**SECURITIES AND EXCHANGECOMMISSION**

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

##### ** **

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                                        | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934.**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                              |
| **For the  quarterly period ended March 31, 2006.**                                                                                                                                                                                          |
| ** **                                                                                                                                                                                                                                        |
| **OR**                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                              |
| **o**                                                                                                                                                                                                                                             | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934.** |
| ** **                                                                                                                                                                                                                                        |
| **For the  transition period from                 to                 ** |
|                                                                                                                                                                                                                                              |
| **Commission  file number 1-14462**                                                                                                                                                                                                               |

 

**AMERIVESTPROPERTIES INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act (check one)

 

Largeaccelerated filer o        Accelerated filer ý         Non-accelerated filer o

 

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

 

The number of shares of the registrant’scommon stock outstanding as of April 30, 2006 was 24,128,206.

 

 

----

 

**Table ofContents**

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

 

----

 

**PART I– FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

 

**AMERIVESTPROPERTIES INC.**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                                                                                                            | ** ** | **March 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                            | ** ** | **(unaudited)**          | ** **  | ** **                  | ** ** |
| **ASSETS**                                                                                                                            | ** ** | ** **               | ** **  | ** **                  | ** ** |
| Investment in real estate:                                                                                                            |       |                     |        |                        |       |
| Land                                                                                                                                  |       | $                        | 48,059,765  |                        | $          | 48,059,765 |   |
| Buildings  and improvements                                                                                                           |       | 166,983,570              |        | 166,431,824                 |       |
| Furniture,  fixtures and equipment                                                                                                    |       | 1,303,405                |        | 1,304,879                   |       |
| Tenant  improvements                                                                                                                  |       | 14,567,608               |        | 14,245,047                  |       |
| Tenant  leasing commissions                                                                                                           |       | 4,023,206                |        | 3,479,965                   |       |
| Intangible  assets                                                                                                                    |       | 13,342,198               |        | 13,371,477                  |       |
| Real estate  assets – held-for-sale, net                                                                                         |       | —                   |        | 46,930,658                  |       |
| Less:  accumulated depreciation and amortization                                                                                      |       | (26,890,948              | )           | (24,220,447                 | )          |
| Net  investment in real estate                                                                                                        |       | 221,388,804              |        | 269,603,168                 |       |
| Cash and cash equivalents                                                                                                             |       | 2,397,403                |        | 988,420                     |       |
| Escrow deposits                                                                                                                       |       | 4,021,609                |        | 4,920,968                   |       |
| Accounts receivable, net                                                                                                              |       | 743,376                  |        | 1,310,627                   |       |
| Deferred rents receivable                                                                                                             |       | 3,728,854                |        | 4,511,512                   |       |
| Deferred financing costs, net                                                                                                         |       | 1,199,848                |        | 1,421,375                   |       |
| Prepaid expenses and other assets                                                                                                     |       | 717,374                  |        | 923,928                     |       |
| Other assets – held-for-sale                                                                                                     |       | —                   |        | 229,792                     |       |
| Total assets                                                                                                                          |       | $                        | 234,197,268 |                        | $          | 283,909,790 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                        | ** ** | ** **               | ** **  | ** **                  | ** ** |
| Liabilities:                                                                                                                          |       |                     |        |                        |       |
| Secured  mortgage loans and notes payable                                                                                             |       | $                        | 127,068,220 |                        | $          | 127,673,784 |   |
| Unsecured  line of credit                                                                                                             |       | —                   |        | 29,897,129                  |       |
| Secured  mortgage loans – held-for-sale                                                                                          |       | —                   |        | 28,232,661                  |       |
| Accounts  payable and accrued expenses                                                                                                |       | 4,905,071                |        | 6,917,224                   |       |
| Accrued real  estate taxes                                                                                                            |       | 2,405,038                |        | 4,195,875                   |       |
| Prepaid  rents, deferred revenue and security deposits                                                                                |       | 2,828,305                |        | 3,273,861                   |       |
| Dividends  payable                                                                                                                    |       | —                   |        | 302,208                     |       |
| Total  liabilities                                                                                                                    |       | 137,206,634              |        | 200,492,742                 |       |
|                                                                                                                                  |       |                     |        |                        |       |
| Stockholders’ 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:  24,128,206 and 24,121,306 shares, respectively |       | 24,128                   |        | 24,121                      |       |
| Capital in  excess of par value                                                                                                       |       | 133,262,065              |        | 133,231,147                 |       |
| Other  comprehensive income                                                                                                           |       | 9,290                    |        | —                      |       |
| Distributions  in excess of accumulated earnings                                                                                      |       | (36,304,849              | )           | (49,838,220                 | )          |
| Total  stockholders’ equity                                                                                                      |       | 96,990,634               |        | 83,417,048                  |       |
| Total  liabilities and stockholders’ equity                                                                                      |       | $                        | 234,197,268 |                        | $          | 283,909,790 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

1

----

 

**AMERIVEST PROPERTIES INC.**

 

**Condensed Consolidated Statements of Operations**

**(unaudited)**

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Real Estate  Operating Revenue:                     |       |                                   |       |   |   |
| Rental revenues                                     |       | $                                      | 8,892,599  |   | $ | 8,722,072 |   |
|                                                |       |                                   |       |   |   |
| Real Estate Operating Expenses:                     |       |                                   |       |   |   |
| Property  operating expenses -                      |       |                                   |       |   |   |
| Operating  expenses                                 |       | 2,508,683                              |       | 2,185,835 |   |
| Real estate  taxes                                  |       | 1,193,880                              |       | 1,270,456 |   |
| General and  administrative expenses                |       | 1,336,248                              |       | 1,246,442 |   |
| Interest  expense                                   |       | 2,174,836                              |       | 2,842,027 |   |
| Depreciation  and amortization expense              |       | 3,161,176                              |       | 3,194,483 |   |
| Strategic  alternative expenses                     |       | 126,969                                |       | 69,371 |   |
| Total  operating expense                            |       | 10,501,792                             |       | 10,808,614 |   |
|                                                |       |                                   |       |   |   |
| Loss from continuing operations                     |       | (1,609,193                             | )          | (2,086,542 | ) |
|                                                |       |                                   |       |   |   |
| Other Income:                                       |       |                                   |       |   |   |
| Interest  income and other                          |       | 95,966                                 |       | 10,739 |   |
| Total other  income                                 |       | 95,966                                 |       | 10,739 |   |
|                                                |       |                                   |       |   |   |
| Loss before discontinued operations                 |       | (1,513,227                             | )          | (2,075,803 | ) |
|                                                |       |                                   |       |   |   |
| Net earnings/(loss) from discontinued  operations   |       | 15,046,598                             |       | (508,217 | ) |
|                                                |       |                                   |       |   |   |
| Net earnings/(loss)                                 |       | $                                      | 13,533,371 |   | $ | (2,584,020 | ) |
|                                                |       |                                   |       |   |   |
| Net earnings/(loss) per Share-Basic and  Diluted:   |       |                                   |       |   |   |
| Net  earnings/(loss) before discontinued operations |       | $                                      | (0.06      | ) | $ | (0.09 | ) |
| Discontinued  operations, net                       |       |                                   | 0.62       |   | $ | (0.02 | ) |
| Net  earnings/(loss)                                |       | $                                      | 0.56       |   | $ | (0.11 | ) |
|                                                |       |                                   |       |   |   |
| Weighted Average Common Shares Outstanding:         |       |                                   |       |   |   |
| Basic                                               |       | 24,122,426                             |       | 24,011,672 |   |
| Diluted                                             |       | 24,127,393                             |       | 24,011,672 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

2

----

 

**AMERIVESTPROPERTIES INC.**

 

**CondensedConsolidated Statement of Stockholders’ Equity**

**andComprehensive Income**

 

**ThreeMonths Ended March 31, 2006**

**(unaudited)**

 
| ** **                                         | ** ** | **Common Stock** | ** ** | **Additional  Paid in  Capital** | ** ** | **Other  Comprehensive  Income** | ** ** | **Distributions  in Excess of  Net Earnings** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **Shares**       | ** ** | **Amount**                       | ** ** | ** **                       | ** ** | ** **                                    | ** ** |
| Balance at December 31,  2005                 |       | 24,121,306       |       | $                                | 24,121     |                             | $          | 133,231,147                                   |       | $          | —     |   | $ | (49,838,220 | ) | $ | 83,417,048 |   |
|                                               |       |             |       |                             |       |                             |       |                                          |       |       |       |   |   |
| Comprehensive  income:                             |       |             |       |                             |       |                             |       |                                          |       |       |       |   |   |
| Net earnings                                       |       | —           |       | —                           |       | —                           |       | —                                        |       | 13,533,371 |       | 13,533,371 |   |
| Change in  fair value of marketable securities     |       | —           |       | —                           |       | —                           |       | 9,290                                         |       | —     |       | 9,290 |   |
| Comprehensive  income attributable to common stock |       |             |       |                             |       |                             |       |                                          |       |       |       | 13,542,661 |   |
|                                               |       |             |       |                             |       |                             |       |                                          |       |       |       |   |   |
| Equity-based  compensation                         |       | 6,900            |       | 7                                |       | 30,918                           |       | —                                        |       | —     |       | 30,925 |   |
| Balance at March 31,  2006                    |       | 24,128,206       |       | $                                | 24,128     |                             | $          | 133,262,065                                   |       | $          | 9,290      |   | $ | (36,304,849 | ) | $ | 96,990,634 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

3

----

 

**AMERIVESTPROPERTIES INC.**

 

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Cash Flows from Operating Activities:                                                        |       |                                  |       |   |   |
| Net  earnings/(loss)                                                                         |       | $                                     | 13,533,371 |   | $ | (2,584,020 | ) |
| Adjustments  to reconcile net earnings/(loss) to net cash provided by operating  activities- |       |                                  |       |   |   |
| Depreciation  and amortization expense                                                       |       | 3,190,455                             |       | 4,867,056 |   |
| Loss/(gain)  on sale of real estate, net                                                     |       | (15,327,481                           | )          | 21,804 |   |
| Amortization  of deferred financing costs                                                    |       | 101,451                               |       | 290,065 |   |
| Write-off of  unamortized deferred financing costs                                           |       | 301,463                               |       | 215,993 |   |
| Minority  interest                                                                           |       | —                                |       | (88,082 | ) |
| Equity-based  compensation                                                                   |       | 30,925                                |       | 70,590 |   |
| Changes in  assets and liabilities-                                                          |       |                                  |       |   |   |
| Accounts  receivable                                                                         |       | 567,251                               |       | (26,508 | ) |
| Deferred  rent receivable                                                                    |       | (73,496                               | )          | (455,875 | ) |
| Prepaid  expenses and other assets                                                           |       | 216,051                               |       | (152,407 | ) |
| Accounts  payable and accrued expenses                                                       |       | (1,446,179                            | )          | (632,611 | ) |
| Other  accrued liabilities                                                                   |       | (1,678,830                            | )          | (686,640 | ) |
| Net cash flows provided by/(used in) operating activities                                    |       | (585,019                              | )          | 839,365 |   |
|                                                                                         |       |                                  |       |   |   |
| Cash Flows from Investing  Activities:                                                       |       |                                  |       |   |   |
| Capital  expenditures                                                                        |       | (170,917                              | )          | (711,742 | ) |
| Tenant  improvements                                                                         |       | (927,399                              | )          | (1,122,169 | ) |
| Leasing  commissions                                                                         |       | (824,209                              | )          | (435,175 | ) |
| Proceeds  from sales, net of closing costs                                                   |       | 61,704,117                            |       | — |   |
| Cash paid to  complete deed-in-lieu transaction                                              |       | —                                |       | (114,600 | ) |
| Legal  settlement proceeds                                                                   |       | —                                |       | 450,000 |   |
| Net cash flows provided by /(used in) investing activities                                   |       | 59,781,592                            |       | (1,933,686 | ) |
|                                                                                         |       |                                  |       |   |   |
| Cash Flows from Financing  Activities:                                                       |       |                                  |       |   |   |
| Additions to  mortgage loans and lines of credit                                             |       | —                                |       | 5,203,233 |   |
| Payments of  mortgage loans, lines of credit and notes payable                               |       | (58,073,709                           | )          | (1,000,000 | ) |
| Regularly  scheduled principal payments                                                      |       | (661,645                              | )          | (781,142 | ) |
| Payment of  deferred financing costs                                                         |       | (181,387                              | )          | (236,608 | ) |
| Net proceeds  from exercising of options and warrants                                        |       | —                                |       | 7,501 |   |
| Net change  in escrow deposits                                                               |       | 1,129,151                             |       | (94,072 | ) |
| Dividends  paid                                                                              |       | —                                |       | (3,075,074 | ) |
| Net cash flows provided by/(used in) financing activities                                    |       | (57,787,590                           | )          | 23,838 |   |
|                                                                                         |       |                                  |       |   |   |
| Net change in cash and cash equivalents                                                      |       | 1,408,983                             |       | (1,070,483 | ) |
| Cash and cash equivalents, beginning of  period                                              |       | 988,420                               |       | 1,859,660 |   |
| Cash and cash equivalents, end of period                                                     |       | $                                     | 2,397,403  |   | $ | 789,177 |   |
|                                                                                         |       |                                  |       |   |   |
| Supplemental Disclosure of Cash  Flow Information:                                           |       |                                  |       |   |   |
| Cash paid  for interest                                                                      |       | $                                     | 2,532,518  |   | $ | 3,611,511 |   |
|                                                                                         |       |                                  |       |   |   |
| Supplemental Disclosure of  Non-Cash Investing and Financing Activities:                     |       |                                  |       |   |   |
| Basis of  real estate involved in deed-in-lieu transaction                                   |       | $                                     | —     |   | $ | 5,160,022 |   |
| Debt  extinguishment as part of deed-in-lieu transaction                                |       | $                                     | —     |   | $ | 5,565,859 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

4

----

 

**AMERIVEST PROPERTIES INC.**

 

**Notes toCondensed Consolidated Financial Statements**

**March 31,2006**

**(unaudited)**

 

1 – Organization

 

AmeriVest Properties Inc. (the Company) is a realestate investment trust (REIT) incorporated under the laws of the State ofMaryland. The Company primarily invests in and operates commercial officebuildings in selective markets and leases the commercial office buildings tosmall and medium size tenants. At March 31, 2006, the Company owned 12office properties located in metropolitan Denver, Dallas and Phoenix.

 

On February 9, 2006, we announced thatour Board of Directors approved a plan of liquidation for the Company. The Planis subject to approval by the Company’s stockholders holding a majority of theCompany’s outstanding shares of common stock at the Annual Meeting ofStockholders on May 24, 2006. Under the Plan, the Company intends to sellits assets on an orderly basis, to pay or provide for its liabilities, and todistribute its remaining cash to its stockholders. The Company currentlyestimates that liquidating distributions will be paid over a period of between6 months and 24 months and that the stockholders could receive between $4.20and $4.80 per share in total distributions over the liquidation period. Thisestimated distribution range is based on numerous assumptions, notablyincluding the estimated sale prices of assets for which no definitive saleagreements or letters of intent are in place. Although the Company’s managementbelieves its assumptions are reasonable, the assumptions may prove to beinaccurate and the ultimate amount of liquidating distributions to stockholdersmay be reduced or delayed.

 

2 – Interim Financial Statements

 

The unaudited consolidated financialstatements included herein were prepared from the records of the Company inaccordance with U.S. generally accepted accounting principles and reflect alladjustments which are, in the opinion of management, necessary to provide a fairstatement of the results of operations and financial position for the interimperiods. Such financial statements generally conform to the presentationreflected in the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 2005. The consolidatedresults of operations for the three months ended March 31, 2006 are notnecessarily indicative of the results that may be expected for the yearending December 31, 2006. 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, 2005.

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

Certain prior period balances have beenreclassified to conform to current period presentation.

 

5

----

 

3 – New Accounting Pronouncements

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) SFAS No. 123R, *“Share-BasedPayment”.*This Statement is a revision of SFAS No. 123, *“Accounting for Stock-Based Compensation”,* and supersedesAPB No. 25, *“Accounting for Stock Issued to Employees”.*TheStatement requires companies to recognize in the income statement thegrant-date fair value of stock options and other equity based compensationissued to employees. This Statement was effective as of the beginning of thefirst interim or annual period that commenced after January 1, 2006. Theadoption of SFAS 123R did not have a material impact on our financialposition, net earnings or cash flows.

 

4 – Share-Based Compensation

 

Prior to January 1, 2006, we accountedfor our stock options using the intrinsic value method of accounting providedunder Accounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* (“APB 25”) and relatedinterpretations, as permitted by Financial Accounting Standard Board Statementof Financial Accounting Standards No. 123, *“Accountingfor Share-based Compensation”* (“SFAS 123”). Applying the intrinsicvalue method of accounting for our stock options, we did not record share-basedcompensation in our net earnings because the exercise price of our optionsequaled the market price of the underlying stock on the date of the grant. Accordingly,share-based compensation for our options was included as a proforma disclosurein the financial statement footnotes and continues to be provided as proformadisclosure in the financial statement footnotes for periods prior to January 1,2006.

 

Effective January 1, 2003, the Companyadopted a long-term incentive plan as a means to compensate certain employeesand directors with equity-based compensation. The plan provides for grants inthe form of non-qualified and incentive stock options, stock appreciationrights, bonus stock, stock units, performance shares, performance units,restricted stock and restricted stock units. There were no option grants underthe long-term incentive plan during the three months ended March 31, 2006or year ended December 31, 2005. During 2005, 12,000 units of restrictedstock were granted. We recognize the value of restricted stock as compensationexpense based on the grant date fair value of $4.00 per share recognized overthe one year vesting period. As of March 31, 2006, 9,000 restricted shareshave vested with an additional 3,000 unvested restricted shares outstanding. Weassume that all restricted shares will ultimately be exercised.

 

Effective January 1, 2006, we adoptedthe fair value recognition provisions of SFAS 123R, *“Share-BasedPayment”* (“SFAS 123R”), using the modified-prospective transitionmethod. Under this transition method, the Company recognized compensationexpense for all unvested options as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS123. Compensation expense for any share-based payments granted subsequent to January 1,2006 will be based on the grant date fair value estimated in accordance withthe provisions of SFAS 123R. Results for periods prior to January 1, 2006have not been restated. As a result of the adoption of SFAS 123R, we recognizedapproximately $1,700 of compensation expense during the three months ended March 31,2006. The estimated compensation on the unvested options is approximately$7,000 and will be recognized over a one year period. The Company had electedto be taxed as a REIT under the Internal Revenue Code of 1986, as amended;therefore, we did not recognize a tax impact related to the adoption of SFAS123R.

 

6

----

 

Had compensation cost for the Company’s stockoption plan been determined based on the fair value recognition provisions ofSFAS No. 123, the Company’s net loss and net loss per share for the threemonths ended March 31, 2005 would have been calculated as shown in thefollowing table:

 

| ** **                                                         | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|
|                                                               |       |     |       |
| Net earnings/(loss) – as reported                             |       | $        | (2,584,020 | ) |
| Plus: Recognized equity-based compensation                         |       | 70,590   |       |
| Less: Total equity-based compensation  expense based on fair value |       | (71,488  | )          |
| Net loss – pro forma                                          |       | $        | (2,584,918 | ) |
|                                                               |       |     |       |
| Loss per basic share – as reported                            |       | $        | (0.11      | ) |
| Loss per diluted share – as reported                          |       | $        | (0.11      | ) |
|                                                               |       |     |       |
| Loss per basic share – pro forma                              |       | $        | (0.11      | ) |
| Loss per diluted share – pro forma                            |       | $        | (0.11      | ) |

 

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

 

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

 

Thestatus of outstanding options granted pursuant to the Company’s options plans,as of March 31, 2006, was as follows:

 

| ** **             | ** ** | **Number of  Options  Outstanding** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Range of  Exercise  Prices** | ** ** |
|------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|--------------------------------|------------|
| December 31, 2005 |       | 98,000                              |       | 86,000                              |       | $                                       | 6.34       |                           | $          | 4.75 - 7.10 |   |
| Granted at  fair value |       | —                              |       |                                |       | —                                  |       | —                         |       |
| Exercised              |       | —                              |       |                                |       | —                                  |       | —                         |       |
| Forfeited              |       | (5,000                              | )          |                                |       | $                                       | 6.16       |                           | $          | 6.16 |   |
| Expired                |       | (12,000                             | )          |                                |       | $                                       | 4.75       |                           | $          | 4.75 |   |
| March 31,  2006   |       | 81,000                              |       | 69,000                              |       | $                                       | 6.59       |                           | $          | 5.70 -7.10 |   |

 

Theweighted-average contractual life of options outstanding at March 31, 2006was approximately 2 years.

 

5 – Dispositions

 

On January 23, 2006, the Company sold Financial Plaza,a 310,838 square foot office property located in Phoenix, for $55.0 million toa publicly traded REIT, recording a net gain on the sale of approximately $15.3million in the first quarter of 2006. The net cash proceeds of approximately$53 million were used to repay an outstanding first mortgage balance ofapproximately $23 million and approximately $30 million of indebtedness underthe Company’s Unsecured Credit Facility.

 

7

----

 

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

 

6 – Discontinued Operations

 

In accordance with SFAS No. 144,*“Accounting for Impairment of Long-Lived Assets”*,the operating results of properties sold during the period or designated asheld-for-sale and any related impairment and gain/loss on the disposition areincluded in discontinued operations for the three months ended March 31,2006 and 2005.

 

During the three monthsended March 31, 2006, the Company completed the disposition of FinancialPlaza and Keystone Office Park. The Company wrote-off unamortized deferredfinancing costs in connection with the dispositions of $301,463 and incurredprepayment penalties of $203,540. The Company recognized net gains ofapproximately $15.3 million.

 

During the twelve monthsended December 31, 2005, the Company completed the disposition of PanoramaFalls, AmeriVest Plaza at Inverness and Chateau Plaza and completed aDeed-In-Lieu Agreement to return 13 non-core Texas State Buildings to thelender. During the three months ended March 31, 2005, the Companywrote-off unamortized deferred financing costs of approximately $215,993, andrecognized a loss of approximately $22,000 in connection with the Texas StateBuildings dispositions, both of which are reflected in discontinued operationsduring the three months ended March 31, 2005. The following is a summaryof the operating results of these properties included in discontinuedoperations:

 

| ** **                                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Rental revenue                                                                                     |       | $                                      | 540,283    |   | $ | 4,180,505 |   |
|                                                                                               |       |                                   |       |   |   |
| Property operating expenses -                                                                      |       |                                   |       |   |   |
| Operating  expenses                                                                                |       | (133,276                               | )          | (1,244,810 | ) |
| Real estate  taxes                                                                                 |       | (59,275                                | )          | (594,372 | ) |
| Interest expense                                                                                   |       | (123,612                               | )          | (1,056,536 | ) |
| Deferred  financing costs and prepayment penalties associated with the disposition of  real estate |       | (505,003                               | )          | (215,993 | ) |
| Depreciation and amortization expense                                                              |       | —                                 |       | (1,643,289 | ) |
| Total  expense                                                                                     |       | (821,166                               | )          | (4,755,000 | ) |
|                                                                                               |       |                                   |       |   |   |
| Minority interest                                                                                  |       | —                                 |       | 88,082 |   |
|                                                                                               |       |                                   |       |   |   |
| Gain/(loss) on sale                                                                                |       | 15,327,481                             |       | (21,804 | ) |
|                                                                                               |       |                                   |       |   |   |
| Net earnings/(loss) from discontinued  operations                                                  |       | $                                      | 15,046,598 |   | $ | (508,217 | ) |

 

8

----

 

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

 

TheCompany finances its properties with mortgage loans and other debt instruments,such as lines of credit. The following is a summary of the Company’soutstanding mortgage loans, notes payable and lines of credit, classified byinterest type (fixed or variable) and in order of maturity at March 31,2006 and December 31, 2005:

 
| ** **                                                               | ** **   | ** **                                           | ** **   | ** **         | ** **   | **March 31, 2006** | ** **   | **December 31, 2005** | ** **   |
|--------------------------------------------------------------------------|--------------|------------------------------------------------------|--------------|--------------------|--------------|-------------------------|--------------|----------------------------|--------------|
| **Lender**                                                               | ** **   | **Mortgaged Property**                               | ** **   | **Maturity  Date** | ** **   | **Principal  Balance**  | ** **   | **Interest  Rate(1)**      | ** **   | **Principal  Balance** | ** ** | **Interest  Rate(1)** | ** ** |
| ***Fixed Rate***                                                         | *** *** | *** ***                                         | *** *** | *** ***       | *** *** | *** ***            | *** *** | *** ***               | *** *** | *** *** | *** *** | *** *** | *** *** |
| GEMSA                                                                    |         | Hampton Court                                        |         | 11/1/2007          |         | $                       | 7,900,000    |                       | 5.48         | % | $ | 7,900,000 |   | 5.48 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Greenwich Capital Financial Products                                     |         | Parkway Centre II Centerra Southwest Gas Building    |         | 10/1/2008          |         | 37,086,330              |         | 5.13                       | %            | 37,306,859 |   | 5.13 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Metropolitan Life Insurance Company                                      |         | Parkway Centre III                                   |         | 9/10/2009          |         | 14,726,201              |         | 4.47                       | %            | 14,813,833 |   | 4.47 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Southern Farm Bureau Life Insurance Company                              |         | Scottsdale Norte                                     |         | 4/1/2011           |         | 6,490,918               |         | 7.90                       | %            | 6,507,070 |   | 7.90 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| J.P. Morgan Chase                                                        |         | Hackberry View – 1st                            |         | 9/1/2012           |         | 11,249,032              |         | 6.57                       | %            | 11,287,282 |   | 6.57 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| J.P. Morgan Chase                                                        |         | Hackberry View – 2nd (2)                        |         | 9/1/2012           |         | 930,004                 |         | 8.00                       | %            | 937,796 |   | 8.00 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Teachers Insurance and Annuity Association of America                    |         | Sheridan Center Arrowhead Fountains Kellogg Building |         | 1/1/2013           |         | 28,231,907              |         | 7.40                       | %            | 28,360,682 |   | 7.40 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Allstate Life Insurance Company                                          |         | Camelback – 1st                                 |         | 9/5/2014           |         | 15,554,695              |         | 5.82                       | %            | 15,631,631 |   | 5.82 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Allstate Life Insurance Company                                          |         | Camelback – 2nd                                 |         | 9/5/2014           |         | 4,860,842               |         | 5.82                       | %            | 4,884,884 |   | 5.82 | % |
| Subtotal                                                                 |         |                                                 |         |               |         | 127,029,929             |         | 5.98                       | %            | 127,630,037 |   | 5.98 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| ***Variable Rate***                                                      | *** *** | *** ***                                         | *** *** | *** ***       | *** *** | *** ***            | *** *** | *** ***               | *** *** | *** *** | *** *** | *** *** | *** *** |
| KeyBank National Association – $10 million Secured  Credit Facility |         | Greenhill Park                                       |         | 12/28/06           |         | —                  |         | —                     |         | — |   | — |   |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| KeyBank National Association – Unsecured Credit  Facility           |         | Unsecured                                            |         | n/a                |         | —                  |         | —                     |         | 29,897,129 |   | 6.91 | % |
| Subtotal                                                                 |         |                                                 |         |               |         | —                  |         | —                     |         | 29,897,129 |   | 6.91 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| ***Other Notes Payable***                                                | *** *** | *** ***                                         | *** *** | *** ***       | *** *** | *** ***            | *** *** | *** ***               | *** *** | *** *** | *** *** | *** *** | *** *** |
| Lease Capital Corporation                                                |         | Phone system                                         |         | 10/31/2007         |         | 38,291                  |         | 11.11                      | %            | 43,747 |   | 11.11 | % |
| Subtotal, excluding held  for sale properties                            |         |                                                 |         |               |         | 127,068,220             |         | 5.98                       | %            | 157,570,913 |   | 6.16 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| ***Held-for-Sale Portfolio***                                            |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Allstate Life Insurance Company                                          |         | Financial Plaza                                      |         | (3                 | )            | —                  |         | —                     |         | 23,650,188 |   | 5.25 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Security Life of Denver Insurance Company                                |         | Keystone Office Park – 1st                      |         | (3                 | )            | —                  |         | —                     |         | 4,119,506 |   | 8.00 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Security Life of Denver Insurance Company                                |         | Keystone Office Park – 2nd                      |         | (3                 | )            | —                  |         | —                     |         | 462,967 |   | 8.63 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Subtotal, held-for-sale properties                                       |         |                                                 |         |               |         | —                  |         | —                     |         | 28,232,661 |   | 5.71 | % |
|                                                                     |         |                                                 |         |               |         |                    |         |                       |         |   |   |   |   |
| Total                                                                    |         |                                                 |         |               |         | $                       | 127,068,220  |                       | 5.98         | % | $ | 185,803,574 |   | 6.09 | % |

 

----

(1)   Interest only,does not include amortization of deferred financing costs or any fees.

(2)   The amountrecorded reflects a net present value calculation based on a fair value rate of8%. The actual loan balance assumed was approximately $698,000 at an interestrate of 15%.

(3)   Property wassold in January 2006.

 

9

----

 

Thefollowing table details the scheduled maturities of debt outstanding at March 31,2006:

 

| 2006       |   | $          | 1,796,689   |   |
|------------|--------|------------|-------------|--------|
| 2007       |   | 9,858,090  |        |
| 2008       |   | 36,886,592 |        |
| 2009       |   | 15,246,244 |        |
| 2010       |   | 1,537,734  |        |
| Thereafter |   | 61,742,871 |        |
| Total      |   | $          | 127,068,220 |   |

 

Thechange in debt during the three months ended March 31, 2006 consisted ofthe following:

 

| ** **                                       | ** ** | **2006**    | ** **  |
|--------------------------------------------------|------------|-------------|-------------|
| Balance at January 1                        |       | $           | 185,803,574 |   |
| Additions                                        |       | —      |        |
| Repayments,  including repayments at disposition |       | (58,073,709 | )           |
| Scheduled  principal payments                    |       | (661,645    | )           |
| Balance at March 31                         |       | $           | 127,068,220 |   |

 

*Secured Line of Credit*

 

On January 23, 2006, the Companycompleted a loan agreement with its primary bank group which amends itsunsecured revolving credit agreement and reinstates a revolving credit facilityof up to $10 million to be used for working capital and other limited corporatepurposes. The revolver is secured by the Company’s Greenhill Park property andmatures December 28, 2006. The amendment also modifies certain covenantrequirements and collateral provisions and requires the Company to extend theemployment agreement with its Chief Executive Officer through the maturity ofthe loan. This facility has an interest rate of LIBOR plus 250 basis points.There were no borrowings on this facility during the three months ended March 31,2006.

 

*Other*

 

Our debt instruments generally contain certain covenants common to thetype of facility or borrowing, including financial covenants establishingminimum debt service coverage ratios and maximum leverage ratios. We were incompliance with all financial covenants pertaining to our debt instrumentsduring the three months ended March 31, 2006.

 

8 – Per ShareInformation

 

For the three months ended March 31,2006, the only adjustment necessary to the basic weighted average common sharesoutstanding to arrive at the diluted average common shares was theweighted-average effect of the 3,000 restricted shares issued during thequarter and 3,000 unvested restricted shares. The outstanding options wereexcluded from the diluted weighted-average shares due to their anti-dilutiveeffect as the option exercise price exceeds the stock fair value and wouldresult in a reduction to the number of shares outstanding utilizing thetreasury stock method. There are no adjustments necessary for the three monthsended March 31, 2005 as the Company recognized a net loss and the impactwould be anti-dilutive.

 

10

----

 

9 – Other Comprehensive Income

 

In May 2003, the Company filed abankruptcy claim of $478,700 against UAL Corporation, a former tenant, relatedto unpaid rent. During the three months ended March 31, 2006, the Companyreceived 2,084 shares of UAL common stock as payment for the claim. The shareswere accounted for utilizing the guidance in SFAS 115, *“Accountingfor Certain Investments in Debt and Equity Securities,”* and aredeemed as available-for-sale. At the time of receipt, the value of the shareswas approximately $73,924, which is included in “Other income”. At March 31,2006, the value of the shares, based on the closing price on that date was$83,214. The $9,290 increase in the fair value was recorded to “OtherComprehensive Income” at March 31, 2006.

 

10 – Subsequent Events

 

Under the AmeriVest 401(k) plan (“Plan”),withdrawing plan participants are entitled to cash equal to the value of theiraccounts, including the vested shares of AmeriVest stock in their accounts. In February andMarch 2006, withdrawing participant requests for distributions from thePlan exceeded the available cash in the Plan. Based on the advice of the Planconsultant, the Plan sold the vested 18,240 shares of AmeriVest stockattributable to the withdrawing plan participants, at a price of $4.41 pershare, to fulfill the cash requirements of the plan participants seekingdistributions in March 2006. Inadvertently, an additional 22,040 shares ofAmeriVest stock were concurrently sold at the same average price, representingthe remaining balance of the shares in the Plan. On April 4, 2006, thePlan acquired 22,040 shares, at an average price per share of $4.45 to offsetthe inadvertent sale. Commissions and any differences between the sale andrepurchase price of the shares will be paid with Plan forfeitures, to theextent permitted under the Plan. Any excess commissions will be paid by theCompany.

 

11

----

 

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

 

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

 

Forward-Looking Statements

 

Certain statements in this Form 10-Qthat are not historical facts are “forward-looking statements” as that term isdefined under the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are based on the Company’s current expectations,beliefs, assumptions, estimates and projections about the industry and marketsin which the Company operates. Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates” and variations of such words andsimilar expressions are intended to identify such forward-looking statements. Informationconcerning expected investment balances, expected funding sources, plannedinvestments, forecasted dates and revenue and expense growth assumptions areexamples of forward-looking statements. These statements are not guarantees offuture performance and involve certain risks, uncertainties and assumptions,which are difficult to predict and many of which are beyond the Company’scontrol. Therefore, actual outcomes and results may differ materially fromwhat is expressed, forecasted or implied in such forward-looking statements. TheCompany undertakes no obligation to update publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise,except as required by applicable law.

 

The Company’s operating results dependprimarily on income from its properties, which are substantially influenced bysupply and demand for such properties, operating expense levels, property leveloperations and the pace and price at which the Company can develop or disposeof such properties. Capital and credit market conditions, which affect theCompany’s cost of capital, also influence operating results. See “Item 1.Description of Business” in the Company’s Annual Report on Form 10-K forthe period ending December 31, 2005 for a more complete discussion of riskfactors that could impact the Company’s future financial performance.

 

Overview

 

As used herein, “we”, “us”, “our” and “theCompany” refer to AmeriVest Properties Inc., a Maryland corporation. Wewere incorporated in the State of Maryland in 1999. We are a Real EstateInvestment Trust (“REIT”) investing in, operating and leasing commercial officebuildings primarily to small and medium size tenants. At March 31, 2006,we owned 12 properties, which included an aggregate of approximately 1,738,000rentable square feet located in metropolitan Denver, Dallas and Phoenix. At March 31,2005, we owned 17 properties, which included an aggregate of approximately2,508,000 rentable square feet.

 

We have elected to be taxed as a REIT forfederal income tax purposes and generally will not be subject to federal incometax if we distribute at least 90% of our taxable income and comply with anumber of organizational and operational requirements.

 

12

----

 

Results Of Operations

 

*Comparison of the three months ended March 31,2006 to March 31, 2005:*

 
| ** **                                        | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate operating revenue:                    |       |       |       |       |       |       |       |
| Rental  revenue                                   |       | $          | 8,892,599  |       | $          | 8,722,072  |       | $ | 170,527 |   |
|                                              |       |       |       |       |       |       |       |
| Real estate  operating expenses:                  |       |       |       |       |       |       |       |
| Property  operating expenses-                     |       |       |       |       |       |       |       |
| Operating  expenses                               |       | 2,508,683  |       | 2,185,835  |       | 322,848    |       |
| Real estate  taxes                                |       | 1,193,880  |       | 1,270,456  |       | (76,576    | )          |
| General and  administrative expenses              |       | 1,336,248  |       | 1,246,442  |       | 89,806     |       |
| Interest  expense                                 |       | 2,174,836  |       | 2,842,027  |       | (667,191   | )          |
| Depreciation  and amortization expense            |       | 3,161,176  |       | 3,194,483  |       | (33,307    | )          |
| Strategic  alternatives expenses                  |       | 126,969    |       | 69,371     |       | 57,598     |       |
| Total  operating expense                          |       | 10,501,792 |       | 10,808,614 |       | (306,822   | )          |
|                                              |       |       |       |       |       |       |       |
| Loss from continuing operations                   |       | (1,609,193 | )          | (2,086,542 | )          | 477,349    |       |
|                                              |       |       |       |       |       |       |       |
| Other income:                                     |       |       |       |       |       |       |       |
| Interest  income and other                        |       | 95,966     |       | 10,739     |       | 85,227     |       |
| Total other  income/(loss)                        |       | 95,966     |       | 10,739     |       | 85,227     |       |
|                                              |       |       |       |       |       |       |       |
| Loss before discontinued operations               |       | (1,513,227 | )          | (2,075,803 | )          | 562,576    |       |
|                                              |       |       |       |       |       |       |       |
| Net earnings/(loss) from discontinued  operations |       | 15,046,598 |       | (508,217   | )          | 15,554,815 |       |
|                                              |       |       |       |       |       |       |       |
| Net earnings/(loss)                               |       | $          | 13,533,371 |       | $          | (2,584,020 | )          | $ | 16,117,391 |   |

 

*Rental revenue* – Rental revenue increased $170,527, or2.0%, during the first quarter of 2006 as compared to the same period of 2005. Thechange is primarily due to increased tenant operating expense recoveries atHackberry View and Parkway Centre III. This increase was partially offset by aslight decrease in rental revenues at several properties due to a decrease inthe average occupancy and rental rates during the three months ended March 31,2006. For properties that were owned during the entire three months ended March 31,2006 and March 31, 2005, the occupancy was 90.0% at March 31, 2006 ascompared to 91.0% at March 31, 2005 and the average rent was $20.04 versus$20.20 for the same periods, respectively.

 

*Property operating expenses* – Total property operating expenses(operating expenses and real estate taxes) increased approximately $246,000, or7.1%, during the first quarter of 2006 as compared to the same period of 2005.The $323,000 increase in operating expenses for the three months ended March 31,2006 as compared to March 31, 2005 is primarily due to third partymanagement fees and higher electricity expense at several of our Texasproperties. The increase in electricity expense is primarily due to higherrates. The increase in operating expenses is offset by a $77,000 decrease inreal estate taxes primarily due to reductions in assessments of real estatevalues on certain of our properties. The Company has focused, and will continueto focus, on the ongoing management of controllable operating expenses,including aggressively challenging increased real estate tax assessments.

 

13

----

 

*General and administrative expenses* – General and administrative expensesincreased approximately $90,000, or 7.2%, during the first quarter of 2006 ascompared to the same period of 2005. This increase is primarily attributable toseverance costs of $191,875, which includes $180,000 for the former ChiefInvestment Officer, which was recognized during the three months ended March 31,2006. Excluding these severance costs, compensation expense decreasedapproximately $32,000 due to a reduction in headcount as compared to prior year.The Company also recognized approximately $100,000 in additional audit feesduring the three months ended March 31, 2006, as compared to the sameperiod of 2005, primarily due to the earlier completion of the Sarbanes-Oxleycomponent of the audit in 2006. This increase was offset by a decrease inconsulting fees during the three months ended March 31, 2006, ofapproximately $90,000. During the three months ended March 31, 2006, theCompany also recognized a $75,000 decrease in Board compensation due to SpecialCommittee fees recognized in 2005.

 

*Interest expense –* Interest expense decreased approximately$667,000, or 23.5%, during the first quarter of 2006 as compared to the sameperiod of 2005. This change is attributable to the pay off of the Company’sUnsecured and Secured Credit facilities, which were paid down with the proceedsfrom asset sales.

 

*Depreciation and amortization*– Depreciation and amortization expense decreased approximately $33,000, or1.0%, during the first quarter of 2006 as compared to the same period of 2005. Thischange is primarily attributable to the cessation of amortization of intangibleassets at several properties, which were fully amortized during 2005. Thisdecrease is partially offset by the increase in depreciation expense due toadditional capital improvements, tenant improvements and leasing commissionsfor our real estate investments.

 

*Strategic alternatives expenses*—The$127,000 expense recognized during 2006 was primarily for legal costs incurredin connection with the Company’s strategic alternative review and proposed planof liquidation.

 

*Other income* – Thethree months ended March 31, 2006 includes approximately $74,000 for UALcommon shares which were received as payment for a bankruptcy claim. TheCompany anticipates completing the sale of these shares during the secondquarter of 2006.

 

*Discontinued operations—* The results of operations for propertiessold during the period or designated as held-for-sale at the end of the periodare required to be classified as discontinued operations. During the threemonths ended March 31, 2006, the Company sold the Keystone property inIndianapolis and the Financial Plaza property in Mesa, Arizona, both of whichhad previously been classified as held-for-sale under the provisions of SFAS No. 144.Accordingly, we have classified the operating earnings and gain on dispositionfrom these properties within discontinued operations for the three months endedMarch 31, 2006 and 2005. In December 2005, the Company completed thedisposition of AmeriVest Plaza at Inverness in a submarket of Denver and theChateau Plaza property in Dallas, both of which were previously classified asheld-for-sale. In addition, the Company sold its 20% equity interest in itsjoint venture (Panorama Falls) in a submarket of Denver in September 2005and completed a Deed-in-Lieu Agreement to return its 13 non-core TexasState Buildings to the lender in March 2005. The results of operations forthese properties and the loss on disposition for the Texas State Buildings arealso included as discontinued operations for the three months ended March 31,2005.

 

14

----

 

| ** **                                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Rental revenue                                                                                     |       | $                                      | 540,283    |   | $ | 4,180,505 |   |
|                                                                                               |       |                                   |       |   |   |
| Property operating expenses -                                                                      |       |                                   |       |   |   |
| Operating  expenses                                                                                |       | (133,276                               | )          | (1,244,810 | ) |
| Real estate  taxes                                                                                 |       | (59,275                                | )          | (594,372 | ) |
| Interest expense                                                                                   |       | (123,612                               | )          | (1,056,536 | ) |
| Deferred  financing costs and prepayment penalties associated with the disposition of  real estate |       | (505,003                               | )          | (215,993 | ) |
| Depreciation and amortization expense                                                              |       | —                                 |       | (1,643,289 | ) |
| Total  expense                                                                                     |       | (821,166                               | )          | (4,755,000 | ) |
|                                                                                               |       |                                   |       |   |   |
| Minority interest                                                                                  |       | —                                 |       | 88,082 |   |
|                                                                                               |       |                                   |       |   |   |
| Gain/(loss) on sale                                                                                |       | 15,327,481                             |       | (21,804 | ) |
|                                                                                               |       |                                   |       |   |   |
| Net earnings/(loss) from discontinued  operations                                                  |       | $                                      | 15,046,598 |   | $ | (508,217 | ) |

 

Liquidity and Capital Resources

 

Our net cash provided by operating activitiesis primarily dependent upon the occupancy level of our properties, the rentalrates on our leases, the collectibility of rent from our tenants, and the levelof operating and other expenses. Our net cash provided by operating activitieshas been a significant source of liquidity to help fund debt service, capitalimprovements, tenant improvements and leasing costs for operating properties.Due to the Board’s adoption of the Plan of Liquidation, the Company does notintend to acquire any properties during 2006.

 

A material adverse change in our net cashprovided by operating activities may affect our ability to fund the itemslisted above and may affect the financial performance covenants under ournew $10 million credit facility that was signed January 23, 2006. If wefail to meet our financial performance covenants and to reach a satisfactoryresolution with our lenders, our credit facility could become unavailable to usor the interest charged on the credit facility could increase. Any of thesecircumstances could adversely affect our ability to fund working capital andunanticipated cash needs and development costs.

 

Due to strategic assets sales that werecompleted during 2005 and January 2006, the Company’s historic cash flows may notbe representative of future cash flows.

 

*Operating Activities*

 

Net cash flows provided by/(used in)operations decreased approximately $1,424,000 for the three months ended March 31,2006 as compared to the same period in 2005. The decrease is primarily due tochanges in assets and accounts payable, primarily due to the timing ofpayments, and changes to accrued real estate taxes.

 

*Investing Activities*

 

Net cash flows provided by/(used in)investing activities increased approximately $61.7 million for the three monthsended March 31, 2006 as compared to the same period in 2005. This increaseis primarily due to the net sale proceeds received from the sale of theFinancial Plaza and Keystone properties in the first quarter of 2006.

 

15

----

 

*Financing Activities*

 

Net cash flows provided by financing activitiesdecreased approximately $57.8 million for the three months ended March 31,2006 as compared to the same period of 2005. This decrease is primarily due todebt repayments  made with net salesproceeds during the three months ended March 31, 2006. This use of fundswas partially offset by draws on loan escrow accounts. The remainder of thechange is primarily due to the $3.1 million dividend paid in the first quarterof 2005. No dividends were paid in the first quarter of 2006.

 

*Future Sources of Capital*

 

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

 

On January 23, 2006, the Company completed a loan agreement withits primary bank group which amends its unsecured revolving credit agreementand reinstates a revolving credit facility of up to $10 million to be used forworking capital and other limited corporate purposes. The revolver is securedby the Company’s Greenhill Park property and matures December 28, 2006. Theamendment also modifies certain covenant requirements and collateral provisionsand required the Company to extend the employment agreement with its ChiefExecutive Officer through the maturity of the loan. There were no borrowingsoutstanding in this facility on April 30, 2006.

 

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

 

The following table details the contractualobligations at March 31, 2006:

 
| **For the years  ended December 31,** | ** ** | **Scheduled Debt  Maturities** | ** ** | **Interest Payments  on Secured  Mortgage Loans** | ** ** | **Tenant  Improvements,  Capital  Expenditures and  Leasing  Commissions** | ** ** | **Total**    | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------|------------|
| 2006                                       |       | $1,796,689                     |       | $5,939,622                                        |       | $1,896,000                                                                 |       | $9,632,311   |       |
| 2007                                       |       | 9,858,090                      |       | 8,058,070                                         |       | —                                                                     |       | 17,916,160   |       |
| 2008                                       |       | 36,886,592                     |       | 7,102,585                                         |       | —                                                                     |       | 43,989,177   |       |
| 2009                                       |       | 15,246,244                     |       | 5,662,981                                         |       | —                                                                     |       | 20,909,225   |       |
| 2010                                       |       | 1,537,734                      |       | 5,596,329                                         |       | —                                                                     |       | 7,134,063    |       |
| Thereafter                                 |       | 61,742,871                     |       | 24,584,229                                        |       | —                                                                     |       | 86,327,100   |       |
| Total                                      |       | $127,068,220                   |       | $56,943,816                                       |       | $1,896,000                                                                 |       | $185,908,036 |       |

 

*Interest Rate Information*

 

As of March 31, 2006, all of ouroutstanding mortgage debt are fixed rate loans with a weighted-average interestrate of 5.98%.

 

*Debt Covenants*

 

Certain of the Company’s debt instrumentscontain covenants common to that type of facility or borrowing, includingfinancial covenants establishing minimum debt service coverage and maximumleverage ratios. The Company was in compliance with all financial covenantspertaining to its debt instruments during the three months ended March 31,2006.

 

Critical Accounting Policies

 

The discussion and analysis of the Company’sfinancial condition and results of operations are based upon its consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements require management to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities at the date of thefinancial statements. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

16

----

 

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

 

*Investment in Real Estate*

 

Upon acquisition, the purchase price of aproperty is allocated to land, building and improvements and other intangibleassets and associated liabilities as required by SFAS No. 141 “BusinessCombinations.” The allocation to land is based on an estimate of its fair valuebased on all available information including appraisals. The allocation to otherintangible assets represents the value associated with the in-place leases,including leasing commission, legal and other related costs. Also required bySFAS No. 141, is the creation of an intangible asset or liabilityresulting from in-place leases being above or below the market rental rates onthe date of acquisition. This asset or liability is amortized over the life ofthe related in-place leases as an adjustment to revenue.

 

Investment in real estate is stated at cost,unless adjusted for impairment. Depreciation and amortization are computed on astraight-line basis over the estimated useful lives as follows:

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

 

Maintenance and repairs are expensed asincurred and improvements are capitalized. The cost of assets sold or retiredand the related accumulated depreciation and/or amortization are removed fromthe accounts and the resulting gain or loss is reflected in operations in theperiod in which such sale or retirement occurs. Allocating the purchase priceof a property to the different components of investment in real estate,determining whether expenditures meet the criteria for capitalization andassigning depreciable lives is considered to be critical because it requiresmanagement to exercise significant judgment.

 

The Company capitalizes incremental internalproject costs, primarily payroll and payroll related costs, associated withdevelopment, renovation, rehabilitation and tenant improvements if such costsare incremental and identifiable to a specific activity. Capitalized costs areincluded in the investment basis of the real estate assets and are depreciatedover their estimated useful lives.

 

*Valuation of Real Estate Assets*

 

Long-lived assets to be held and used arecarried at cost, unless adjusted for impairment, and evaluated for impairmentwhen events or changes in circumstances indicate such an evaluation iswarranted. We also evaluate assets for potential impairment when we deem themto be held for sale. Valuation of real estate is considered a “criticalaccounting estimate” because the evaluation of impairment and the determinationof fair values involve a number of management assumptions relating to futureeconomic events that could materially affect the determination of the ultimatevalue, and therefore, the carrying amounts of our real estate. Furthermore,decisions regarding when a property should be classified as held for sale underSFAS No. 144, *“Accounting forImpairment or Disposal of Long-Lived Assets,”*requires significantmanagement judgment. There are many phases to the disposition process rangingfrom the initial market research to being under contract with non-refundableearnest money. Deciding when management is committed to selling an asset istherefore highly subjective.

 

When determining if there is an indication ofimpairment, we estimate the asset’s rental revenues less operating expensesover the anticipated holding period on an undiscounted cash flow basis andcompare this amount to its carrying value. Estimating the expected rentalrevenues less operating expenses and holding period requires significantmanagement judgment. If it is determined that there is an indication ofimpairment for assets to be held and used, or if an asset is deemed to be heldfor sale, we then determine the fair value of the asset.

 

17

----

 

The real estate industry uses capitalizationrates as the primary measure of fair value. Specifically, annual rentalrevenues less operating expenses for a property is divided by an estimatedcapitalization rate to determine the fair value of the property. Determiningthe appropriate capitalization rate requires significant judgment and istypically based on many factors including the prevailing rate for the market orsubmarket, as well as the quality and location of the properties. Further,capitalization rates can fluctuate up or down due to a variety of factors inthe overall economy or within local markets. If the actual capitalization ratefor a property is significantly different from our estimated rate, theimpairment evaluation for an individual asset could be materially affected.

 

*Revenue Recognition*

 

Certain leases provide for tenant occupancyduring periods for which no rent is due or where minimum rent payments increaseduring the term of the lease. Rental revenue is recorded for the full term ofeach lease on a straight-line basis. Accordingly, the Company records areceivable from tenants for rents that it expects to collect over the remaininglease term as deferred rents receivable. When the Company acquires a property,the term of the existing leases is considered to commence as of the acquisitiondate for the purposes of this calculation. Revenue recognition is considered tobe critical because the evaluation of the realizability of such deferred rentsreceivable involves management’s assumptions relating to such tenant’sviability.

 

*Income Taxes*

 

The Company operates in a manner intended toenable it to continue to qualify as a REIT under Sections 856-860 of theInternal Revenue Code of 1986, as amended. Under those sections, a REIT whichdistributes at least 90% of its REIT taxable income as a dividend to itsshareholders each year and which meets certain other conditions will not betaxed 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 toqualify as a REIT and substantial adverse tax consequences may result.

 

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

 

Our future earnings, cash flows and fairvalues relevant to financial instruments depend upon prevalent market rates forthose financial instruments. Market risk is the risk of loss from adversechanges in market prices and interest rates. We manage our market risk bymatching projected cash inflows from operating, investing and financingactivities with projected cash outflows to fund debt service, acquisitions,capital expenditures, dividends and other cash requirements. At March 31,2006, all of our outstanding debt obligations have fixed interest rates whichlimit the risk of fluctuating interest rates. See “Item 7a. Quantitative andQualitative Disclosure about Market Risk” in our 2005 Annual Report on Form 10-Kfor detailed information about the qualitative and quantitative disclosuresabout our market risk.

 

**Item 4.****    Controlsand Procedures**

 

The Company carried out an evaluation as of March 31,2006, under the supervision and with participation of the Company’s management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15under the Securities Exchange Act of 1934. Based on their evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that disclosurecontrols and procedures were effective as of the end of the period covered bythis report to ensure that information required to be disclosed by the Companyin its reports that it files or submits under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commissions rules and forms. Subsequentto March 31, 2006, there have been no significant changes in the Company’sinternal controls over financial reporting that occurred during the periodcovered by this report that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

18

----

 

**Part II. Other Information**

 
| Item 1.  | Legal Proceedings                                                                                                                                                                                           |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                        |
|     | No changes.                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                        |
| Item 1A. | Risk Factors                                                                                                                                                                                                |
|     |                                                                                                                                                                                                        |
|     | We have not identified any  material changes from the risk factors as previously disclosed in our Annual  Report Item 1A to Part 1 filed on Form 10-K for the year ended  December 31, 2005. |
|     |                                                                                                                                                                                                        |
| Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                |
|     |                                                                                                                                                                                                        |
|     | None.                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                        |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                                                                                                                                        |
|     |                                                                                                                                                                                                        |
|     | None.                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                        |
| Item 5.  | Other Information                                                                                                                                                                                           |
|     |                                                                                                                                                                                                        |
|     | None.                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                        |
| Item 6.  | Exhibits                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                        |
|     | 31.1         Certifications  of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley  Act of 2002.                                            |
|     | 31.2         Certification  of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley  Act of 2002                                              |
|     | 32.1         Certification  of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley  Act of 2002.                                             |
|     | 32.2         Certification  of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley  Act of 2002                                              |

 

19

----

 

###### SIGNATURES

 

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

 
|         | AMERIVEST PROPERTIES INC. |
|--------------|---------------------------|
|         |                      |
| May 10, 2006 |                      |
|         |                      |
|         | 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) |
|              |                           |  |  |  |

 

20

----