SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2004 Commission File Number 33-19316 Qualified Housing Partners Limited Partnership (Exact name of registrant as specified in its charter) North Carolina 56-1589469 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification Number) Suite 220 4700 Homewood Court Raleigh, North Carolina 27609 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (919)787-4243 Indicate by a 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 such shorter period the registrant has been 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 whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act.). Yes No X As of September 30, 2004, there were 8,673 units of limited partnership interests in registrant outstanding, $1,000 per unit, and the aggregate value of such units was $8,673,000. Of such units, 4,371 having an aggregate value of $4,371,000, were held by limited partners deemed by the registrant to be non-affiliates. PART I FINANCIAL INFORMATION QUALIFIED HOUSING PARTNERS LIMITED PARTNERSHIP Item 1: Financial Statements - Consolidated Balance Sheets - Unaudited Consolidated Statements of Income and Expenses (Three Months) - Unaudited Consolidated Statements of Income and Expenses (Nine Months) - Unaudited Consolidated Statements of Cash Flows - Unaudited Notes to Financial Statements Item 2: Management's Discussion - Liquidity and Capital Resources - Results of Operations - Tax Credits Item 4: Controls and Procedures The Partnership carried out an evaluation under the supervision and with the participation of the Partnership's management, including the Partnership's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures as of September 30, 2004, pursuant to Securities Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures are effective in timely alerting them to material information relating to the Partnership required to be included in the Partnership's periodic SEC Filings. There were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls during the most recent fiscal quarter. QUALIFIED HOUSING PARTNERS LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS September 30, 2004 and December 31, 2003 09/30/04 12/31/03 (Unaudited) (*) ASSETS Rental Properties Land $1,326,402 $1,326,402 Buildings 34,773,704 34,757,798 Furniture & Fixtures 2,362,449 2,357,006 38,462,555 38,436,206 Accumulated Depreciation (14,159,595) (13,484,052) 24,302,960 24,952,154 Cash 374,659 305,114 Other Assets 2,047,401 1,877,743 TOTAL ASSETS $26,725,020 $27,145,011 LIABILITIES AND PARTNERS' CAPITAL Liabilities Applicable to Rental Properties $23,994,919 $24,070,613 Other Liabilities 1,469,923 1,325,332 Total Liabilities 25,464,842 25,395,945 Minority Interests in Subsidiary Operating Partnerships 1,693,407 1,698,076 Partners' Capital (433,229) 50,990 TOTAL LIABILITIES AND PARTNERS' CAPITAL $26,725,020 $27,145,011 See accompanying notes. *Derived from audited consolidated balance sheet. CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES Three Months Ended September 30, 2004 and 2003 (Unaudited) 07/01/04- 07/01/03- 09/30/04 09/30/03 Revenue Rent $957,502 $1,024,639 Other 20,649 14,966 978,151 1,039,605 Rental Expense Interest 130,302 136,216 Depreciation 225,182 215,415 Repairs and Maintenance 288,369 290,273 Utilities 91,600 88,525 Real Estate Taxes 94,171 91,317 Management Fees 123,159 111,065 Advertising 2,485 2,339 Other 170,234 163,080 1,125,502 1,098,230 Loss from Rental Activities (147,351) (58,625) Other Income (Expenses) Interest Income 19 18 Management Fees 0 (21,141) Administrative Costs (5,875) (8,745) Loss Before Deducting Minority Interests in Subsidiary Operating Partnerships (153,207) (88,493) Minority Interests in Losses of Subsidiary Operating Partnerships 1,491 600 Net Loss ($151,716) ($87,893) Net Loss Allocated to General Partners ($1,517) ($879) Net Loss Allocated to Limited Partners (150,199) (87,014) Net Loss ($151,716) ($87,893) Net Loss per Limited Partnership Unit ($17.32) ($10.03) Average Number of Limited Partnership Units Outstanding 8,673 8,673 See accompanying notes. CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES Nine Months Ended September 30, 2004 and 2003 (Unaudited) 01/01/04- 01/01/03- 09/30/04 09/30/03 Revenue Rent $2,896,975 $3,061,303 Other 56,722 63,309 2,953,697 3,124,612 Rental Expense Interest 406,169 438,629 Depreciation 675,543 659,730 Repairs and Maintenance 870,825 852,842 Utilities 264,293 273,177 Real Estate Taxes 276,054 272,210 Management Fees 371,108 346,769 Advertising 7,018 5,918 Other 520,960 495,186 3,391,970 3,344,461 Loss from Rental Activities (438,273) (219,849) Other Income (Expenses) Interest Income 45 61 Management Fees (13,000) (63,422) Administrative Costs (37,421) (36,463) Loss Before Deducting Minority Interests in Subsidiary Operating Partnerships (488,649) (319,673) Minority Interests in Losses of Subsidiary Operating Partnerships 4,429 2,224 Net Loss ($484,220) ($317,449) Net Loss Allocated to General Partners ($4,842) ($3,174) Net Loss Allocated to Limited Partners (479,378) (314,275) Net Loss ($484,220) ($317,449) Net Loss per Limited Partnership Unit ($55.27) ($36.24) Average Number of Limited Partnership Units Outstanding 8,673 8,673 See accompanying notes. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2004 and 2003 (Unaudited) 01/01/04- 01/01/03- 09/30/04 09/30/03 Cash Flows from Operating Activities Net Loss ($484,220) ($317,449) Adjustments to Reconcile Net Loss To Net Cash Provided by Operating Activities: Depreciation 675,543 659,730 Minority Interest in Losses of Subsidiary Operating Partnerships (4,429) (2,224) Change in Other Assets and Liabilities (15,066) 325,062 Net Cash Provided by Operating Activities 171,828 665,119 Cash Flows from Investing Activities Purchases of Buildings and Equipment (26,349) (146,466) Net Cash Used by Investing Activities (26,349) (146,466) Cash Flows from Financing Activities Principal Payments on Borrowings (75,694) (483,270) Return of Equity to Minority Investors (240) (225) Net Cash Used by Financing Activities (75,934) (483,495) Net Increase (Decrease) in Cash 69,545 35,158 Cash Beginning 305,114 211,526 Cash Ending $374,659 $246,684 See accompanying notes. NOTES TO FINANCIAL STATEMENTS (Unaudited) Note A - Basis of Presentation The unaudited consolidated financial statements included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. In the opinion of the Partnership, all adjustments which are considered necessary for a fair statement of the results for the interim periods have been made; all such adjustments are of a normal recurring nature. These consolidated financial statements, which do not include all disclosures included in the annual financial statements, should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership's latest annual report on Form 10-K. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be achieved for the year. Note B - Net Loss Per Limited Partnership Unit Net loss per limited partnership Unit is based upon the net loss allocated to the limited partners and is computed using the number of Units outstanding of 8,673. Note C - Liabilities Applicable to Rental Properties Liabilities applicable to rental properties at September 30, 2004 consist of $23,994,919 of permanent mortgage loans to Subsidiary Operating Partnerships. Note D - Related Party Transactions The accompanying consolidated financial statements reflect transactions between Qualified Housing Partners Limited Partnership ("QHP") and its general partners or affiliates and between the various Subsidiary Operating Partnerships and their general partners or affiliates. Frederick Investment Corporation, the Managing General Partner of QHP, is a general or special limited partner in each of the Operating Partnerships. Each Operating Partnership also has one or more other general partners (the "Local General Partners"). Following is a summary of related party transactions for the three months ended September 30, 2004. QHP General Local General Items Paid or Payable Partners Partners of Operating Partnerships Management Fees $0 $108,000 Reimbursable Operating Expenses $4,800 $0 Following is a summary of related party transactions for the nine months ended September 30, 2004. QHP General Local General Items Paid or Payable Partners Partners of Operating Partnerships Management Fees $13,000 $324,000 Reimbursable Operating Expenses $21,300 $0 MANAGEMENT'S DISCUSSION Accounting/SEC Reporting Issues Because QHP is a public company, its interests are with the SEC, and therefore it is subject to new financial reporting and other compliance requirements of the Sarbanes-Oxley Act of 2002. Even though Sarbanes-Oxley was enacted to prevent fraud such as that which occurred at WorldCom and Enron, it still applies to small untraded entities including QHP. Because of Sarbanes-Oxley, QHP's auditor,Dixon Hughes, PLLC has stated that they intend to resign effective December 31, 2004. It is important to note that their resignation is not the result of any disagreement over accounting or financial issues, and that they have agreed to continue preparing the tax returns. QHP approached other accounting firms who also, because of Sarbanes-Oxley, decided not to perform the audit. If an audit is not performed, and QHP remains a public company, QHP will be out of compliance with the SEC. Dixon Hughes and its predecessor have served as QHP's auditor since QHP's formation sixteen years ago. Their reasons for resigning include QHP's unusual structure and its insufficient financial resources to pay the substantial cost of compliance with Sarbanes-Oxley. QHP is an upper tier partnership whose only assets are limited partnership interests in lower tier partnerships. Dixon Hughes is unwilling to accept the additional risk imposed by Sarbanes-Oxley if it must audit the upper tier partnerships only and rely upon others to audit the lower tier partnerships, where all the assets are held and the business takes place. QHP does not have the authority to require the lower tier partnerships to retain Dixon Hughes. Even if another auditing firm can be found, it is highly unlikely that the cost will be affordable to QHP. Without an audit, QHP will be out of compliance unless it deregisters with the SEC. If the total number of investors falls below 300, QHP can elect to deregister and the Sarbanes-Oxley requirements will not apply. 318 investors have elected to divest within the past year, which will bring the number of investors remaining down to 328. If another 29 investors elect to divest, the general partners will be able to deregister and will do so. Many investors are divesting as part of an exit strategy the general partners proposed in 2003. Divesting investors can gain federal tax savings of up to 34% of their original investment, and still receive cash distributions, if any, through December 31, 2018. The exit strategy was explained in letters over the past year, and is summarized in "Divestiture" below. Liquidity and Capital Resources Net of the Subsidiary Operating Partnerships, QHP held approximately $26,000 in cash and liquid investments at September 30, 2004. These assets will be held as working capital. At September 30, 2004, there were 403 holders of limited partnership Units. Results of Operations The Partnership's loss from rental activities, including depreciation, during the third quarter of 2004 is $147,351 as compared with a loss of $58,625 for the same period in 2003. Third quarter revenue decreased as a result of increased vacancy loss at Litton, the largest property in QHP's portfolio. Repairs and maintenance continue to increase as the properties age. In addition, management fees, approved by USDA-Rural Development, on a number of properties have also increased. Occupancy at the 24-unit property located in Dimmitt, TX increased slightly from 58% at the end of the second quarter, 2004, to 62.5% as of the date of this report. Local management is still in discussions with the taxing authority to work out a payment plan for 2003 taxes. No payments have been made to-date. Divestiture In November 2003, the general partners offered an exit strategy whereby many investors could divest and receive a one-time tax benefit. Investors electing that strategy assign their interest to the general partner, and, by doing so, will (a) receive a one-time Federal tax benefit of up to 34% of their investment plus any state tax savings, (b) still receive cash distributions (if any) until December 31, 2018, and (c) stop future reporting of QHP results in their tax returns. As of the date of this report, 318 investors owning 4,387 units had elected divestiture. Those investors who divested in divested in 2003, received their additional tax benefit on their 2003 tax return and will receive no further mailings from the Partnership unless there are cash distributions. Those who are divesting in 2004 will continue to receive QHP mailings through the remainder of the year and will receive their final k-1 in March 2005. If you are interested in divesting, contact Ramona Logan at either (919) 787-4243 or investor_svcs@hotmail.com. Form 10-Q A copy of the Partnership's Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission will be furnished without charge to any investor upon written request. PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits (a) Exhibits 4 The Partnership Agreement is Exhibit A to the Prospectus that is part of the Registration Statement on Form S-11, Number 33-19316 and effective May 20, 1988, the final form of which was filed on May 20, 1988 pursuant to Rule 424(b), and is incorporated herein by reference. 31.1 Section 302 Certification by Chief Executive Officer 31.2 Section 302 Certification by Chief Financial Officer 32.1 Section 906 Certification by Chief Executive Officer 32.2 Section 906 Certification by Chief Financial Officer SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Frederick Investment Corporation A General Partner Date: November 15, 2004 By: /s/ George F. Marshall George F. Marshall, President (Chief Executive Officer) Date: November 15, 2004 By: /s/ Jenny C. Petri Jenny C. Petri, Vice President (Chief Financial Officer) Date: November 15, 2004 By: /s/ George F. Marshall George F. Marshall A General Partner EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Section 302 Certification I, George F. Marshall, certify that: I have reviewed this quarterly report on Form 10-Q of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership (the "registrant"); 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; 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; The registrant's other certifying officer 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: 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, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 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 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 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; The registrant's other certifying officer 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): all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 15, 2004 By: /s/ George F. Marshall George F. Marshall, General Partner Chief Executive Officer EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Section 302 Certification I, Jenny C. Petri, certify that: I have reviewed this quarterly report on Form 10-Q of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership (the "registrant"); 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; 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; The registrant's other certifying officer 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: 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, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 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 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 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; The registrant's other certifying officer 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): all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. FREDERICK INVESTMENT CORPORATION Date: November 15, 2004 By: /s/ Jenny C. Petri Jenny C. Petri, Vice President (Chief Financial Officer) EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350), the undersigned, George F. Marshall, Chief Executive Officer of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership, does hereby certify, to his knowledge, that: The Quarterly Report on Form 10-Q for the period ended September 30, 2004 of the Partnership (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. Date: November 15, 2004 By: /s/ George F. Marshall George F. Marshall General Partner (Chief Executive Officer) EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350), the undersigned, Jenny C. Petri, Chief Financial Officer of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership, does hereby certify, to her knowledge, that: The Quarterly Report on Form 10-Q for the period ended September 30, 2004 of the Partnership (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. FREDERICK INVESTMENT CORPORATION Date: November 15, 2004 By: /s/ Jenny C. Petri Jenny C. Petri, Vice President (Chief Financial Officer)