   |
| Equity in loss of affiliate                                                      |       | —                 |       | 18,076 |   |
| Minority interest                                                                |       | (88,082                | )          | — |   |
| Equity-based compensation                                                        |       | 70,590                 |       | 88,326 |   |
| Changes in assets and liabilities-                                               |       |                   |       |   |   |
| Accounts receivable                                                              |       | (26,508                | )          | (588,747 | ) |
| Deferred rents receivable                                                        |       | (455,875               | )          | (230,790 | ) |
| Prepaid expenses and other assets                                                |       | (152,407               | )          | (139,477 | ) |
| Accounts payable and accrued expenses                                            |       | (632,611               | )          | 402,065 |   |
| Other accrued liabilities                                                        |       | (686,640               | )          | 148,523 |   |
| Net cash flows provided by operating activities                                  |       | 839,365                |       | 1,719,464 |   |
|                                                                             |       |                   |       |   |   |
| Investing activities:                                                            |       |                   |       |   |   |
| Acquisitions of real estate, net                                                 |       | —                 |       | (31,884,486 | ) |
| Capital expenditures                                                             |       | (711,742               | )          | (948,667 | ) |
| Tenant improvements                                                              |       | (1,122,169             | )          | (2,075,136 | ) |
| Leasing commissions paid                                                         |       | (435,175               | )          | (249,386 | ) |
| Deposits on pending real estate acquisitions                                     |       | —                 |       | (168,000 | ) |
| Proceeds from sale, net of closing costs                                         |       | —                 |       | 4,049,229 |   |
| Cash paid to complete deed-in-lieu transaction                                   |       | (114,600               | )          | — |   |
| Legal settlement                                                                 |       | 450,000                |       | — |   |
| Ending cash balance of newly consolidated affiliate                              |       | —                 |       | 92,732 |   |
| Amounts paid to affiliate                                                        |       | —                 |       | (47,464 | ) |
| Net cash flows used in investing activities                                      |       | (1,933,686             | )          | (31,231,178 | ) |
|                                                                             |       |                   |       |   |   |
| Financing activities:                                                            |       |                   |       |   |   |
| Additions to mortgage loans and lines of credit                                  |       | 5,203,233              |       | 36,017,462 |   |
| Payments on mortgage loans, notes payable and line of credit                     |       | (1,781,142             | )          | (40,808,012 | ) |
| Payment of deferred financing costs                                              |       | (236,608               | )          | (118,613 | ) |
| Net proceeds from common stock offering                                          |       | —                 |       | 39,940,375 |   |
| Net proceeds from exercising of options and warrants                             |       | 7,501                  |       | 79,099 |   |
| Net change in escrow deposits                                                    |       | (94,072                | )          | (2,826,032 | ) |
| Dividends paid                                                                   |       | (3,075,074             | )          | (2,223,616 | ) |
| Net cash flows provided by financing activities                                  |       | 23,838                 |       | 30,060,663 |   |
|                                                                             |       |                   |       |   |   |
| Net change in cash and cash equivalents                                          |       | (1,070,483             | )          | 548,949 |   |
| Cash and cash equivalents at beginning of period                                 |       | 1,859,660              |       | 1,477,585 |   |
| Cash and cash equivalents at end of period                                       |       | $                      | 789,177    |   | $ | 2,026,534 |   |
|                                                                             |       |                   |       |   |   |
| Supplemental disclosure of cash flow information:                                |       |                   |       |   |   |
| Cash paid for interest                                                           |       | $                      | 3,611,511  |   | $ | 2,379,081 |   |
|                                                                             |       |                   |       |   |   |
| 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  |   | — |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

4

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**AMERIVEST PROPERTIES INC.**

 

**Notes****toCondensed Consolidated Financial Statements**

 

**March31, 2005**

**(unaudited)**

 

1 — Organization

 

AmeriVestProperties Inc. (the Company) is incorporated under the laws of the State ofMaryland and operates as a self-administered and self-managed real estateinvestment trust (REIT).  The Companyprimarily invests in and operates commercial office buildings in selectivemarkets and leases the commercial office buildings to small and medium sizetenants.  At March 31, 2005, the Companyowned, or had an ownership interest in, 17 office properties located inmetropolitan Denver, Dallas, Phoenix and Indianapolis.

 

2 — Interim Financial Statements

 

                The unauditedconsolidated financial statements included herein were prepared from therecords of the Company in accordance with U.S. generally accepted accountingprinciples and reflect all adjustments which are, in the opinion of management,necessary to provide a fair statement of the results of operations andfinancial position for the interim periods. Such financial statements generally conform to the presentationreflected in the Company’s Form 10-K filed with the Securities and ExchangeCommission for the year ended December 31, 2004.  The consolidated results of operations forthe three months ended March 31, 2005 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005.  These financial statements and notes thereinshould be read together with the financial statements and notes included in theCompany’s Form 10-K for the year ended December 31, 2004.

 

                The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements andreported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

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

 

3 — Equity-Based Compensation

 

The Company appliesAccounting Principles Board (APB) Opinion No. 25 and related interpretations inaccounting for its equity-based compensation. Accordingly, the Company does not recognize compensation cost foroptions granted to employees whose exercise price is equal to or exceeds thefair value of the underlying stock as of the grant date and which qualify forfixed plan accounting.

 

Equity-based compensationissued to non-employees is accounted for based on the fair value of the equityinstruments issued.  The measurement dateis considered to be the issuance date, or if there are performance vestingprovisions, when earned.

 

The Company has adopted thedisclosure-only provisions of Statement of Financial Accounting Standards(SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure, an amendment of FASB Statement No. 123.”  Had compensation cost for the Company’s stockoption plan been determined based on the fair value at the grant dateconsistent with the provisions of SFAS No. 148, the Company’s net loss and lossper share for the three months ended March 31, 2005 and 2004 would have beenchanged to the pro forma amounts as indicated in the following table:

 

5

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| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **March 31,**          | ** ** |
| ** **                                                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                |       |                   |       |   |   |
| Net loss — as reported                                         |       | $                      | (2,584,020 | ) | $ | (375,011 | ) |
| Plus: Recognized equity-based compensation                          |       | 70,590                 |       | 88,326 |   |
| Less: Total equity-based compensation   expense based on fair value |       | (71,488                | )          | (89,223 | ) |
| Net loss — pro forma                                           |       | $                      | (2,584,918 | ) | $ | (375,908 | ) |
|                                                                |       |                   |       |   |   |
| Loss per basic share — as reported                             |       | $                      | (0.11      | ) | $ | (0.02 | ) |
| Loss per diluted share — as reported                           |       | $                      | (0.11      | ) | $ | (0.02 | ) |
|                                                                |       |                   |       |   |   |
| Loss per basic share — pro forma                               |       | $                      | (0.11      | ) | $ | (0.02 | ) |
| Loss per diluted share — pro forma                             |       | $                      | (0.11      | ) | $ | (0.02 | ) |

 

 

The fair value ofeach grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

 

| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Dividend yield        |       | 2.0      | %          | 7.5      | %          |
| Volatility            |       | 9.3      | %          | 27.0     | %          |
| Discount rate         |       | 2.7      | %          | 2.7      | %          |
| Expected life (years) |       | 2.2      |       | 5.0      |       |

 

 

4 — Transactions

 

*TexasState Buildings sale*

On March 2, 2005, theCompany 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, bearing interest at 7.66% throughAugust 1, 2028 and had a net book value of $5.2 million (excluding approximately$383,000 in escrow deposits which were included as part of the transaction),subsequent to an impairment charge of $1.2 million recognized during the fourthquarter of 2004.  In 2005, the Companyrecognized a net loss of approximately $21,800 and wrote-off unamortizeddeferred financing costs in connection with the disposition of approximately$216,000, which are reflected in discontinued operations.

*DeanFoods Lease — Chateau Plaza*

                On March 22, 2005, the Companyamended and extended its existing lease with Dean Foods Company for 120,607rentable square feet in the Chateau Plaza building in Dallas, Texas.  Under the terms of the amendment, the leaseis extended for at least a one-year term commencing January 1, 2006.  On or before July 1, 2005, Dean Foods has aone-time right to further extend the lease for up to an additional fouryears.  The base rental rate for theextended term commencing January 1, 2006 is $19.75 per rentable square foot,plus electricity and parking.

 

6

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5 — DiscontinuedOperations

 

During the three months ended March 31, 2005, the Company completed aDeed-In-Lieu Agreement to return our 13 non-core Texas State Buildings to thelender.  The properties consisted of222,542 square feet and had a net book value of $5.2 million (excluding certaindeposits maintain by the lender) (see Note 4). In accordance with SFAS 144, these properties were considered to havebeen abandoned and were not classified as held for sale prior to thedisposition.  During the three monthsended March 31, 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 the relatedgain/(loss) on the sale are included in discontinued operations for the threemonths ended March 31, 2005 and 2004.

 

 

  The following is a summary of the netincome/(loss) of the properties which comprise discontinued operations:

 

| ** **                                                               | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**          | ** ** |
| ** **                                                               | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Rental revenue                                                           |       | $                      | 263,357    |   | $ | 657,024 |   |
|                                                                     |       |                   |       |   |   |
| Property operating expenses -                                            |       |                   |       |   |   |
| Operating expenses                                                       |       | (121,720               | )          | (241,166 | ) |
| Real estate taxes                                                        |       | (40,754                | )          | (74,369 | ) |
| Interest expense                                                         |       | (72,476                | )          | (133,938 | ) |
| Deferred financing costs associated with the disposition of real  estate |       | (215,993               | )          | — |   |
| Depreciation and amortization expense                                    |       | (53,783                | )          | (107,565 | ) |
|                                                                     |       | (504,726)              |       | (557,038 | ) |
|                                                                     |       |                   |       |   |   |
| Gain/(loss) on sale                                                      |       | (21,804                | )          | 574,276 |   |
|                                                                     |       |                   |       |   |   |
| Net income/(loss)                                                        |       | $                      | (263,173   | ) | $ | 674,262 |   |

 

7

----

 

6 — Variable Interest Entity

 

Effective March 31, 2004,the Company adopted FIN 46R and applied it to its investment in Panorama Falls,located in Englewood, Colorado.  TheCompany owns 20% of Panorama Falls as a tenant-in-common with the majorityinvestor.  The Company financed theproperty through its Unsecured Facility.  Panorama Falls is deemed to be a variable interest entity (VIE) asdefined by FIN 46R.  In accordance withFIN 46R, the Company determined it is subject to the majority of thevariability in the variable interests in the entity and has consolidated theassets and liabilities of Panorama Falls effective March 31, 2004.  With respect to the consolidated statementsof operations, the investment was accounted for under the consolidation methodof accounting beginning April 1, 2004 and under the equity method of accountingfor prior periods.  The following tabledetails the asset and liability amounts related to Panorama Falls property atMarch 31, 2005:

 

| Assets                                          | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| Investment in real estate                       | ** ** | ** ** | ** ** |
| Land                                            |       | $          | 1,051,372  |   |
| Buildings and improvements                      |       | 5,426,691  |       |
| Furniture, fixtures and equipment               |       | 32,216     |       |
| Tenant improvements                             |       | 1,060,390  |       |
| Tenant leasing commissions                      |       | 222,108    |       |
| Less: accumulated depreciation and amortization |       | (1,188,509 | )          |
| Net investment in real estate                   |       | 6,604,268  |       |
|                                            |       |       |       |
| Cash and cash equivalents                       |       | 31,227     |       |
| Accounts receivable                             |       | 25,630     |       |
| Deferred rents receivable                       |       | 118,794    |       |
| Deferred financing costs, net                   |       | 15,900     |       |
| Total assets                                    |       | $          | 6,795,819  |   |
|                                            |       |       |       |
| Liabilities                                     |       |       |       |
| Mortgage loans and notes payable                |       | $          | 4,214,408  |   |
| Accrued real estate taxes                       |       | 108,756    |       |
| Other liabilities                               |       | 126,062    |       |
| Total liabilities                               |       | $          | 4,449,226  |   |
|                                            |       |       |       |
| Minority interest                               |       | $          | 1,491,976  |   |

 

8

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7 —Mortgage Loans, Notes Payable, and Lines of Credit

 

                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 line of credit,classified by interest type (fixed or variable) and in order of maturity atMarch 31, 2005 and December 31, 2004:

 
| ** **                                                         | ** ** | ** **                                            | ** ** | ** **   | ** ** | **March  31, 2005** | ** **  | **December  31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------|------------|---------------------|-------------|------------------------|------------|
| ** **                                                         | ** ** | **Mortgaged  Property at**                            | ** ** | **Maturity** | ** ** | **Principal**       | ** **  | **Interest**           | ** ** | **Principal** | ** ** | **Interest** | ** ** |
| **Lender**                                                         | ** ** | **March  31, 2005**                                   | ** ** | **Date**     | ** ** | **Balance**         | ** **  | **Rate(1)**            | ** ** | **Balance** | ** ** | **Rate(1)** | ** ** |
| ***Fixed  Rate***                                                  |       |                                                  |       |         |       |                |        |                   |       |   |   |   |   |
| Teachers  Insurance and Annuity Association of America             |       | AmeriVest Plaza at  Inverness                         |       | 1/10/2006    |       | $                   | 14,370,197  |                   | 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    |       | 37,910,204          |        | 5.13                   | %          | 38,115,018 |   | 5.13 | % |
| Metropolitan Life  Insurance Company                               |       | Parkway Centre III                                    |       | 9/10/2009    |       | 15,070,941          |        | 4.47                   | %          | 15,154,645 |   | 4.47 | % |
| Allstate Life  Insurance Company                                   |       | Financial Plaza                                       |       | 10/5/2010    |       | 24,045,098          |        | 5.25                   | %          | 24,173,324 |   | 5.25 | % |
| Southern Farm  Bureau Life Insurance Company                       |       | Scottsdale Norte                                      |       | 4/1/2011     |       | 6,553,731           |        | 7.90                   | %          | 6,568,596 |   | 7.90 | % |
| J.P. Morgan Chase                                                  |       | Hackberry View — 1st                             |       | 9/1/2012     |       | 11,387,931          |        | 6.57                   | %          | 11,424,345 |   | 6.57 | % |
| J.P. Morgan Chase                                                  |       | Hackberry View — 2nd                             | (2)        | 9/1/2012     |       | 960,839             |        | 8.00                   | %          | 967,654 |   | 8.00 | % |
| Teachers  Insurance and Annuity Association of America             |       | Sheridan Center  Arrowhead Fountains Kellogg Building |       | 1/1/2013     |       | 28,733,061          |        | 7.40                   | %          | 28,852,678 |   | 7.40 | % |
| Allstate Life  Insurance Company                                   |       | Camelback — 1st                                  |       | 9/5/2014     |       | 15,855,852          |        | 5.82                   | %          | 15,928,449 |   | 5.82 | % |
| Allstate Life  Insurance Company                                   |       | Camelback — 2nd                                  |       | 9/5/2014     |       | 4,954,954           |        | 5.82                   | %          | 4,977,640 |   | 5.82 | % |
| Security Life of  Denver Insurance Company                         |       | Keystone Office Park —  1st                      |       | 5/1/2022     |       | 4,207,994           |        | 8.00                   | %          | 4,236,333 |   | 8.00 | % |
| Security Life of  Denver Insurance Company                         |       | Keystone Office Park —  2nd                      |       | 5/1/2022     |       | 472,286             |        | 8.63                   | %          | 474,284 |   | 8.63 | % |
| Transatlantic  Capital Company, LLC (3)                            |       | Texas State Buildings                                 |       | 8/1/2028     |       | —              |        | —                 |       | 5,579,891 |   | 7.66 | % |
| Subtotal                                                           |       |                                                  |       |         |       | $                   | 172,423,088 |                   | 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  |                   | 5.35       | % | $ | 32,900,000 |   | 4.96 | % |
| KeyBank National  Association — Unsecured Line of Credit      |       | Unsecured                                             |       | (5)          |       | 29,060,296          |        | 5.64                   | %          | 24,857,063 |   | 5.63 | % |
| Subtotal                                                           |       |                                                  |       |         |       | $                   | 61,960,296  |                   | 5.49       | % | $ | 57,757,063 |   | 5.25 | % |
| ***Other  Notes Payable***                                         |       |                                                  |       |         |       |                |        |                   |       |   |   |   |   |
| Lease Capital  Corporation                                         |       | Phone system                                          |       | 10/31/2007   |       | $                   | 59,239      |                   | 11.11      | % | $ | 64,124 |   | 11.11 | % |
| Subtotal                                                           |       |                                                  |       |         |       | $                   | 59,239      |                   | 11.11      | % | $ | 64,124 |   | 11.11 | % |
| Total                                                              |       |                                                  |       |         |       | $                   | 234,442,623 |                   | 5.93       | % | $ | 236,586,391 |   | 5.92 | % |

----

1.               Interest only, does notinclude amortization of deferred financing costs or any fees.

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

3.               On March 2, 2005, the Company completed aDeed-in-Lieu Agreement to return these properties to the lender.

4.               The Secured Line of Credithas mandatory repayments of at least $2.5 million by July 1, 2005 and at least$10.0 million by September 1, 2005.  Theline matures on November 12, 2005.

5.               The Unsecured Line ofCredit has mandatory repayments of at least $5.0 million by September 1, 2005and at least $10.0 million by January 3, 2006. The line matures on April 1, 2006.

 

9

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The following table details the scheduled maturities ofdebt outstanding at March 31, 2005:

 

| 2005       |   | $          | 40,207,412  |   |
|------------|--------|------------|-------------|--------|
| 2006       |   | 41,382,483 |        |
| 2007       |   | 11,167,321 |        |
| 2008       |   | 38,057,259 |        |
| 2009       |   | 15,526,679 |        |
| Thereafter |   | 88,101,469 |        |
| Total      |   | $          | 234,442,623 |   |

 

                The change in debt during thethree months ended March 31, 2005 consisted of the following:

 

| ** **                   | ** ** | **2005**   | ** **  |
|------------------------------|------------|------------|-------------|
| Balance at January 1         |       | $          | 236,586,391 |   |
| Additions                    |       | 5,203,233  |        |
| Repayments                   |       | (6,565,859 | )           |
| Scheduled principal payments |       | (781,142   | )           |
| Balance at March 31          |       | $          | 234,442,623 |   |

 

*Other*

Our debt instrumentsgenerally contain certain covenants common to the type of facility orborrowing, 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 three monthsended March 31, 2005.

As a result of not complying with certain provisionsof our debt covenants as of December 31, 2004, on March 15, 2005, the Companyamended its Secured Facility and Unsecured Facility with KeyBank due to theCompany not being in compliance with its leverage, interest coverage and fixedcharge coverage covenants required by the Secured Facility. The amendment tothe Secured Facility involved: (i) a waiver for the events of non-compliance,noted above, 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 the revolvingfeature 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.

As a result of the amendmentsto the Secured and Unsecured Facilities, the Company believes that it will beable to continue to comply with the revised covenants based on the 2005budgeted results of operations. In addition, the Company believes it will meetits obligations under the mandatory repayments on the Secured and UnsecuredFacilities by either: (i) completing a strategic transaction, which may includea sale or recapitalization of all or a portion of the Company’s assets or amerger of the Company; (ii) obtaining additional financing by refinancingcertain assets, or (iii) issuing equity. If the Company is unable to raisesufficient capital for the mandatory repayments, or if we are unable to remainin compliance with our debt covenants, the bank could accelerate and demandrepayment of outstanding balances on the Secured and Unsecured Facilities.

 

10

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8 —Loss Per Share

 

                There are noadjustments necessary to the basic weighted average common shares outstandingto arrive at the diluted weighted average common shares outstanding for thethree months ended March 31, 2005 and 2004 as the Company recognized a net lossand the impact would be anti-dilutive.

 

 

9 —Legal Settlement

 

                In January 2005,the Company settled a lawsuit against a property inspection firm regarding apre-acquisition inspection of our Sheridan Center property.  This action was settled for $450,000, whichwas recorded as a reduction in book value of that asset.

 

11

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

 

                The followingdiscussion and analysis of the consolidated financial condition and results ofoperations should be read in conjunction with the consolidated financialstatements and notes thereto included in this Form 10-Q and elsewhere.

 

Forward-Looking Statements

 

Certain statements in thisForm 10-Q that are not historical facts are “forward-looking statements” asthat term is defined under the Private Securities Litigation Reform Act of1995.  These forward-looking statementsare based on the Company’s current expectations, beliefs, assumptions,estimates and projections about the industry and markets in which the Companyoperates.  Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates” and variations of suchwords and similar expressions are intended to identify such forward-lookingstatements.  Information concerningexpected investment balances, expected funding sources, planned investments,forecasted dates and revenue and expense growth assumptions are examples offorward-looking statements.  Thesestatements are not guarantees of future performance and involve certain risks,uncertainties and assumptions, which are difficult to predict and many of whichare beyond the Company’s control. Therefore, actual outcomes and results may differ materially from whatis expressed, forecasted or implied in such forward-looking statements.  The Company undertakes no obligation toupdate publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise, except as required by applicable law.

 

The Company’s operatingresults depend primarily on income from its properties, which are substantiallyinfluenced by supply and demand for such properties, operating expense levels,property level operations and the pace and price at which the Company candevelop, acquire or dispose of such properties. Capital and credit market conditions, which affect the Company’s cost ofcapital, also influence operating results. See “Item 1. Description of Business” in the Company’s Annual Report onForm 10-K for the period ending December 31, 2004 for a more completediscussion of risk factors that could impact the Company’s future financialperformance.

 

Overview

 

                As used herein,“we”, “us”, “our” and “the Company” refer to AmeriVest Properties Inc., aMaryland corporation. We were incorporated in the State of Maryland in 1999. Weare a fully-integrated, self-administered and self-managed Real EstateInvestment Trust (“REIT”) and primarily invest in and operate commercial officebuildings in select markets and lease the commercial office buildings to smalland medium size tenants. At March 31, 2005, we owned 17 properties, whichincluded an aggregate of 2,508,115 square feet compared to 27 propertiestotaling 2,365,640 square feet at March 31, 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

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Results Of Operations

*Comparison of the three months ended March 31, 2005 to March31, 2004:*

* *
| ** **                                       | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Real estate operating revenue:                   |       |       |       |       |       |       |       |
| Rental revenue                                   |       | $          | 12,639,220 |       | $          | 9,208,874  |       | $ | 3,430,346 |   |
|                                             |       |       |       |       |       |       |       |
| Real estate operating expenses:                  |       |       |       |       |       |       |       |
| Property operating expenses-                     |       |       |       |       |       |       |       |
| Operating expenses                               |       | 3,308,925  |       | 2,833,667  |       | 475,258    |       |
| Real estate taxes                                |       | 1,824,074  |       | 1,179,868  |       | 644,206    |       |
| General and administrative expenses              |       | 1,315,813  |       | 932,549    |       | 383,264    |       |
| Interest expense                                 |       | 3,826,087  |       | 2,612,254  |       | 1,213,833  |       |
| Depreciation and amortization expense            |       | 4,783,989  |       | 2,697,096  |       | 2,086,893  |       |
| Total operating expense                          |       | 15,058,888 |       | 10,255,434 |       | 4,803,454  |       |
|                                             |       |       |       |       |       |       |       |
| Loss from continuing operations                  |       | (2,419,668 | )          | (1,046,560 | )          | (1,373,108 | )          |
|                                             |       |       |       |       |       |       |       |
| Other income/(loss):                             |       |       |       |       |       |       |       |
| Interest income                                  |       | 10,739     |       | 15,363     |       | (4,624     | )          |
| Equity in loss of affiliate                      |       | —     |       | (18,076    | )          | 18,076     |       |
| Minority interest                                |       | 88,082     |       | —     |       | 88,082     |       |
| Total other income/(loss)                        |       | 98,821     |       | (2,713     | )          | 101,534    |       |
|                                             |       |       |       |       |       |       |       |
| Loss before discontinued operations              |       | (2,320,847 | )          | (1,049,273 | )          | (1,271,574 | )          |
|                                             |       |       |       |       |       |       |       |
| Net earnings/(loss) from discontinued operations |       | (263,173   | )          | 674,262    |       | (937,435   | )          |
|                                             |       |       |       |       |       |       |       |
| Net loss                                         |       | $          | (2,584,020 | )          | $          | (375,011   | )          | $ | (2,209,009 | ) |

 

 

*Rental revenue* — Rental revenue increased approximately$3.4 million, or 37.3%, during the first quarter of 2004 as compared to thesame period of 2004.  Approximately $3.2million of the increase is due to the inclusion of the operating results of the2004 acquisitions (Camelback Lakes, Hackberry View, Parkway Center III andHampton Court).  The remaining increaseis primarily due to the consolidation of Panorama Falls due to the adoption ofFIN 46R whereby its operations are included with those of the Company beginningMarch 31, 2004.  The Company  believes that rental revenue for theremainder of 2005 will be negatively impacted by the straight-line adjustmentrelated to the Dean Foods lease amendment. This adjustment is currently estimated to be approximately $66,000 perquarter for the remainder of 2005.

 

The Company’s same store occupancy was 88.1%at March 31, 2005 as compared to 85.6% at March 31, 2004.  This increase was partially offset by adecrease in average rent per square foot, which was $20.72 at March 31, 2005compared to $20.88 at March 31, 2004.

 

                *Property operating expenses* — Propertyoperating expenses (operating expenses and real estate taxes) increasedapproximately $1.1 million, or 27.9%, during the first quarter of 2005 ascompared to the same period of 2004.  Approximately$1.2 million of the increase is due to the inclusion of the 2004 acquisitionsand approximately $117,000 is due to the consolidation of Panorama Falls.  These increases are partially offset by a$161,000 decrease in ground lease expense due to the acquisition in October2004 of the Greenhill Park land that was subject to a ground lease. Real estatetaxes, which are the largest component of operating expenses, increasedapproximately $644,000; approximately $533,000 of this increase is due to the2004 acquisitions.  The remainder of theincrease in real estate taxes is due to increases in assessed propertyvalues.  The Company has focused, andwill continue to focus, on the ongoing management of controllable operatingexpenses, and believes that we will be able to maintain or increase ouroperating margins.

 

13

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                *General and administrative expenses* —General and administrative expenses increased approximately $383,000, or 41.1%,during the first quarter of 2005 as compared to the same period of 2004.  Approximately $335,000 of the increase isrelated to audit and consulting fees primarily incurred by the Company’sefforts to comply with the Sarbanes-Oxley Act of 2002.  The Company also recognized approximately$144,000 of costs related to the evaluation of strategic alternatives duringthe first quarter of 2005.  Excluding theone-time severance cost for our former Chief Executive Officer of approximately$285,000 to be recorded in the second quarter of 2005, the Company anticipatesa slight decrease in general and administrative expenses during the remainderof 2005.  The decrease is primarily dueto lower fees related to Sarbanes-Oxley compliance.

 

                *Interest expense —* Interest expenseincreased by approximately $1.2 million, or 46.5%, during the first quarter of2005 as compared to the same period of 2004. This increase is primarily due to the borrowings the Company incurredfor acquisitions during 2004.  Theremainder of the increase is primarily due to the acquisition of the landunderlying the Greenhill Park building, which was previously subject to aground lease, and higher interest rates on our variable rate debt.  The Company anticipates an increase in interestexpense during the remainder of 2005 due to the accelerated maturity date ofour Unsecured Facility, which increased the amortization of deferred financingcosts relative to the prior year.

 

                *Depreciation and amortization* — Depreciation andamortization expense increased approximately $2.1 million, or 77.4%, during thefirst quarter of 2005 as compared to the same period of 2004.  This increase is primarily due to the 2004acquisitions and additional capital improvements, tenant improvements and leasingcommissions for our current real estate investments.

 

                *Discontinued operations —*In March 2005, the Company completeda Deed-In-Lieu Agreement to return our 13 non-core Texas State Buildings to thelender.  The properties had a net bookvalue of $5.2 million (excluding certain deposits maintain by the lender).  We recognized a net loss of approximately$21,800 and wrote-off unamortized deferred financing costs in connection withthe disposition of approximately $216,000. In March 2004, the Company sold its Texas Bank Buildings for $4.1 millionand recognized a net gain of approximately $574,000. In accordance with SFASNo. 144, the Company has classified the operations of these properties, as wellas the gain/(loss) on disposition, as discontinued operations.

 

 

Liquidityand Capital Resources

                Ournet cash provided by operating activities is primarily dependent upon theoccupancy level of our properties, the rental rates on our leases, our abilityto collect rent from our tenants, and the level of operating and otherexpenses. Our net cash provided by operating activities has been a significantsource of liquidity to help fund debt service, capital improvements, tenantimprovements and leasing costs for operating properties as well asdistributions to our shareholders. Until our evaluation of strategicalternatives is competed, we do not plan to make any new acquisitions.

On March 15, 2005, theCompany amended its Secured Facility and Unsecured Facility with KeyBank due tothe Company not being in compliance with its leverage, interest coverage andfixed charge coverage covenants required by the Secured Facility. The amendmentto the Secured Facility involved: (i) a waiver for the events ofnon-compliance, noted above, as of December 31, 2004, (ii) changes to the debtcovenant calculations to set them at the same levels as those previouslyestablished for the Unsecured Facility, (iii) mandatory repayments of at least$2.5 million by July 1, 2005 and at least $10.0 million by September 1, 2005,(iv) removal of the revolving feature of the Secured Facility, and (v) theelimination of the obligation of the lender to make any further loans under theSecured Facility. The amendment to the Unsecured Facility involved: (i) awaiver for the events of non-compliance as of December 31, 2004 due to cross defaultprovisions with the Secured Facility (ii) moving up the maturity date fromNovember 12, 2007 to April 1, 2006, (iii) mandatory repayments of at least $5.0million by September 1, 2005 and at least $10.0 million by January 3, 2006,(iv) removal of the revolving feature of the Unsecured Facility, (v) arequirement that any further borrowings, including borrowings to pay dividends,be subject to the approval of the lender in its sole and absolute discretion,(vi) a limitation on the incurrence of any other indebtedness by the Companywithout the prior written consent of the lender and (vii) a requirement thatall net proceeds from a property sale, refinancing or other capital transactionbe used to pay down any amounts outstanding.

 

14

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On March 9, 2005, our Boardsuspended the payment of the common dividend for the first quarter of 2005. TheBoard determined that suspension of the dividend would maximize the Company’sability to complete a strategic transaction in a timely manner. The Boardintends to review and consider the resumption of a dividend for the secondquarter of 2005, or thereafter, based on a number of factors, including thecompletion of a strategic transaction or other significant capital event, suchas refinancing or asset sales, the Company’s financial results, capitalresources and liquidity needs at that time.

A material adverse change in our net cash providedby operating activities may affect our ability to fund the items listed aboveand may affect the financial performance covenants under our lines of credit.If we fail to meet our financial performance covenants and to reach asatisfactory resolution with our lenders, our lines of credit could becomeunavailable to us or the interest charged on the line of credit could increase.Any of these circumstances could adversely affect our ability to fund workingcapital and unanticipated cash needs and development costs.

*OperatingActivities*

                Netcash flows provided by operations decreased approximately $880,000, or 51.2%,for the three months ended March 31, 2005 as compared to the same period in2004.  The decrease is primarily due tochanges in assets and liabilities primarily due to the timing of payment forreal estate taxes and other accounts payable, partially offset by the inclusionof the operations from property acquisitions made subsequent to March 31, 2004.

 

*InvestingActivities*

                Netcash flows used in investing activities decreased approximately $29.3 million,or 93.8%, for the three months ended March 31, 2005 as compared to the sameperiod in 2004.  This decrease isprimarily due to the $31.9 million in acquisitions in the first quarter of2004, which was partially offset by the net proceeds from the sale of the TexasBank Buildings of $4.0 million.  Inaddition, there was a decrease in cash used for capital expenditures and tenantimprovements in 2005.

 

*Financing Activities*

Net cash flowsprovided by financing activities decreased approximately $30.0 million for thethree months ended March 31, 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 baserent under non-cancelable tenant leases and most leases provide for additionalrent based on increases in operating expenses.

 

The Company has two creditfacilities: the Secured Facility and the Unsecured Facility.   At March 31, 2005, there was $32.9 millionoutstanding under the Secured Facility and $29.1 million outstanding under theUnsecured Facility.

 

As noted above, as a resultof the amendments to our Secured Facility and Unsecured Facility, our abilityto borrow additional amounts under the Secured Facility has been terminated andour ability to incur additional borrowings under the Unsecured Facility issubject to the approval of the lender in its sole and absolute discretion.Moreover, the amendments to the Unsecured Facility restrict our ability toincur any additional indebtedness from any other party without the priorwritten consent of the lender. To the extent that we are unable to borrowadditional funds, we may be unable to make any additional acquisitions ofoffice properties and could be limited in our ability to fund tenantimprovements or make other necessary or desirable portfolio capitalexpenditures unless we issue additional equity in the Company or sell one ormore of our existing properties. In addition, we would be dependent upon cashflow from our operations to cover these capital expenditures and our corporateoperating expenses. As a result, there can be no assurance that we will be ableto execute our business plan, and our limited access to capital could have amaterial adverse effect on our financial condition and our operations.

 

15

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Subject to the results of ourstrategic alternatives review and the availability of capital, the Company mayseek to acquire additional properties. In order to do so, we will try toutilize current sources of debt financing and possibly incur additional debtand/or obtain additional equity capital. The issuance of such securities orincrease in debt to acquire additional properties, of which there is noassurance, could adversely affect the amount of cash available to pay dividendsto stockholders. Due to the unknown outcome of the Company review of strategicalternatives, it is unclear whether we will be able to effectively access thepublic equity markets or incur additional debt at attractive rates. If astrategic 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 ofCapital, Contractual Commitments and Off-Balance Sheet Arrangements*

                The followingtable details the contractual obligations for scheduled debt maturities atMarch 31, 2005.

 

| **For the years**

**ended December 31,** | ** ** | ** ** | ** **  |
|-------------------------------------------|------------|------------|-------------|
| 2005                                      |       | $          | 40,207,412  |   |
| 2006                                      |       | 41,382,483 |        |
| 2007                                      |       | 11,167,321 |        |
| 2008                                      |       | 38,057,259 |        |
| 2009                                      |       | 15,526,679 |        |
| Thereafter                                |       | 88,101,469 |        |
| Total                                     |       | $          | 234,442,623 |   |

 

 

 

*Interest Rate Information*

As of March 31, 2005,approximately 74% of the total mortgage loans outstanding are fixed rate loanswith a weighted-average interest rate of 6.1% and 26% are variable rate loanswith a weighted-average interest rate of 5.5%.

 

*Debt Covenants*

Certainof the Company’s debt instruments contain covenants common to that type offacility or borrowing, including financial covenants establishing minimum debtservice coverage and maximum leverage ratios. The Company was in compliance with all financial covenants pertaining toits debt instruments during the three months ended March 31, 2005.

 

TheCompany believes that it will meet its obligation under the mandatoryrepayments on the Secured and Unsecured Facilities by either: (i) completing astrategic transaction, which may include a sale or recapitalization of all or aportion of the Company’s assets or a merger of the Company; (ii) obtainingadditional financing by refinancing certain assets, or (iii) issuing equity. Ifthe Company is unable to raise sufficient capital for the mandatory repayments,or if we are unable to remain in compliance with our debt covenants, the bankcould accelerate and demand repayment of outstanding amounts based on the termsof the amended facilities agreements.  Ifthis were to occur, the Company may not be able to meet its obligation underthe accelerated repayment obligations.

 

Critical Accounting Policies

The discussion and analysisof the Company’s financial condition and results of operations are based uponits condensed consolidated financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles.  The preparation of these financial statementsrequire management to make estimates and judgments that affect the reportedamounts of assets and liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities at the date of the financialstatements.  Actual results may differfrom these estimates under different assumptions or conditions.

 

Critical accounting policiesare defined as those that are reflective of significant judgments anduncertainties, which would potentially result in materially different resultsunder different assumptions and conditions. The Company believes that its critical accounting policies include thoseitems described below.

 

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*Investmentin Real Estate*

Upon acquisition, the purchaseprice of a property is allocated to land, building and improvements and otherintangible assets and associated liabilities as required by SFAS No. 141 “BusinessCombinations.”  The allocation to land isbased on an estimate of its fair value based on all available information,including appraisals.  The allocation toother intangible assets represents the value associated with the in-placeleases, including leasing commission, legal and other related costs.  Also required by SFAS No. 141 is the creationof an intangible asset or liability resulting from in-place leases being aboveor 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 isstated at cost.  Depreciation andamortization are computed on a straight-line basis over the estimated usefullives 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 areexpensed as incurred and improvements are capitalized.  The cost of assets sold or retired and therelated accumulated depreciation and/or amortization are removed from theaccounts and the resulting gain or loss is reflected in operations in theperiod in which such sale or retirement occurs. Allocating the purchase price of a property to the different componentsof investment in real estate, determining whether expenditures meet thecriteria for capitalization and assigning depreciable lives is considered to becritical because it requires management to exercise significant judgment.

 

*Valuationof Real Estate Assets*

Long-lived assets to be heldand used by the Company are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. The Company continually evaluates the recoverability of itslong-lived assets based on estimated future cash flows from and the estimatedliquidation value of such long-lived assets, and provides for impairment ifsuch undiscounted cash flows are insufficient to recover the carrying amount ofthe long-lived asset.  Valuation of realestate assets is considered to be critical because the evaluation of impairmentand the determination of fair values involve management’s assumptions relatingto future economic events that could materially affect the determination of thefair value, and therefore the carrying value of real estate.

 

*RevenueRecognition*

Certain leases provide fortenant occupancy during periods for which no rent is due or where minimum rentpayments increase during the term of the lease. Rental revenue is recorded for the full term of each lease on astraight-line basis.  Accordingly, theCompany records a receivable from tenants for rents that it expects to collectover the remaining lease term as deferred rents receivable.  When the Company acquires a property, theterm of the existing leases is considered to commence as of the acquisitiondate for the purposes of this calculation. Revenue recognition is considered to be critical because the evaluationof the realizability of such deferred rents receivable involves management’sassumptions relating to such tenant’s viability.

 

*Income Taxes*

The Company operates in amanner intended to enable it to continue to qualify as a REIT under Sections856-860 of the Internal Revenue Code of 1986, as amended. Under those sections,a REIT which distributes at least 90% of its REIT taxable income as a dividendto its shareholders each year and which meets certain other conditions will notbe taxed on that portion of its taxable income which is distributed to itsshareholders. The Company intends to distribute to our shareholders 90% of ourtaxable income. Therefore, no provision for Federal income taxes is required.If the Company fails to distribute the required amount of income to ourshareholders, or fails to meet other REIT requirements, we may fail to qualifyas a REIT and substantial adverse tax consequences may result.

 

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Item 3.           Quantitativeand Qualitative Disclosures About Market Risk

                Our future earnings, cash flows and fair valuesrelevant to financial instruments depend upon prevalent market rates for thosefinancial instruments.  Market risk isthe risk of loss 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, capitalexpenditures, dividends and other cash requirements.  The majority of our outstanding debtobligations have fixed interest rates which limit the risk of fluctuatinginterest rates.  At March 31, 2005, ourinterest rate risk only related to our Secured Facility and our UnsecuredFacility, of which there was $32.9 million and $29.1 million outstanding,respectively.  Based on the amountsoutstanding at March 31, 2005, the annual impact of a 1% change in interestrates would be approximately $619,600. There have been no material changes to our market risk profile sinceDecember 31, 2004.  See “Item 7a.  Quantitative and Qualitative Disclosure aboutMarket Risk” in our 2004 Annual Report on Form 10-K for detailed informationabout the qualitative and quantitative disclosures about our market risk.

 

Item 4.             Controls andProcedures

                The Company carried out an evaluation under thesupervision and with participation of the Company’s management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe Company’s disclosure controls and procedures pursuant to Rule 13a-15 underthe Securities Exchange Act of 1934 as of March 31, 2005.  Based on their evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that disclosure controlsand procedures were effective as of the end of the period covered by thisreport to ensure that information required to be disclosed by the Company inits reports that it files or submits under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commissions rules and forms.  Subsequent to March 31, 2005, there have beenno significant changes in the Company’s internal controls over financialreporting that occurred during the period covered by this report that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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

 

Item 1.           LegalProceedings

No changes.

 

Item 2.         Changes inSecurities and Use of Proceeds

 

*Issuanceof Equity Securities Upon Exercise of Warrants*

During the three monthperiod ended March 31, 2005, the Company issued 1,500 shares of common stockupon exercise of previously issued warrants. The issuance of the shares of common stock was made pursuant to anexemption from registration in accordance with Section 4(2) of the SecuritiesAct based on a representation to us from the entity receiving the shares thatsuch entity was a sophisticated investor who was knowledgeable about ouroperations and financial condition and was able to evaluate the risks andmerits of receipt of the shares.

 

*Purchase of EquitySecurities*

Certain informationregarding purchases made by or on behalf of the Company or any affiliatepurchases (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of1934, as amended) of our common stock during the three months ended March 31,2005, is provided below:

 
| **Period**   | ** ** | **Number of Shares Purchased** | ** ** | **Average Price Paid per Share** | ** ** | **Total Number of Shares Purchased as Part of Publicly Announced Plans (1)** | ** ** | **Maximum Number of Shares That May Yet Be Purchased Under the Plan (2)** | ** ** |
|--------------|------------|--------------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
|         |       |                           |       |                             |       |                                                                         |       |                                                                      |       |
| January 2005 |       | 6,609                          |       | $6.21                            |       | 6,609                                                                        |       | N/A                                                                       |       |

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(1)          On August 11, 2000, the Company’sBoard of Directors approved the adoption of the Dividend Reinvestment Plan (the“Plan”).  Under the Plan, the Company isauthorized to instruct the plan administrator to repurchase shares of itscommon stock from time to time, either directly or through agents, in the openmarket at prices and on terms satisfactory to the Company in order to offsetsome of all such shares issued pursuant to the Plan.  The Company announced the Plan in September2000.  The Plan has no expiration date.

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

 

Item 4.  Submissionof Matters to a Vote of Security Holders

None.

 

Item 6.  Exhibits

                                                31.1   Certifications of Chief Executive Officerpursuant to section 302 of the Sarbanes-Oxley Act of 2002.

                                                31.2   Certification of Chief Financial Officerpursuant to section 302 of the Sarbanes-Oxley Act of 2002

                                                32.1   Certification of Chief Executive Officerpursuant to section 906 of the Sarbanes-Oxley Act of 2002.

                                                32.2   Certification of Chief Financial Officerpursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

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###### SIGNATURES

 

                Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|         | AMERIVEST PROPERTIES INC. |
|--------------|---------------------------|
|         |                      |   |
|         |                      |   |
| May  9, 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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