| AMERIVEST PROPERTIES INC ITEM 1A RISK FACTORS Risks Related to Historical Business Our access to capital may be extremely limited and may affect our ability to execute our business plan |
| Subsequent to December 31, 2005, the Company’s existing Secured and Unsecured Credit Facilities were paid in full |
| As a result, the Secured Credit Facility was terminated and the Unsecured Credit Facility was amended to a dlra10 million credit facility that will mature on December 28, 2006 |
| The amended facility is secured by the Greenhill Office Park property in Dallas, Texas |
| Should the Company need funds in excess of the dlra10 million facility or subsequent to the maturity date, we could be limited in our ability to fund tenant improvements or make other necessary or desirable portfolio capital expenditures or pay dividends unless we have sold additional properties |
| Due to the Company seeking to effect a corporate sale transaction or receive approval for the Plan, our ability to raise equity or refinance properties would be unlikely |
| In addition, we would be dependent upon cash flow from our operations to cover capital expenditures and our corporate operating expenses |
| As a result, should a corporate sale not be completed nor the Plan be adopted or if under the Plan the projected sales are not completed at expected prices, our limited access to capital could have a material adverse effect on our financial condition and our operations |
| Our decision to actively pursue a plan of liquidation may result in unanticipated costs and distract management |
| On November 22, 2004, we announced that our Board of Directors would undertake a review of a broad range of strategic alternatives for the company, including the identification of an institutional capital partner to assist in the company’s growth going forward, a sale or recapitalization of all or a portion of the company’s properties, the potential sale or merger of the company and other possible transactions designed to enhance shareholder value |
| On February 9, 2006, it was announced that the Board of Directors had adopted the Plan, subject to stockholder approval |
| As a result of our pursuit of potential buyers for our properties, we face considerable operational uncertainty |
| This uncertainty may disrupt our business operations and may result in the loss of business opportunities we would otherwise pursue |
| Our management team may be distracted from the day-to-day operations of our business as a result of this uncertainty and some members of management may decide to leave their employment |
| 10 ______________________________________________________________________ Our variable rate debt subjects us to interest rate risk |
| At December 31, 2005, our Unsecured Credit Facility with an outstanding balance of approximately dlra29dtta9 million, or 16prca, of our total debt was at variable rates of 350 basis points over LIBOR The weighted-average interest rate on this variable rate debt was approximately 6dtta9prca at December 31, 2005 |
| The Unsecured Credit Facility was paid in full in January 2006 and amended to provide for a dlra10 million credit facility at LIBOR plus 250 basis points, secured by an office property in a submarket of Dallas |
| (see “Future Sources of Capital” for information on the amended facility) |
| Increases in interest rates could increase our interest expense, which would adversely affect net earnings and cash available for payment of our debt obligations and distributions to our stockholders |
| We face a competitive market, which could limit our ability to lease our properties or secure attractive investment opportunities |
| Our historical business strategy had contemplated expansion through acquisition |
| 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 |
| As a result, we have suspended acquisition activity for the Company and should we not complete a corporate sales transaction or receive approval for the Plan, we may not 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 |
| The presence of these competitors may impede the continuation and development of our business, causing lower occupancy rates and lower values obtainable under the planned sales of the properties included in the Plan |
| We may not be able to pay dividends to our stockholders regularly and distributions under the Plan may be lower than estimated |
| Our ability to pay dividends in the future depends on our ability to operate profitably and to generate cash from our operations in excess of debt service obligations and required capital expenditures |
| Historically, because we have had to finance our growth, we have not been able to generate sufficient cash from our operations to cover all these obligations and have had to fund certain capital expenditures from external sources, including borrowings and equity offerings |
| The payment of dividends is in the sole discretion of our Board of Directors |
| During 2005, we suspended all dividend payments |
| Under the Plan, the Company has estimated liquidating distributions of dlra4dtta20 to dlra4dtta80, payable six to twenty-four months subsequent to the potential approval of the Plan by a majority of common stockholders |
| This estimated distribution range is based on numerous assumptions, notably including the sales price of assets for which no definitive sale agreements or letters of intent are currently in place |
| Although management and the Board of Directors believe our assumptions are reasonable and have solicited and received input from various outside investment and real estate brokers, the assumptions may prove to be inaccurate and the ultimate amount of liquidating distributions to stockholders may be reduced or delayed |
| 11 ______________________________________________________________________ Our debt level may have a negative impact on our income and our ability to pay dividends |
| 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 operating activities |
| At December 31, 2005, we had approximately dlra185dtta8 million of long-term indebtedness including properties deemed held-for-sale, of which approximately dlra44dtta1 million in the aggregate is due in 2006 and 2007 |
| Of the amounts due at December 31, 2005, dlra58dtta2 million was paid in conjunction with property sales closed in January 2006, including dlra29dtta9 million that was due in 2006 |
| As a result of our use of debt, we are subject to the risks normally associated with debt financing, including: · that our cash flow will be insufficient to make required payments of principal and interest; · that we will be unable to refinance some or all of our indebtedness or that any refinancing will not be on terms as favorable as those of the existing indebtedness; · that required payments on mortgages and on our other indebtedness are not reduced if the economic performance of any property declines; · that debt service obligations will reduce funds available for distribution to our stockholders; and · that any default on our indebtedness could result in acceleration of those obligations |
| If the economic performance of any of our properties declines, 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, we may lose that property to lender foreclosure with a consequent loss of income and asset value |
| Should any of the individual properties be sold under the Plan at a sales price less than the outstanding mortgage due on that property, funds for repayment would have to drawn from proceeds from other sales transactions and would reduce liquidating distributions to stockholders |
| We do not have a policy limiting the amount of debt that we may incur; however, as of December 31, 2005, our Unsecured Credit Facility limited our total liabilities to 70prca of gross assets, as calculated in accordance with the loan agreement |
| This limitation was reduced to 65prca under the amended loan agreement signed in January 2006 |
| Our total liabilities to gross asset value at December 31, 2005 was 63prca |
| Our total liabilities to total market capitalization ratio was approximately 67prca at December 31, 2005 |
| Our leverage levels and our current strategic alternative review process (including but not limited to the liquidation of properties) 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 leverage levels also may adversely affect the market value of our stock if we are perceived as more risky than our peers |
| Some of our buildings are subject to special income tax considerations, which could result in substantial tax liability 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 rate on the excess of the buildings’ fair market value at the effective time of our REIT election over its adjusted basis at such time (or, if lesser, the excess of the fair market value of the building at the time of the sale over its adjusted basis at the time of the sale) |
| Given our current estimate of fair market value, we do not expect to face any adverse tax consequences because of the built-in gain limitations with respect to Sheridan Center |
| New developments and acquisitions may fail to perform as we expect |
| Over the last few years, we have focused our efforts on the acquisition and redevelopment of multi-tenant office buildings |
| In deciding whether to acquire or develop a particular property, we made 12 ______________________________________________________________________ assumptions regarding the expected future performance of that property |
| In particular, we estimated 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 properties do not perform as initially expected, our financial performance may be adversely affected |
| Construction risks could adversely affect our profitability |
| We continue to invest in necessary improvements and maintenance capital in our existing properties |
| Our construction activities may subject us to the following risks: · 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 projects |
| · We may incur construction costs for a property that exceed our original estimates due to increased costs for materials or labor or other costs, such as asbestos or mold abatement, which we did not anticipate |
| · We may not be able to obtain financing on favorable terms, which may make us unable to proceed with our development activities |
| · 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 lease-up of these properties means that we may have to wait years for a significant cash return |
| Because we are required to make cash distributions to our stockholders to maintain our REIT tax status, if the cash flow from operations or refinancing is not sufficient, we may be forced to borrow additional money to fund such distributions |
| 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 |
| If we own properties that 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 is adversely affected |
| Income from properties may be adversely affected by: · decreases in rent and/or occupancy rates due to competition, economic or other factors; · increases in operating costs such as real estate taxes, insurance premiums, site maintenance and utilities; · changes in interest rates and the availability of financing; and · changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes |
| Future terrorist attacks in the United States and international hostilities may result in declining economic activity, which could reduce 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, DC on September 11, 2001, and other acts of terrorism or war, whether in the United States or abroad, may result in declining economic activity and reduced demand for our properties |
| A decrease in 13 ______________________________________________________________________ demand would make it difficult for us to renew or re-lease 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 |
| We have obtained insurance coverage with respect to some of these risks |
| We cannot predict whether such coverage will actually cover such risks or whether the risks for which we obtained insurance will actually occur |
| 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 and insurance costs for our properties and limit our access to capital or increase our cost of raising capital |
| General economic conditions may adversely affect our financial condition, results of operations and potential distributions under the Plan |
| 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 by our tenants under existing leases, which would adversely affect our financial position, results of operations and cash flow, as well as the trading price of our securities and our ability to satisfy our debt service obligations and to make distributions to our stockholders |
| Unfavorable changes in local market and economic conditions could hurt occupancy or rental rates |
| At December 31, 2005, our properties were located in metropolitan Denver, Dallas, Phoenix and Indianapolis |
| Economic conditions in our local markets can 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 our local markets may depend 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 compete for tenants based on rental rates, attractiveness and location of a property, and quality of maintenance and management services |
| Changes in market conditions could affect the timing and prices received for the properties sold under the Plan |
| 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 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 factors affecting the industries in which our tenants operate may affect our tenants’ 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 |
| 14 ______________________________________________________________________ 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 |
| A significant number of leases on our properties (excluding the two properties sold in January 2006), representing approximately 16prca of our annualized lease revenue, expire on or before December 31, 2006 |
| Current tenants may elect not to 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 |
| Many of our leases are for relatively short terms of a few years |
| If non-renewals or terminations occur, 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 |
| This may cause affected properties to be impaired and/or to be sold for prices less than currently estimated under the Plan |
| Loss of a significant tenant could lead to a substantial decrease in our cash flow and an impairment of the value of our real estate |
| Although we target tenants seeking 2cmam000 to 4cmam000 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 and may cause affected properties to be impaired |
| Our uninsured and underinsured losses could result in loss of value of our properties |
| 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 uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to obtaining appropriate insurance on our investments at a reasonable cost and on suitable terms |
| These decisions 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 |
| 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 property operations |
| Although we have employment agreements in place with our CEO only through December 31, 2006 and with our CFO only through May 31, 2006, we also have in place retention agreements with other employees |
| Notwithstanding these agreements, any executive officer or key employee may terminate his or her relationship with us at any time |
| 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 sales price of any disposition may not recoup or exceed the amount of our investment |
| With respect to any liquidating distribution, we expect to continue to qualify as a REIT and be entitled to a dividends paid deduction |
| In order to qualify as a liquidating distribution, the distribution must be made within a twenty-four month period after the adoption of the Plan |
| We may not be able to liquidate our entire portfolio within this time period, and may have to create on behalf of our shareholders a liquidating trust for properties not sold within the given time frame |
| Liquidating distributions are subject to special tax rules |
| 15 ______________________________________________________________________ We may suffer environmental liabilities that 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 and mold, that are located on or under the property |
| 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 |
| 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 that is expected to be completed over the next few years as tenants vacate spaces, allowing access to the asbestos materials |
| Non-compliance with the Americans with Disabilities Act could result in compliance costs and fines |
| Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations are required to meet certain federal requirements related to physical access and use by disabled persons |
| While we believe we are in compliance with the ADA requirements, a determination that we are not in compliance with the ADA could require capital expenditures to remove access barriers and non-compliance 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 or other governmental rules and regulations, our ability to make expected distributions to our stockholders could be adversely affected |
| The ability of our stockholders to control our policies or effect 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 stockholders with a premium over the then-prevailing market price of our common or preferred stock or that might otherwise be in the best interests of our stockholders |
| These provisions include: · 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 662¤3prca 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 |
| 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 |
| 16 ______________________________________________________________________ · Ownership Limitation |
| In order to assist us in maintaining our qualification as a REIT, our Articles of Incorporation contain provisions generally limiting the ownership of shares of our capital stock by any single stockholder to 9prca of our outstanding shares, unless waived by our Board of Directors |
| 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: · 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 directors to elect to be governed, without shareholder approval, by all or any part of Maryland law provisions relating to extraordinary actions and unsolicited takeovers |
| · 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 10prca or more of its assets, issuances 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 |
| 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 shares of common stock entitled to be cast on the matter |
| Other constituencies |
| Maryland law expressly authorizes 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 current 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 is in the best interests of our stockholders |
| Other Maryland laws |
| Maryland law also permits the Board of Directors, without stockholder approval, and even if contrary to a company’s bylaws or charter, to classify the Board of Directors, require a two-thirds vote for the removal of directors and give the Board of Directors sole power to fill Board vacancies occurring for any reason |
| 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 limited trading volume for our common stock and, in the event that we issue preferred stock, there may be a limited trading volume for our preferred stock |
| Our equity market capitalization places us at the low end of market capitalization among all REITs |
| We cannot assure you that the market for our securities will remain at current levels or expand |
| Due to our limited trading 17 ______________________________________________________________________ volume and small market capitalization, many investors may not be interested in owning our securities because of the inability to acquire or sell a substantial block of our stock at one time |
| This illiquidity could have an adverse effect on the market price of our securities |
| In addition, a stockholder may not be able to borrow funds using our securities as collateral because lenders may be unwilling to accept the pledge of securities having such a limited market |
| Any substantial sale of our securities could have a material adverse effect on the market price of our securities |
| We may incur tax liabilities if we fail 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, since our taxable year ended December 31, 1996 |
| 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 |
| In order to qualify as a REIT, at all times during the second half of each taxable year following our first taxable year, no more than 50prca in value of our shares may be owned, directly or indirectly and by applying constructive ownership rules, by five or fewer individuals, including some tax-exempt entities |
| Our Articles of Incorporation provide restrictions regarding the transfer of shares, including a 9prca limitation on the ownership of our shares by any stockholder, that are intended to assist us in continuing to satisfy this share ownership requirement |
| 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 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 have to incur substantial indebtedness or may have to 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 are required each year to distribute to our stockholders at least 90prca of our REIT taxable income, excluding any net capital gains |
| To the extent that we satisfy the distribution requirement, but distribute less than 100prca of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income |
| In addition, we will be subject to a 4prca 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 85prca of our ordinary income for that year plus 95prca of our capital gain net income for that year plus any undistributed taxable income from prior periods |
| On March 9, 2005, we suspended our dividend payment |
| Our Board will review and consider the resumption of a dividend on our common stock based on a number of factors, including the adoption of the Plan, completion of a strategic transaction or other significant capital event, such as a refinancing or asset sales, the Company’s financial results, capital resources and liquidity needs at that time |
| We have determined that in 2005, we will generate a taxable loss and do not need to make a distribution of our REIT taxable income |
| However if we should generate REIT taxable income, we intend to make distributions to our stockholders to comply 18 ______________________________________________________________________ with the 90prca distribution requirement and to avoid corporate income tax and the nondeductible excise tax |
| We may have to borrow funds on a short-term basis to meet the 90prca distribution requirement and to avoid corporate income tax and the nondeductible excise tax if differences in timing between taxable income and cash available for distribution exist |
| Additionally, any such borrowings may not be at favorable interest rates |
| Adverse legislative or regulatory tax changes may affect the tax treatment of us or our stockholders |
| At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended |
| Any of those new laws or interpretations thereof may take effect retroactively and could adversely affect our company or you, as a shareholder |
| For example, on May 28, 2003, the President signed into law tax legislation that reduced the federal tax rate on both dividends and long-term capital gains for individuals to 15prca through 2008 |
| Because REITs generally are not subject to corporate income tax, this reduced tax rate generally does not apply to ordinary REIT dividends, which continue to be taxed at the higher tax rates applicable to ordinary income |
| The 15prca tax rate applies to: · long-term capital gains recognized on the disposition of REIT shares; · REIT capital gain distributions (except to the extent attributable to real estate depreciation, in which case such distributions continue to be subject to a 25prca tax rate); · REIT dividends attributable to dividends received by a REIT from non-REIT corporations, such as taxable REIT subsidiaries; and · REIT dividends attributable to income that was subject to corporate income tax at the REIT level (eg, to the extent that a REIT distributes less than 100prca of its taxable income) |
| This law could be causing shares in non-REIT corporations to be a relatively more attractive investment to individual investors than shares in REITs |
| The legislation also could be having an adverse effect on the market price of our securities |
| Risks Related to Plan of Liquidation We do not know the exact amount or timing of liquidation distributions |
| We cannot assure you of the precise nature and amount of any distributions to our stockholders pursuant to the Plan |
| Furthermore, the timing of our distributions will be affected, in large part, by our ability to sell in a timely and orderly manner our remaining assets |
| The methods used by management in estimating the values of our assets (other than cash and cash equivalents) and liabilities are based on estimates which are inexact and may not approximate values actually realized or the actual costs incurred |
| Our board of directors’ assessment assumes that the estimates of our assets, liabilities, construction and operating costs, and sale prices of our remaining assets are accurate, but those estimates are subject to numerous uncertainties beyond our control, including any new contingent liabilities that may materialize and other matters discussed below |
| In addition, our board of directors has relied on (i) management’s estimates as to the value of our company’s properties, other assets, costs and operating expenses, and (ii) Bear Stearns’ mathematical compilations and computations of such estimates and has not obtained or sought an appraisal of any of the properties that it proposes to liquidate |
| For all of these reasons, the actual net proceeds distributed to stockholders in liquidation may be more or less than the estimated amounts |
| We have estimated the range of distributions based upon management’s estimates of the values of the assets after considering, among other factors, internally prepared budgets, projections and models, comparable sales figures, and values ascribed to certain assets during discussions with bidders and brokers for our company |
| Bear Stearns assisted us by helping to develop financial models and providing 19 ______________________________________________________________________ sophisticated analyses of these models |
| There can be no assurance that we will be able to find buyers for all the remaining assets, and if we are able to sell such assets, there can be no guaranty that the value received upon such sale will be consistent with management’s estimates |
| If our stockholders approve the Plan, potential purchasers of our assets may try to take advantage of our liquidation process and offer less-than-optimal prices for our assets |
| We intend to seek and obtain the highest sales prices reasonably available for our assets, and believe that we can out-wait bargain-hunters; however, we cannot predict how changes in local real estate markets or in the national economy may affect the prices that we can obtain in the liquidation process |
| Therefore, there can be no assurance that the announcement and approval of the Plan will not hinder management’s ability to obtain the best price possible in the liquidation of our assets |
| We currently estimate that an aggregate of between dlra101dtta3 million and dlra115dtta8 million may be available for distribution to holders of our shares of common stock under the Plan, which would result in a total distribution of between dlra4dtta20 and dlra4dtta80 per share of common stock |
| The actual amount available for distribution could be more or less or could be delayed, depending on a number of other factors including (i) unknown liabilities or claims, (ii) unexpected or greater or lesser than expected expenses, and (iii) greater or lesser than anticipated net proceeds of asset sales |
| Although we anticipate making an initial distribution of substantially all of the net proceeds from the sale of our properties, interim and final distributions will depend on the amount of proceeds we receive, when we receive them, and the extent to which we must establish reserves for current or future liabilities |
| In addition, although we expect that a distribution of substantially all of the remaining amount will be made to stockholders within two years following the adoption of the Plan by our stockholders, the actual time of distribution may be longer in the event that we have difficulties disposing of our assets or if a creditor seeks the intervention of the Maryland courts to enjoin dissolution |
| We are currently unable to predict the precise timing of any distributions pursuant to the Plan |
| The timing of any distribution will depend upon and could be delayed by, among other things, the timing of the sale of our company’s assets |
| Additionally, a creditor could seek an injunction against our making distributions to our stockholders on the ground that the amounts to be distributed were needed for the payment of the liabilities and expenses |
| Any action of this type could delay or substantially diminish the amount, if any, available for distribution to our stockholders |
| Valuations of our real estate assets are subject to general risks associated with real estate assets and within the real estate industry |
| The value of our real estate assets and consequently the value of your investment, is subject to certain risks applicable to our assets and inherent in the real estate industry |
| The following factors, among others, may adversely affect the value of our real estate assets: · downturns in the national, regional and local economic climate where our properties are located; · downturn in general economic conditions as well as a downturn in specific regional and local market conditions; · competition from other commercial real estate entities; · local real estate market conditions, such as oversupply of, or reduction in demand for, leasing of commercial real estate; · decreases in rent and/or occupancy rates due to competition, economic or other factors; · increases in operating costs such as real estate taxes, insurance premiums, site maintenance and utilities; 20 ______________________________________________________________________ · changes in interest rates and the availability of financing; and · changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes |
| We face potential risks with asset sales |
| Risks associated with the sale of properties which, if they materialize, may have a material adverse effect on amounts you may receive, include: · lack of demand by prospective buyers; · inability to find qualified buyers; · inability of buyers to obtain satisfactory financing; · lower than anticipated sale prices; and · the inability to close on sales of properties under contract |
| Our stockholders could vote against the Plan |
| If our stockholders do not approve the Plan, we would have to continue our business operations from a difficult position, in light of the announced intent to liquidate and dissolve |
| Employees, customers and other third parties may refuse to continue to conduct business with us if they are uncertain as to our future, particularly with respect to long-term relationships that would be advantageous to the conduct of our business as a going concern |
| In addition, our company will have to continue operations while being faced with the same strategic issues it considered in determining to adopt the Plan |
| If we are unable to satisfy all of our obligations to creditors, or if we have underestimated our future expenses, the amount of liquidation proceeds will be reduced |
| We have current and future obligations to creditors |
| Claims, liabilities and expenses from operations (such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal, accounting and consulting fees and miscellaneous office expenses) will continue to be incurred through the liquidation process |
| As part of this process, we will attempt to satisfy any obligations with creditors remaining after the sale of our assets |
| These expenses will reduce the amount of assets available for ultimate distribution to our stockholders |
| To the extent our liabilities exceed the estimates that we have made, the amount of liquidation proceeds will be reduced |
| Stockholders may be liable to our creditors for amounts received from us if our reserves are inadequate |
| If the Plan is approved by the stockholders, we intend to file Articles of Dissolution with the State Department of Assessments and Taxation of Maryland promptly after the sale of all our remaining assets or at such time as our directors have transferred our company’s remaining assets, subject to its liabilities, into a liquidating trust |
| Pursuant to Maryland law, our company will continue to exist for the purpose of discharging any debts or obligations, collecting and distributing its assets, and doing all other acts required to liquidate and wind up its business and affairs |
| We intend to pay for all liabilities and distribute all of our remaining assets before we file our Articles of Dissolution |
| Under Maryland law, certain obligations or liabilities imposed by law on our stockholders, directors, or officers cannot be avoided by the dissolution of a company |
| For example, if we make distributions to our stockholders without making adequate provisions for payment of creditors’ claims, our stockholders would be liable to the creditors to the extent of the unlawful distributions |
| The liability of any stockholder is, however, limited to the amounts previously received by such stockholder from us (and from any liquidating 21 ______________________________________________________________________ trust) |
| Accordingly, in such event, a stockholder could be required to return all liquidating distributions previously made to such stockholder and a stockholder could receive nothing from us under the Plan |
| Moreover, in the event a stockholder has paid taxes on amounts previously received as a liquidation distribution, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable |
| Therefore, to the extent that we have underestimated the size of our contingency reserve and distributions to our stockholders have already been made, our stockholders may be required to return some or all of such distributions |
| You will not be able to buy or sell our shares of common stock after we file our Articles of Dissolution |
| If the stockholders approve the Plan, we intend to close our transfer books on the date on which we file Articles of Dissolution with the State Department of Assessments and Taxation of Maryland (the “Final Record Date”) |
| We anticipate that the Final Record Date will be shortly after the sale of all of our assets or such earlier time as when our board of directors transfers all of our remaining assets into a liquidating trust |
| The Final Record Date is likely to be 6 to 24 months after the approval of the Plan by our stockholders |
| Your interests in a liquidating trust are likely to be non-transferable except in certain limited circumstances |
| After the Final Record Date, we will not record any further transfers of our shares of common stock except pursuant to the provisions of a deceased stockholder’s will, intestate succession or operation of law and we will not issue any new stock certificates other than replacement certificates or certificates representing your interest in a liquidating trust |
| In addition, after the Final Record Date, we will not issue any shares of common stock upon exercise of outstanding options |
| It is anticipated that no further transfers of our shares of common stock will occur after the Final Record Date |
| Our success depends on key personnel whose continued service is not guaranteed |
| We have a highly skilled management team and specialized workforce managing our properties |
| Although we entered into employment and change of control agreements with our chief executive officer and chief financial officer, and retention agreements with other key employees, any executive officer or key employee may terminate his or her relationship with us at any time |
| The employment agreement with our chief executive officer expires December 31, 2006 and the employment agreement with our chief financial officer expires May 31, 2006 Although we intend to complete our sale of our properties before the expiration of our chief executive officer’s employment agreement, our business operations and ability to complete the Plan in a timely manner and sell our assets for the estimated proceeds could be negatively impacted if we are unable to retain the services of other key personnel or hire suitable replacements |
| Our chief executive officer and chief financial officer have conflicts of interest |
| The employment agreements of each of our chief executive officer and chief financial officer contain provisions that entitle the officer to certain benefits and payments if that officer terminates that employment agreement following a “change of control” (as defined in his employment agreements and which definition includes adoption of a Plan as a “change of control”) |
| Accordingly, if the stockholders approve the Plan and either officer elects to terminate employment with our company, that officer would be entitled to severance payments |
| Consequently, those officers may have been influenced by the potential severance payments to support, or in the case of the chief executive officer who is also a director, to vote to approve, the Plan |
| Liquidation and dissolution may not maximize value for our stockholders |
| Although our board of directors believes that the Plan is more likely to result in greater returns to stockholders than if we continued the status quo or pursued other alternatives, it is possible that one or more of the other alternatives would be better for us and our stockholders, in which case, we will be foregoing such alternatives if we implement the Plan |
| 22 ______________________________________________________________________ Approval of the Plan may reduce our stock price, increase its volatility and reduce the liquidity of our shares |
| If our stockholders approve the Plan, but believe that we will be unable to complete the Plan in a timely manner, the price of our shares of common stock may decline |
| In addition, as we sell our assets, pay off our liabilities and make liquidating distributions to stockholders, our stock price will likely decline and our shares of common stock will likely become less liquid |
| In addition, our shares of common stock may no longer be eligible for listing on the American Stock Exchange as a result of adopting the Plan, thus reducing liquidity of the shares of common stock |
| Being delisted by the American Stock Exchange would further decrease the market demand and liquidity for, and price of, our shares of common stock |
| The policy of the American Stock Exchange is to consider delisting a company if, among other reasons: · the total number of public stockholders is less than 300; · if the aggregate market value of shares publicly held is less than dlra1 million; or · if liquidation has been authorized by a company’s board of directors and stockholders |
| Furthermore, in the event that our board of directors elects to transfer our company’s remaining assets into a liquidating trust, the trust certificates to be issued to each stockholder will not be transferable except in certain very limited circumstances, such as upon death of the holder |
| Approval of the Plan may lead to stockholder litigation which could result in substantial costs and distract management |
| Historically, extraordinary corporation actions, such as the proposed Plan, often lead to securities class action lawsuits being filed against a company |
| Such litigation is likely to be expensive and, even if we ultimately prevail, the process will be time consuming and divert management’s attention from implementing the Plan of liquidation and otherwise operating our business |
| If we do not prevail in any such lawsuit, we may be liable for damages, the validity of a stockholder vote approving the Plan may be challenged, or we may be unable to complete some transactions that we contemplate as part of the Plan |
| We cannot predict the cost of defense or the amount of such damages but they may be significant and would likely reduce our cash available for distribution |
| Approval of the Plan could cause our methodology of accounting to change, which may require us to reduce the net carrying value of our assets |
| Once our stockholders approve the proposed Plan, we could change our basis of accounting from the going-concern basis to that of the liquidation basis of accounting |
| In order for our financial statements to be in accordance with generally accepted accounting principles under the liquidation basis of accounting, all of our assets must be stated at their estimated net realizable value, and all of our liabilities (including those related to commitments under employment agreements) must be recorded at the estimated amounts at which the liabilities are expected to be settled |
| Based on the most recent available information, if the Plan is adopted, we expect to make liquidating distributions that exceed the carrying amount of our net assets |
| However, we cannot assure you what the ultimate amounts of such liquidating distributions will be |
| Therefore, there is a risk that the liquidation basis of accounting may entail write downs of certain of our assets to values substantially less than their current respective carrying amounts, and may require that certain of our liabilities be increased or certain other liabilities be recorded to reflect the anticipated effects of an orderly liquidation |
| Until we determine that the Plan is about to be approved, we will continue to use the going-concern basis of accounting |
| If our stockholders do not approve the Plan, we will continue to account for our assets 23 ______________________________________________________________________ and liabilities under the going-concern basis of accounting |
| Under the going-concern basis, assets and liabilities are expected to be realized in the normal course of business |
| However, long-lived assets to be sold or disposed of should be reported at the lower of carrying amount or estimated fair value less costs to sell |
| For long-lived assets to be held and used, when a change in circumstances occurs, our management must assess whether we can recover the carrying amounts of our long-lived assets |
| If our management determines that based on all of the available information, we cannot recover those carrying amounts, an impairment of value of our long-lived assets has occurred and the assets would be written down to their estimated fair value |
| Our management believes that the carrying amounts of our long-lived assets at March 15, 2006, had not been impaired, other than to the extent of amounts already recorded in prior accounting periods |
| We may, however, be required to make write downs of our assets in the future based on estimated net realizable value of our assets at that time |
| Such write downs could reduce our stock price |