**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**(Mark One)**

 

**ý****  ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For the fiscal yearended December 31, 2003**

 

**OR**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transitionperiod from                    to                    **

 

**Commission filenumber 1-14462**

 

**AMERIVEST PROPERTIES INC.**

(Name of small business issuer in its charter)

 
| **Maryland**                                                    |   | **84-1240264**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **1780 South Bellaire Street, Suite 100  Denver, Colorado**     |   | **80222**                                |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                               |
|                                                            |   |                                     |
| **(303) 297-1800**                                              |
| (Issuer’s Telephone Number, Including Area Code)           |
|                                                            |
| Securities registered under Section 12(b) of the Exchange Act:  |

 

| **Title of  Each Class**      |   | **Name of  Each Exchange on Which Registered** |
|-------------------------------|--------|------------------------------------------------|
| Common Stock, $.001 par value |   | American Stock Exchange                        |

 

Securities registered under Section 12(g) of the Exchange Act:

**None.**(Title of Class)

 

Check whetherthe issuer (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ýNo o

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bis not contained in this form, and no disclosure will be contained, to be thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.o

 

The issuer’srevenues for its most recent fiscal year were: $29,865,670

 

The aggregatemarket value of the issuer’s voting common stock held by non-affiliates of theissuer at June 30, 2003 was $91,890,833 (computed on the basis of $6.26 pershare which was the reported closing sale price of the issuer’s common stock onthe American Stock Exchange on June 30, 2003).

 

APPLICABLE ONLY TO CORPORATE REGISTRANTS

 

The number ofshares outstanding of the issuer’s common stock at March 18, 2004 was17,523,066.

 

Transitional Small Business Disclosure Format (check one): Yes oNo ý

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions ofthe issuer’s definitive proxy statement for its 2004 annual meeting ofshareholders are incorporated by reference into Part III of this Annual Reporton Form 10-KSB.

 

 

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**TABLE OF CONTENTS**

 
| Part I   |                                                                                                             |   |
|----------|------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                             |   |
| Item 1   | Description of Business                                                                                          |   |
| Item 2   | Properties                                                                                                       |   |
| Item 3   | Legal Proceedings                                                                                                |   |
| Item 4   | Submission of Matters to a Vote of Security  Holders                                                             |   |
|     |                                                                                                             |   |
| Part II  |                                                                                                             |   |
|     |                                                                                                             |   |
| Item 5   | Market for Common Equity and Related  Stockholder Matters                                                        |   |
| Item 6   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                      |   |
| Item 7   | Financial Statements                                                                                             |   |
| Item 8   | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                            |   |
| Item 8A  | Controls and Procedures                                                                                          |   |
|     |                                                                                                             |   |
| Part III |                                                                                                             |   |
|     |                                                                                                             |   |
| Item 9   | Directors, Executive Officers, Promoters  and Control Persons; Compliance With Section 16(a) of the Exchange Act |   |
| Item 10  | Executive Compensation                                                                                           |   |
| Item 11  | Security Ownership of Certain Beneficial  Owners and Management                                                  |   |
| Item 12  | Certain Relationships and Related  Transactions                                                                  |   |
| Item 13  | Exhibits and Reports on Form 8-K                                                                                 |   |
| Item 14  | Principal Accountant Fees and Services                                                                           |   |

 

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**PART I**

 

**ITEM 1. DESCRIPTION OF BUSINESS**

 

**Overview**

 

AmeriVest Properties Inc. is incorporatedunder the laws of the State of Maryland and operates as a self-administered andself-managed real estate investment trust (REIT).  We were incorporated in the State of Maryland in 1999.  We are a fully-integrated self-managed REITand primarily invest in and operate commercial office buildings in selectmarkets and lease the commercial office buildings to small and medium sizetenants.  At December 31, 2003, we own30 properties, which include an aggregate of 2,222,079 square feet, located inmetropolitan Denver, Dallas, Phoenix and Indianapolis.

 

**Business Strategy**

 

We focus ourefforts on the acquisition, rehabilitation and development of multi-tenantoffice buildings with a targeted average tenant size of between 2,000 and 4,000square feet in select cities.

 

We believethat office space for small to medium size businesses is a large andunderserved market.  According to datacompiled by the Office of Advocacy of the U.S. Small Business Administration in2002, 89% of all U.S. businesses employed fewer than 20 employees.  As a result, we believe that many businesseshave office space requirements of no more than 4,000 square feet.

 

Small to mediumsize businesses often have specific needs and limitations that are differentfrom larger businesses.  For example,small and medium size businesses cannot usually afford large corporate staffsto manage office leasing.  Thesebusinesses have needs similar to larger firms, such as access to cutting edgetechnology, conference facilities, high quality telecommunications equipmentand other amenities, but usually do not have a comparable budget to thosefirms.  Our strategy is to focus onproviding an office product targeted to this large market and its underservedneeds in a cost effective manner.  Thekey elements of our strategy include:

 

*Provide a Superior, Consistent Product*

 

We seek toprovide a level of amenities to the small and medium size businesses in ouroffice properties that usually only larger companies would be able toobtain.  We accomplish this through newdevelopment, redevelopment of existing properties and improved management witha focus on customer service.  Uponacquiring a building, the AmeriVest design team evaluates the building’sarchitectural design, common areas, technology and amenities relative to ourtargeted small business tenant.  Basedon the results of the design team’s evaluation, a design intent package andcapital improvement budget is established for each acquisition which willdictate the improvements to be made to the property over the next fewyears.  Although the specificimprovements and amenities may differ among buildings, all are designed toenhance the experience for the small and medium size business tenant.

 

The design andtechnology features incorporated into some of our buildings include keylessentry card systems to allow secure access 24 hours a day to individual suites,surveillance camera systems, and common area conference rooms with the latesttelecommunications and presentation equipment available to all tenants withoutadditional charge.  Entry lobbies mayfeature touchpad electronic directories and, where possible, our buildings areengineered to provide control of heating and air conditioning in individualtenant suites.  Many properties includea unique art program in common areas and corridors.  Signage for tenant suites in many buildings allows for thetenant’s individual logo to be incorporated on a common background.  Many properties are wired to offer highspeed voice and data service from multiple telecom providers.  Over time we plan to add some of these andadditional small tenant amenities to all of our core buildings as market demandand capital constraints dictate.

 

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*Streamline the Leasing Process*

 

We provide our clients with a leasingphilosophy that is designed to meet the unique needs of a small to medium sizetenant with limited staffing and real estate expertise.  We operate our multi-tenant buildings undera “no-hassle” leasing experience, using a simplified standard lease that hasbeen designed for fairness to both tenant and landlord.  For every property, the lease transactionstarts with our rate matrix, a standardized menu of rental rates based on leaseterms and market lease rates for our submarkets.  This rate matrix reduces negotiating time and provides forfairness and consistency to our tenants. We also incorporate a high quality standard tenant finish package,greatly reducing the time to design and build out finished space.  In some buildings, we build completelyfinished suites in varying sizes on a purely speculative basis.  Our streamlined process greatly reducesnegotiation and space planning time and allows the tenant to move into itsspace sooner and with less aggravation than is typical in the leasing process,reducing the lease transaction time and cost for the tenant and us.

 

*Provide a High Level of Service*

 

We have developed and employ a positive,service-oriented mentality to our tenants. Our core buildings feature a regional “Tenant Relations Advocate” whosejob description is to interface regularly with all tenants and maximize tenantretention.  The Tenant RelationsAdvocate is dedicated to tenant issues with a singular focus on tenantretention.  The Tenant RelationsAdvocate personifies our service-oriented mentality and is available to resolveminor tenant service complaints before they develop into major issues.

 

Our Tenant Relations Advocates work with teamleaders for each region, who in turn report to a senior manager in our Denverheadquarters, providing direct and regular feedback on tenant concerns.  We believe that our customer-focusedmanagement will improve our tenant retention rates.

 

*Target Select Cities*

 

We have focused on employing our strategy inbuildings or projects containing at least 100,000 square feet, within selectcities where we hope to build meaningful multi-property portfolios.  We target cities that possess enough totaloffice square footage to offer the possibility of multiple acquisitions andliquidity in the event of a desired sale, a healthy number of small businessesand positive growth dynamics. Historically, in order to maximize management efficiencies, we havefocused on markets in relatively close proximity to our headquarters inDenver.  As we grow, we plan to expandour radius to include cities within the United States and Canada that possessour desired characteristics.

 

As a result of our focused strategy, webelieve that our properties provide office space that is particularlyattractive for small to medium size tenants. By executing on our strategy we believe we have been able to maintainhigh occupancy rates while still maintaining strong rent per square foot trendsin our core markets compared to the general office market.

 

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**Operating Performanceand Stockholder Return**

 

Since 1997, our first full year as a publiccompany, our average annual total return to stockholders has been 23.0%.  The following table compares our totalreturn, based on stock price appreciation and reinvestment of all dividends,with the office REIT and equity REIT sectors, as reported by the NationalAssociation of Real Estate Investment Trusts (NAREIT), and the total return ofthe S&P 500, also reported by NAREIT.

 

**TotalReturn(1) to Stockholders**

 
|                           |   | **AmeriVest(2)** |   | **Office  REIT(3)** |   | **Equity  REIT(3)** |   | **S & P  500(3)** |   |
|--------------------------------|--------|------------------|--------|---------------------|--------|---------------------|--------|-----------------------|--------|
| 1 -Year   (2003)          |   | 25.4             | %      | 34.0                | %      | 37.1                | %      | 28.7                  | %      |
| 2 -Year Avg.  (2002-2003) |   | 20.8             | %      | 13.9                | %      | 20.5                | %      | 3.3                   | %      |
| 3 -Year Avg.  (2001-2003) |   | 24.8             | %      | 11.5                | %      | 18.3                | %      | (1.8                  | )%     |
| 4 -Year Avg.  (2000-2003) |   | 23.2             | %      | 17.5                | %      | 20.3                | %      | (3.6                  | )%     |
| 5 -Year Avg.  (1999-2003) |   | 23.5             | %      | 14.8                | %      | 15.3                | %      | 1.3                   | %      |
| 6 -Year Avg.  (1998-2003) |   | 19.6             | %      | 9.5                 | %      | 9.9                 | %      | 5.9                   | %      |
| 7 -Year Avg.  (1997-2003) |   | 23.0             | %      | 12.2                | %      | 11.3                | %      | 9.8                   | %      |

 

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(1)Total return based on stock price appreciation and reinvestment of alldividends.

(2)Morningstar, Inc. (Morningstar.com)

(3)National Association of Real Estate Investment Trusts (NAREIT)

 

We believe that by focusing on a specificproperty type in cities with a growing small tenant market, we should be ableto increase our revenues, earnings and cash flows.  Although there is no assurance or guarantee, it is our intentionthat growth in our revenues, earnings and cash flows, over the long term, willresult in an increase in our stock price and the total return to ourstockholders.

 

**Acquisitions andDevelopments**

 

**2004 Transactions**

 

On March 16,2004, the Company acquired the Camelback Lakes office building.  Camelback Lakes is located in Phoenix,Arizona and contains approximately 203,000 square feet on 12.04 acres ofland.  The purchase price for CamelbackLakes was $31,980,000, which was paid with $21,000,000 from our $42,000,000 senior secured revolving line ofcredit from Fleet National Bank (Secured Fleet Facility) and the balancefrom our $30,000,000 unsecuredrevolving line of credit from Fleet National Bank (Unsecured Fleet Facility).

 

On March 16, 2004, the Company sold its TexasBank Buildings for $4,100,000.  The fourproperties are located in Clifton, Georgetown, Henderson and Mineral Wells,Texas, contain an aggregate of 60,095 square feet and had an aggregate net bookvalue of approximately $3,195,000 at December 31, 2003.

 

**2003 Transactions**

 

*Greenhill Park Acquisition*

 

On December 4, 2003, the Company acquired theGreenhill Park office building. Greenhill Park is located in Addison, Texas and contains approximately252,000 square feet.  Greenhill Park issubject to a ground lease.  The purchaseprice for Greenhill Park was $10,500,000, which was paid with $5,250,000 fromthe Secured Fleet Facility andthe balance in cash from a portion of the proceeds from our 2003 publicoffering.

 

*Scottsdale Norte Acquisition*

 

On October 7, 2003, the Company acquired theScottsdale Norte office building. Scottsdale Norte is located in Scottsdale, Arizona and containsapproximately 79,000 square feet on 5.451 acres of land.  The purchase price for Scottsdale Norte was$12,250,000, which was paid with $6,630,000 from the assumption of the existingloan from Southern Farm Bureau Life Insurance Company and the balance in cashfrom a portion of the proceeds 

 

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from our 2003 public offering.

 

*Financial Plaza Acquisition*

 

On September10, 2003, the Company acquired the Financial Plaza office building.  Financial Plaza is located in Mesa, Arizonaand contains approximately 311,000 square feet on 6.0673 acres of land.  The purchase price for Financial Plaza was$39,000,000, which was paid with $24,750,000 from the assumption of theexisting loan from Allstate Life Insurance Company and the balance in cash froma portion of the proceeds from our 2003 public offering.

 

*Keystone Office Park IV Development*

 

During 2003, the Company completed theconstruction of an approximately 18,000 square foot building adjacent to theexisting Keystone Office Park in Indianapolis, Indiana.  This building was constructed to accommodatethe expansion needs of some of the existing tenants as well as marketdemand.  The building opened foroccupancy in August 2003 and had an occupancy rate of approximately 68% atDecember 31, 2003.

 

*Southwest Gas Acquisition*

 

On February 6, 2003, the Company acquired theSouthwest Gas office building.  TheSouthwest Gas Building is located in Phoenix, Arizona and containsapproximately 148,000 square feet on 7.38 acres of land.  The purchase price for the Southwest GasBuilding was $17,000,000, which was paid with $11,900,000 from the SecuredFleet Facility and the balance from a short-term loan, also from Fleet NationalBank.  This short-term loan wasrefinanced with the Unsecured FleetFacility.

 

**2002 Transactions**

 

*Chateau Plaza Acquisition*

 

On November 25, 2002, the Company acquiredthe Chateau Plaza office building. Chateau Plaza is located in Dallas, Texas and contains approximately171,000 square feet on one acre of land. The purchase price for Chateau Plaza was $22,000,000, which was paidwith $15,400,000 from the Secured Fleet Facility and the balance paid in cashfrom a portion of the proceeds from our 2002 public offering.

 

*Centerra Acquisition*

 

On November 12, 2002, the Company acquiredthe Centerra office building.  Centerrais located in Denver, Colorado and contains approximately 186,000 square feeton 1.15 acres of land.  The purchaseprice for Centerra was $18,658,300, which was paid with $13,057,660 from theSecured Fleet Facility and the balance paid in cash from a portion of theproceeds from our 2002 public offering.

 

*Keystone Land Acquisition*

 

On September6, 2002, the Company acquired 2.55 acres of undeveloped land, adjacent toKeystone Office Park in Indianapolis, Indiana, from Sheridan Realty Partners,L.P., an affiliate, for $320,000.  Thepurchase price was determined based on the fair market value of the land andwas paid through the issuance of 52,893 shares of our common stock ($6.05 pershare).  In late 2002, the Companycommenced construction of an approximately 18,000 square foot building on thisland.

 

*Parkway Centre II Acquisition*

 

On September 5, 2002, the Company acquiredthe Parkway Centre II office building. Parkway Centre II is located in Plano, Texas and contains approximately152,000 square feet on 6.4 acres of land. The purchase price for Parkway Centre II was $22,000,000, which was paidwith $17,000,000 from the assumption of the existing loan from J.P. MorganChase Commercial Mortgage Securities Corp. and the balance paid in cash from aportion of the 

 

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proceeds from our 2002 public offering.

 

**2001**

 

*Kellogg Building Acquisition*

 

On December 21, 2001, the Company acquiredthe Kellogg Building.  The KelloggBuilding is located in Littleton, Colorado and contains approximately 112,000square feet on five acres of land.  Thepurchase price for the Kellogg Building was $13,550,000, which was paid with$9,500,000 from the proceeds of a loan from US Bank National Association andthe balance paid in cash from a portion of the proceeds from our 2001 publicoffering.

 

*Panorama Falls Sale*

 

On December 6, 2001, the Company sold an 80%tenancy-in-common interest in the Panorama Falls building to a long-terminvestor affiliated with a large shareholder. Panorama Falls is located in Englewood, Colorado and containsapproximately 60,000 square feet on six acres of land.  The sales price for the interest in PanoramaFalls was $4,880,000 payable as follows:

 

•                  $2,180,000 toKeyBank National Association to pay down a portion of the mortgage loan;

 

•                  assumption of80% of the remaining mortgage loan in the amount of $2,395,732; and

 

•                  the remainder of$304,268 in cash, less closing costs.

 

*Arrowhead Fountains Acquisition*

 

On November 19, 2001, the Company acquiredthe Arrowhead Fountains office building. Arrowhead Fountains is located in Peoria, Arizona and containsapproximately 96,000 square feet on five acres of land.  The purchase price for Arrowhead Fountainswas $12,750,000, which was paid with $9,300,000 from the assumption of theexisting loan from Nationwide Life Insurance Company and the balance paid incash from a portion of the proceeds from our 2001 public offering.

 

*Odessa Sale*

 

On October 23, 2001, the Company sold itsoffice building in Odessa, Texas for $132,500. The sale resulted in a gain on sale of $12,747.

 

*Giltedge Sale*

 

On June 1, 2001, the Company sold theGiltedge office building in Appleton, Wisconsin for $3,650,000.  The sale resulted in a gain on sale of$1,143,698.  The cash proceeds from thistransaction of $458,030 were used to complete a tax-deferred exchange underSection 1031 of the Internal Revenue Code.

 

*AmeriVest Plaza at Inverness Acquisition*

 

On April 1, 2001, the Company acquired fromSheridan Investments, LLC, an affiliate, 100% of the ownership interests ofSheridan Plaza at Inverness, LLC. Sheridan Plaza at Inverness, LLC owns two office buildings (which areknown as AmeriVest Plaza at Inverness) located in Englewood, Coloradocontaining approximately 119,000 square feet on 6.7 acres of land.  The purchase price was $22,895,067 andconsisted of:

 

•                  $705,135 for our9.639% preferred membership interest in Sheridan Investments, LLC, the owner ofall of the membership interests in Sheridan Plaza at Inverness LLC, which wastransferred back to Sheridan Investments, LLC;

 

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•                  $6,474,329 paidwith (1) 1,057,346 shares of our common stock, at a price of $5.69 per share(based on an average market price of the shares over a period of several daysbefore and after the date of the announcement of the acquisition) and (2) thecash proceeds of $458,030 from the sale of the Giltedge building;

 

•                  assumption ofthe mortgage loan in the amount of $14,954,425; and

 

•                  assumption ofother liabilities in the amount of $761,178.

 

The acquisition was structured as atax-deferred exchange of the Giltedge office building under Section 1031 of theInternal Revenue Code.  Due to therelated party nature of this transaction, accounting principles generallyaccepted in the United States require us to record this acquisition at itshistorical net book value.  Thedifference between the purchase price and the historical net book value was$4,507,557 and has been recorded as a non-cash dividend during 2001.

 

**Disclosure RegardingForward-Looking Statements And Cautionary Statements**

 

This annual report includes “forward-lookingstatements” within the meaning of Section 21E of the Securities Exchange Act of1934 and Section 27A of the Securities Act of 1933, as amended.  All statements other than statements of historicalfacts included in or incorporated by reference into this annual report,including statements regarding our expected financial position, businessstrategy, plans and objectives of management for future operations, expectedcapital expenditures, expected funding sources, planned investments andforecasted dates, are forward-looking statements.  These forward-looking statements are based on our currentexpectations, beliefs, assumptions, estimates and projections about theindustry and markets in which we operate. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“seeks,” “estimates” and variations of such words and similar expressions areoften used to identify forward-looking statements.  Although we believe that the expectations and assumptionsreflected in the forward-looking statements are reasonable, these statementsare not guarantees of future performance and involve certain risks,uncertainties and assumptions, which are difficult to predict and many of whichare beyond our control.  Therefore,actual outcomes and results may differ materially from what is expressed,forecasted or implied in such forward-looking statements.  We undertake no obligation to updatepublicly any forward-looking statements, whether as a result of newinformation, future events or otherwise, except as required by applicable law.

 

Additional cautionary statements concerningimportant factors that could cause actual results to differ materially from ourexpectations are disclosed in this annual report, including the statementscontained in the “Risk Factors” section below. All written and oral forward-looking statements attributable to us orpersons acting on our behalf subsequent to the date of this annual report areexpressly qualified in their entirety by such cautionary statements.

 

**Risk Factors**

 

**Ourvariable rate debt subjects us to interest rate risk.**

 

At December 31, 2003, approximately $33.6million, or 21%, of our total mortgage debt was at variable rates ranging from275 to 400 basis points over LIBOR.  Theweighted-average interest rate on this variable rate debt was approximately 5%at December 31, 2003.  All of thisvariable rate debt is due in 2005. Increases in interest rates could increase our interest expense, whichwould adversely affect net earnings and cash available for payment of our debtobligations and distributions to our stockholders.

 

**Weface a competitive market, which could limit our ability to lease ourproperties or secure attractive investment opportunities.**

 

Our business strategy contemplates expansionthrough acquisition.  The commercialreal estate industry is highly competitive, and we compete with substantiallylarger companies, including substantially larger REITs, for the acquisition,development and operation of properties. Some of these companies are national or regional 

 

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operators with far greater resources than we have.  As a result, we may not be able or have theopportunity to make suitable investments on favorable terms in the future.  Competition in a particular area also couldadversely affect our ability to lease our properties or to increase or maintainrental rates.  Thus, the presence ofthese competitors may impede the continuation and development of our business.

 

**Ourdebt level may have a negative impact on our income and our ability to paydividends.**

 

We have incurred indebtedness in connectionwith the acquisition of our properties, and we may incur new indebtedness inthe future in connection with our acquisition, development and operatingactivities.  At December 31, 2003, wehad approximately $159.5 million of long-term indebtedness, of whichapproximately $52.6 million in the aggregate is due in 2005 and 2006.  As a result of our use of debt, we aresubject to the risks normally associated with debt financing, including:

 

•                  that our cashflow will be insufficient to make required payments of principal and interest;

 

•                  that we will beunable to refinance some or all of our indebtedness or that any refinancingwill not be on terms as favorable as those of the existing indebtedness;

 

•                  that requiredpayments on mortgages and on our other indebtedness are not reduced if theeconomic performance of any property declines;

 

•                  that debtservice obligations will reduce funds available for distribution to ourstockholders; and

 

•                  that any defaulton our indebtedness could result in acceleration of those obligations.

 

If the economic performance of any of ourproperties declines, our ability to make debt service payments would beadversely affected.  If a property ismortgaged to secure payment of indebtedness and we are unable to meet mortgagepayments, we may lose that property to lender foreclosure with a consequentloss of income and asset value.

 

We do not have a policy limiting the amountof debt that we may incur; however, our Secured Fleet Facility limits our totalliabilities to 70% of gross assets, as calculated in accordance with the loanagreement.  This threshold will decreaseto 65% at June 30, 2004.  Our totalliabilities to total market capitalization ratio was approximately 57% atDecember 31, 2003.  Our leverage levelsmay make it difficult to obtain any additional financing based on our currentportfolio or to refinance existing debt on favorable terms or at all.  Our leverage levels also may adverselyaffect the market value of our stock if we are perceived as more risky than ourpeers.

 

**Someof our buildings are subject to special income tax considerations, which couldresult in substantial tax liability upon their sale.**

 

If we sell any of our Sheridan Centerbuildings before 2006 (ten years after the original acquisition date of theproperty or the property exchanged for that property), we will be required topay tax at the highest applicable corporate rate on the excess of thebuildings’ fair market value at the effective time of our REIT election overits adjusted basis at such time (or, if lesser, the excess of the fair marketvalue of the building at the time of the sale over its adjusted basis at thetime of the sale).

 

Because we used proceeds from the sale of asmall office building in Wisconsin to purchase AmeriVest Plaza in an exchangequalifying under Section 1031 of the Internal Revenue Code, we may also berequired to hold AmeriVest Plaza until 2006 in order to avoid corporate tax onthe appreciation of the exchanged property as of the effective date of our REITelection.  If we are subject to tax onany such gain at the highest corporate rate, the amount of this corporate taxcould be substantial.  We may not havesufficient cash available to pay the corporate taxes resulting from the sale ofthese properties.

 

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**Newdevelopments and acquisitions may fail to perform as we expect.**

 

Over the last few years, we have focused ourefforts on the acquisition and redevelopment of multi-tenant officebuildings.  We intend to continue toselectively develop and acquire office properties.  In deciding whether to acquire or develop a particular property,we make assumptions regarding the expected future performance of that property.In particular, we estimate the return on our investment based on expectedoccupancy and rental rates.  If theproperty is unable to achieve the expected occupancy and rental rates, it mayfail to perform as we expected in analyzing our investment.  When we acquire a property, we oftenreposition or redevelop that property with the goal of increasingprofitability.  Our estimate of thecosts of repositioning or redeveloping an acquired property may proveinaccurate, which may result in our failure to meet our profitabilitygoals.  Additionally, we may acquire newproperties not fully leased and the cash flow from existing operations may beinsufficient to pay the operating expenses and debt service associated withthat property until the property is fully leased.  If one or more of these new properties do not perform as expectedor we are unable to successfully integrate new properties into our existingoperations, our financial performance may be adversely affected.

 

**Developmentand construction risks could adversely affect our profitability.**

 

We are currently improving several of ourproperties and may develop new properties in the future.  Our renovation, redevelopment, developmentand related construction activities may subject us to the following risks:

 

•                  We may be unableto obtain, or suffer delays in obtaining, necessary zoning, land-use, building,occupancy and other required governmental permits and authorizations, whichcould result in increased costs or our abandonment of these projects.

 

•                  We may incurconstruction costs for a property which exceed our original estimates due toincreased costs for materials or labor or other costs, such as asbestos or moldabatement, that we did not anticipate.

 

•                  We may not beable to obtain financing on favorable terms, which may make us unable toproceed with our development activities.

 

•                  We may be unableto complete construction and lease-up of a property on schedule, which couldresult in increased debt service expense or construction costs.

 

Additionally, the time frame required fordevelopment, construction and lease-up of these properties means that we mayhave to wait years for a significant cash return.  Because we are required to make cash distributions to ourstockholders to maintain our REIT tax status, if the cash flow from operationsor refinancing is not sufficient, we may be forced to borrow additional moneyto fund such distributions.

 

**Failureto succeed in new markets may limit our growth.**

 

We may make selected acquisitions outside ourcurrent market areas from time to time as appropriate opportunities arise.  Our historical experience is in metropolitanDenver, Dallas, Phoenix and Indianapolis, and we may not be able to operatesuccessfully in other market areas new to us. We may be exposed to a variety of risks if we choose to enter into newmarkets. These risks include:

 

•                  a lack of marketknowledge and understanding of the local economies;

 

•                  an inability to identifyacquisition or development opportunities;

 

•                  an inability toattract tenants to our properties in these new markets;

 

•                  an inability toobtain construction trades people; and

 

•                  an unfamiliaritywith local government and permitting procedures.

 

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Any of these factors could adversely affectthe profitability of projects outside our current markets and limit the successof our acquisition, development and leasing strategy.

 

**Realestate investments are inherently risky, which could adversely affect ourprofitability and our ability to make distributions to our stockholders.**

 

Real estate investments are subject tovarying degrees of risk.  If we acquireor develop properties and they do not generate sufficient operating cash flowto meet operating expenses, including debt service, capital expenditures andtenant improvements, our income and ability to pay dividends to ourstockholders will be adversely affected. Income from properties may beadversely affected by:

 

•                  decreases inrent and/or occupancy rates due to competition, economic or other factors;

 

•                  increases inoperating costs such as real estate taxes, insurance premiums, site maintenanceand utilities;

 

•                  changes ininterest rates and the availability of financing; and

 

•                  changes in lawsand governmental regulations, including those governing real estate usage,zoning and taxes.

 

**Futureterrorist attacks in the United States and international hostilities may resultin declining economic activity, which could reduce the demand for and the valueof our properties.**

 

Future terrorist attacks in the UnitedStates, such as the attacks that occurred in New York and Washington, D.C. onSeptember 11, 2001, and other acts of terrorism or war, whether in the UnitedStates or abroad, may result in declining economic activity and reduced demandfor our properties.  A decrease indemand would make it difficult for us to renew or re-lease our properties atlease rates equal to or above historical rates.  Terrorist activities also could directly impact the value of ourproperties through damage, destruction or loss.  To the extent that our tenants are impacted by future attacks,their businesses similarly could be adversely affected, including their abilityto continue to honor obligations under their existing leases.

 

These types of events also may adverselyaffect the markets in which our securities trade.  These acts may cause further erosion of business and consumerconfidence and spending and may result in increased volatility in national andinternational financial markets and economies. Any one of these events may cause a decline in the demand for realestate, delay the time in which our new or renovated properties reach stableoccupancy, increase our operating expenses due to increased physical securityand insurance costs for our properties and limit our access to capital orincrease our cost of raising capital.

 

**Generaleconomic conditions may adversely affect our financial condition and results ofoperations.**

 

Periods of economic slowdown or recession inthe United States and in other countries, rising interest rates or decliningdemand for real estate, or the public perception that any of these events mayoccur, could result in a general decline in rents or an increased incidence ofdefaults by our tenants under existing leases, which would adversely affect ourfinancial position, results of operations and cash flow, as well as the tradingprice of our securities and our ability to satisfy our debt service obligationsand to make distributions to our stockholders.

 

**Unfavorablechanges in local market and economic conditions could hurt occupancy or rentalrates.**

 

Currently, our properties are located inmetropolitan Denver, Dallas, Phoenix and Indianapolis. Economic conditions inour local markets may significantly affect occupancy and rental rates.  Occupancy and rental rates, in turn, maysignificantly affect our profitability and our ability to satisfy our financialobligations.  The economic condition ofour local markets may depend on one or more industries and, therefore, aneconomic downturn in one of these industry sectors may adversely affect ourperformance in that market.  Local realestate market conditions 

 

9

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may include a large supply of competing space, and we compete fortenants based on rental rates, attractiveness and location of a property, andquality of maintenance and management services.

 

**Weare subject to the credit risk of our tenants, which could result in leasepayments not being made and a significant decrease in our revenues.**

 

We are subject to the credit risk of ourtenants.  Many of our tenants are smallcompanies with nominal net worth.  Wecannot assure you that our tenants will not default on their leases and fail tomake rental payments to us.  Inparticular, local economic conditions and factors affecting the industries inwhich our tenants operate may affect our tenants’ ability to make leasepayments to us.  Moreover, we may beunable to locate a replacement tenant in a timely manner or on comparable orbetter terms if a tenant defaults on its lease.  The loss of rental revenues from a number of our tenants mayadversely affect our profitability and our ability to meet our financialobligations.

 

**Wemay be unable to renew leases or re-lease space on a timely basis or oncomparable or better terms, which could significantly decrease our revenues.**

 

A significant number of our leases on our100%-owned properties, representing approximately 46% of our annualized leaserevenue expire on or before December 31, 2005. Current tenants may elect not to renew their leases upon the expirationof their terms.  Alternatively, currenttenants may attempt to terminate their leases prior to the expiration of theircurrent terms.  Many of our leases arefor relatively short terms of a few years. If non-renewals or terminations occur, we may not be able to locate aqualified replacement tenant and, as a result, we would lose a source ofrevenue while remaining responsible for the payment of our obligations.  Moreover, the terms of a renewal or newlease may be less favorable than current lease terms.  This may cause affected properties to be impaired.

 

**Lossof a significant tenant could lead to a substantial decrease in our cash flowand an impairment of the value of our real estate.**

 

Although we target tenants seeking 2,000 to4,000 square feet of office space, we may have several significant tenants fromtime to time, the loss of any of which could adversely affect our cash flow andmay cause affected properties to be impaired.

 

Chateau Plaza in Dallas, Texas isapproximately 70% (120,607 square feet) leased to a single tenant, Dean FoodsCompany, under a direct lease through December 2005.  However, the tenant has the option to terminate the lease uponeight months written notice.  Should thetenant elect to terminate the lease early, it is obligated to pay a terminationpenalty equal to three months of the current base rent plus any unamortized tenantimprovement and leasing costs.  The lossof this tenant could adversely affect our cash flow until we are able tore-lease the vacated space.  Our leasewith Dean Foods Company accounts for approximately $2,760,000 of our annualrevenue.

 

Currently, eleven of our thirteen Texas StateBuildings are leased to various agencies of the State of Texas.  Although each of these leases includes aspecific termination date, the State of Texas may terminate a lease at any timeif state appropriated funds necessary to pay the required rents are unavailableor federally funded programs are curtailed. If the State of Texas were to terminate or fail to renew a lease, it maybe difficult for us to locate another tenant on a timely basis or on comparableor better terms, especially for those buildings located in smaller cities andmore remote locations.  The State ofTexas also may elect not to renew leases with us upon expiration.  For the years ended December 31, 2003 and2002, leases with the State of Texas accounted for approximately $1,577,000 and$1,775,000 in revenue, respectively.  InNovember 2001, the State of Texas vacated our Clint, Texas building, whichaccounted for $125,676 in annual revenue. In 2002 and 2003, we recorded impairment charges for this property of$275,000 and $334,592, respectively, due to difficulties in finding areplacement tenant.  Impairment chargesrecorded on this property have reduced its net book value to its estimated fairvalue of $100,000.  In December 2002,the State of Texas vacated our Paris, Texas building, which accounted for$242,567 in annual revenue.  In 2003, werecorded an impairment charge for this property of $1,131,340 due todifficulties in finding a replacement tenant. The impairment charge recorded on this property has reduced its net bookvalue to its estimated fair value of $43,000. The leases for two properties in Amarillo and Bellville, Texas expire inAugust 2004 and December 2004, respectively, and it has yet to be determined ifthe State of Texas will renew its leases. These properties account for approximately $308,000 in aggregate annualrevenue and had an aggregate net book value of 

 

10

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approximately $1,683,000 at December 31, 2003.  The Clint, Texas building and Paris, Texasbuilding remain vacant at the date of this report.

 

**Ouruninsured and underinsured losses could result in loss of value of ourproperties.**

 

There are certain types of losses, generallyof a catastrophic nature, such as earthquakes and floods, that may beuninsurable or not economically insurable, as to which our facilities are atrisk in their particular locations.  Ourmanagement uses its discretion in determining amounts, coverage limits and deductibilityprovisions of insurance, with a view to obtaining appropriate insurance on ourinvestments at a reasonable cost and on suitable terms.  These decisions may result in our havinginsurance coverage that, in the event of a substantial loss, would not besufficient to repay us for the full current market value or current replacementcost.  Also, due to inflation, changesin codes and ordinances, environmental considerations, and other factors, itmay not be feasible to use insurance proceeds to replace a building after ithas been damaged or destroyed.

 

**Thesuccess of our company depends on the continuing contributions of our keypersonnel.**

 

We have a highly skilled management team andspecialized workforce managing our properties. We do not have employment agreements with any of our executive officersor key employees and, thus, any executive officer or key employee may terminatehis or her relationship with us at any time.

 

**Thereis limited liquidity in our real estate investments, which could limit ourflexibility.**

 

Real estate investments are relativelyilliquid.  Our ability to vary ourportfolio in response to changes in economic and other conditions will belimited.  We may not be able to disposeof an investment when we find disposition advantageous or necessary, and thesale price of any disposition may not recoup or exceed the amount of ourinvestment.  In addition, federal taxlaws limit our ability to sell properties that we have owned for fewer thanfour years, and this may affect our ability to sell properties withoutadversely affecting returns to our stockholders.

 

Furthermore, certain of our mortgage loansprovide for penalties upon the early termination of the respective loan.  This may restrict our ability to sell thosesubject properties.

 

**Wemay suffer environmental liabilities which could result in substantial costs.**

 

Under various environmental laws, a currentor previous owner or operator of real property may be liable for the costs ofremoval or remediation of hazardous or toxic substances, includingasbestos-containing materials and mold, that are located on or under theproperty.  These laws often imposeliability whether the owner or operator knew of, or was responsible for, thepresence of those substances. In connection with our ownership and operation ofproperties, we may be liable for these costs, which could be substantial.  Also, our ability to arrange for financingsecured by that real property might be adversely affected because of thepresence of hazardous or toxic substances or the failure to properly remediateany contamination.  In addition, we maybe subject to claims by third parties based on damages and costs resulting fromenvironmental contamination at or emanating from our properties.  In particular, two lawsuits have been filedagainst our AmeriVest Properties Texas Inc. subsidiary alleging that ourMission, Texas property is contaminated with airborne contaminants.  Our insurance company is defending us inthese lawsuits.  These lawsuits, orsimilar lawsuits, if adversely determined, could have a material adverse effecton our business and financial condition, and we cannot assure you that otherlawsuits will not be filed against us with respect to this building or ourother buildings.

 

After the acquisition of the Sheridan Centerbuildings, we embarked on an asbestos remediation program in accordance withapplicable federal and state requirements, using licensed contractors toremove, wherever accessible or otherwise required, asbestos-containingmaterials in the buildings, including ceiling tiles, drywall joint compound,wood and metal fire doors, wall texture, mudded pipe elbows and valves, thermalsystems insulation, floor tile and mastic and boiler insulation.  Most of the remediation has been completed,except for one building, which is expected to be completed over the next fewyears as tenants vacate spaces, allowing access to the asbestos materials.

 

11

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**Non-compliancewith the Americans with Disabilities Act could result in compliance costs and fines.**

 

Under the Americans with Disabilities Act of1990, or the ADA, all public accommodations are required to meet certainfederal requirements related to physical access and use by disabledpersons.  While we believe we are incompliance with the ADA requirements, a determination that we are not incompliance with the ADA could require capital expenditures to remove accessbarriers and non-compliance could result in the imposition of fines or an awardof damages to private litigants.  If wewere required to make modifications to comply with the ADA or othergovernmental rules and regulations, our ability to make expected distributionsto our stockholders could be adversely affected.

 

**Theability of our stockholders to control our policies or effect a change incontrol of our company is limited, which may not be in our stockholders’ bestinterests.**

 

*Charter and Bylaws Provisions*.  Some provisions of our charter and bylawsmay delay or prevent a change in control of our company or other transactionsthat could provide our stockholders with a premium over the then-prevailingmarket price of our common or preferred stock or that might otherwise be in thebest interests of our stockholders. These provisions include:

 

•                  *Classified Board of Directors and size of Board ofDirectors fixed within range; removal of directors only for cause*.  Our Board of Directors is divided into threeclasses with staggered terms of office. The total number of directors is fixed by a majority vote of the Boardof Directors within a range of a minimum of three and a maximum of nine.  Directors may only be removed forcause.  These provisions may make itmore difficult for a third party to gain control of our Board ofDirectors.  At least two annual meetingsof stockholders, instead of one, generally would be required to effect a changein a majority of our Board of Directors, and the number of directors cannot beincreased above the maximum number of directors specified in our charterwithout board and stockholder approvals.

 

•                  *Two-thirds stockholder vote required to approve someamendments to the charter*. Some amendments to our charter must be approved by the affirmative voteof stockholders holding at least 66 2/3% of the outstanding shares of ourcommon stock, voting together as a single class.  These voting requirements may make amendments to our charter thatstockholders believe desirable more difficult to effect.

 

•                  *Issuance of preferred stock without stockholderapproval*.  Our Board ofDirectors has the ability to authorize the issuance of preferred stock withoutstockholder approval and to set or change the designation, preferences,conversion or other rights, voting powers, restrictions, limitations as todividends and other distributions, qualifications, or terms or conditions ofredemption of the preferred stock.  OurBoard of Directors could therefore authorize series of preferred stock that mayhave voting provisions that could delay or prevent a change in control or othertransaction that might involve a premium price or otherwise be in the bestinterests of our stockholders.

 

•                  *Ownership Limitation*.  In order to assist us in maintaining ourqualification as a REIT, our Articles of Incorporation contain provisionsgenerally limiting the ownership of shares of our capital stock by any singlestockholder to 9% of our outstanding shares, unless waived by our Board ofDirectors.  At our 2003 annual meeting,our stockholders approved the amendment and restatement of our Articles ofIncorporation to include the ownership limitation provisions in our Articles ofIncorporation.  Prior to the 2003 annualmeeting, these ownership limitation provisions were contained in ourbylaws.  These provisions could alsodelay or prevent an acquisition or change in control of our company that couldbenefit our stockholders.

 

*Maryland Business Statutes*.  As a Maryland corporation, we are subject tothe provisions of the Maryland General Corporation Law.  Maryland law imposes restrictions on somebusiness combinations and requires compliance with statutory procedures beforesome mergers and acquisitions can occur. These provisions of Maryland law may have the effect of discouragingoffers to acquire us even if the acquisition would be advantageous to ourstockholders.  These provisions include:

 

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•                  *Unsolicited takeover provisions*.  Maryland law provides that the Board ofDirectors of a Maryland corporation is not subject to higher duties with regardto actions taken in a takeover context. These provisions may make it more difficult to effect an unsolicitedtakeover of a Maryland corporation. Maryland law also allows publicly held corporations with at least threeindependent directors to elect to be governed, without shareholder approval, byall or any part of Maryland law provisions relating to extraordinary actionsand unsolicited takeovers.

 

•                  *Business combination with interested stockholders*.  The Maryland Business Combination Actprovides that, unless exempted, a Maryland corporation may not engage inbusiness combinations, including mergers, dispositions of 10% or more of itsassets, issuances of shares and other specified transactions, with an“interested stockholder” or its affiliates, for five years after the mostrecent date on which the interested stockholder became an interestedstockholder and thereafter unless specified criteria are met.

 

*Control share acquisition*.  The Maryland Control Shares Acquisition Actprovides that shares acquired by any person over one-tenth, one-third and amajority of the voting power of a corporation do not have voting rights, exceptto the extent approved by the vote of two-thirds of the shares of common stockentitled to be cast on the matter.

 

*Other constituencies*.  Maryland law expressly authorizes a Marylandcorporation to include in its charter a provision that allows the Board ofDirectors to consider the effect of a potential acquisition of control onstockholders, employees, suppliers, customers, creditors and communities inwhich offices or other establishments of the corporation are located.  Our current charter does not include aprovision of this type.  Maryland lawalso provides, however, that the inclusion or omission of this type ofprovision in the charter of a Maryland corporation does not create an inferenceconcerning factors that may be considered by the Board of Directors regarding apotential acquisition of control.  Thislaw may allow our Board of Directors to reject an acquisition proposal eventhough the proposal is in the best interests of our stockholders.

 

*Other Maryland laws*.  Maryland law also permits the Board ofDirectors, without stockholder approval, and even if contrary to a company’sbylaws or charter, to classify the Board of Directors, require a two-thirdsvote for the removal of directors and give the Board of Directors sole power tofill Board vacancies occurring for any reason.

 

**Thereis a limited market for our common stock, which could hinder the ability of ourstockholders to sell our shares.**

 

Historically, there has been limited tradingvolume for our common stock and there may be a limited trading volume for ourpreferred stock.  Our equity marketcapitalization places us at the low end of market capitalization among allREITs.  Because of our small marketcapitalization, most of our investors are individuals.  We cannot assure you that the market for oursecurities will remain at current levels or expand.  Due to our limited trading volume and small marketcapitalization, many investors may not be interested in owning our securitiesbecause of the inability to acquire or sell a substantial block of our stock atone time.  This illiquidity could havean adverse effect on the market price of our securities. In addition, astockholder may not be able to borrow funds using our securities as collateralbecause lenders may be unwilling to accept the pledge of securities having sucha limited market.  Any substantial saleof our securities could have a material adverse effect on the market price ofour securities.

 

**Wemay not be able to pay dividends to our stockholders regularly.**

 

Our ability to pay dividends in the futuredepends on our ability to operate profitably and to generate cash from ouroperations in excess of debt service obligations and required capitalexpenditures.  Because we have had tofinance our growth, we have not been able to generate sufficient cash from ouroperations to cover all these obligations and have had to fund certain capitalexpenditures from external sources, including borrowings and equity offerings.  The payment of dividends is in the solediscretion of our Board of Directors. We cannot assure you that we will be able to pay dividends consistentlywith historical payments.

 

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**Wemay incur tax liabilities if we fail to qualify as a REIT.**

 

We believe that we have been organized andoperated so as to qualify as a REIT under the Internal Revenue Code of 1986, asamended, since our taxable year ended December 31, 1996.  However, we cannot assure you that we willcontinue to be qualified as a REIT. Qualification as a REIT involves the application of highly technical andcomplex Internal Revenue Code provisions for which there are only limitedjudicial or administrative interpretations. The determination of various factual matters and circumstances notentirely within our control may affect our ability to qualify as a REIT.  In addition, legislation, new regulations,administrative interpretations or court decisions may significantly change therequirements for qualification as a REIT or the federal income tax consequencesof that qualification.

 

In order to qualify as a REIT, at all timesduring the second half of each taxable year following our first taxable year,no more than 50% in value of our shares may be owned, directly or indirectlyand by applying constructive ownership rules, by five or fewer individuals,including some tax-exempt entities.  OurArticles of Incorporation provide restrictions regarding the transfer ofshares, including a 9% limitation on the ownership of our shares by anystockholder, that are intended to assist us in continuing to satisfy this shareownership requirement.

 

If we were unable to qualify as a REIT in anytaxable year, we would not be allowed a deduction for distributions tostockholders in computing our taxable income and would be subject to federalincome tax on our taxable income at regular corporate rates and possibly to thealternative minimum tax.  Unless we areentitled to relief under certain Internal Revenue Code provisions, we alsowould be disqualified from treatment as a REIT for the four taxable yearsfollowing the year during which REIT qualification was lost.  As a result, the funds available fordistribution to our stockholders would be reduced for each of the yearsinvolved.  In addition, we may have toincur substantial indebtedness or may have to liquidate substantial investmentsin order to pay the resulting federal income tax liabilities if differences intiming exist between the receipt of income and payment of our taxobligations.  Although we currentlyintend to operate in a manner designed to qualify as a REIT, it is possiblethat future economic, market, legal, tax or other considerations may cause usto revoke our REIT election.

 

**Wemay have to borrow money to make required distributions to our stockholders.**

 

In order to qualify as a REIT, we generallyare required each year to distribute to our stockholders at least 90% of ourREIT taxable income, excluding any net capital gains.  To the extent that we satisfy the distribution requirement, butdistribute less than 100% of our taxable income, we will be subject to federalcorporate income tax on our undistributed taxable income.  In addition, we will be subject to a 4%nondeductible excise tax on the amount, if any, by which certain distributionspaid by us with respect to any calendar year are less than the sum of 85% ofour ordinary income for that year plus 95% of our capital gain net income forthat year plus any undistributed taxable income from prior periods.  We intend to make distributions to ourstockholders to comply with the 90% distribution requirement and to avoidcorporate income tax and the nondeductible excise tax.  We may have to borrow funds on a short-termbasis to meet the 90% distribution requirement and to avoid corporate incometax and the nondeductible excise tax if differences in timing between taxableincome and cash available for distribution exist.  Because we already have significant debt obligations and arehighly leveraged, we may not be able to borrow these funds at favorableinterest rates or at all.

 

**Adverselegislative or regulatory tax changes may affect the tax treatment of us or ourstockholders.**

 

At any time, the federal income tax lawsgoverning REITs or the administrative interpretations of those laws may beamended.  Any of those new laws orinterpretations thereof may take effect retroactively and could adverselyaffect our company or you, as a shareholder. On May 28, 2003, the President signed into law tax legislation thatreduces the federal tax rate on both dividends and long-term capital gains forindividuals to 15% through 2008. Because REITs generally are not subject to corporate income tax, thisreduced tax rate generally does not apply to ordinary REIT dividends, whichcontinue to be taxed at the higher tax rates applicable to ordinaryincome.  The new 15% tax rate appliesto:

 

•                  long-termcapital gains recognized on the disposition of REIT shares;

 

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•                  REIT capitalgain distributions (except to the extent attributable to real estatedepreciation, in which case such distributions continue to be subject to a 25%tax rate);

 

•                  REIT dividendsattributable to dividends received by a REIT from non-REIT corporations, suchas taxable REIT subsidiaries; and

 

•                  REIT dividendsattributable to income that was subject to corporate income tax at the REITlevel (e.g., to the extent that a REIT distributes less than 100% of itstaxable income).

 

This new law could cause shares in non-REITcorporations to be a relatively more attractive investment to individualinvestors than shares in REITs.  Thelegislation also could have an adverse effect on the market price of oursecurities.

 

**Competition**

 

The business of managing, leasing andoperating office buildings is competitive and we compete for tenants with otheroffice buildings, including buildings owned by larger companies with morefinancial and other resources available to them.  This competition could limit our ability to lease our properties,increase or maintain rental rates, or secure attractive investmentopportunities.  We will need to competefor tenants based on rental rates, attractiveness and location of a property,and quality of maintenance and management services.  We believe that our niche focus on multi-tenant office buildingswith smaller average tenant sizes will improve our ability to compete.

 

**Employees**

 

At December 31, 2003, we had 51 employees.

 

**EnvironmentalMatters**

 

Under various federal, state and local lawsand regulations, an owner or operator of real property may be liable for thecosts of removal or remediation of certain hazardous or toxic substances onthat property.  These laws often imposesuch liability regardless of whether the owner caused or knew of the presenceof hazardous or toxic substances and regardless of whether the storage of thosesubstances was in violation of a tenant’s lease.  Furthermore, the costs of remediation or removal of those substancesmay be substantial, and the presence of hazardous or toxic substances, or thefailure to promptly remediate those substances, may adversely affect theowner’s ability to sell the property or to borrow money using the property ascollateral.  In connection with theownership and operation of the properties, we may be potentially liable forsuch costs.

 

We have obtained an environmental assessmentof each of our properties.  Theseenvironmental assessments have not revealed any environmental conditions thatmanagement believes will subject us to material liability.  In addition, we have not been, nor do wehave knowledge that any of the previous owners of the properties have been,notified by any governmental authority of any material noncompliance, liabilityor claim relating to hazardous or toxic substances or other environmentalsubstances in connection with any of the properties.  Although we have obtained environmental assessments of theproperties, and although we are not aware of any notifications by anygovernmental authority of any material noncompliance, it is possible that ourassessments do not reveal all environmental liabilities or that there arematerial environmental liabilities of which we are unaware.  For a description of pending legalproceedings involving environmental issues, see “Legal Proceedings.”

 

After the acquisition of the Sheridan Centerbuildings, we embarked on an asbestos remediation program in accordance withapplicable federal and state requirements, using licensed contractors toremove, wherever accessible or otherwise required, asbestos-containingmaterials in the buildings, including ceiling tiles, drywall joint compound,wood and metal fire doors, wall texture, mudded pipe elbows and valves, thermalsystems insulation, floor tile and mastic and boiler insulation.  Most of the remediation has been completed,except for one building, which is expected to be completed over the next fewyears as tenants vacate spaces, allowing access to the asbestos materials.

 

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**ITEM 2. PROPERTIES**

 

At December 31, 2003, we own and operate30 office properties in metropolitan Denver, Dallas, Phoenix andIndianapolis.  Given access to capital,we believe we will continue to be able to identify and complete acquisition anddevelopment opportunities.

 

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The following table provides certain information abouteach of our office properties owned at December 31, 2003:

 
|                                        |   |               |   |                  |   | **At  December 31, 2003:** |   | **At  December 31, 2002:**  |   |
|---------------------------------------------|--------|--------------------|--------|-----------------------|--------|----------------------------|--------|-----------------------------|--------|
| **Building/  Location**                     |   | **Year  Acquired** |   | **Rentable  Area(1)** |   | **Occupancy  Rate(2)**     |   | **Average  Rent Per SF(3)** |   | **Occupancy  Rate(2)** |   | **Average  Rent Per SF(3)** |   |
| *Same Store-*                               |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Chateau Plaza  Dallas, TX                   |   | 2002               |   | 171,294               |   | 100.0                      | %      | $                           | 22.70  |   | 97.6 | % | $ | 22.79 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Centerra  Denver, CO                        |   | 2002               |   | 186,377               |   | 72.9                       | %      | 19.89                       |   | 68.1 | % | 20.78 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Parkway Centre II  Plano, TX                |   | 2002               |   | 151,968               |   | 95.4                       | %      | 20.61                       |   | 97.9 | % | 20.84 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Kellogg Building  Littleton, CO             |   | 2001               |   | 111,580               |   | 85.8                       | %      | 21.04                       |   | 98.6 | % | 21.92 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Arrowhead Fountains  Peoria, AZ             |   | 2001               |   | 96,092                |   | 100.0                      | %      | 21.85                       |   | 100.0 | % | 21.41 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| AmeriVest Plaza at Inverness  Englewood, CO |   | 2001               |   | 118,720               |   | 91.3                       | %      | 23.10                       |   | 99.2 | % | 23.57 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Sheridan Center  Denver, CO                 |   | 2000               |   | 140,162               |   | 82.7                       | %      | 16.36                       |   | 79.5 | % | 15.83 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   | Subtotal           |   | 976,193               |   | 88.9                       | %      | $                           | 20.84  |   | 89.9 | % | $ | 21.13 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| *2003 Acquisitions and Developments-*       |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Greenhill Park  Addison, TX                 |   | 2003               |   | 251,917               |   | 76.7                       | %      | $                           | 18.84  |   | N/A |   | N/A |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Scottsdale Norte  Scottsdale, AZ            |   | 2003               |   | 79,223                |   | 80.9                       | %      | 23.16                       |   | N/A |   | N/A |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Financial Plaza  Mesa, AZ                   |   | 2003               |   | 310,828               |   | 80.5                       | %      | 23.02                       |   | N/A |   | N/A |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Keystone Office Park(4)  Indianapolis, IN   |   | 1999/2003          |   | 114,060               |   | 86.4                       | %      | 17.71                       |   | 97.1 | % | $ | 17.33 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Southwest Gas Building  Phoenix, AZ         |   | 2003               |   | 147,660               |   | 80.4                       | %      | 22.10                       |   | N/A |   | N/A |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   | Subtotal           |   | 903,688               |   | 80.2                       | %      | $                           | 21.05  |   | N/A |   | N/A |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| *Informal Joint Venture-*                   |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Panorama Falls(5)  Englewood, CO            |   | 2000               |   | 59,561                |   | 78.0                       | %      | $                           | 19.01  |   | 70.8 | % | $ | 19.15 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   | Subtotal           |   | 59,561                |   | 78.0                       | %      | $                           | 19.01  |   | 70.8 | % | $ | 19.15 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| *Non-Core-*                                 |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Texas Bank Buildings(6)  Texas              |   | 1998               |   | 60,095                |   | 100.0                      | %      | $                           | 15.88  |   | 97.4 | % | $ | 16.00 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
| Texas State Buildings(7)  Texas             |   | 1997-98            |   | 222,542               |   | 76.8                       | %      | 9.00                        |   | 77.7 | % | 9.05 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   | Subtotal           |   | 282,637               |   | 81.7                       | %      | $                           | 10.79  |   | 81.9 | % | $ | 10.81 |   |
|                                        |   |               |   |                  |   |                       |   |                        |   |   |   |   |   |
|                                        |   | Total              |   | 2,222,079             |   | 84.2                       | %      | $                           | 19.63  |   | 88.0 | % | $ | 18.86 |   |

 

----

(1)          Includes office space but excludes storage, telecommunications andgarage space.

(2)          Includes space leased but not yet occupied.

(3)          Annualized cash basis revenue divided by leased rentable area.

(4)          A fourth building was constructed during 2003; as such, 2002 is notcomparable.

(5)          20% of the property is owned by AmeriVest and 80% of the property isowned by Freemark Abbey Panorama, LLC as tenants in common.

(6)          These four buildings are leased approximately 63% to Bank ofAmerica.  The buildings are located inClifton, Georgetown, Henderson and Mineral Wells, Texas.  These buildings were sold on March 16, 2004.

(7)          Eleven of these thirteen buildings are leased primarily to variousagencies of the State of Texas.  Thebuildings are located in Lubbock, El Paso (2), Clint, Temple, Bellville,Columbus, Hempstead, Mission, Arlington, Marshall, Amarillo and Paris, Texas.

 

17

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The following charts illustrate the geographic distribution of our100%-owned core properties (1) at December 31, 2003 by square footage and2003 revenues:

 

**Figure 1 – GeographicDistribution by Square Footage**

 

 

 

**Figure2 – Geographic Distribution by 2003 Revenues**

 

 

----

(1)     Does not include Texas Bank Buildings, TexasState Buildings or Panorama Falls.

 

18

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The followingtable categorizes the area leased to tenants of our 100%-owned coreproperties(1) by industry at December 31, 2003:

 

| **Industry**                                        |   | **Percentage  of Area** |   |
|-----------------------------------------------------|--------|-------------------------|--------|
| Wholesale trade and manufacturing                   |   | 15.5                    | %      |
| Consulting and business services                    |   | 10.6                    | %      |
| Health care                                         |   | 9.2                     | %      |
| Financial services – advisement and  brokerage |   | 9.2                     | %      |
| Real estate                                         |   | 8.4                     | %      |
| Financial services – insurance                 |   | 8.0                     | %      |
| Legal                                               |   | 7.2                     | %      |
| Financial services – mortgage                  |   | 6.4                     | %      |
| Energy                                              |   | 6.3                     | %      |
| Computer systems and software                       |   | 5.3                     | %      |
| Telecommunications                                  |   | 3.3                     | %      |
| Other                                               |   | 3.1                     | %      |
| Accounting                                          |   | 3.0                     | %      |
| Financial services – banking                   |   | 2.2                     | %      |
| Travel, entertainment and food service              |   | 1.4                     | %      |
| Engineering                                         |   | 0.6                     | %      |
| Advertising and marketing                           |   | 0.3                     | %      |

 

----

(1) Does not include Texas Bank Buildings, Texas State Buildings orPanorama Falls.

 

**ConsolidatedLease Expirations**

 

The following schedule details the tenant(1) leaseexpirations for our 100%-owned properties(2) at December 31, 2003:

 
| **Year** |   | **Number of  Expiring Leases** |   | **Expiring   Square Footage** |   | **Expiring  Annual  Revenue** |       | **Percentage  of Total   Annual Revenue** |   |
|----------|--------|--------------------------------|--------|-------------------------------|--------|-------------------------------|------------|-------------------------------------------|--------|
| 2004     |   | 109                            |   | 311,746                       |   | $                             | 5,892,566  |                                      | 17.0   | % |
| 2005     |   | 102                            |   | 483,812                       |   | 10,062,586                    |       | 28.9                                      | %      |
| 2006     |   | 93                             |   | 249,916                       |   | 4,488,091                     |       | 12.9                                      | %      |
| 2007     |   | 50                             |   | 301,149                       |   | 6,030,583                     |       | 17.3                                      | %      |
| 2008     |   | 39                             |   | 169,641                       |   | 3,232,124                     |       | 9.3                                       | %      |
| 2009     |   | 14                             |   | 99,592                        |   | 2,181,460                     |       | 6.3                                       | %      |
| 2010     |   | 6                              |   | 77,652                        |   | 1,175,004                     |       | 3.4                                       | %      |
| 2011     |   | 3                              |   | 13,490                        |   | 186,072                       |       | 0.5                                       | %      |
| 2012     |   | 6                              |   | 70,805                        |   | 1,517,168                     |       | 4.4                                       | %      |
| Total    |   | 422                            |   | 1,777,803                     |   | $                             | 34,765,654 |                                      | 100.0  | % |

 

----

(1)Excludes Kellogg Executive Suite and month-to-month tenants.

(2)Does not include Panorama Falls.

 

**Descriptionof Specific Properties**

 

AtDecember 31, 2003, Financial Plaza was the only property whose book valuewas greater than or equal to 10% of our consolidated assets.  A description of this property is set forthbelow.

 

*Financial Plaza*

 

On September10, 2003, we acquired the Financial Plaza office building in Mesa, Arizona.  The property is comprised of a 16-storyoffice building, a 2-story retail building and a 5-story parking garagecontaining approximately 311,000 square feet on 6.0673 acres of land.  The parking garage contains approximately1,000 spaces.  Financial Plaza was builtin 1986.

 

19

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Financial Plaza isthe dominant high-rise office asset in the entire Southeast Valley submarket,offering panoramic views of the Phoenix metropolitan area from its higherfloors, high quality interior finishes and extensive exterior landscaping.  The property enjoys excellent access to thePhoenix highway system via the nearby Superstition Freeway and to the manyamenities of the Fiesta Mall, located across the street.  Competition for Financial Plaza comesprincipally from a wide range of smaller properties of lesser quality locatedthroughout the Southeast Valley, which compete on price, as well as two newcomparable Class A properties, which are well leased at similar rates to FinancialPlaza.

 

We intend toprovide certain amenities including, but not limited to, common area conferencerooms, electronic directories and common area and tenant finish upgrades atFinancial Plaza.  The improvements to beperformed are based on our design team’s evaluation and are subject to budgetapproval.

 

Financial Plaza isleased to 42 tenants at base rental rates ranging from $18.50 to $26.35 persquare foot.  The average effectiveannual rent per square foot at December 31, 2003 was $23.02.  Lease terms range from three to ten years.

 

The occupancy ratefor Financial Plaza was 81% at December 31, 2003 and 82% at December 31,2002.  Occupancy information for prioryears is not available.  One tenant, an insurancecompany, occupies 10% or more of the rentable area.  This tenant occupies 36,833 square feet, or approximately 12% ofthe building, under a direct lease through April 2005.  This tenant is also responsible for its pro-ratashare of operating expenses.

 

The followingschedule details the tenant lease expirations for Financial Plaza at December31, 2003:

 

| **Year** |   | **Number of   Expiring Leases** |   | **Expiring  Square Footage** |   | **Expiring  Annual  Revenue** |      | **Percentage  of Total  Annual Revenue** |   |
|----------|--------|---------------------------------|--------|------------------------------|--------|-------------------------------|-----------|------------------------------------------|--------|
| 2004     |   | 5                               |   | 17,613                       |   | $                             | 430,670   |                                     | 7.7    | % |
| 2005     |   | 8                               |   | 53,626                       |   | 1,181,970                     |      | 21.2                                     | %      |
| 2006     |   | 12                              |   | 31,990                       |   | 739,583                       |      | 13.3                                     | %      |
| 2007     |   | 12                              |   | 88,801                       |   | 1,926,816                     |      | 34.6                                     | %      |
| 2008     |   | 2                               |   | 17,424                       |   | 391,718                       |      | 7.0                                      | %      |
| 2009     |   | 1                               |   | 7,333                        |   | 175,992                       |      | 3.2                                      | %      |
| 2010     |   | 1                               |   | 6,962                        |   | 181,012                       |      | 3.2                                      | %      |
| 2011     |   | —                          |   | —                       |   | —                        |      | —                                   |   |
| 2012     |   | 1                               |   | 24,444                       |   | 546,610                       |      | 9.8                                      | %      |
| Total    |   | 42                              |   | 248,193                      |   | $                             | 5,574,371 |                                     | 100.0  | % |

 

For 2003, the realestate taxes for Financial Plaza were $774,117 as determined by the MaricopaCounty Treasurer.

 

Financial Plazahad a federal tax basis of $29,810,670 at December 31, 2003.  For federal income tax purposes,depreciation is computed using the straight-line method over a useful life of39 years, for a depreciation rate of 2.56% per year.  For financial reporting purposes, depreciation is determined andcomputed in accordance with generally accepted accounting principles.

 

We hold fee simpletitle to this property.  See “MortgageLoans and Notes Payable” below for information regarding the financing of thisproperty.

 

**PropertyImprovements**

 

We currentlyintend to spend approximately $9,500,000 for capital improvements, includingtenant improvements, at our properties during 2004.  This amount is in addition to amounts that will be expended forroutine maintenance and repairs.  Thisamount is to be funded from working capital, additional borrowing, the conversionof outstanding options and warrants, and the sale of additional equitysecurities.

 

20

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**MortgageLoans and Notes Payable**

 

The Companyfinances its properties with mortgage loans and has other debt instruments,such as lines of credit, available to it. The following is a summary of the Company’s outstanding mortgage loansand notes payable, classified by interest type (fixed or variable) and in orderof maturity, at December 31, 2003 and 2002:

 
|                                                                  |   |                                                   |   |               |   | **2003**               |        | **2002**              |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------|--------|------------------------|-------------|-----------------------|--------|
| **Lender**                                                            |   | **Mortgaged  Property**                                |   | **Maturity  Date** |   | **Principal  Balance** |        | **Interest  Rate(1)** |   | **Principal  Balance** |   | **Interest  Rate(1)** |   |
| *Fixed  Rate*                                                    |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Teachers Insurance and Annuity Association  of America                |   | AmeriVest Plaza at  Inverness                          |   | 1/10/2006          |   | $                      | 14,572,888  |                  | 7.90   | % | $ | 14,721,273 |   | 7.90 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Greenwich Capital Financial Products                                  |   | Parkway Centre II  Centerra  Southwest Gas Building    |   | 10/1/2008          |   | 38,876,849             |        | 5.13                  | %      | — |   | — |   |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Allstate Life Insurance Company                                       |   | Financial Plaza                                        |   | 10/5/2010          |   | 24,669,760             |        | 5.25                  | %      | — |   | — |   |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Southern Farm Bureau Life Insurance Company                           |   | Scottsdale Norte                                       |   | 4/1/2011           |   | 6,625,460              |        | 7.90                  | %      | — |   | — |   |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Teachers Insurance and Annuity Association  of America                |   | Sheridan Center  Arrowhead Fountains  Kellogg Building |   | 1/1/2013           |   | 29,309,686             |        | 7.40                  | %      | 29,700,000 |   | 7.40 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Jefferson Pilot                                                       |   | Texas Bank Buildings                                   |   | 5/1/2013           |   | 1,292,749              |        | 9.00                  | %      | 1,377,372 |   | 9.00 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Security Life of Denver Insurance Company                             |   | Keystone Office Park – 1st                        |   | 5/1/2022           |   | 4,334,828              |        | 8.00                  | %      | 4,435,814 |   | 8.00 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Security Life of Denver Insurance Company                             |   | Keystone Office Park – 2nd                        |   | 5/1/2022           |   | 485,638                |        | 8.63                  | %      | 496,064 |   | 8.63 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Transatlantic Capital Company, LLC                                    |   | Texas State Buildings                                  |   | 8/1/2028           |   | 5,660,436              |        | 7.66                  | %      | 5,735,061 |   | 7.66 | % |
|                                                                  |   |                                                   |   | Subtotal           |   | $                      | 125,828,294 |                  | 6.41   | % | $ | 56,465,584 |   | 7.65 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| *Variable Rate*                                                       |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Fleet National Bank – $42 million Senior  Secured Line of Credit |   | Chateau Plaza  Greenhill Park                          |   | 11/12/2005         |   | $                      | 18,470,020  |                  | 3.90   | % | $ | 28,457,660 |   | 4.17 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Fleet National Bank – $30 million Unsecured  Line of Credit      |   | Unsecured                                              |   | 11/12/2005         |   | 15,149,725             |        | 5.17                  | %      | — |   | — |   |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| J.P. Morgan Chase                                                     |   | Parkway Centre II                                      |   | —             |   | —                 |        | —                |   | 17,000,000 |   | 3.39 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| KeyBank National Association                                          |   | Panorama Falls                                         |   | —             |   | —                 |        | —                |   | 4,072,283 |   | 3.91 | % |
|                                                                  |   |                                                   |   | Subtotal           |   | $                      | 33,619,745  |                  | 4.47   | % | $ | 49,529,943 |   | 3.88 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| *Other Notes Payable*                                                 |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
| Lease Capital Corporation                                             |   | Phone system                                           |   | 10/31/2007         |   | $                      | 82,371      |                  | 11.11  | % | $ | 98,705 |   | 11.11 | % |
|                                                                  |   |                                                   |   | Subtotal           |   | $                      | 82,371      |                  | 11.11  | % | $ | 98,705 |   | 11.11 | % |
|                                                                  |   |                                                   |   |               |   |                   |        |                  |   |   |   |   |   |
|                                                                  |   |                                                   |   | Total              |   | $                      | 159,530,410 |                  | 6.01   | % | $ | 106,094,232 |   | 5.89 | % |
|                                                                       |        |                                                        |        |                    |        |                        |             |                       |        |  |  |  |  |  |  |  |  |  |

 

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(1) Interest only, does notinclude amortization of deferred financing costs or unused facility fees.

 

**Insurance**

 

We believe thateach of our properties is adequately covered by insurance under a blanketpolicy.

 

**Policiesand Objectives With Respect to Certain Activities**

 

The following is adiscussion of our policies with respect to investment, financing and otheractivities.  The policies with respectto these activities have been determined by our Board of Directors and,although our Board currently does not contemplate any changes to thesepolicies, our Board may change these policies without a vote or other approvalof stockholders.

 

21

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**Acquisition, Development and Investment Policies**

 

Our business andgrowth strategies are designed to maximize total return to stockholders overthe medium- and long-term with a niche property type and geographic focus.  Our current policies contemplate thepossibility of:

 

•                                          directownership of real estate properties, including ownership through wholly-ownedsubsidiaries, focusing on office properties with average tenant sizes ofbetween 2,000 and 4,000 square feet;

 

•                                          indirectparticipation in those types of properties through investments in corporations,business trusts, general partnerships, limited partnerships, joint ventures andother legal entities; and

 

•                                          developmentand acquisition of unimproved property or the acquisition and conversion ofexisting structures.

 

At the present time,all of our existing and contemplated investments in real estate properties areheld through direct ownership. Generally, we intend to hold our properties for the long term.  However, we may sell properties when webelieve the economic benefits, including the income tax consequences, warrantsuch action.  Our long-term view is tofocus on multi-tenant office buildings in select cities and dispose of non-coreassets and property types when economically and operationally feasible.

 

Although we haveno formal policy as to the allocation of assets among our investments, wegenerally intend to limit investment in a single property to a maximum of 25%of our total assets.  We expect to fundfuture development and acquisitions utilizing funds from additional indebtedness,future offerings of our securities, sale or exchange of existing properties,and retained cash flow.  In order tomaintain our qualification as a REIT, we must make annual distributions to ourstockholders of at least 90% of our REIT taxable income, which does not includenet capital gains.  This requirement mayimpair our ability to use retained cash flow for future acquisitions.

 

**FinancingPolicies**

 

We intend to makeadditional investments in properties and may incur indebtedness to make thoseinvestments or to meet the distribution requirements imposed by the REITprovisions of the Internal Revenue Code of 1986, as amended, to the extent thatcash flow from our operations, investments and working capital is insufficient.  Additional indebtedness incurred by us maybe secured by part or all of our real estate properties.  Our Board of Directors has placed nolimitations on the number or amount of secured indebtedness or mortgages thatmay be placed on any one of our properties, however, our Secured Fleet Facilitylimits our total liabilities to 70% of gross assets, as calculated inaccordance with the loan agreement.

 

Securedindebtedness incurred by us may be in the form of purchase money obligations tothe sellers of properties, or publicly or privately placed debt instruments orfinancing from banks, institutional investors or other lenders.  This indebtedness may be recourse to all orany part of our assets, or may be limited to the particular property to whichthe indebtedness relates.  The proceedsfrom any borrowings by us may be used for, among other things, refinancingexisting indebtedness, financing development and acquisition of properties,financing renovation or redevelopment of properties, the payment of dividends,and working capital.

 

If our Board ofDirectors decides to raise additional equity capital, our Board has theauthority, generally without stockholder approval and provided we havesufficient authorized shares, to issue additional common stock or preferredstock in any manner, and on such terms and for such consideration, as our Boarddeems appropriate, including in exchange for property.  Existing stockholders have no preemptiveright to purchase shares issued in any offering, and any such offering mightcause a dilution of a stockholder’s investment in us.

 

22

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**ITEM3.  LEGAL PROCEEDINGS**

 

On June 14, 2001,a lawsuit was filed in the District Court, Hidalgo County, Texas againstInnerarity Austin, Inc., a Nevada corporation, and our AmeriVest PropertiesTexas, Inc. subsidiary, by Laura Smith alleging that the defendants werenegligent and breached various duties in allowing our Mission, Texas buildingto be contaminated with airborne contaminants while leasing the premises to theplaintiff’s employer, the Texas Department of Human Services.  Innerarity Austin, Inc. was the previousowner of the property.  The plaintiffalleges that due to the acts and omissions of the defendants, she has sufferedserious and some permanent injuries and severe physical and mental pain.  The plaintiff seeks monetary and otherrelief, including exemplary damages, in excess of $50,000, and pre-judgment andpost-judgment interest as provided by law, costs of the lawsuit and such otherrelief to which the plaintiff may be justly entitled.

 

On February 11,2002, a lawsuit was filed in the District Court, Hidalgo County, Texas againstour AmeriVest Properties Texas, Inc. subsidiary and Woodhaven ManagementCorporation, our external property manager, by Irma and Yreneo Carranzaalleging that the defendants were negligent in maintaining our Mission, Texasbuilding while leasing the premises to the plaintiff’s employer, the TexasDepartment of Human Services.  The plaintiffalleges that due to the acts and omissions of the defendants, she has sufferedserious and some permanent injuries and severe physical and mental pain,including loss of consortium.  Theplaintiff seeks monetary and other relief, including exemplary damages, andpre-judgment and post-judgment interest as provided by law, costs of thelawsuit and such other relief to which the plaintiff may be justly entitled.

 

On August 23,2002, a lawsuit was filed in the District Court, County of Arapahoe, Colorado,against our AmeriVest Broadway Properties, Inc. subsidiary, Sheridan RealtyAdvisors, LLC (SRA), our former outside advisor, Porter Construction Services,Inc., and others by Jane Doe alleging that the defendants were negligent inmaintaining security at our Panorama Falls building.  The plaintiff alleges that due to the acts and omissions of thedefendants, she was sexually assaulted and continues to suffer from physicalinjuries and mental anguish.  Theplaintiff seeks monetary relief, including exemplary damages, and pre- andpost-judgment interest as provided by law, costs of the lawsuit and such otherrelief to which the plaintiff may be justly entitled.

 

We have asserted ageneral denial of the material allegations in all lawsuits and our insurancecompanies are defending us in these lawsuits and are responsible for allcosts.  We believe that these lawsuitswill not be adversely determined and will not have any material adverse effecton our business and financial condition.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Not applicable.

 

23

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**PART II**

 

**ITEM 5.  MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Our common stockhas traded on the American Stock Exchange under the symbol “AMV” since January27, 2000.

 

The table belowpresents the range of high and low sale prices for our common stock during eachof the quarters indicated, as reported by the American Stock Exchange andNasdaq SmallCap Stock Market and the cash dividends per share paid with respectto those quarters:
|               |   | **Common  Stock** |   |
|--------------------|--------|-------------------|--------|
| **Quarter Ended**  |   | **High**          |   | **Low** |   | **Dividend  Per Share** |   |
| March 31, 2002     |   | $                 | 6.55   |   | $ | 5.45 |   | $ | 0.125 |   |
| June 30, 2002      |   | 6.45              |   | 5.56 |   | 0.125 |   |
| September 30, 2002 |   | 6.30              |   | 5.40 |   | 0.130 |   |
| December 31, 2002  |   | 6.29              |   | 5.00 |   | 0.130 |   |
| March 31, 2003     |   | 6.55              |   | 5.66 |   | 0.130 |   |
| June 30, 2003      |   | 6.65              |   | 5.85 |   | 0.130 |   |
| September 30, 2003 |   | 6.75              |   | 6.11 |   | 0.130 |   |
| December 31, 2003  |   | 7.21              |   | 6.50 |   | 0.130 |   |
|                    |        |                   |        |  |  |  |  |  |  |  |

 

On March 17, 2004,the closing sale price for our common stock was $6.95 per share, as reported bythe American Stock Exchange.  On March17, 2004, there were approximately 8,000 stockholders of AmeriVest, consistingof 321 holders of record.  Theinformation concerning beneficial owners is based on information provided bybrokers and depositories who hold shares in their names on behalf of others.

 

**DividendPolicy**

 

Since our initialpublic offering in November 1996, we have paid a dividend each quarter.  We intend to pay quarterly dividends in thefuture.  Future dividends will be at thediscretion of our Board of Directors and will depend on a number of factors,including our operating results and financial condition.  We cannot assure you that any dividends willbe paid or that the historical level of dividends will be maintained.

 

**RecentSales of Unregistered Securities**

 

During the fourthquarter of 2003, we issued shares of common stock that were not registeredunder the Securities Act of 1933 in the following transactions:

 

We issued 3,247shares of common stock upon exercise of stock options by a former employee.  The issuance of these 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.

 

We issued 16,000shares of common stock upon exercise of previously issued warrants.  The issuance of these 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.

 

24

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**ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

The following is adiscussion and comparison of the financial condition and results of operationsof AmeriVest as of and for the years ended December 31, 2003 and 2002.  These discussions should be read inconjunction with our consolidated financial statements and notes toconsolidated financial statements.

 

**Introduction**

 

AmeriVest is a REIT which owns and operatescommercial office buildings in select markets catering to small and medium sizebusinesses.  At December 31, 2003, weown 30 properties totaling 2,222,079 square feet compared to 26 propertiestotaling 1,416,350 square feet at December 31, 2002.  We generaterevenue primarily through the rental of office space at our properties.  The demand for our products is correlated,in general, to the national economy, and more specifically, to the demand foroffice space by small and medium size tenants in metropolitan Denver, Dallas,Phoenix and Indianapolis.  We increasedour revenues and expenses significantly by adding approximately 800,000 squarefeet to our portfolio through the acquisition of four properties and thedevelopment of another building at an existing property during 2003, combinedwith the inclusion of the operations of our 2002 acquisitions for a full year.

 

**Resultsof Operations**

 

*Thefollowing is a comparison of the years ended December 31, 2003 and 2002:*

* *
|                                        |   | **2003**   |       | **2002**   |   | **Change** |   |
|---------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| REAL ESTATE OPERATING REVENUE               |   |       |       |       |   |       |   |
| Rental revenue                              |   | $          | 29,865,670 |       | $      | 16,385,965 |   | $ | 13,479,705 |   |
|                                        |   |       |       |       |   |       |   |
| REAL ESTATE OPERATING EXPENSES              |   |       |       |       |   |       |   |
| Property operating expenses-                |   |       |       |       |   |       |   |
| Operating expenses                          |   | 8,117,055  |       | 3,935,774  |   | 4,181,281  |   |
| Real estate taxes                           |   | 3,721,266  |       | 1,628,455  |   | 2,092,811  |   |
| Management fees                             |   | 141,150    |       | 173,011    |   | (31,861    | )      |
| General and administrative  expenses        |   | 3,527,747  |       | 1,755,104  |   | 1,772,643  |   |
| Advisory and capital projects  fees         |   | —     |       | 1,367,380  |   | (1,367,380 | )      |
| Interest expense                            |   | 7,867,534  |       | 4,144,231  |   | 3,723,303  |   |
| Depreciation and amortization  expense      |   | 7,023,923  |       | 3,362,508  |   | 3,661,415  |   |
| Impairment of investment in  real estate    |   | 1,465,932  |       | 275,000    |   | 1,190,932  |   |
| Total  operating expenses                   |   | 31,864,607 |       | 16,641,463 |   | 15,223,144 |   |
|                                        |   |       |       |       |   |       |   |
| OTHER INCOME/(LOSS)                         |   |       |       |       |   |       |   |
| Interest income                             |   | 73,470     |       | 164,519    |   | (91,049    | )      |
| Equity in loss of  unconsolidated affiliate |   | (54,953    | )          | (66,295    | )      | 11,342     |   |
| Total  other income                         |   | 18,517     |       | 98,224     |   | (79,707    | )      |
|                                        |   |       |       |       |   |       |   |
| NET  LOSS                                   |   | $          | (1,980,420 | )          | $      | (157,274   | )      | $ | (1,823,146 | ) |

 

Rental revenue increased by approximately$13,480,000, or 82%, from 2002 to 2003. Approximately $5,638,000 of the increase is due to the inclusion of theoperating results from the 2003 acquisitions (Southwest Gas, Financial Plaza,Scottsdale Norte and Greenhill Park) and approximately $8,540,000 is due to theinclusion of the operating results from the 2002 acquisitions (Parkway CentreII, Centerra and Chateau Plaza) for a full year in 2003 versus a partial yearin 2002.  Offsetting these increases isa decrease of approximately $480,000 due to a 1% decline in our existingportfolio (core properties owned for the full year) occupancy rate combinedwith a weak rental market which negatively impacted rental revenue.  A majority of the decline in the existingportfolio was experienced in the Denver market where the soft economy forcedsome companies to downsize or go out of business.  The remaining decrease of approximately $218,000 was due to theloss of the tenant, an agency of the State of Texas, at our Paris, Texasproperty in December 2002.  We have beenunsuccessful in re-leasing this property; see the impairment discussion belowfor more information.

 

25

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The total portfolio occupancy rate was 84.2%at December 31, 2003, a decline from 88.0% at December 31, 2002.  This decrease is primarily attributable tothe 2003 acquisitions, which were approximately 79% occupied at year end,however, the above-mentioned 1% decline in our existing portfolio occupancyrate also contributed to the overall decline in occupancy.

 

Property operating expenses increased byapproximately $6,242,000 from 2002 to 2003. Approximately $2,182,000 of the increase is due to the inclusion of the2003 acquisitions and approximately $3,562,000 is due to the inclusion of the2002 acquisitions for a full year in 2003. The remainder of the increase was experienced in our existing portfolioand non-core properties.  The maincomponents of the additional expense consisted of increases in real estatetaxes, utilities and regional property management personnel.  Real estate taxes increased from approximately$1,628,000, or 10% of revenue, in 2002 to approximately $3,721,000, or 12% ofrevenue, in 2003.  Currently, seven ofthe twelve core properties have been acquired in the past two years.  Upon acquisition, the properties are oftenreassessed by the local municipalities at the purchase price and real estatetaxes increase accordingly.  While theCompany utilizes outside property tax consulting firms to protest thevaluations of any properties that are deemed to be overvalued, it records theactual expense in the year incurred with any amounts refunded to the Companythrough this process recorded when realized. Regional operating management personnel were added in the latter half of2003 in the Phoenix and Dallas markets in anticipation of continued growth.  We recently hired a regional manager for theDenver market and would add regional personnel for any new markets entered intoin the future.  The Company believes itis important to its strategy to self-manage its properties with key experiencedmanagement in the local markets.  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.

 

To support the continued growth of theCompany, we continued to incur additional general and administrative expenses,including salary, consulting, legal and accounting costs.  Included in 2003 were charges of approximately$258,000 in compensation expense for bonuses to our Chief Executive Officer,Chief Operating Officer and Chief Investment Officer as provided by theCompany’s 2003 Long-Term Incentive Plan, approximately $170,000 in severanceexpense to our former Chief Financial Officer and approximately $125,000 inrecruiting fees related to corporate and regional hires.  Legal and accounting fees have continued toincrease as the Company has grown and it is anticipated that they will continueto increase in 2004, particularly with respect to activities necessary tocomply with the Sarbanes-Oxley Act of 2002.

 

The advisory and capitalprojects fees expense recognized in 2002 represents the fees earned bySRA, in accordance with the Advisory Agreement, for 2002 property acquisitionsand as provided for in the Termination of Advisory Agreement we executed withSRA.  Effective January 1, 2002, theAdvisory Agreement was amended whereby certain SRA employees became ouremployees and as a result, the advisory and capital project fees wereexpensed.  Prior to January 1, 2002,these fees were capitalized. Additionally, due to the termination of the Advisory Agreement effectiveNovember 1, 2002 whereby all remaining SRA employees became our employees,these fees have been eliminated. Beginning November 1, 2002, the salaries of these additional employeesare included in general and administrative expenses.

 

Interest expense increased by approximately$3,723,000 from 2002 to 2003.  Of thisincrease, approximately $1,095,000 relates to mortgage loans on the 2003 acquisitionsand approximately $2,041,000 relates to mortgage loans on the 2002 acquisitionsheld for an entire year in 2003.  Inaddition, approximately $610,000 of the increase is due to the refinancing ofthe Sheridan Center, Arrowhead Fountains and Kellogg Building variable rateloans with a weighted average rate of 4.5% with a fixed rate portfolio loanwith a fixed rate of 7.4%. Although the refinancings have negatively impacted our results, webelieve it was the proper course of action to have our long-term assetsfinanced with long-term, fixed rate debt, which provides more stability andcertainty.  The increase in interestexpense is also attributable to the interest and fees related to the short-termloan, which was used in the acquisition of the Southwest Gas Building and laterrefinanced with the Unsecured Fleet Facility. This facility provides the Company with more flexibility and a readilyavailable vehicle for financing acquisitions and other capital needs.  The cost of this facility will have a morematerial effect on operations in 2004.

 

The increase in depreciation and amortization expense is due to theincrease in depreciable assets resulting from the above-mentionedacquisitions.  Furthermore, theCompany’s adoption of Statement of Financial Accounting Standards (SFAS) No.141 “Business Combinations”, which, among other things, requires an allocation

 

26

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of the purchaseprice of a property to an intangible asset representing the value associatedwith the in-place leases, has had and will continue to have a significantimpact on the Company’s depreciation and amortization expense as moreproperties are acquired.  The intangibleassets are amortized over the remaining life of the in-place leases whichgenerally range from 24 to 55 months.

 

During 2003, the Company recorded a$334,592 impairment charge for 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 had beenpreviously leased to agencies of the State of Texas.  The Clint building has been vacant since November 2001 and theParis building has been vacant since December 2002.  The Company has been unsuccessful in re-leasing these propertiesbut will continue in its efforts, however there are no near termprospects.  The Company recorded a$275,000 impairment charge related to the Clint property in 2002.  Impairment charges recorded on theseproperties have reduced their net book values to their estimated fair values of$100,000 and $43,000 for Clint and Paris, respectively.  The Company arrived at the estimated fairvalues using a combination of the property tax assessment values, valuesestimated by the our property tax consulting firms and local real estatebrokers.

 

**Liquidityand Capital Resources**

 

*Operating Activities*

 

Net cash flows provided by operations were approximately $10,651,000for the year ended December 31, 2003. This results primarily from the Company’s operating results adjusted fornon-cash expenses and a general increase in our payables and other liabilitiesfor expenses that have not yet been paid in excess of the prior year.  The increase from the prior year period isprimarily due to the inclusion of the operations of the late-2002 and 2003property acquisitions.  Cash flow fromoperations is the primary source to fund dividend payments, debt service andcapital expenditures.

 

* Investing Activities*

 

Net cash flows used in investing activities were approximately$56,062,000 for the year ended December 31, 2003, of which approximately$47,858,000, net of debt assumed, was used to acquire the Southwest Gas,Financial Plaza, Scottsdale Norte and Greenhill Park properties.  The remainder is primarily composed of coststo complete the construction of the fourth building at Keystone Office Park,capital improvement, tenant improvement and leasing commission costs.

 

*Financing Activities*

 

Net cash flowsprovided by financing activities were approximately $44,570,000 for the yearended December 31, 2003.  Of thisamount, approximately $33,267,000 represents the net proceeds from the June2003 common stock offering.  Theremainder is primarily composed of net loan draws used for acquisitions andproceeds from the exercising of options and warrants, offset by scheduledprincipal payments on mortgage loans, payment of financing costs related to therefinancings and new loans, dividend payments and payments into escrow accountsas required by certain lenders.

 

*Future Sources of Capital*

 

The followingtable summarizes future minimum base rent to be received under non-cancelabletenant leases for the Company’s commercial properties expiring each year, atDecember 31, 2003:

 
|          |   | **Less than  1 Year** |       | **2-3 Years** |   | **4-5 Years** |   | **Over 5  Years** |       | **Total** |   |
|---------------|--------|-----------------------|------------|---------------|--------|---------------|--------|-------------------|------------|-----------|--------|
| Minimum Rents |   | $                     | 32,854,456 |          | $      | 44,937,455    |   | $                 | 20,654,809 |      | $      | 10,148,577 |   | $ | 108,595,297 |   |
|               |        |                       |            |               |        |               |        |                   |            |           |        |  |  |  |  |  |

 

The Company desires to acquire additionalproperties.  In order to do so, it willutilize current sources of debt financing and possibly incur additional debtand/or obtain additional equity capital. The Company also intends to obtain credit facilities for short andlong-term borrowings with commercial banks or other financial institutions.

 

27

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The issuance of such securities or increase in debt to acquireadditional properties, of which there is no assurance, could adversely affectthe amount of cash available to pay dividends to stockholders.

 

In January 2004, the Company filed a shelf registration statement (FormS-3) under which the Company could potentially raise up to $200,000,000 throughthe issuance of common stock or preferred stock.  The proceeds from those issuances, if any, would be used toacquire and improve new and existing properties, repay borrowings under ourlines of credit or other loans and for working capital and general corporatepurposes.

 

The Company has two credit facilities from Fleet National Bank, a$42,000,000 senior secured revolving line of credit (Secured Fleet Facility)and a $30,000,000 unsecured revolving line of credit (Unsecured FleetFacility).  At December 31, 2003, therewas $18,470,020 outstanding with $23,529,980 available under the Secured FleetFacility and $15,149,725 outstanding with $14,850,275 available under theUnsecured Fleet Facility.  Availableamounts under these facilities will be used to acquire and improve new andexisting properties, as well as for working capital.

 

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

 

The followingtable details the contractual obligations at December 31, 2003.  These include scheduled maturities ofmortgage loans and notes payable as well as a ground lease for Greenhill Parkthat expires on December 1, 2083:

 
|                                   |   | **Less than  1 Year** |      | **2-3 Years** |   | **4-5 Years** |   | **Over 5  Years** |       | **Total**   |   |
|----------------------------------------|--------|-----------------------|-----------|---------------|--------|---------------|--------|-------------------|------------|-------------|--------|
| Mortgage Loans and  Notes Payable |   | $                     | 2,244,174 |          | $      | 52,622,828    |   | $                 | 39,785,256 |        | $      | 64,878,152 |   | $ | 159,530,410 |   |
| Ground Lease                           |   | 642,165               |      | 1,505,181     |   | 1,726,032     |   | 225,671,046       |       | 229,544,424 |   |
| Total                                  |   | $                     | 2,886,339 |          | $      | 54,128,009    |   | $                 | 41,511,288 |        | $      | 290,549,198 |   | $ | 389,074,834 |   |

 

With respect to the ground lease, the lease requires the Company tomake monthly rental payments based on the value of the land that isre-established every ten years.  Theannual minimum rent increases every ten years to the greater of (i) 10% of thefair market value of the land, or (ii) 10% of the initial value of the landcompounded annually at 3%.  The nextbase rent calculation will be performed on January 1, 2006.  In addition to the annual base rent, theground lessor is entitled to a participating rent equal to 25% of gross revenuereceipts in excess of $6,723,205.  Thecombined annual base rent and participating rent is limited to the greater of(i) 10% of the fair market value of the land, or (ii) 50% of the difference betweenthe gross revenue receipts and $6,723,205.

 

*DebtCovenants*

 

Certain of itsmortgage lenders require the Company to comply with certain debt covenants asdescribed in the specific loan documents, including the loan-to-value ratio,the interest coverage ratio, the fixed charge coverage ratio and the dividendpayout ratio.  At December 31, 2003, theCompany was in compliance with all of its debt covenants with the exception ofthe dividend payout ratio covenant as required by the Secured Fleet Facility andthe Unsecured Fleet Facility.  TheCompany received a waiver from Fleet National Bank for this event ofnon-compliance with this covenant for the year ended December 31, 2003.  In addition, on March 16, 2004, the Companyamended its Secured Fleet Facility and Unsecured Fleet Facility loan agreementsto modify certain of its debt covenants. The Company believes it will be in compliance with these modifiedcovenants based on forecasted operating results, however, there is no assurancethat the Company will remain in compliance with these amended covenants.

 

*Inflation*

 

Managementbelieves that inflation should not have a material adverse effect on ouroperations.  Our office leases requirethe tenants to pay increases in operating expenses should any inflationarypressures materialize.

 

28

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**NewAccounting Principles**

 

In December 2003, the Financial AccountingStandards Board (FASB) issued FASB Interpretation (FIN) No. 46 (Revised),“Consolidation of Variable Interest Entities”, which addresses how a businessenterprise should evaluate whether it has a controlling financial interest inan entity through means other than voting rights and accordingly shouldconsolidate the entity.  FIN 46Rreplaces FIN 46, “Consolidation of Variable Interest Entities”, which wasissued in January 2003.  The Companywill be required to apply FIN 46R to variable interests in variable interestentities (VIEs) created after December 31, 2003.  For variable interests in VIEs created before January 1, 2004,this interpretation will be applied beginning on March 31, 2004.  For any VIEs that must be consolidated underFIN 46R that were created before January 1, 2004, the assets, liabilities andnon-controlling interests of the VIE initially would be measured at theircarrying amounts with any difference between the net amount added to thebalance sheet and any previously recognized interest being recognized as thecumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value atthe date this interpretation first applies may be used to measure the assets,liabilities and non-controlling interest in the VIE.  The Company has an interest in an entitywhose sole purposes is to own and operate the Panorama Falls building inEnglewood, Colorado, which may be considered a VIE.  The Company’s losses are limited to its investment in thetenancy-in-common relationship of approximately $1,364,000, the amounts due fromthe related party of approximately $3,372,000, and any underlying rentsreceivable.  This interest is beingaccounted for under the equity method of accounting and is included as aninvestment in unconsolidated affiliate in our consolidated balance sheets.

 

**CriticalAccounting Policies**

 

The discussionand analysis 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 financialstatements require management to make estimates and judgments that affect thereported amounts 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.

 

Criticalaccounting policies are defined as those that are reflective of significantjudgments and uncertainties, which would potentially result in materiallydifferent results under different assumptions and conditions.  The Company believes that its criticalaccounting policies include those items described below.

 

*Investment in Real Estate*

 

Uponacquisition, the purchase price of a property is allocated to land, buildingand improvements and other intangible assets and associated liabilities asrequired by SFAS No. 141 “Business Combinations.”  The allocation to land is based on an estimate of its fair valuebased on all available information including appraisals.  The allocation to other intangible assetsrepresents the value associated with the in-place leases, including leasingcommission, legal and other related costs. Also required by SFAS No. 141, is the creation of an intangible asset orliability resulting from in-place leases being above or below the market rentalrates on the date of acquisition.  Thisasset or liability is amortized over the life of the related in-place leases asan adjustment to revenue.

 

Investment inreal estate is stated at cost. Depreciation and amortization are computed on a straight-line basis overthe estimated useful lives as follows:

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

 

Maintenanceand repairs are 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

 

29

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resulting gain or loss isreflected in operations in the period in which such sale or retirementoccurs.  Allocating the purchase priceof a property to the different components of investment in real estate,determining whether expenditures meet the criteria for capitalization andassigning depreciable lives is considered to be critical because it requiresmanagement to exercise significant judgment.

 

*Valuation of Real Estate Assets*

 

Long-livedassets to be held and used by the Company are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. The Company continually evaluates therecoverability of its long-lived assets based on estimated future cash flowsfrom and the estimated liquidation value of such long-lived assets, andprovides for impairment if such undiscounted cash flows are insufficient torecover the carrying amount of the long-lived asset.  Valuation of real estate assets is considered to be criticalbecause the evaluation of impairment and the determination of fair valuesinvolve management’s assumptions relating to future economic events that couldmaterially affect the determination of the fair value, and therefore thecarrying value of real estate.

 

*Revenue Recognition*

 

Certain leasesprovide for tenant occupancy during periods for which no rent is due or whereminimum rent payments increase during the term of the lease.  Rental revenue is recorded for the full termof each lease on a straight-line basis. Accordingly, the Company records a receivable from tenants for rentsthat it expects to collect over the remaining lease term as deferred rentsreceivable.  When the Company acquires aproperty, the term of the existing leases is considered to commence as of theacquisition date for the purposes of this calculation.  Revenue recognition is considered to becritical because the evaluation of the realizability of such deferred rentsreceivable involves management’s assumptions relating to such tenant’sviability.

 

30

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**ITEM7.  FINANCIAL STATEMENTS**

 

**AMERIVEST PROPERTIES INC. AND SUBSIDIARIES**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Independent Auditors’  Report                                                                    |   |   |
|-------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                  |   |   |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                         |   |   |
|                                                                                                  |   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2003 and 2002                 |   |   |
|                                                                                                  |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2003 and  2002 |   |   |
|                                                                                                  |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003 and 2002                 |   |   |
|                                                                                                  |   |   |
| Notes to  Consolidated Financial Statements                                                           |   |   |

 

31

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**INDEPENDENT AUDITORS’ REPORT**

 

The Board of Directors

AmeriVest Properties Inc.:

 

We have audited the accompanying consolidatedbalance sheets of AmeriVest Properties Inc. as of December 31, 2003 and 2002,and the related consolidated statements of operations, stockholders’ equity andcash flows for the years then ended.  These consolidated financial statements are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these consolidated financial statementsbased on our audits.

 

We conducted our auditsinaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits providea reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of AmeriVest Properties Inc. as of December 31, 2003 and2002, and the results of their operations and their cash flows for the yearsthen ended in conformity with accounting principles generally accepted inthe United States of America.

 

 
|                           | **KPMG LLP** |
|--------------------------------|--------------|
|                           |         |
|                           |         |
| Denver, Colorado               |         |
| February 20,  2004, except for |         |
| Note 5, which is  as of        |         |
| March 16, 2004                 |         |

 

F-1

----

 

**CONSOLIDATED BALANCE SHEETS****AS OF DECEMBER 31, 2003 AND 2002**

 
|                                                                                                                                                                          |   | **2003**    |        | **2002**    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| **ASSETS**                                                                                                                                                                    |   |        |        |        |   |
| Investment in real estate-                                                                                                                                                    |   |        |        |        |   |
| Land                                                                                                                                                                          |   | $           | 29,647,423  |        | $      | 20,730,999 |   |
| Buildings and improvements                                                                                                                                                    |   | 187,560,948 |        | 124,597,852 |   |
| Furniture, fixtures and  equipment                                                                                                                                            |   | 799,730     |        | 467,188     |   |
| Tenant  improvements                                                                                                                                                          |   | 6,159,440   |        | 2,969,044   |   |
| Tenant leasing commissions                                                                                                                                                    |   | 1,063,204   |        | 450,647     |   |
| Intangible assets                                                                                                                                                             |   | 11,468,120  |        | 2,153,229   |   |
| Less: accumulated depreciation  and amortization                                                                                                                              |   | (12,806,269 | )           | (6,383,631  | )      |
| Net investment in real estate                                                                                                                                                 |   | 223,892,596 |        | 144,985,328 |   |
|                                                                                                                                                                          |   |        |        |        |   |
| Cash and cash equivalents                                                                                                                                                     |   | 1,478,285   |        | 2,318,566   |   |
| Escrow deposits                                                                                                                                                               |   | 5,778,427   |        | 2,335,519   |   |
| Investment  in unconsolidated affiliate                                                                                                                                       |   | 1,364,032   |        | 1,390,560   |   |
| Due from related party                                                                                                                                                        |   | 3,371,526   |        | 3,257,826   |   |
| Due from unconsolidated  affiliate                                                                                                                                            |   | 262,347     |        | 217,578     |   |
| Accounts receivable                                                                                                                                                           |   | 296,377     |        | 286,691     |   |
| Deferred rents receivable                                                                                                                                                     |   | 1,401,455   |        | 671,737     |   |
| Deferred financing costs, net  of accumulated amortizationof  $519,399 and $130,773, respectively                                                                             |   | 2,301,043   |        | 1,243,907   |   |
| Prepaid expenses and other  assets                                                                                                                                            |   | 354,374     |        | 475,875     |   |
|                                                                                                                                                                          |   |        |        |        |   |
| Total assets                                                                                                                                                                  |   | $           | 240,500,462 |        | $      | 157,183,587 |   |
|                                                                                                                                                                          |   |        |        |        |   |
| LIABILITIES                                                                                                                                                                   |   |        |        |        |   |
| Mortgage loans and notes  payable                                                                                                                                             |   | $           | 159,530,410 |        | $      | 106,094,232 |   |
| Accounts  payable and accrued expenses                                                                                                                                        |   | 2,736,657   |        | 2,384,620   |   |
| Accrued real estate taxes                                                                                                                                                     |   | 3,169,183   |        | 1,714,594   |   |
| Prepaid rents, deferred  revenue and security deposits                                                                                                                        |   | 2,697,635   |        | 1,656,507   |   |
| Dividends payable                                                                                                                                                             |   | 2,262,170   |        | 1,437,834   |   |
|                                                                                                                                                                          |   |        |        |        |   |
| Total liabilities                                                                                                                                                             |   | 170,396,055 |        | 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 and 15,000,000 shares, respectively Issued and  outstanding – 17,401,309 and 11,060,260 shares, respectively |   | 17,401      |        | 11,060      |   |
| Capital in excess of par value                                                                                                                                                |   | 91,706,371  |        | 55,247,483  |   |
| Distributions in excess of  accumulated earnings                                                                                                                              |   | (21,619,365 | )           | (11,362,743 | )      |
|                                                                                                                                                                          |   |        |        |        |   |
| Total stockholders’ equity                                                                                                                                               |   | 70,104,407  |        | 43,895,800  |   |
|                                                                                                                                                                          |   |        |        |        |   |
| Total liabilities and  stockholders’ equity                                                                                                                              |   | $           | 240,500,462 |        | $      | 157,183,587 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-2

----

 

**CONSOLIDATED STATEMENTS OF OPERATIONS****FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002**

 
|                                                  |   | **2003**   |       | **2002**   |   |
|-------------------------------------------------------|--------|------------|------------|------------|--------|
| REAL ESTATE OPERATING REVENUE                         |   |       |       |       |   |
| Rental revenue                                        |   | $          | 29,865,670 |       | $      | 16,385,965 |   |
|                                                  |   |       |       |       |   |
| REAL ESTATE OPERATING EXPENSES                        |   |       |       |       |   |
| Property operating expenses-                          |   |       |       |       |   |
| Operating expenses                                    |   | 8,117,055  |       | 3,935,774  |   |
| Real estate taxes                                     |   | 3,721,266  |       | 1,628,455  |   |
| Management fees                                       |   | 141,150    |       | 173,011    |   |
| General and administrative  expenses                  |   | 3,527,747  |       | 1,755,104  |   |
| Advisory and capital projects  fees                   |   | —     |       | 1,367,380  |   |
| Interest expense                                      |   | 7,867,534  |       | 4,144,231  |   |
| Depreciation and amortization  expense                |   | 7,023,923  |       | 3,362,508  |   |
| Impairment of investment in  real estate              |   | 1,465,932  |       | 275,000    |   |
| Total  operating expenses                             |   | 31,864,607 |       | 16,641,463 |   |
|                                                  |   |       |       |       |   |
| OTHER INCOME/(LOSS)                                   |   |       |       |       |   |
| Interest income                                       |   | 73,470     |       | 164,519    |   |
| Equity in loss of  unconsolidated affiliate           |   | (54,953    | )          | (66,295    | )      |
| Total  other income                                   |   | 18,517     |       | 98,224     |   |
|                                                  |   |       |       |       |   |
| NET LOSS                                              |   | $          | (1,980,420 | )          | $      | (157,274 | ) |
|                                                  |   |       |       |       |   |
| LOSS PER SHARE                                        |   |       |       |       |   |
| Basic                                                 |   | $          | (0.13      | )          | $      | (0.02 | ) |
|                                                  |   |       |       |       |   |
| Diluted                                               |   | $          | (0.13      | )          | $      | (0.02 | ) |
|                                                  |   |       |       |       |   |
| WEIGHTED AVERAGE NUMBER OF  COMMON SHARES OUTSTANDING |   |       |       |       |   |
| Basic                                                 |   | 14,686,369 |       | 9,341,608  |   |
|                                                  |   |       |       |       |   |
| Diluted                                               |   | 14,686,369 |       | 9,341,608  |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-3

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**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY****FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002**

** **
|                                   |   |              |   |          |   |            |   | **Distributions**       |   |       |        |
|----------------------------------------|--------|-------------------|--------|---------------|--------|-----------------|--------|-------------------------|--------|------------|-------------|
|                                   |   |              |   |          |   | **Capital in**  |   | **in Excess  of ** |   |       |        |
|                                   |   | **Common  Stock** |   | **Excess of** |   | **Accumulated** |   |                    |   |
|                                   |   | **Shares**        |   | **Amount**    |   | **Par Value**   |   | **Earnings**            |   | **Total**  |        |
|                                   |   |              |   |          |   |            |   |                    |   |       |        |
| Balance at December 31, 2001           |   | 6,682,259         |   | $             | 6,682  |            | $      | 31,132,650              |   | $          | (6,142,347  | ) | $ | 24,996,985 |   |
|                                   |   |              |   |          |   |            |   |                    |   |       |        |
| Issuance of common stock-              |   |              |   |          |   |            |   |                    |   |       |        |
| Public offering, net of offering costs |   | 4,140,000         |   | 4,140         |   | 22,744,898      |   | —                  |   | 22,749,038 |        |
| Acquisition of land                    |   | 52,893            |   | 53            |   | 319,947         |   | —                  |   | 320,000    |        |
| Property improvements                  |   | 21,114            |   | 21            |   | 117,373         |   | —                  |   | 117,394    |        |
| Warrants exercised                     |   | 54,150            |   | 54            |   | 270,696         |   | —                  |   | 270,750    |        |
| Stock options exercised                |   | 60,000            |   | 60            |   | 270,756         |   | —                  |   | 270,816    |        |
| Dividend Re-Investment Plan (DRIP)     |   | 47,196            |   | 47            |   | 269,830         |   | —                  |   | 269,877    |        |
| Equity-based compensation              |   | 2,648             |   | 3             |   | 15,730          |   | —                  |   | 15,733     |        |
| Issuance of incentive warrants         |   | —            |   | —        |   | 61,095          |   | —                  |   | 61,095     |        |
| Amortization of incentive warrants     |   | —            |   | —        |   | 44,508          |   | —                  |   | 44,508     |        |
| Dividends declared                     |   | —            |   | —        |   | —          |   | (5,063,122              | )      | (5,063,122 | )           |
| Net loss                               |   | —            |   | —        |   | —          |   | (157,274                | )      | (157,274   | )           |
| 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         |   | 33,261,703      |   | —                  |   | 33,267,453 |        |
| Warrants exercised                     |   | 495,045           |   | 495           |   | 2,474,730       |   | —                  |   | 2,475,225  |        |
| Stock options exercised                |   | 33,247            |   | 33            |   | 163,015         |   | —                  |   | 163,048    |        |
| DRIP                                   |   | 49,081            |   | 49            |   | 297,936         |   | —                  |   | 297,985    |        |
| Equity-based compensation              |   | 13,676            |   | 14            |   | 261,504         |   | —                  |   | 261,518    |        |
| Dividends declared                     |   | —            |   | —        |   | —          |   | (8,276,202              | )      | (8,276,202 | )           |
| Net loss                               |   | —            |   | —        |   | —          |   | (1,980,420              | )      | (1,980,420 | )           |
| Balance at December 31, 2003           |   | 17,401,309        |   | $             | 17,401 |            | $      | 91,706,371              |   | $          | (21,619,365 | ) | $ | 70,104,407 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-4

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS****FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002**

** **
|                                                                             |   | **2003**    |       | **2002**    |   |
|----------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| CASH FLOWS FROM OPERATING  ACTIVITIES                                            |   |        |       |        |   |
| Net loss                                                                         |   | $           | (1,980,420 | )           | $      | (157,274 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities- |   |        |       |        |   |
| Depreciation and amortization expense                                            |   | 7,023,923   |       | 3,362,508   |   |
| Impairment of investment in real estate                                          |   | 1,465,932   |       | 275,000     |   |
| Amortization of deferred financing costs                                         |   | 515,318     |       | 189,755     |   |
| Write-off of unamortized deferred financing  costs                               |   | 29,843      |       | 135,258     |   |
| Equity in loss of unconsolidated affiliate                                       |   | 54,953      |       | 66,295      |   |
| Equity-based compensation                                                        |   | 261,518     |       | 60,241      |   |
| Changes in assets and liabilities-                                               |   |        |       |        |   |
| Accounts receivable                                                              |   | (9,686      | )          | 95,989      |   |
| Deferred rent receivable                                                         |   | (729,718    | )          | (297,345    | )      |
| Prepaid expenses and other assets                                                |   | 121,501     |       | (33,306     | )      |
| Accounts payable and accrued expenses                                            |   | 1,402,037   |       | 1,070,280   |   |
| Other accrued liabilities                                                        |   | 2,495,717   |       | 659,644     |   |
| Net cash flows provided by  operating activities                                 |   | 10,650,918  |       | 5,427,045   |   |
|                                                                             |   |        |       |        |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                            |   |        |       |        |   |
| Acquisitions, developments and  improvements of real estate, net of debt assumed |   | (52,006,298 | )          | (48,662,156 | )      |
| Tenant improvements                                                              |   | (3,322,017  | )          | (1,191,800  | )      |
| Tenant leasing commissions                                                       |   | (688,809    | )          | (165,362    | )      |
| Deposits on real estate  acquisitions                                            |   | —      |       | (170,000    | )      |
| Amounts paid to unconsolidated  affiliate                                        |   | (44,769     | )          | (123,104    | )      |
| Net  cash flows used in investing activities                                     |   | (56,061,893 | )          | (50,312,422 | )      |
|                                                                             |   |        |       |        |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                            |   |        |       |        |   |
| Additions to mortgage loans and  notes payable                                   |   | 110,899,725 |       | 60,589,117  |   |
| Repayments of mortgage loans  and notes payable                                  |   | (88,985,672 | )          | (30,971,098 | )      |
| Payment of deferred financing  costs                                             |   | (1,602,297  | )          | (971,035    | )      |
| Net proceeds from common stock  offering                                         |   | 33,267,453  |       | 22,749,038  |   |
| Net proceeds from exercising of  options and warrants                            |   | 1,588,273   |       | 541,566     |   |
| Net change in escrow deposits                                                    |   | (3,442,908  | )          | (1,662,306  | )      |
| Dividends paid                                                                   |   | (7,153,880  | )          | (4,190,694  | )      |
| Net  cash flows provided by financing activities                                 |   | 44,570,694  |       | 46,084,588  |   |
|                                                                             |   |        |       |        |   |
| NET  CHANGE IN CASH AND CASH EQUIVALENTS                                         |   | (840,281    | )          | 1,199,211   |   |
|                                                                             |   |        |       |        |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR                                    |   | 2,318,566   |       | 1,119,355   |   |
|                                                                             |   |        |       |        |   |
| CASH  AND CASH EQUIVALENTS, END OF YEAR                                          |   | $           | 1,478,285  |        | $      | 2,318,566 |   |
|                                                                             |   |        |       |        |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                                |   |        |       |        |   |
| Cash paid for interest                                                           |   | $           | 6,841,482  |        | $      | 3,763,091 |   |
|                                                                             |   |        |       |        |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES          |   |        |       |        |   |
| Mortgage  loans assumed                                                          |   | $           | 31,380,000 |        | $      | 17,000,000 |   |
| Common  stock issued to the DRIP                                                 |   | $           | 297,985    |        | $      | 269,877 |   |
| Common  stock issued for improvements of real estate                             |   | $           | —     |        | $      | 117,394 |   |

 

See accompanying notes to consolidated financial statements.

 

F-5

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS****DECEMBER 31, 2003 AND 2002**

 

**NOTE 1 –ORGANIZATION**

 

AmeriVest Properties Inc.(the Company) is incorporated under the laws of the State of Maryland andoperates as a self-administered and self-managed real estate investment trust(REIT).  The Company primarily investsin and operates commercial office buildings in selective markets and leases thecommercial office buildings to small and medium size tenants.  At December 31, 2003, the Company ownsand operates, through its wholly-owned subsidiaries, the following properties:

 
| **Property**                 |   | **Location**     |
|------------------------------|--------|------------------|
| Greenhill Park               |   | Addison, TX      |
| Scottsdale Norte             |   | Scottsdale, AZ   |
| Financial Plaza              |   | Mesa, AZ         |
| Southwest Gas Building       |   | 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(1)            |   | Englewood, CO    |
| Texas Bank Buildings(2)      |   | Texas            |
| Texas State Buildings(3)     |   | Texas            |

 

----

(1)          20% of the property is owned by the Company,80% of the property is owned by Freemark Abbey Panorama, LLC as a tenant incommon with the Company.

(2)          These four buildings are leased approximately63% to Bank of America.  The buildingsare located in Clifton, Georgetown, Henderson and Mineral Wells, Texas.  These building were sold on March 16,2004.

(3)          Eleven of these thirteen buildings are leasedprimarily to various agencies of the State of Texas.  The buildings are located in Lubbock, El Paso (2), Clint, Temple,Bellville, Columbus, Hempstead, Mission, Arlington, Marshall, Amarillo andParis, Texas.

 

**NOTE 2 –SIGNIFICANT ACCOUNTING POLICIES**

 

*Basisof Presentation*

 

The accompanyingconsolidated financial statements include the consolidated operations of theCompany and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have beeneliminated in consolidation.  Certainprior period balances have been reclassified to conform to current periodpresentation.

 

*Use ofEstimates*

 

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.

 

*Investmentin Real Estate*

 

Upon acquisition, thepurchase price of a property is allocated to land, building, leasingcommissions and other intangible assets and associated liabilities.  The allocation to land is based on theCompany’s estimate of its 

 

F-6

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fair value based on allavailable information including appraisals. The allocation to intangible assets represents the value associated withthe in-place leases, including leasing commissions, legal and other relatedcosts.  The purchase price allocationmay also include the creation of an intangible asset or liability resultingfrom in-place leases being above or below the market rental rates on the dateof acquisition.  This asset or liabilityis amortized over the life of the remaining in-place leases as an adjustment torevenue.

 

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,  tenant leasing commissions and other intangible assets |   | Term of related  lease      |

 

Maintenanceand repairs are 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.

 

*Other Intangible Assets*

 

The intangible assets areamortized over the remaining life of the in-place leases which generally rangefrom 24 to 55 months.  Estimatedamortization expense for the next five years is: $3,593,744 in 2004, $3,246,830in 2005, $2,174,973 in 2006, $554,443 in 2007 and $6,614 in 2008.

 

*Long-LivedAssets*

 

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 continuallyevaluates the recoverability of its long-lived assets based on estimated futurecash flows from and the estimated liquidation value of such long-lived assets,and provides for impairment if such undiscounted cash flows are insufficient torecover the carrying amount of the long-lived asset.  If an asset is deemed to be impaired, the book value will bewritten down to its estimated fair value.

 

*CashEquivalents*

 

For purposes of reportingcash flows, the Company considers as cash equivalents all highly liquidinvestments with a maturity of three months or less at the time of purchase.

 

*Escrow Deposits*

 

In accordance with theloan agreements for five of the Company’s loans, the lenders require theCompany to maintain reserves for real estate taxes, property insurance, capitalimprovements and/or tenant improvements.

 

*DeferredFinancing Costs*

 

Deferred financing costsinclude fees and costs incurred to obtain long-term financing.  These costs are amortized over the terms ofthe respective loans and are included as a component of interest expense in theaccompanying consolidated statements of operations.

 

*FairValue*

 

The Company’s financialinstruments include accounts receivable, deferred rents receivable, accountspayable and accrued expenses and mortgage loans and notes payable.  The fair value of the Company’s mortgage 

 

F-7

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loans and notes payableis estimated by discounting the future cash flows of each instrument at currentrates expected for similar debt instruments of comparable maturities andrisk.  The fair values of thesefinancial instruments were not materially different from their carrying orcontract values with the exception of mortgage loans and notes payable asdetailed below:

 
|                              |   | **2003**             |        | **2002**             |   |
|-----------------------------------|--------|----------------------|-------------|----------------------|--------|
|                              |   | **Carrying  Amount** |        | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
| Mortgage loans  and notes payable |   | $                    | 159,530,410 |                 | $      | 161,141,311 |   | $ | 106,094,232 |   | $ | 111,429,642 |   |
|                                   |        |                      |             |                      |        |  |  |  |  |  |  |  |  |

 

*RevenueRecognition*

 

Certain leases providefor tenant occupancy during periods for which no rent is due or where minimumrent payments increase during the term of the lease.  The Company records rental revenue for the full term of eachlease on a straight-line basis. Accordingly, the Company records a receivable from tenants for rentsthat the Company expects to collect over the remaining lease term as deferredrents receivable in the accompanying consolidated balance sheets.  When the Company acquires a property, theterm of existing leases is considered to commence as of the acquisition datefor the purposes of this calculation.

 

*Concentrationsof Credit Risk*

 

The Company leases officespace to commercial businesses in metropolitan Denver, Dallas, Phoenix andIndianapolis.  The Company also leasesoffice space to State of Texas governmental agencies.  The terms of the leases generally require basic rent payments atthe beginning of each month.  Creditrisk associated with the lease agreements is limited to the amount of rentsreceivable from tenants less any related security deposits.  Leases with the State of Texas governmentalagencies may be canceled by the lessee should funding for the specificgovernmental agency on a complete agency basis be decreased or discontinued.

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprincipally of cash and cash equivalents. The Company maintains cash accounts at three financial institutions.  The Company periodically evaluates thecredit worthiness of these financial institutions, and maintains cash accountsonly in large high quality financial institutions, thereby minimizing exposurefor deposits in excess of federally insured amounts.  On occasion, cash on deposit may exceed federally insuredamounts.

 

*Salesof Properties*

 

The Company accounts forthe sale of properties under the full accrual method.  Gains or losses on sale are recognized only after closing takesplace, title has transferred, an adequate down payment has been received by theCompany and the collectibility of the receivable from the buyer, if applicable,is reasonably assured.

 

*IncomeTaxes*

 

Effective January 1,1996, the Company elected to be taxed as a REIT under Sections 856 through 860of the Internal Revenue Code (the Code), as amended.  As a REIT, the Company generally would not be subject to federalincome taxation at the corporate level to the extent it distributes annually atleast 100% of its REIT taxable income, as defined in the Code, to itsstockholders and satisfies certain other requirements.  Accordingly, no provision has been made forfederal income taxes in the accompanying consolidated financial statements.  As of December 31, 2003, the Companyhas satisfied the requirements as defined in the Code.

 

Certain of the Company’ssubsidiaries are subject to certain state excise and franchise taxes.  The provision for such state taxes has beenreflected in general and administrative expense in the accompanying consolidatedstatements of operations and has not been separately stated due to itsinsignificance.

 

For federal income taxpurposes, the cash dividends paid to stockholders may be characterized asordinary income, return of capital (generally non-taxable) or capital gains.  Dividends declared for the year endedDecember 

 

F-8

----

 

31, 2003 totaled$8,276,202 and are characterized for tax purposes as 36% ordinary income and64% return of capital.  Dividendsdeclared for the year ended December 31, 2002 totaled $5,063,122 and arecharacterized for tax purposes as 56% ordinary income and 44% return ofcapital.

 

*Equity-Based Compensation*

 

The Company applies Accounting PrinciplesBoard (APB) Opinion No. 25 and related interpretations in accounting for itsequity-based compensation.  Accordingly,the Company does not recognize compensation cost for options granted toemployees whose exercise price is equal to or exceeds the fair value of theunderlying stock as of the grant date and which qualify for fixed plantreatment.

 

Equity-based compensation issued tonon-employees is 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 adopted the disclosure-onlyprovisions of Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure, an amendment of FASB Statement No.123.” Had compensation cost for the Company’s stock option plan beendetermined based on the fair value at the grant date consistent with theprovisions of SFAS No. 148, the Company’s net loss and loss per share for theyears ended December 31, 2003 and 2002 would have been changed to the proforma amounts indicated below:

 

|                                                         |   | **2003** |       | **2002** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|
| Net loss – as reported                                  |   | $        | (1,980,420 | )        | $      | (157,274 | ) |
| Plus: Recognized  equity-based compensation                  |   | 261,518  |       | 15,733   |   |
| Total equity-based compensation expense based on  fair value |   | (211,893 | )          | (13,506  | )      |
| Net loss – pro forma                                    |   | $        | (1,930,795 | )        | $      | (155,047 | ) |
| Loss per share (basic) – as reported                    |   | $        | (0.13      | )        | $      | (0.02 | ) |
| Loss per share (diluted) – as reported                  |   | $        | (0.13      | )        | $      | (0.02 | ) |
| Loss per share (basic) – pro forma                      |   | $        | (0.13      | )        | $      | (0.02 | ) |
| Loss per share (diluted) – pro forma                    |   | $        | (0.13      | )        | $      | (0.02 | ) |

 

*NewAccounting Principles*

 

InDecember 2003, the Financial Accounting Standards Board (FASB) issued FASBInterpretation (FIN) No. 46 (Revised), “Consolidation of Variable InterestEntities”, which addresses how a business enterprise should evaluate whether ithas a controlling financial interest in an entity through means other thanvoting rights and accordingly should consolidate the entity.  FIN 46R replaces FIN 46, “Consolidation ofVariable Interest Entities”, which was issued in January 2003.  The Company will be required to apply FIN46R to variable interests in variable interest entities (VIEs) created afterDecember 31, 2003.  For variableinterests in VIEs created before January 1, 2004, this interpretation willbe applied beginning on March 31, 2004. For any VIEs that must be consolidated under FIN 46R that were createdbefore January 1, 2004, the assets, liabilities and non-controlling interestsof the VIE initially would be measured at their carrying amounts with anydifference between the net amount added to the balance sheet and any previouslyrecognized interest being recognized as the cumulative effect of an accountingchange.  If determining the carryingamounts is not practicable, fair value at the date this interpretation firstapplies may be used to measure the assets, liabilities and non-controllinginterest in the VIE.  The Companyhas an interest in an entity whose sole purposes is to own and operate thePanorama Falls building in Englewood, Colorado, which may be considered aVIE.  The Company’s losses are limitedto its investment in the tenancy-in-common relationship of approximately$1,364,000, the amounts due from the related party of approximately $3,372,000,and any underlying rents receivable.

 

F-9

----

 

**NOTE 3 –ACQUISITIONS AND DEVELOPMENTS**

 

**2003Transactions**

 

Greenhill Park Acquisition

 

On December 4, 2003, the Company acquired theGreenhill Park office building located in Addison, Texas.  Greenhill Park is subject to a ground lease,see Note 10 – Commitments and Contingencies for additional information.  The purchase price for Greenhill Park was$10,500,000, which was paid with $5,250,000 from the Secured Fleet Facility andthe balance in cash from a portion of the proceeds from our 2003 publicoffering.

 

*ScottsdaleNorte Acquisition*

 

On October 7, 2003, the Company acquired theScottsdale Norte office building located in Scottsdale, Arizona.  The purchase price for Scottsdale Norte was$12,250,000, which was paid with $6,630,000 from the assumption of the existingloan from Southern Farm Bureau Life Insurance Company and the balance in cashfrom a portion of the proceeds from our 2003 public offering.

 

*FinancialPlaza Acquisition*

 

On September 10, 2003, the Company acquired the Financial Plazaoffice building located in Mesa, Arizona. The purchase price for Financial Plaza was $39,000,000, which was paidwith $24,750,000 from the assumption of the existing loan from Allstate LifeInsurance Company and the balance in cash from a portion of the proceeds fromour 2003 public offering.

 

*KeystoneOffice Park IV Development*

 

During 2003, the Company completed the construction of a buildingadjacent to the existing Keystone Office Park in Indianapolis, Indiana.  This building was constructed to accommodatethe expansion needs of some of the existing tenants as well as marketdemand.  The building opened for occupancyin August 2003.

 

*SouthwestGas Acquisition*

 

On February 6, 2003, the Company acquired the Southwest Gas officebuilding located in Phoenix, Arizona. The purchase price for the Southwest Gas Building was $17,000,000, whichwas paid with $11,900,000 from the Secured Fleet Facility and the balance froma short-term loan, also from Fleet National Bank.  This short-term loan was refinanced with the Unsecured Fleet Facility.

 

The following unaudited pro forma financial information is presented asif the Company had acquired these properties as of the beginning of the periodspresented.  This information ispresented for illustrative purposes only and may not be indicative of theresults that actually would have occurred if the acquisitions had been ineffect on the dates indicated or which may be obtained in the future.

 

|                                     |   | **2003** |       | **2002** |   |
|------------------------------------------|--------|----------|------------|----------|--------|
| Revenue                                  |   | $        | 38,748,968 |     | $      | 30,907,407 |   |
| Net (loss)/income                        |   | $        | (2,399,638 | )        | $      | 37,412 |   |
| (Loss)/earnings per share – basic   |   | $        | (0.16      | )        | $      | 0.00 |   |
| (Loss)/earnings per share – diluted |   | $        | (0.16      | )        | $      | 0.00 |   |

 

The unaudited pro forma financial information for 2003 is notcomparable to the 2002 pro forma information as the operating results from the2002 acquisitions are reflected from the acquisition date and are not presentedas if they occurred as of the beginning of the period.

 

F-10

----

 

**2002Transactions**

 

*ChateauPlaza Acquisition*

 

On November 25, 2002, the Company acquired the Chateau Plazaoffice building located in Dallas, Texas. The purchase price for Chateau Plaza was $22,000,000, which was paidwith $15,400,000 from the Secured Fleet Facility and the balance paid in cashfrom a portion of the proceeds from our 2002 public offering.

 

*CenterraAcquisition*

 

On November 12, 2002, the Company acquired the Centerra officebuilding located in Denver, Colorado. The purchase price for Centerra was$18,658,300, which was paid with $13,057,660 from the Secured Fleet Facilityand the balance paid in cash from a portion of the proceeds from our 2002public offering.

 

*KeystoneLand Acquisition*

 

On September 6, 2002, the Company acquired a parcel of undevelopedland, adjacent to Keystone Office Park in Indianapolis, Indiana, from SheridanRealty Partners, L.P., an affiliate, for $320,000.  The purchase price was determined based on the fair market valueof the land and was paid through the issuance of 52,893 shares of our commonstock ($6.05 per share).  In late 2002,the Company commenced construction of a fourth building on this land.

 

*ParkwayCentre II Acquisition*

 

On September 5, 2002, the Company acquired the Parkway Centre IIoffice building located in Plano, Texas. The purchase price for Parkway Centre II was $22,000,000, which was paidwith $17,000,000 from the assumption of the existing loan from J.P. MorganChase Commercial Mortgage Securities Corp. and the balance paid in cash from aportion of the proceeds from our 2002 public offering.

 

**NOTE 4 –INVESTMENT IN UNCONSOLIDATED AFFILIATES**

 

In December 2001,the Company completed the sale of an 80% tenancy in common interest in thePanorama Falls building to a related party, retaining the remaining 20%interest.  This interest is beingaccounted for under the equity method of accounting and is included as aninvestment in an unconsolidated affiliate in the accompanying consolidated balancesheets.  The Company also holds themortgage loan on Panorama Falls in the amount of $4,214,408 and has recorded areceivable for 80% of this amount, as due from related party with the remaining20%, included in the investment in unconsolidated affiliate balance.  The property had a net book value of$6,915,557 at December 31, 2003. This investment may be considered a variable interest entity, see thediscussion of FIN 46R under Note 2 – Significant Accounting Policies foradditional information.

 

F-11

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**NOTE5 – MORTGAGE LOANS AND NOTES PAYABLE**

 

The Company finances itsproperties with mortgage loans and other debt instruments available, such aslines of credit.  See above under Note 3– Acquisitions and Developments for property specific financing activity.  The following is a summary of the Company’soutstanding mortgage loans and notes payable, classified by interest type(fixed or variable) and in order of maturity, at December 31, 2003 and 2002:

 
|                                                                |   |                                               |   |                     |   | **2003**                     |        | **2002**                        |   |
|---------------------------------------------------------------------|--------|----------------------------------------------------|--------|--------------------------|--------|------------------------------|-------------|---------------------------------|--------|
| **Lender**                                                          |   | **Mortgaged Property**                             |   | **Maturity********Date** |   | **Principal********Balance** |        | **Interest********Rate****(1)** |   | **Principal********Balance** |   | **Interest********Rate****(1)** |   |
| *Fixed Rate*                                                        |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Teachers Insurance andAnnuity Association of America                |   | AmeriVest Plaza at  Inverness                      |   | 1/10/2006                |   | $                            | 14,572,888  |                            | 7.90   | % | $ | 14,721,273 |   | 7.90 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Greenwich Capital FinancialProducts                                 |   | Parkway Centre IICenterraSouthwest Gas Building    |   | 10/1/2008                |   | 38,876,849                   |        | 5.13                            | %      | — |   | — |   |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Allstate Life Insurance Company                                     |   | Financial Plaza                                    |   | 10/5/2010                |   | 24,669,760                   |        | 5.25                            | %      | — |   | — |   |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Southern Farm Bureau Life Insurance Company                         |   | Scottsdale Norte                                   |   | 4/1/2011                 |   | 6,625,460                    |        | 7.90                            | %      | — |   | — |   |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Teachers Insurance and AnnuityAssociation of America                |   | Sheridan CenterArrowhead FountainsKellogg Building |   | 1/1/2013                 |   | 29,309,686                   |        | 7.40                            | %      | 29,700,000 |   | 7.40 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Jefferson Pilot                                                     |   | Texas Bank Buildings                               |   | 5/1/2013                 |   | 1,292,749                    |        | 9.00                            | %      | 1,377,372 |   | 9.00 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Security Life of Denver InsuranceCompany                            |   | Keystone Office Park – 1st                    |   | 5/1/2022                 |   | 4,334,828                    |        | 8.00                            | %      | 4,435,814 |   | 8.00 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Security Life of Denver InsuranceCompany                            |   | Keystone Office Park – 2nd                    |   | 5/1/2022                 |   | 485,638                      |        | 8.63                            | %      | 496,064 |   | 8.63 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Transatlantic Capital Company, LLC                                  |   | Texas State Buildings                              |   | 8/1/2028                 |   | 5,660,436                    |        | 7.66                            | %      | 5,735,061 |   | 7.66 | % |
|                                                                |   |                                               |   | Subtotal                 |   | $                            | 125,828,294 |                            | 6.41   | % | $ | 56,465,584 |   | 7.65 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| *Variable Rate*                                                     |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Fleet National Bank –$42 million Senior Secured Line of Credit |   | Chateau PlazaGreenhill Park                        |   | 11/12/2005               |   | $                            | 18,470,020  |                            | 3.90   | % | $ | 28,457,660 |   | 4.17 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Fleet National Bank –$30 million Unsecured Line of Credit      |   | Unsecured                                          |   | 11/12/2005               |   | 15,149,725                   |        | 5.17                            | %      | — |   | — |   |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| J.P. Morgan Chase                                                   |   | Parkway Centre II                                  |   | —                   |   | —                       |        | —                          |   | 17,000,000 |   | 3.39 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| KeyBank National Association                                        |   | Panorama Falls                                     |   | —                   |   | —                       |        | —                          |   | 4,072,283 |   | 3.91 | % |
|                                                                |   |                                               |   | Subtotal                 |   | $                            | 33,619,745  |                            | 4.47   | % | $ | 49,529,943 |   | 3.88 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| *Other Notes Payable*                                               |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
| Lease Capital Corporation                                           |   | Phone system                                       |   | 10/31/2007               |   | $                            | 82,371      |                            | 11.11  | % | $ | 98,705 |   | 11.11 | % |
|                                                                |   |                                               |   | Subtotal                 |   | $                            | 82,371      |                            | 11.11  | % | $ | 98,705 |   | 11.11 | % |
|                                                                |   |                                               |   |                     |   |                         |        |                            |   |   |   |   |   |
|                                                                |   |                                               |   | Total                    |   | $                            | 159,530,410 |                            | 6.01   | % | $ | 106,094,232 |   | 5.89 | % |

 

----

(1) Interest only, does notinclude amortization of deferred financing costs or unused facility fees.

 

*Refinancings*

 

In September 2003,the Company borrowed $39,000,000 from Greenwich Capital Financial Products (seeterms above).  The proceeds were used torepay (i) a portion of the Secured Fleet Facility that was secured by Centerraand the Southwest Gas Building, respectively and (ii) a loan from J.P. MorganChase secured by Parkway Centre II. This loan allowed the Company to fix the interest rate on a largeportion of variable rate debt.

 

In December 2002,the Company borrowed $29,700,000 from Teachers Insurance and AnnuityAssociation of America (see terms above). The proceeds were used to repay (i) two loans from US Bank NationalAssociation secured by Sheridan Center and the Kellogg Building, respectivelyand (ii) a loan from Nationwide Life Insurance Company secured by ArrowheadFountains.  This loan allowed theCompany to fix the interest rate on a large portion of variable rate debt.

 

F-12

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*Lines of Credit*

 

In November 2002,the Company obtained a senior secured revolving line of credit from FleetNational Bank (the Secured Fleet Facility) (see terms above).  The original available amount under thisfacility was $30,000,000, which was increased to $42,000,000 inFebruary 2003.  The Secured FleetFacility is currently secured by Chateau Plaza and Greenhill Park and had anoutstanding balance of $18,470,020 at December 31, 2003 with $23,530,000 ofavailability.

 

In February 2003,the Company obtained a $5,100,000 short-term loan from Fleet National Bankwhich was used for the acquisition of the Southwest Gas Building.  In August 2003, the Company refinancedthis loan with a $15,000,000 unsecured revolving line of credit from FleetNational Bank (the Unsecured Fleet Facility) (see terms above), which wasincreased to $30,000,000 in December 2003.  The Unsecured Fleet Facility had an outstanding balance of$15,149,725 at December 31, 2003 with $14,850,275 of availability.

 

*Other Information*

 

The following tabledetails the scheduled maturities of mortgage loans and notes payableoutstanding at December 31, 2003:

 

| 2004       |   | $          | 2,244,174   |   |
|------------|--------|------------|-------------|--------|
| 2005       |   | 36,017,028 |        |
| 2006       |   | 16,605,800 |        |
| 2007       |   | 2,516,001  |        |
| 2008       |   | 37,269,255 |        |
| Thereafter |   | 64,878,152 |        |
| Total      |   | $          | 159,530,410 |   |

 

Certain of its mortgagelenders require the Company to comply with certain debt covenants as describedin the specific loan documents, including the loan-to-value ratio, the interestcoverage ratio, the fixed charge coverage ratio and the dividend payoutratio.  At December 31, 2003, theCompany was in compliance with all of its debt covenants with the exception ofthe dividend payout ratio covenant as required by the Secured Fleet Facilityand the Unsecured Fleet Facility.  TheCompany received a waiver from Fleet National Bank for this event ofnon-compliance with this covenant for the year ended December 31,2003.  In addition, on March 16,2004, the Company amended its Secured Fleet Facility and Unsecured FleetFacility loan agreements to modify certain of its debt covenants.  The Company believes it will be incompliance with these modified covenants based on forecasted operating results,however, there is no assurance that the Company will remain in compliance withthese amended covenants.

 

Certain of its mortgagelenders require the Company to escrow funds to be used for the payment offuture real estate taxes, property insurance, tenant improvements, leasingcommissions and other capital expenditures. At December 31, 2003 and 2002, these amounts totaled $5,778,427 and$2,335,519, respectively, and are classified as escrow deposits on theaccompanying consolidated balance sheets.

 

**NOTE 6 –STOCK OFFERINGS**

 

DuringJune 2003, the Company offered 5,750,000 shares of common stock, including750,000 shares to cover over-allotments, at a price of $6.20 per share.  The Company received approximately$33,267,000, net of underwriting commissions and expenses.  The proceeds were used to repay a portion ofthe outstanding balance on the senior secured revolving line of credit withFleet National Bank (the Secured Fleet Facility), for capital improvements andas working capital.  The Company intendsto use available amounts on the Secured Fleet Facility to fund future propertyacquisitions.

 

During May andJune 2002, the Company offered 4,140,000 shares of common stock, including540,000 shares to cover over-allotments, at a price of $6.05 per share.  The Company received $22,749,038, net of the

 

F-13

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underwriting commissionsand offering expenses.  The proceedswere used to acquire additional properties, for capital improvements and forgeneral corporate purposes.

 

**NOTE7 – TENANT LEASES**

 

The following tablesummarizes future minimum base rent to be received under non-cancelable tenantleases for the Company’s commercial properties expiring each year, atDecember 31, 2003:

 

| 2004       |   | $          | 32,854,456  |   |
|------------|--------|------------|-------------|--------|
| 2005       |   | 26,745,103 |        |
| 2006       |   | 18,192,352 |        |
| 2007       |   | 12,553,306 |        |
| 2008       |   | 8,101,503  |        |
| Thereafter |   | 10,148,577 |        |
| Total      |   | $          | 108,595,297 |   |

 

Some leases also providefor additional rent based on increases in operating expenses.  These increases are generally payableannually in the succeeding year.

 

For the years endedDecember 31, 2003 and 2002, there were no tenants who accounted forgreater than 10% of revenues.

 

**NOTE 8 –IMPAIRMENT OF INVESTMENT IN REAL ESTATE**

 

During 2003, the Companyrecorded a $334,592 impairment charge for a property in Clint, Texas and a$1,131,340 impairment charge for a property in Paris, Texas.  Both properties had been previously leasedto agencies of the State of Texas.  TheClint building has been vacant since November 2001 and the Paris buildinghas been vacant since December 2002. The Company has been unsuccessful in re-leasing these properties butwill continue in its efforts, however there are no near term prospects.  The Company had previously recorded a$275,000 impairment charge related to the Clint property in 2002.  Impairment charges recorded on theseproperties have reduced their net book values to their estimated fair values of$100,000 and $43,000 for Clint and Paris, respectively.  The Company arrived at the estimated fairvalues using a combination of the property tax assessment values, valuesestimated by the Company’s property tax consulting firms and local real estatebrokers.  The Company continues tomonitor their non-core properties for any indications of impairment.

 

**NOTE 9 –EQUITY-BASED COMPENSATION**

 

*2003Long-Term Incentive Plan*

 

EffectiveJanuary 1, 2003, the Company adopted the 2003 Long-Term Incentive Plan(the LTIP) as a means to compensate employees and directors with equity-basedcompensation.  The LTIP provides for thegrant of up to 500,000 shares of common stock in the form of non-qualified andincentive stock options, stock appreciation rights, bonus stock, stock units,performance shares, performance units, restricted stock and restricted stockunits.

 

During2003, 58,000 shares of restricted common stock were granted to each of WilliamT. Atkins, the Chief Executive Officer and Chairman, and Charles K. Knight, theChief Operating Officer and President, under the LTIP, and such shares vestover a five year period.

 

*1995and 1998 Stock Option Plans*

 

Pursuant to the Company’s1995 and 1998 Stock Option Plans (collectively, the 95-98 Option Plans), theCompany may grant options to purchase an aggregate of 330,000 shares of theCompany’s common stock to key employees, directors, and other persons who haveor are contributing to the success of the Company.  The options granted pursuant to the 95-98 Option Plans may beincentive options qualifying for beneficial tax treatment for the recipient,non-qualified options or non-qualified, non-discretionary options.  Directors who are not employees of the 

 

F-14

----

 

Company (OutsideDirectors) automatically receive options to purchase 12,000 shares pursuant tothe 95-98 Option Plans at the time of their election.  None of these options are exercisable at the time of grant.  One-third of these options becomeexercisable on December 30th of each of the first three yearsimmediately following the date of grant. The exercise price for options granted to Outside Directors is the fairmarket value of the common stock on the date of grant, and all options grantedto Outside Directors expire five years from the date of grant.  On the date that all of an OutsideDirector’s options become exercisable, options to purchase an additional 12,000shares, none of which are exercisable at that time, shall be granted to thatOutside Director.

 

The status of outstandingoptions granted pursuant to the Company’s Option Plans was as follows:

 
|                   |   | **Number of  Options  Outstanding** |   | **Number of  Options  Exercisable** |   | **Weighted-  Average  Exercise  Price** |   | **Weighted-  Average  Fair Value** |   | **Range of  Exercise  Prices** |       |
|------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-----------------------------------------|--------|------------------------------------|--------|--------------------------------|------------|
| December 31, 2001 |   | 214,000                             |   | 164,000                             |   | $                                       | 4.74   |                               |   |                           | $3.97-5.70 |   |
|                   |   |                                |   |                                |   |                                    |   |                               |   |                           |       |
| Granted at fair value  |   | 24,000                              |   |                                |   | $                                       | 6.22   |                               | $      | 0.58                           |       | $6.22 |   |
| Exercised              |   | (60,000                             | )      |                                |   | $                                       | 4.51   |                               |   |                           | $4.38-4.81 |   |
| Forfeited              |   | (20,000                             | )      |                                |   | $                                       | 4.90   |                               |   |                           | $4.75-5.00 |   |
| December 31, 2002 |   | 158,000                             |   | 112,000                             |   | $                                       | 5.04   |                               |   |                           | $3.97-6.22 |   |
|                   |   |                                |   |                                |   |                                    |   |                               |   |                           |       |
| Granted at fair value  |   | 83,000                              |   |                                |   | $                                       | 6.60   |                               | $      | 0.69                           |       | $6.16-7.10 |   |
| Exercised              |   | (33,247                             | )      |                                |   | $                                       | 4.90   |                               |   |                           | $3.97-6.16 |   |
| December 31, 2003 |   | 207,753                             |   | 147,753                             |   | $                                       | 5.24   |                               |   |                           | $4.13-7.10 |   |

 

The fair value of eachgrant is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following weighted-average assumptions:

 

|                  |   | **2003** |   | **2002** |   |
|-----------------------|--------|----------|--------|----------|--------|
| Dividend yield        |   | 7.9      | %      | 8.5      | %      |
| Volatility            |   | 27.0     | %      | 27.0     | %      |
| Discount rate         |   | 2.9      | %      | 2.9      | %      |
| Expected life (years) |   | 4.6      |   | 5.0      |   |

 

The weighted averageremaining contractual life of options outstanding at December 31, 2003 wasapproximately 3 years.

 

At December 31, 2003and 2002, options to purchase 12,000 and 95,000 shares, respectively, wereavailable for grant pursuant to the 95-98 Option Plans.

 

*Warrants*

 

At December 31, 2003the status of exercisable warrants is as follows:

 

| **Issue Date**    |   | **Exercisable** |   | **Exercise  Price** |   | **Expiration  Date** |              |
|-------------------|--------|-----------------|--------|---------------------|--------|----------------------|-------------------|
| January 2000 |   | 273,500         |   | $                   | 5.00   |                 | January 2005 |   |
| July 2000    |   | 63,105          |   | $                   | 5.00   |                 | July 2005    |   |
| June 2001    |   | 50,000          |   | $                   | 7.00   |                 | July 2005    |   |

 

**NOTE 10– COMMITMENTS AND CONTINGENCIES**

 

*Ground Lease*

 

Greenhill Park is subjectto a 99-year ground lease expiring on December 1, 2083.  The lease requires the Company to makemonthly rental payments based on the value of the land that is re-establishedevery ten years.  The annual minimumrent increases every ten years to the greater of (i) 10% of the fair marketvalue of the land, or (ii) 

 

F-15

----

 

10% of the initial valueof the land compounded annually at 3%. The next base rent calculation will be performed on January 1,2006.  In addition to the annual baserent, the ground lessor is entitled to a participating rent equal to 25% ofgross revenue receipts in excess of $6,723,205.  The combined annual base rent and participating rent is limitedto the greater of (i) 10% of the fair market value of the land, or (ii) 50% ofthe difference between the gross revenue receipts and $6,723,205.

 

| **Term**          |   | **Annual  Minimum Rent** |    |
|-------------------|--------|--------------------------|---------|
| 2004  – 2005 |   | $                        | 642,165 |   |
| 2006  – 2015 |   | 863,016                  |    |
| 2016  – 2025 |   | 1,159,822                |    |
| 2026  – 2035 |   | 1,558,704                |    |
| 2036  – 2045 |   | 2,094,768                |    |
| 2046  – 2055 |   | 2,815,193                |    |
| 2056  – 2065 |   | 3,783,384                |    |
| 2066  – 2075 |   | 5,084,552                |    |
| 2076  – 2083 |   | 6,833,213                |    |
|                   |        |                          |         |  |

 

*Legal Claims*

 

From time to time, theCompany and/or its subsidiaries may become involved in litigation relating toclaims arising out of its operations in the normal course of business. Thefollowing is a discussion of outstanding legal claims against the Company andby the Company:

 

On June 14, 2001, alawsuit was filed in the District Court, Hidalgo County, Texas againstInnerarity Austin, Inc., a Nevada corporation, and the Company’s wholly-ownedsubsidiary, AmeriVest Properties Texas, Inc., by Laura Smith alleging that thedefendants were negligent and breached various duties in allowing the Company’sMission, Texas building to be contaminated with airborne contaminants whileleasing the premises to the plaintiff’s employer, the Texas Department of HumanServices.  Innerarity Austin, Inc. wasthe previous owner of the property.  Theplaintiff alleges that due to the acts and omissions of the defendants, she hassuffered serious and some permanent injuries and severe physical and mentalpain.  The plaintiff seeks monetary andother relief, including exemplary damages, in excess of $50,000, andpre-judgment and post-judgment interest as provided by law, costs of the lawsuitand such other relief to which the plaintiff may be justly entitled.

 

On February 11,2002, a lawsuit was filed in the District Court, Hidalgo County, Texas againstthe Company’s wholly-owned subsidiary, AmeriVest Properties Texas, Inc., andWoodhaven Management Corporation, the Company’s external property manager, byIrma and Yreneo Carranza alleging that the defendants were negligent inmaintaining the Company’s Mission, Texas building while leasing the premises tothe plaintiff’s employer, the Texas Department of Human Services.  The plaintiff alleges that due to the actsand omissions of the defendants, she has suffered serious and some permanentinjuries and severe physical and mental pain, including loss ofconsortium.  The plaintiff seeks monetaryand other relief, including exemplary damages, and pre-judgment andpost-judgment interest as provided by law, costs of the lawsuit and such otherrelief to which the plaintiff may be justly entitled.

 

On August 23, 2002,a lawsuit was filed in the District Court, County of Arapahoe, Colorado,against the Company’s wholly-owned subsidiary, AmeriVest Broadway Properties,Inc., Sheridan Realty Advisors, LLC (SRA), Porter Construction Services, Inc.and others by Jane Doe alleging that the defendants were negligent inmaintaining security at our Panorama Falls building.  The plaintiff alleges that due to the acts and omissions of thedefendants, she was sexually assaulted and continues to suffer from physicalinjuries and mental anguish.  Theplaintiff seeks monetary relief, including exemplary damages, and pre- andpost-judgment interest as provided by law, costs of the lawsuit and such otherrelief to which the plaintiff may be justly entitled.

 

The Company has asserteda general denial of the material allegations in all lawsuits and the Company’sinsurance companies are defending the Company in these lawsuits and areresponsible for all costs.  The Companybelieves that these lawsuits will not be adversely determined and will not haveany material adverse effect on the Company’s business and financial condition.

 

F-16

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**NOTE 11– RELATED PARTY TRANSACTIONS**

 

*Sheridan Realty Advisors, LLC (SRA)*

 

Effective January 1,2000 through December 31, 2001, all of the Company’s properties weremanaged under a Property Management and Advisory Agreement (as amended andrestated on March 12, 2001 and December 31, 2001, the Agreement) withSRA, which also managed the day-to-day operations of the Company and assistedand advised the Board of Directors on real estate acquisitions and investmentopportunities.  SRA is owned by two ofour executives, William T. Atkins and Alexander S. Hewitt.  Effective January 1, 2002, the Companyacquired the administrative and property management and accounting servicesbusiness of SRA for approximately $50,000, which resulted in the Companyemploying most of SRA’s employees and the elimination of the related fees.  Furthermore, effective November 1, 2002,the Company terminated the Agreement in accordance with the Termination ofAdvisory Agreement entered into on December 27, 2002.  Due to the amendment of the Agreementeffective January 1, 2002 whereby certain SRA employees became employeesof the Company, the advisory and capital project fees were expensed in2002.  Prior to January 1, 2002,these fees were capitalized. Additionally, due to the termination of the Advisory Agreement effectiveNovember 1, 2002 whereby all remaining SRA employees became employees ofthe Company, these fees have been eliminated. Beginning on November 1, 2002, the salaries of these additionalemployees are included in general and administrative expenses.

 

In accordance with theAgreement, SRA received an administrative fee, a property management andaccounting fee, an advisory fee and a capital project fee for theseservices.  The property management feewas calculated as 5% of gross collected rents, the advisory fee was calculatedas 5% of capital deployed for real property acquisitions and the capitalproject fee was calculated as 3% of the total cost of capital projects inexcess of $100,000.  The following is adetail of the fees for the years ended December 31, 2003 and 2002:

 

|                |   | **2003** |   | **2002** |   |
|---------------------|--------|----------|--------|----------|--------|
| Advisory fee        |   | $        | — |     | $      | 1,267,380 |   |
| Capital project fee |   | —   |   | 100,000  |   |
| Total               |   | $        | — |     | $      | 1,367,380 |   |

 

*Sheridan Realty Partners, L.P.*

 

On September 6,2002, the Company acquired a parcel of undeveloped land, adjacent to KeystoneOffice Park in Indianapolis, Indiana, from Sheridan Realty Partners, L.P., anaffiliate.  See Note 3 – Acquisitionsand Developments for additional information.

 

*Panorama Falls Sale*

 

On December 6, 2001,the Company sold an 80% tenancy in common interest in the Panorama Fallsbuildings to a related party.  See Note4 – Investment in Unconsolidated Affiliates for additional information.

 

**NOTE 12– COMPREHENSIVE INCOME**

 

There are no adjustmentsnecessary to net income as presented in the accompanying consolidatedstatements of operations to derive comprehensive income in accordance with SFASNo. 130, “Reporting Comprehensive Income.”

 

**NOTE 13– LOSS PER SHARE**

 

There are no adjustmentsnecessary to the basic weighted average number of common shares outstanding toarrive at the diluted weighted average number of common shares outstanding asthe Company recognized a net loss for the years ended December 31, 2003and 2002 and the impact would be anti-dilutive.  The amounts excluded from the calculation due to theiranti-dilutive effect are as follows: 28,567 options, 76,075 warrants and116,000 shares of restricted common stock.

 

F-17

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**NOTE 14 – SUBSEQUENT EVENTS**

 

On March 16, 2004,the Company acquired the Camelback Lakes office building located in Phoenix,Arizona.  The purchase price forCamelback Lakes was $31,980,000, which was paid with $21,000,000 from theSecured Fleet Facility and the balance from Unsecured Fleet Facility.

 

On March 16,2004, the Company sold its Texas Bank Buildings for $4,100,000.  The four properties are located in Clifton,Georgetown, Henderson and Mineral Wells, Texas and had an aggregate net bookvalue of approximately $3,195,000 at December 31, 2003.

 

F-18

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**ITEM 8****.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 8A****.  CONTROLS ANDPROCEDURES**

 

The Company carried out anevaluation under the supervision and with participation of the Company’smanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the Company’s disclosure controls and procedurespursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as ofDecember 31, 2003.  Based on theirevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that disclosure controls and procedures were effective as of the endof the period covered by this report to ensure that information required to bedisclosed by the Company in its reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commissionsrules and forms.  There was no change inthe Company’s internal controls over financial reporting that occurred duringthe period covered by this report that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PARTIII**

 

**ITEM 9****.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS ANDCONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**

 

Information required byItem 9 is incorporated by reference to the description under thesection entitled “Directors and Executive Officers” of our definitiveproxy statement for the 2004 annual meeting of our stockholders.

 

**ITEM 10****.  EXECUTIVE COMPENSATION**

 

Information required byItem 10 is incorporated by reference to the description under thesection entitled “Executive Compensation” of our definitive proxystatement for the 2004 annual meeting of our stockholders.

 

**ITEM 11****.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

Information required byItem 11 is incorporated by reference to the description under the sectionsentitled “Directors and Officers” and “Beneficial Owners of Securities” of ourdefinitive proxy statement for the 2004 annual meeting of our stockholders.

 

**ITEM 12****.  CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

Information required byItem 12 is incorporated by reference to the description under thesection entitled “Transactions Between AmeriVest and Related Parties” ofour definitive proxy statement for the 2004 annual meeting of our stockholders.

 

**ITEM 13****.  EXHIBITS AND REPORTS ON FORM8-K**

 

(a) Exhibits

 

See Index to Exhibits.

 

(b)  Reports On Form 8-K

 

During the fourth quarterof our fiscal year ended December 31, 2003, we filed the following CurrentReports on Form 8-K:

 

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1.               Current Report on Form 8-K/A datedSeptember 10, 2003 (filed November 7, 2003).  This Current Report consisted of an amendmentto the Current Report on Form 8-K dated September 10, 2003 filed onSeptember 16, 2003 and included disclosures under “Item 7. FinancialStatements and Exhibits.”  The financialstatements included were an Independent Auditors’ Report; Statement of Revenueand Certain Expenses for the six months ended June 30, 2003 (unaudited)and for the year ended December 31, 2002; Notes to Statement of Revenueand Certain Expenses; Pro Forma Consolidated Balance Sheet as ofDecember 31, 2002 (unaudited); Pro Forma Consolidated Statement ofOperations for the six months ended June 30, 2003 (unaudited); Pro FormaConsolidated Statement of Operations for the year ended December 31, 2002(unaudited); Notes to Pro Forma Consolidated Financial Statements (unaudited);Statement of Estimated Taxable Operating Results and Cash to be Made Availableby Operations for the Year ended December 31, 2002 (unaudited); and Noteto Statement of Estimated Taxable Operating Results and Cash to be MadeAvailable by Operations (unaudited).  (FinancialPlaza)

 

2.               Current Report on Form 8-K datedOctober 7, 2003 (filed November 13, 2003).  This Current Report included disclosures under “Item 5. OtherEvents.”  (Scottsdale Norte)

 

**ITEM 14****.  PRINCIPALACCOUNTANT FEES AND SERVICES**

 

Information required byItem 14 is incorporated by reference to the description under thesection entitled “Principal Accountant Fees and Services” of ourdefinitive proxy statement for the 2004 annual meeting of our stockholders.

 

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | **AMERIVEST PROPERTIES INC.**              |
|--------|--------------------------------------------|
|   |                                       |
|   |                                       |
|   | By:                                        | /s/ William T. Atkins |   |
|   | William T. Atkins, Chief Executive Officer |

 

Date:  March 18, 2004

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**              |   | **Title**                                                          |                                    | **Date** |
|----------------------------|--------|--------------------------------------------------------------------|-----------------------------------------|----------|
| /s/ William T.  Atkins     |   |                                                               | Chief Executive  Officer (Principal     |     | March 18,  2004 |
| William T.  Atkins         |   | Executive  Officer) and Chairman of the Board                      |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ Charles K.  Knight     |   |                                                               | Chief Operating  Officer, President and |     | March 18,  2004 |
| Charles K. Knight          |   | Director                                                           |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ Kathryn L.  Hale       |   |                                                               | Chief Financial  Officer (Principal     |     | March 18,  2004 |
| Kathryn L. Hale            |   | Financial  Officer and Principal Accounting Officer) and Secretary |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ Patrice  Derrington    |   |                                                               | Director                                |     | March 18,  2004 |
| Patrice Derrington         |   |                                                               |                                    |     |
|                       |   |                                                               |                                    |     |
|                       |   |                                                               | Director                                |     |   |
| James F. Etter             |   |                                                               |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ Harry P.  Gelles       |   |                                                               | Director                                |     | March 18,  2004 |
| Harry P. Gelles            |   |                                                               |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ Alexander S.  Hewitt   |   |                                                               | Director                                |     | March 18,  2004 |
| Alexander S.  Hewitt       |   |                                                               |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ Robert W.  Holman, Jr. |   |                                                               | Director                                |     | March 18,  2004 |
| Robert W.  Holman, Jr.     |   |                                                               |                                    |     |
|                       |   |                                                               |                                    |     |
| /s/ John A.  Labate        |   |                                                               | Director                                |     | March 18,  2004 |
| John A. Labate             |   |                                                               |                                    |     |
|                       |   |                                                               |                                    |     |
|                       |   |                                                               | Director                                |     |   |
| Jerry J. Tepper            |   |                                                               |                                    |     |
|                            |        |                                                                    |                                         |          |  |  |  |  |  |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2          |   | Form of Agreement and  Plan of Merger of AmeriVest and AMVP Inc. (to reincorporate in  Maryland).  Incorporated by reference  to Exhibit A of AmeriVest’s Definitive Proxy Statement concerning AmeriVest’s  June 29, 1999 Annual Meeting of Stockholders filed with the SEC on May  27, 1999.                                                                                                                                             |
| 3.1        |   | Articles of  Amendment and Restatement of Articles of Incorporation.  Incorporated by reference to Exhibit 3.1  of AmeriVest’s Registration Statement on Form SB-2/A filed with the SEC on  May 29, 2003 (Registration No. 333-105183.                                                                                                                                                                                                               |
| 3.2A       |   | Amended and  Restated Bylaws as amended and restated as of April 16, 2002.  Incorporated by reference to Exhibit 3.2  of AmeriVest’s Registration Statement on Form SB-2 filed with the SEC on  April 19, 2003 (Registration No. 333-86676).                                                                                                                                                                                               |
| 3.2B       |   | First Amendment  to Amended and Restated Bylaws dated May 20, 2003.  Incorporated by reference to Exhibit 3.2B of AmeriVest’s  Registration Statement on Form SB-2/A filed with the SEC on May 29, 2003  (Registration No. 333-105183).                                                                                                                                                                                                              |
| 4.1        |   | Specimen Common  Stock Certificate.  Incorporated by  reference to Exhibit 4.1(a) of AmeriVest’s Registration Statement on Form  SB-2 filed with the SEC on June 21, 1996 (Registration No. 333-5114-D).                                                                                                                                                                                                                                        |
| 10.1       |   | 1995 Stock  Option Plan.  Incorporated by  reference to Exhibit 10.9 of AmeriVest’s Annual Report on Form 10-KSB for the  year ended December 31, 1997 filed with the SEC on March 30, 1998.                                                                                                                                                                                                                                               |
| 10.2       |   | 1998 Stock  Option Plan.  Incorporated by  reference to AmeriVest’s Definitive Proxy Statement concerning AmeriVest’s  May 21, 1998 Annual Meeting of Stockholders filed with the SEC on  March 30, 1998.                                                                                                                                                                                                                                  |
| 10.3       |   | Dividend  Reinvestment Plan.  Incorporated by  reference to AmeriVest’s Registration Statement on Form S-3 filed with the  SEC on August 21, 2000 (Registration No. 333-44210).                                                                                                                                                                                                                                                                 |
| 10.4A      |   | Revolving Credit  Agreement among AmeriVest Properties Inc. and Fleet National Bank, as  administrative agent, and the lenders party thereto, dated November 12,  2002.  Incorporated by reference to  Exhibit 10.1 of AmeriVest’s Current Report on Form 8-K filed with the SEC on  December 30, 2002.                                                                                                                                    |
| 10.4B      |   | Revolving Credit  Note by AmeriVest Properties Inc. to Fleet National Bank, as agent, dated  November 12, 2002.  Incorporated  by reference to Exhibit 10.2 of AmeriVest’s Current Report on Form 8-K filed  with the SEC on December 30, 2002.                                                                                                                                                                                            |
| 10.4C      |   | First Amendment to Revolving Credit Agreement between AmeriVest  Properties Inc. and Fleet National Bank, as administrative agent, and the  lenders party thereto, dated February 6, 2003.  Incorporated by reference to Exhibit 10.1 of AmeriVest’s  Current Report on Form 8-K filed with the SEC on February 21, 2003.                                                                                                                  |
| 10.5A      |   | Cross-Collateralization  and Cross-Default Agreement among AmeriVest Properties Inc., AmeriVest  Sheridan Center Inc., AmeriVest Kellogg Inc. and AmeriVest Arrowhead Inc. and  Teachers Insurance and Annuity Association of America dated December 23,  2002.  Incorporated by reference to  Exhibit 10.21A of AmeriVest’s Annual Report on Form 10-KSB for the year ended  December 31, 2002 filed with the SEC on March 31, 2003. |
| 10.5B      |   | Promissory Note  by AmeriVest Arrowhead Inc. to Teachers Insurance and Annuity Association of  America dated December 23, 2002.   Incorporated by reference to Exhibit 10.21B of AmeriVest’s Annual  Report on Form 10-KSB for the year ended December 31, 2002 filed with the  SEC on March 31, 2003.                                                                                                                                |
| 10.5C      |   | Promissory Note  by AmeriVest Kellogg Inc. to Teachers Insurance and Annuity Association of  America dated December 23, 2002.   Incorporated by reference to Exhibit 10.21C of AmeriVest’s Annual  Report on Form 10-KSB for the year ended December 31, 2002 filed with  the SEC on March 31, 2003.                                                                                                                                  |
| 10.5D      |   | Promissory Note  by AmeriVest Sheridan Center Inc. to Teachers Insurance and Annuity  Association of America dated December 23, 2002.  Incorporated by reference to Exhibit  10.21D of AmeriVest’s Annual Report on Form 10-KSB for the year ended  December 31, 2002 filed with the SEC on March 31, 2003.                                                                                                                           |
| 10.8A      |   | Deed of Trust  between AmeriVest Mesa Inc. and Allstate Life Insurance Company dated                                                                                                                                                                                                                                                                                                                                                                           |

 

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|   |   | September 8,  2003.  Incorporated by reference to  Exhibit 10.1 of AmeriVest’s Current Report on Form 8-K filed with the SEC on  November 7, 2003.                                                                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8B  |   | Mortgage Note by AmeriVest Mesa Inc. to Allstate Life Insurance  Company dated September 8, 2003.   Incorporated by reference to Exhibit 10.2 of AmeriVest’s Current  Report on Form 8-K filed with the SEC on November 7, 2003.                                                                            |
| 10.9A  |   | Loan Agreement between AmeriVest Centerra Inc., AmeriVest Parkway  Inc., and AmeriVest Black Canyon Inc. and Greenwich Capital Financial  Products Inc. dated September 19, 2003.                                                                                                                                          |
| 10.9B  |   | Promissory Note by AmeriVest Centerra Inc., AmeriVest Parkway Inc.,  and AmeriVest Black Canyon Inc. to Greenwich Capital Financial Products Inc.  dated September 19, 2003.                                                                                                                                               |
| 10.10  |   | AmeriVest Properties Inc. 2003 Long-Term Incentive Plan.  Incorporated by reference to Exhibit 10.22  of AmeriVest’s Registration Statement on Form SB-2/A filed with the SEC on  May 29, 2003 (Registration No. 333-105183).                                                                                         |
| 10.11  |   | Severance Agreement and Release between AmeriVest Properties Inc. and  D. Scott Ikenberry                                                                                                                                                                                                                                       |
| 10.12A |   | Unsecured Revolving Credit Agreement among AmeriVest Properties Inc.  and Fleet National Bank, as administrative agent, and the lenders party  thereto, dated December 15, 2003.                                                                                                                                           |
| 10.12B |   | Revolving Credit Note by AmeriVest Properties Inc. to Fleet National  Bank, as agent, dated December 15, 2003.                                                                                                                                                                                                             |
| 10.13  |   | Contract of Sale between LSF Presidio Investment I, LLC and AmeriVest  Camelback Inc. dated January 15, 2004.   (Camelback Lakes)                                                                                                                                                                                     |
| 10.14  |   | Termination of Advisory Agreement between AmeriVest Properties Inc.  and Sheridan Realty Advisors, LLC dated December 27, 2002.  Incorporated by reference to Exhibit 10.1  of AmeriVest’s Current Report on Form 8-K filed with the SEC on  January 7, 2003.                                               |
| 10.15  |   | Amended Revolving Line of Credit Agreement dated March 11, 2002  between AmeriVest Properties Inc. and Sheridan Investments, LLC.  Incorporated by reference to Exhibit  10.13B of AmeriVest’s Annual Report on Form 10-KSB for the year ended  December 31, 2001 filed with the SEC on April 1, 2002. |
| 21     |   | Subsidiaries of  AmeriVest Properties Inc.                                                                                                                                                                                                                                                                                      |
| 23     |   | Consent of KPMG  LLP                                                                                                                                                                                                                                                                                                            |
| 31     |   | Section 302  Certifications of Chief Executive Officer and Chief Financial Officer                                                                                                                                                                                                                                         |
| 32     |   | Section 906  Certifications of Chief Executive Officer and Chief Financial Officer                                                                                                                                                                                                                                         |
| 99     |   | Computation of  Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends                                                                                                                                                                                                                                       |

 

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