** **

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

 

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

** **

**                For the quarterly period endedSeptember 30, 2004.**

** **

**or**

** **

o**    TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

** **

**                For the quarterly period endedSeptember 30, 2004.**

** **

**For thetransition period from                                           to                                           **

 

Commissionfile number 1-14462

 

**AMERIVESTPROPERTIES INC.**

(Exactname of registrant as specified in its charter)

 

| **Maryland**                                                            | ** ** | **84-1240264**                       |
|-------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)          |       | (I.R.S. Employer Identification No.) |
| ** **                                                              | ** ** | ** **                           |
| **1780 South Bellaire Street**** ****Suite 100, Denver, Colorado** | ** ** | **80222**                            |
| (Address of principal executive offices)                                |       | (Zip Code)                           |

 

 **(303) 297-1800**

(Registrant’s telephonenumber, including area code)    

 

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

 

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

 

Thenumber of shares of the registrant’s common stock outstanding as of November 3,2004 was 23,940,919.   

 

 

----

 

**Table of Contents**
|        |                                                                                                                          | **Page No.** |
|-------------|-------------------------------------------------------------------------------------------------------------------------------|--------------|
| **Part  I** | **Financial  Information**                                                                                                    |         |
|        |                                                                                                                          |         |
| Item  1.    | Financial  Statements:                                                                                                        |         |
|        |                                                                                                                          |         |
|        | Condensed Consolidated  Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003                             |         |
|        | Condensed Consolidated  Statements of Operations for the three and nine months ended September 30,  2004 and 2003 (unaudited) |         |
|        | Condensed Consolidated  Statement of Stockholders’ Equity for the nine months ended September 30,  2004 (unaudited)      |         |
|        | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2004 and  2003(unaudited)            |         |
|        | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                             |         |
|        |                                                                                                                          |         |
| Item 2.     | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                   |         |
|        |                                                                                                                          |         |
| Item 3.     | Quantitative and  Qualitative Disclosures About Market Risk                                                                   |         |
|        |                                                                                                                          |         |
| Item 4.     | Controls and Procedures                                                                                                       |         |
|        |                                                                                                                          |         |
| **Part II** | **Other Information**                                                                                                         |         |
|        |                                                                                                                          |         |
| Item 1.     | Legal Proceedings                                                                                                             |         |
|        |                                                                                                                          |         |
| Item 2.     | Changes in Securities and  Use of Proceeds                                                                                    |         |
|        |                                                                                                                          |         |
| Item 6.     | Exhibits and Reports on  Form 8-K                                                                                             | 17           |

  i 

----

 

**AMERIVESTPROPERTIES INC.**

 

**Condensed Consolidated BalanceSheets**

** **
| **ASSETS**                                                              | ** ** | **September 30,  2004  (unaudited)** | ** **  | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|-------------|------------------------|------------|
| Investment in real estate                                               |       |                                 |        |                   |       |
| Land                                                                    |       | $                                    | 40,961,332  |                   | $          | 28,838,214 |   |
| Buildings and improvements                                              |       | 244,540,282                          |        | 184,519,890            |       |
| Furniture, fixtures and equipment                                       |       | 1,273,552                            |        | 799,730                |       |
| Tenant improvements                                                     |       | 13,030,911                           |        | 6,144,440              |       |
| Tenant leasing commissions                                              |       | 2,503,489                            |        | 1,061,160              |       |
| Intangible assets                                                       |       | 21,125,721                           |        | 11,468,120             |       |
| Less: accumulated depreciation and amortization                         |       | (22,283,364                          | )           | (12,134,025            | )          |
| Net investment in real estate                                           |       | 301,151,923                          |        | 220,697,529            |       |
|                                                                    |       |                                 |        |                   |       |
| Cash and cash equivalents                                               |       | 2,563,176                            |        | 1,477,585              |       |
| Escrow deposits                                                         |       | 7,129,571                            |        | 5,778,427              |       |
| Assets — held for sale                                             |       | —                               |        | 3,196,877              |       |
| Investment in affiliate                                                 |       | —                               |        | 1,364,032              |       |
| Due from related party                                                  |       | —                               |        | 3,371,526              |       |
| Due from affiliate                                                      |       | —                               |        | 262,347                |       |
| Accounts receivable                                                     |       | 666,333                              |        | 296,377                |       |
| Deferred rents receivable                                               |       | 2,786,040                            |        | 1,401,455              |       |
| Deferred financing costs, net                                           |       | 2,364,043                            |        | 2,301,043              |       |
| Prepaid expenses and other assets                                       |       | 1,105,200                            |        | 353,264                |       |
| Total assets                                                            |       | $                                    | 317,766,286 |                   | $          | 240,500,462 |   |
| ** **                                                              |       |                                 |        |                   |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                          |       |                                 |        |                   |       |
| Liabilities:                                                            |       |                                 |        |                   |       |
| Mortgage loans and notes payable                                        |       | $                                    | 202,312,186 |                   | $          | 158,237,661 |   |
| Liabilities — held for sale                                        |       | —                               |        | 1,296,049              |       |
| Accounts payable and accrued expenses                                   |       | 2,650,358                            |        | 2,736,657              |       |
| Accrued real estate taxes                                               |       | 4,317,366                            |        | 3,169,183              |       |
| Prepaid rents, deferred revenue and security deposits                   |       | 3,681,158                            |        | 2,694,335              |       |
| Dividends payable                                                       |       | 3,112,513                            |        | 2,262,170              |       |
| Total liabilities                                                       |       | 216,073,581                          |        | 170,396,055            |       |
| Minority interest                                                       |       | 1,671,092                            |        | —                 |       |
| Shareholders’ equity:                                              |       |                                 |        |                   |       |
| Preferred stock, $0.001par value                                        |       |                                 |        |                   |       |
| Authorized: 5,000,000 shares                                            |       |                                 |        |                   |       |
| Issued and outstanding: none                                            |       | —                               |        | —                 |       |
| Common stock, $0.001 par value                                          |       |                                 |        |                   |       |
| Authorized: 75,000,000 shares                                           |       |                                 |        |                   |       |
| Issued and outstanding: 23,948,056 and 17,401,309 shares,  respectively |       | 23,948                               |        | 17,401                 |       |
| Capital in excess of par value                                          |       | 132,342,983                          |        | 91,706,371             |       |
| Distributions in excess of accumulated earnings                         |       | (32,345,318                          | )           | (21,619,365            | )          |
| Total shareholders’ equity                                         |       | 100,021,613                          |        | 70,104,407             |       |
| Total liabilities and shareholders’ equity                         |       | $                                    | 317,766,286 |                   | $          | 240,500,462 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

1

----

 

**AMERIVESTPROPERTIES INC.**

 

**Condensed Consolidated Statementsof Operations**

**(unaudited)**

** **
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2004**                              | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Real Estate Operating  Revenue:             |       |                                  |       |                                   |       |   |   |   |   |
| Rental revenues                             |       | $                                     | 11,435,128 |                                   | $          | 6,895,235 |   | $ | 32,431,672 |   | $ | 20,124,585 |   |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Real Estate Operating Expenses:             |       |                                  |       |                                   |       |   |   |   |   |
| Property operating expenses -               |       |                                  |       |                                   |       |   |   |   |   |
| Operating expenses                          |       | 3,381,971                             |       | 1,929,966                              |       | 9,293,204 |   | 5,139,566 |   |
| Real estate taxes                           |       | 1,393,953                             |       | 832,051                                |       | 4,109,575 |   | 2,346,828 |   |
| Management fees                             |       | 17,496                                |       | 17,756                                 |       | 52,246 |   | 84,930 |   |
| General and administrative expenses         |       | 1,105,901                             |       | 777,579                                |       | 3,022,715 |   | 2,357,432 |   |
| Ground lease expense                        |       | 160,542                               |       | —                                 |       | 482,225 |   | — |   |
| Interest expense                            |       | 3,069,512                             |       | 1,809,933                              |       | 8,622,861 |   | 5,316,903 |   |
| Depreciation and amortization expense       |       | 3,740,880                             |       | 1,636,449                              |       | 9,963,605 |   | 4,378,968 |   |
| Impairment of investment in real estate     |       | —                                |       | —                                 |       | — |   | 1,465,932 |   |
| Total operating expense                     |       | 12,870,255                            |       | 7,003,734                              |       | 35,546,431 |   | 21,090,559 |   |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Loss from continuing operations             |       | (1,435,127                            | )          | (108,499                               | )          | (3,114,759 | ) | (965,974 | ) |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Other Income/(Loss):                        |       |                                  |       |                                   |       |   |   |   |   |
| Interest income                             |       | 29,139                                |       | 43,434                                 |       | 55,395 |   | 61,187 |   |
| Equity in loss of affiliate                 |       | —                                |       | (14,537                                | )          | (18,076 | ) | (38,451 | ) |
| Minority interest                           |       | 104,094                               |       | -                                      |       | 165,212 |   | - |   |
| Total other income                          |       | 133,233                               |       | 28,897                                 |       | 202,531 |   | 22,736 |   |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Loss before discontinued operations         |       | (1,301,894                            | )          | (79,602                                | )          | (2,912,228 | ) | (943,238 | ) |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Discontinued operations                     |       | —                                |       | 56,134                                 |       | 687,735 |   | 214,683 |   |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Net loss                                    |       | $                                     | (1,301,894 | )                                      | $          | (23,468 | ) | $ | (2,224,493 | ) | $ | (728,555 | ) |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Loss per Share:                             |       |                                  |       |                                   |       |   |   |   |   |
| Basic                                       |       | $                                     | (0.05      | )                                      | $          | 0.00 |   | $ | (0.10 | ) | $ | (0.05 | ) |
| Diluted                                     |       | $                                     | (0.05      | )                                      | $          | 0.00 |   | $ | (0.10 | ) | $ | (0.05 | ) |
|                                        |       |                                  |       |                                   |       |   |   |   |   |
| Weighted Average Common Shares Outstanding: |       |                                  |       |                                   |       |   |   |   |   |
| Basic                                       |       | 23,934,094                            |       | 17,356,751                             |       | 21,807,943 |   | 13,777,395 |   |
| Diluted                                     |       | 23,934,094                            |       | 17,356,751                             |       | 21,807,943 |   | 13,777,395 |   |
|                                             |            |                                       |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

2

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**AMERIVESTPROPERTIES INC.**

 

**Condensed Consolidated Statement of Stockholders’ Equity**

 

**Nine Months Ended September 30, 2004**

**(unaudited)**

 

 

 

 
| ** **                             | ** ** | **Common Stock** | ** ** | **Capital in Excess of Par Value** | ** ** | **Distributions in Excess of  Accumulated Earnings** | ** ** | **Total**   | ** ** |
|----------------------------------------|------------|------------------|------------|------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|
| ** **                             | ** ** | **Shares**       | ** ** | **Amount**                         | ** ** | ** **                                           | ** ** | ** **  |
| Balance at December 31, 2003           |       | 17,401,309       |       | $                                  | 17,401     |                                                 | $          | 91,706,371  |       | $ | (21,619,365 | ) | $ | 70,104,407 |   |
|                                   |       |             |       |                               |       |                                                 |       |        |       |   |   |
| Issuance of common stock:              |       |             |       |                               |       |                                                 |       |        |       |   |   |
| Public offering, net of offering costs |       | 6,325,000        |       | 6,325                              |       | 39,889,104                                           |       | —      |       | 39,895,429 |   |
| Warrants exercised                     |       | 98,062           |       | 98                                 |       | 88,952                                               |       | —      |       | 89,050 |   |
| Stock options exercised                |       | 75,753           |       | 76                                 |       | 386,322                                              |       | —      |       | 386,398 |   |
| Dividend Re-Investment Plan            |       | 5,570            |       | 6                                  |       | 38,549                                               |       | —      |       | 38,555 |   |
| Equity-based compensation              |       | 42,362           |       | 42                                 |       | 233,685                                              |       | —      |       | 233,727 |   |
| Dividends declared                     |       | —           |       | —                             |       | —                                               |       | (8,501,460  | )          | (8,501,460 | ) |
| Net loss                               |       | —           |       | —                             |       | —                                               |       | (2,224,493  | )          | (2,224,493 | ) |
| Balance at September 30, 2004          |       | 23,948,056       |       | $                                  | 23,948     |                                                 | $          | 132,342,983 |       | $ | (32,345,318 | ) | $ | 100,021,613 |   |
|                                        |            |                  |            |                                    |            |                                                      |            |             |            |  |  |  |  |  |  |  |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes tocondensed consolidated financial statements.

 

3

----

**AMERIVESTPROPERTIES INC.**

 

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

** **
| ** **                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                      |       |                                |       |   |   |
| Net loss                                                  |       | $                                   | (2,224,493 | ) | $ | (728,555 | ) |
| Adjustments to reconcile net loss to net cash provided by |       |                                |       |   |   |
| operating activities-                                     |       |                                |       |   |   |
| Depreciation and amortization expense                     |       | 9,991,173                           |       | 4,477,601 |   |
| Impairment of investment in real estate                   |       | —                              |       | 1,465,932 |   |
| Gain on sale                                              |       | (574,276                            | )          | — |   |
| Amortization of deferred financing costs                  |       | 541,199                             |       | 399,448 |   |
| Equity in loss of affiliate                               |       | 18,076                              |       | 38,451 |   |
| Minority interest                                         |       | (165,212                            | )          | — |   |
| Equity-based compensation                                 |       | 233,727                             |       | 187,650 |   |
| Changes in assets and liabilities-                        |       |                                |       |   |   |
| Accounts receivable                                       |       | (352,137                            | )          | (79,401 | ) |
| Deferred rents receivable                                 |       | (1,510,687                          | )          | (474,944 | ) |
| Prepaid expenses and other assets                         |       | (25,436                             | )          | 159,614 |   |
| Accounts payable and accrued expenses                     |       | (227,581                            | )          | 590,272 |   |
| Other accrued liabilities                                 |       | 1,996,953                           |       | 1,349,500 |   |
| Net cash flows provided by operating activities           |       | 7,701,306                           |       | 7,385,568 |   |
|                                                      |       |                                |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                      |       |                                |       |   |   |
| Acquisitions of real estate, net                          |       | (59,983,705                         | )          | (31,524,876 | ) |
| Capital expenditures                                      |       | (3,538,766                          | )          | (3,169,693 | ) |
| Tenant improvements                                       |       | (6,253,622                          | )          | (1,922,632 | ) |
| Leasing commissions                                       |       | (1,303,538                          | )          | (490,272 | ) |
| Deposits on pending real estate acquisitions              |       | (726,500                            | )          | (120,000 | ) |
| Proceeds from sale, net of closing costs                  |       | 4,049,229                           |       | — |   |
| Ending cash balance of newly consolidated affiliate       |       | 92,732                              |       | — |   |
| Amounts (paid to)/received from affiliate                 |       | (76,384                             | )          | 24,629 |   |
| Net cash flows used in investing activities               |       | (67,740,554                         | )          | (37,202,844 | ) |
|                                                      |       |                                |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                      |       |                                |       |   |   |
| Additions to mortgage loans and notes payable             |       | 93,227,462                          |       | 91,500,000 |   |
| Payments on mortgage loans and notes payable              |       | (62,941,369                         | )          | (88,555,915 | ) |
| Payment of deferred financing costs                       |       | (568,424                            | )          | (1,326,409 | ) |
| Deposits for pending refinance                            |       | —                              |       | (132,600 | ) |
| Net proceeds from common stock offering                   |       | 39,895,429                          |       | 33,267,453 |   |
| Net proceeds from exercising of options and warrants      |       | 475,448                             |       | 1,488,271 |   |
| Net change in escrow deposits                             |       | (1,351,144                          | )          | (2,639,426 | ) |
| Dividends paid                                            |       | (7,612,563                          | )          | (4,929,020 | ) |
| Net cash flows provided by financing activities           |       | 61,124,839                          |       | 28,672,354 |   |
|                                                      |       |                                |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                   |       | 1,085,591                           |       | (1,144,922 | ) |
|                                                      |       |                                |       |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD            |       | 1,477,585                           |       | 2,318,566 |   |
|                                                      |       |                                |       |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                  |       | $                                   | 2,563,176  |   | $ | 1,173,644 |   |

 

 

See accompanying notes tocondensed consolidated financial statements.

 

4

**AMERIVESTPROPERTIES INC.**

 

**CondensedConsolidated Statements of Cash Flows (continued)**

**(unaudited)**

 
| ** **                                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                        |       |                                |       |   |   |
| Cash paid for interest                                                  |       | $                                   | 7,514,934  |   | $ | 4,735,286 |   |
|                                                                    |       |                                |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING  ACTIVITIES |       |                                |       |   |   |
| Mortgage loans assumed                                                  |       | $                                   | 12,492,383 |   | $ | 24,750,000 |   |
| Stock issued to the DRIP                                                |       | $                                   | 38,555     |   | $ | 264,614 |   |
|                                                                         |            |                                     |            |  |  |  |  |  |  |  |

 

 

SUPPLEMENTAL INFORMATION

Dueto the Company’s adoption of Financial Accounting Standards Board (FASB)Interpretation (FIN) No. 46 (Revised), “Consolidation of Variable InterestEntities”, the assets and liabilities of Panorama Falls have been consolidatedwith those of the Company since March 31, 2004 (see Note 5 to the condensedconsolidated financial statements).  Thefollowing table details the asset and liability amounts related to PanoramaFalls property as of September 30, 2004:

 

| Assets                                                | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|
| Investment in real estate                             | ** ** | ** ** | ** ** |
| Land                                                  |       | $          | 1,051,372  |   |
| Buildings and improvements                            |       | 5,420,757  |       |
| Furniture, fixtures and equipment                     |       | 29,426     |       |
| Tenant improvements                                   |       | 965,752    |       |
| Tenant leasing commissions                            |       | 194,114    |       |
| Less: accumulated depreciation and amortization       |       | (957,977   | )          |
| Net investment in real estate                         |       | 6,703,444  |       |
|                                                  |       |       |       |
| Cash and cash equivalents                             |       | 30,413     |       |
| Accounts receivable                                   |       | 7,349      |       |
| Deferred rents receivable                             |       | 137,618    |       |
| Deferred financing costs, net                         |       | 24,477     |       |
| Total assets                                          |       | $          | 6,903,301  |   |
|                                                  |       |       |       |
| Liabilities                                           |       |       |       |
| Mortgage loans and notes payable                      |       | $          | 4,214,408  |   |
| Accounts payable and accrued expenses                 |       | 35,196     |       |
| Accrued real estate taxes                             |       | 108,522    |       |
| Prepaid rents, deferred revenue and security deposits |       | 73,581     |       |
| Total liabilities                                     |       | $          | 4,431,707  |   |
|                                                  |       |       |       |
| Minority interest                                     |       | $          | 1,671,092  |   |

 

 

See accompanying notes tocondensed consolidated financial statements.

 

5

 

**AMERIVEST PROPERTIES INC.**

 

**Notes to CondensedConsolidated Financial Statements**

 

**September30, 2004**

**(unaudited)**

 

1 — Organization

AmeriVestProperties Inc. (the Company) is incorporated under the laws of the State ofMaryland and operates as a self-administered and self-managed real estateinvestment trust (REIT).  The Companyprimarily invests in and operates commercial office buildings in selectivemarkets and leases the commercial office buildings to small and medium sizetenants.  At September 30, 2004, theCompany owned, through its wholly-owned subsidiaries, 29 office propertieslocated in metropolitan Denver, Dallas, Phoenix and Indianapolis and severalsmall cities in Texas.

 

2 — Interim Financial Statements

                The unauditedconsolidated financial statements included herein were prepared from therecords of the Company in accordance with accounting principles generallyaccepted in the United States of America and reflect all adjustments which are,in the opinion of management, necessary to provide a fair statement of theresults of operations and financial position for the interim periods.  Such financial statements generally conformto the presentation reflected in the Company’s Form 10-KSB filed with theSecurities and Exchange Commission for the year ended December 31, 2003.  The consolidated results of operations forthe nine months ended September 30, 2004 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2004.  These financial statements and notes thereinshould be read together with the financial statements and notes included in theCompany’s Form 10-KSB for the year ended December 31, 2003.

 

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

 

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

 

3 — Equity-Based Compensation

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

 

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

 

The Company has adopted thedisclosure-only provisions of Statement of Financial Accounting Standards(SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure, an amendment of FASB Statement No. 123.”  Had compensation cost for the Company’s stockoption plan been determined based on the fair value at the grant dateconsistent with the provisions of SFAS No. 148, the Company’s net loss and lossper share for the three and nine months ended September 30, 2004 and 2003 wouldhave been changed to the pro forma amounts as indicated in the following table:

 

 

6

----

 

**AMERIVEST PROPERTIES INC.**

 

**Notesto Condensed Consolidated Financial Statements — (continued)**

 
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                        | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss — as reported                                       |       | $                                         | (1,301,894 | )                                        | $          | (23,468 | ) | $ | (2,224,493 | ) | $ | (728,555 | ) |
| Plus: Recognized equity-based compensation                        |       | 102,030                                   |       | 66,045                                   |       | 233,727 |   | 164,339 |   |
| Less: Total equity-based compensation expense based on fair value |       | (123,943                                  | )          | (113,443                                 | )          | (330,486 | ) | (304,351 | ) |
| Net loss — pro forma                                         |       | $                                         | (1,323,807 | )                                        | $          | (70,866 | ) | $ | (2,321,252 | ) | $ | (868,567 | ) |
|                                                              |       |                                      |       |                                     |       |   |   |   |   |
| Loss per basic share — as reported                           |       | $                                         | (0.05      | )                                        | $          | 0.00 |   | $ | (0.10 | ) | $ | (0.05 | ) |
| Loss per diluted share — as reported                         |       | $                                         | (0.05      | )                                        | $          | 0.00 |   | $ | (0.10 | ) | $ | (0.05 | ) |
|                                                              |       |                                      |       |                                     |       |   |   |   |   |
| Loss per basic share — pro forma                             |       | $                                         | (0.06      | )                                        | $          | 0.00 |   | $ | (0.11 | ) | $ | (0.06 | ) |
| Loss per diluted share — pro forma                           |       | $                                         | (0.06      | )                                        | $          | 0.00 |   | $ | (0.11 | ) | $ | (0.06 | ) |

 

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

 

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

 

4 — Transactions

*CamelbackLakes acquisition*

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

 

*TexasBank Buildings sale*

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

 

*HackberryView acquisition*

On May 7, 2004, the Company acquired the Hackberry View office propertylocated in Irving, Texas.  The purchaseprice for Hackberry View was $16,800,000, which was paid with approximately$12,200,000 from the assumption of the existing first and second mortgage loansand the balance in cash.

 

*ParkwayCentre III acquisition*

On September 10, 2004, the Company acquired the Parkway Centre IIIoffice property located in Plano, Texas. The purchase price for Parkway Centre III was $23,400,000, which waspaid with approximately $15,210,000 of mortgage debt, $2,700,000 in Section1031 funds held in escrow from the sale of the Texas Bank Buildings and thebalance in cash.

 

7

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** **

**AMERIVEST PROPERTIES INC.**

 

**Notesto Condensed Consolidated Financial Statements — (continued)**

 

*Properties Under Contract*

**               **During thequarter, the Company entered into a contract to acquire an office property in asubmarket of Dallas.  The Companyanticipates this transaction closing in the fourth quarter of 2004.

 

5 — Variable Interest Entity

                EffectiveMarch 31, 2004, the Company adopted FIN 46R and applied it to its investment inPanorama Falls.  The Company owns 20% ofPanorama Falls as a tenant-in-common with the majority investor.  The Panorama Falls property is located inEnglewood, Colorado.  The building has acarrying value of $6,700,000.  TheCompany financed the property through its $30,000,000 unsecured revolving lineof credit with Fleet (the Unsecured Fleet Facility) (see Note 9 to thecondensed consolidated financial statements for an update on the UnsecuredFleet Facility).   Panorama Falls isdeemed to be a variable interest entity (VIE) as defined by FIN 46R.  In accordance with FIN 46R, the Companydetermined it is subject to the majority of the variability in the variableinterests in the entity and has consolidated the assets and liabilities ofPanorama Falls effective March 31, 2004 (see the note to the consolidatedstatements of cash flows for a detail of the assets and liabilities of PanoramaFalls which have been consolidated). With respect to the consolidated statements of operations, theinvestment was accounted for under the consolidation method of accountingbeginning April 1, 2004 and under the equity method of accounting for priorperiods.

 

6 — Common Stock Offering

                DuringMarch 2004, the Company completed an offering of 6,325,000 shares of commonstock, including 825,000 shares to cover over-allotments, at a price of $6.75per share.  The Company receivedapproximately $39,895,000, net of underwriting commissions and expenses.  The proceeds were used to repay theoutstanding balance on the Unsecured Fleet Facility and a portion of theoutstanding balance on the Secured Fleet Facility.  The Company intends to use available amountsunder these facilities to fund future property acquisitions and other workingcapital and cash needs of the business.

 

7 — DiscontinuedOperations

                On March 16, 2004, the Company sold its Texas BankBuildings for $4,100,000.  The net cashproceeds of approximately $2,700,000 were being held in escrow and used tocomplete a tax deferred exchange under Section 1031 of the Internal RevenueCode on the Parkway Centre III acquisition on September 10, 2004.  In accordance with SFAS No. 144, the Companyhas classified the operations of these properties as discontinued operationsfor the three and nine months ended September 30, 2004 and 2003.  The following is a summary of the operatingresults of these properties:

 
| ** **                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Rental revenue                        |       | $                                         | —     |                                     | $          | 269,089 |   | $ | 272,003 |   | $ | 801,984 |   |
|                                  |       |                                      |       |                                     |       |   |   |   |   |
| Property operating expenses -         |       |                                      |       |                                     |       |   |   |   |   |
| Operating expenses                    |       | —                                    |       | 120,522                                  |       | 82,141 |   | 308,215 |   |
| Real estate taxes                     |       | —                                    |       | 19,923                                   |       | 16,373 |   | 60,549 |   |
| Management fees                       |       | —                                    |       | 9,600                                    |       | 8,335 |   | 28,800 |   |
| Interest expense                      |       | —                                    |       | 29,897                                   |       | 24,125 |   | 91,104 |   |
| Depreciation and amortization expense |       | —                                    |       | 33,013                                   |       | 27,570 |   | 98,633 |   |
|                                  |       | —                                    |       | 212,955                                  |       | 158,544 |   | 587,301 |   |
|                                  |       |                                      |       |                                     |       |   |   |   |   |
| Gain on sale                          |       | —                                    |       | —                                   |       | 574,276 |   | — |   |
|                                  |       |                                      |       |                                     |       |   |   |   |   |
| Net income                            |       | $                                         | —     |                                     | $          | 56,134 |   | $ | 687,735 |   | $ | 214,683 |   |
|                                       |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

8

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**AMERIVEST PROPERTIES INC.**

 

**Notesto Condensed Consolidated Financial Statements — (concluded)**

 

8 —Loss Per Share

                There are noadjustments necessary to the basic weighted average common shares outstandingto arrive at the diluted weighted average common shares outstanding for thethree and nine months ended September 30, 2004 and 2003 as the Companyrecognized a net loss and the impact would be anti-dilutive.

 

9 — Subsequent Events

                On October 20,2004, KeyBank National Association (KeyBank) assumed the Company’s UnsecuredCredit Facility.  The amended facilityhas a capacity of $40,000,000 and a maturity date of November 12, 2007.  In addition, the amended Unsecured CreditFacility has the option of a one-time increase to $50,000,000 available untilDecember 31, 2005.   The amended facilityhas an interest rate of LIBOR plus 350 basis points or the Prime plus 275 basispoints.  The Company paid a one-timecommitment fee in October 2004 of $800,000. The fee was capitalized and is being amortized into interest expenseover the life of the loan agreement.

 

                On October 25,2004, the Company acquired the land underlying its Greenhill Park officeproperty for $14,500,000.  The GreenhillPark Building was subject to a ground lease with 80 years remaining on theterm.  Prior to the acquisition, theCompany accounted for the lease as an operating lease.

 

 

9

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**Item 2.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

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

 

Forward-Looking Statements

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

 

The Company’s operatingresults depend primarily on income from its properties, which are substantiallyinfluenced by supply and demand for such properties, operating expense levels,property level operations and the pace and price at which the Company candevelop, acquire or dispose of such properties. Capital and credit market conditions, which affect the Company’s cost ofcapital, also influence operating results. See the Company’s 2003 Form 10-KSB “Item 1. Description of Business” fora more complete discussion of risk factors that could impact the Company’sfuture financial performance.

 

Introduction

                AmeriVest is a REIT which owns and operates commercial office buildingsin select markets catering to small and medium size businesses.  At September 30, 2004, we owned 29 propertiestotaling 2,628,044 square feet compared to 28 properties totaling 1,891,352square feet at September 30, 2003.  We generate revenue primarily through the rental of office space at ourproperties.  The demand for our productsis correlated, in general, to the national economy, and more specifically, tothe demand for office space by small and medium size tenants in metropolitanDenver, Dallas, Phoenix and Indianapolis.

 

                Due to the sale ofthe Texas Bank Buildings, the operations of these properties, including thegain on sale, have been classified as discontinued operations for the periodspresented in accordance with SFAS No. 144.

 

 

10

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Results Of Operations

*Comparison of the three months ended September 30, 2004 toSeptember 30, 2003:*

* *
| ** **                            | ** ** | **2004**   | ** ** | **2003**  | ** ** | **Change** | ** ** |
|---------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| REAL ESTATE OPERATING REVENUE         |       |       |       |      |       |       |       |
| Rental revenue                        |       | $          | 11,435,128 |      | $          | 6,895,235  |       | $ | 4,539,893 |   |
|                                  |       |       |       |      |       |       |       |
| REAL ESTATE OPERATING EXPENSES        |       |       |       |      |       |       |       |
| Property operating expenses-          |       |       |       |      |       |       |       |
| Operating expenses                    |       | 3,381,971  |       | 1,929,966 |       | 1,452,005  |       |
| Real estate taxes                     |       | 1,393,953  |       | 832,051   |       | 561,902    |       |
| Management fees                       |       | 17,496     |       | 17,756    |       | (260       | )          |
| General and administrative expenses   |       | 1,105,901  |       | 777,579   |       | 328,322    |       |
| Ground rent expense                   |       | 160,542    |       | —    |       | 160,542    |       |
| Interest expense                      |       | 3,069,512  |       | 1,809,933 |       | 1,259,579  |       |
| Depreciation and amortization expense |       | 3,740,880  |       | 1,636,449 |       | 2,104,431  |       |
| Total operating expense               |       | 12,870,255 |       | 7,003,734 |       | 5,866,521  |       |
|                                  |       |       |       |      |       |       |       |
| LOSS FROM CONTINUING OPERATIONS       |       | (1,435,127 | )          | (108,499  | )          | (1,326,628 | )          |
|                                  |       |       |       |      |       |       |       |
| OTHER INCOME/(LOSS)                   |       |       |       |      |       |       |       |
| Interest income                       |       | 29,139     |       | 43,434    |       | (14,295    | )          |
| Equity in loss of affiliate           |       | —     |       | (14,537   | )          | 14,537     |       |
| Minority interest                     |       | 104,094    |       | —    |       | 104,094    |       |
| Total other income                    |       | 133,233    |       | 28,897    |       | 104,336    |       |
|                                  |       |       |       |      |       |       |       |
| LOSS BEFORE DISCONTINUED OPERATIONS   |       | (1,301,894 | )          | (79,602   | )          | (1,222,292 | )          |
|                                  |       |       |       |      |       |       |       |
| DISCONTINUED OPERATIONS               |       | —     |       | 56,134    |       | (56,134    | )          |
|                                  |       |       |       |      |       |       |       |
| NET LOSS                              |       | $          | (1,301,894 | )         | $          | (23,468    | )          | $ | (1,278,426 | ) |
|                                       |            |            |            |           |            |            |            |  |  |  |  |  |  |

 

Rental revenue increased by $4,539,893, or65.8%, from the third quarter of 2003 to the same period of 2004.  Approximately $2,582,800 of the increase isdue to the inclusion of the operating results from the late-2003 acquisitions(Financial Plaza, Scottsdale Norte and Greenhill Park) and $2,004,400 is due tothe inclusion of the 2004 acquisitions (Camelback Lakes and Hackberry View fora full quarter and Parkway Center III for a partial quarter).  Additionally, $147,000 of the increase is dueto the inclusion of Panorama Falls due to the adoption of FIN 46R whereby itsoperations are consolidated with those of the Company beginning March 31, 2004.

 

                Property operatingexpenses increased by $2,013,647, or 72.4%, from the third quarter of 2003 tothe same period of 2004.  Approximately$1,216,700 of the increase is due to the inclusion of the late-2003acquisitions, $643,600 is due to the 2004 acquisitions and $105,350 is due tothe consolidation of Panorama Falls.  Theremaining increase of approximately $48,000, or 1.7%, was experienced in ourexisting portfolio (properties owned for the full quarter of both years).  The main components of the additional expenseconsisted of increases in property tax accruals, utilities and regionalproperty management personnel.  TheCompany focuses on the control of operating expenses as a percent of revenueand as it continues to grow and gain scale in each of its markets, believesthat it will be able to maintain or increase its operating margins.

 

                General andadministrative expenses increased from $777,579, or 11.3% of revenue, for thethird quarter of 2003 to $1,105,901, or 9.7% of revenue, for the same period in2004.  Approximately $166,000 of theincrease is related to accounting and consulting fees primarily related to theCompany’s efforts in Sarbanes-Oxley compliance and the associated independentauditor’s review.  The Companyanticipates recognizing in excess of $200,000 during the fourth quarter of 2004related to Sarbanes-Oxley.  Theremainder of the increase is primarily due to the addition of corporatepersonnel hired during the latter half of 2003 and the nine months endedSeptember 30, 2004 to support the continued growth of the Company.

 

 

11

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                The ground rent expenserecognized in 2004 relates to the ground lease for Greenhill Park, acquired inDecember 2003.  On October 22, 2004, theCompany acquired the land for $14,500,000 and therefore, no subsequent groundlease costs will be incurred.  Prior tothe acquisition, the Company accounted for this lease as an operating lease.

 

                Interest expenseincreased by $1,259,579, or 69.6%, from the third quarter of 2003 to the sameperiod of 2004.  This increase is due tothe additional debt used to acquire the above-mentioned properties.  The average outstanding debt balanceincreased by approximately 76% from the third quarter of 2003 to the sameperiod of 2004 and the weighted average interest rate on this debt was flatfrom 2003 to 2004.  The increasein interest expense is also attributable to the fees related to the UnsecuredFleet Facility.  This facility providesthe Company with more flexibility and a readily available vehicle for financingacquisitions and other capital needs. Additionally, the consolidation of Panorama Falls was attributable for$62,500 of the increase.

 

                The increase indepreciation and amortization expense of $2,104,431, or 129%, is due to theincrease in depreciable assets resulting from the above-mentioned acquisitionsand additional capital improvements, tenant improvements and leasingcommissions for our current real estate investments.

 

                The minorityinterest component represents 80% of the net loss of Panorama Falls which isattributable to the majority shareholder. The Company continues to own a 20% interest in the property.

 

                Included indiscontinued operations are the operations of the Texas Bank Buildings whichwere sold on March 16, 2004.

 

*Comparison of the nine months ended September 30, 2004 toSeptember 30, 2003:*

* *
| ** **                              | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| REAL ESTATE OPERATING REVENUE           |       |       |       |       |       |       |       |
| Rental revenue                          |       | $          | 32,431,672 |       | $          | 20,124,585 |       | $ | 12,307,087 |   |
|                                    |       |       |       |       |       |       |       |
| REAL ESTATE OPERATING EXPENSES          |       |       |       |       |       |       |       |
| Property operating expenses-            |       |       |       |       |       |       |       |
| Operating expenses                      |       | 9,293,204  |       | 5,139,566  |       | 4,153,638  |       |
| Real estate taxes                       |       | 4,109,575  |       | 2,346,828  |       | 1,762,747  |       |
| Management fees                         |       | 52,246     |       | 84,930     |       | (32,684    | )          |
| General and administrative expenses     |       | 3,022,715  |       | 2,357,432  |       | 665,283    |       |
| Ground rent expense                     |       | 482,225    |       | —     |       | 482,225    |       |
| Interest expense                        |       | 8,622,861  |       | 5,316,903  |       | 3,305,958  |       |
| Depreciation and amortization expense   |       | 9,963,605  |       | 4,378,968  |       | 5,584,637  |       |
| Impairment of investment in real estate |       | —     |       | 1,465,932  |       | (1,465,932 | )          |
| Total operating expense                 |       | 35,546,431 |       | 21,090,559 |       | 14,455,872 |       |
|                                    |       |       |       |       |       |       |       |
| LOSS FROM CONTINUING OPERATIONS         |       | (3,114,759 | )          | (965,974   | )          | (2,148,785 | )          |
|                                    |       |       |       |       |       |       |       |
| OTHER INCOME/(LOSS)                     |       |       |       |       |       |       |       |
| Interest income                         |       | 55,395     |       | 61,187     |       | (5,792     | )          |
| Equity in loss of affiliate             |       | (18,076    | )          | (38,451    | )          | 20,375     |       |
| Minority interest                       |       | 165,212    |       | —     |       | 165,212    |       |
| Total other income                      |       | 202,531    |       | 22,736     |       | 179,795    |       |
|                                    |       |       |       |       |       |       |       |
| LOSS BEFORE DISCONTINUED OPERATIONS     |       | (2,912,228 | )          | (943,238   | )          | (1,968,990 | )          |
|                                    |       |       |       |       |       |       |       |
| DISCONTINUED OPERATIONS                 |       | 687,735    |       | 214,683    |       | 473,052    |       |
|                                    |       |       |       |       |       |       |       |
| NET LOSS                                |       | $          | (2,224,493 | )          | $          | (728,555   | )          | $ | (1,495,938 | ) |
|                                         |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

 

12

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Rental revenue for the nine months endedSeptember 30 increased by $12,307,087 or 61.2%, from 2003 to 2004.  Approximately $8,195,800 of the increase isdue to the inclusion of the operating results from the late-2003 acquisitions,$3,834,300 is due to the inclusion of the 2004 acquisitions and $369,800 is dueto the consolidation of Panorama Falls.

 

                Property operatingexpenses for the nine months ended September 30 increased by $5,883,701 or77.7%, from 2003 to 2004.  Approximately$3,782,100 of the increase is due to the inclusion of the late-2003acquisitions, $1,252,400 is due to the 2004 acquisitions and $222,900 is due tothe consolidation of Panorama Falls.  Theremaining increase of approximately $626,000, or 8.3%, was experienced in ourexisting portfolio with the main components of the additional expenseconsisting of increases in property tax accruals, utilities and regionalproperty management personnel.

 

                General andadministrative expenses increased from $2,357,432, or 11.7% of revenue, for thenine months ended September 30, 2003 to $3,022,715, or 9.3% of revenue, for thesame period in 2004.  Approximately$166,000 of the increase is related to accounting and consulting fees primarilyrelated to the Company’s efforts in Sarbanes-Oxley compliance and theassociated independent auditor’s review. The Company anticipates recognizing in excess of $200,000 during thefourth quarter of 2004 related to Sarbanes-Oxley. The remainder of theincrease is primarily due to the addition of corporate personnel hired duringthe latter half of 2003 and the nine months ended September 30, 2004 to supportthe continued growth of the Company.

 

 

                The ground rent expenserecognized in 2004 relates to the ground lease for Greenhill Park, acquired inDecember 2003.  On October 22, 2004, theCompany acquired the land for $14,500,000 and therefore, no subsequent groundlease costs will be incurred.  Prior tothe acquisition, the Company accounted for this lease as an operating lease.

 

                Interest expenseincreased by $3,305,958, or 62%, from the nine months ended September 30, 2003to the same period of 2004.  This increaseis due to the additional debt used to acquire the above-mentioned properties.

 

                The increase indepreciation and amortization expense of $5,584,637, 127.5%, is due to theincrease in depreciable assets resulting from acquisitions and additional capitalimprovements, tenant improvements and leasing commissions for our current realestate investments.

 

                The impairmentcharges recognized in 2003 related to two of the properties in the Texas StateBuilding portfolio; no additional charges have been recorded in 2004.

 

                The minorityinterest component represents 80% of the net loss of Panorama Falls which isattributable to the majority shareholder. The Company continues to own a 20% interest in the property.

 

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

 

Liquidityand Capital Resources

*OperatingActivities*

                Netcash flows provided by operations were approximately $7,701,000 for the ninemonths ended September 30, 2004.  Thisresults primarily from the Company’s operating results adjusted for non-cashexpenses and a general increase in our receivables in excess of the prior yearperiod.  Cash flow from operations is theprimary source to fund dividend payments, debt service and capitalexpenditures.

 

*InvestingActivities*

                Netcash flows used in investing activities were approximately $67,741,000 for thenine months ended September 30, 2004, of which $59,984,000 was used to acquireCamelback Lakes, Hackberry View and Parkway Centre III, net of debtassumed.  The remainder is primarilycomposed of capital improvement, tenant improvement and leasing commissioncosts offset by the net proceeds from the sale of the Texas Bank Buildings of$4,049,000.

 

 

13

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*Financing Activities*

Net cash flows provided byfinancing activities were approximately $61,125,000 for the nine months endedSeptember 30, 2004.  Included in thisamount is approximately $39,895,000 which represents the net proceeds from theMarch 2004 common stock offering; of this amount approximately $39,000,000 wasimmediately used to pay down the Company’s secured and unsecured creditfacilities.  The Company subsequentlyrecorded additions to mortgage loans and notes payable of approximately$61,500,000 related to Camelback Lakes, Hackberry View and Parkway Centre IIIproperties.  The remainder of the changeis primarily composed of scheduled principal payments on mortgage loans,dividend payments and payments into escrow accounts as required by certainlenders.

 

*Future Sources of Capital*

The Company receives baserent under non-cancelable tenant leases and most leases provide for additionalrent based on increases in operating expenses.

 

The Company desires toacquire additional properties.  In orderto do so, it will utilize current sources of debt financing and possibly incuradditional debt and/or obtain additional equity capital.  The Company also intends to obtain creditfacilities for short and long-term borrowing with commercial banks or otherfinancial institutions.  The issuance ofsuch securities or increase in debt to acquire additional properties, of whichthere is no assurance, could adversely affect the amount of cash available topay dividends to stockholders.

 

At September 30, 2004, theCompany has two credit facilities with Fleet National Bank.  At September 30, 2004, there was $20,650,000outstanding with $21,350,000 available under the Secured Fleet Facility andthere was $10,000,000 outstanding with $20,000,000 available under theUnsecured Fleet Facility.  In October2004, the Company’s Unsecured Fleet Facility was assumed by KeyBank (UnsecuredKeyBank Facility). The amended Unsecured KeyBank Facility has a total borrowingcapacity of $40,000,000 and matures November 12, 2007.  Available amounts under the Secured andUnsecured Credit Facilities will be used to acquire and improve new andexisting properties, as well as for working capital.

 

*FutureUses of Capital, Contractual Commitments and Off-Balance Sheet Arrangements*

                The followingtable details the contractual obligations for scheduled maturities of mortgageloans and notes payable at September 30, 2004. The Company acquired the land underlying its Greenhill Park officeproperty in October 2004, and accordingly, will not incur ground lease chargesin subsequent months.

 

| **For the years ended December 31,** | ** ** | **Mortgage Loans and Notes Payable** | ** **  |
|-------------------------------------------|------------|-------------------------------------------|-------------|
| 2004                                      |       | $                                         | 741,421     |   |
| 2005                                      |       | 23,811,458                                |        |
| 2006                                      |       | 17,416,022                                |        |
| 2007 (1)                                  |       | 13,368,603                                |        |
| 2008                                      |       | 38,171,976                                |        |
| Thereafter                                |       | 108,802,706                               |        |
| Total                                     |       | $                                         | 202,312,186 |   |
|                                           |            |                                           |             |  |  |

 

----

(1)                In October 2004,KeyBank National Association assumed the Company’s Unsecured Line ofCredit.  The amended facility has acapacity of $40,000,000 and a maturity date of November 12, 2007.

 

*Interest Rate Information*

*               *As of September30, 2004, approximately 85% of the total mortgage loans outstanding are fixedrate loans with a weighted-average interest rate of 6.2% and 15% are variablerate loans with a weighted-average interest rate of 5.0%.

 

 

14

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*Debt Covenants*

Certainof the Company’s debt instruments contain covenants common to that type offacility or borrowing, including financial covenants establishing minimum debtservice coverage and maximum leverage ratios. The Company was in compliance with all financial covenants pertaining toits debt instruments during the three months and nine months ended September30, 2004.

 

Critical Accounting Policies

The discussion and analysisof the Company’s financial condition and results of operations are based uponits condensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements require management to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities at the date of thefinancial statements.  Actual results maydiffer from these estimates under different assumptions or conditions.

 

Critical accounting policiesare defined as those that are reflective of significant judgments and uncertainties,which would potentially result in materially different results under differentassumptions and conditions.  The Companybelieves that its critical accounting policies include those items describedbelow.

 

*Investmentin Real Estate*

Upon acquisition, thepurchase price of a property is allocated to land, building and improvementsand other intangible assets and associated liabilities as required by SFAS No.141 “Business Combinations.”  Theallocation to land is based on an estimate of its fair value based on allavailable information, including appraisals. The allocation to other intangible assets represents the valueassociated with the in-place leases, including leasing commission, legal andother related costs.  Also required bySFAS No. 141 is the creation of an intangible asset or liability resulting fromin-place leases being above or below the market rental rates on the date ofacquisition.  This asset or liability isamortized over the life of the related in-place leases as an adjustment to revenue.

 

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

 

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

 

Maintenance and repairs areexpensed as incurred and improvements are capitalized.  The cost of assets sold or retired and therelated accumulated depreciation and/or amortization are removed from theaccounts and the resulting gain or loss is reflected in operations in theperiod in which such sale or retirement occurs. Allocating the purchase price of a property to the different componentsof investment in real estate, determining whether expenditures meet thecriteria for capitalization and assigning depreciable lives is considered to becritical because it requires management to exercise significant judgment.

 

*Valuationof Real Estate Assets*

Long-lived assets to be heldand used by the Company are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not be recoverable.The Company continually evaluates the recoverability of its long-lived assetsbased on estimated future cash flows from and the estimated liquidation valueof such long-lived assets, and provides for impairment if such undiscountedcash flows are insufficient to recover the carrying amount of the long-livedasset.  Valuation of real estate assetsis considered to be critical because the evaluation of impairment and thedetermination of fair values involve management’s assumptions relating to futureeconomic events that could materially affect the determination of the fairvalue, and therefore the carrying value of real estate.

 

 

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*RevenueRecognition*

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

 

Item 3.    Quantitative and Qualitative DisclosuresAbout Market Risk

                Our future earnings, cash flows and fair valuesrelevant to financial instruments depend upon prevalent market rates for thosefinancial instruments.  Market risk isthe risk of loss from adverse changes in market prices and interest rates.  We manage our market risk by matchingprojected cash inflows from operating, investing and financing activities withprojected cash outflows to fund debt service, acquisitions, capitalexpenditures, dividends and other cash requirements.  The majority of our outstanding debtobligations have fixed interest rates which limit the risk of fluctuatinginterest rates.  At September 30, 2004,our interest rate risk only related to our $42,000,000 Secured Fleet Facilityand our $30,000,000 Unsecured Fleet Facility, of which there was $20,650,000and $10,000,000 outstanding, respectively. In October 2004, the Company’s Unsecured Fleet Facility was assumed byKeyBank (Unsecured KeyBank Facility). The amended Unsecured KeyBank Facilityhas a total borrowing capacity of $40,000,000 and matures November 12,2007.  Basedon the amounts outstanding at September 30, 2004, the annual impact of a 1%change in interest rates would be approximately $306,500.

 

Item 4.    Controls and 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 as of September 30, 2004.  Based on their evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that disclosurecontrols and procedures were effective as of the end of the period covered bythis report to ensure that information required to be disclosed by the Companyin its reports that it files or submits under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commissions rules and forms.  There was no change in the Company’s internalcontrols over financial reporting that occurred during the period covered bythis report that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

 

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**Part II.   Other Information**

 

Item 1.    Legal Proceedings

No changes.

 

Item 2.    Changesin Securities and Use of Proceeds

 

                *Issuance of EquitySecurities Upon Exercise of Warrants*

During the three monthperiod ended September 30, 2004, the Company issued 5,100 shares of commonstock upon exercise of previously issued warrants.  The issuance of the shares of common stockwas made pursuant to an exemption from registration in accordance with Section4(2) of the Securities Act based on a representation to us from the entityreceiving the shares that such entity was a sophisticated investor who wasknowledgeable about our operations and financial condition and was able toevaluate the risks and merits of receipt of the shares.

 

*Purchase of EquitySecurities*

                Certaininformation regarding purchases made by or on behalf of the Company or anyaffiliate purchases (as defined in Rule 10b-18(a)(3) under the Securities ExchangeAct of 1934, as amended) of our common stock during the three months endedSeptember 30, 2004, is provided below:

 
| **Period** | ** ** | **Number of  Shares Purchased** | ** ** | **Average Price Paid per Share** | ** ** | **Total Number of Shares Purchased as Part of Publicly Announced Plans (1)** | ** ** | **Maximum Number of Shares That May Yet Be Purchased Under the Plan (2)** | ** ** |
|------------|------------|--------------------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| July 2004  |       | 7,074                                |       | $6.11                            |       | 7,074                                                                        |       | N/A                                                                       |       |

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(1)          On August 11, 2000, theCompany’s Board of Directors approved the adoption of the Dividend ReinvestmentPlan (the “Plan”).  Under the Plan, theCompany is authorized to instruct the plan administrator to repurchase sharesof its common stock from time to time, either directly or through agents, inthe open market at prices and on terms satisfactory to the Company in order tooffset some of all such shares issued pursuant to the Plan.  The Company announced the Plan in September2000.  The Plan has no expiration date.

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

 

Item 6.  Exhibits and Reports on Form 8-K

(a)          Exhibits

10.1         Mortgage note in theprincipal amount of $16,000,000 between AmeriVest Camelback Incorporated andAllstate Life Insurance Company of New York dated August 19, 2004.

10.2         Mortgage note in theprincipal amount of $5,000,000 between AmeriVest Camelback Incorporated andAllstate Life Insurance Company of New York dated August 19, 2004.

10.3         Deed of Trust, Assignment ofLeases, Rents and Contracts, Security Agreement and Fixture Filing betweenAmeriVest Camelback Incorporated, Chicago Title Insurance Company and AllstateLife Insurance Company of New York, dated August 19, 2004.

                                                31.     Certifications of Chief Executive Officerand Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Actof 2002.

                                                32.     Certification of Chief Executive Officer andChief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

 

(b)  Reports on Form 8-K

1.       Current report on Form 8-K dated August 25, 2004 (filed August31, 2004).

2.       Current report on Form8-K dated September 10, 2004 (filed September 15, 2004). 

 

 

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######  

###### SIGNATURES

 

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

 
|              | AMERIVEST PROPERTIES INC. |
|-------------------|---------------------------|
|              |                      |   |
|              |                      |   |
| November  5, 2004 |                      |   |
|              | By:                       | /s/  William Atkins |
|              |                      | William Atkins |
|              |                      | Chairman and Chief Executive Officer |
|              |                      |   |
|              |                      |   |
|              |                      |   |
|              | By:                       | /s/  Kathryn L. Hale |
|              |                      | Kathryn L. Hale |
|              |                      | Chief Financial Officer  (Principal Financial Officer and Principal Accounting Officer) |
|              |                      |
|              |                      |

 

 

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