**SECURITIESAND EXCHANGE COMMISSION**

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

 

**FORM10-QSB**

 
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934.**                                                                                                                                                                                                                                                         |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                               |
|       | **For  the quarterly period ended June 30, 2003.**                                                                                                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                               |
|       | **OR**                                                                                                                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                                                               |
| o          | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934.**                                                                                                                                                                                                                                                        |
|       |                                                                                                                                                                                                                                                                                                                                               |
|       | **For  the transition period  from                         to                         ** |
|       |                                                                                                                                                                                                                                                                                                                                               |
|       | **Commission  file number 1-14462**                                                                                                                                                                                                                                                                                                                |

 

 

| **AMERIVEST  PROPERTIES INC.**                                     |
|--------------------------------------------------------------------|
| (Exact name of small business  issuer as specified in its charter) |
|                                                               |   |   |
| **Maryland**                                                       |   | **84-1240264** |
| (State or other  jurisdiction of  incorporation or organization)   |   | (I.R.S. Employer  Identification No.) |
|                                                               |   |   |
| **1780  South Bellaire Street  Suite 100, Denver, Colorado**       |   | **80222** |
| (Address of  principal executive offices)                          |   | (Zip Code) |
|                                                               |   |   |
| **(303)  297-1800**                                                |
| (Registrant’s  telephone number, including area code)         |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý              No o

 

The number of shares of the issuer’s common stockoutstanding as of August 14, 2003 was 17,353,269.

 

Transitional Small Business Disclosure Format (checkone):  Yes o         No ý

 

 

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Table of Contents

 
| Part I         |                                                                                                                  |   |
|----------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                  |   |
| Item  1.       | Consolidated  Financial Statements:                                                                                   |   |
|           | Consolidated Balance Sheets  as of June 30, 2003 and   December 31, 2002 (unaudited)                                  | 3      |
|           | Consolidated Statements  of Operations for the three- and six-month periods  ended June 30, 2003 and 2002 (unaudited) | 4      |
|           | Consolidated  Statement of Stockholders’ Equity for the six-month period   ended June 30, 2003 (unaudited)       | 5      |
|           | Consolidated  Statements of Cash Flows for the six-month periods  ended June 30, 2003 and 2002 (unaudited)            | 6      |
|           | Notes to  Consolidated Financial Statements (unaudited)                                                               | 7      |
|           |                                                                                                                  |   |
| Item  2.       | Management’s  Discussion and Analysis of  Financial Condition and Results of Operations                          | 11     |
|           |                                                                                                                  |   |
| Item 3.        | Controls and Procedures                                                                                               | 17     |
|           |                                                                                                                  |   |
| Part II        |                                                                                                                  |   |
|           |                                                                                                                  |   |
| Item 1.        | Legal Proceedings                                                                                                     | 17     |
|           |                                                                                                                  |   |
| Item  4.  | Submission  of Matters to a Vote of Security Holders                                                                  | 17     |
|           |                                                                                                                  |   |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                                     | 17     |

 

2

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**AMERIVESTPROPERTIES INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(unaudited)**

 
|                                                                                               |   | **June 30,  2003** |        | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------|--------|--------------------|-------------|------------------------|------------|
| ASSETS                                                                                             |   |               |        |                   |       |
| Investment  in real estate-                                                                        |   |               |        |                   |       |
| Land                                                                                               |   | $                  | 22,918,563  |                   | $          | 20,730,999 |   |
| Buildings  and improvements                                                                        |   | 139,515,555        |        | 124,861,852            |       |
| Furniture,  fixtures and equipment                                                                 |   | 573,734            |        | 467,188                |       |
| Tenant improvements                                                                                |   | 3,635,556          |        | 2,969,044              |       |
| Tenant  leasing commissions                                                                        |   | 3,038,516          |        | 2,339,876              |       |
| Less:  accumulated depreciation and amortization                                                   |   | (8,761,430         | )           | (6,383,631             | )          |
| Net  investment in real estate                                                                     |   | 160,920,494        |        | 144,985,328            |       |
|                                                                                               |   |               |        |                   |       |
| Cash  and cash equivalents                                                                         |   | 8,456,888          |        | 2,318,566              |       |
| Escrow  deposits                                                                                   |   | 3,312,773          |        | 2,335,519              |       |
| Investment in unconsolidated affiliate                                                             |   | 1,395,071          |        | 1,390,560              |       |
| Due  from related party                                                                            |   | 3,371,526          |        | 3,257,826              |       |
| Due  from unconsolidated affiliate                                                                 |   | 165,056            |        | 217,578                |       |
| Accounts  receivable                                                                               |   | 292,298            |        | 286,691                |       |
| Deferred  rents receivable                                                                         |   | 970,034            |        | 671,737                |       |
| Deferred  financing costs, net of accumulated amortization of $379,275 and $130,773,  respectively |   | 1,340,972          |        | 1,243,907              |       |
| Prepaid  expenses and other assets                                                                 |   | 992,760            |        | 475,875                |       |
|                                                                                               |   |               |        |                   |       |
| Total  assets                                                                                      |   | $                  | 181,217,872 |                   | $          | 157,183,587 |   |
|                                                                                               |   |               | ** **  |                   | ** ** |
| LIABILITIES                                                                                        |   |               |        |                   |       |
| Mortgage  loans and notes payable                                                                  |   | $                  | 97,891,676  |                   | $          | 106,094,232 |   |
| Accounts payable and accrued expenses                                                              |   | 2,232,470          |        | 2,384,620              |       |
| Accrued  real estate taxes                                                                         |   | 1,667,951          |        | 1,714,594              |       |
| Prepaid  rents, deferred revenue and security deposits                                             |   | 1,681,981          |        | 1,656,507              |       |
| Dividends  payable                                                                                 |   | 2,255,247          |        | 1,437,834              |       |
|                                                                                               |   |               |        |                   |       |
| Total  liabilities                                                                                 |   | 105,729,325        |        | 113,287,787            |       |
|                                                                                               |   |               | ** **  |                   | ** ** |
| STOCKHOLDERS’ EQUITY                                                                          |   |               |        |                   |       |
| Preferred  stock, $.001 par value                                                                  |   |               |        |                   |       |
| Authorized  – 5,000,000 shares                                                                |   |               |        |                   |       |
| Issued  and outstanding – none                                                                |   | —             |        | —                 |       |
| Common  stock, $.001 par value                                                                     |   |               |        |                   |       |
| Authorized  – 75,000,000 shares                                                               |   |               |        |                   |       |
| Issued  and outstanding – 17,348,052 and 11,060,260 shares, respectively                      |   | 17,348             |        | 11,060                 |       |
| Capital  in excess of par value                                                                    |   | 91,294,828         |        | 55,247,483             |       |
| Distributions  in excess of accumulated earnings                                                   |   | (15,823,629        | )           | (11,362,743            | )          |
|                                                                                               |   |               |        |                   |       |
| Total  stockholders’ equity                                                                   |   | 75,488,547         |        | 43,895,800             |       |
|                                                                                               |   |               |        |                   |       |
| Total  liabilities and stockholders’ equity                                                   |   | $                  | 181,217,872 |                   | $          | 157,183,587 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**AMERIVESTPROPERTIES INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                        |   | **For the Three-  Month Periods Ended  June 30,** |       | **For the Six-  Month Periods Ended  June 30,** |   |
|---------------------------------------------|--------|---------------------------------------------------|------------|-------------------------------------------------|--------|
|                                        |   | **2003**                                          |       | **2002**                                        |   | **2003** |   | **2002** |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| REAL  ESTATE OPERATING REVENUE              |   |                                              |       |                                            |   |   |   |   |   |
| Rental  revenue                             |   | $                                                 | 6,947,717  |                                            | $      | 3,528,818 |   | $ | 13,762,245 |   | $ | 7,154,870 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| REAL  ESTATE OPERATING EXPENSES             |   |                                              |       |                                            |   |   |   |   |   |
| Property  operating expenses:               |   |                                              |       |                                            |   |   |   |   |   |
| Operating  expenses                         |   | 1,761,815                                         |       | 887,391                                         |   | 3,397,293 |   | 1,773,486 |   |
| Real  estate taxes                          |   | 783,642                                           |       | 257,799                                         |   | 1,555,403 |   | 624,822 |   |
| Management  fees                            |   | 42,897                                            |       | 31,820                                          |   | 86,374 |   | 59,882 |   |
| General  and administrative expenses        |   | 742,773                                           |       | 379,326                                         |   | 1,579,853 |   | 731,634 |   |
| Impairment  of investment in real estate    |   | 1,465,932                                         |       | —                                          |   | 1,465,932 |   | — |   |
| Interest  expense                           |   | 1,811,907                                         |       | 920,170                                         |   | 3,568,177 |   | 1,818,526 |   |
| Depreciation  and amortization expense      |   | 1,447,426                                         |       | 706,149                                         |   | 2,808,139 |   | 1,391,079 |   |
| Total operating expenses                    |   | 8,056,392                                         |       | 3,182,655                                       |   | 14,461,171 |   | 6,399,429 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| OTHER  INCOME/(LOSS)                        |   |                                              |       |                                            |   |   |   |   |   |
| Interest  income                            |   | 11,936                                            |       | 50,816                                          |   | 17,753 |   | 52,897 |   |
| Equity  in loss of unconsolidated affiliate |   | (13,312                                           | )          | (23,649                                         | )      | (23,914 | ) | (44,046 | ) |
| Total other income/(loss)                   |   | (1,376                                            | )          | 27,167                                          |   | (6,161 | ) | 8,851 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| NET  (LOSS)/INCOME                          |   | $                                                 | (1,110,051 | )                                               | $      | 373,330 |   | $ | (705,087 | ) | $ | 764,292 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| (LOSS)/EARNINGS  PER SHARE                  |   |                                              |       |                                            |   |   |   |   |   |
| Basic                                       |   | $                                                 | (0.09      | )                                               | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.10 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| Diluted                                     |   | $                                                 | (0.09      | )                                               | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.10 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING |   |                                              |       |                                            |   |   |   |   |   |
| Basic                                       |   | 12,806,389                                        |       | 8,688,314                                       |   | 11,958,053 |   | 7,698,139 |   |
|                                        |   |                                              |       |                                            |   |   |   |   |   |
| Diluted                                     |   | 12,806,389                                        |       | 8,891,825                                       |   | 11,958,053 |   | 7,879,376 |   |

 

See accompanyingnotes to consolidated financial statements.

 

4

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**AMERIVESTPROPERTIES INC.**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY******

**FOR THE SIX-MONTH PERIOD ENDED JUNE30, 2003**

**(unaudited)**

 

 
|                                            |   | **Common Stock** |   | **Capital in  Excess of** |   | **Distributions  in Excess of  Accumulated** |   |         |   |
|-------------------------------------------------|--------|------------------|--------|---------------------------|--------|----------------------------------------------|--------|--------------|--------|
|                                            |   | **Shares**       |   | **Amount**                |   | **Par Value**                                |   | **Earnings** |   | **Total** |   |
|                                            |   |             |   |                      |   |                                         |   |         |   |   |   |
| Balance  at December 31, 2002                   |   | 11,060,260       |   | $                         | 11,060 |                                         | $      | 55,247,483   |   | $ | (11,362,743 | ) | $ | 43,895,800 |   |
| Issuance  of common stock:                      |   |             |   |                      |   |                                         |   |         |   |   |   |
| Public  offering, net of offering costs         |   | 5,750,000        |   | 5,750                     |   | 33,320,991                                   |   | —       |   | 33,326,741 |   |
| Warrants  exercised                             |   | 463,000          |   | 463                       |   | 2,314,537                                    |   | —       |   | 2,315,000 |   |
| Stock  options exercised                        |   | 30,000           |   | 30                        |   | 143,016                                      |   | —       |   | 143,046 |   |
| Dividend  Re-Investment Plan (“DRIP”) |   | 38,948           |   | 39                        |   | 232,302                                      |   | —       |   | 232,341 |   |
| Board  of Directors compensation                |   | 3,800            |   | 4                         |   | 24,050                                       |   | —       |   | 24,054 |   |
| Company  401(k) plan common stock match         |   | 2,044            |   | 2                         |   | 12,449                                       |   | —       |   | 12,451 |   |
| Dividends  declared                             |   | —           |   | —                    |   | —                                       |   | (3,755,799   | )      | (3,755,799 | ) |
| Net  loss                                       |   | —           |   | —                    |   | —                                       |   | (705,087     | )      | (705,087 | ) |
| Balance  at June 30, 2003                       |   | 17,348,052       |   | $                         | 17,348 |                                         | $      | 91,294,828   |   | $ | (15,823,629 | ) | $ | 75,488,547 |   |

 

See accompanyingnotes to consolidated financial statements.

 

5

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**AMERIVESTPROPERTIES INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                                       |   | **Six-Month Periods Ended  June 30,** |      |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                                       |   | **2003**                              |      | **2002** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                     |   |                                  |      |   |   |
| Net  (loss)/income                                                                         |   | $                                     | (705,087  | ) | $ | 764,292 |   |
| Adjustments  to reconcile net (loss)/income to net cash provided by  operating activities: |   |                                  |      |   |   |
| Depreciation  and amortization expense                                                     |   | 2,808,139                             |      | 1,391,079 |   |
| Impairment  of investment in real estate                                                   |   | 1,465,932                             |      |   |   |
| Amortization  of deferred financing costs                                                  |   | 248,502                               |      | 81,646 |   |
| Amortization  of warrants                                                                  |   | —                                |      | 9,209 |   |
| Equity  in loss of unconsolidated affiliate                                                |   | 23,914                                |      | 44,046 |   |
| Common  stock issued to the Company’s 401(k) plan                                     |   | 12,451                                |      | — |   |
| Common  stock issued to the Company’s Board of Directors                              |   | 24,054                                |      | — |   |
| Changes  in assets and liabilities:                                                        |   |                                  |      |   |   |
| Accounts  receivable                                                                       |   | (5,607                                | )         | 125,961 |   |
| Deferred  rents receivable                                                                 |   | (298,297                              | )         | (136,765 | ) |
| Prepaid  expenses and other assets                                                         |   | 123,115                               |      | (100,976 | ) |
| Accounts  payable and accrued expenses                                                     |   | 897,850                               |      | (250,281 | ) |
| Other  accrued liabilities                                                                 |   | (21,169                               | )         | (728,103 | ) |
| Net cash flows provided by operating activities                                            |   | 4,573,797                             |      | 1,200,108 |   |
|                                                                                       |   |                                  |      |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                     |   |                                  |      |   |   |
| Acquisitions  and improvements of real estate                                              |   | (19,886,996                           | )         | (1,889,161 | ) |
| Deposits  on real estate acquisitions                                                      |   | (510,000                              | )         | (200,000 | ) |
| Leasing  commissions paid                                                                  |   | (322,239                              | )         | (74,231 | ) |
| Amounts  received from/(paid to) unconsolidated affiliate                                  |   | 52,522                                |      | (377,295 | ) |
| Net cash flows used in investing activities                                                |   | (20,666,713                           | )         | (2,540,687 | ) |
|                                                                                       |   |                                  |      |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                     |   |                                  |      |   |   |
| Additions  to mortgage loans and notes payable                                             |   | 17,000,000                            |      | 2,330,201 |   |
| Payments  on mortgage loans and notes payable                                              |   | (25,344,682                           | )         | (1,554,383 | ) |
| Deposit  for establishment of long-term credit facility                                    |   | (130,000                              | )         | (664,094 | ) |
| Payment  of deferred financing costs                                                       |   | (345,567                              | )         | (13,906 | ) |
| Net  proceeds from common stock offering                                                   |   | 33,326,741                            |      | 22,868,619 |   |
| Net  proceeds from exercising of options and warrants                                      |   | 1,408,046                             |      | 164,780 |   |
| Net  change in escrow deposits                                                             |   | (977,254                              | )         | 25,295 |   |
| Dividends  paid                                                                            |   | (2,706,046                            | )         | (1,518,612 | ) |
| Net cash flows provided by financing activities                                            |   | 22,231,238                            |      | 21,637,900 |   |
|                                                                                       |   |                                  |      |   |   |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                                                 |   | 6,138,322                             |      | 20,297,321 |   |
|                                                                                       |   |                                  |      |   |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            |   | 2,318,566                             |      | 1,119,355 |   |
|                                                                                       |   |                                  |      |   |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                  |   | $                                     | 8,456,888 |   | $ | 21,416,676 |   |
|                                                                                       |   |                                  |      |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                         |   |                                  |      |   |   |
| Cash  paid for interest during the period                                                  |   | $                                     | 3,121,237 |   | $ | 1,710,114 |   |
|                                                                                       |   |                                  |      |   |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                   |   |                                  |      |   |   |
| Stock  issued to the Dividend Re-Investment Plan (“DRIP”)                        |   | $                                     | 232,341   |   | $ | 154,188 |   |

 

See accompanyingnotes to consolidated financial statements.

 

6

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**AMERIVESTPROPERTIES INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE30, 2003**

**(unaudited)**

 

1.  Organization

AmeriVest Properties Inc. (the “Company”) isincorporated under the laws of the State of Maryland and operates as aself-administered and self-managed real estate investment trust (“REIT”).  The Company primarily invests in andoperates commercial office buildings in selective markets and leases thecommercial office buildings to small and medium size tenants.  As of June 30, 2003, the Company owns andoperates, through its wholly-owned subsidiaries, the following properties:

 
| **Property**                   |   | **Location**     |
|--------------------------------|--------|------------------|
| Southwest Gas                  |   | Phoenix, AZ      |
| Chateau Plaza                  |   | Dallas, TX       |
| Centerra                       |   | Denver, CO       |
| Parkway Centre II              |   | Plano, TX        |
| Kellogg Building               |   | Littleton, CO    |
| Arrowhead Fountains            |   | Peoria, AZ       |
| AmeriVest Plaza at  Inverness  |   | Englewood, CO    |
| Sheridan Center                |   | Denver, CO       |
| Keystone Office Park           |   | Indianapolis, IN |
| Panorama Falls (a)             |   | Englewood, CO    |
| Bank of America  Buildings (b) |   | Texas            |
| State of Texas  Buildings (c)  |   | Texas            |

 

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(a)                                  20% of the property is owned by theCompany and 80% of the property is owned by Freemark Abbey Panorama, LLC as atenant in common with the Company.

(b)                                 These four buildings are approximately63% leased to Bank of America.  Thebuildings are located in Clifton, Georgetown, Henderson and Mineral Wells,Texas.

(c)                                  Eleven of these thirteen buildings areleased primarily to various agencies of the State of Texas.  The buildings are located in Lubbock, ElPaso (2), Clint, Temple, Bellville, Columbus, Hempstead, Mission, Arlington,Marshall, Amarillo and Paris, Texas.

 

2.  Interim Financial Statements

The unaudited consolidated financial statementsincluded herein were prepared from the records of the Company in accordancewith accounting principles generally accepted in the United States of Americaand reflect all adjustments which are, in the opinion of management, necessaryto provide a fair statement of the results of operations and financial positionfor the interim periods.  Such financialstatements generally conform to the presentation reflected in the Company’sForm 10-KSB filed with the Securities and Exchange Commission for the yearended December 31, 2002.  Theconsolidated results of operations for the six months ended June 30, 2003 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2003.  Thesefinancial statements and notes should be read together with the financialstatements and notes included in the Company’s Form 10-KSB for the year endedDecember 31, 2002.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Certain prior period balances have been reclassifiedto conform to current period presentation.

 

7

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3.  New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46“Consolidation of Variable Interest Entities.” The Company is required to adopt the interpretation for financialstatements for the fiscal year or interim periods beginning after June 15,2003.  This interpretation clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” and requires the consolidation of results of variable interestentities in which the Company has a majority variable interest.  The Company does not anticipate that theadoption of Interpretation No. 46 will have a material impact on its financialposition, results of operations or cash flows.

 

In April 2003, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 149 “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” The Company is required to adopt this statement for contracts or hedgingrelationships entered into or modified after June 30, 2003.  Its purpose is to provide more consistentapplication and clarification of SFAS No. 133. The Company does not anticipate that the adoption of SFAS No. 149 willhave a material impact on its financial position, results of operations or cashflows.

 

In May 2003, the FASBissued SFAS No. 150 “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  This statement is effective for financial instruments enteredinto or modified after May 31, 2003 and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003.  It requires that certain financialinstruments, formerly presented as equity, be classified as liabilities.  The Company does not anticipate that theadoption of SFAS No. 150 will have a material impact on its financial position,results of operations or cash flows.

 

4.  Stock Option Plans And Warrants

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

 

Options and warrantsissued to non-employees are accounted for based on the fair value of the equityinstruments issued.  The measurementdate is considered to be the issuance date, or if there are performance vestingprovisions, when earned.

 

The Company has adoptedthe disclosure-only provisions of SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure, an amendment of FASB Statement No.123.”  Had compensation cost for the Company’sstock option plan been determined based on the fair value at the grant dateconsistent with the provisions of SFAS No. 148, the Company’s net income andnet income per share for the three- and six-month periods ended June 30, 2003and 2002 would have been changed to the pro forma amounts indicated below:

 
|                                                        |   | **For  the Three-  Month Periods Ended  June 30,** |       | **For  the Six-  Month Periods Ended  June 30,** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------|------------|--------------------------------------------------|--------|
|                                                        |   | **2003**                                           |       | **2002**                                         |   | **2003** |   | **2002** |   |
| Net  (loss)/income – as reported                       |   | $                                                  | (1,110,051 | )                                                | $      | 373,330 |   | $ | (705,087 | ) | $ | 764,292 |   |
| Total  stock-based compensation expense based on fair value |   | (3,360                                             | )          | (3,377                                           | )      | (27,084 | ) | (6,754 | ) |
| Net  (loss)/income – pro forma                         |   | $                                                  | (1,113,411 | )                                                | $      | 369,953 |   | $ | (732,171 | ) | $ | 757,538 |   |
| Net  (loss)/income per basic share – as reported       |   | $                                                  | (0.09      | )                                                | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.10 |   |
| Net  (loss)/income per diluted share – as reported     |   | $                                                  | (0.09      | )                                                | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.10 |   |
| Net  (loss)/income per basic share – pro forma         |   | $                                                  | (0.09      | )                                                | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.10 |   |
| Net  (loss)/income per diluted share – pro forma       |   | $                                                  | (0.09      | )                                                | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.10 |   |

 

8

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The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants: dividend yield of 8.5% to 11.3%, expected volatility of 27.0% to 30.0%,discount rate of 2.6% to 6.4%, and expected option lives of 5 years.

 

5.  Common Stock Offering

During June 2003, the Company sold 5,750,000 shares ofcommon stock, including 750,000 shares to cover over-allotments, at a price of$6.20 per share.  The Company received$33,600,125, net of the underwriting commissions.  After payment of approximately $300,000 in additional offeringexpenses, the proceeds were used to repay debt, for capital improvements and asworking capital.

 

During June 2003, the Company used $24,957,660 of theproceeds to repay a portion of the outstanding balance on the revolving line ofcredit with Fleet National Bank.  Thisleft an outstanding balance of $15,400,000 at June 30, 2003 with $26,600,000 ofavailability.  During July 2003, theCompany used $4,000,000 of the proceeds to further repay the outstandingbalance.  This left an outstandingbalance on the line of credit of $11,400,000 at July 31, 2003 with $30,600,000of availability. The Company intends to use available amounts under this lineof credit to fund future property acquisitions.

 

6.  Acquisitions

On February 6, 2003, theCompany acquired the Southwest Gas Building. The Southwest Gas Building is located in Phoenix, Arizona and contains147,660 rentable square feet on 7.38 acres of land.  The purchase price for the Southwest Gas Building was$17,000,000, which was paid with $11,900,000 from a revolving credit facilitywith Fleet National Bank and $5,100,000 from a short-term loan also from FleetNational Bank.

 

The Company entered intotwo separate contracts to acquire two office properties within the next 60 daysfor an aggregate purchase price of approximately $51,250,000.  The buildings contain an aggregate of approximately390,000 rentable square feet.  Bothcontracts are subject to a number of contingencies and there is no assurancethat either of these acquisitions will occur.

 

7.  Mortgage Loans and Notes Payable

On February 6, 2003, theCompany increased its revolving line of credit with Fleet National Bank from$30,000,000 to $42,000,000.  Outstandingbalances on this facility, $15,400,000 at June 30, 2003, continue to bearinterest at LIBOR plus 275 basis points and are due on November 12, 2005.  The Company also obtained a $5,100,000short-term loan from Fleet National Bank. This loan bears interest at LIBOR plus 500 basis points and wasoriginally due on August 6, 2003.  Thisloan was repaid with the proceeds of the refinancing discussed below under“Subsequent Event.”  Proceeds from therevolving credit facility and the short-term loan were used to acquire theSouthwest Gas Building.

 

During the secondquarter of 2003, the Company entered into a commitment for a $42,000,000long-term fixed-rate credit facility from a financial services company.  This facility will be secured by mortgageson Parkway Centre II, Centerra and Southwest Gas.  The proceeds will be used to repay the variable-rate loan onParkway Centre II, which has an outstanding balance of $17,000,000 and amaturity of August 2004, and to acquire additional properties as the proceedsfrom the common stock offering were used to repay the loans on Centerra andSouthwest Gas.  This refinancing isexpected to close in late-August 2003, however the loan is subject to a numberof contingencies and there is no assurance that this refinancing will actuallyoccur.

 

Certain of the Company’sdebt instruments contain covenants common to that type of facility orborrowing, including financial covenants establishing minimum debt servicecoverage and maximum leverage ratios. The Company was in compliance with all financial covenants pertaining toour debt instruments during the six months ended June 30, 2003.

 

8.  Impairment of Investment in Real Estate

The second quarter of 2003 included a $334,592 chargefor an impairment in the value of a 12,979 square foot building in Clint, Texasand a $1,131,340 impairment charge for a 33,312 square foot building in Paris,Texas.  Both properties are non-coreassets and had been previously leased to agencies of the State of Texas.  The Clint building has been vacant sinceNovember 2001 and the Paris building has been vacant since

 

9

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December 2002.  The Company hasbeen unsuccessful in re-leasing these properties but will continue in itsefforts, however there are no near term prospects.  The Company previously recorded a $275,000 impairment chargerelated to the Clint building in the fourth quarter of 2002 and has recordedadditional impairment charges this quarter to reduce the net book values of theproperties to their estimated fair values of $100,000 and $43,000 for Clint andParis, respectively. The Company arrived at the estimated fair values using theproperty tax assessment values, values estimated by the Company's property taxprotest consultants and local real estate brokers. The Company will continue tomonitor their non-core properties for any indications of impairment.

 

9.  Subsequent Event

On August 1, 2003, theCompany refinanced its short-term loan with Fleet National Bank.  The facility was increased from $5,100,000to $15,000,000 and the term was extended from August 6, 2003 to November 12,2005.  Upon closing, the Company drewdown $10,000,000 under this facility, of which $5,100,000 was used to repay theexisting balance and the remainder will be used to repay the mortgage loan onPanorama Falls in the amount of $4,214,408, which is due on September 1, and asworking capital.  The Company may drawdown an additional $5,000,000 under this facility within 90 days ofclosing.  This loan bears interest atLIBOR plus 450 basis points, due in monthly installments of interest only.  The Company paid a 1% origination fee on the$10,000,000 draw and will pay a 1% fee on the additional $5,000,000 if itelects to draw down the remaining amount. The Company will also be required to pay a 1% fee on the outstandingbalance as of March 31, 2004.

 

10

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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-QSB and elsewhere.

 

Results Of Operations

*Comparisonof the three-month periods ended June 30, 2003 and 2002:*

 
|                                        |   | **Three-Month  Periods Ended  June 30,** |       |      |   |
|---------------------------------------------|--------|------------------------------------------|------------|-----------|--------|
|                                        |   | **2003**                                 |       | **2002**  |   | **Change** |   |
|                                        |   |                                     |       |      |   |   |   |
| Rental  revenue                             |   | $                                        | 6,947,717  |      | $      | 3,528,818 |   | $ | 3,418,899 |   |
|                                        |   |                                     |       |      |   |   |   |
| Property  operating expenses:               |   |                                     |       |      |   |   |   |
| Operating  expenses                         |   | 1,761,815                                |       | 887,391   |   | 874,424 |   |
| Real  estate taxes                          |   | 783,642                                  |       | 257,799   |   | 525,843 |   |
| Management  fees                            |   | 42,897                                   |       | 31,820    |   | 11,077 |   |
| General  and administrative expenses        |   | 742,773                                  |       | 379,326   |   | 363,447 |   |
| Impairment  of investment in real estate    |   | 1,465,932                                |       | —    |   | 1,465,932 |   |
| Interest  expense                           |   | 1,811,907                                |       | 920,170   |   | 891,737 |   |
| Depreciation  and amortization expense      |   | 1,447,426                                |       | 706,149   |   | 741,277 |   |
| Total  operating expenses                   |   | 8,056,392                                |       | 3,182,655 |   | 4,873,737 |   |
|                                        |   |                                     |       |      |   |   |   |
| Other  income/(loss)                        |   |                                     |       |      |   |   |   |
| Interest  income                            |   | 11,936                                   |       | 50,816    |   | (38,880 | ) |
| Equity  in loss of unconsolidated affiliate |   | (13,312                                  | )          | (23,649   | )      | 10,337 |   |
| Total  other income/(loss)                  |   | (1,376                                   | )          | 27,167    |   | (28,543 | ) |
|                                        |   |                                     |       |      |   |   |   |
| Net  (loss)/income                          |   | $                                        | (1,110,051 | )         | $      | 373,330 |   | $ | (1,483,381 | ) |

 

*Rentalrevenue*

The increase in rental revenue is due to the inclusionof the operations of the late-2002 and early-2003 property acquisitions,including Parkway Centre II (September 2002), Centerra (November 2002), ChateauPlaza (November 2002) and the Southwest Gas Building (February 2003).

 

*Propertyoperating expenses*

Operating expenses and real estate taxes increased asa result of the above-mentioned acquisitions.

 

Management fees are paid to third-party providers forthe property management of Parkway Centre II, the Bank of America Buildings andthe State of Texas Buildings.  Thecontract with the third party property manager for Parkway Centre II wasterminated effective June 30, 2003. Beginning July 1, 2003, the property will be internally managed.

 

*Generaland administrative expenses*

The increase in general and administrative expenses isprimarily due to the termination of the advisory agreement with the Company’sformer advisor, Sheridan Realty Advisors, effective November 1, 2002 wherebyall of the remaining employees of Sheridan Realty Advisors became employees ofthe Company.  Additionally, beginning in2003, the Company began to accrue approximately $37,000 per quarter for non-cashlong-term stock compensation for certain of the Company’s executive officers asprovided by the Long-Term Incentive Plan. Shareholders approved this plan at the 2003 annual meeting on May 20,2003.  It is anticipated that generaland administrative expenses will continue to increase as the Company acquiresadditional assets.

 

*Impairmentof investment in real estate*

The charges recognized in 2003 represent theimpairment in the value of two buildings in Clint

 

11

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and Paris, Texas.  Bothproperties are non-core assets and had been previously leased to agencies ofthe State of Texas.  The Company hasbeen unsuccessful in re-leasing these properties since the State vacated upontheir lease expirations and therefore has reduced the net book values of theproperties to its best estimate of their current market values. The Companywill continue to monitor their non-core properties for any indications ofimpairment.

 

*Interestexpense*

The increase in interest expense is due to higheraverage outstanding mortgage debt balances in 2003, which is primarilyattributable to the above-mentioned acquisitions.

 

*Depreciationand amortization expense*

The increase in depreciation and amortization expenseis due to the overall increase in depreciable assets resulting from theabove-mentioned acquisitions.

 

*Interestincome*

Interest income decreased due to lower averageoutstanding cash balances in interest bearing accounts in 2003.

 

*Equityin loss of unconsolidated affiliate*

The equity in loss of unconsolidated affiliaterepresents the Company’s share of the net loss of Panorama Falls.  The Company sold 80% of its interest inPanorama Falls in December 2001, retaining its current 20% interest.  The net loss of Panorama Falls has decreaseddue to improved property operations resulting from the lease up of the propertyfrom approximately 16% at the time of sale to approximately 78% at June 30,2003.

 

*Comparisonof the six-month periods ended June 30, 2003 and 2002:*

 
|                                        |   | **Six-Month  Periods Ended  June 30,** |       |      |   |
|---------------------------------------------|--------|----------------------------------------|------------|-----------|--------|
|                                        |   | **2003**                               |       | **2002**  |   | **Change** |   |
|                                        |   |                                   |       |      |   |   |   |
| Rental  revenue                             |   | $                                      | 13,762,245 |      | $      | 7,154,870 |   | $ | 6,607,375 |   |
|                                        |   |                                   |       |      |   |   |   |
| Property  operating expenses:               |   |                                   |       |      |   |   |   |
| Operating  expenses                         |   | 3,397,293                              |       | 1,773,486 |   | 1,623,807 |   |
| Real  estate taxes                          |   | 1,555,403                              |       | 624,822   |   | 930,581 |   |
| Management  fees                            |   | 86,374                                 |       | 59,882    |   | 26,492 |   |
| General  and administrative expenses        |   | 1,579,853                              |       | 731,634   |   | 848,219 |   |
| Impairment  of investment in real estate    |   | 1,465,932                              |       | —    |   | 1,465,932 |   |
| Interest  expense                           |   | 3,568,177                              |       | 1,818,526 |   | 1,749,651 |   |
| Depreciation  and amortization expense      |   | 2,808,139                              |       | 1,391,079 |   | 1,417,060 |   |
| Total  operating expenses                   |   | 14,461,171                             |       | 6,399,429 |   | 8,061,742 |   |
|                                        |   |                                   |       |      |   |   |   |
| Other  income/(loss)                        |   |                                   |       |      |   |   |   |
| Interest  income                            |   | 17,753                                 |       | 52,897    |   | (35,144 | ) |
| Equity  in loss of unconsolidated affiliate |   | (23,914                                | )          | (44,046   | )      | 20,132 |   |
| Total  other income/(loss)                  |   | (6,161                                 | )          | 8,851     |   | (15,012 | ) |
|                                        |   |                                   |       |      |   |   |   |
| Net  (loss)/income                          |   | $                                      | (705,087   | )         | $      | 764,292 |   | $ | (1,469,379 | ) |

 

*Rentalrevenue*

Rental revenue increased as a result of theabove-mentioned acquisitions.

 

*Propertyoperating expenses*

Operating expenses and real estate taxes increased asa result of the above-mentioned acquisitions.

 

Management fees are paid to third-party providers forthe property management of Parkway

 

12

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Centre II, the Bank of America Buildings and the State of TexasBuildings.  The contract with the thirdparty property manager for Parkway Centre II was terminated effective June 30,2003.  Beginning July 1, 2003, theproperty will be internally managed.

 

*Generaland administrative expenses*

The increase in general and administrative expenses isprimarily due to the above-mentioned termination of the advisory agreement withthe Company’s former advisor, Sheridan Realty Advisors.  It is anticipated that general andadministrative expenses will continue to increase as the Company acquiresadditional assets.

 

*Impairmentof investment in real estate*

The charges recognized in 2003 represent theimpairment in the value of two buildings in Clint and Paris, Texas.

 

*Interestexpense*

The increase in interest expense is due to higheraverage outstanding mortgage debt balances in 2003, which is primarilyattributable to the above-mentioned acquisitions.

 

*Depreciationand amortization expense*

The increase in depreciation and amortization expenseis due to the overall increase in depreciable assets resulting from theabove-mentioned acquisitions.

 

*Interestincome*

Interest income decreased due to lower averageoutstanding cash balances in interest bearing accounts in 2003.

 

*Equityin loss of unconsolidated affiliate*

The net loss of Panorama Falls has decreased due toimproved property operations as described above.

 

Liquidity And CapitalResources

*OperatingActivities*

Net cash flows from operations were approximately$4,574,000 for the six-month period ended June 30, 2003.  The increase from the prior year period isprimarily due to the inclusion of the operations of the late-2002 andearly-2003 property acquisitions.  Thisis the primary source to fund dividend payments, debt service and capitalexpenditures.  Management believes thatthe cash flow from the Company’s existing properties will be sufficient to meetits working capital needs for this year and beyond.

 

*Investingand Financing Activities*

Net cash flows used in investing activities wereapproximately $20,667,000 for the six-month period ended June 30, 2003, ofwhich $17,000,000 represents the acquisition of the Southwest GasBuilding.  The remainder is primarilycomposed of deposits made on potential property acquisitions and recurringcapital improvement, tenant improvement and leasing commission costs.

 

Net cash flows from financing activities wereapproximately $22,231,000 for the six-month period ended June 30, 2003.  Of this amount, approximately $33,327,000represents the proceeds from the June 2003 common stock offering and$17,000,000 represents the loan proceeds used to acquire the Southwest GasBuilding, offset by the repayment of approximately $24,958,000 of theoutstanding balance on the revolving line of credit with Fleet NationalBank.  The remainder is primarilycomposed of dividend payments, scheduled principal payments on mortgage loansand payments into escrow accounts required by certain lenders, offset by theproceeds from the exercising of options and warrants.

 

*Acquisitions*

The Company entered into two separate contracts toacquire two office properties within the next 60 days for an aggregate purchaseprice of approximately $51,250,000.  Thebuildings contain an aggregate of approximately 390,000 rentable squarefeet.  Both contracts are subject to anumber of contingencies and there is no assurance that either of theseacquisitions will occur.

 

13

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

 

*Scheduled Debt Maturities and Interest Rate Information*

The following table details the scheduled maturitiesof mortgage loans and notes payable outstanding as of June 30, 2003:

 

| 2003       |   | $          | 9,789,158  |   |
|------------|--------|------------|------------|--------|
| 2004       |   | 17,931,655 |       |
| 2005       |   | 16,407,252 |       |
| 2006       |   | 15,139,761 |       |
| 2007       |   | 969,752    |       |
| Thereafter |   | 37,654,098 |       |
| Total      |   | $          | 97,891,676 |   |

 

Included in the 2003 maturities is the mortgage loanon Panorama Falls in the amount of $4,214,408, which is due on September1.  Although the Company sold 80% of itsinterest in the property, the Company has retained 100% of the loan balance onits balance sheet due to its continued obligation.  As an offset, the Company has recorded a receivable for 80% ofthis amount as due from related party, with the remaining 20% included in theinvestment in unconsolidated affiliate balance.

 

During June 2003, the Company used $24,957,660 of theproceeds to repay a portion of the outstanding balance on the revolving line ofcredit with Fleet National Bank.  Thisleft an outstanding balance of $15,400,000 at June 30, 2003 with $26,600,000 ofavailability.  During July 2003, theCompany used $4,000,000 of the proceeds to further repay the outstandingbalance.  This left an outstandingbalance on the line of credit of $11,400,000 at July 31, 2003 with $30,600,000of availability.  The Company intends touse available amounts under this line of credit to fund future propertyacquisitions.

 

Duringthe second quarter of 2003, the Company entered into a commitment for a$42,000,000 long-term fixed-rate credit facility from a financial servicescompany.  This facility will be securedby mortgages on Parkway Centre II, Centerra and Southwest Gas.  The proceeds will be used to repay thevariable-rate loan on Parkway Centre II, which has an outstanding balance of$17,000,000 and a maturity of August 2004, and to acquire additional propertiesas the proceeds from the common stock offering were used to repay the loans onCenterra and Southwest Gas.  Thisrefinancing is expected to close in late-August 2003, however the loan issubject to a number of contingencies and there is no assurance that thisrefinancing will actually occur.

 

OnAugust 1, 2003, the Company refinanced its short-term loan with Fleet NationalBank.  The facility was increased from$5,100,000 to $15,000,000 and the term was extended from August 6, 2003 toNovember 12, 2005.  Upon closing, theCompany drew down $10,000,000 under this facility, of which $5,100,000 was usedto repay the existing balance and the remainder will be used to repay themortgage loan on Panorama Falls in the amount of $4,214,408, which is due onSeptember 1, and as working capital. The Company may draw down an additional $5,000,000 under this facilitywithin 90 days of closing.  This loanbears interest at LIBOR plus 450 basis points, due in monthly installments ofinterest only.

 

As of June 30, 2003, approximately 57% of the totalmortgage loans outstanding are fixed rate loans with a weighted-averageinterest rate of approximately 7.7% and 43% are variable rate loans with aweighted-average interest rate of approximately 4.0%.  The Company intends to refinance some of its variable rate debtto fixed rate debt upon stabilization of the underlying mortgaged properties.

 

14

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New AccountingPronouncements

In January 2003, the FASBissued Interpretation No. 46 “Consolidation of Variable InterestEntities.”  The Company is required toadopt the interpretation for financial statements for the fiscal year orinterim periods beginning after June 15, 2003. This interpretation clarifies the application of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” and requires theconsolidation of results of variable interest entities in which the Company hasa majority variable interest.  TheCompany does not anticipate that the adoption of Interpretation No. 46 willhave a material impact on its financial position, results of operations or cashflows.

 

In April 2003, the FASB issued SFAS No. 149 “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities.”  The Company is required to adopt thisstatement for contracts or hedging relationships entered into or modified afterJune 30, 2003.  Its purpose is toprovide more consistent application and clarification of SFAS No. 133.  The Company does not anticipate that theadoption of SFAS No. 149 will have a material impact on its financial position,results of operations or cash flows.

 

In May 2003, the FASBissued SFAS No. 150 “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  This statement is effective for financial instruments enteredinto or modified after May 31, 2003 and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003.  It requires that certain financial instruments,formerly presented as equity, be classified as liabilities.  The Company does not anticipate that theadoption of SFAS No. 150 will have a material impact on its financial position,results of operations or cash flows.

 

Critical Accounting Policies

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.  The preparation of these financial statementsrequire management to make estimates and judgments that affect the reportedamounts of assets and liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities at the date of the financialstatements.  Actual results may differfrom these estimates under different assumptions or conditions.

 

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

 

*Investmentin Real Estate*

Upon acquisition, thepurchase price of a property is allocated to land, building, leasingcommissions and other intangible assets and associated liabilities as requiredby SFAS No. 141 “Business Combinations.” The allocation to land is based on an estimate of its fair value basedon all available information including appraisals.  The allocation to leasing commissions, as required by SFAS No.141, represents the value associated with the in-place leases, includingleasing commission, legal and other related costs.  Also required by SFAS No. 141, is the creation of an intangibleasset or liability resulting from in-place leases being above or below themarket rental rates on the date of acquisition.  This asset or liability is amortized over the life of the relatedin-place leases as an adjustment to revenue.

 

Investment in real estateis stated at cost.  Depreciation andamortization are computed on a straight-line basis over the estimated usefullives as follows:

 
| **Description**                              |   | **Estimated  Useful Lives** |
|----------------------------------------------|--------|-----------------------------|
| Land                                         |   | Not  depreciated            |
| Buildings and  improvements                  |   | 20 to 40 years              |
| Furniture, fixtures and  equipment           |   | 5 to 7 years                |
| Tenant improvements and  leasing commissions |   | Term of related  lease      |

 

15

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Maintenance and repairsare expensed as incurred and improvements are capitalized.  The cost of assets sold or retired and therelated accumulated depreciation and/or amortization are removed from theaccounts and the resulting gain or loss is reflected in operations in theperiod in which such sale or retirement occurs.  Allocating the purchase price of a property to the differentcomponents of investment in real estate, determining whether expenditures meetthe criteria for capitalization and assigning depreciable lives is consideredto be critical because it requires management to exercise significant judgment.

 

*Valuationof Real Estate Assets*

Long-lived assets to beheld and used by the Company are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. The Company continually evaluates the recoverability of itslong-lived assets based on estimated future cash flows from and the estimatedliquidation value of such long-lived assets, and provides for impairment ifsuch undiscounted cash flows are insufficient to recover the carrying amount ofthe long-lived asset.  Valuation of realestate assets is considered to be critical because the evaluation of impairmentand the determination of fair values involve management’s assumptions relatingto future economic events that could materially affect the determination of thefair value, and therefore the carrying value of real estate.

 

*RevenueRecognition*

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

 

Inflation

Management believes that inflation should not have amaterial adverse effect on the Company. The Company’s office leases generallyrequire the tenants to pay increases in operating expenses should anyinflationary pressures materialize.

 

Forward-LookingStatements

Certain statements inthis Form 10-QSB that are not historical facts are “forward-looking statements”as that term is defined under the Private Securities Litigation Reform Act of1995.  These forward-looking statementsare based on the Company’s current expectations, beliefs, assumptions,estimates and projections about the industry and markets in which the Companyoperates.  Words such as “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” andvariations of such words and similar expressions are intended to identify suchforward-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 of future performance and involvecertain risks, uncertainties and assumptions, which are difficult to predictand many of which are beyond the Company’s control.  Therefore, actual outcomes and results may differ materially fromwhat is expressed, forecasted or implied in such forward-lookingstatements.  The Company undertakes noobligation to update publicly any forward-looking statements, whether as aresult of new information, future events or otherwise, except as required byapplicable law.

 

The Company’s operatingresults depend primarily on income from its properties, which are substantiallyinfluenced by supply and demand for such properties, operating expense levels,property level operations and the pace and price at which the Company candevelop, acquire or dispose of such properties.  Capital and credit market conditions, which affect the Company’scost of capital, also influence operating results.  See the Company’s 2002 Form 10-KSB “Item 1. Business” for a morecomplete discussion of risk factors that could impact the Company’s futurefinancial performance.

 

16

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Item 3.    Controlsand Procedures

The Company carried out an evaluation under thesupervision and with participation of the Company’s management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe Company’s disclosure controls and procedures pursuant to Rule 13a-15 underthe Securities Exchange Act of 1934. 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.  There was no change in theCompany’s internal controls over financial reporting that occurred during theperiod covered by this report that has materially affected or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

** **

**PartII.   Other Information**

 

Item 1.    Legal Proceedings

No changes

 

Item 4.    Submissionof Matters to a Vote of Security Holders

At the annual meeting ofstockholders held May 20, 2003, stockholders elected the following individualsto serve on the Board of Directors of the Company, each as a Class 1 Director:

 

| **Name**           |   | **Shares  Vote in Favor** |   | **Abstentions  and  Non-Votes** |   |
|--------------------|--------|---------------------------|--------|---------------------------------|--------|
| Patrice Derrington |   | 10,585,794                |   | 956,919                         |   |
| Harry  P. Gelles   |   | 10,533,194                |   | 1,009,519                       |   |
| John  A. Labate    |   | 10,534,094                |   | 1,008,619                       |   |

 

At the annual meeting,stockholders also elected the following individual to serve on the Board ofDirectors of the Company, as a Class 2 Director:

 

| **Name**        |   | **Shares  Vote in Favor** |   | **Abstentions  and  Non-Votes** |   |
|-----------------|--------|---------------------------|--------|---------------------------------|--------|
| James  F. Etter |   | 10,513,447                |   | 1,029,266                       |   |

 

 

Following the meeting,Charles K. Knight and Jerry J. Tepper continued as Class 2 Directors andWilliam T. Atkins and Robert W. Holman, Jr. continued as Class 3 Directors. 

 

Additionally, at theannual meeting the stockholders voted to approve the Articles of Amendment andRestatement of the Company’s Articles of Incorporation (the “Articles ofAmendment and Restatement”) for the purposes of (i) increasing the authorizedcapital to be issued from time-to-time by the Company and (ii) including theprovisions that were contained in the bylaws of the Company relating to (A)ownership limitations intended to ensure the Company’s continued qualificationas a real estate investment trust under the Internal Revenue Code of 1986, asamended, and (B) the indemnification of the Company’s directors, officers,employees and agents.  At the annualmeeting 10,355,336 shares of common stock voted in favor of the Articles ofAmendment and Restatement; 246,316 shares of common stock voted against; 75,724shares of common stock were recorded as abstentions and 865,337 shares ofcommon stock were recorded as broker non-votes.

 

The stockholders alsovoted to approve the AmeriVest Properties Inc. 2003 Long Term Incentive Plan(the “LTIP”), which was recommended by the Board of Directors for the purposeof providing the Company’s executives with compensation opportunities that areintended to provide incentives and motivation to the executives by aligning theexecutives’ interests with those of the Company’s other stockholders throughcompensation that is based on common stock total return performance.  At the annual meeting 10,150,743 shares ofcommon stock voted in favor of the LTIP; 416,082 shares of common stock votedagainst; 110,551 shares of common stock were recorded as abstentions and865,337 shares of common stock were recorded as broker non-votes.

 

Item 6.  Exhibitsand Reports on Form 8-K

(a)  Exhibits

31. Certifications ofChief Executive Officer and Chief Financial Officer pursuant to section

 

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302 of the Sarbanes-OxleyAct of 2002.

32. Certification ofChief Executive Officer and Chief Financial Officer pursuant to section

906 of the Sarbanes-OxleyAct of 2002.

 

(b)  Reports on Form 8-K

1.  Current Report on Form 8-K/A dated February6, 2003 (filed April 22, 2003).  ThisCurrent

Report consisted of anamendment to the Current Report on Form 8-K dated February 6, 2003 filed onFebruary 21, 2003 and included disclosures under “Item 7. Financial Statementsand Exhibits”.  The financial statementsincluded were an Independent Auditors’ Report; Statement of Revenue and CertainExpenses for the year ended December 31, 2002; Notes to Statement of Revenueand Certain Expenses; Pro Forma Consolidated Balance Sheet as of December 31,2002 (unaudited); Pro Forma Consolidated Statement of Operations (unaudited)for the year ended December 31, 2002; Notes to Pro Forma Consolidated FinancialStatements (unaudited); Statement of Estimated Taxable Operating Results andCash to be Made Available by Operations for the Year ended December 31, 2002(unaudited); and Note to Statement of Estimated Taxable Operating Results andCash to be Made Available by Operations.

 

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###### SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|            |   | AMERIVEST PROPERTIES  INC. |
|-----------------|--------|----------------------------|
|            |   |                       |
| August 14, 2003 |   |                       |
|            |   | By:                        | /s/ | D. Scott Ikenberry |
|            |   |                       | D. Scott Ikenberry |
|            |   |                       | Chief Financial Officer |
|            |   |                       | (Principal Financial  Officer and |
|            |   |                       | Principal Accounting  Officer) |

 

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