UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (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, 2004 [ ] 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 0-14569 SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Maryland 04-2848939 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) Registrant's telephone number (864) 239-1000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rate 12b-2). Yes ___ No _X__ State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests, as of December 31, 2004. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE NONE The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; litigation, including costs associated with prosecuting and defending claims and any adverse outcomes, and possible environmental liabilities. Readers should carefully review the Registrant's financial statements and the notes thereto, as well as the risk factors described in the documents the Registrant files from time to time with the Securities and Exchange Commission. PART I Item 1. Description of Business Springhill Lake Investors Limited Partnership (the "Registrant" or the "Partnership") was organized as a Maryland limited partnership under the Maryland Revised Uniform Limited Partnership Act on December 28, 1984, for the purpose of investing as a general partner in Springhill Lake Limited Partnerships I through IX and Springhill Commercial Limited Partnership (collectively, the "Operating Partnerships"), each of which is a Maryland limited partnership owning a section of a garden apartment complex in Greenbelt, Maryland (the "Project" or "Property"). The Registrant is the sole General Partner of each Operating Partnership. The Limited Partner of each Operating Partnership is Theodore N. Lerner ("Lerner"), a former general partner of the Operating Partnerships whose interest was converted to that of a limited partner on January 16, 1985 in conjunction with the Registrant's acquisition of its interest in the Operating Partnerships. The Managing General Partner of the Registrant is AIMCO/Springhill Lake Investors GP, LLC ("AIMCO LLC" or "Managing General Partner"), a wholly owned subsidiary of AIMCO Properties, L.P., an affiliate of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The Partnership Agreement provides that the Partnership and Operating Partnerships are to terminate on December 31, 2035 unless terminated prior to such date. On December 11, 2003, AIMCO Properties, L.P., a Delaware limited partnership, entered into a Redemption and Contribution Agreement (the "Redemption and Contribution Agreement") with First Winthrop Corporation, a Delaware corporation ("FWC") and the sole shareholder of Three Winthrop Properties, Inc. ("Winthrop"), the former managing general partner of the Partnership, with respect to the acquisition of its general partner interest in the Partnership (the "MGP Interest") by an affiliate of AIMCO Properties, L.P., the operating partnership of AIMCO. As of the time of the execution of the Redemption and Contribution Agreement and until such time as the transfer of the MGP Interest from Winthrop to AIMCO LLC became effective, NHP Management Company ("NHP"), an affiliate of AIMCO Properties, L.P., was vested with the authority to, subject to certain limitations, cause Winthrop to take such actions as it deemed necessary and advisable in connection with the activities of the Partnership. The transfer of the MGP Interest from Winthrop to AIMCO LLC became effective on March 31, 2004. As used herein, the term "Managing General Partner" shall mean Winthrop, with respect to matters occurring prior to March 31, 2004 and AIMCO LLC for matters occurring from and after March 31, 2004. The Registrant was initially capitalized with nominal capital contributions from its General Partners. In April 1985, the Registrant completed a private offering of 649 units of limited partnership interest (the "Units") pursuant to Regulation D under the Securities Act of 1933 and the terms of the Confidential Memorandum dated January 16, 1985. The Registrant raised $40,562,500 in capital contributions from investors who were admitted to the Registrant as limited partners ("Limited Partners"). Since its initial offering, the Registrant has not received, nor are limited partners required to make, additional capital contributions. The Registrant purchased its interest in the Operating Partnerships on January 16, 1985, for approximately $73,515,000. The Registrant's interest in the Operating Partnerships entitles it to 87.26% of profits and losses for tax purposes, 87.26% of the Operating Partnerships' cash flow (after certain priority distributions), and 85% of the proceeds of a sale or disposition of the Project (after certain priority distributions). The only business of the Partnership is investing as a general partner in the Operating Partnerships, and as such, to cause the Operating Partnerships to own and operate the Project, until such time as a sale, if any, of all or a portion of the Project appears to be advantageous to the Registrant and is permitted under the terms of the Operating Partnerships' Partnership Agreements. See "Item 2. Description of Property" for further information on the project owned by the Operating Partnerships. The Partnership has no employees. Management and administrative services are performed by the Managing General Partner and by agents retained by the Managing General Partner. The Partnership receives income from its interest in the Project and is responsible for operating expenses, capital improvements and debt service payments under mortgage obligations secured by the property. The Partnership financed its investment primarily through non-recourse debt. Therefore, in the event of default, the lender can generally look only to the subject property for recovery of amounts due. Risk Factors The real estate business in which the Partnership is engaged is highly competitive. There are other residential properties within the market area of the Partnership's project. The number and quality of competitive properties, including those which may be managed by an affiliate of the Managing General Partner, in such market area could have a material effect on the rental market for the apartments and commercial space at the Partnership's property and the rents that may be charged for such apartments and space. While the Managing General Partner and its affiliates own and/or control a significant number of apartment units in the United States, such units represent an insignificant percentage of total apartment units in the United States and competition for the apartments is local. Laws benefiting disabled persons may result in the Partnership's incurrence of unanticipated expenses. Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to the Registrant's property, or restrict renovations of the property. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although the Managing General Partner believes that the Registrant's property is substantially in compliance with present requirements, the Partnership may incur unanticipated expenses to comply with the ADA and the FHAA. Both the income and expenses of operating the property owned by the Partnership are subject to factors outside of the Partnership's control, such as changes in the supply and demand for similar properties resulting from various market conditions, increases/decreases in unemployment or population shifts, changes in the availability of permanent mortgage financing, changes in zoning laws, or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential properties because such properties are susceptible to the impact of economic and other conditions outside of the control of the Partnership. From time to time, the Federal Bureau of Investigation, or FBI, and the United States Department of Homeland Security issue alerts regarding potential terrorist threats involving apartment buildings. Threats of future terrorist attacks, such as those announced by the FBI and the Department of Homeland Security, could have a negative effect on rent and occupancy levels at the Partnership's property. The effect that future terrorist activities or threats of such activities could have on the Partnership's operations is uncertain and unpredictable. If the Partnership were to incur a loss at a property as a result of an act of terrorism, the Partnership could lose all or a portion of the capital invested in the property, as well as the future revenue from the property. In this regard, the Partnership has purchased insurance to cover acts of terrorism. The Managing General Partner does not anticipate that these costs will have a negative effect on the Partnership's consolidated financial condition or results of operations. There have been, and it is possible there may be other, Federal, state and local legislation and regulations enacted relating to the protection of the environment. The Partnership is unable to predict the extent, if any, to which such new legislation or regulations might occur and the degree to which such existing or new legislation or regulations might adversely affect the property owned by the Partnership. The Partnership monitors its property for evidence of pollutants, toxins and other dangerous substances, including the presence of asbestos. In certain cases environmental testing has been performed, which resulted in no material adverse conditions or liabilities. In no case has the Partnership received notice that it is a potentially responsible party with respect to an environmental clean up site. A further description of the Partnership's business is included in "Management's Discussion and Analysis of Financial Condition and Results of Operation" included in "Item 7." of this Form 10-K. Item 2. Description of Property The following table sets forth the Registrant's investment in property: Date of Property Purchase Type of Ownership Use Springhill Lake Apartments 10/84 Fee ownership subject Apartment Greenbelt, Maryland to a first mortgage. 2,899 units The Project was initially acquired by the Operating Partnerships in October 1984 for an initial cost of $73,316,500. The Project consists of 2,899 apartment and townhouse units and a four-store shopping center situated on 154 acres of landscaped grounds. The Project also contains a clubhouse/community center, two Olympic-size swimming pools and six tennis courts. Schedule of Property Set forth below for the Registrant's property is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and federal tax basis. Gross Carrying Accumulated Depreciable Federal Property Value Depreciation Life Method Tax Basis (in thousands) (in thousands) Springhill Lake $133,465 $87,489 5-30 yrs S/L $31,884 See "Item 8. Financial Statements, Note A" for a description of the Partnership's capitalization and depreciation policies. Schedule of Property Indebtedness The following table sets forth certain information relating to the loan encumbering the Partnership's property. Principal Principal Principal Balance At Balance At Stated Balance December 31, Interest Period Maturity Due At Property 2004 2003 Rate Amortized Date Maturity (1) (in thousands) (in thousands) Springhill Lake 1st mortgage $113,500 $110,386 (2) (3) 08/11 $113,500 (1) See "Item 8. Financial Statements and Supplementary Data - Note E" for information with respect to the Registrant's ability to prepay this loan and other specific details about the loan. (2) Adjustable rate based on the Freddie Mac discounted mortgage-backed security index plus 63 basis points. The rate at December 31, 2004 was 2.728% and will reset monthly. (3) Interest only payments on loan at December 31, 2004. On July 22, 2004, the Partnership refinanced the mortgage encumbering Springhill Lake Apartments. The new mortgage of $113,500,000 replaced existing mortgage indebtedness of approximately $109,007,000. The new mortgage bears interest at a variable rate and has a balloon payment of $113,500,000 due on August 1, 2011. The interest rate on the variable rate loan is the Freddie Mac discounted mortgage-backed security index plus 63 basis points. The rate was 2.728% at December 31, 2004. After repayment of the existing mortgage, payment of closing costs, and funding of a $675,000 repair escrow account and operating reserves, the Partnership received net proceeds of approximately $3,294,000. The Partnership also received a refund of approximately $7,085,000 relating to the repair escrow required by the previous lender. Total capitalized loan costs associated with this refinancing were approximately $526,000 during the year ended December 31, 2004. The Partnership recognized a loss on the early extinguishment of debt of approximately $918,000 due to the write off of approximately $904,000 of unamortized loan costs and a prepayment penalty of approximately $14,000 during the year ending December 31, 2004. The mortgage note payable is non-recourse and is secured by a pledge of the Partnership's interest in the operating partnerships, and joint and several guarantees by the operating partnerships which, in turn, are secured by an indemnity first mortgage on the operating partnerships and a pledge of the stock of Springfield Facilities, Inc., an affiliate. Further, the property may not be sold subject to existing indebtedness. Rental Rates and Occupancy Average annual rental rate and occupancy for 2004 and 2003 for the property: Average Annual Average Annual Rental Rate Occupancy (per unit) Property 2004 2003 2004 2003 Springhill Lake $11,275 $11,001 95% 96% As noted under "Item 1. Description of Business," the real estate industry is highly competitive. The Property is subject to competition from other residential complexes in the area. The Managing General Partner believes that the Property is adequately insured. The Property is a predominately residential complex which leases its units for terms of one year or less. No residential tenant leases 10% or more of the available rental space. The property is in good physical condition, subject to normal depreciation and deterioration as is typical for assets of this type and age. Schedule of Real Estate Taxes and Rates Real estate taxes and rates in 2004 for the property were: 2004 2004 Billing Rate (in thousands) Springhill Lake $2,335 1.91% The Property has a fiscal year different than the real estate tax year; therefore, real estate tax expense as stated in the Partnership's Consolidated Statement of Operations does not agree to the 2004 billings. Capital Improvements The Partnership completed approximately $4,847,000 in capital improvements at Springhill Lake Apartments during the year ended December 31, 2004, consisting primarily of structural improvements, appliance, water and sewer upgrades, roof and floor covering replacements, air conditioning and cabinet upgrades and heating and electrical improvements. Approximately $28,000 of these additions were related to a September 2003 casualty. These improvements were funded from operations, insurance proceeds and replacement reserves. The Partnership regularly evaluates the capital improvement needs of the property for the upcoming year. During 2005 the Partnership anticipates completing the repairs and improvements at the property required to be made in connection with the July 2004 refinancing of the mortgage encumbering the property. In connection with the refinancing, approximately $675,000 was deposited in an escrow account to fund such repairs and improvements. At December 31, 2004, the balance in the escrow account was approximately $535,000. Additional improvements and routine capital expenditures are anticipated during 2005. Such capital expenditures will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. The additional capital expenditures will be incurred only if cash is available from operations or from Partnership reserves. To the extent that capital improvements are completed the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. Item 3. Legal Proceedings As previously disclosed, AIMCO Properties L.P. and NHP Management Company, both affiliates of the Managing General Partner, are defendants in an action in the United States District Court, District of Columbia. The plaintiffs have styled their complaint as a collective action under the Fair Labor Standards Act ("FLSA") and seek to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties L.P. failed to compensate maintenance workers for time that they were required to be "on-call". Additionally, plaintiffs allege AIMCO Properties L.P. failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call". The defendants have filed an answer to the amended complaint denying the substantive allegations. Discovery relating to the certification of the collective action has concluded and briefing on the matter is currently underway. Although the outcome of any litigation is uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome will have a material adverse effect on its financial condition or results of operations. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's consolidated financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders During the quarter ended December 31, 2004, no matter was submitted to a vote of unit holders through the solicitation of proxies or otherwise. PART II Item 5. Market for the Partnership Equity and Related Partner Matters The Partnership, a publicly-held limited partnership, offered and sold 649 limited partnership units aggregating $40,562,500. The Partnership currently has 145 holders of record owning an aggregate of 649 Units. Affiliates of the Managing General Partner owned 522.65 units or 80.53% of the outstanding units at December 31, 2004. No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. The Partnership distributed the following amounts during the years ended December 31, 2004, 2003, and 2002 (in thousands, except per unit data): Year Ended Per Limited Year Ended Per Limited Year Ended Per Limited December 31, Partnership December 31, Partnership December 31, Partnership 2004 Unit 2003 Unit 2002 Unit Refinance $ 7,744 (2) $11,932 $ 2,818 (1) $ 4,342 $45,840 (1) $70,632 Operations 10,865 15,904 3,932 5,755 5,966 8,733 Total $18,609 $27,836 $ 6,750 $10,097 $51,806 $79,365 (1) Proceeds from the November 2002 refinancing of the mortgage encumbering Springhill Lake Apartments. (2) Proceeds from the July 2004 refinancing of the mortgage encumbering Springhill Lake Apartments. Future cash distributions will depend on the levels of net cash generated from operations, the timing of the debt maturity, property sale and/or refinancing. The Partnership's cash available for distribution is reviewed on a monthly basis. There can be no assurance that the Partnership will generate sufficient funds from operations after required capital improvement expenditures to permit additional distributions to its partners during 2005 or subsequent periods. See "Item 2. Description of Property - Capital Improvements" for information relating to anticipated capital expenditures at the property. Other AIMCO and its affiliates owned 522.65 limited partnership units (the "Units") in the Partnership representing 80.53% of the outstanding Units at December 31, 2004. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 80.53% of the outstanding Units, AIMCO and its affiliates are in a position to control all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder. Item 6. Selected Financial Data (in thousands, except unit data) 2004 2003 2002 2001 2000 Total revenues from rental operations $ 32,824 $ 32,282 $ 32,290 $ 31,004 $ 27,220 Net income $ 2,074 $ 4,455 $ 3,213 $ 2,387 $ 1,725 Net income per limited partnership unit $ 3,035 $ 6,521 $ 4,703 $ 3,495 $ 2,525 Limited partnership units outstanding 649 649 649 649 649 Total assets $ 51,540 $ 65,825 $ 71,425 $ 67,310 $ 64,900 Mortgage note payable $113,500 $110,386 $113,100 $ 51,788 $ 53,689 The above selected financial data should be read in conjunction with the Partnership's financial statements and notes thereto appearing in "Item 8. Financial Statements and Supplementary Data." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation This item should be read in conjunction with the consolidated financial statements and other items contained elsewhere in this report. The Partnership's financial results depend upon a number of factors including the ability to attract and maintain tenants at the investment property, interest rates on mortgage loans, costs incurred to operate the investment property, general economic conditions and weather. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the rental market environment of its investment property to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, the Managing General Partner may use rental concessions and rental rate reductions to offset softening market conditions, accordingly, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Further, a number of factors that are outside the control of the Partnership, such as the local economic climate and weather, can adversely or positively affect the Partnership's financial results. Results of Operations 2004 Compared with 2003 The Partnership's net income for the year ended December 31, 2004 was approximately $2,074,000 compared to net income of approximately $4,455,000 for the year ended December 31, 2003 (See "Item 8. Financial Statements and Supplementary Data - Note C" for a reconciliation of these amounts to the Partnership's federal taxable income.) Income before minority interest for the year ended December 31, 2004 was approximately $4,811,000 compared to approximately $5,440,000 for the year ended December 31, 2003. The decrease in income before minority interest is primarily due to an increase in total expenses partially offset by an increase in total revenues. The increase in total revenues for the year ended December 31, 2004 is due to an increase in rental and other income partially offset by a decrease in casualty gain. Rental income increased due to an increase in the average rental rates at the Partnership's property. Other income increased due to an increase in utility reimbursements, legal costs charged to tenants and lease cancellation fees at Springhill Lake Apartments. During September 2003, Hurricane Isabel caused damages to some of the apartment buildings at the property. During the year ended December 31, 2004, all work was completed to repair the damage and the property recorded a casualty gain of approximately $31,000. The gain was the result of the receipt of insurance proceeds of approximately $38,000 offset by approximately $7,000 of undepreciated damaged assets being written off. During 2002, a fire occurred at Springhill Lake Apartments which resulted in damage to eleven units at the property. During the year ended December 31, 2003, all work was completed to repair the damage and the property recorded a casualty gain of approximately $83,000. The gain was the result of the receipt of insurance proceeds of approximately $104,000 offset by approximately $21,000 of undepreciated damaged assets being written off. Total expenses for the year ended December 31, 2004 increased due to increases in depreciation, property tax, bad debt expenses and loss on early extinguishment of debt offset by decreases in operating and general and administrative expenses. Interest expense remained relatively constant between the comparable periods. Depreciation expense increased due to property improvements and replacements being placed into service during the past twelve months which are now being depreciated. Property tax expense increased due to an increase in the assessed value of the Partnership's investment property by the local taxing authority. Bad debt expense increased due to a number of evictions of residents. Loss on early extinguishment of debt increased due to the Partnership refinancing the mortgage during the year ended December 31, 2004. The decrease in operating expense is primarily due to a decrease in maintenance expenses offset by an increase in advertising and property expenses. Maintenance expenses decreased due to decreases in contract services as more work is now being performed by on-site employees and the cost of repairs to the property. Advertising expenses increased due to special promotions to attract new tenants and maintain occupancy levels. Property expenses increased due to increases in utility costs, salaries and related employee expenses. General and administrative expenses decreased due to a decrease in accountable reimbursements charged to the Partnership in accordance with the Partnership Agreement. Included in general and administrative expenses are reimbursements to the Managing General Partner as allowed under the Partnership Agreement associated with its management of the Partnership. Costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement are also included in general and administrative expenses. The limited partnership interest of Theodore N. Lerner in the operating partnerships is reflected as a minority interest in the accompanying consolidated financial statements. Minority interest in net earnings of the operating partnerships recorded by the Partnership totaled approximately zero for the years ended December 31, 2004 and 2003. During the years ended December 31, 2004 and 2003, the Partnership did not recognize any minority interest in net earnings of the operating partnerships as previous distributions to the minority partner during 2002 reduced the minority interest partner's balance to zero. For the years ended December 31, 2004 and 2003, distributions to the minority interest partner of approximately $2,737,000 and $985,000, respectively, were made in excess of the minority partner's investment in the operating partnerships. When the operating partnerships make distributions in excess of the minority partner's investment balance, the Partnership, as the majority partner, records a charge equal to the minority partner's excess distribution over the investment balance. The charge is classified as distributions to the minority partner in excess of investment on the accompanying consolidated statements of operations. Cumulative distributions to the minority partner in excess of investment totaled approximately $4,820,000 and $2,083,000 at December 31, 2004 and 2003, respectively. No income is allocated to the minority partner until all previous losses recognized by the majority partner are recovered. For the years ended December 31, 2004 and 2003, approximately $994,000 and $1,070,000, respectively, in earnings were allocated to the majority partner to recover previous losses recognized. Earnings will continue to be allocated to the majority partner to recover previous losses recognized until such time as the net amount of approximately $2,756,000 at December 31, 2004 is recovered. 2003 Compared with 2002 The Partnership's net income for the year ended December 31, 2003 was approximately $4,455,000 compared to net income of approximately $3,213,000 for the year ended December 31, 2002 (See "Item 8. Financial Statements and Supplementary Data - Note C" for a reconciliation of theses amounts to the Partnership's federal taxable income.) Income before minority interest for the year ended December 31, 2003 was approximately $5,440,000 compared to approximately $5,377,000 for the year ended December 31, 2002. The increase in income before minority interest was primarily due to a decrease in total expenses partially offset by a decrease in total revenues. The decrease in total revenues for the year ended December 31, 2003 was due to a larger casualty gain recognized in 2002 compared to 2003 related to separate fires at the property in April 2001 and March 2002, respectively, slightly offset by an increase in both other and rental income. Other income increased due to increases in utility reimbursements and legal fees partially offset by decreases in lease cancellation fees and miscellaneous resident charges at the property. Rental income increased slightly due to increased rental rates at Springhill Lake Apartments. During March 2002 a fire occurred at Springhill Lake Apartments which resulted in damage to eleven units at the property. During the year ended December 31, 2003, all work was completed to repair the damage and the property recorded a casualty gain of approximately $83,000. The gain was the result of the receipt of insurance proceeds of approximately $104,000 offset by approximately $21,000 of undepreciated property improvements and replacements being written off. Total expenses for year ended December 31, 2003 decreased due to decreases in interest and general and administrative expenses partially offset by increases in operating, property tax, bad debt and depreciation expenses. Interest expense decreased due to the refinancing of the mortgage encumbering Springhill Lake Apartments in November 2002. Though the mortgage principal balance increased significantly, the variable interest rate on the new loan was significantly lower in 2003 than the fixed interest rate applicable to the old loan during 2002. General and administrative expense decreased due to a decrease in accountable reimbursements paid to an affiliate of the Managing General Partner in accordance with the Partnership Agreement. The increase in operating expense was primarily due to increases in property administrative costs and maintenance expenses at the property. Property administrative expenses increased primarily due to the cost of cleaning contracts and costs associated with collecting tenant rents. Maintenance expenses increased primarily due to roof repairs, snow removal expenses and contract work offset by decreases in interior and exterior building improvements at the Partnership's investment property. Property tax expense increased due to an increased tax rate by the local taxing authority. Depreciation expense increased due to property improvements and replacements placed into service during the past twelve months which are now being depreciated. Bad debt expense increased as a result of larger balances owed by tenants that were evicted during 2003 compared to the balances owed for 2002 evictions. Included in general and administrative expenses are reimbursements to the Managing General Partner as allowed under the Partnership Agreement associated with its management of the Partnership. Costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement are also included in general and administrative expenses. Minority interest in net earnings of the operating partnerships totaled approximately zero and $1,066,000 for the years ended December 31, 2003 and 2002, respectively. During the year ended December 31, 2003, the Partnership did not recognize any minority interest in net earnings of the operating partnerships as previous distributions to the minority partner during 2002 reduced the minority interest partner's investment balance to zero. For the years ended December 31, 2003 and 2002, distributions to the minority interest partner of approximately $985,000 and $1,098,000, respectively, were made in excess of the minority partner's investment in the operating partnerships. When the operating partnerships make distributions in excess of the minority partner's investment balance, the Partnership, as the majority partner, records a charge equal to the minority partner's excess distribution over the investment balance. The charge is classified as distributions to the minority partner in excess of investment on the accompanying consolidated statements of operations. Cumulative distributions to the minority partner in excess of investment totaled approximately $2,083,000 and $1,098,000 at December 31, 2003 and 2002, respectively. No income is allocated to the minority partner until all previous losses recognized by the majority partner are recovered. For the years ended December 31, 2003 and 2002, approximately $1,070,000 and zero, respectively, in earnings were allocated to the majority partner to recover previous losses recognized. Earnings will continue to be allocated to the majority partner to recover previous losses recognized until such time as the net amount of approximately $1,013,000 at December 31, 2003 is recovered. Liquidity and Capital Reserves At December 31, 2004, the Partnership had cash and cash equivalents of approximately $1,502,000, compared to approximately $5,194,000 at December 31, 2003. Cash and cash equivalents decreased approximately $3,692,000 from December 31, 2003 due to approximately $18,772,000 of cash used in financing activities partially offset by approximately $13,219,000 and $1,861,000 of cash provided by operating and investing activities, respectively. Cash used in financing activities consisted of repayment of the mortgage encumbering the Partnership's investment property, distributions to partners, loan costs paid for the property refinancing, payment of a prepayment penalty and principal payments made on the mortgage encumbering the property partially offset by proceeds from the new mortgage encumbering the property. Cash provided by investing activities consisted of net withdrawals from restricted escrows and the receipt of insurance proceeds partially offset by property improvements and replacements. The Partnership invests its working capital in interest bearing accounts. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the property to adequately maintain the physical assets and other operating needs of the Partnership and to comply with Federal, state and local legal and regulatory requirements. The Managing General Partner monitors developments in the area of legal and regulatory compliance. For example, the Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance. The Partnership regularly evaluates the capital improvement needs of the property for the upcoming year. During 2005 the Partnership anticipates completing the repairs and improvements at the property required to be made in connection with the July 2004 refinancing of the mortgage encumbering the property. In connection with the refinancing, approximately $675,000 was deposited in an escrow account to fund such repairs and improvements. At December 31, 2004, the balance in the escrow account was approximately $535,000. Additional improvements and routine capital expenditures are anticipated during 2005. Such capital expenditures will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. The additional capital expenditures will be incurred only if cash is available from operations or from Partnership reserves. To the extent that capital improvements are completed the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. The Partnership's assets are thought to be sufficient for any near term needs (exclusive of capital improvements) of the Partnership. On July 22, 2004, the Partnership refinanced the existing mortgage encumbering Springhill Lake Apartments which had been previously refinanced in 2002 (see discussion below). The new mortgage of $113,500,000 replaced existing mortgage indebtedness of approximately $109,007,000. The new mortgage bears interest at a variable rate and has a balloon payment of $113,500,000 due on August 1, 2011. The interest rate on the variable rate loan is the Freddie Mac discounted mortgage-backed security index plus 63 basis points. The rate was 2.728% at December 31, 2004. After repayment of the existing mortgage, payment of closing costs, and funding of a $675,000 repair escrow account and operating reserves, the Partnership received net proceeds of approximately $3,294,000. The Partnership also received a refund of approximately $7,085,000 relating to the repair escrow required by the previous lender. Total capitalized loan costs associated with this refinancing were approximately $526,000 during the year ended December 31, 2004. The Partnership recognized a loss on the early extinguishment of debt of approximately $918,000 due to the write off of approximately $904,000 of unamortized loan costs and a prepayment penalty of approximately $14,000 during the year ended December 31, 2004. On November 14, 2002, the Partnership refinanced its then existing mortgage encumbering Springhill Lake Apartments. This loan was initially refinanced under an interim credit facility ("Interim Credit Facility") which had a term of three months. The Interim Credit Facility included properties in other partnerships that are affiliated with the Partnership. However, the Interim Credit Facility created separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. During the term of the Interim Credit Facility, the property was required to make interest-only payments. The first month's interest, which was paid at the date of the refinancing, was calculated at LIBOR plus 70 basis points. Interest for the following month was calculated at LIBOR plus 150 basis points. During December 2002 the loan was sold to Fannie Mae under a permanent credit facility ("Permanent Credit Facility"). The Credit Facility had a maturity of five years, with one five-year extension option. This Permanent Credit Facility also created separate loans for each property that were not cross-collateralized or cross-defaulted with the other property loans. Each note under this Permanent Credit Facility began as a variable rate loan with the option of converting to a fixed rate loan after three years. The interest rate on the variable rate loans was the Fannie Mae discounted mortgage-backed security index plus 85 basis points. The rate was 1.92% at December 31, 2003 and reset monthly. Each loan automatically renewed at the end of each month. In addition, monthly principal payments were required based on a 30-year amortization schedule, using the interest rate in effect during the first month that any property was on the Permanent Credit Facility. The loans could be prepaid without penalty. The 2002 refinancing of the existing Springhill Lake Apartments loan replaced the first mortgage of approximately $50,300,000 with a new mortgage in the amount of $113,100,000. Total capitalized loan costs were approximately $2,058,000 during the year ended December 31, 2002. Additional loan costs of approximately $53,000 were capitalized during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $58,000 during the year ended December 31, 2002 due to the write off of unamortized loan costs. In addition, approximately $7,783,000 was initially deposited in an escrow account to be used to complete required repairs at the property. At December 31, 2003, the escrow account balance was approximately $7,070,000. The Partnership distributed the following amounts during the years ended December 31, 2004, 2003, and 2002 (in thousands, except per unit data): Year Ended Per Limited Year Ended Per Limited Year Ended Per Limited December 31, Partnership December 31, Partnership December 31, Partnership 2004 Unit 2003 Unit 2002 Unit Refinance $ 7,744 (2) $11,932 $ 2,818 (1) $ 4,342 $45,840 (1) $70,632 Operations 10,865 15,904 3,932 5,755 5,966 8,733 Total $18,609 $27,836 $ 6,750 $10,097 $51,806 $79,365 (1) Proceeds from the November 2002 refinancing of the mortgage encumbering Springhill Lake Apartments. (2) Proceeds from the July 2004 refinancing of the mortgage encumbering Springhill Lake Apartments. Future cash distributions will depend on the levels of net cash generated from operations, the timing of the debt maturity, property sale and/or refinancing. The Partnership's cash available for distribution is reviewed on a monthly basis. There can be no assurance that the Partnership will generate sufficient funds from operations after required capital improvement expenditures to permit additional distributions to its partners during 2005 or subsequent periods. Other AIMCO and its affiliates owned 522.65 limited partnership units (the "Units") in the Partnership representing 80.53% of the outstanding Units at December 31, 2004. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 80.53% of the outstanding Units, AIMCO and its affiliates are in a position to control all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder. Critical Accounting Policies and Estimates A summary of the Partnership's significant accounting policies is included in "Note A - Organization and Summary of Significant Accounting Policies" which is included in the consolidated financial statements in "Item 8. Financial Statements". The Managing General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the financial statements with useful and reliable information about the Partnership's operating results and financial condition. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Partnership's accounting policies in many areas. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Impairment of Long-Lived Assets The Partnership's investment property is recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of the property may be impaired, the Partnership will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Real property investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of the Partnership's investment property. These factors include, but are not limited to, changes in the national, regional and local economic climate; local conditions, such as an oversupply of multifamily properties; competition from other available multifamily property owners and changes in market rental rates. Any adverse changes in these factors could cause an impairment in the Partnership's asset. Revenue Recognition The Partnership generally leases apartment units for twelve-month terms or less. Commercial building lease terms are generally for terms of 3 to 10 years or month to month. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Rental income attributable to leases, net of any concessions, is recognized on a straight-line basis over the term of the lease. The Partnership evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Partnership is exposed to market risks from adverse changes in interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Partnership's cash and cash equivalents as well as interest paid on its indebtedness. As a policy, the Partnership does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Partnership is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations. The debt encumbering the property bears interest at a variable rate. Based on interest rates at December 31, 2004, a 100 basis point increase or decrease in market interest rates would affect net income by approximately $1.1 million. The Partnership's debt obligations at December 31, 2004 consist of a mortgage of $113,500,000 which is due on August 1, 2011. The mortgage bears interest at a variable rate and requires monthly payments of interest only. The interest rate on the variable rate loan is the Freddie Mac discounted mortgage-backed security index ("DMBS") plus 63 basis points. The rate was 2.728% at December 31, 2004 and resets monthly. Management believes that the fair value of the Partnership's debt approximates its carrying value as of December 31, 2004. Item 8. Financial Statements and Supplementary Data SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP LIST OF FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets - December 31, 2004 and 2003 Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Partners' (Deficiency) Capital - Years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm The Partners of Springhill Lake Investors Limited Partnership We have audited the accompanying consolidated balance sheets of Springhill Lake Investors Limited Partnership as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in partners' (deficiency) capital, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Partnership's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Springhill Lake Investors Limited Partnership at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. /s/ERNST & YOUNG LLP Greenville, South Carolina March 10, 2005 SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (in thousands, except unit data) December 31, 2004 2003 Assets Cash and cash equivalents $ 1,502 $ 5,194 Receivables and deposits 943 1,944 Restricted escrows 535 7,070 Other assets 2,584 3,046 Investment property (Notes B and E): Land 5,833 5,833 Buildings and related personal property 127,632 122,808 133,465 128,641 Less accumulated depreciation (87,489) (80,070) 45,976 48,571 $ 51,540 $ 65,825 Liabilities and Partners' Deficit Liabilities Accounts payable $ 227 $ 830 Tenant security deposit liabilities 654 834 Other liabilities 575 656 Mortgage note payable (Note E) 113,500 110,386 114,956 112,706 Minority Interest (Note H) -- -- Partners' Deficit General partners (3,210) (2,771) Investor limited partners (649 units issued and outstanding) (60,206) (44,110) (63,416) (46,881) $ 51,540 $ 65,825 See Accompanying Notes to Consolidated Financial Statements SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit data) Years Ended December 31, 2004 2003 2002 Revenues: Rental income $31,073 $30,677 $30,462 Other income 1,720 1,522 1,362 Casualty gain (Note F) 31 83 466 Total revenues 32,824 32,282 32,290 Expenses: Operating 13,821 13,990 12,347 General and administrative 575 598 639 Depreciation 7,435 7,377 7,106 Interest 2,715 2,714 4,714 Property taxes 2,173 1,883 1,850 Bad debt expense 376 280 199 Loss on early extinguishment of debt (Note E) 918 -- 58 Total expenses 28,013 26,842 26,913 Income before minority interest 4,811 5,440 5,377 Distributions to minority interest partner in excess of investment (Note H) (2,737) (985) (1,098) Minority interest in net earnings of operating partnerships (Note H) -- -- (1,066) Net income $ 2,074 $ 4,455 $ 3,213 Net income allocated to general partners (5%) $ 104 $ 223 $ 161 Net income allocated to investor limited partners (95%) 1,970 4,232 3,052 Net income $ 2,074 $ 4,455 $ 3,213 Net income per limited partnership unit $ 3,035 $ 6,521 $ 4,703 Distributions per limited partnership unit $27,836 $10,097 $79,365 See Accompanying Notes to Consolidated Financial Statements SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' (DEFICIENCY) CAPITAL For The Years Ended December 31, 2004, 2003 and 2002 (in thousands, except unit data) Total Limited Investor Partners' Partnership General Limited (Deficit) Units Partners Partners Capital Original capital contributions 649 $ -- $ 40,563 $ 40,563 Partners' (deficiency) capital at December 31, 2001 649 $(2,660) $ 6,667 $ 4,007 Distributions to partners -- (298) (51,508) (51,806) Net income for the year ended December 31, 2002 -- 161 3,052 3,213 Partners' deficit at December 31, 2002 649 (2,797) (41,789) (44,586) Distributions to partners (197) (6,553) (6,750) Net income for the year ended December 31, 2003 -- 223 4,232 4,455 Partners' deficit at December 31, 2003 649 (2,771) (44,110) (46,881) Distributions to partners (543) (18,066) (18,609) Net income for the year ended December 31, 2004 -- 104 1,970 2,074 Partners' deficit at December 31, 2004 649 $(3,210) $(60,206) $(63,416) See Accompanying Notes to Consolidated Financial Statements SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2004 2003 2002 Cash flows from operating activities: Net income $ 2,074 $ 4,455 $ 3,213 Adjustments to reconcile net income to net cash provided by operating activities: Distributions to minority interest partner in excess of investment 2,737 985 1,098 Minority interest in net earnings of operating Partnerships -- -- 1,066 Depreciation 7,435 7,377 7,106 Casualty gain (31) (83) (466) Amortization of loan costs 297 437 150 Loss on early extinguishment of debt 918 -- 58 Bad debt expense 376 280 199 Change in accounts: Receivables and deposits 625 (370) 65 Other assets (213) (6) (318) Accounts payable (738) 280 (1,042) Tenant security deposit liabilities (180) 60 (1) Other liabilities (81) (281) (2) Due to affiliate -- -- (99) Net cash provided by operating activities 13,219 13,134 11,027 Cash flows from investing activities: Insurance proceeds received 38 104 445 Property improvements and replacements (4,712) (2,901) (3,858) Net withdrawals from (deposits to) restricted escrows 6,535 (44) (4,694) Refund of construction service fees from affiliate -- -- 2,245 Net cash provided by (used in) investing activities 1,861 (2,841) (5,862) Cash flows from financing activities: Proceeds from advances from affiliate -- -- 156 Payments on advances from affiliate -- (156) (1,853) Payments on mortgage note payable (1,379) (2,714) (1,488) Distributions to partners (18,609) (6,750) (51,806) Distributions to minority interest partner (2,737) (985) (7,634) Repayment of mortgage notes payable (109,007) -- (50,300) Proceeds from mortgage note payable 113,500 -- 113,100 Prepayment penalty (14) -- -- Loan costs paid (526) (53) (2,058) Net cash used in financing activities (18,772) (10,658) (1,883) Net (decrease) increase in cash and cash equivalents (3,692) (365) 3,282 Cash and cash equivalents at beginning of year 5,194 5,559 2,277 Cash and cash equivalents at end of year $ 1,502 $ 5,194 $ 5,559 Supplemental disclosure of cash flow information: Cash paid for interest, including approximately $0, $0, and $41, respectively, paid to an affiliate $ 2,505 $ 2,456 $ 4,586 Supplemental disclosure of non-cash information: Property improvements and replacements in accounts payable and other liabilities $ 135 $ -- $ 494 See Accompanying Notes to Consolidated Financial Statements SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 Note A - Organization and Summary of Significant Accounting Policies Organization: Springhill Lake Investors Limited Partnership (the "Partnership"), a Maryland limited partnership was formed on December 28, 1984, to acquire and own a 90% general partnership interest in Springhill Lake Limited Partnerships I through IX and Springhill Commercial Limited Partnership (the "Operating Partnerships"). The Operating Partnerships own and operate the Springhill Lake complex in Greenbelt, Maryland. The complex consists of 2,899 apartment and townhouse units and a four-store shopping center. The Managing General Partner of the Registrant is AIMCO/Springhill Lake Investors GP, LLC ("AIMCO LLC" or "Managing General Partner") a wholly owned subsidiary of AIMCO Properties, L.P., an affiliate of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2035 unless terminated prior to such date. On December 11, 2003, AIMCO Properties, L.P., a Delaware limited partnership, entered into a Redemption and Contribution Agreement (the "Redemption and Contribution Agreement") with First Winthrop Corporation, a Delaware corporation ("FWC") and the sole shareholder of Three Winthrop Properties, Inc. ("Winthrop"), the former managing general partner of the Partnership, with respect to the acquisition of its general partner interest in the Partnership (the "MGP Interest") by an affiliate of AIMCO Properties, L.P., the operating partnership of AIMCO. As of the time of the execution of the Redemption and Contribution Agreement and until such time as the transfer of the MGP Interest from Winthrop to AIMCO LLC became effective, NHP Management Company ("NHP"), an affiliate of AIMCO Properties, L.P., was vested with the authority to, subject to certain limitations, cause Winthrop to take such actions as it deemed necessary and advisable in connection with the activities of the Partnership. The transfer of the MGP Interest from Winthrop to AIMCO LLC became effective on March 31, 2004. As used herein, the term "Managing General Partner" shall mean Winthrop, with respect to matters occurring prior to March 31, 2004 and AIMCO LLC for matters occurring from and after March 31, 2004. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Partnership and the Operating Partnerships. Theodore N. Lerner's ownership in the Operating Partnerships has been reflected as a minority interest in the accompanying consolidated financial statements. All significant interpartnership accounts and transactions have been eliminated in consolidation. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Allocation of Profits, Gains and Losses: The Partnership Agreement provides for net income and net losses for both financial and tax reporting purposes to be allocated 95% to the Limited Partners and 5% to the General Partner. Gains from property sales are allocated in accordance with the Partnership Agreement. Accordingly, net income as shown in the statements of operations and changes in partners' capital for 2004, 2003 and 2002 was allocated 95% to the Limited Partners and 5% to the General Partner. Net income per limited partnership unit for each year was computed as 95% of net income divided by 649 units outstanding (the "Units"). Depreciation: Depreciation is provided by the straight-line method over the estimated lives of the apartment property and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used for real property over 19 years for additions after May 8, 1985, and before January 1, 1987. As a result of the Tax Reform Act of 1986, for additions after December 31, 1986, the modified accelerated cost recovery method is used for depreciation of (1) real property over 27.5 years and (2) personal property additions over 5 years. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances included approximately $1,421,000 and $5,125,000 at December 31, 2004 and 2003, respectively, that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts. Investment Property: Investment property consists of one apartment complex with a four-store shopping center and is stated at cost. Acquisition fees are capitalized as a cost of real estate. The Partnership capitalizes all expenditures in excess of $250 that clearly relate to the acquisition and installation of real and personal property components. These expenditures include costs incurred to replace existing property components, costs incurred to add a material new feature to a property, and costs that increase the useful life or service potential of a property component. These capitalized costs are depreciated over the useful life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. No adjustments for impairment of value were recorded in the years ended December 31, 2004, 2003 or 2002. Advertising: The Partnership expenses the costs of advertising as incurred. Advertising costs of approximately $135,000, $87,000, and $73,000 for the years ended December 31, 2004, 2003 and 2002, respectively, were charged to operating expense as incurred. Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS No. 131, the Partnership has only one reportable segment. Deferred Costs: Loan costs of approximately $985,000 and $2,111,000 are included in other assets in the accompanying consolidated balance sheet as of December 31, 2004 and 2003, respectively. Accumulated amortization of approximately $46,000 and $497,000 was also included in other assets as of December 31, 2004 and 2003, respectively. The loan costs at December 31, 2004 are amortized over the term of the related loan agreement. Amortization expense is included in interest expense in the accompanying consolidated statements of operations. Amortization of loan costs is expected to be approximately $141,000 each year for years 2005 through 2009. Leasing commissions and other direct costs incurred in connection with successful leasing efforts are deferred and amortized over the terms of the related leases. Amortization of these costs is included in operating expenses. Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amount of its financial instruments (except for long term debt) approximate their fair value due to the short term maturity of these instruments. The Partnership estimates the fair value of its long term debt by discounting future cash flows using a discount rate commensurate with that currently believed to be available to the Partnership for similar term, fully amortizing long term debt. The fair value of the Partnership's long term debt approximates its carrying value at December 31, 2004. Leases: The Partnership generally leases apartment units for twelve-month terms or less. Commercial building lease terms are generally for terms of 3 to 10 years of month to month. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Rental income attributable to leases, net of any concessions, is recognized on a straight-line basis over the term of the lease. The Partnership evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants. Tenant Security Deposits: The Partnership requires security deposits from lessees for the duration of the lease and are included in receivables and deposits in the accompanying consolidated balance sheets. Deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on its rental payments. Income Taxes: No provision for income taxes is reflected in the accompanying consolidated financial statements. Each partner is required to report on his individual tax return his allocable share of income, gains, losses, deductions and credits. Note B - Investment Property and Accumulated Depreciation Initial Cost Investment Property To Partnership Buildings Cost and Related Capitalized Personal Subsequent to Description Encumbrances Land Property Acquisition (in thousands) (in thousands) Springhill Lake $113,500 $ 5,833 $ 67,484 $ 60,148 Gross Amount At Which Carried At December 31, 2004 (in thousands) Buildings And Related Personal Accumulated Date Depreciable Description Land Property Total Depreciation Acquired Life-Years Springhill Lake $5,833 $127,632 $133,465 $ 87,489 10/84 5-30 Reconciliation of "Investment Property and Accumulated Depreciation": Years Ended December 31, 2004 2003 2002 (in thousands) Investment Property Balance at beginning of year $128,641 $126,302 $125,133 Property improvements 4,847 2,407 3,679 Disposition of property (23) (68) (265) Refund of construction service fees previously capitalized (1) -- -- (2,245) Balance at end of year $133,465 $128,641 $126,302 Accumulated Depreciation Balance at beginning of year $ 80,070 $ 72,740 $ 65,806 Depreciation of real estate 7,435 7,377 7,106 Disposition of property (16) (47) (172) Balance at end of year $ 87,489 $ 80,070 $ 72,740 (1) See Note D - Related Party Transactions for further information. The aggregate cost of the real estate for Federal income tax purposes at December 31, 2004 and 2003, is approximately $132,415,000 and $127,734,000. The accumulated depreciation taken for Federal income tax purposes at December 31, 2004 and 2003 is approximately $100,531,000 and $96,655,000. Note C - Taxable Income Taxable income or loss of the Partnership is reported in the income tax returns of its partners. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. The following is a reconciliation of reported income and Federal taxable income (in thousands, except per unit data): 2004 2003 2002 Net income as reported $ 2,074 $ 4,455 $ 3,213 Excess of accelerated depreciation for income tax purposes 3,558 3,623 778 Deferred revenue - laundry income (65) (79) (79) Other 978 117 542 Casualty (32) -- -- Federal taxable income $ 6,513 $ 8,116 $ 4,454 Federal taxable income per limited partnership unit $ 9,535 $11,881 $ 6,519 The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net liabilities (in thousands): 2004 2003 Net liabilities as reported: $(63,416) $(46,881) Land and buildings (1,050) (907) Accumulated depreciation (13,042) (16,585) Deferred sales commission -- 65 Other 4,664 3,558 Net liabilities - income tax method $(72,844) $(60,750) Note D - Related Party Transactions The Partnership has no employees and depends on the Managing General Partner and its affiliates for the management and administration of all Partnership activities. The Limited Partnership Agreement provides for (i) certain payments to affiliates for services (ii) reimbursements of certain expenses incurred by affiliates on behalf of the Partnership (iii) an annual asset management fee of $100,000 and (iv) an annual administration fee of $10,000. Affiliates of the Managing General Partner receive 3% of residential rent collections and 5% of commercial income from the Partnership's property as compensation for providing property management services. The Partnership paid to such affiliates approximately $965,000, $953,000 and $936,000 for the years ended December 31, 2004, 2003 and 2002, respectively, which is included in operating expense. Affiliates of the Managing General Partner charged the Partnership reimbursement of accountable administrative expenses amounting to approximately $381,000, $413,000 and $435,000 for the years ended December 31, 2004, 2003 and 2002, respectively, which is included in general and administrative expenses. For the year ended 2002, the first three quarters were based on estimated amounts and in the fourth quarter the reimbursement was adjusted based on actual costs (see "Note J"). During 2001, the Partnership was charged, by affiliates of the Managing General Partner, approximately $2,245,000 for fees related to construction management services for work performed during 1999, 2000 and 2001. These fees had been capitalized and included in investment property. During the second quarter of 2002, it was determined by the Managing General Partner that these fees should not have been charged and the Partnership was refunded the full amount. Accordingly, such previously capitalized fees were no longer included in investment property at December 31, 2002. In accordance with the Partnership Agreement, the Managing General Partner earned approximately $100,000 in asset management fees and approximately $10,000 in administrative fees for the years ended December 31, 2004, 2003 and 2002, which is included in general and administrative expense. During the year ended December 31, 2002, an affiliate of the Managing General Partner advanced the Partnership approximately $156,000. There were no advances made for the years ended December 31, 2004 and 2003. Approximately $156,000 and $1,853,000 was repaid during 2003 and 2002, respectively. At December 31, 2004 and 2003, there was no balance due for advances from affiliate. In accordance with the Partnership Agreement, interest is charged at the prime rate plus 2%. The Partnership recognized approximately $30,000 of interest expense related to these advances during the year ended December 31, 2002. Interest expense for the year ended December 31, 2003 amounted to less than $1,000. The Partnership insures its property up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its property above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the years ended December 31, 2004, 2003 and 2002, the Partnership was charged by AIMCO and its affiliates approximately $288,000, $273,000 and $331,000, respectively, for insurance coverage and fees associated with policy claims administration. AIMCO and its affiliates owned 522.65 limited partnership units (the "Units") in the Partnership representing 80.53% of the outstanding Units at December 31, 2004. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 80.53% of the outstanding Units, AIMCO and its affiliates are in a position to control all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder. Note E - Mortgage Note Payable The terms of the mortgage note payable are as follows: Principal Principal Balance Balance Principal Due At Due At Balance Property December 31, Interest Maturity Due At 2004 2003 Rate Date Maturity (in thousands) (in thousands) Springhill Lake 1st mortgage $113,500 $110,386 (1) 08/11 $113,500 (1) Adjustable rate based on Freddie Mac discounted mortgage-backed security index plus 63 basis points. The rate at December 31, 2004 was 2.728% and will reset monthly. On July 22, 2004, the Partnership refinanced the mortgage encumbering Springhill Lake Apartments. The new mortgage of $113,500,000 replaced existing mortgage indebtedness of approximately $109,007,000. The new mortgage bears interest at a variable rate and has a balloon payment of $113,500,000 due on August 1, 2011. The interest rate on the variable rate loan is the Freddie Mac discounted mortgage-backed security index plus 63 basis points. The rate was 2.728% at December 31, 2004. After repayment of the existing mortgage, payment of closing costs, and funding of a $675,000 repair escrow account and operating reserves, the Partnership received net proceeds of approximately $3,294,000. The Partnership also received a refund of approximately $7,085,000 relating to the repair escrow required by the previous lender. Total capitalized loan costs associated with this refinancing were approximately $526,000 during the year ended December 31, 2004. The Partnership recognized a loss on the early extinguishment of debt of approximately $918,000 due to the write off of approximately $904,000 of unamortized loan costs and a prepayment penalty of approximately $14,000 during the year ended December 31, 2004. On November 14, 2002, the Partnership refinanced its then existing mortgage encumbering Springhill Lake Apartments. This loan was initially refinanced under an interim credit facility ("Interim Credit Facility") which had a term of three months. The Interim Credit Facility included properties in other partnerships that are affiliated with the Partnership. However, the Interim Credit Facility created separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. During the term of the Facility, the property was required to make interest-only payments. The first month's interest, which was paid at the date of the refinancing, was calculated at LIBOR plus 70 basis points. Interest for the following month was calculated at LIBOR plus 150 basis points. During December 2002 the loan was sold to Fannie Mae under a permanent credit facility ("Permanent Credit Facility"). The Credit Facility had a maturity of five years, with one five-year extension option. This Permanent Credit Facility also created separate loans for each property that were not cross-collateralized or cross-defaulted with the other property loans. Each note under this Permanent Credit Facility began as a variable rate loan with the option of converting to a fixed rate loan after three years. The interest rate on the variable rate loans was the Fannie Mae discounted mortgage-backed security index plus 85 basis points. The rate was 1.92% at December 31, 2003 and reset monthly. Each loan automatically renewed at the end of each month. In addition, monthly principal payments were required based on a 30 year amortization schedule, using the interest rate in effect during the first month that any property was on the Permanent Credit Facility. The loans could be prepaid without penalty. The 2002 refinancing of the existing Springhill Lake Apartments loan replaced the first mortgage of approximately $50,300,000 with a new mortgage in the amount of $113,100,000. Total capitalized loan costs were approximately $2,058,000 during the year ended December 31, 2002. Additional loan costs of approximately $53,000 were capitalized during the year ended December 31, 2003. The Partnership recognized a loss on the early extinguishment of debt of approximately $58,000 during the year ended December 31, 2002 due to the write off of unamortized loan costs. In addition, approximately $7,783,000 was initially deposited in an escrow account to be used to complete required repairs at the property. At December 31, 2003, the escrow account balance was approximately $7,070,000. The mortgage note payable is non-recourse and is secured by pledge of the Partnership's interest in the Operating Partnerships, and joint and several guarantees by the Operating Partnerships which, in turn, are secured by an indemnity first mortgage on the Operating Partnerships and a pledge of the stock of Springfield Facilities, Inc., an affiliate. Further, the property may not be sold subject to existing indebtedness. Note F - Casualty Gains During September 2003, Hurricane Isabel caused damaged to some of the apartment buildings at the property. During the year ended December 31, 2004, all work was completed to repair the damage and the property recorded a casualty gain of approximately $31,000. The gain was the result of the receipt of insurance proceeds of approximately $38,000 offset by approximately $7,000 undepreciated damaged assets being written off. During March 2002, a fire occurred at Springhill Lake Apartments which resulted in damage to eleven units at the property. During the year ended December 31, 2003, all work was completed to repair the damage and the property recorded a casualty gain of approximately $83,000. The gain was the result of the receipt of insurance proceeds of approximately $104,000 offset by approximately $21,000 of undepreciated damaged assets being written off. During April 2001 a fire occurred at Springhill Lake Apartments which resulted in damage to two buildings at the property. The property initially received $145,000 of insurance proceeds during August 2001 and received the remaining balance of $445,000 in June 2002. All work has been completed with the total costs to restore the buildings totaling approximately $595,000. A casualty gain was recognized during the year ended December 31, 2002 of approximately $466,000 as a result of the receipt of $590,000 in total insurance proceeds less the write-off of approximately $124,000 in undepreciated assets. Note G - Operating Leases One of the Operating Partnerships leases retail space to tenants in the shopping center under operating leases which expire in various years through August 31, 2011. The leases call for base monthly rentals plus additional charges for pass throughs and percentage rent. Minimum future rental payments to be received subsequent to December 31, 2004 are as follows (in thousands): 2005 $ 158 2006 163 2007 149 2008 129 2009 111 Thereafter 155 $ 865 Note H - Minority Interest The limited partnership interest of Theodore N. Lerner in the operating partnerships is reflected as a minority interest in the accompanying consolidated financial statements. Minority interest in net earnings of the operating partnerships recorded by the Partnership totaled approximately zero for the years ended December 31, 2004 and 2003. During the years ended December 31, 2004 and 2003, the Partnership did not recognize any minority interest in net earnings of the operating partnerships as previous distributions to the minority partner during 2002 reduced the minority interest partner's balance to zero. For the years ended December 31, 2004 and 2003, distributions to the minority interest partner of approximately $2,737,000 and $985,000, respectively, were made in excess of the minority partner's investment in the operating partnerships. When the operating partnerships make distributions in excess of the minority partner's investment balance, the Partnership, as the majority partner, records a charge equal to the minority partner's excess distribution over the investment balance. The charge is classified as distributions to the minority partner in excess of investment on the accompanying consolidated statements of operations. Cumulative distributions to the minority partner in excess of investment totaled approximately $4,820,000 and $2,083,000 at December 31, 2004 and 2003, respectively. No income is allocated to the minority partner until all previous losses recognized by the majority partner are recovered. For the years ended December 31, 2004 and 2003, approximately $994,000 and $1,070,000, respectively, in earnings were allocated to the majority partner to recover previous losses recognized. Earnings will continue to be allocated to the majority partner to recover previous losses recognized until such time as the net amount of approximately $2,756,000 at December 31, 2004 is recovered. Note I - Selected Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations for the Partnership (in thousands, except per unit data): 1st 2nd 3rd 4th 2004 Quarter Quarter Quarter Quarter Total Total revenues $ 8,003 $ 8,116 $ 8,337 $ 8,368 $32,824 Total expenses 6,581 6,487 10,999 6,683 30,750 Net income (loss) $ 1,422 $ 1,629 $(2,662) $ 1,685 $ 2,074 Net income (loss) per limited partnership unit $ 2,082 $ 2,385 $(3,897) $ 2,465 $ 3,035 1st 2nd 3rd 4th 2003 Quarter Quarter Quarter Quarter Total Total revenues $ 7,902 $ 8,048 $ 8,165 $ 8,167 $32,282 Total expenses 7,656 6,626 6,789 6,756 27,827 Net income $ 246 $ 1,422 $ 1,376 $ 1,411 $ 4,455 Net income per limited partnership unit $ 361 $ 2,082 $ 2,014 $ 2,064 $ 6,521 Note J - Fourth-Quarter Adjustment The Partnership's policy is to record management reimbursements to the Managing General Partner as allowed under the Partnership Agreement on a quarterly basis, using estimated financial information furnished by an affiliate of the Managing General Partner. For the first three quarters of 2002 these reimbursements of accountable administrative expenses were based on estimated amounts. During the fourth quarter of 2002 the Partnership recorded an adjustment to management reimbursements to the Managing General Partner of approximately ($99,000) due to a difference in the estimated costs and the actual costs incurred. The actual management reimbursements to the Managing General Partner for the year ended December 31, 2002 was approximately $435,000 as compared to the estimated management reimbursements to the Managing General Partner for the nine months ended September 30, 2002 of approximately $401,000. The adjustment to management reimbursements was included in general and administrative expenses. Note K - Contingencies As previously disclosed, AIMCO Properties L.P. and NHP Management Company, both affiliates of the Managing General Partner, are defendants in an action in the United States District Court, District of Columbia. The plaintiffs have styled their complaint as a collective action under the Fair Labor Standards Act ("FLSA") and seek to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties L.P. failed to compensate maintenance workers for time that they were required to be "on-call". Additionally, plaintiffs allege AIMCO Properties L.P. failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call". The defendants have filed an answer to the amended complaint denying the substantive allegations. Discovery relating to the certification of the collective action has concluded and briefing on the matter is currently underway. Although the outcome of any litigation is uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome will have a material adverse effect on its financial condition or results of operations. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's consolidated financial condition or results of operations. The Partnership is unaware of any other pending or outstanding litigation matters involving it or its investment property that are not of a routine nature arising in the ordinary course of business. Environmental Various Federal, state and local laws subject property owners or operators to liability for management, and the costs of removal or remediation, of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of the hazardous substances. The presence of, or the failure to manage or remedy properly, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by government agencies, the presence of hazardous substances on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal, remediation or disposal of hazardous substances through a licensed disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership and operation of its property, the Partnership could potentially be liable for environmental liabilities or costs associated with its property. Mold The Partnership is aware of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold, some of which have resulted in substantial monetary judgments or settlements. The Partnership has only limited insurance coverage for property damage loss claims arising from the presence of mold and for personal injury claims related to mold exposure. Affiliates of the Managing General Partner have implemented a national policy and procedures to prevent or eliminate mold from its properties and the Managing General Partner believes that these measures will eliminate, or at least minimize, the effects that mold could have on residents. To date, the Partnership has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change the Managing General Partner can make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on the Partnership's consolidated financial condition or results of operations. As previously disclosed, the Central Regional Office of the United States Securities and Exchange Commission (the "SEC") is conducting a formal investigation relating to certain matters. Although the staff of the SEC is not limited in the areas that it may investigate, AIMCO believes the areas of investigation include AIMCO's miscalculated monthly net rental income figures in third quarter 2003, forecasted guidance, accounts payable, rent concessions, vendor rebates, capitalization of payroll and certain other costs, and tax credit transactions. AIMCO is cooperating fully. AIMCO is not able to predict when the matter will be resolved. AIMCO does not believe that the ultimate outcome will have a material adverse effect on its consolidated financial condition or results of operations. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's consolidated financial condition or results of operations. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9a. Controls and Procedures (a) Disclosure Controls and Procedures. The Partnership's management, with the participation of the principal executive officer and principal financial officer of the Managing General Partner, who are the equivalent of the Partnership's principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer of the Managing General Partner, who are the equivalent of the Partnership's principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership's disclosure controls and procedures are effective. (b) Internal Control Over Financial Reporting. There have not been any changes in the Partnership's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. Item 9b. Other Information None. PART III Item 10. Directors and Executive Officers of the Registrant The Registrant has no directors or officers. AIMCO/Springhill Lake Investors GP, LLC is the Managing General Partner and manages and controls substantially all of the Registrant's affairs and has general responsibility and ultimate authority in all matters affecting its business. On December 11, 2003, AIMCO Properties, L.P., a Delaware limited partnership, entered into a Redemption and Contribution Agreement (the "Redemption and Contribution Agreement") with First Winthrop Corporation, a Delaware corporation ("FWC") and the sole shareholder of Three Winthrop Properties, Inc. ("Winthrop"), the former managing general partner of the Partnership, with respect to the acquisition of its general partner interest in the Partnership (the "MGP Interest") by an affiliate of AIMCO Properties, L.P., the operating partnership of AIMCO. As of the time of the execution of the Redemption and Contribution Agreement and until such time as the transfer of the MGP Interest from Winthrop to AIMCO LLC became effective, NHP Management Company ("NHP"), an affiliate of AIMCO Properties, L.P., was vested with the authority to, subject to certain limitations, cause Winthrop to take such actions as it deemed necessary and advisable in connection with the activities of the Partnership. The transfer of the MGP Interest from Winthrop to AIMCO LLC became effective on March 31, 2004. As used herein, the term "Managing General Partner" shall mean Winthrop, with respect to matters occurring prior to March 31, 2004 and AIMCO LLC for matters occurring from and after March 31, 2004. There are no family relationships between or among any directors or officers. Name Age Position Harry G. Alcock 42 Director and Executive Vice President Martha L. Long 45 Director and Senior Vice President Miles Cortez 61 Executive Vice President, General Counsel and Secretary Patti K. Fielding 41 Executive Vice President Paul J. McAuliffe 48 Executive Vice President and Chief Financial Officer Thomas M. Herzog 42 Senior Vice President and Chief Accounting Officer Stephen B. Waters 43 Vice President Harry G. Alcock was appointed as a Director of the Managing General Partner in October 2004 and was appointed Executive Vice President of the Managing General Partner in February 2004 and has been Executive Vice President and Chief Investment Officer of AIMCO since October 1999. Prior to October 1999 Mr. Alcock served as a Vice President of AIMCO from July 1996 to October 1997, when he was promoted to Senior Vice President Acquisitions where he served until October 1999. Mr. Alcock has had responsibility for acquisition and financing activities of AIMCO since July 1994. Martha L. Long has been a Director and Senior Vice President of the Managing General Partner since February 2004. Ms. Long has been with AIMCO since October 1998 and has served in various capacities. From 1998 to 2001, Ms. Long served as Senior Vice President and Controller of AIMCO and the Managing General Partner. During 2002 and 2003, Ms. Long served as Senior Vice President of Continuous Improvement for AIMCO. Miles Cortez was appointed Executive Vice President, General Counsel and Secretary of the Managing General Partner in February 2004 and of AIMCO in August 2001. Prior to joining AIMCO, Mr. Cortez was the senior partner of Cortez Macaulay Bernhardt & Schuetze LLC, a Denver law firm, from December 1997 through September 2001. Patti K. Fielding was appointed Executive Vice President - Securities and Debt of the Managing General Partner in February 2004 and of AIMCO in February 2003. Ms. Fielding was appointed Treasurer of AIMCO in January 2005. Ms. Fielding is responsible for debt financing and the treasury department. Ms. Fielding previously served as Senior Vice President - Securities and Debt of AIMCO from January 2000 to February 2003. Ms. Fielding joined AIMCO in February 1997 as a Vice President. Thomas M. Herzog was appointed Senior Vice President and Chief Accounting Officer of the Managing General Partner in February 2004 and of AIMCO in January 2004. Prior to joining AIMCO in January 2004, Mr. Herzog was at GE Real Estate, serving as Chief Accounting Officer & Global Controller from April 2002 to January 2004 and as Chief Technical Advisor from March 2000 to April 2002. Prior to joining GE Real Estate, Mr. Herzog was at Deloitte & Touche LLP from 1990 until 2000. Paul J. McAuliffe has been Executive Vice President and Chief Financial Officer of the Managing General Partner since April 2002. Mr. McAuliffe has served as Executive Vice President of AIMCO since February 1999 and was appointed Chief Financial Officer of AIMCO in October 1999. From May 1996 until he joined AIMCO, Mr. McAuliffe was Senior Managing Director of Secured Capital Corp. Stephen B. Waters was appointed Vice President of the Managing General Partner in April 2004. Mr. Waters previously served as a Director of Real Estate Accounting since joining AIMCO in September 1999. Mr. Waters has responsibilities for real estate and partnership accounting with AIMCO. One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act. Further, one or more of the above persons are also directors and/or officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act. The board of directors of the Managing General Partner does not have a separate audit committee. As such, the board of directors of the Managing General Partner fulfills the functions of an audit committee. The board of directors has determined that Martha L. Long meets the requirement of an "audit committee financial expert". The director and officers of the Managing General Partner with authority over the Partnership are all employees of subsidiaries of AIMCO. AIMCO has adopted a code of ethics that applies to such director and officers that is posted on AIMCO's website (www.AIMCO.com). AIMCO's website is not incorporated by reference to this filing. Item 11. Executive Compensation The Registrant is not required to and did not pay any compensation to the officers or directors of the Managing General Partner. The Managing General Partner does not presently pay any compensation to any of its officers and directors (See "Item 13, Certain Relationships and Related Transactions"). Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners Except as noted below, no person or entity was known by the Registrant to be the beneficial owner or more than 5% of the Limited Partnership Units of the Registrant as of December 31, 2004. Number Entity of Units Percentage AIMCO IPLP, L.P. (an affiliate of AIMCO) 241.15 37.16% AIMCO Properties, L.P. (an affiliate of AIMCO) 281.50 43.37% AIMCO IPLP, L.P. is ultimately owned by AIMCO. Its business address is 55 Beattie Place, Greenville, South Carolina 29601. AIMCO Properties, L.P. is indirectly ultimately controlled by AIMCO. Its business address is 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237. No director or officer of the Managing General Partner owns any Units. Item 13. Certain Relationships and Related Transactions The Partnership has no employees and depends on the Managing General Partner and its affiliates for the management and administration of all Partnership activities. The Limited Partnership Agreement provides for (i) certain payments to affiliates for services (ii) reimbursements of certain expenses incurred by affiliates on behalf of the Partnership (iii) an annual asset management fee of $100,000 and (iv) an annual administration fee of $10,000. Affiliates of the Managing General Partner receive 3% of residential rent collections and 5% of commercial income from the Partnership's property as compensation for providing property management services. The Partnership paid to such affiliates approximately $965,000, $953,000 and $936,000 for the years ended December 31, 2004, 2003 and 2002, respectively, which is included in operating expense. Affiliates of the Managing General Partner charged the Partnership reimbursement of accountable administrative expenses amounting to approximately $381,000, $413,000 and $435,000 for the years ended December 31, 2004, 2003 and 2002, respectively, which is included in general and administrative expenses. For the year ended 2002, the first three quarters were based on estimated amounts and in the fourth quarter the reimbursement was adjusted based on actual costs (see Item 8. Financial Statements Note J). During 2001, the Partnership was charged, by affiliates of the Managing General Partner, approximately $2,245,000 for fees related to construction management services for work performed during 1999, 2000 and 2001. These fees had been capitalized and included in investment property. During the second quarter of 2002, it was determined by the Managing General Partner that these fees should not have been charged and the Partnership was refunded the full amount. Accordingly, such previously capitalized fees were no longer included in investment property at December 31, 2002. In accordance with the Partnership Agreement, the Managing General Partner earned approximately $100,000 in asset management fees and approximately $10,000 in administrative fees for the years ended December 31, 2004, 2003 and 2002, which is included in general and administrative expense. During the year ended December 31, 2002, an affiliate of the Managing General Partner advanced the Partnership approximately $156,000. There were no advances made for the years ended December 31, 2004 and 2003. Approximately $156,000 and $1,853,000 was repaid during 2003 and 2002, respectively. At December 31, 2004 and 2003, there was no balance due for advances from affiliate. In accordance with the Partnership Agreement, interest is charged at the prime rate plus 2%. The Partnership recognized approximately $30,000 of interest expense related to these advances during the year ended December 31, 2002. Interest expense for the year ended December 31, 2003 amounted to less than $1,000. The Partnership insures its property up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its property above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the years ended December 31, 2004, 2003 and 2002, the Partnership was charged by AIMCO and its affiliates approximately $288,000, $273,000 and $331,000, respectively, for insurance coverage and fees associated with policy claims administration. AIMCO and its affiliates owned 522.65 limited partnership units (the "Units") in the Partnership representing 80.53% of the outstanding Units at December 31, 2004. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 80.53% of the outstanding Units, AIMCO and its affiliates are in a position to control all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder. Item 14. Principal Accounting Fees and Services The Managing General Partner has reappointed Ernst & Young LLP as independent auditors to audit the financial statements of the Partnership for 2005. The aggregate fees billed for services rendered by Ernst & Young LLP for 2004 and 2003 are described below. Audit Fees. Fees for audit services totaled approximately $24,000 and $32,000 for 2004 and 2003, respectively. Fees for audit services also include fees for the reviews of the Partnership's Quarterly Reports on Form 10-Q. Tax Fees. Fees for tax services totaled approximately $49,000 and $29,000 for 2004 and 2003, respectively. Item 15. Exhibits See Exhibit Index. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP By: AIMCO/Springhill Lake Investors GP,LLC Managing General Partner By: /s/Martha L. Long Martha L. Long Senior Vice President /s/Stephen B. Waters By: Stephen B. Waters Vice President Date: March 25, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. /s/Martha L. Long Director and Senior Date: March 25, 2005 Martha L. Long Vice President /s/Stephen B. Waters Vice President Date: March 25, 2005 Stephen B. Waters /s/Harry G. Alcock Director and Executive Date: March 25, 2005 Harry G. Alcock Vice President Index to Exhibits Exhibit No. Document 3.4 Amended and Restated Limited Partnership Agreement and Certificate of Amendment of Springhill Lake Investors Limited Partnership(1) 3.4 (a) Amendment to Amended and Restated Limited Partnership Agreement of Springhill Lake Investors Limited Partnership dated August 23, 1995 (3) 10 (a) Amended and Restated Limited Partnership Agreement and Certificate of Amendment of First Springhill Lake Limited Partnership (Partnership Agreements of Second - Ninth Springhill Lake Limited Partnerships are substantially identical)(1) (j) Consolidated, Amended and Restated Multifamily Note dated November 1, 2002 between Springhill Lake Investors Limited Partnership and GMAC Commercial Mortgage Corporation (2) (k) Guaranty dated November 1, 2002 by AIMCO Properties, L.P., for the benefit of GMAC Commercial Mortgage Corporation (2) (l) Consolidated, Amended and Restated Payment Guaranty dated November 1, 2002 by the Operating Partnerships (2) (m) Completion/Repair and Security Agreement dated November 1, 2002 between the Operating Partnerships and GMAC Commercial Mortgage Corporation (2) (n) Replacement Reserve and Security Agreement dated November 1, 2002 between the Operating Partnerships and GMAC Commercial Mortgage Corporation (2) (o) Promissory Note dated November 1, 2002 between Springhill Lake Investors Limited Partnership and the Operating Partnerships (2) (p) Maryland Amended and Restated Multifamily Note dated July 22, 2004 between Springhill Lake Investors Limited Partnership and GMAC Commercial Mortgage Corporation (4) (q) Amended and Restated Limited Guaranty dated July 22, 2004 by AIMCO Properties, L.P., for the benefit of GMAC Commercial Mortgage Corporation (4) (r) Amended and Restated Payment Guaranty dated July 22, 2004 by the Operating Partnerships (4) (s) Repair Escrow Agreement dated July 22, 2004 between the Springhill Lake Investors Limited Partnership and the Operating Partnerships and GMAC Commercial Mortgage Corporation (4) (t) Replacement Reserve Agreement dated July 22, 2004 between the Springhill Lake Investors Limited Partnership and the Operating Partnerships and GMAC Commercial Mortgage Corporation (4) (u) Maryland Amended and Restated Promissory Note dated July 22, 2004 between Springhill Lake Investors Limited Partnership and the Operating Partnerships (4) 31.1 Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ------------------------------------------------------------------------------ (1) Incorporated herein by reference to the Registrant's Registration Statement on Form 10 dated April 30, 1986, as thereafter amended. (2) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated November 14, 2002, as filed November 29, 2002. (3) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated August 23, 1995, as filed September 5, 1995. (4) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated July 22, 2004, as filed August 4, 2004. Exhibit 31.1 CERTIFICATION I, Martha L. Long, certify that: 1. I have reviewed this annual report on Form 10-K of Springhill Lake Investors Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 25, 2005 /s/Martha L. Long Martha L. Long Senior Vice President of AIMCO/Springhill Lake Investors GP, LLC, equivalent of the chief executive officer of the Partnership Exhibit 31.2 CERTIFICATION I, Stephen B. Waters, certify that: 1. I have reviewed this annual report on Form 10-K of Springhill Lake Investors Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 25, 2005 /s/Stephen B. Waters Stephen B. Waters Vice President of AIMCO/Springhill Lake Investors GP, LLC equivalent of the chief financial officer of the Partnership Exhibit 32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-K of Springhill Lake Investors Limited Partnership (the "Partnership"), for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Martha L. Long, as the equivalent of the Chief Executive Officer of the Partnership, and Stephen B. Waters, as the equivalent of the Chief Financial Officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/Martha L. Long Name: Martha L. Long Date: March 25, 2005 /s/Stephen B. Waters Name: Stephen B. Waters Date: March 25, 2005 This certification is furnished with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.