SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-14462
AMERIVEST PROPERTIES INC.
(Name of small business issuer in its charter)
Maryland 84-1240264
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1780 South Bellaire Street, Suite 515 80222
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(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 whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to be the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[ ]
The issuer's revenues for its most recent fiscal year were: $10,944,383
The aggregate market value of the issuer's voting common stock held by
non-affiliates of the issuer as of March 27, 2002 was $25,569,297 (computed on
the basis of $6.10 per share which was the reported closing sale price of the
issuer's common stock on the American Stock Exchange on March 27, 2002). Without
asserting that any director or executive officer of the issuer is an affiliate,
the shares of which they are beneficial owners have been deemed to be owned by
affiliates solely for this calculation.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the issuer's common stock as of March
27, 2002 was 6,700,140.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement for its 2002 annual
meeting of shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-KSB.
TABLE OF CONTENTS
Page
----
Part I
------
Item 1 Description of Business ......................................... 1
Item 2 Properties ...................................................... 16
Item 3 Legal Proceedings ............................................... 28
Item 4 Submission of Matters to a Vote of Security Holders ............. 28
Part II
-------
Item 5 Market for Common Equity and Related Stockholder Matters ........ 29
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 31
Item 7 Financial Statements ............................................ 38
Item 8 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure ........................................ 39
Part III
--------
Item 9 Directors, Executive Officers, Promoters And Control Persons;
Compliance With Section 16(A) of the Exchange Act ............... 39
Item 10 Executive Compensation .......................................... 39
Item 11 Security Ownership of Certain Beneficial Owners and Management .. 39
Item 12 Certain Relationships and Related Transactions .................. 39
Item 13 Exhibits and Reports on Form 8-K ................................ 39
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
AmeriVest Properties Inc. was incorporated in 1993 in the State of Delaware
and was reincorporated in 1999 in the State of Maryland. We are a real estate
investment trust, or REIT, that owns 23 office properties. We market and lease
our properties to small to mid-sized tenants. Our properties, which include an
aggregate of approximately 912,000 rentable square feet, are currently located
in Colorado, Indiana, Arizona and Texas.
We are a self-administered REIT. In 2000 and 2001, all of our properties
were managed under an agreement with Sheridan Realty Advisors, LLC, which also
managed our day-to-day operations and assisted and advised our Board of
Directors with respect to real estate acquisitions and investment opportunities.
Effective as of January 1, 2002, we purchased the administrative and property
management and accounting services business from Sheridan Realty Advisors for
the sum of $100 plus the book value of the furniture, fixtures and equipment at
December 31, 2001, which was approximately $50,000. As a result, 25 of Sheridan
Realty Advisors' 31 employees, including three of our senior executives, became
employees of AmeriVest and manage our day-to-day operations. The three senior
executives will also remain employees of Sheridan Realty Advisors.
Sheridan Realty Advisors continues as an outside advisor to the company in
connection with our capital market activities, real estate acquisitions and
dispositions and major capital projects and continues to earn an advisory and
capital project fee for those services under the terms of our agreement with
them, which expires on December 31, 2003.
Business Strategy
Focus on Multi-Tenant Office Buildings in Target Growth Cities
Since 1999, we have focused our efforts on the acquisition, rehabilitation
and development of multi-tenant office buildings with an average tenant size of
between 2,000 and 4,000 square feet in select cities. We have sold our
non-office building assets, which at one time included one industrial and four
self-storage properties. As of August 25, 2000, all our assets were office
buildings.
The Case for an Office Focus
We believe the public equity markets for REITs reward a strongly focused
strategy and that the office sector can support a relatively higher valuation
than do other property types. We believe the reason for this is that the demand
for office space has continued to grow as the economy has transitioned from
manufacturing to service businesses. We believe that demand will continue in our
target markets of small to mid-sized tenants.
The Case for Small Tenants
Within the growing office sector, we believe that a niche focus on
properties with small average tenant sizes is appropriate due to the positive
"corporate demographics" of small firms. According to data compiled by
Cognetics, Inc., a leading research firm in the area of economic change and
company formation, and reported in the 2000 Corporate Almanac, there were more
than eight million companies in the U.S. economy in 1999. Of these firms, 98% of
them employed fewer than 100 employees, and in 1999 this 98% employed almost 45%
of all workers. Assuming each office worker occupies the national average of 150
square feet, these firms each require less than 15,000 square feet of office
space. This research further reveals that in 1999, 90% of U.S. businesses
employed fewer than 20 employees, indicating an average office space requirement
of no more than 3,000 square feet.
1
We believe that this small tenant market has been underserved by most
office landlords. Through new development, such as Sheridan Plaza, redevelopment
of existing properties, such as Sheridan Center, and improved management with a
focus on customer service, such as Keystone Office Park, we believe that we
bring a level of amenities to the small tenant that usually only larger tenants
enjoy. For example, tenants in our largest buildings enjoy a keyless entry card
system to allow secure access 24 hours a day to their individual suites, as well
as use of common area conference rooms with the latest telecommunications and
presentation equipment. Entry lobbies feature touchpad electronic directories
and, where possible, our buildings are engineered to provide control of heating
and air conditioning in individual tenant suites. Signage for each tenant suite
allows for the tenant's individual logo to be incorporated on a common
background. Each property is wired to offer high speed voice and data service
from multiple telecom providers, and in some buildings tenants can elect to use
the building's centralized server and local area network as their own computer
system, with 24 hour, seven days a week, support from third party providers. We
operate our multi-tenant buildings under a "no-hassle" leasing philosophy, using
a standard simplified lease that has been designed for fairness to both tenant
and landlord and incorporating a turn-key tenant finish package, greatly
reducing the time to design and build out finished space. Our streamlined system
greatly reduces negotiation and space planning time and allows the tenant to
move into its space earlier and with less aggravation than is usual in the
leasing process.
The two frequently cited concerns about the small and mid-sized tenant
office market are its perceived high level of credit risk and management
intensity. As explained below, we believe that both these concerns are
overstated, and can be addressed by proper staffing and management systems
tailored to this tenant base. We believe that these perceived risks are higher
than the actual risks and, thus, provide an effective deterrent for competition
and an attractive opportunity for us. Regarding credit risk, with an average
tenant size of between 2,000 and 4,000 square feet, the loss of a single tenant
of such size does not meaningfully affect our financial results. Additionally,
we maintain a high level of credit quality in our largest office buildings
through accounting and collection systems that flag any late payments and
rigorously impose late payment penalty charges. Eviction action will be quickly
taken if a tenant does not make timely lease payments. These control systems are
centralized in our Denver headquarters, and monitored by an experienced
accounting staff. We believe that we can maintain and improve this high level of
credit quality in all our properties.
We also believe that, based on our experience, the issue of management
intensity may be largely a matter of mind-set. Smaller tenants may be viewed as
problematic primarily because most property managers are accustomed to giving
priority to their large users. With our deliberate focus on small to mid-sized
users, we bring a positive, service-oriented mentality to our tenants.
Our largest buildings, consisting of Sheridan Center, Keystone Office Park,
Sheridan Plaza, Arrowhead Fountains, the Kellogg Building and Panorama Falls,
feature a regional "Tenant Relations Advocate" whose job description is to
interface regularly with all tenants and maximize tenant retention. Building
engineers and maintenance staff are also assigned to these properties to deal
with physical maintenance. The Tenant Relations Advocate, unlike a conventional
property manager, does not have responsibility for the physical operation of a
building, but rather is solely dedicated to tenant issues with a singular focus
on tenant retention. The Tenant Relations Advocate personifies our
service-oriented mentality and is available to resolve minor tenant service
complaints before they develop into major issues.
2
Our Tenant Relations Advocates work with team leaders for each region, who
in turn report to a senior manager in our Denver headquarters, providing direct
and regular feedback on tenant concerns. We believe that our customer-focused
management will improve our tenant retention rates over those of our
competitors. Over time, we believe that smaller tenants actually are less
demanding than large tenants, who use their economic leverage not only in
initial lease negotiations but throughout their tenancy as well.
AmeriVest Growth Cities
Within the niche of multi-tenant properties with smaller average tenant
size, we have elected to narrow our focus even further by generally restricting
our acquisition or development activities to buildings or projects containing at
least 100,000 square feet, unless adding to an existing metropolitan portfolio,
within target cities where we hope to build meaningful multi-property portfolios
over the short- and medium-term. In order to employ our management resources in
the most efficient manner, only cities within a two-hour air travel radius by
air from our Denver headquarters were selected. The target cities also must be
large enough in total office square footage to offer the possibility of multiple
acquisitions and liquidity in the event of a desired sale and have a high
concentration of firms of fewer than 20 employees. In the short term, we plan to
focus our acquisition activities in the following cities:
1. Phoenix, AZ
2. San Francisco, CA
3. Denver, CO
4. Indianapolis, IN
5. Dallas, TX
We believe that the geographic logic of these proposed cities is strong.
Our management has prior experience owning and managing properties in Dallas,
and has current experience owning and managing our properties in Denver,
Indianapolis and Phoenix. We already have a large existing portfolio of
buildings in Texas that will be complemented by a focus on Dallas. All of these
cities consistently rank highly in job growth and sustained growth prospects for
the long term.
Operating Performance and Stockholder Return
Since 1997, which was our first full year as a public company, our average
annual total return to stockholders was 24%. The following table compares our
total return, based on stock price appreciation and reinvestment of all
dividends, with the average total return of 21 of the industry's largest REITs
and real estate operating companies, and the total return of the S&P 500, as
reported by Morningstar.
Total Return * to Stockholders
--------------------------------------------------------------------------------
AmeriVest % Industry %** S & P 500 %
--------------------------------------------------------------------------------
1-Year (2001) 33.0 28.3 -11.9
2-Year Avg. (2000-2001) 25.6 19.6 -10.5
3-Year Avg. (1999-2001) 25.4 11.8 0.0
4-Year Avg. (1998-2001) 19.1 5.4 7.2
5-Year Avg. (1997-2001) 24.0 8.8 12.4
--------------------------------------------------------------------------------
Source: Morningstar, Inc. (Morningstar.com) as of December 31, 2001.
* Total return based on stock price appreciation and reinvestment of all
dividends.
** Total return based on an equal-weighted average of the total returns for 21
of the industry's largest REITs and real estate operating companies.
3
We believe that by focusing on a specific property type in cities with a
growing small tenant market, we should be able to increase our revenues, our
earnings, and our funds from operations. Although there is no assurance or
guarantee, it is our intention that growth in our revenues, earnings and funds
from operations will, over the long term, result in an increase in our stock
price and the total return to our stockholders.
Recent Acquisitions and Sales
2001
Kellogg Building Acquisition
On December 21, 2001, we completed the acquisition of the Kellogg Building.
The Kellogg Building is located in Littleton, Colorado, contains approximately
113,000 rentable square feet and is located on approximately 5 acres of land.
The aggregate purchase 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 and the balance from a portion of the proceeds from the 2001 public
offering.
Panorama Falls Sale
On December 6, 2001, we completed the sale of an 80% interest in the
Panorama Falls building to a long-term investor affiliated with a large
shareholder. Panorama Falls is a three-story office building with 61,963
rentable square feet on approximately six acres located in Englewood, Colorado.
The aggregate sales price for the interest in Panorama Falls was $4,880,000
payable as follows:
o $2,180,000 to Key Bank National Association to pay down a portion
of the existing mortgage loan;
o the assumption of 80% of the remaining existing mortgage loan in the
amount of $2,395,732; and
o the remainder of $304,268 in cash, less closing costs.
Arrowhead Fountains Acquisition
On November 19, 2001, we completed the acquisition of the Arrowhead
Fountains office building. Arrowhead Fountains is located in suburban Phoenix,
Arizona, contains approximately 96,000 rentable square feet and is located on
approximately 5 acres of land. The aggregate purchase price for Arrowhead
Fountains was $12,750,000, which was paid by the assumption of the mortgage loan
from Nationwide Life Insurance Company with a principal balance of $9,300,000
and the balance from a portion of the proceeds from the 2001 public offering.
Odessa Sale
On October 23, 2001, we completed the sale of our office building in
Odessa, Texas for $132,500. The sale resulted in a gain on sale of $12,747.
Giltedge Sale
On June 1, 2001, we completed the sale of our Giltedge building in
Appleton, Wisconsin for $3,650,000. The sale resulted in a gain on sale of
$1,143,698. The cash proceeds from this transaction of $458,030 were used to
complete a tax-deferred exchange under Section 1031 of the Internal Revenue
Code.
4
Sheridan Plaza at Inverness Acquisition
On April 1, 2001, we purchased from Sheridan Investments, LLC, an
affiliate, 100% of the ownership interests of Sheridan Plaza at Inverness, LLC,
an affiliate. Sheridan Plaza at Inverness, LLC owns two office buildings located
in Englewood, Colorado consisting of 118,720 total rentable square feet on
approximately 6.7 acres of land with 405 total parking spaces, including 80
underground parking spaces. For accounting purposes, the purchase price was
$22,895,067, which consisted of:
o $705,135 for our 9.639% preferred membership interest in Sheridan
Investments, LLC, the owner of all of the membership interests in
Sheridan Plaza at Inverness LLC, which was transferred back to
Sheridan Investments, LLC;
o $6,474,329 paid with (1) 1,057,346 shares of our common stock, at a
price of $5.69 per share (as required for accounting purposes, based
on an average market price of the shares over a period of several days
before and after the date of the announcement of the acquisition) and
(2) the cash proceeds of $458,030 from the sale of the Giltedge
building;
o assumption of the mortgage in the principal amount of $14,954,425
secured by the property; and
o assumption of other liabilities in the amount of $761,178.
The acquisition was structured as a tax-deferred exchange of the Giltedge
building under Section 1031 of the Internal Revenue Code. Due to the related
party nature of this transaction, accounting principles generally accepted in
the United States require us to record this acquisition at its historical net
book value. The difference 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.
2000
Sheridan Investments, LLC Membership Interest Acquisition
On September 29, 2000, we purchased a 9.639% preferred membership interest
in Sheridan Investments, LLC, the sole owner of Sheridan Plaza at Inverness,
LLC, which owns two office buildings in Englewood, Colorado, containing
approximately 119,000 square feet and located on approximately 6.7 acres of
land. The aggregate purchase price for the interest was $658,918, which we paid
by issuing 131,784 shares of common stock and 65,892 common stock purchase
warrants at $5 per share. This interest was transferred back to Sheridan
Investments, LLC in April 2001 as partial consideration for the remaining
interest in Sheridan Plaza at Inverness, LLC.
Self-Storage Sale
On June 6, 2000, we entered into a contract to sell our four self-storage
facilities in the metropolitan Denver, Colorado area for $8,400,000. This sale
closed on August 25, 2000, resulting in a gain on sale of approximately
$2,557,000. The net proceeds of approximately $1,818,000 were used to complete a
tax-deferred exchange under Section 1031 of the Internal Revenue Code for office
building assets.
Sheridan Center Acquisition
On June 2, 2000, we entered into a contract to purchase a three-building
office complex, Sheridan Center, in southeast Denver, Colorado for $9,600,000.
The buildings contain approximately 143,000 square feet and are located on
approximately 3.74 acres of land. The transaction closed on August 31, 2000.
Funds for closing included approximately $1,818,000 held in escrow and on
deposit as part of the tax-deferred exchange under Section 1031 of the Internal
Revenue Code from the sale of the self-storage facilities, together with
mortgage financing and a portion of the proceeds from our 2000 public offering.
5
Panorama Falls Acquisition
On May 25, 2000, we purchased a three-story office building, Panorama
Falls, for $5,900,000. Panorama Falls contains approximately 62,000 square feet
on approximately six acres of land in southeast Denver, Colorado. Funds for
closing included approximately $514,000 being held in escrow and on deposit as
part of the tax-deferred exchange under Section 1031 of the Internal Revenue
Code from the sale of the Broadway Property completed in December 1999, together
with mortgage financing and short-term financing, which was partially repaid in
August 2000 with proceeds from our 2000 public offering.
1999
Broadway Property Sale
On December 13, 1999, we sold our industrial office and showroom building
in Denver, Colorado for $2,100,000, resulting in a gain on sale of approximately
$737,000. We reinvested approximately $514,000 in net proceeds from this
transaction in a tax-deferred exchange under Section 1031 of the Internal
Revenue Code on May 25, 2000, purchasing the 62,000 square foot three-story
Panorama Falls office building.
Keystone Office Park Acquisition
On August 12, 1999, we completed the acquisition of three office buildings,
known as Keystone Office Park, located in suburban Indianapolis, Indiana.
Keystone Office Park contains a total of 96,048 rentable square feet. The total
purchase price for Keystone Office Park was $7,944,000, which we paid by
assuming approximately $5,255,000 of existing debt and $116,400 of related
escrow balances on the properties and issuing 541,593 shares of our common stock
at $4.75 per share. In conjunction with the assumption of the debt, we also
agreed to indemnify the original guarantors of this debt if we fail to repay it.
Disclosure Regarding Forward-Looking Statements And Cautionary Statements
This annual report includes "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. All statements other than statements of historical facts
included in or incorporated by reference into this annual report, including
statements regarding our expected financial position, business strategy, plans
and objectives of management for future operations, expected capital
expenditures, expected funding sources, planned investments and forecasted
dates, are forward-looking statements. These forward-looking statements are
based on our current expectations, beliefs, assumptions, estimates and
projections about the industry and markets in which we operate. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and variations of such words and similar expressions are often used to identify
forward-looking statements. Although we believe that the expectations and
assumptions reflected in the forward-looking statements are reasonable, these
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which are difficult to predict and many of which
are 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 update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by applicable law.
6
Additional cautionary statements concerning important factors that could
cause actual results to differ materially from our expectations are disclosed in
this annual report, including the statements contained in the "Risk Factors"
section below. All written and oral forward-looking statements attributable to
us or persons acting on our behalf subsequent to the date of this annual report
are expressly qualified in their entirety by such cautionary statements.
Risk Factors
We face a strong competitive market, which could limit our ability to lease our
properties or secure attractive investment opportunities.
The commercial real estate industry is highly competitive, and we compete
with substantially larger companies, including substantially larger REITs, for
the acquisition, development and operation of properties. Some of these
companies are national or regional operators with far greater resources than
ours. As a result, we may not be able or have the opportunity to make suitable
investments on favorable terms in the future. Competition in a particular area
also could adversely affect our ability to lease our properties or to increase
or maintain rental rates. Thus, the presence of these competitors may be a
significant impediment to the continuation and development of our business.
Our debt level may have a negative impact on our income and asset value.
We have incurred indebtedness in connection with the acquisition of our
properties, and we may incur new indebtedness in the future in connection with
our acquisition, development and operating activities. As a result of our use of
debt, we will be subject to the risks normally associated with debt financing,
including:
o the risk that our cash flow will be insufficient to make required
payments of principal and interest;
o the risk that any indebtedness will not be able to be refinanced or to
be refinanced on as favorable terms as those of the existing
indebtedness, and the risk of a default under the terms of any
indebtedness and an acceleration resulting from such default; and
o the required payments on mortgages and on other indebtedness are not
reduced if the economic performance of any property declines.
If any such decline occurs, our ability to make debt service payments would
be adversely affected. If a property is mortgaged to secure payment of
indebtedness and we are unable to meet mortgage payments, that property could be
transferred to the mortgagee with a consequent loss of income and asset value.
We do not have a policy limiting the amount of debt that we may incur.
Accordingly, our management and Board of Directors have discretion to increase
the amount of our outstanding debt at any time. Our debt to total capitalization
ratio of 61% at December 31, 2001 exceeds those normally carried by our
competitors and REITs in general. While we believe that our level of leverage is
normal for a direct private or institutional investor, our higher leverage
levels may make it difficult to obtain any additional financing based on our
current portfolio or to refinance existing debt on favorable terms or at all.
Our high leverage levels also may adversely affect the market value of our stock
if we are perceived as more risky than our peers.
7
We may not be able to pay dividends to our stockholders regularly.
Our ability to pay dividends in the future is dependent on our ability to
operate profitably and to generate cash from our operations. Although we have
done so in the past, we cannot guarantee that we will be able to pay dividends
on a regular quarterly basis in the future.
We may incur tax liabilities as a result of failing to qualify as a REIT.
We believe that we have been organized and operated so as to qualify as a
REIT under the Internal Revenue Code of 1986, as amended. However, we cannot
assure you that we will continue to be qualified as a REIT. Qualification as a
REIT involves the application of highly technical and complex Internal Revenue
Code provisions for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely 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 the requirements for qualification as a REIT
or the federal income tax consequences of that qualification.
If we were unable to qualify as a REIT in any taxable year, we would not be
allowed a deduction for distributions to stockholders in computing our taxable
income and would be subject to the regular federal income tax on our taxable
income at regular corporate rates and possibly to the alternative minimum tax.
Unless we are entitled to relief under certain Internal Revenue Code provisions,
we also would be disqualified from treatment as a REIT for the four taxable
years following the year during which REIT qualification was lost. As a result,
the funds available for distribution to our stockholders would be reduced for
each of the years involved. In addition, we may incur substantial indebtedness
or may liquidate substantial investments in order to pay the resulting federal
income tax liabilities if differences in timing exist between the receipt of
income and payment of our tax obligations. Although we currently intend to
operate in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause us to revoke our
REIT election.
We may have to borrow money to make required distributions to our stockholders.
In order to qualify as a REIT, we generally will be required each year to
distribute to our stockholders at least 90% of our REIT taxable income,
excluding any net capital gains. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by us with respect to any calendar year are less than the sum of 85% of our
ordinary income plus 95% of our capital gain net income for that year. We intend
to make distributions to our stockholders to comply with the 90% distribution
requirement and to avoid the nondeductible excise tax. We may have to borrow
funds on a short-term basis to meet the 90% distribution requirement and to
avoid the nondeductible excise tax if differences in timing between taxable
income and cash available for distribution exist. Because we already have
significant debt obligations and are highly leveraged, we may not be able to
borrow these funds at favorable interest rates or at all.
Some of our buildings are subject to special income tax considerations, which
could result in our being required to pay substantial taxes upon their sale.
If we sell any of our Sheridan Center buildings before 2006 (ten years
after the original acquisition date of the property or the property exchanged
for that property), we will be required to pay tax at the highest applicable
corporate rates on the difference between its fair market value and its adjusted
basis at the effective time of our REIT election. Because we used proceeds from
a recent sale of an office building in Wisconsin to purchase Sheridan Plaza in
an exchange qualifying under Section 1031 of the Internal Revenue Code, we may
also be required to hold Sheridan Plaza until 2006 in order to avoid corporate
tax upon sale on the appreciation of the exchanged property as of the effective
date of our REIT election. By utilizing a property exchange under Section 1031
8
of the Internal Revenue Code, which allows for the deferral of gain if the
proceeds of the sale of investment properties are reinvested in other investment
properties in certain circumstances, we may be able to defer the recognition of
gain until after the 10-year period expires in 2006 so that we are not subject
to the highest applicable corporate rates. If we are subject to the highest
corporate rate, the amount of this corporate tax could be substantial. There is
a risk that we would not have sufficient cash available to pay the corporate
taxes resulting from the sale of these properties. We currently do not intend to
sell any property while such a sale would be subject to this corporate tax
(other than in an exchange qualifying under Section 1031 of the Internal Revenue
Code pursuant to which this tax is not recognized) unless other economic,
financial and business consequences of the sale would lead us to believe it
would be in our best interests to effect such a sale.
New developments and acquisitions may fail to perform as expected.
Over the last few years, we focused our efforts on the acquisition and
redevelopment of multi-tenant office buildings. We intend to continue to develop
and acquire office properties on a select basis. 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 expected occupancy and rental rates. If the property is
unable to achieve the expected occupancy and rental rates, it may fail to
perform as we expected in analyzing our investment. When we acquire a property,
we often reposition or redevelop that property with the goal of increasing
profitability. Our estimate of the costs of repositioning or redeveloping an
acquired property may prove inaccurate, which may result in our failure to meet
our profitability goals. If one or more of these new properties do not perform
as expected or we are unable to successfully integrate new properties into our
existing operations, our financial performance may be adversely affected.
Real estate investments are inherently risky, which could adversely affect our
profitability and our ability to make distributions to our stockholders.
Real estate investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
and capital appreciation generated by the properties held by the entity in which
the investment is made. If we acquire or develop properties and they do not
generate sufficient operating cash flow to meet operating expenses, including
debt service, capital expenditures and tenant improvements, our income and
ability to pay dividends to our stockholders will be adversely affected. Income
from properties may be adversely affected by:
o changes in economic conditions;
o increases in operating costs such as real estate taxes, insurance
premiums, site maintenance and utilities;
o changes in interest rates and the availability of financing; and
o changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
Development and construction risks could adversely affect our profitability.
We currently are renovating and redeveloping some of our properties and may
develop new properties in the future. Our renovation, redevelopment, development
and related construction activities may be exposed to the following risks:
o We may be unable to obtain, or suffer delays in obtaining, necessary
zoning, land-use, building, occupancy and other required governmental
permits and authorizations, which could result in increased costs or
our abandonment of these activities.
9
o We may incur construction costs for a property which exceed our
original estimates due to increased costs for materials or labor or
other costs that were unexpected.
o We may not be able to obtain financing with favorable terms, which may
make us unable to proceed with our development activities.
o We may be unable to complete construction and lease-up of a property
on schedule, which could result in increased debt service expense or
construction costs.
Additionally, the time frame required for development, construction and
lease-up of these properties means that we may have to wait a few years for a
significant cash return. Because we are required to make cash distributions to
our stockholders, if the cash flow from operations or refinancing is not
sufficient, we may be forced to borrow to fund such distributions.
General economic conditions may adversely affect our financial condition and
results of operations.
Periods of economic slowdown or recession in the United States and in other
countries, rising interest rates or declining demand for real estate, or the
public perception that any of these events may occur, could result in a general
decline in rents or an increased incidence of defaults under existing leases,
which would adversely affect our financial position, results of operations, cash
flow, quoted per share trading price of our common stock and ability to satisfy
our debt service obligations and to pay distributions to our stockholders.
Unfavorable changes in local market and economic conditions could hurt occupancy
or rental rates.
Currently, our properties are located in Colorado, Indiana, Arizona and
Texas. The market and economic conditions in our local markets may significantly
affect occupancy and rental rates. Occupancy and rental rates, in turn, may
significantly affect our profitability and our ability to satisfy our financial
obligations. The economic condition of each of these local markets may be
dependent on one or more industries and, therefore, an economic downturn in one
of these industry sectors may adversely affect our performance in that market.
Local real estate market conditions may include a large supply of competing
space, and we will need to compete for tenants based on rental rates,
attractiveness and location of a property, and quality of maintenance and
management services.
We are subject to the credit risk of our tenants, which could result in lease
payments not being made and a significant decrease in our revenues.
We are subject to the credit risk of our tenants. Although we maintain a
high level of credit quality in our largest office buildings through our control
systems, we cannot assure you that our tenants will not default on their leases
and fail to make rental payments to us. In particular, local economic conditions
and the industries in which our tenants operate may affect their ability to make
lease payments to us. Moreover, we may be unable to locate a replacement tenant
in a timely manner or on comparable or better terms if a tenant defaults on its
lease. The loss of rental revenues from a number of our tenants may adversely
affect our profitability and our ability to meet our financial obligations.
We may be unable to renew leases or re-lease space on a timely basis or on
comparable or better terms, which could significantly decrease our revenues.
Although our properties currently have favorable occupancy rates, current
tenants may not renew their leases upon the expiration of their terms.
Alternatively, current tenants may attempt to terminate their leases prior to
the expiration of their current terms. If this occurs, we may not be able to
locate a qualified replacement tenant and, as a result, we would lose a source
of revenue while remaining responsible for the payment of our obligations.
Moreover, the terms of a renewal or new lease may be less favorable than current
lease terms. Additionally, new properties we may acquire may not be fully leased
and the cash flow from existing operations may be insufficient to pay the
operating expenses and debt service associated with that property until the
property is fully leased.
10
Loss of a significant tenant could lead to a substantial decrease in our cash
flow.
Although our target market is tenants seeking 2,000 to 4,000 square feet of
office space, we may have several significant tenants from time to time, the
loss of any of which could adversely affect our cash flow. In August 2001,
Rhythms NetConnections, Inc., the primary tenant in our Panorama Falls building
in Englewood, Colorado, filed for reorganization under Chapter 11 of the
Bankruptcy Code. In November 2001, we agreed to terminate the lease with Rhythms
and apply a security deposit of $335,000 against future lease payments. The
rental revenue related to Rhythms was approximately $611,000 and $480,000 for
the years ended December 31, 2001 and 2000, respectively, which was
approximately 5.6% and 6.6% of our total rental revenue for the respective
periods. On December 6, 2001, we completed the sale of an 80% interest in the
Panorama Falls building.
Currently, thirteen of our office buildings are leased to various agencies
of the State of Texas. Although each of these leases includes a specific
termination date, the State of Texas may terminate a lease at any time that the
state legislature fails to appropriate funds necessary to pay the required rents
or federally-funded programs housed in one of these buildings are discontinued.
If the State of Texas were to terminate or fail to renew a lease, it may be
difficult for us to locate another tenant on a timely basis or on comparable or
better terms, especially for those buildings located in smaller cities and more
remote locations. On occasion, the State of Texas may elect not to renew leases
with us upon termination. We were not the successful bidder in a recent request
by the Texas Department of Human Services for a new lease on our Clint, Texas
building, which provided for an annual gross rent of $125,676. Subsequent to
year-end, we began negotiations with the Town of Clint for a long-term lease of
the building. In addition, the lease on our Paris, Texas building, which
provides for an annual gross rent of $208,376 expires on August 31, 2002 and we
believe the State of Texas will not renew.
Future terrorist attacks in the United States may result in declining economic
activity, which could harm the demand for and the value of our properties.
Future terrorist attacks in the United States, such as the attacks that
occurred in New York and Washington, D.C. on September 11, 2001, and other acts
of terrorism or war, may result in declining economic activity, which could harm
the demand for and the value of our properties. A decrease in demand would make
it difficult for us to renew or release our properties at lease rates equal to
or above historical rates. Terrorist activities also could directly impact the
value of our properties 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 ability to continue to honor obligations
under their existing leases.
These types of events also may adversely affect the markets in which our
securities trade. These acts may cause further erosion of business and consumer
confidence and spending and may result in increased volatility in national and
international financial markets and economies. Any one of these events may cause
a decline in the demand for real estate, delay the time in which our new or
renovated properties reach stable occupancy, increase our operating expenses due
to increased physical security for our properties and limit our access to
capital or increase our cost of raising capital.
Sheridan Realty Advisors and its affiliates have significant influence over our
company.
Entities affiliated with Sheridan Realty Advisors, our former
administrator, and members of our Board of Directors and management who also are
affiliated with Sheridan Realty Advisors collectively beneficially own
11
approximately 25% of our common stock. As a result, these individuals and
entities acting together would be able to exert significant influence over us
through their ability to influence the election of directors and all other
matters that require action by our stockholders. The voting power of these
individuals and entities could have the effect of preventing or delaying a
change in control of our company which they oppose even if our other
stockholders believe it is in their best interests. In addition, all of our
executive officers are principals of Sheridan Realty Advisors and related
entities and, thus, these Sheridan affiliates have the ability to influence the
day-to-day operations of our company. Sheridan Realty Advisors continues to act
as our outside advisor with respect to capital market activities, real estate
acquisitions and dispositions and major capital projects and continues to earn
an advisory and capital project fee for those services.
The success of our company depends on the continuing contributions of our key
personnel.
We have a highly skilled management team and specialized workforce managing
our properties. All of our executive officers are principals of Sheridan Realty
Advisors. Three of these executive officers became our employees as of January
1, 2002 as a result of our purchasing the administrative and property management
and accounting services business from Sheridan Realty Advisors. We do not have
employment agreements with any of our executive officers or key employees and,
thus, any executive officer or key employee may terminate his or her
relationship with us at any time.
Failure to succeed in new markets may limit our growth.
We may make selected acquisitions outside our current market areas from
time to time as appropriate opportunities arise. Our historical experience is in
Colorado, Indiana, Arizona and Texas, and we may not be able to operate
successfully in other market areas new to us. We may be exposed to a variety of
risks if we choose to enter into new markets. These risks include:
o a lack of market knowledge and understanding of the local economies;
o an inability to identify acquisition or development opportunities;
o an inability to obtain construction trades people; and
o an unfamiliarity with local government and permitting procedures.
There is limited liquidity in our real estate investments, which could limit our
flexibility.
Real estate investments are relatively illiquid. Our ability to vary our
portfolio in response to changes in economic and other conditions will be
limited. We may not be able to dispose of an investment when we find disposition
advantageous or necessary, and the sale price of any disposition may not recoup
or exceed the amount of our investment. In addition, federal tax laws limit our
ability to sell properties that we have owned for fewer than four years, and
this may affect our ability to sell properties without adversely affecting
returns to our stockholders.
There is a limited market for our common stock, which could hinder the ability
of our stockholders to sell our shares.
Historically, there has been an extremely limited public market for our
common stock. We cannot assure you that the market will be sustained or will
expand. Due to the limited trading volume and small capitalization of our common
stock, many investors may not be interested in owning our securities because of
the higher risks associated with limited trading volume and small market
capitalization such as the inability to sell a substantial block of stock at one
time without driving down prices. This could have an adverse effect on the
market for our common stock. In addition, there is no assurance that a
stockholder will be in a position to borrow funds using our securities as
collateral because lenders may be unwilling to accept the pledge of securities
having such a limited market.
12
Our equity market capitalization places us at the extreme low end of market
capitalization among all REITs. As a result of our small market capitalization,
substantially all of our investors are retail investors. This limits the ability
for investors to acquire substantial blocks of our stock. This also places a
near-term limit on capital appreciation for our shares if a significant number
of our stockholders decide to sell their stock.
Our uninsured and underinsured losses could result in loss of value of our
properties.
We maintain comprehensive insurance on each of our properties, including
liability, fire and extended coverage. We believe this coverage is of the type
and amount customarily obtained for or by an owner of real property assets. We
intend to obtain similar insurance coverage on subsequently acquired properties.
However, there are certain types of losses, generally of a catastrophic nature,
such as earthquakes and floods, that may be uninsurable or not economically
insurable, as to which our facilities are at risk in their particular locations.
Our management will use its discretion in determining amounts, coverage limits
and deductibility provisions of insurance, with a view to requiring appropriate
insurance on our investments at a reasonable cost and on suitable terms. This
may result in our having insurance coverage that, in the event of a substantial
loss, would not be sufficient to repay us for the full current market value or
current replacement cost. Also, due to inflation, changes in codes and
ordinances, environmental considerations, and other factors, it may not be
feasible to use insurance proceeds to replace a building after it has been
damaged or destroyed. Generally, our insurance does not cover acts of war or
terrorist attacks. As a result of the September 11 attacks, we believe that the
cost of our insurance may increase. However, we believe that our costs will
increase less than those of some of our competitors because our buildings are
not large, high profile buildings in major cities.
We may suffer environmental liabilities which could result in substantial costs.
Under various environmental laws, a current or previous owner or operator
of real property may be liable for the costs of removal or remediation of
hazardous or toxic substances, including asbestos-containing materials that are
located on or under the property. We have substantially completed the asbestos
remediation in our Sheridan Center buildings and have completed actions designed
to maintain proper air quality in our Mission, Texas building. These laws often
impose liability whether the owner or operator knew of, or was responsible for,
the presence of those substances. In connection with our ownership and operation
of properties, we may be liable for these costs, which could be substantial.
Also, our ability to arrange for financing secured by that real property might
be adversely affected because of the presence of hazardous or toxic substances
or the failure to properly remediate any contamination. In addition, we may be
subject to claims by third parties based on damages and costs resulting from
environmental contamination at or emanating from our properties. In particular,
two lawsuits have been filed against our AmeriVest Properties Texas Inc.
subsidiary alleging that our Mission, Texas property is contaminated with
airborne contaminants. Our insurance company is defending us in these lawsuits.
These lawsuits, if adversely determined, could have a material adverse effect on
our business and financial condition, and we cannot assure you that other
lawsuits will not be filed against us with respect to this building.
Non-compliance with the Americans with Disabilities Act could result in fines.
Under the ADA, all public accommodations are required to meet certain
federal requirements related to physical access and use by disabled persons.
While we believe that our properties comply in all material respects with these
physical requirements or would be eligible for applicable exemptions from
material requirements because of adaptive assistance provided, a determination
that we are not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. If we were required to make
modifications to comply with the ADA, our ability to make expected distributions
to our stockholders could be adversely affected.
13
The ability of our stockholders to control our policies or affect a change in
control of our company is limited, which may not be in our stockholders' best
interests.
Charter and Bylaws Provisions. Some provisions of our charter and bylaws
may delay or prevent a change in control of our company or other transactions
that could provide our common stockholders with a premium over the
then-prevailing market price of our common stock or that might otherwise be in
the best interests of our stockholders. These provisions include:
o Classified board of directors and size of board fixed within range;
removal of directors only for cause. Our Board of Directors is divided
into three classes with staggered terms of office. The total number of
directors is fixed by a majority vote of the Board of Directors within
a range of a minimum of three and a maximum of nine. Directors may
only be removed for cause. These provisions may make it more difficult
for a third party to gain control of our Board of Directors. At least
two annual meeting of stockholders, instead of one, generally would be
required to effect a change in a majority of our Board of Directors,
and the number of directors cannot be increased above the maximum
number of directors specified in our charter without board and
stockholder approvals.
o Two-thirds stockholder vote required to approve some amendments to the
charter. Some amendments to our charter must be approved by the
affirmative vote of stockholders holding at least 66 2/3% of the
outstanding shares of our common stock, voting together as a single
class. These voting requirements may make amendments to our charter
that stockholders believe desirable more difficult to effect.
o Issuance of preferred stock without stockholder approval. Our Board of
Directors has the ability to authorize the issuance of preferred stock
without stockholder approval and to set or change the designation,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications,
or terms or conditions of redemption of the preferred stock. Our Board
of Directors could therefore authorize series of preferred stock that
may have voting provisions that could delay or prevent a change in
control or other transaction that might involve a premium price or
otherwise be in the best interests of our stockholders.
o Ownership Limit. In order to assist us in maintaining our
qualification as a REIT, our bylaws contain provisions generally
limiting the ownership of shares of our capital stock by any single
stockholder to 9.8% of our outstanding shares, unless waived by our
Board of Directors. In 2001, our Board granted a one-time waiver of
this restriction in order to allow Jerry Tepper, a director who
beneficially owned or controlled approximately 7% of our outstanding
shares as of January 15, 2002, to exercise some of his warrants. These
provisions could also delay or prevent an acquisition or change in
control of our company that could benefit our stockholders.
Maryland Business Statutes. As a Maryland corporation, we are subject to
the provisions of the Maryland General Corporation Law. Maryland law imposes
restrictions on some business combinations and requires compliance with
statutory procedures before some mergers and acquisitions can occur. These
provisions of Maryland law may have the effect of discouraging offers to acquire
us even if the acquisition would be advantageous to our stockholders. These
provisions include:
14
o Unsolicited takeover provisions. Maryland law provides that the board
of directors of a Maryland corporation is not subject to higher duties
with regard to actions taken in a takeover context. These provisions
may make it more difficult to effect an unsolicited takeover of a
Maryland corporation. Maryland law also allows publicly held
corporations with at least three independent trustees to elect to be
governed by all or any part of Maryland law provisions relating to
extraordinary actions and unsolicited takeovers.
o Business combination with interested stockholders. The Maryland
Business Combination Act provides that, unless exempted, a Maryland
corporation may not engage in business combinations, including
mergers, dispositions of 10% or more of its assets, issuance of shares
and other specified transactions, with an "interested stockholder" or
its affiliates, for five years after the most recent date on which the
interested stockholder became an interested stockholder and thereafter
unless specified criteria are met.
o Control share acquisition. The Maryland Control Shares Acquisition Act
provides that shares acquired by any person over one-tenth, one-third
and a majority of the voting power of a corporation do not have voting
rights, except to the extent approved by the vote of two-thirds of the
votes entitled to be cast on the matter.
Other constituencies. Maryland law expressly codifies the authority of a
Maryland corporation to include in its charter a provision that allows the board
of directors to consider the effect of a potential acquisition of control on
stockholders, employees, suppliers, customers, creditors and communities in
which offices or other establishments of the corporation are located. Our
charter does not include a provision of this type. Maryland law also provides,
however, that the inclusion or omission of this type of provision in the charter
of a Maryland corporation does not create an inference concerning factors that
may be considered by the board of directors regarding a potential acquisition of
control. This law may allow our Board of Directors to reject an acquisition
proposal even though the proposal was in the best interests of our stockholders.
Other Maryland laws. Maryland law also permits the board of trustees of a
REIT, without shareholder approval, and even if contrary to a company's bylaws
or charter, to classify the board of trustees, require a two-thirds vote for the
removal of trustees and give the board the sole power to fill board vacancies
occurring for any reason.
Our certified public accountant may become unable to provide audit-related
services.
Our independent certified public accountant, Arthur Andersen, has informed
us that on March 14, 2002, it was indicted on federal obstruction of justice
charges arising from the government's investigation of Enron. Arthur Andersen
has indicated that it intends to contest vigorously the indictment. Our Audit
Committee has been carefully monitoring this situation. As a public company, we
are required to file with the SEC periodic financial statements audited or
reviewed by an independent, certified public accountant. The SEC has said that
it will continue accepting financial statements audited by Arthur Andersen, and
interim financial statements reviewed by it, so long as Arthur Andersen is able
to make certain representation to its clients. Our access to the capital markets
and our ability to make timely SEC filings could be impaired if the SEC ceases
accepting financial statements audited by Arthur Andersen, if Arthur Andersen
becomes unable to make the required representations to us or if for any other
reason Arthur Andersen is unable to perform required audit-related services for
us. In such a case, we would promptly seek to engage new independent certified
public accountants or take such other actions as may be necessary to enable us
to maintain access to the capital markets and timely financial reporting.
15
ITEM 2. PROPERTIES
At December 31, 2001, we owned and operated 23 office properties in
Colorado, Texas, Indiana and Arizona. Other than as described under "Description
of Specific Properties" below, we have no plans to renovate our office
properties other than for routine capital maintenance. Given access to capital,
we believe we will continue to be able to identify and complete acquisition and
development opportunities.
The following chart illustrates the geographic distribution of our property
portfolio as of December 31, 2001 by square footage:
[Data points for graph:
47% Colorado
31% Texas
11% Arizona
11% Indiana]
The following chart illustrates the geographic distribution of our property
portfolio based on 2001 revenue:
[Data points for graph:
53% Colorado
27% Texas
15% Indiana
5% Wisconsin/Arizona*]
* The Giltedge building in Appleton, Wisconsin was sold on June 1, 2001 and the
Arrowhead Fountains building in Peoria, Arizona was purchased on November 19,
2001.
16
The following table sets forth certain information about each of our office
properties owned as of December 31, 2001:
Percentage Average
Rentable Occupancy Rent Per
Year Square at December Square
Location Acquired Footage(a) 31, 2001 Foot(b)
-------- -------- ---------- -------- -------
Small Tenant Office Buildings
Denver, CO--Sheridan Center.................. 2000 143,332 90.4% $13.91
Englewood, CO--Sheridan Plaza................ 2001 118,720 100.0% $23.45
Indianapolis, IN--Keystone................... 1999 96,048 99.2% $16.90
Englewood, CO--Panorama Falls (c)............ 2000 61,963 16.3% $20.50
Peoria, AZ--Arrowhead Fountains.............. 2001 96,076 90.3% $23.03
Littleton, CO--Kellogg Building.............. 2001 112,732 90.4% $22.39
Bank of America Buildings(d)................. 1998 60,095 99.6% $15.13
Mineral Wells, TX
Georgetown, TX
Henderson, TX
Clifton, TX
State of Texas Leased Buildings(e)........... 1997-1998 222,542 92.9% $ 8.78
Arlington, Paris, Marshall, Amarillo,
El Paso (2 buildings), Belleville, Mission,
Clint, Lubbock, Temple, Hempstead and
Columbus, TX
Totals....................................... 911,508 88.7%(f) $18.88
======= ==== ======
-----------
(a) Includes office space but excludes storage, telecommunications and garage
space.
(b) Annualized base rent divided by net rentable area leased. Annualized base
rent is original base rent plus contractual increases, but excludes
percentage rent, additional rent for common area maintenance, taxes and
expense reimbursements and parking.
(c) 20% of the property is owned by AmeriVest, 80% of the property is owned by
Freemark Abbey Panorama, LLC as a tenant in common with AmeriVest.
(d) Buildings leased approximately 63% to Bank of America, with the remainder
leased to a number of small to mid-sized tenants.
(e) Buildings leased primarily to various agencies of the State of Texas.
(f) Occupancy was 94.0% for 100% owned properties.
Description of Specific Properties
As of December 31, 2001, the following four properties had a book value
greater than or equal to 10% of our consolidated assets: Sheridan Center,
Sheridan Plaza at Inverness, Arrowhead Fountains and the Kellogg Building. Set
forth below is a description of each of these properties.
Sheridan Center. On August 31, 2000, we acquired the Sheridan Center office
buildings, formerly known as The Writer Buildings. The project consists of one
four-story, one five-story and one eight-story office building on 3.72 acres of
land. The buildings total 143,332 rentable square feet and site improvements
include parking for approximately 400 cars, including 129 spaces in a separate
surface lot. The buildings were built in 1966, 1968 and 1971 and, prior to our
renovation, were considered Class C office buildings.
17
We have substantially renovated the buildings at a cost of approximately
$5.0 million for the period from our acquisition in August 2000 through December
2001. The buildings are now considered Class B office buildings and command
higher rental rates.
Exterior improvements include:
o a new exterior facade for each building to tie the buildings together
visually;
o a new entry and handicap access ramp for each building;
o new fixed and operable thermal windows; and
o resurfaced parking lots with new landscape and lighting.
Interior improvements include:
o refurbished lobbies and hallways with new carpet and lighting;
o new oak suite entry doors and sidelights;
o new building and suite signage;
o computerized touch-screen building directories;
o keyless entry systems to the building and each suite monitored by
computer;
o refurbished bathrooms with new tile, lighting, paint and ADA fixtures;
o a new selection of interior tenant finish packages; and
o improved HVAC systems and new fire safety sprinklers and systems.
As part of the renovation, we embarked on an asbestos remediation program
in accordance with state and federal requirements using licensed contractors to
remove, wherever accessible or otherwise required, asbestos containing materials
in the buildings, including ceiling tiles, drywall joint compound, wood and
metal fire doors, wall texture, mudded pipe elbows and valves, thermal systems
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 few years as tenants vacate spaces, allowing access to the
asbestos materials. The estimated cost of the future asbestos remediation is
approximately $380,000.
The property is located in a central location between downtown Denver and
the southeast suburbs along Interstate 25 at Colorado Boulevard. The Colorado
Department of Transportation and the Regional Transportation District has
commenced construction of a light-rail system and highway expansion project on
Interstate 25, or I-25. The project, which is scheduled to continue through June
2008, has disrupted traffic on I-25 due to lane closures and massive
construction along 19 miles of the Interstate adjacent to Sheridan Center and
near our Sheridan Plaza and Panorama Falls buildings. Sheridan Center is located
north of I-25 on the other side of most of the proposed construction, which
allows for alternative access from most metropolitan Denver locations. We
believe that the central location of Sheridan Center, together with our focus on
tenants whose employees have more flexible work schedules than employees of
larger companies, should minimize the adverse impact of the highway construction
on occupancy levels and leasing activity at this project.
Sheridan Center competes with several smaller and larger buildings in the
area, including buildings that lease to small and mid-sized tenants.
Sheridan Center is leased to approximately 100 tenants at base rental rates
ranging from $8.69 to $17.50 per rentable square foot. The average effective
annual rent per square foot for the year ended December 31, 2001 was $13.91.
Lease terms range from approximately one to five years.
18
The occupancy rate for Sheridan Center was 90.4% at December 31, 2001,
90.0% at December 31, 2000 and 91.0% at December 31, 1999. Occupancy information
for prior years, which are before we acquired the property, is not available. As
of December 31, 2001, there are no tenants occupying 10% or more of the rentable
space.
The following is a schedule of lease expirations for Sheridan Center for
the next ten years:
Total
Area in Square Annual
Number of Feet of Revenue of Percentage of
Leases Expiring Expiring Gross Rents on
That Will Expire Leases Leases Expiring Leases
---------------- ------ ------ ---------------
2002..................... 30 38,658 $530,179 29.2%
2003..................... 29 32,666 $472,704 26.0%
2004..................... 18 15,713 $245,559 13.5%
2005..................... 6 6,248 $84,898 4.7%
2006..................... 14 22,737 $356,768 19.6%
2007 (1)................. 5 8,554 $126,219 7.0%
-----------------
(1) At December 31, 2001, there were no leases in effect with an expiration date
after 2007.
For 2001, the real estate taxes for the Sheridan Center buildings were
$123,874, which is equal to 5.9% of the assessed value of the Sheridan Center
buildings for real estate tax purposes as determined by the Denver County
Assessors Office. We are not able to estimate the possible impact of the
renovations to Sheridan Center on future real estate taxes.
Sheridan Plaza at Inverness. On April 1, 2001, we purchased 100% of the
ownership interests of Sheridan Plaza at Inverness, LLC. The primary assets of
this entity are two multi-tenant office buildings, together known as Sheridan
Plaza at Inverness, located in Englewood, Colorado, and related assets. These
two office buildings consist of 118,720 square feet on approximately 6.7 acres
of land with 405 total parking spaces, including 80 underground parking spaces.
Sheridan Plaza was constructed in 1998 and 1999.
Sheridan Plaza is located within the Inverness Business Park just east of
I-25 at County Line Road. We believe that the location of Sheridan Plaza near
the southern end of the highway project described above under "--Sheridan
Center" could be an advantage in leasing during the highway construction period.
Sheridan Plaza is just off the first exit north of the planned construction
activity and is easily accessible from all southeast and east metro Denver
residential areas. We currently do not have any plans for major capital
improvements for Sheridan Plaza. The property must compete with several mid-
sized office buildings in the area, including buildings that lease to small to
mid-sized tenants and including buildings owned by CarrAmerica and Mack Cali,
but there is no dominant owner or building.
Sheridan Plaza is leased to approximately 45 tenants at base rental rates
ranging from $22.00 to $25.71 per rentable square foot. The average effective
annual rent per square foot for the year ended December 31, 2001 was $23.45.
Lease terms range from approximately two to six years.
The occupancy rate for Sheridan Plaza at December 31, 2001 was 100%, at
December 31, 2000 was 100% and at December 31, 1999 was 61%. Only one tenant, a
local law firm, occupies 10% or more of the rentable space. This tenant occupies
12,136 rentable square feet under a direct lease through September 2005 and an
additional 2,915 rentable square feet under a sublease through December 2004.
The tenant is responsible for its pro-rata share of operating expenses and the
leases contain annual base rent escalation provisions.
19
The following is a schedule of lease expirations for Sheridan Plaza for the
next ten years:
Total
Area in Square Annual
Number of Feet of Revenue of Percentage of
Leases Expiring Expiring Gross Rents on
That Will Expire Leases Leases Expiring Leases
---------------- ------ ------ ---------------
2002..................... 6 10,738 $259,621 9.3%
2003..................... 7 13,805 $334,490 12.0%
2004..................... 14 38,006 $902,737 32.3%
2005 (1)................. 18 56,171 $1,294,964 46.4%
-------------------
(1) At December 31, 2001, there were no leases in effect with an expiration date
after 2005.
For 2001, the real estate taxes for Sheridan Plaza were $582,490, which is
equal to 10.3% of the assessed value of Sheridan Plaza for real estate tax
purposes as determined by the Douglas County Assessors Office.
Arrowhead Fountains. On November 19, 2001 we acquired Arrowhead Fountains,
located in Peoria, Arizona (metropolitan Phoenix). Arrowhead Fountains consists
of one building containing 96,076 rentable square feet located on approximately
5 acres of land. Arrowhead Fountains was built in 1998 and is the only
commercial office building in its area.
Arrowhead Fountains is leased to approximately 20 tenants at base rental
rates ranging from $20.00 to $23.50 per rentable square foot. The average
effective annual rent per square foot for the year ended December 31, 2001 was
$23.03. Lease terms range from approximately two to ten years.
The occupancy rate for Arrowhead Fountains at December 31, 2001 was 90.3%
and at December 31, 2000 was 90.0 %. Occupancy information for prior years,
which are before we acquired the property, is not available.
The following is a schedule of tenants who occupy 10% or more of the
rentable space:
Base Rent ($/SF) at
Tenant Business Lease Expiration Square Footage December 31, 2001
------ -------- ---------------- -------------- -----------------
A Realty company December 31, 2005 18,282 $20.00
B Insurance company April 14, 2010 17,150 $20.25
The following is a schedule of lease expirations for Arrowhead Fountains
for the next ten years:
Total
Area in Square Annual Percentage of
Number of Feet of Revenue of Gross Rents
Leases Expiring Expiring on Expiring
That Will Expire Leases Leases Leases
---------------- ------ ------ ------
2002....................... 3 5,163 $119,484 6.5%
2003....................... 3 12,968 $294,366 15.9%
2004....................... 7 12,475 $279,850 15.1%
2005....................... 4 25,052 $519,038 28.1%
2006....................... 2 5,167 $120,843 6.6%
2007....................... - - - -
2008....................... - - - -
2009....................... 1 7,951 $166,971 9.0%
2010....................... 1 17,150 $347,288 18.8%
20
For 2001, the real estate taxes for Arrowhead Fountains were $152,892,
which is equal to 13.6% of the assessed value of Arrowhead Fountains for real
estate tax purposes as determined by the Maricopa County Assessors Office.
Kellogg Building. On December 21, 2001 we acquired the Kellogg Building,
located in Littleton, Colorado. The Kellogg Building consists of one building
containing 112,732 rentable square feet located on approximately 5 acres of
land. The Kellogg Building was built in 1983.
The Kellogg Building is leased to approximately 35 tenants at base rental
rates ranging from $19.22 to $24.00 per rentable square foot. The average
effective annual rent per square foot for the year ended December 31, 2001 was
$22.39. Lease terms range from approximately 3 to 6 years.
The Kellogg Building also contains executive office suites. These suites
account for 11,882 rentable square feet of the total square footage. These
suites are leased to approximately 30 tenants at base rental rates ranging from
$39.71 to $63.75 per rentable square foot. Lease terms range from 2 months to 2
years. Due to the short-term nature and high turnover of these leases, these
were not included in the lease expiration table below.
Executive office suite tenants are provided additional services other than
the rental of real property. These additional services include a receptionist as
well as other administrative services. In accordance with the Internal Revenue
Code, the revenue generated from these additional services is non-qualified REIT
income. As a result, we have formed a taxable REIT subsidiary to capture this
revenue, segregating this non-qualified REIT income from the qualified REIT
income of the building.
The occupancy rate for the Kellogg Building at December 31, 2001 was 90.4%
and at December 31, 2000 was 94.0 %. Occupancy information for prior years,
which are before we acquired the property, is not available. As of December 31,
2001, there were no tenants occupying 10% or more of the rentable space.
The Kellogg Building competes with several office buildings in its area,
including buildings that lease to small and mid-sized tenants, but there is no
dominant owner or building.
The following is a schedule of lease expirations for the Kellogg Building
for the next ten years:
Total
Area in Square Annual Percentage of
Number of Feet of Revenue of Gross Rents
Leases Expiring Expiring on Expiring
That Will Expire Leases Leases Leases
---------------- ------ ------ ------
2002...................... 4 8,599 $184,283 9.4%
2003...................... 9 38,243 $817,313 41.7%
2004...................... 15 26,037 $548,106 28.0%
2005...................... 6 12,853 $281,670 14.4%
2006 (1).................. 2 5,715 $128,588 6.5%
---------------
(1) At December 31, 2001, there were no leases in effect with an expiration date
after 2006.
21
For 2001, the real estate taxes for the Kellogg Building were $197,902,
which is equal to 7.0% of the assessed value of the Kellogg Building for real
estate tax purposes as determined by the Arapahoe County Assessors Office.
Depreciation
The following table shows the federal tax basis at December 31, 2001 used
to determine depreciation for federal income tax purposes on each of the
aforementioned properties. For federal income tax purposes, depreciation is
computed using the straight-line method over a useful life of 39 years, for a
depreciation rate of 2.56% per year.
Federal Tax
Basis
-------------
Sheridan Center
Denver, Colorado ............................... $ 10,119,508
Sheridan Plaza at Inverness
Englewood, Colorado ............................ $ 20,296,868
Arrowhead Fountains
Peoria, Arizona ................................ $ 12,762,642
Kellogg Building
Littleton, Colorado ............................ $ 13,551,672
For accounting purposes, depreciation is determined in accordance with
generally accepted accounting principles, which use different bases for the
properties and useful lives of 25 years (Sheridan Center) and 40 years (Sheridan
Plaza at Inverness, Arrowhead Fountains and the Kellogg Building). See "Notes to
Consolidated Financial Statements--Note 1--Summary of Significant Accounting
Policies."
Other Leases
State of Texas Office Building Leases. Thirteen of our office buildings are
leased to various agencies of the State of Texas with primary lease periods
ranging from approximately six months to eight years, subject to the right of
the State to terminate these leases as discussed below. Most of the leases grant
five multiple renewal option periods of three years to five years at the
election of the tenant. Although each of the leases with the State of Texas
includes a specific termination date, the State of Texas may terminate a lease
at any time that the legislature of the State of Texas fails to appropriate
funds necessary to pay required rents, or federally-funded programs housed in
one of these office buildings are discontinued. Prior to terminating the lease,
the State of Texas may assign another agency to fill or partially fill the
rented space, and the lease would be adjusted accordingly. Despite this risk, we
have no information that would lead us to believe that the State of Texas is
considering any such terminations. If the State of Texas terminates or fails to
renew a lease, it may be difficult to locate another tenant in a timely manner
or on comparable or better terms, especially for certain buildings in smaller
cities or remote locations. We were not the successful bidder in a recent
request by the Texas Department of Human Services for a new lease on our Clint,
Texas building, which provided for an annual gross rent of $125,676. Subsequent
to year-end, we have begun negotiations with the Town of Clint for a long-term
lease of the building. In addition, the lease on our Paris, Texas building,
which provides for an annual gross rent of $208,376 expires on August 31, 2002
and we believe the State of Texas will not renew.
Bank of America Building Lease. Approximately 63% of four office buildings
in Texas are leased to the Bank of America on a long-term basis, with the
primary leases expiring July 20, 2012. The leases with the Bank of America
provide for automatic rent increases every three years at a predetermined rate.
They also provide for multiple renewal option periods for the Bank of America.
The other leases in these buildings are with smaller tenants and range from one
year to five years in length.
22
Property Improvements
We currently intend to spend up to $1 million for capital improvements,
including tenant finish, on our properties during 2002. This amount is in
addition to amounts that will be expended for routine maintenance and repairs.
This amount is expected to be funded from working capital and additional
borrowing.
Mortgages and Promissory Notes
Substantially all of our properties are secured by mortgages. The following
is a summary of our indebtedness, including mortgage debt:
Outstanding
Balance at
December 31,
Description of Indebtedness 2001 2000
--------------------------- ----------- -----------
Note payable to Transatlantic Capital Company, LLC. Fixed
interest at 7.66%, due in monthly installments of
$42,612 through July 1, 2028, with the principal
balance and accrued interest due on August 1, 2028.
This note may be prepaid on or after July 1, 2008
without penalty and may be defeased after July 13, 2002
by providing non-callable U.S. government obligations
in an amount sufficient to meet all interest and
principal payments due under the note. This note is
secured by a mortgage on the State of Texas buildings. ... $ 5,798,637 $ 5,868,255
Note payable to Jefferson Pilot. Fixed interest at 9.00%,
due in monthly installments of $17,095 through May 1,
2013. This note may be prepaid after March 31, 2003 but
only if prepaid in full. A prepayment penalty is
required, which declines by 1% per year from 6% in the
first year prepayment is allowed down to 1%. This note
is secured by a mortgage on four office buildings
primarily leased to Bank of America. ..................... 1,454,737 1,530,945
Note payable to Security Life of Denver Insurance Company.
Fixed interest at 8.00%, due in monthly installments of
$37,626 through May 1, 2022. The lender can call the
outstanding balance due on June 1, 2007, June 1, 2012
or June 1, 2017. This note may be prepaid in full with
a prepayment penalty equal to the greater of 1% of the
outstanding loan amount or the excess of the present
value of the remaining principal and interest payments
discounted at the interest rate of the closest U.S.
Treasury obligation for the remaining term. This note
is secured by a mortgage on the Keystone Office Park. .... 4,528,498 4,620,712
23
Outstanding
Balance at
December 31,
Description of Indebtedness 2001 2000
--------------------------- ----------- -----------
Note payable to Security Life of Denver Insurance Company.
Fixed interest at 8.63%, due in monthly installments of
$4,403 through May 1, 2022. The lender can call the
outstanding balance due on June 1, 2007, June 1, 2012
or June 1, 2017. This note may be prepaid in full with
a prepayment penalty equal to the greater of 1% of the
outstanding loan amount or the excess of the present
value of the remaining principal and interest payments
discounted at the interest rate of the closest U.S.
Treasury obligation for the remaining term. This note
is secured by a mortgage on the Keystone Office Park. .... 505,642 515,108
Note payable to US Bank National Association. Interest at
LIBOR (subject to our election) plus 225 basis points
is due monthly (4.89% and 9.06% at December 31, 2001
and 2000, respectively), with the principal balance and
any accrued interest due on August 31, 2003. The
maturity date may be extended to August 31, 2004 if
specified conditions are met. This note may be prepaid
at any time without penalty upon the expiration of any
applicable LIBOR borrowing period. This note is secured
by a mortgage on Sheridan Center. ........................ 9,469,799 7,342,522
Note payable to Teachers Insurance and Annuity Association
of America. Fixed interest at 7.90%, due in monthly
installments of $108,835 through January 10, 2006, with
the outstanding principal balance and accrued interest
due on July 10, 2006. The note may not be prepaid, but
may be defeased after January 2003 by providing
non-callable U.S. government obligations in an amount
sufficient to meet all interest and principal payments
due under the note. This note is secured by a mortgage
on Sheridan Plaza at Inverness. .......................... 14,858,423 --
Note payable to Nationwide Life Insurance Company. Interest
at 1-month LIBOR plus 190 basis points (3.76% at
December 31, 2001), due in monthly installments, with
the outstanding principal balance and accrued interest
due on December 5, 2003. This note maybe prepaid on or
before December 5, 2002 with a prepayment penalty equal
to 0.5% of the outstanding loan amount. There is no
prepayment penalty if the note is prepaid after
December 5, 2002. This note is secured by a mortgage on
Arrowhead Fountains. ..................................... 9,300,000 --
Note payable to US Bank National Association. Interest at
the bank's internal money market rate (subject to our
election) plus 250 basis points (4.77% at December 31,
2001), due in monthly installments with principal
payments of $11,806, with the outstanding principal
balance and accrued interest due on December 21, 2004.
This note may be prepaid at any time with a prepayment
penalty as determined by the loan agreement and the
current interest rate contract. This note is secured by
a mortgage on the Kellogg Building. ...................... 9,488,194 --
24
Outstanding
Balance at
December 31,
Description of Indebtedness 2001 2000
--------------------------- ----------- -----------
Note payable to KeyBank National Association. Interest at
LIBOR plus 250 basis points (4.31% and 8.90% at
December 31, 2001 and 2000, respectively), due in
monthly installments, with the outstanding principal
balance and accrued interest due on June 1, 2003. This
note may be prepaid at any time without penalty. This
note is secured by a mortgage on Panorama Falls. ......... 3,004,494 5,119,830
Note payable to Anchor Bank. Fixed interest at 7.75% due in
monthly installments of $22,925 based on a 30-year
amortization through June 1, 2008, at which time a
balloon payment of $2,797,181 is due. This note is
secured by a mortgage on the Giltedge building in
Appleton, Wisconsin. ..................................... -- 3,125,484
----------- -----------
Total.......................................................... $58,408,424 $28,122,856
=========== ===========
As of December 31, 2001, we had a short-term revolving credit line from a
bank in the amount of $300,000 and a $500,000 short-term unsecured line of
credit with Sheridan Investments, LLC, a related party. At December 31, 2001, we
had no outstanding balances on either of these lines of credit. On March 11,
2002, we increased our short-term unsecured line of credit with Sheridan
Investments, LLC from $500,000 to $1,500,000.
Insurance
We believe that each of our properties is adequately covered by insurance
under a blanket policy.
Depreciation
For a discussion of the treatment of the depreciation of the properties in
the financial statements, see "Item 7. Financial Statements--Notes To
Consolidated Financial Statements".
Competition
The business of managing, leasing and operating office buildings is
competitive and we compete for tenants with other office buildings, including
buildings owned by larger companies with more financial and other resources
available to them. This competition could limit our ability to lease our
properties, increase or maintain rental rates, or secure attractive investment
opportunities. We will need to compete for 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
buildings with smaller average tenant sizes will improve our ability to compete.
Competitive conditions relating specifically to Sheridan Center, Sheridan Plaza,
Arrowhead Fountains and the Kellogg Building are described above under
"Description of Specific Properties."
Employees
As of December 31, 2001, we had no direct employees. At that date, Sheridan
Realty Advisors had 31 employees who spent the majority of their time on our
business, including five senior executives and 26 administrative, support, and
property management personnel. As a result of our purchase of the administrative
and property management and accounting services business of Sheridan Realty
Advisors effective January 1, 2002, three of the senior executives and 22 of the
other employees of Sheridan Realty Advisors became our direct employees and
manage our day-to-day operations. The three senior executives who became our
employees, William T. Atkins, our Chief Executive Officer, Charles K. Knight,
our President, and D. Scott Ikenberry, our Chief Financial Officer, will also
remain employees of Sheridan Realty Advisors and their 2002 salary obligations
will be shared between us and Sheridan Realty Advisors such that we will pay
their cash compensation and Sheridan Realty Advisors will accrue their deferred
compensation as a liability of Sheridan Realty Advisors. Sheridan Realty
Advisors retained six employees, consisting of two officers and four
administrative personnel.
25
The business of Sheridan Realty Advisors is currently limited to advising
AmeriVest. Sheridan Realty Advisors is owned by our five executive officers who
assist Sheridan Realty Advisors in connection with their continuing advisory
duties. As AmeriVest increases its size and the number of properties it owns or
controls, it is anticipated that the remaining employees working for Sheridan
Realty Advisors will become employees of AmeriVest.
Environmental Matters
Under various federal, state and local laws and regulations, an owner or
operator of real property may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on that property. These laws often
impose such liability regardless of whether the owner caused or knew of the
presence of hazardous or toxic substances and regardless of whether the storage
of those substances was in violation of a tenant's lease. Furthermore, the costs
of remediation or removal of those substances may be substantial, and the
presence of hazardous or toxic substances, or the failure to promptly remediate
those substances, may adversely affect the owner's ability to sell the property
or to borrow money using the property as collateral. In connection with the
ownership and operation of the properties, we may be potentially liable for such
costs.
We have obtained an environmental assessment of each of our properties.
These environmental assessments have not revealed any environmental conditions
that management believes will subject us to material liability. In addition, we
have not been, nor do we have knowledge that any of the previous owners of the
properties have been, notified by any governmental authority of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
other environmental substances in connection with any of the properties.
Although we have obtained environmental assessments of the properties, and
although we are not aware of any notifications by any governmental authority of
any material noncompliance, it is possible that our assessments do not reveal
all environmental liabilities or that there are material environmental
liabilities of which we are unaware. For a description of pending legal
proceedings involving environmental issues, see "Legal Proceedings."
After the acquisition of the Sheridan Center buildings, we embarked on an
asbestos remediation program in accordance with applicable federal and state
requirements, using licensed contractors to remove, wherever accessible or
otherwise required, asbestos-containing materials in the buildings, including
ceiling tiles, drywall joint compound, wood and metal fire doors, wall texture,
mudded pipe elbows and valves, thermal systems 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 few years as
tenants vacate spaces, allowing access to the asbestos materials. Through
December 31, 2001, we have incurred approximately $272,000 in asbestos
remediation costs. We may spend an additional $380,000 over the next few years
to remediate tenant spaces as they become vacant.
Policies and Objectives With Respect to Certain Activities
The following is a discussion of our policies with respect to investment,
financing and other activities. The policies with respect to these activities
have been determined by our Board of Directors and, although our Board currently
does not contemplate any changes to these policies, our Board may change these
policies without a vote or other approval of stockholders.
26
Acquisition, Development and Investment Policies
Our business and growth strategies are designed to maximize total return to
stockholders over the medium- and long-term with a niche property type and
geographic focus. Our current policies contemplate the possibility of:
o direct ownership of real estate properties, including ownership
through wholly-owned subsidiaries, focusing on office properties with
average tenant sizes of between 2,000 and 4,000 square feet;
o indirect participation in those types of properties through
investments in corporations, business trusts, general partnerships,
limited partnerships, joint ventures and other legal entities; and
o development and acquisition of unimproved property or the acquisition
and conversion of existing structures.
At the present time, all of our existing and contemplated investments in
real estate properties are held through direct ownership. Generally, we intend
to hold our properties for the long term. However, we may sell properties when
we believe the economic benefits, including the income tax consequences, warrant
such action. Our long-term view is to focus on multi-tenant office buildings in
select cities and dispose of non-core assets and property types when
economically and operationally feasible.
Although we have no formal policy as to the allocation of assets among our
investments, we generally intend to limit investment in a single property to a
maximum of 25% of our total assets. We expect to fund future 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 to maintain our qualification as a REIT, we must make annual
distributions to our stockholders of at least 90% of our REIT taxable income,
which does not include net capital gains. This requirement may impair our
ability to use retained cash flow for future acquisitions.
Financing Policies
We intend to make additional investments in properties and may incur
indebtedness to make those investments or to meet the distribution requirements
imposed by the REIT provisions of the Internal Revenue Code to the extent that
cash flow from our operations, investments and working capital is insufficient.
Additional indebtedness incurred by us may be secured by part or all of our real
estate properties. Our Board of Directors has placed no limitations on the
number or amount of secured indebtedness or mortgages that may be placed on any
one of our properties.
Secured indebtedness incurred by us may be in the form of purchase money
obligations to the sellers of properties, or publicly or privately placed debt
instruments or financing from banks, institutional investors or other lenders.
This indebtedness may be recourse to all or any part of our assets, or may be
limited to the particular property to which the indebtedness relates. The
proceeds from any borrowings by us may be used for, among other things,
refinancing existing indebtedness, financing development and acquisition of
properties, financing renovation or redevelopment of properties, the payment of
dividends, and working capital.
If our Board of Directors decides to raise additional equity capital, our
Board has the authority, generally without stockholder approval and provided we
have sufficient authorized shares, to issue additional common stock or preferred
stock in any manner, and on such terms and for such consideration, as our Board
deems appropriate, including in exchange for property. Existing stockholders
have no preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a stockholder's investment in us.
27
ITEM 3. LEGAL PROCEEDINGS
On June 14, 2001, a lawsuit was filed in the District Court, Hidalgo
County, Texas against Innerarity Austin, Inc., a Nevada corporation, and our
wholly-owned subsidiary, AmeriVest Properties Texas, Inc., by Laura Smith
alleging that the defendants were negligent and breached various duties in
allowing our Mission, Texas building to be contaminated with airborne
contaminants while leasing the premises to the plaintiff's employer, the Texas
Department of Human Services. Innerarity Austin, Inc. was the previous owner of
the property. The plaintiff alleges that due to the acts and omissions of the
defendants, she has suffered serious and some permanent injuries and severe
physical and mental pain. The plaintiff seeks monetary and other relief,
including exemplary damages, in excess of $50,000, and pre-judgment and
post-judgment interest as provided by law, costs of the lawsuit and 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 against our AmeriVest Properties Texas, Inc. subsidiary and
Woodhaven Management Corporation, our external property manager, by Irma and
Yreneo Carranza alleging that the defendants were negligent in maintaining our
Mission, Texas building while leasing the premises to the plaintiff's employer,
the Texas Department of Human Services. The plaintiff alleges that due to the
acts and omissions of the defendants, she has suffered serious and some
permanent injuries and severe physical and mental pain, including loss of
consortium. The plaintiff seeks monetary and other relief, including exemplary
damages, and pre-judgment and post-judgment interest as provided by law, costs
of the lawsuit and such other relief to which the plaintiff may be just
entitled.
We have asserted a general denial of the material allegations in both
lawsuits. These lawsuits, if adversely determined, could have a material adverse
effect on our business and financial condition, and we cannot assure you that
other lawsuits will not be filed. Our insurance company is defending us in these
lawsuits. We previously hired consultants to examine the air quality in this
building and replaced certain air conditioning units. Other actions designed to
maintain proper air quality in the building have also been undertaken.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
28
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the American Stock Exchange under the symbol
"AMV" since January 27, 2000. From our initial public offering in November 1996
until our listing on the American Stock Exchange, our common stock traded on the
Nasdaq SmallCap Stock Market under the symbol "AMVP." The warrants issued in our
initial public offering were traded on the Nasdaq SmallCap Stock Market under
the symbol "AMVPW" until November 20, 2000 when they expired without being
exercised.
The table below presents the range of high and low sale prices for our
common stock during each of the quarters indicated, as reported by the American
Stock Exchange and Nasdaq SmallCap Stock Market and the cash dividends per share
paid with respect to those quarters:
Common Stock
-------------------- Dividend
Quarter Ended High Low Per Share
------------- ------- ------- ---------
March 31, 2000......................... $ 4.750 $ 3.313 $ 0.120
June 30, 2000.......................... 4.750 3.875 0.120
September 30, 2000..................... 5.125 4.250 0.125
December 31, 2000...................... 4.875 4.250 0.125
March 31, 2001......................... 5.950 4.250 0.125
June 30, 2001.......................... 6.200 4.850 0.125
September 30, 2001..................... 6.200 5.200 0.125
December 31, 2001...................... 6.000 5.050 0.125
On March 27, 2002, the closing sale price for our common stock was $6.10
per share, as reported by the American Stock Exchange. On March 11, 2002, there
were approximately 2,098 stockholders of AmeriVest, consisting of 262 holders of
record. The information concerning beneficial owners is based on information
provided by brokers and depositories who hold shares in their names on behalf of
others.
Dividend Policy
Since our initial public offering in November 1996, we have paid a dividend
each quarter. We intend to pay quarterly dividends in the future. Future
dividends will be at the discretion 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 will be paid or that the historical level
of dividends will be maintained.
Recent Sales of Unregistered Securities
During 2001, we issued shares of common stock and warrants to purchase
common stock that were not registered under the Securities Act of 1933 in the
following transactions:
On June 7, 2001, we issued 100,211 shares of common stock to an affiliate
of the property manager of our properties that are leased to various agencies of
the State of Texas, an unrelated party, as consideration for improvements made
to one of those properties. We may be required to issue additional shares on or
after April 16, 2002 based on the actual net operating income of the property.
For accounting purposes, the shares were valued at $557,175, or $5.56 per share.
The issuance of the shares of common stock was made pursuant to an exemption
from registration in accordance with Section 3(b) of the Securities Act based on
a representation to us from entity receiving the shares that such entity was a
sophisticated investor who was knowledgeable about our operations and financial
condition and was able to evaluate the risks and merits of receipt of the
shares.
29
On June 13, 2001, we issued warrants to purchase 50,000 shares of common
stock for $7.00 per share until June 13, 2005 to seven officers of a regional
investment banking firm as compensation for investment banking services. These
warrants were issued in reliance on an exemption from registration under Section
4(2) of the Securities Act based on representations to us that each of such
banking firm officers was a sophisticated investor who was knowledgeable about
our operations and financial condition and was able to evaluate the risks and
merits of receipt of the warrants.
On June 26, 2001, we issued 1,057,346 shares of common stock, $.001 par
value, at a rate of $5.69 per share, as required for accounting purposes based
on an average market price of the shares over a period of several days before
and after the date of the announcement of the acquisition, to Sheridan
Investments, LLC, an affiliate, as a portion of the purchase price for 100% of
the ownership interests of Sheridan Plaza at Inverness, LLC, effective April 1,
2001. The issuance of the shares of common stock was made pursuant to an
exemption from registration in accordance with Rule 506 of Regulation D and
Section 4(2) of the Securities Act based on our belief that Sheridan
Investments, LLC was an accredited investor as defined in Rule 501 of Regulation
D promulgated under the Securities Act.
During 2001, we issued 17,000 shares of our common stock upon exercise of
stock options by a former director and a former employee. We issued 164,200
shares of our common stock upon exercise of warrants by participants of the 2000
offering. In addition, we issued 65,892 shares of our common stock upon exercise
of warrants by Sheridan Realty Partners, L.P. The warrants were issued as part
of the purchase price of the 9.639% preferred membership interest in Sheridan
Investments, LLC in 2000. These shares were issued in reliance on an exemption
from registration under Section 4(2) of the Securities Act based on a
representation to us by each of the former director and the former employee that
such person was knowledgeable about our operations and financial condition at
the time of receipt of the shares and was able to evaluate the risks and merits
of receipt of the shares.
30
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and comparison of the financial condition and
results of operations of AmeriVest as of and for the years ended December 31,
2001 and 2000. These discussions should be read in conjunction with our
financial statements, the notes to the financial statements, and the other
financial data included in this prospectus.
Results of Operations
Comparison of the year ended December 31, 2001 with the year ended December 31,
2000:
Year Ended December 31,
2001 2000 Change
------------ ------------ ------------
Rental revenue $ 10,944,383 $ 7,222,437 $ 3,721,946
------------ ------------ ------------
Property operating expenses-
Operating expenses 2,643,448 1,946,633 696,815
Real estate taxes 1,132,819 668,224 464,595
Management fees 523,687 344,636 179,051
General and administrative expense 677,845 517,019 160,826
Severance expense -- 255,442 (255,442)
Impairment of deferred rents receivable 326,113 -- 326,113
Interest expense 3,181,697 2,167,869 1,013,828
Depreciation and amortization expense 2,244,435 1,205,795 1,038,640
------------ ------------ ------------
10,730,044 7,105,618 3,624,426
------------ ------------ ------------
Other income-
Interest income 135,075 55,874 79,201
Equity in loss of unconsolidated affiliates (17,366) (52,808) 35,442
------------ ------------ ------------
117,709 3,066 114,643
------------ ------------ ------------
Income before gain on sales of real estate 332,048 119,885 212,163
------------ ------------ ------------
Gain on sales of real estate 1,156,445 2,556,839 (1,400,394)
------------ ------------ ------------
Net Income $ 1,488,493 $ 2,676,724 $ (1,188,231)
============ ============ ============
Rental Revenue
The increase in rental revenue is due primarily to the inclusion of the
operations of the Sheridan Center office complex which was acquired in August
2000 and Sheridan Plaza at Inverness, LLC, which was acquired in April 2001,
offset by the exclusion of the operations of the four self-storage facilities
which were sold in August 2000 and the Giltedge building which was sold in June
2001. The acquisition of Arrowhead Fountains in November 2001 and the Kellogg
Building in December 2001, offset by the sale of the 80% interest in Panorama
Falls in December 2001, also contributed to the net increase in rental revenue.
Rental revenue for 2001 also included approximately $285,000 attributable to
increased property taxes at Sheridan Plaza at Inverness, which were passed
through to the tenants in accordance with their leases.
31
Property Operating Expenses
Operating expenses, real estate taxes and management fees increased as a
result of the above-mentioned transactions. Operating expenses also increased in
2001 due to planned maintenance projects, increased utility costs and increased
property taxes at Sheridan Plaza at Inverness.
General and Administrative Expense
The increase in general and administrative expenses is due to the
above-mentioned transactions as well as costs related to our continued growth.
Severance Expense
The severance expense recognized in 2000 was in accordance with a
separation agreement between us and a former officer.
Impairment of Deferred Rents Receivable
During the second quarter of 2001, we recorded an impairment of deferred
rents receivable from a significant tenant, Rhythms NetConnections, Inc., which
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. We
reached an agreement with Rhythms to terminate its lease effective November 1,
2001. See the discussion in the "Liquidity and Capital Resources" section.
Interest Expense
The increase in interest expense is due to the increase in debt outstanding
at December 31, 2001 by approximately 108% from the prior year. The effect of
the increase in debt level is partially offset by a decrease in interest rates,
which results in lower interest costs on our floating rate debt.
Depreciation and Amortization Expense
The increase in depreciation and amortization is due to the overall
increase in depreciable assets due to the previously mentioned transactions and
the continued redevelopment of Sheridan Center. The 2001 amount also includes
the accelerated amortization of a lease commission related to the Rhythms lease
that was recorded in the second quarter in the amount of $323,447.
Interest Income
Interest income increased due to higher outstanding cash balances in 2001
resulting from our public offering of approximately 2.3 million shares of common
stock.
Equity in Loss of Unconsolidated Affiliates
The equity in losses of our unconsolidated affiliates recognized in 2001
represents our share of the net loss of Sheridan Investments, LLC (which owned
Sheridan Plaza at Inverness, LLC) and Panorama Falls. We acquired the original
9.639% interest in Sheridan Investments, LLC in September 2000. This interest
was then used as partial consideration for the acquisition of 100% of Sheridan
Plaza at Inverness, LLC in April 2001. Our 20% interest in Panorama Falls as of
December 31, 2001, resulted from the sale of an 80% interest in December 2001.
32
Gain on Sales of Real Estate
The gain recognized in 2001 was a result of the sales of the Giltedge
building in the amount of $1,143,698 and the building in Odessa, Texas in the
amount of $12,747. The gain recognized in 2000 resulted from the sale of the
four self-storage facilities.
Comparison of year ended December 31, 2000 with year ended December 31, 1999:
Year Ended December 31,
2000 1999 Change
----------- ----------- -----------
Rental revenue $ 7,222,437 $ 5,976,757 $ 1,245,680
----------- ----------- -----------
Property operating expenses-
Operating expenses 1,946,633 1,636,305 310,328
Real estate taxes 668,224 596,790 71,434
Management fees 344,636 124,111 220,525
General and administrative expense 517,019 657,349 (140,330)
Severance expense 255,442 -- 255,442
Interest expense 2,167,869 1,696,222 471,647
Depreciation and amortization expense 1,205,795 1,033,450 172,345
----------- ----------- -----------
7,105,618 5,744,227 1,361,391
----------- ----------- -----------
Other income-
Interest income 55,874 15,506 40,368
Equity in loss of unconsolidated affiliate (52,808) -- (52,808)
----------- ----------- -----------
3,066 15,506 (12,440)
----------- ----------- -----------
Income (loss) before gain on sales of real estate 119,885 248,036 (128,151)
----------- ----------- -----------
Gain on sales of real estate 2,556,839 720,712 1,836,127
----------- ----------- -----------
Net Income $ 2,676,724 $ 968,748 $ 1,707,976
=========== =========== ===========
Rental Revenue
The increase in rental revenue is due primarily to the inclusion of the
operations of the Keystone Office Park for a full year, together with the
operations of Sheridan Center beginning September 1, 2000 and the operations of
Panorama Falls beginning May 25, 2000, offset by the elimination of the
operations of the Broadway property which was sold on December 13, 1999 and the
four self-storage facilities which were sold on August 25, 2000.
Property Operating Expenses
Operating expenses, real estate taxes and management fees increased as a
result of the above-mentioned transactions. Management fees also increased due
to the management agreement with Sheridan Realty Advisors, LLC in 2000 versus
internal management in 1999.
33
General and Administrative Expense
The decrease in general and administrative expenses decreased due to the
management agreement with Sheridan Realty Advisors, LLC in 2000 versus internal
management in 1999.
Severance Expense
The severance expense recognized in 2000 was in accordance with a
separation agreement between us and a former officer.
Interest Expense
The increase in interest expense is due to the increase in debt
outstanding.
Depreciation and Amortization Expense
The increase in depreciation and amortization is due to the overall
increase in depreciable assets due to the previously mentioned transactions.
Interest Income
Interest income increased in 2000 primarily as a result of funds being held
in escrow from the sale of the Broadway property for an IRS Section 1031
exchange and the investment of funds from the stock and warrants offering.
Equity in Loss of Unconsolidated Affiliate
The equity in losses of our unconsolidated affiliate recognized in 2000
represents our share of the net loss of Sheridan Investments, LLC.
Gain on Sales of Real Estate
The gains recognized in 2000 and 1999 were a result of the sales of the
four self-storage facilities and industrial office and showroom building,
respectively.
Liquidity and Capital Resources
Liquidity
Net cash from operations for the twelve months ended December 31, 2001 was
approximately $3.4 million and is the primary source of liquidity to fund
distributions, debt service and capital expenditures. We also have available
lines of credit to assist with such cash needs. In August 2001, we completed a
public offering of common stock, which raised approximately $11.0 million net of
commissions and expenses. The proceeds were used for the acquisitions of
Arrowhead Fountains and the Kellogg Building, the payment of certain
redevelopment costs at Sheridan Center and as working capital.
Management believes that the cash flow from our properties, together with
its existing lines of credit, will be sufficient to meet our working capital
needs for this year and beyond.
We desire to acquire additional properties. In order to do so, we will need
to raise additional debt or equity capital. We also intend to obtain credit
facilities for short and long-term borrowing with commercial banks or other
financial institutions. The issuance of such securities or increase in debt for
additional properties, of which there is no assurance, could adversely affect
the amount of cash available to pay dividends to stockholders.
34
Financing
Mortgage loans are collateralized by substantially all properties. The
following table details the scheduled maturities of mortgages as of December 31,
2001:
2002 $ 524,514
2003 22,331,059
2004 9,654,927
2005 488,010
2006 14,579,886
Thereafter 10,830,028
------------
Total $ 58,408,424
============
As of December 31, 2001, we had a short-term revolving credit line from a
bank in the amount of $300,000 and a $500,000 short-term unsecured line of
credit with Sheridan Investments, LLC, a related party. At December 31, 2001, we
had no outstanding balances on either of these lines of credit. On March 11,
2002, we increased our short-term unsecured line of credit with Sheridan
Investments, LLC from $500,000 to $1,500,000.
Rhythms
On August 2, 2001, Rhythms NetConnections, Inc., the primary tenant in our
Panorama Falls building in Englewood, Colorado, filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Effective November 1, 2001, we agreed to
terminate our lease with Rhythms and apply the security deposit from Rhythms in
the amount of $335,000 against future lease payments. We also wrote off tenant
leasing costs in the amount of $323,447 and deferred rents receivable in the
amount of $326,113 during 2001. The rental revenue related to Rhythms was
approximately $611,000 and $480,000 for the years ended December 31, 2001 and
2000, respectively, which is approximately 5.6% and 6.6% of our total rental
revenue for the respective periods. In December 2001, we sold 80% of our
interest in Panorama Falls to a related party.
Inflation
Management believes that inflation should not have a material adverse
effect on our operations. Our office leases require the tenants to pay increases
in operating expenses should any inflationary pressures materialize.
New Accounting Principles
In June 2001, the Financial Accounting Standards Board ("FASB") authorized
the issuance of SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS No. 141 requires intangible assets to be recognized if they arise
from contractual or legal rights or are "separable", meaning that it is feasible
that they may be sold, transferred, licensed, rented, exchanged or pledged. As a
result, it is likely that more intangible assets will be recognized under SFAS
No. 141 than its predecessor, Accounting Principles Board ("APB") Opinion No.16
although in some instances previously recognized intangibles will be subsumed
into goodwill.
35
Under SFAS No. 142, goodwill will no longer be amortized on a straight-line
basis over its estimated useful life, but will be tested for impairment on an
annual basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed on a reporting
unit level. A reporting unit is defined as a SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", operating segment or one
level lower. Goodwill will no longer be allocated to other long-lived assets for
impairment testing under SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". Under SFAS No.
142, intangible assets with indefinite lives will not be amortized. Instead they
will be carried at the lower of cost or market value and tested for impairment
at least annually. All other recognized intangible assets will continue to be
amortized over their estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. If we had adopted SFAS No. 142 at January 1, 2000, there would have been
no effect on our financial statements. Our adoption of these statements will not
have an impact on our financial statements, as we have not recorded any goodwill
or intangible assets.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement", which is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. We are currently evaluating
the potential impact, if any, the adoption of SFAS No. 143 will have on our
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
periods beginning after December 15, 2001 and interim periods within those
fiscal years. SFAS No. 144 establishes an accounting model for impairment or
disposal of long-lived assets to be disposed of by sale. We are currently
evaluating the potential impact, if any, the adoption of SFAS No. 144 will have
on our financial position and results of operations.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements required us to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, which would potentially result in
materially different results under different assumptions and conditions. We
believe that our critical accounting policies are limited to those described
below. For a detailed discussion on the application of these and other
accounting policies, see notes to the consolidated financial statements included
elsewhere herein.
36
Investment in Real Estate
Real estate, property, and equipment are stated at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives as follows:
Description Estimated Useful Lives
----------- ----------------------
Land Not depreciated
Buildings 20 to 40 years
Equipment 5 to 7 years
Tenant improvements and lease commissions Term of lease
Maintenance and repairs are expensed as incurred and improvements are
capitalized. The cost of assets sold or retired and the related accumulated
depreciation and/or amortization are removed from the accounts and the resulting
gain or loss is reflected in operations in the period in which such sale or
retirement occurs.
Revenue Recognition
Certain leases provide for tenant occupancy during periods for which no
rent is due or where minimum rent payments increase during the term of the
lease. We record rental revenue for the full term of each lease on a
straight-line basis. Accordingly, we record a receivable from tenants from whom
we expect to collect over the remaining lease term rather than currently, which
is recorded as deferred rents receivable in the accompanying balance sheet. When
we acquire a property, the term of the existing leases is considered to commence
as of the acquisition date for the purposes of this calculation.
Sale of Properties
We account for the sale of properties under the full accrual method. Gains
or losses on sale are recognized only after closing takes place, title has
transferred, an adequate down payment has been received by us and the
collectibility of the note receivable from the buyer, if applicable, is
reasonably assured.
37
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
AmeriVest Properties Inc. and Subsidiaries
Report of Independent Public Accountants .......................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000....... F-2
Consolidated Statements of Operations for the
years ended December 31, 2001 and 2000 ......................... F-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001 and 2000 ................. F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2001 and 2000 ............................... F-5-7
Notes to Consolidated Financial Statements ........................ F-8-23
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To AmeriVest Properties Inc.:
We have audited the accompanying consolidated balance sheets of AMERIVEST
PROPERTIES INC. (a Maryland corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AMERIVEST PROPERTIES INC. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
------------------------
Arthur Andersen LLP
Denver, Colorado
March 15, 2002
F-1
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
Investment in real estate
Land $ 14,137,891 $ 8,761,566
Buildings and improvements 67,433,077 32,210,274
Furniture, fixtures and equipment 237,442 68,793
Tenant improvements 1,788,942 645,429
Tenant leasing commissions 302,337 585,887
Less accumulated depreciation and amortization (3,058,662) (3,349,569)
------------ ------------
Net Investment in Real Estate 80,841,027 38,922,380
Cash and cash equivalents 1,119,355 1,046,976
Restricted cash 673,213 587,424
Investment in unconsolidated affiliates 1,243,298 584,640
Due from related party 2,403,595 --
Accounts receivable 495,950 52,328
Deferred rents receivable 374,392 524,581
Deferred financing costs, net of accumulated amortization
of $118,751 and $75,818, respectively 597,885 411,634
Prepaid expenses, and other assets 272,569 233,834
------------ ------------
Total Assets $ 88,021,284 $ 42,363,797
============ ============
LIABILITIES
Mortgage loans and notes payable $ 58,408,424 $ 28,122,856
Accounts payable and accrued expenses 838,605 932,975
Due to related party 494,531 92,491
Accrued real estate taxes 1,564,341 747,647
Prepaid rents and security deposits 883,116 737,207
Dividends payable 835,282 372,118
------------ ------------
Total Liabilities 63,024,299 31,005,294
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value
Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Common stock, $.001 par value
Authorized - 15,000,000 shares
Issued and outstanding - 6,682,259 and 2,976,939 shares,
respectively 6,682 2,977
Capital in excess of par value 31,132,650 11,879,099
Distributions in excess of accumulated earnings (6,142,347) (523,573)
------------ ------------
Total Stockholders' Equity 24,996,985 11,358,503
------------ ------------
Total Liabilities and Stockholders' Equity $ 88,021,284 $ 42,363,797
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
REAL ESTATE OPERATING REVENUE
Rental revenue
Commercial properties $ 10,944,383 $ 6,360,902
Storage properties -- 861,535
------------ ------------
10,944,383 7,222,437
------------ ------------
REAL ESTATE OPERATING EXPENSES
Property operating expenses
Operating expenses 2,643,448 1,946,633
Real estate taxes 1,132,819 668,224
Management fees 523,687 344,636
General and administrative expense 677,845 517,019
Severance expense -- 255,442
Impairment of deferred rents receivable 326,113 --
Interest expense 3,181,697 2,167,869
Depreciation and amortization expense 2,244,435 1,205,795
------------ ------------
10,730,044 7,105,618
------------ ------------
OTHER INCOME
Interest income 135,075 55,874
Equity in loss of unconsolidated affiliates (17,366) (52,808)
------------ ------------
117,709 3,066
------------ ------------
INCOME BEFORE GAIN ON SALES OF REAL ESTATE 332,048 119,885
------------ ------------
GAIN ON SALES OF REAL ESTATE 1,156,445 2,556,839
------------ ------------
NET INCOME $ 1,488,493 $ 2,676,724
============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.32 $ 1.07
============ ============
Diluted $ 0.31 $ 1.07
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 4,680,719 2,492,584
============ ============
Diluted 4,801,307 2,495,919
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Distributions
Common Stock Capital in in Excess of
-------------------------- Excess of Accumulated
Shares Amount Par Value Earnings
----------- ----------- ----------- -----------
Balances, December 31, 1999 2,228,850 $ 2,229 $ 8,179,723 $(1,923,176)
Issuance of common stock-
Public offering, net of offering costs 600,000 600 2,930,541 --
Acquisition of interest in affiliate 131,784 132 658,786 --
Acquisition of life insurance policy 16,305 16 79,360 --
Issuance of incentive warrants 19,946 --
Amortization of incentive warrants 10,743
Dividends declared -- -- -- (1,277,121)
Net income -- -- -- 2,676,724
----------- ----------- ----------- -----------
Balances, December 31, 2000 2,976,939 2,977 11,879,099 (523,573)
Issuance of common stock-
Public offering, net of offering costs 2,262,047 2,262 10,960,467 --
Acquisition of property 1,057,346 1,057 6,015,242 --
Property improvements 100,211 100 557,075 --
Warrants exercised 230,092 230 1,150,230 --
Stock options exercised 17,000 17 73,616 --
Dividend Re-Investment Plan ("DRIP") 38,624 39 216,098 --
Issuance of incentive warrants -- -- 262,405 --
Amortization of incentive warrants -- -- 18,418 --
Dividends declared (2,599,710)
Deemed dividend resulting from property acquisition -- -- -- (4,507,557)
Net income -- -- -- 1,488,493
----------- ----------- ----------- -----------
Balances, December 31, 2001 6,682,259 $ 6,682 $31,132,650 $(6,142,347)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,488,493 $ 2,676,724
Adjustments to reconcile net income to net cash from
operating activities-
Gain on sales of real estate (1,156,445) (2,556,839)
Depreciation and amortization expense 2,244,435 1,205,795
Amortization of deferred financing costs 105,049 64,624
Amortization of warrants 39,078 10,743
Equity in loss of unconsolidated affiliates 17,366 52,808
Impairment of deferred rents receivable 326,113 --
Accrued interest added to mortgage payable 123,894 422,052
Changes in assets and liabilities-
(Increase) decrease in accounts receivable (326,102) 9,558
Increase in deferred rents receivable (175,924) (524,581)
Decrease (increase) in prepaid expenses,
restricted cash and other assets 232,534 (215,639)
Increase in accounts payable and accrued expenses 191,980 720,100
Increase in other accrued liabilities 317,115 574,571
------------ ------------
Net cash from operating activities 3,427,586 2,439,916
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions and improvements of real estate, net of cash
acquired and debt assumed (25,314,629) (16,861,713)
Net proceeds from the sales of real estate 854,530 1,818,161
Leasing commissions paid (117,035) (531,793)
Distributions from unconsolidated affiliate -- 60,000
Release of escrow deposit -- 509,556
------------ ------------
Net cash from investing activities (24,577,134) (15,005,789)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to mortgage loans and notes payable 12,515,584 12,565,301
Payments on mortgage loans and notes payable (1,358,268) (1,023,165)
Payment of deferred financing costs (201,806) (146,299)
Net proceeds from equity offering 10,962,729 2,931,141
Net proceeds from exercising of options and warrants 1,224,093 --
Dividends paid (1,920,405) (1,172,465)
------------ ------------
Net cash from financing activities 21,221,927 13,154,513
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 72,379 588,640
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,046,976 458,336
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,119,355 $ 1,046,976
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 2001 and 2000, the Company made cash
payments for interest on indebtedness of $2,932,659 and $2,127,231,
respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On November 19, 2001, the Company completed the acquisition of the
Arrowhead Fountains office building. The aggregate purchase price for Arrowhead
Fountains was $12,750,000, which was paid by the assumption of the mortgage loan
from Nationwide Life Insurance Company with a principal balance of $9,300,000
and the balance from a portion of the proceeds from the 2001 public offering.
On June 7, 2001, the Company issued 100,211 shares of common stock to an
affiliate of the property manager of the Company's buildings that are leased to
agencies of the State of Texas, an unrelated third party, as consideration for
improvements made to a property. For accounting purposes, the shares were valued
at $557,175 ($5.56 per share) and are included in investment in real estate on
the accompanying balance sheet.
On June 1, 2001, the Company sold its Giltedge building for $3,650,000.
From the cash at closing, $3,111,624 was used to repay the outstanding principal
balance on the mortgage loan secured by the property.
On April 1, 2001, the Company purchased from Sheridan Investments, LLC, an
affiliate, 100% of the ownership interests of Sheridan Plaza at Inverness, LLC,
an affiliate. For accounting purposes, the purchase price was $22,895,067, which
consisted of:
o $705,135 for the Company's 9.639% preferred membership interest in
Sheridan Investments, LLC, the owner of all of the membership
interests in Sheridan Plaza at Inverness LLC, which was transferred
back to Sheridan Investments, LLC;
o $6,474,329 paid with (1) 1,057,346 shares of common stock at a price
of $5.69 per share (as required for accounting purposes, based on an
average market price of the shares over a period of several days
before and after the date of the announcement of the acquisition) and
(2) the cash proceeds of $458,030 from the sale of the Giltedge
building;
o assumption of the mortgage in the principal amount of $14,954,425
secured by the property; and
o assumption of other liabilities in the amount of $761,178.
Due to the related party nature of this transaction, accounting principles
generally accepted in the United States require the Company to record this
acquisition at its historical net book value. The difference between the
purchase price and the historical net book value was $4,507,557 and has been
recorded as a non-cash dividend.
On September 29, 2000, the Company purchased a 9.639% preferred membership
interest in Sheridan Investments, LLC. The aggregate purchase price for this
investment consisted of $658,918, which the Company paid by issuing 65,892
units, with each unit consisting of two shares of common stock and one
redeemable common stock purchase warrant.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
On December 6, 2001, the Company completed the sale of an 80% interest in
the Panorama Falls building to a related party. Due to the Company's continued
obligation on the mortgage loan on Panorama Falls, the Company has retained 100%
of the outstanding principal loan balance on its balance sheet. The balance at
December 31, 2001 was $3,004,494. As an offset, the Company has recorded a
receivable for 80% of this amount, or $2,403,595, as due from related party with
the remaining 20%, or $600,899, included in the investment in unconsolidated
affiliate balance.
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
AmeriVest Properties Inc. (the "Company") was incorporated under the laws
of the State of Delaware on August 25, 1993 and was reincorporated in the State
of Maryland in 1999. Effective January 1, 1996, the Company commenced operating
as a self-administered and self-managed real estate investment trust ("REIT").
The Company owns and operates, through its wholly owned subsidiaries, the
following properties:
Property Location
-------- --------
Sheridan Plaza at Inverness Englewood, CO
Sheridan Center Denver, CO
Kellogg Building Littleton, CO
Panorama Falls (a) Englewood, CO
Arrowhead Fountains Peoria, AZ
Keystone Office Park Indianapolis, IN
Bank of America Buildings (b) Texas
State of Texas Buildings (c) Texas
(a) 20% of the property is owned by the Company, 80% of the property is
owned by Freemark Abbey Panorama, LLC as a tenant in common with the
Company.
(b) These four buildings are leased approximately 63% to Bank of America.
The buildings are located in Mineral Wells, Georgetown, Henderson and
Clifton, Texas.
(c) These thirteen buildings are leased primarily to various agencies of
the State of Texas. The buildings are located in Arlington, Paris,
Marshall, Amarillo, El Paso (2), Belleville, Mission, Clint, Lubbock,
Temple, Hempstead and Columbus, Texas.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
operations of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
INVESTMENT IN REAL ESTATE
Real estate, property, and equipment are stated at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives as follows:
Description Estimated Useful Lives
----------- ----------------------
Land Not depreciated
Buildings 20 to 40 years
Equipment 5 to 7 years
Tenant improvements and lease commissions Term of lease
Depreciation and amortization expense related to investment in real estate
was $2,244,435 and $1,205,795 for the years ended December 31, 2001 and 2000,
respectively.
F-8
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maintenance and repairs are expensed as incurred and improvements are
capitalized. The cost of assets sold or retired and the related accumulated
depreciation and/or amortization are removed from the accounts and the resulting
gain or loss is reflected in operations in the period in which such sale or
retirement occurs.
LONG-LIVED ASSETS
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company continually
evaluates the recoverability of its long-lived assets based on estimated future
cash flows from and the estimated liquidation value of such long-lived assets,
and provides for impairment if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived asset. If impaired, the long-lived
asset is written down to its estimated fair value.
REVENUE RECOGNITION
Certain leases provide for tenant occupancy during periods for which no
rent is due or where minimum rent payments increase during the term of the
lease. The Company records rental revenue for the full term of each lease on a
straight-line basis. Accordingly, the Company records a receivable from tenants
that the Company expects to collect over the remaining lease term rather than
currently, which is recorded as deferred rents receivable in the accompanying
balance sheet. When the Company acquires a property, the term of existing leases
is considered to commence as of the acquisition date for the purposes of this
calculation. The amounts included in rental revenue for the years ended December
31, 2001 and 2000 that are not currently due from tenants are $208,797 and
$524,581, respectively.
SALE OF PROPERTIES
The Company accounts for the sale of properties under the full accrual
method. Gains or losses on sale are recognized only after closing takes place,
title has transferred, an adequate down payment has been received by the Company
and the collectibility of the receivable from the buyer, if applicable, is
reasonably assured.
INCOME TAXES
Effective January 1, 1996, the Company elected to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code (the "Code"), as amended.
As a REIT, the Company generally would not be subject to federal income taxation
at the corporate level to the extent it distributes annually at least 100% of
its REIT taxable income, as defined in the Code, to its stockholders and
satisfies certain other requirements. Accordingly, no provision has been made
for federal income taxes in the accompanying consolidated financial statements.
As of December 31, 2001, the Company has satisfied the requirements as defined
in the Code.
Certain of the Company's subsidiaries are subject to certain state excise
and franchise taxes. The provision for such state taxes has been reflected in
general and administrative expense in the accompanying consolidated statements
of operations and has not been separately stated due to its insignificance.
For federal income tax purposes, the cash dividends paid to stockholders
may be characterized as ordinary income, return of capital (generally
non-taxable) or capital gains. Dividends declared for the year ended December
31, 2001 totaled $2,599,710 and are characterized as 46% ordinary income, 24%
capital gain and 30% return of capital. Dividends declared for the year ended
December 31, 2000 totaled $1,277,121, of which $905,003 were characterized as
100% return of capital. The remaining dividends of $372,118 ($.125 per share),
which were declared in the fourth quarter and paid January 17, 2001, were
treated as a 2001 dividend for federal income tax purposes.
F-9
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock option plan. Accordingly,
the Company does not recognize compensation cost for options granted to
employees whose exercise price is equal to or exceeds the fair value of the
underlying stock as of the grant date and which qualify for fixed plan
treatment.
Options and warrants issued to non-employees in which goods or services are
the consideration received are accounted for based on the fair value of the
equity instruments issued. The measurement date is considered to be the issuance
date, or if there are performance vesting provisions, when earned.
FAIR VALUE
The Company's financial instruments include accounts receivable, deferred
rents receivable, accounts payable and accrued expenses, mortgage loans and
notes payable. The fair values of these financial instruments were not
materially different from their carrying or contract values.
CONCENTRATIONS OF CREDIT RISK
The Company leases office space to commercial businesses in Colorado,
Indiana, Texas and Arizona. The Company also leases office space to State of
Texas governmental agencies. The terms of the leases generally require basic
rent payments at the beginning of each month. Credit risk associated with the
lease agreements is limited to the amount of rents receivable from tenants less
any related security deposits. Leases with the State of Texas governmental
agencies may be canceled by the lessee should funding for the specific
governmental agency on a complete agency basis be decreased or discontinued.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents.
The Company maintains cash accounts at three financial institutions. The Company
periodically evaluates the credit worthiness of these financial institutions,
and maintains cash accounts only in large high quality financial institutions,
thereby minimizing exposure for deposits in excess of federally insured amounts.
On occasion, cash on deposit may exceed federally insured amounts.
DEFERRED FINANCING COSTS
Deferred financing costs include fees and costs incurred to obtain
long-term financing. These costs are amortized over the terms of the respective
loans and are included as a component of interest expense in the accompanying
consolidated statements of operations.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three months or
less at the time of purchase.
F-10
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTED CASH
In accordance with the loan agreements for four of the Company's loans, the
lenders require the Company to maintain reserves for real estate taxes, property
insurance, capital improvements and/or tenant improvements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic net income per common share is determined by dividing net income
attributable to common stockholders by the weighted average number of common
shares outstanding during each period. Diluted net income per common share
includes the effects of potentially issuable common stock, but only if dilutive.
NEW ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board ("FASB") authorized
the issuance of SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS No. 141 requires intangible assets to be recognized if they arise
from contractual or legal rights or are "separable", i.e., it is feasible that
they may be sold, transferred, licensed, rented, exchanged or pledged. As a
result, it is likely that more intangible assets will be recognized under SFAS
No. 141 than its predecessor, APB Opinion No.16 although in some instances
previously recognized intangibles will be subsumed into goodwill.
Under SFAS No. 142, goodwill will no longer be amortized on a straight-line
basis over its estimated useful life, but will be tested for impairment on an
annual basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed on a reporting
unit level. A reporting unit is defined as a SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", operating segment or one
level lower. Goodwill will no longer be allocated to other long-lived assets for
impairment testing under SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". Under SFAS No.
142, intangible assets with indefinite lives will not be amortized. Instead they
will be carried at the lower of cost or market value and tested for impairment
at least annually. All other recognized intangible assets will continue to be
amortized over their estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Had the Company adopted SFAS No. 142 at January 1, 2000, there would have
been no effect on the Company's financial statements. The Company's adoption of
these statements will not have an impact on its financial statements, as it has
not recorded any goodwill or intangible assets.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement", which is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company is currently
evaluating the potential impact, if any, the adoption of SFAS No. 143 will have
on its financial position and results of operations.
F-11
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
periods beginning after December 15, 2001 and interim periods within those
fiscal years. SFAS No. 144 establishes an accounting model for impairment or
disposal of long-lived assets to be disposed of by sale. The Company is
currently evaluating the potential impact, if any, the adoption of SFAS No. 144
will have on its financial position and results of operations.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current
period presentation.
NOTE 3 - STOCK OFFERINGS
During July 2001, the Company offered 2,000,000 shares of common stock,
with a 30-day option to the underwriter to purchase up to an additional 300,000
shares to cover over-allotments, at a price of $5.50 per share. On August 1,
2001, the Company received $10,230,000, net of the underwriting discounts and
commissions, from the sale of the 2,000,000 shares. On August 24, 2001, the
Company received an additional $1,340,370, net of the underwriting discounts and
commissions, from the sale of 262,047 of the over-allotment shares. After
payment of approximately $608,000 in additional offering expenses, the proceeds
were used to acquire real estate properties, to repay debt, for capital
improvements and to increase working capital.
During March 2000, the Company offered units consisting of common stock and
warrants. As modified in June 2000, the offering was for a maximum of 300,000
units offered at a price of $10.00 per unit. Each unit consisted of two shares
of common stock and one redeemable common stock purchase warrant. The warrants
are exercisable at $5.00 per share, expiring on July 10, 2005. The offering
period was extended to August 31, 2000, whereupon it terminated after raising
the maximum amount of $3,000,000. The amount of net proceeds allocated to the
warrants was approximately $148,000. Proceeds from the sale of these units,
after payment of expenses of $68,859, were used to acquire and improve real
estate properties, to repay debt and to increase working capital.
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
2001
Kellogg Building Acquisition
----------------------------
On December 21, 2001, the Company completed the acquisition of the Kellogg
Building. The Kellogg Building is located in Littleton, Colorado, contains
112,732 rentable square feet and is located on approximately 5 acres of land.
The aggregate purchase 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 and the balance from a portion of the proceeds from the 2001 public
offering.
Panorama Falls Sale
-------------------
On December 6, 2001, the Company completed the sale of an 80% interest in
the Panorama Falls building to a related party. Panorama Falls consists of a
three-story office building with 61,963 rentable square feet on approximately
six acres located in Englewood, Colorado. The aggregate sales price for the
interest in Panorama Falls was $4,880,000 payable as follows:
F-12
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o $2,180,000 to KeyBank National Association to pay down a portion of
the existing mortgage loan;
o the assumption of 80% of the remaining existing mortgage loan in the
amount of $2,395,732; and
o the remainder of $304,268 in cash, less closing costs.
Due to the Company's continued obligation on the mortgage loan on Panorama
Falls, the Company has retained 100% of the outstanding principal loan balance
on its balance sheet. As an offset, the Company has recorded a receivable for
80% of this amount as due from related party with the remaining 20% included in
the investment in unconsolidated affiliates balance.
Arrowhead Fountains Acquisition
-------------------------------
On November 19, 2001, the Company completed the acquisition of the
Arrowhead Fountains office building. Arrowhead Fountains is located in suburban
Phoenix, Arizona, contains 96,076 rentable square feet and is located on
approximately 5 acres of land. The aggregate purchase price for Arrowhead
Fountains was $12,750,000, which was paid by the assumption of the mortgage loan
from Nationwide Life Insurance Company with a principal balance of $9,300,000
and the balance from a portion of the proceeds from the 2001 public offering.
Odessa Sale
-----------
In July 2001, the Company entered into a contract to sell its office
building in Odessa, Texas for $132,500. The sale closed on October 23, 2001,
resulting in a gain on sale of $12,747.
Giltedge Sale
-------------
On June 1, 2001, the Company completed the sale of its Giltedge building in
Appleton, Wisconsin for $3,650,000. The sale resulted in a gain on sale of
$1,143,698. The cash proceeds from this transaction of $458,030 were used to
complete a tax-deferred exchange for Sheridan Plaza at Inverness, LLC under
Section 1031 of the Code.
Sheridan Plaza at Inverness, LLC Acquisition
--------------------------------------------
On April 1, 2001, the Company purchased from Sheridan Investments, LLC, an
affiliate, 100% of the ownership interests of Sheridan Plaza at Inverness, LLC,
an affiliate. Sheridan Plaza at Inverness, LLC owns two office buildings located
in Englewood, Colorado consisting of 118,720 rentable square feet on
approximately 6.7 acres of land with 405 total parking spaces, including 80
underground parking spaces. For accounting purposes, the purchase price was
$22,895,067, which consisted of:
o $705,135 for the Company's 9.639% preferred membership interest in
Sheridan Investments, LLC, the owner of all of the membership
interests in Sheridan Plaza at Inverness LLC, which was transferred
back to Sheridan Investments, LLC;
o $6,474,329 paid with (1) 1,057,346 shares of the Company's common
stock, at a price of $5.69 per share (as required for accounting
purposes, based on an average market price of the shares over a period
of several days before and after the date of the announcement of the
acquisition) and (2) the cash proceeds of $458,030 from the sale of
the Giltedge building;
o assumption of the mortgage in the principal amount of $14,954,425
secured by the property; and
o assumption of other liabilities in the amount of $761,178.
The acquisition was structured as a tax-deferred exchange of the Giltedge
building under Section 1031 of the Code.
F-13
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to the related party nature of this transaction, this acquisition was
recorded at historical net book value. The difference 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.
2000
Self-Storage Sale
-----------------
On June 6, 2000, the Company entered into a contract to sell its four
self-storage facilities in the metropolitan Denver, Colorado area for
$8,400,000. This sale closed on August 25, 2000, resulting in a gain on sale of
approximately $2,557,000. The net proceeds of approximately $1,818,000 were used
to complete a 1031 Exchange for office building assets.
Sheridan Center Acquisition
---------------------------
On June 2, 2000, the Company entered into a contract to purchase a
three-building office complex, Sheridan Center, in southeast Denver, Colorado
for $9,600,000. The buildings contain approximately 143,000 square feet and are
located on approximately 3.74 acres of land. The transaction closed on August
31, 2000. Funds for closing included approximately $1,818,000 held in escrow and
on deposit as part of the 1031 Exchange from the sale of the self-storage
facilities, together with mortgage financing and a portion of the proceeds from
the 2000 public offering.
Panorama Falls Acquisition
--------------------------
On February 24, 2000, the Company entered into a contract to purchase for
$5,900,000 a three-story office building, Panorama Falls, containing
approximately 62,000 square feet on approximately six acres of land in southeast
Denver, Colorado. The transaction closed on May 25, 2000. Funds for closing
included approximately $514,000 being held in escrow and on deposit as part of
the 1031 Exchange from the sale of the Broadway Property completed in December
1999, together with mortgage financing and short-term financing, which was
partially repaid in August 2000 with proceeds from the 2000 public offering.
NOTE 5 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
In September 2000, the Company purchased a 9.639% preferred membership
interest in Sheridan Investments, LLC, a related party. Sheridan Investments,
LLC was the sole owner of Sheridan Plaza at Inverness, LLC, which owns two
office buildings in Englewood, Colorado, containing 118,720 rentable square feet
and located on approximately 6.7 acres of land. The aggregate purchase price for
the preferred membership interest was $658,918, which the Company paid by
issuing 65,892 units, with each unit consisting of two shares of common stock
and one redeemable common stock purchase warrant. The interest was accounted for
under the equity method of accounting and is included as an investment in
unconsolidated affiliate in the accompanying consolidated balance sheet. This
interest was transferred back to Sheridan Investments, LLC in April 2001 as
partial consideration for the acquisition of Sheridan Plaza at Inverness, LLC.
On December 6, 2001, the Company completed the sale of an 80% interest in
the Panorama Falls building to a related party, retaining the remaining 20%
interest. This interest is being accounted for under the equity method of
accounting and is included as an investment in unconsolidated affiliate in the
accompanying consolidated balance sheet.
F-14
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - MORTGAGE LOANS AND NOTES PAYABLE
Mortgages payable are collateralized by substantially all properties of the
Company and require monthly principal and interest payments. Following is a
summary of the Company's mortgages and notes payable at December 31, 2001:
Outstanding
Balance at
December 31,
Description of Indebtedness 2001 2000
--------------------------- ------------ ------------
Note payable to Transatlantic Capital Company, LLC. Fixed
interest at 7.66%, due in monthly installments of
$42,612 through July 1, 2028, with the principal
balance and accrued interest due on August 1, 2028.
This note may be prepaid on or after July 1, 2008
without penalty and may be defeased after July 13, 2002
by providing non-callable U.S. government obligations
in an amount sufficient to meet all interest and
principal payments due under the note. This note is
secured by a mortgage on the State of Texas buildings. ....... $ 5,798,637 $ 5,868,255
Note payable to Jefferson Pilot. Fixed interest at 9.00%,
due in monthly installments of $17,095 through May 1,
2013. This note may be prepaid after March 31, 2003 but
only if prepaid in full. A prepayment penalty is
required, which declines by 1% per year from 6% in the
first year prepayment is allowed down to 1%. This note
is secured by a mortgage on four office buildings
primarily leased to Bank of America. ......................... 1,454,737 1,530,945
Note payable to Security Life of Denver Insurance Company.
Fixed interest at 8.00%, due in monthly installments of
$37,626 through May 1, 2022. The lender can call the
outstanding balance due on June 1, 2007, June 1, 2012
or June 1, 2017. This note may be prepaid in full with
a prepayment penalty equal to the greater of 1% of the
outstanding loan amount or the excess of the present
value of the remaining principal and interest payments
discounted at the interest rate of the closest U.S.
Treasury obligation for the remaining term. This note
is secured by a mortgage on the Keystone Office Park. ........ 4,528,498 4,620,712
Note payable to Security Life of Denver Insurance Company.
Fixed interest at 8.63%, due in monthly installments of
$4,403 through May 1, 2022. The lender can call the
outstanding balance due on June 1, 2007, June 1, 2012
or June 1, 2017. This note may be prepaid in full with
a prepayment penalty equal to the greater of 1% of the
outstanding loan amount or the excess of the present
value of the remaining principal and interest payments
discounted at the interest rate of the closest U.S.
Treasury obligation for the remaining term. This note
is secured by a mortgage on the Keystone Office Park. ........ 505,642 515,108
F-15
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding
Balance at
December 31,
Description of Indebtedness 2001 2000
--------------------------- ------------ ------------
Note payable to US Bank National Association. Interest at
LIBOR (subject to our election) plus 225 basis points
is due monthly (4.89% and 9.06% at December 31, 2001
and 2000, respectively), with the principal balance and
any accrued interest due on August 31, 2003. The
maturity date may be extended to August 31, 2004 if
specified conditions are met. This note may be prepaid
at any time without penalty upon the expiration of any
applicable LIBOR borrowing period. This note is secured
by a mortgage on Sheridan Center. ............................ 9,469,799 7,342,522
Note payable to Teachers Insurance and Annuity Association
of America. Fixed interest at 7.90%, due in monthly
installments of $108,835 through January 10, 2006, with
the outstanding principal balance and accrued interest
due on July 10, 2006. The note may not be prepaid, but
may be defeased after January 2003 by providing
non-callable U.S. government obligations in an amount
sufficient to meet all interest and principal payments
due under the note. This note is secured by a mortgage
on Sheridan Plaza at Inverness. .............................. 14,858,423 --
Note payable to Nationwide Life Insurance Company. Interest
at 1-month LIBOR plus 190 basis points (3.76% at
December 31, 2001), due in monthly installments, with
the outstanding principal balance and accrued interest
due on December 5, 2003. This note maybe prepaid on or
before December 5, 2002 with a prepayment penalty equal
to 0.5% of the outstanding loan amount. There is no
prepayment penalty if the note is prepaid after
December 5, 2002. This note is secured by a mortgage on
Arrowhead Fountains. ......................................... 9,300,000 --
Note payable to US Bank National Association. Interest at
the bank's internal money market rate (subject to our
election) plus 250 basis points (4.77% at December 31,
2001), due in monthly installments with principal
payments of $11,806, with the outstanding principal
balance and accrued interest due on December 21, 2004.
This note may be prepaid at any time with a prepayment
penalty as determined by the loan agreement and the
current interest rate contract. This note is secured by
a mortgage on the Kellogg Building. .......................... 9,488,194 --
Note payable to KeyBank National Association. Interest at
LIBOR plus 250 basis points (4.31% and 8.90% at
December 31, 2001 and 2000, respectively), due in
monthly installments, with the outstanding principal
balance and accrued interest due on June 1, 2003. This
note may be prepaid at any time without penalty. This
note is secured by a mortgage on Panorama Falls. ............. 3,004,494 5,119,830
F-16
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding
Balance at
December 31,
Description of Indebtedness 2001 2000
--------------------------- ------------ ------------
Note payable to Anchor Bank. Fixed interest at 7.75% due in
monthly installments of $22,925 based on a 30-year
amortization through June 1, 2008, at which time a
balloon payment of $2,797,181 is due. This note is
secured by a mortgage on the Giltedge building in
Appleton, Wisconsin. .. ...................................... -- 3,125,484
------------ ------------
Total ............................................................. $ 58,408,424 $ 28,122,856
============ ============
As of December 31, 2001, the scheduled maturities of mortgages are as
follows:
2002 $ 524,514
2003 22,331,059
2004 9,654,927
2005 488,010
2006 14,579,886
Thereafter 10,830,028
------------
Total $ 58,408,424
============
As of December 31, 2001, the Company had a short-term revolving credit line
from a bank in the amount of $300,000 and a $500,000 short-term unsecured line
of credit with Sheridan Investments, LLC, a related party. At December 31, 2001,
the Company had no outstanding balances on either of these lines of credit. On
March 11, 2002, the Company increased its short-term unsecured line of credit
with Sheridan Investments, LLC from $500,000 to $1,500,000.
The Company is required by certain of its mortgage debt lenders to restrict
funds to be used for the payment of insurance, real estate taxes and certain
other expenditures. As of December 31, 2001 and 2000, these amounts totaled
$673,213 and $587,424, respectively, and are classified as restricted cash on
the accompanying consolidated balance sheets.
NOTE 7 - STOCK OPTION PLANS AND WARRANTS
STOCK OPTION PLANS
Pursuant to the Company's 1995 and 1998 Stock Option Plans (collectively,
the "Option Plans"), the Company may grant options to purchase an aggregate of
330,000 shares of the Company's common stock to key employees, directors, and
other persons who have or are contributing to the success of the Company. The
options granted pursuant to the Option Plans may be incentive 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
Company ("Outside Directors") automatically receive options to purchase 12,000
shares pursuant to the Option Plans at the time of their election. None of these
options are exercisable at the time of grant. One-third of these options become
exercisable on December 31 of each of the first three years immediately
following the date of grant. The exercise price for options granted to Outside
Directors is the fair market value of the common stock on the date of grant, and
all options granted to Outside Directors expire five years from the date of
grant. On the date that all of an Outside Director's options become exercisable,
options to purchase an additional 12,000 shares, none of which are exercisable
at that time, shall be granted to that Outside Director.
F-17
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of outstanding options granted pursuant to the Company's Option
Plans was as follows:
Weighted
Average Weighted
Number of Exercise Average Exercise
Shares Price Fair Value Price
------ ----- ---------- -----
Options Outstanding -
December 31, 1999 172,000 $4.66 $3.97 - 5.00
(122,000 exercisable)
Granted at fair value 24,000 $4.44 $.47 $4.13 - 4.75
Granted above fair value 10,000 $5.00 $.44 $5.00
Forfeited (3,000) $4.19 $4.00 - 4.38
-------
Options Outstanding - $4.65
December 31, 2000 203,000 $3.97 - 5.00
=======
(173,750 exercisable)
Granted at fair value 48,000 $4.99 $.52 $4.75 - 5.70
Exercised (17,000) $4.33 $3.97 - 4.44
Forfeited (20,000) $4.70 $3.97 - 5.00
-------
Options Outstanding -
December 31, 2001 214,000 $4.74 $3.97 - 5.70
=======
(164,000 exercisable)
The weighted average remaining contractual life of options outstanding at
December 31, 2001 was approximately 3 years.
At December 31, 2001, the number of options exercisable was 164,000, the
weighted average exercise price of these options was $4.70, the weighted average
remaining contractual life of the options was approximately 3 years and the
range of exercise prices was $3.97 to $5.70 per share.
At December 31, 2001 and 2000, options to purchase 99,000 shares and
127,000 shares, respectively, were available to be granted pursuant to the
Company's Option Plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the Company's net income
and net income per share for the years ended December 31, 2001 and 2000 would
have been changed to the pro forma amounts indicated below:
2001 2000
---- ----
Net income applicable to common stockholders - as
reported $1,488,493 $2,676,724
========== ==========
Net income applicable to common stockholders - pro forma $1,470,239 $2,651,953
========== ==========
Basic net income per share - as reported $ 0.32 $ 1.07
========== ==========
Diluted net income per share - as reported $ 0.31 $ 1.07
========== ==========
Basic net income per share - pro forma $ 0.31 $ 1.06
========== ==========
Diluted net income per share - pro forma $ 0.31 $ 1.06
========== ==========
F-18
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 7.4% to 11.3%, expected
volatility of 25% to 30%, discount rate of 4.55% to 6.36%, and expected lives of
5 years.
WARRANTS
At December 31, 2001 the status of exercisable warrants is as follows:
Issue Date Shares Exercisable Exercise Price Expiration Date
---------- ------------------ -------------- ---------------
July 2000 135,800 $5.00 July 2005
June 2001 50,000 $7.00 July 2005
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The following table summarizes future minimum base rent to be received
under noncancelable tenant leases for the Company's commercial properties
expiring each year, as of December 31, 2001:
2002 $ 12,074,026
2003 10,164,412
2004 7,893,473
2005 5,093,266
2006 2,847,496
Thereafter 9,211,091
------------
Total $ 47,283,764
============
Some leases also provide for additional rent based on increases in
operating expenses. These increases are generally payable annually in the
succeeding year. As of December 31, 2001, the Company had a receivable of
$284,536 attributable to increased property taxes at Sheridan Plaza at
Inverness, which has been passed through to the tenants in accordance with their
leases.
For the year ended December 31, 2001, there were no tenants who accounted
for greater than 10% of revenues. For the year ended December 31, 2000, one
tenant, a financial institution, accounted for approximately 11% of the
revenues.
From time to time, the Company and/or its subsidiaries may become involved
in litigation relating to claims arising out of its operations in the normal
course of business. The following is a discussion of outstanding legal claims
against the Company and by the Company:
On June 14, 2001, a lawsuit was filed in the District Court, Hidalgo
County, Texas against Innerarity Austin, Inc., a Nevada corporation, and the
Company's wholly-owned subsidiary, AmeriVest Properties Texas, Inc., by Laura
Smith alleging that the defendants were negligent and breached various duties in
allowing the Company's Mission, Texas building to be contaminated with airborne
contaminants while leasing the premises to the plaintiff's employer, the Texas
Department of Human Services. Innerarity Austin, Inc. was the previous owner of
the property. The plaintiff alleges that due to the acts and omissions of the
defendants, she has suffered serious and some permanent injuries and severe
physical and mental pain. The plaintiff seeks monetary and other relief,
including exemplary damages, in excess of $50,000, and pre-judgment and
post-judgment interest as provided by law, costs of the lawsuit and such other
relief to which the plaintiff may be justly entitled.
F-19
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 11, 2002, a lawsuit was filed in the District Court, Hidalgo
County, Texas against the Company's wholly-owned subsidiary, AmeriVest
Properties Texas, Inc., and Woodhaven Management Corporation, the Company's
external property manager, by Irma and Yreneo Carranza alleging that the
defendants were negligent in maintaining our Mission, Texas building while
leasing the premises to the plaintiff's employer, the Texas Department of Human
Services. The plaintiff alleges that due to the acts and omissions of the
defendants, she has suffered serious and some permanent injuries and severe
physical and mental pain, including loss of consortium. The plaintiff seeks
monetary and other relief, including exemplary damages, and pre-judgment and
post-judgment interest as provided by law, costs of the lawsuit and such other
relief to which the plaintiff may be justly entitled.
We have asserted a general denial of the material allegations in both
lawsuits. These lawsuits, if adversely determined, could have a material adverse
effect on the Company's business and financial condition; there is no assurance
that other lawsuits will not be filed. The Company's insurance company is
defending the Company in these lawsuits. The Company previously hired
consultants to examine the air quality in this building and replaced certain air
conditioning units. Other actions designed to maintain proper air quality in the
building have also been undertaken.
NOTE 9 - RELATED PARTY TRANSACTIONS
Effective January 1, 2000 through December 31, 2001, all of the Company's
properties were managed under a Property Management and Advisory Agreement (as
amended on March 12, 2001, the "Agreement") with Sheridan Realty Advisors, LLC
("SRA"), which also manages day-to-day operations of the Company and assists and
advises the Board of Directors on real estate acquisitions and investment
opportunities. Certain senior members of SRA are members of the Company's
management team and of the Company's Board of Directors. In accordance with the
Agreement, SRA received an administrative fee, a property management and
accounting fee, an advisory fee and a capital project fee for these services.
The property management fee is calculated as 5% of gross collected rents, the
advisory fee is calculated as 5% of capital deployed for real property
acquisitions and the capital project fee is calculated as 3% of the total cost
of capital projects in excess of $100,000. The following is a detail of the fees
for the years ended December 31, 2001 and 2000:
2001 2000
---- ----
Administrative fee $ 199,080 $ 189,600
Property management and accounting fee 408,319 244,022
Advisory fee 898,005 141,180
Capital project fee 188,259 --
---------- ----------
Total $1,693,663 $ 574,802
========== ==========
As of December 31, 2001 and 2000, the Company had a payable due to SRA of
$494,531 and $92,491, respectively, which consisted of unpaid fees and
unreimbursed payroll costs.
In addition, SRA received incentive compensation in the form of five-year
warrants to purchase up to 750,000 shares of common stock at $5.00 per share.
Issuance of the warrants was approved by the shareholders at the annual meeting
on June 6, 2000. According to the Agreement, 225,000 of these warrants were
granted and vested on the approval date. These vested warrants have an estimated
fair value of $73,668, which is being amortized over the life of the Agreement.
The remaining 525,000 warrants vest in an amount equal to 2.1% of capital
deployed for real property acquisitions. As of December 31, 2001, 436,457 of the
remaining 525,000 warrants vested and have an estimated fair value of $261,691,
which has been capitalized with the related acquisition costs on the
accompanying consolidated balance sheet.
F-20
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Agreement was further amended and restated as of December 31, 2001 to
provide for the Company's acquisition of SRA's administrative and property
management and accounting services, along with elimination of those related
fees, effective January 1, 2002.
As of December 31, 2001, the Company had a $500,000 short-term unsecured
line of credit with Sheridan Investments, LLC, a related party. At December 31,
2001, the Company did not have an outstanding balance on this line of credit.
NOTE 10 - COMPREHENSIVE INCOME
There are no adjustments necessary to net income as presented in the
accompanying consolidated statements of operations to derive comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income".
NOTE 11 - NET INCOME PER SHARE
The following represents a reconciliation from basic income per share to
diluted income per share:
2001 2000
---- ----
Determination of shares-
Weighted average common shares outstanding 4,680,719 2,492,584
Assumed conversion of stock options and warrants
using the treasury stock method 120,588 3,335
--------- ---------
Diluted shares outstanding 4,801,307 2,495,919
========= =========
Basic net income per common share $ 0.32 $ 1.07
========= =========
Diluted net income per common share $ 0.31 $ 1.07
========= =========
NOTE 12 - SEGMENT REPORTING
SFAS No. 131 requires a public enterprise to report financial and
descriptive information about its reportable operating segments. Operating
segments, as defined in the pronouncement, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the Company in deciding how to allocate resources and in assessing performance.
The financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.
The Company has reportable segments organized by the region in which they
operate as follows: Wisconsin, Indiana, Texas, Colorado and Arizona.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon income from real estate from the combined properties in
each segment.
F-21
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Wisconsin/
Arizona (a) Indiana Texas Colorado Corporate Consolidated
------------ ------------ ------------ ------------ ------------ ------------
2001
Real estate operating revenue $ 557,665 $ 1,586,522 $ 2,946,176 $ 5,854,005 $ 15 $ 10,944,383
Real estate operating expenses 220,152 675,323 1,420,425 1,965,636 18,418 4,299,954
------------ ------------ ------------ ------------ ------------ ------------
Net operating income (loss) 337,513 911,199 1,525,751 3,888,369 (18,403) 6,644,429
Percent of consolidated net
operating income (loss) 5.1% 13.7% 23.0% 58.5% (0.3%) 100.0%
Adjustments to arrive at net income-
Interest expense 158,680 409,602 589,299 2,011,803 12,313 3,181,697
Depreciation and amortization expense 107,206 287,272 458,665 1,376,139 15,153 2,244,435
Interest income 218 -- 18,104 7,494 109,259 135,075
Equity in loss of unconsolidated
affiliates -- -- -- (17,366) -- (17,366)
Gain on sales of real estate 1,143,698 -- 12,747 -- -- 1,156,445
General and administrative expense 3,055 61,366 6,063 37,148 570,213 677,845
Impairment of deferred rents
receivable -- -- -- 326,113 -- 326,113
------------ ------------ ------------ ------------ ------------ ------------
Total adjustments to arrive at net
income- 874,975 (758,240) (1,023,176) (3,761,075) (488,420) (5,155,936)
Net income (loss) $ 1,212,488 $ 152,959 $ 502,575 $ 127,294 $ (506,823) $ 1,488,493
============ ============ ============ ============ ============ ============
Net investment in real estate $ 13,012,727 $ 8,269,368 $ 12,081,540 $ 47,439,477 $ 37,915 $ 80,841,027
============ ============ ============ ============ ============ ============
Additions to real estate investments $ 13,045,491 $ 329,581 $ 996,747 $ 38,235,663 $ 13,461 $ 52,620,943
============ ============ ============ ============ ============ ============
Total assets $ 13,186,546 $ 8,369,028 $ 12,811,293 $ 52,231,935 $ 1,422,482 $ 88,021,284
============ ============ ============ ============ ============ ============
2000
Real estate operating revenue $ 842,855 $ 1,519,941 $ 2,779,775 $ 2,079,866 $ -- $ 7,222,437
Real estate operating expenses 369,176 608,767 1,340,884 629,923 10,743 2,959,493
------------ ------------ ------------ ------------ ------------ ------------
Net operating income (loss) 473,679 911,174 1,438,891 1,449,943 (10,743) 4,262,944
Percent of consolidated net
operating income (loss) 11.1% 21.4% 33.8% 34.0% (0.3%) 100.0%
Adjustments to arrive at net income-
Interest expense 252,649 417,929 610,379 880,962 5,950 2,167,869
Depreciation and amortization expense 138,909 208,384 407,066 439,834 11,602 1,205,795
Interest income -- -- 14,389 13,739 27,746 55,874
Equity in loss of unconsolidated
affiliates -- -- -- (52,808) -- (52,808)
Gain on sales of real estate -- -- -- 2,556,839 -- 2,556,839
General and administration expense 3,664 19,225 6,780 62,849 424,501 517,019
Severence expense -- -- -- -- 255,442 255,442
------------ ------------ ------------ ------------ ------------ ------------
Total adjustments to arrive at net
income- (395,222) (645,538) (1,009,836) 1,134,125 (669,749) (1,586,220)
Net income (loss) $ 78,457 $ 265,636 $ 429,055 $ 2,584,068 $ (680,492) $ 2,676,724
============ ============ ============ ============ ============ ============
Net investment in real estate $ 2,404,957 $ 8,227,058 $ 11,649,246 $ 16,601,509 $ 39,610 $ 38,922,380
============ ============ ============ ============ ============ ============
Additions to real estate investments $ 51,528 $ 465,497 $ 50,744 $ 6,954,495 $ 5,695 $ 7,527,959
============ ============ ============ ============ ============ ============
Total Assets $ 2,483,493 $ 8,321,881 $ 12,438,843 $ 17,763,388 $ 1,356,192 $ 42,363,797
============ ============ ============ ============ ============ ============
(a) The Giltedge building in Appleton, Wisconsin was sold on June 1, 2001 and the Arrowhead Fountains building in Peoria, Arizona
was purchased on November 19, 2001.
F-22
AMERIVEST PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS
Effective January 1, 2002, the Company became a self-administered REIT.
Twenty-six of SRA's 31 employees, including three of the Company's senior
executives, became employees of the Company and manage the day-to-day
operations. The three senior executives will also remain employees of SRA. SRA
will continue to advise the Company with respect to capital markets activity,
real estate acquisitions and dispositions and major capital projects. For these
services, SRA will continue to earn an advisory and capital project fee under
the amended and restated Agreement.
Effective January 1, 2002, the Company adopted a 401(k) savings and
retirement plan. Under this plan, eligible employees may elect to contribute up
to 15% of their gross wages or the maximum amount permitted by the Internal
Revenue Service. In addition, the Company will match employees' contributions of
up to 5% with common stock.
On March 11, 2002, the Company increased its short-term unsecured line of
credit with Sheridan Investments, LLC from $500,000 to $1,500,000.
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required by Item 9 is incorporated by reference to the
description under the section entitled "Directors and Executive Officers" of our
definitive proxy statement for the 2002 annual meeting of our stockholders.
ITEM 10. EXECUTIVE COMPENSATION
Information required by Item 10 is incorporated by reference to the
description under the section entitled "Executive Compensation" of our
definitive proxy statement for the 2002 annual meeting of our stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 11 is incorporated by reference to the
description under the section entitled "Beneficial Owners of Securities" of our
definitive proxy statement for the 2002 annual meeting of our stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 12 is incorporated by reference to the
description under the section entitled "Transactions Between AmeriVest and
Related Parties" of our definitive proxy statement for the 2002 annual meeting
of our stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
See Index to Exhibits.
(b) Reports On Form 8-K.
--------------------
During the fourth quarter of our fiscal year ended December 31, 2001, we
filed the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated November 19, 2001 (filed November 21,
2001). This Current Report included disclosures under "Item 2.
Acquisition or Disposition of Assets" and "Item 7. Financial
Statements and Exhibits." The financial statements were included in an
amendment to this Current Report, described below.
2. Current Report on Form 8-K dated December 6, 2001 (filed December 21,
2001). This Current Report included disclosures under "Item 2.
Acquisition or Disposition of Assets," "Item 5. Other Events" and
"Item 7. Financial Statements and Exhibits." The financial statements
included were a Pro Forma Consolidated Balance Sheet as of September
30, 2001 (Unaudited) and Pro Forma Consolidated Statements of
Operations (Unaudited) for the nine months ended September 30, 2001
and the year ended December 31, 2000, and accompanying notes.
39
Subsequent to December 31, 2001, but prior to filing this Annual Report on
Form 10-KSB, we filed the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated December 21, 2001 (filed January 4,
2002). This Current Report included disclosures under "Item 2.
Acquisition or Disposition of Assets" and "Item 7. Financial
Statements and Exhibits."
2. Current Report on Form 8-K dated January 23, 2002 (filed January 23,
2002). This Current Report included disclosures under "Item 7.
Financial Statements and Exhibits" and "Item 9. Regulation FD
Disclosure."
3. Current Report on Form 8-K/A-1 dated November 19, 2001 (filed January
23, 2002). This Current Report consisted of an amendment to the
Current Report on Form 8-K dated November 19, 2001 filed on November
21, 2001 and included disclosures under "Item 7. Financial Statements
and Exhibits." The financial statements included were a Report of
Independent Public Accountants; Statements of Revenue and Certain
Expenses for the nine months ended September 30, 2001 (Unaudited) and
for the year ended December 31, 2000; Notes to Statements of Revenue
and Certain Expenses; a Pro Forma Consolidated Balance Sheet as of
September 30, 2001 (Unaudited); Pro Forma Consolidated Statements of
Operations (Unaudited) for the nine months ended September 30, 2001
and for the year ended December 31, 2000; Notes to Pro Forma
Consolidated Financial Statements (Unaudited); a Statement of
Estimated Taxable Operating Results and Cash to be Made Available by
Operations for the Year ended December 31, 2000 (Unaudited); and a
Note to Statement of Estimated Taxable Operating Results and Cash to
be Made Available by Operations.
4. Current Report on Form 8-K/A-1 dated December 21, 2001 (filed February
28, 2002). This Current Report consisted of an amendment to the
Current Report on Form 8-K dated December 21, 2001 and filed January
4, 2002 and included disclosures under "Item 7. Financial Statements
and Exhibits." The financial statements included were a Report of
Independent Public Accountants; Statements of Revenue and Certain
Expenses for the nine months ended September 30, 2001 (Unaudited) and
for the year ended December 31, 2000; Notes to Statements of Revenue
and Certain Expenses; a Pro Forma Consolidated Balance Sheet as of
September 30, 2001 (Unaudited); Pro Forma Consolidated Statements of
Operations (Unaudited) for the nine months ended September 30, 2001
and for the year ended December 31, 2000; Notes to Pro Forma
Consolidated Financial Statements (Unaudited); a Statement of
Estimated Taxable Operating Results and Cash to be Made Available by
Operations for the Year ended December 31, 2000 (Unaudited); and a
Note to Statement of Estimated Taxable Operating Results and Cash to
be Made Available by Operations.
40
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERIVEST PROPERTIES INC.
Date: April 1, 2002 By: /s/ William T. Atkins
------------------------------------------
William T. Atkins, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William T. Atkins Chief Executive Officer April 1, 2002
-------------------------- (Principal Executive Officer)
William T. Atkins and Chairman of the Board
/s/ Charles K. Knight President and Director April 1, 2002
--------------------------
Charles K. Knight
/s/ D. Scott Ikenberry Chief Financial Officer April 1, 2002
-------------------------- (Principal Financial Officer and
D. Scott Ikenberry Principal Accounting Officer)
/s/ James F. Etter Director April 1, 2002
--------------------------
James F. Etter
/s/ Harry P. Gelles Director April 1, 2002
--------------------------
Harry P. Gelles
/s/ Robert W. Holman, Jr. Director April 1, 2002
--------------------------
Robert W. Holman, Jr.
/s/ John A. Labate Director April 1, 2002
--------------------------
John A. Labate
/s/ Robert J. McFann Director April 1, 2002
--------------------------
Robert J. McFann
41
EXHIBIT INDEX
Number Description
------ -----------
2 Form of Agreement and Plan of Merger of AmeriVest and AMVP Inc. (to
reincorporate in Maryland) (1)
3.1A Articles of Incorporation (2)
3.1B Articles of Amendment to the Articles of Incorporation filed July 6,
1999
3.2 Bylaws as amended and restated on December 18, 2000 (3)
4.1 Specimen Common Stock Certificate (4)
10.1 1995 Stock Option Plan (5)
10.2 1998 Stock Option Plan (6)
10.3 Dividend Reinvestment Plan (7)
10.4 Form of Employment Agreement effective as of January 1, 1998 between
AveriVest and James F. Etter (8)
10.5 Purchase and Sale Agreement between Sheridan Realty Partners, L.P.
and AmeriVest Properties Inc. dated April 26, 1999 (Keystone Office
Park) (9)
10.6 Severance Protection Agreement dated January 1, 2000 between
AmeriVest and James F. Etter (10)
10.7 Agreement of Sale dated February 24, 2000 between AmeriVest Broadway
Properties Inc. and Jones Panorama Property, Inc. (Panorama Falls)
(11)
10.8 Separation and Release dated September 29, 2000 between AmeriVest
and James F. Etter (12)
Number Description
------ -----------
10.9 Purchase and Sale Agreement between Sheridan Realty Partners, L.P.,
AmeriVest Inverness Inc. and Sheridan Investments, LLC, dated July
1, 2000 (Interest in Sheridan Investments) (13)
10.10A Agreement for Purchase and Sale among WCD Associates LLC, EBD
Associates LLC and Sheridan Investments, LLC dated June 2, 2000
(Sheridan Center) (14)
10.10B First Amendment to Agreement for Purchase and Sale among WCD
Associates, LLC, EBD Associates, LLC and Sheridan Investments, LLC
dated July 19, 2000 (Sheridan Center) (15)
10.11A Advisory Agreement with Sheridan Realty Advisors, LLC dated January
1, 2000 (16)
10.11B Amended and Restated Advisory Agreement with Sheridan Realty
Advisors, LLC dated March 12, 2001 (17)
10.11C Second Amended and Restated Advisory Agreement between AmeriVest
Properties Inc. and Sheridan Realty Advisors, LLC
10.12A Purchase and Sale Agreement among Sheridan Investments, LLC,
Sheridan Plaza at Inverness, LLC, AmeriVest Properties Inc. and
AmeriVest Inverness Inc., dated April 30, 2001 (Sheridan Plaza at
Inverness) (18)
10.12B Amendment Number 1 to the Purchase and Sale Agreement among Sheridan
Investments, LLC, Sheridan Plaza at Inverness, LLC, AmeriVest
Properties Inc. and AmeriVest Inverness Inc. dated May 16, 2001
(Sheridan Plaza at Inverness) (19)
10.13A Revolving Line of Credit Agreement dated June 13, 2001 between
AmeriVest Properties Inc. and Sheridan Investments, LLC (20)
10.13B Amended Revolving Line of Credit Agreement dated March 11, 2002
between AmeriVest Properties Inc. and Sheridan Investments, LLC
10.14 Arrowhead Fountains Purchase Agreement dated November 19, 2001
10.15 Sheridan Realty Advisors Acquisition Agreement dated December 14,
2001
10.16A Agreement for Purchase and Sale between AmeriVest Properties Inc.
and WXI/MCN Commercial Real Estate Limited Partnership dated October
15, 2001 (Kellogg Building)
10.16B First Amendment to Agreement for Purchase and Sale between AmeriVest
Properties Inc. and WXI/MCN Commercial Real Estate Limited
Partnership dated November 29, 2001 (Kellogg Building)
21 Subsidiaries of AmeriVest Properties Inc.
23 Consent of Arthur Andersen LLP
99 Letter from AmeriVest to the SEC dated April 1, 2002
-------------------
(1) 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.
(2) Incorporated by reference to Exhibit B 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) Incorporated by reference to Exhibit 3.2 of AmeriVest's Registration
Statement on Form SB-2/A-2 filed with the SEC on July 26, 2001
(Registration No. 333-63934).
(4) 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).
(5) 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.
(6) 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.
(7) Incorporated by reference to AmeriVest's Registration Statement on Form S-3
filed with the SEC on August 21, 2000 (Registration No. 333-44210).
(8) Incorporated by reference to Exhibit 10.7 of AmeriVest's Annual Report on
Form 10-KSB for the year ended December 31, 1997 filed with the SEC on
March 30, 1998.
(9) Incorporated by reference to Exhibit 10.1 of AmeriVest's Definitive Proxy
Statement concerning AmeriVest's June 29, 1999 Annual Meeting of
Stockholders filed with the SEC on May 27, 1999.
(10) Incorporated by reference to Exhibit 10.10 of AmeriVest's Amendment No. 1
to its Registration Statement on Form SB-2 filed with the SEC on March 27,
2000 (Registration No. 333-31690).
(11) Incorporated by reference to Exhibit 10.7 of AmeriVest's Registration
Statement on Form SB-2 filed on March 3, 2000 (Registration No. 333-31690).
(12) Incorporated by reference to Exhibit 10.16 to AmeriVest's Registration
Statement on Form SB-2 filed with the SEC on June 27, 2001 (File No.
333-63934).
(13) Incorporated by reference to Exhibit 10.11 of AmeriVest's Annual Report on
Form 10-KSB for the year ended December 31, 2000 filed with the SEC on
April 2, 2001.
(14) Incorporated by reference to Exhibit 10.12 of AmeriVest's Annual Report on
Form 10-KSB for the year ended on December 31, 2000 filed with the SEC on
April 2, 2001.
(15) Incorporated by reference to Exhibit 10.11B of AmeriVest's Registration
Statement on Form SB-2 filed with the SEC on June 27, 2001 (Registration
No. 333-63934).
(16) Incorporated by reference to Exhibit 10.1 of AmeriVest's Current Report on
Form 8-K filed with the SEC on January 18, 2000.
(17) Incorporated by reference to Exhibit 10.3 of AmeriVest's Registration
Statement on Form SB-2 filed with the SEC on June 27, 2001 (Registration
No. 333-63934).
(18) Incorporated by reference to Exhibit 10.1 of AmeriVest's Preliminary Proxy
Statement concerning AmeriVest's June 20, 2001 Annual Meeting of
Shareholders filed with the SEC on May 4, 2001.
(19) Incorporated by reference to Exhibit 10.1(b) of AmeriVest's Definitive
Proxy Statement concerning AmeriVest's June 20, 2001 Annual Meeting of
Shareholders filed with the SEC on May 25, 2001.
(20) Incorporated by reference to Exhibit 10.13 of AmeriVest's Registration
Statement on Form SB-2 filed with the SEC on June 27, 2001 (Registration
No. 333-63934).