** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

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** **

**FORM 10-Q**

 

**Quarterly Report Pursuant To Section 13 or 15(d) of**

**the Securities Exchange Act of 1934**

 

**For theQuarter Ended March 31, 2005**

 

**CommissionFile Number 1-32375**

 

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**Comstock HomebuildingCompanies, Inc.**(ExactName of Registrant as Specified in Its Charter)

 
| **Delaware**                                                    | ** ** | **20-1164345**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**11465 Sunset Hills Road Suite 510 Reston, Virginia 20190 (703) 883-1700**

(Address including zip code, and telephonenumber, including areacode, of principal executive offices)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES  ý   NO  o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

YES  o   NO  ý

** **

As of May 16, 2005,  8,889,151 shares of the Class A common stock,par value $.01 per share and 2,733,500 shares of the Class B common stock, parvalue $.01 per share, of the Registrant were outstanding.

 

 

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**COMSTOCKHOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION**                                                         | 1                                                                                           |
|--------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                                             |                                                                                        |
| ITEM 1. FINANCIAL  STATEMENTS:                                                                   | 1                                                                                           |
|                                                                                             |                                                                                        |
| Consolidated  Balance Sheets (unaudited) - March 31, 2005 and December 31, 2004                  | 3                                                                                           |
|                                                                                             |                                                                                        |
| Consolidated  Statements of Operations (unaudited) - Three Months Ended March 31, 2005 and 2004  | 4                                                                                           |
|                                                                                             |                                                                                        |
| Consolidated  Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2005 and  2004 | 5                                                                                           |
|                                                                                             |                                                                                        |
| Notes to  Consolidated Financial Statements                                                      | 6                                                                                           |
|                                                                                             |                                                                                        |
| ITEM 2.                                                                                          | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15 |
|                                                                                             |                                                                                        |
| ITEM 3.                                                                                          | QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 20 |
|                                                                                             |                                                                                        |
| ITEM 4.                                                                                          | CONTROLS AND PROCEDURES                                                                     | 20 |
| ** **                                                                                       | ** **                                                                                  |
| **PART II – OTHER INFORMATION**                                                             | 20                                                                                          |
|                                                                                             |                                                                                        |
| ITEM 1. LEGAL PROCEEDINGS                                                                        | 20                                                                                          |
|                                                                                             |                                                                                        |
| ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                             | 21                                                                                          |
|                                                                                             |                                                                                        |
| ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                         | 21                                                                                          |
|                                                                                             |                                                                                        |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                     | 21                                                                                          |
|                                                                                             |                                                                                        |
| ITEM 5. OTHER INFORMATION                                                                        | 21                                                                                          |
|                                                                                             |                                                                                        |
| ITEM 6.  EXHIBITS                                                                                | 21                                                                                          |
|                                                                                             |                                                                                        |
| SIGNATURES                                                                                       | 22                                                                                          |

 

2

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**PART I****- FINANCIAL INFORMATION**

 

**ITEM 1****. FINANCIAL STATEMENTS**

 

**COMSTOCKHOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES**

**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

**(Amountsin thousands, except share data)**

 
| ** **                                                                                             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                             | ** ** | ** **          | ** ** | ** **             | ** ** |
| ASSETS                                                                                                 |       |                |       |                   |       |
| Cash and cash equivalents                                                                              |       | $                   | 37,337     |                   | $          | 67,559 |   |
| Restricted cash                                                                                        |       | 10,620              |       | 7,500                  |       |
| Receivables                                                                                            |       | 74                  |       | 239                    |       |
| Due from related parties                                                                               |       | 1,603               |       | 1,447                  |       |
| Real estate held for development and sale                                                              |       | 211,210             |       | 104,326                |       |
| Inventory not owned - variable interest entities                                                       |       | 33,640              |       | 118,558                |       |
| Property, plant and equipment                                                                          |       | 496                 |       | 488                    |       |
| Investment in real estate partnerships                                                                 |       | 1,029               |       | 1,029                  |       |
| Deferred income tax                                                                                    |       | 1,009               |       | 821                    |       |
| Other assets                                                                                           |       | 2,195               |       | 2,540                  |       |
| TOTAL ASSETS                                                                                           |       | $                   | 299,213    |                   | $          | 304,507 |   |
|                                                                                                   |       |                |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                              |       |                |       |                   |       |
| Accounts payable and accrued liabilities                                                               |       | $                   | 34,826     |                   | $          | 35,532 |   |
| Income taxes payable                                                                                   |       | 2,462               |       | 290                    |       |
| Due to related parties                                                                                 |       | 149                 |       | 148                    |       |
| Obligations related to inventory not owned                                                             |       | 33,215              |       | 114,333                |       |
| Notes payable                                                                                          |       | 142,806             |       | 65,684                 |       |
| Notes payable—related parties                                                                     |       | 9,142               |       | 10,944                 |       |
| Distribution payable                                                                                   |       | 9,677               |       | 12,655                 |       |
| TOTAL LIABILITIES                                                                                      |       | 232,277             |       | 239,586                |       |
|                                                                                                   |       |                |       |                   |       |
| Commitments and contingencies (Note 11)                                                                |       |                |       |                   |       |
|                                                                                                   |       |                |       |                   |       |
| Minority interest                                                                                      |       | 366                 |       | 2,695                  |       |
|                                                                                                   |       |                |       |                   |       |
| SHAREHOLDERS’ EQUITY                                                                              |       |                |       |                   |       |
| Class A common stock, $0.01 par value, 77,266,500  shares authorized, 9,160,837 issued and outstanding |       | 92                  |       | 92                     |       |
| Class B common stock, $0.01 par value, 2,733,500  shares authorized, 2,733,500 issued and outstanding  |       | 27                  |       | 27                     |       |
| Additional paid-in capital                                                                             |       | 75,535              |       | 75,510                 |       |
| Unearned compensation                                                                                  |       | (3,804              | )          | (4,314                 | )          |
| Retained earnings (accumulated deficit)                                                                |       | (5,280              | )          | (9,089                 | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                        |       | 66,570              |       | 62,226                 |       |
|                                                                                                   |       |                |       |                   |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                                              |       | $                   | 299,213    |                   | $          | 304,507 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**COMSTOCKHOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES**

**UNAUDITEDCONSOLIDATED STATEMENT OF OPERATIONS**

**(Amountsin thousands, except share data)**

 
| ** **                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | ** **                       | ** ** | **Predecessor** | ** ** |
| Revenues                                                                            |       |                             |       |   |   |
| Sale of real estate—homes                                                      |       | $                                | 28,465     |   | $ | 15,136 |   |
| Other revenue                                                                       |       | 264                              |       | 2,745 |   |
| Total revenue                                                                       |       | 28,729                           |       | 17,881 |   |
|                                                                                |       |                             |       |   |   |
| Expenses                                                                            |       |                             |       |   |   |
| Cost of sales of real estate                                                        |       | 17,591                           |       | 10,313 |   |
| Cost of sales of other                                                              |       | 11                               |       | 2,148 |   |
| Selling, general and administrative                                                 |       | 5,052                            |       | 2,431 |   |
|                                                                                |       |                             |       |   |   |
| Operating income                                                                    |       | 6,075                            |       | 2,989 |   |
| Other (income) expense, net                                                         |       | (36                              | )          | 63 |   |
|                                                                                |       |                             |       |   |   |
| Income before minority interest and equity in  earnings of real estate partnerships |       | 6,111                            |       | 2,926 |   |
| Minority interest                                                                   |       | 1                                |       | 848 |   |
|                                                                                |       |                             |       |   |   |
| Income before equity in earnings of real estate  partnerships                       |       | 6,110                            |       | 2,078 |   |
| Equity in earnings of real estate partnerships                                      |       | 30                               |       | 28 |   |
|                                                                                |       |                             |       |   |   |
| Total pre tax income                                                                |       | 6,140                            |       | 2,106 |   |
| Income taxes                                                                        |       | 2,331                            |       | — |   |
|                                                                                |       |                             |       |   |   |
| Net income                                                                          |       | $                                | 3,809      |   | $ | 2,106 |   |
|                                                                                |       |                             |       |   |   |
| Basic earnings per share                                                            |       | 0.33                             |       | 0.30 |   |
| Basic weighted average shares outstanding                                           |       | 11,621                           |       | 7,067 |   |
|                                                                                |       |                             |       |   |   |
| Diluted earnings per share                                                          |       | 0.32                             |       | 0.30 |   |
| Diluted weighted average shares outstanding                                         |       | 11,769                           |       | 7,067 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

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**COMSTOCKHOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES**

**UNAUDITEDCONSOLIDATED STATEMENT OF CASH FLOWS**

(Amounts inthousands, except share data)

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | ** **             | ** ** | **Predecessor** | ** ** |
| ** **                                                                       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                            |       |                   |       |   |   |
| Net income                                                                       |       | $                      | 3,809      |   | $ | 2,106 |   |
| Adjustment to reconcile net income to net cash  provided by operating activities |       |                   |       |   |   |
| Depreciation                                                                     |       | 39                     |       | 27 |   |
| Loss on disposal of assets                                                       |       | 8                      |       | — |   |
| Minority interest                                                                |       | 1                      |       | 848 |   |
| Equity in earnings of real estate partnerships                                   |       | (30                    | )          | (28 | ) |
| Amortization of stock compensation                                               |       | 535                    |       | — |   |
| Deferred income tax                                                              |       | (188                   | )          | — |   |
| Changes in operating assets and liabilities:                                     |       |                   |       |   |   |
| Restricted cash                                                                  |       | (3,120                 | )          | — |   |
| Receivables                                                                      |       | 165                    |       | 1,234 |   |
| Due from related parties                                                         |       | (156                   | )          | (400 | ) |
| Real estate held for development and sale                                        |       | (106,884               | )          | (3,560 | ) |
| Other assets                                                                     |       | 4,145                  |       | (151 | ) |
| Accounts payable and accrued liabilities                                         |       | (706                   | )          | 2,194 |   |
| Income tax payable                                                               |       | 2,172                  |       | — |   |
| Due to related parties                                                           |       | 1                      |       | 5 |   |
| Net cash (used in) provided by operating activities                              |       | (100,209               | )          | 2,275 |   |
| Cash flows from investing activities:                                            |       |                   |       |   |   |
| Purchase of property, plant, and equipment                                       |       | (55                    | )          | (130 | ) |
| Distributions from Investments in real estate  partnerships                      |       | 30                     |       | 30 |   |
| Net cash (used in) provided by investing activities                              |       | (25                    | )          | (100 | ) |
| Cash flows from financing activities:                                            |       |                   |       |   |   |
| Proceeds from notes payable                                                      |       | 93,458                 |       | 12,033 |   |
| Proceeds from related party notes payable                                        |       | 200                    |       | 8 |   |
| Payments on notes payable                                                        |       | (16,336                | )          | (12,077 | ) |
| Payments on related party notes payable                                          |       | (2,002                 | )          | — |   |
| Contribution from minority shareholders                                          |       | 79                     |       | — |   |
| Payments of distribution payable                                                 |       | (2,978                 | )          | — |   |
| Distributions paid to minority shareholders                                      |       | (2,409                 | )          | (600 | ) |
| Net cash provided by (used in) financing activities                              |       | 70,012                 |       | (636 | ) |
| Net (decrease) increase in cash and cash equivalents                             |       | (30,222                | )          | 1,539 |   |
| Cash and cash equivalents, beginning of period                                   |       | 67,559                 |       | 17,160 |   |
| Cash and cash equivalents, end of period                                         |       | $                      | 37,337     |   | $ | 18,699 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

5

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**COMSTOCK HOMEBUILDING COMPANIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Amounts in thousands, except share data)

 

**1.****              ORGANIZATION ANDBASIS OF PRESENTATION**

 

Comstock Companies, Inc. (the “Company”) wasincorporated on May 24, 2004 as a Delaware corporation. On June 30,2004, the Company changed its name to Comstock HomebuildingCompanies, Inc.

 

On December 17, 2004 as a result of completingits initial public offering (“IPO”) of its Class A Common Stock, theCompany acquired 100% of the outstanding capital stock of Comstock HoldingCompany, Inc. and subsidiaries (“Comstock Holdings”) by merger, whichfollowed a consolidation that took place immediately prior to the closing ofthe IPO (the “Consolidation”). The Consolidation was effected through themergers of Sunset Investment Corp., Inc. and subsidiaries and ComstockHomes, Inc. and subsidiaries and Comstock Service Corp., Inc andsubsidiaries (“Comstock Service”) with and into Comstock Holdings. Pursuant tothe terms of the merger agreement, shares of Comstock Holdings were canceledand replaced by 4,333 and 2,734 shares Class A and B Common Stock of theCompany respectively. Both Class A and B Common Stock shares bear the sameeconomic rights. However, for voting purposes, Class A stock holders areentitled to one vote for each share held while Class B stock holders areentitled to fifteen votes for each share held.

 

As a result of the IPO, the Company sold 3,960Class A Common Shares at $16.00 per share, raising proceeds net of theunderwriting discount, of approximately $56.0 million. OnDecember 28, 2004, pursuant to the underwriters’ exercise of theirover-allotment option, the Company sold an additional 594 shares resultingin additional proceeds net of underwriting discount, of approximately $8.8million.

 

Our common stock is traded on the NASDAQ Nationalmarket under the symbol “CHCI”. We have no public trading history prior toDecember 14, 2004.

 

The consolidatedfinancial statements and notes of the Company as of March 31, 2005 and forthe three months ended March 31, 2005 and 2004 have been prepared bymanagement without audit, pursuant to rules and regulations of the Securitiesand Exchange Commission and should be read in conjunction with theDecember 31, 2004 audited financial statements contained in the Company’sAnnual Report on Form 10-K for the year then ended. In the opinion ofmanagement, all normal, recurring adjustments necessary for the fairpresentation of such financial information have been included. The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Certain information and footnote disclosures normallyincluded in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted. Certain amounts in the prior year’s financial statementshave been reclassified to conform to the current year’s presentation with noeffect on previously reported net income or stockholders’ equity.

 

The Companyhistorically has experienced and expects to continue to experience variabilityin quarterly results. The consolidated statement of operations for the threemonths ended March 31, 2005 is not necessarily indicative of the resultsto be expected for the full year.

 

For purposes ofidentification and description, we are referred to as the “Predecessor” for theperiod prior to the IPO, the Company for the period subsequent to the IPO, and “we,”“us,” and “our” for both periods.

 

The Companydevelops, builds and markets single-family homes, townhouses and condominiumsin the Washington D.C. and Raleigh, North Carolina metropolitan markets. TheCompany also provides certain management and administrative support services tocertain related parties.

 

**2.****              REAL ESTATE HELD FOR DEVELOPMENT AND SALE**

 

Real estate held for development and sale includesland, land development costs, interest and other construction costs and isstated at cost or, when circumstances or events indicate that the real estateheld for development or sale is impaired, at estimated fair value.

 

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Land, land development and indirect land developmentcosts are accumulated by specific area and allocated to various lots or housingunits using specific identification and allocation based upon the relativesales value, unit or area methods. Direct construction costs are assigned tohousing units based on specific identification. Construction costs primarilyinclude direct construction costs and capitalized field overhead. Other costsare comprised of prepaid local government fees and capitalized interest andreal estate taxes. Selling costs are expensed as incurred.

 

Estimated fair value is based on comparable sales ofreal estate in the normal course of business under existing and anticipatedmarket conditions. The evaluation takes into consideration the current statusof the property, various restrictions, carrying costs, costs of disposition andany other circumstances which may affect fair value including management’splans for the property. Due to the large acreage of certain land holdings,disposition in the normal course of business is expected to extend over anumber of years. A write-down to estimated fair value is recorded when thecarrying value of the property exceeds its estimated fair value. Theseevaluations are made on a property-by-property basis. The Company assesses theimpairment of real estate assets whenever events or changes in circumstancesindicate that the net book value may not be recoverable.

 

Real estate held for development and sale consists ofthe following:

 
| ** **                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| Land and land development costs                                              |       | $             | 78,051     |             | $          | 65,545 |   |
| Cost of construction (including capitalized interest  and real estate taxes) |       | 133,159       |       | 38,781           |       |
|                                                                         |       | $             | 211,210    |             | $          | 104,326 |   |
|                                                                              |            |               |            |                  |            |  |  |  |  |

 

**3.****              CONSOLIDATION OF VARIABLE INTEREST ENTITIES**

 

The Companytypically acquires land for development at market prices from various entitiesunder fixed price purchase agreements. The purchase agreements require depositsthat may be forfeited if the Company fails to perform under the agreements. Thedeposits required under the purchase agreements are in the form of cash orletters of credit in varying amounts. The Company may, at its option, choosefor any reason and at any time not to perform under these purchase agreementsby delivering notice of its intent not to acquire the land under contract. TheCompany’s sole legal obligation and economic loss for failure to perform underthese purchase agreements is typically limited to the amount of the depositpursuant to the liquidated damages provision contained within the purchaseagreement. As a result, none of the creditors of any of the entities with whichthe Company enters into forward fixed price purchase agreements have recourseto the general credit of the Company. The Company also does not share in anallocation of either the profit earned or loss incurred by any of theseentities with which the Company enters fixed price purchase agreements.

 

The Company hasconcluded that whenever it options land or lots from an entity and pays asignificant non-refundable deposit as described above, a variable interestentity is created under the provisions of FIN 46-R. This is because theCompany has been deemed to have provided subordinated financial support, whichrefers to variable interest that will absorb some or all of an entity’sexpected theoretical losses if they occur. The Company therefore examines theentities with which the Company enters into fixed price purchase agreements,for possible consolidation by the Company under FIN 46-R. This requires theCompany to compute expected losses and expected residual returns based on theprobability of future cash flows as outlined in FIN 46-R. This calculationrequires substantial management judgments and estimates. In addition, becausethe Company does not have any contractual or ownership interests in theentities with which it contracts to buy the land, the Company does not have theability to compel these development entities to provide financial or other datato assist the Company in the performance of the primary beneficiary evaluation.

 

The Company hasevaluated all of its fixed price purchase agreements and has determined that itis the primary beneficiary of some of those entities. As a result, atDecember 31, 2004, the Company has consolidated five entities in theaccompanying consolidated balance sheet. The effect of the consolidation atDecember 31, 2004 was the

 

7

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inclusion of$118,558 in “Inventory not owned—variable interest entities” with acorresponding inclusion of $114,333 (net of land deposits paid of $4,225) to “Obligationsrelated to inventory not owned.” During the three months ended March 31, 2005the Company acquired three entities which were previously consolidated under FIN46-R at December 31, 2004. The effect of the consolidation at March 31,2005 was the inclusion of $33,640 in “Inventory not owned—variable interest entities”with a corresponding inclusion of $33,215 (net of land deposits paid of $425)to “Obligations related to inventory not owned.”  Creditors, if any, of these variable interestentities have no recourse against the Company.

 

**4.****              WARRANTY RESERVE**

 

Warrantyreserves for houses sold are established to cover potential costs for materialsand labor with regard to warranty-type claims expected to arise during theone-year warranty period provided by the Company or within the five-yearstatutorily mandated structural warranty period. Since the Company subcontractsits homebuilding work, subcontractors are required to provide the Company withan indemnity and a certificate of insurance prior to receiving payments fortheir work. Claims relating to workmanship and materials are generally theprimary responsibility of the subcontractors and product manufacturers. Thewarranty reserve is established at the time of closing, and is calculated basedupon historical warranty cost experience and current business factors.Variables used in the calculation of the reserve, as well as the adequacy ofthe reserve based on the number of homes still under warranty, are reviewed ona periodic basis. Warranty claims are directly charged to the reserve as theyarise. The following table is a summary of warranty reserve activity which isincluded in accounts payable and accrued liabilities for the three monthsending March 31, 2005 and 2004:

 
| ** **                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Balance at beginning of period   |       | $                                | 916        |   | $ | 541 |   |
| Additions                        |       | 156                              |       | 167 |   |
| Releases and/or charges incurred |       | (118                             | )          | (37 | ) |
| Balance at end of period         |       | $                                | 954        |   | $ | 671 |   |

 

**5.****              CAPITALIZED INTERESTAND REAL ESTATE TAXES**

 

Interest and real estate taxes incurred relating tothe development of lots and parcels are capitalized to real estate held fordevelopment and sale during the active development period, which generallycommences when borrowings are used to acquire real estate assets and ends whenthe properties are substantially complete. Interest is capitalized based on theinterest rate applicable to specific borrowings or the weighted average of therates applicable to other borrowings during the period. Interest and realestate taxes capitalized to real estate held for development and sale are expensedas a component of cost of sales as related units are sold.

 

The following table is a summary of interest incurredand capitalized:

 
| ** **                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Total interest incurred                                  |       | $                                | 2,551      |   | $ | 1,031 |   |
| Beginning interest capitalized                           |       | $                                | 4,524      |   | $ | 1,428 |   |
| Plus: Interest incurred on notes payable                 |       | 2,103                            |       | 680 |   |
| Plus: Interest incurred on related party notes  payable  |       | 81                               |       | 345 |   |
| Less: Interest expensed as a component of cost of  sales |       | (721                             | )          | (250 | ) |
| Ending interest capitalized                              |       | $                                | 5,987      |   | $ | 2,203 |   |

 

8

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**6.****              EARNINGS PER SHARE**

 

The following weighted average shares and shareequivalents are used to calculate basic and diluted EPS for the three monthsended March 31, 2005 and 2004:

 
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Basic earnings per share                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                  |       | $                                | 3,809      |   | $ | 2,106 |   |
| Basic weighted-average shares outstanding   |       | 11,621                           |       | 7,067 |   |
| Per share amounts                           |       | $                                | 0.33       |   | $ | 0.30 |   |
| Diluted earnings per share                  |       |                             |       |   |   |
| Net income                                  |       | $                                | 3,809      |   | $ | 2,106 |   |
| Basic weighted-average shares outstanding   |       | 11,621                           |       | 7,067 |   |
| Stock options and restricted stock grants   |       | 148                              |       | — |   |
| Diluted weighted-average shares outstanding |       | 11,769                           |       | 7,067 |   |
| Per share amounts                           |       | $                                | 0.32       |   | $ | 0.30 |   |

 

Shares issued to the owners of the Predecessor inexchange for their interests in connection with the Consolidation have beenreflected in weighted average shares as of the beginning of the earliest periodpresented.

 

**Comprehensive income**

 

For the year and three months endedDecember 31, 2004 and March 31, 2005, comprehensive income equaled netincome; therefore, a separate statement of comprehensive income is not includedin the accompanying combined consolidated financial statements.

 

**7.****              MINORITY INTERESTS**

 

During March 2005, the Company purchasedcertain noncontrolling minority interests in its consolidated subsidiaries fora total purchase price of $2,242. Because the underlying book value of the minority interests was $2,360,the Company allocated $118 as a reduction in the subsidiary’s real estate heldfor development and sale accounts.

** **

**8.****              DEBT**

 

In February 2005, the Company completed a purchaseof a 424 unit Condominiumconversion project located in Fairfax, Virginia. To finance this transaction,the Company entered into a promissory note agreement relating to $67,000 ofindebtedness bearing interest at a rate equal to the greater of: (i) 5.50%or (ii) 3.50% + the three month LIBOR rate. At March 31, 2005,the Company was advanced a total of $58,426.

 

In March 2005, as a result of purchasing three realestate projects known as Countryside, Barrington, and Blake, the Companyentered into promissory note agreements relating to an aggregate of $29,282 ofindebtedness bearing a weighted average interest rate of approximately 5.42% tofinance the purchases and future development needs. At March 31, 2005, theCompany was advanced a total of $18,678.

 

9

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**9.****              INCOME TAX**

 

Prior to December 17, 2004, the Predecessor hadelected to be treated as an S corporation under Subchapter S of the InternalRevenue Code and therefore was not subject to income taxes. Taxable income orloss was passed through and reported by the individual shareholders. Subsequentto the Consolidation the Company was reorganized as a C corporation under whichincome taxes are accounted for under the asset and liability method inaccordance with SFAS 109 “Accounting for Income Taxes.” Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax basis. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on the deferred tax assets and liabilities ofa change in tax rates is recognized in income in the period that includes theenactment date.

 

Income tax provision consists of the following as ofMarch 31, 2005:

 
| Current:                 |   |   |   |
|--------------------------|--------|--------|--------|
| Federal                  |   | 2,021  |   |
| State                    |   | 405    |   |
|                     |   | 2,426  |   |
| Deferred:                |   |   |   |
| Federal                  |   | (85    | )      |
| State                    |   | (10    | )      |
|                     |   | (95    | )      |
| Total income tax expense |   | (2,331 | )      |

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes.Components of the Company’s deferred tax assets and liabilities at March 31,2005 were as follows:

 
| ** **                      | ** ** | **March 31, 2005** | ** ** |
|---------------------------------|------------|--------------------|------------|
| Deferred tax assets:            |       |               |       |
| Inventory                       |       | 2,093              |       |
| Warranty                        |       | 307                |       |
| Deferred rent                   |       | 13                 |       |
| Accrued expenses                |       | 96                 |       |
| Stock-based compensation        |       | 196                |       |
|                            |       | 2,705              |       |
| Less — valuation allowance |       | (1,484             | )          |
| Net deferred tax assets         |       | 1,221              |       |
| Deferred tax liabilities:       |       |               |       |
| Depreciation and amortization   |       | (212               | )          |
| Net deferred tax liabilities    |       | (212               | )          |
| Net deferred tax assets         |       | 1,009              |       |

 

The Company has adequately provided for contingenciesrelated to income taxes in accordance with SFAS No. 5.  At March 31, 2005, the Company recorded a $93income tax reserve which is included in other accrued expenses on the balancesheet.  This tax reserve relatespredominately to a potential dispute by taxing authorities over tax benefits resultingfrom additional income tax basis in certain residential housing developmentprojects.  The Company has alsodetermined that a valuation allowance of approximately $1,484 as of March 31,2005 related to a deferred tax asset of approximately $1,484 resulting fromadditional tax basis in residential real estate development projects.  In analyzing the need for the provision oftax contingency reserves and the valuation allowance, management reviewedapplicable statutes, rules, regulations and interpretations and establishedthese reserves based on past experience and judgments about potential actionsby taxing jurisdictions.

 

10

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**10.****        RESTRICTED STOCK, STOCKOPTIONS, AND OTHER STOCK PLANS**

 

On December 14, 2004, the Company adopted the2004 Long-Term Incentive Compensation Plan, (the “Plan”) provides for theissuance of stock options, stock appreciation rights, or SARs, restrictedstock, deferred stock, dividend equivalents, bonus stock and awards in lieu ofcash compensation, other stock-based awards and performance awards. The Planprovided for an initial authorization of 1,550 shares of Class A Commonstock for issuance thereunder, plus an additional annual authorization effectiveJan 1, 2006 equal to the lesser of (i) 3% of the Class A Common Stockoutstanding on the date of determination, (ii) 500,000 shares or (iii) suchlesser as may be determined by the Company’s Board of Directors.

 

Effective January 1, 2004, the Company adoptedSFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”),which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”) and supercedes APB Opinion No. 25, “Accounting for StockIssued to Employees.” SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements over the vesting period based on their fair values at thedate of grant.  In accordance with theprovisions of SFAS No. 123(R) and SFAS No. 148, $0 and $535 wasrecorded for total stock-based compensation expense for the three months endedMarch 31, 2004 and 2005 respectively.  Ofthis amount $55 was related to stock option grants and $480 was related torestricted stock grants.

 

On March 31, 2005, the following amounts wereavailable for issuance under the Plan:

 
| Shares Available for issuance at December 31,  2004 |   | 1,168  |   |
|----------------------------------------------------------|--------|--------|--------|
| Adjustments:                                             |   |   |   |
| Restricted Stock Grants – Issued                    |   | — |   |
| Restricted Stock Grants – Forfeited                 |   | 2      |   |
| Shares Available for issuance at March 31, 2005     |   | 1,170  |   |

 

**11.****       COMMITMENTS AND CONTINGENCIES**

** **

**Litigation**

 

In the normal course of its business, the Companyand/or its subsidiaries are named as defendants in certain legal actionsarising from its normal business activities. Management believes that none ofthe litigation matters in which the Company or any subsidiary is involved wouldhave a material adverse effect on the consolidated financial condition oroperations of the Company.

** **

**Letters of credit and performancebonds**

 

The Company has commitments as a result ofcontracts entered into with certain third parties to meet certain performancecriteria as outlined in such contracts. The Company is required to issueletters of credit and performance bonds to these third parties as a way ofensuring that such commitments entered into are met by the Company. At March31, 2005, the Company has outstanding $8,804 in letters of credit and $9,165 inperformance and payment bonds to these third parties. No amounts have beendrawn against these letters of credit and performance bonds.

 

**Operatingleases**

 

The Company leases office space undernon-cancelable operating leases. Minimum annual lease payments under theseleases at March 31, 2005 approximate:

 

11

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| **Year  Ended:** | ** ** | ** ** | **Amount** | ** ** |
|------------------|------------|------------|------------|------------|
| 2005             |       | $          | 483        |       |
| 2006             |       | 629        |       |
| 2007             |       | 642        |       |
| 2008             |       | 667        |       |
| 2009             |       | 547        |       |
| 2010             |       | 10         |       |
| Thereafter       |       | —     |       |
| Total            |       | $          | 2,978      |       |

 

Operating lease rentalexpense aggregated $138 and $89, respectively, for the three months ended March31, 2005 and 2004.

 

**12.****       RELATED PARTY TRANSACTIONS**

 

In June 2002, the Predecessor entered into apromissory note agreement with TCG Fund I, LC to fund development projects. TCGFund I, LC, is a related party in which the Company has an equity investment.The promissory note agreement allows for the Company to borrow up to $4million. The note bears interest at 12% per annum and is due on June 15,2006. As of March 31, 2005 and December 31, 2004, the amount owed to TCGFund I amounted to approximately $3.3 million. Accrued interest on this notetotaled $106 at both March 31, 2005 and December 31, 2004.

 

In September 2004, the Predecessor entered into apromissory note agreement with TCG Fund II, LC to fund development projects.TCG Fund II, LC is a affiliate which the company manages as a non-member. Thepromissory note agreement allows the Company to borrow up to $10 million. Thenote bears interest at 12% per annum and is due on September 7, 2007. As ofMarch 31, 2005 and December 31, 2004 the Company owed $2.5 and$2.4 million, respectively, under this promissory agreement. Accruedinterest on this note totaled $25 and $49 at March 31, 2005 andDecember 31, 2004, respectively.

 

In April 2002 and January 2004, the Predecessorentered into lease agreements for 7,703 and 8,797 square feet, respectively,for its corporate headquarters at 11465 Sunset Hills Road, Reston, Virginiafrom Comstock Partners, L.C., an affiliate in which executive officers of theCompany Christopher Clemente, Gregory Benson, and others are principals.Christopher Clemente owns a 45% interest, Gregory Benson owns a 5% interest, anentity which is owned or controlled by Christopher Clemente’s father-in-law,Dwight Schar, owns a 45% interest, and an unrelated third party owns a 5%interest in Comstock Partners. For the three months ended March 31, 2004, totalpayments made under this lease agreement were $64.  On September 30, 2004 the lease agreementswere canceled and replaced with new leases for a total of 20,609 square feetwith Comstock Asset Management, L.C., an entity owned by Christopher Clemente.  For the three months ended March 31, 2005,total payments made under this lease agreement was $135.

 

In May 2003, the Predecessor hired a constructioncompany, in which Christopher Clemente’s brother, Louis Clemente, serves as thePresident and is a significant shareholder, to provide construction servicesand act as a general contractor at one of the Company’s developments. The Companypaid $3.4 million and $322 to this construction company during the three monthsended March 31, 2005 and 2004, respectively.

 

12

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In April 2004, the Predecessor entered into anadditional three year $5,000 promissory note agreement, with an entitycontrolled by Scott Kasprowicz, bearing interest at a rate of 12%. Under the termsof the note, the Predecessor was advanced $2,500 in April 2004 and additional$2,500 in June 2004.  As of March 31,2005 and December 31, 2004 the amount owed to Scott Kasprowicz was $2,500.Accrued interest for the three months ended March 31, 2005 and 2004 totaled $49and $0, respectively.

 

At March 31, 2005 and December 31, 2004 the Companyhad an outstanding note receivable from Investors Management, LLC of $0 and$163 respectively, which accrues interest at a rate of 10% per annum. InvestorsManagement, LLC is a related party, which is owned by Christopher Clemente,Gregory Benson, Bruce Labovitz, Lawrence Golub and James Keena (executiveofficers and/or shareholders of the Company). At December 31, 2004 accrued interest on this note totaled $5. DuringFebruary 2005 the Company received payment in full on this note.

 

Christopher Clemente’s mother-in-law, Janice Schar,and Gary Martin each invested $100 as minority shareholders in one of oursubsidiaries, respectively, and Judah and Deborah Labovitz, the parents ofBruce Labovitz, loaned approximately $300 to another of our subsidiaries.  During the first quarter 2005 the Companyrepurchased the minority shareholders interests referenced above for aapproximate purchase price of $136.  InApril 2005 the Company paid the $300 loan in full.

 

During 2003, the Predecessor entered into agreementswith I-Connect, L.C., a company in which Investors Management, LLC holds a 25%interest, for information technology consulting services and the right to usecertain customized enterprise software developed with input from the Company.The intellectual property rights associated with the software solution that wasdeveloped by I-Connect along with any improvements made thereto by the Companyremained the property of I-Connect. During the three months endedMarch 31, 2005 and 2004, the Predecessor paid $105 and $112, respectively,to I-Connect. Also, in March 2003, the Predecessor entered into a space sharingagreement with I-Connect, L.C. to occupy and use 3,342 square feet of officespace subleased by I-Connect, L.C. from a third party in Reston, Virginia. ThePredecessor paid $0 and $4, respectively, under this agreement for the threemonths ended March 31, 2005 and 2004. On June 24, 2003, the I-Connect,L.C. sublease was assigned to Comstock Partners, L.C. (as landlord). The spacesharing agreement with I-Connect ended on September 30, 2004.

 

During the three months ended March 31, 2005 and2004, the Predecessor received revenue of approximately $0 and $737, respectively,by providing administrative and sales support to Comstock Service Corp., Inc.,a related party owned by Christopher Clemente, Gregory Benson, James Keena andLawrence Golub.

 

For the three months ended March 31, 2005 and2004, the Predecessor received revenue of approximately $215 and $371,respectively, by providing administrative and sales support to other relatedparties in which Christopher Clemente, Gregory Benson, Jim Keena, LawrenceGolub and Christopher Clemente’s father-in-law, Dwight Schar, are shareholders.

 

In October 2004, the Predecessor entered into anagreement with Comstock Asset Management Inc. to provide management servicesfor a fee of $20 a month.  For the threemonths ended March 31, 2005 the Company recorded $60 in revenue. At March 31,2005 and December 31, 2004 the Predecessor recorded a receivable for $0 and$60, respectively, from this entity. In addition, the Company in November 2004,entered into an agreement with Comstock Asset Management to sell certain retailcondominium units atPotomac Yard for a total purchase price of $14,500. In connection with thissale, the Company received a deposit of $8,000 upon execution of thisagreement.

 

During the three months ended March 31, 2005 and2004, the Company provided bookkeeping services to related party entities at nocharge.

 

13

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In August 2004, the Predecessor entered into a$2,400 promissory note agreement with Belmont Models I, L.C., an affiliatemanaged by Investors Management. The note bears an interest rate of 12%, whichis payable monthly and matures in July 2005. In March 2004, the Company sold four condominium units to Belmont Models I, L.C. under a saleand leaseback arrangement. The four condominium units were delivered for a total purchase price of $2,000 and leasedback at a rate of $20 per month.  TheCompany expects the lease to continue for a period of twenty-four months.  As a result of the deliveries, the promissorynote was reduced by the total purchase price. For the three months ended March 31, 2005 and year ended December 31,2004 the Predecessor owed $473 and $2,400, respectively. Accrued interest onthis note totaled $23, $0 and $49, respectively, as of three months ended March31, 2005 and 2004 and year ended December 31, 2004.

 

During three months ended March 31, 2005 and 2004the Predecessor entered into sales contracts to sell homes to certain employeesof the Company.  The Company, in order to attract, retain, and motivateemployees maintains a home ownership benefit program.  Under the homeownership benefits, an employee receives certain cost benefits provided by uswhen purchasing a home or having one built by us.  Sales of homes toemployees for investment purposes are conducted at market prices.

 

14

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**ITEM 2.                  MANAGEMENT’SDISCUSSION AND ANALYSIS****OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

FORWARD-LOOKINGSTATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

 

The following discussion of our financialcondition and results of operations should be read in conjunction with theaccompanying unaudited consolidated interim financial statements and the notesthereto appearing elsewhere in the this report and our audited consolidated andcombined financial statements and the notes thereto for the year ended December31, 2004, appearing in our Annual Report on Form 10-K for the year then ended(The “2004 Form 10-K”)

 

This report includes forward-lookingstatements that are made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements canbe identified by the use of words such as “anticipate,” “believe,” “estimate,”“may,” “intend,” “expect,” “will,” “should,” “seeks” or other similarexpressions. Forward-looking statements are based largely on our expectationsand involve inherent risks and uncertainties, many of which are beyond ourcontrol. You should not place undue reliance on any forward-looking statement,which speaks only as of the date made. Some factors which may affect theaccuracy of the forward-looking statements apply generally to the real estateindustry, while other factors apply directly to us. Any number of importantfactors which could cause actual results to differ materially from those in theforward-looking statements include, without limitation: general economic andmarket conditions, including interest rate levels; our ability to service oursubstantial debt; inherent risks in investment in real estate; our ability tocompete in the Washington, D.C. and Raleigh, North Carolina real estate andhome building markets; regulatory actions; fluctuations in operating results;our anticipated growth strategies; shortages and increased costs of labor orbuilding materials; the availability and cost of land in desirable areas;natural disasters; our ability to raise debt and equity capital and grow ouroperations on a profitable basis; and our continuing relationships withaffiliates. Additional information concerning these and other important riskand uncertainties can be found under the heading “Risk Factors” in the 2004Form 10-K. Our actual results could differ materially from these projected orsuggested by the forward-looking statements.

 

**Overview**

 

We engage in the business of residential landdevelopment, production home building and high-rise condominium development inthe greater Washington, D.C. and Raleigh, North Carolina markets. Our businesswas started in 1985 by Christopher Clemente, our Chief Executive Officer, as aresidential land developer and home builder focused on the luxury home marketin the northern Virginia suburbs of Washington, D.C. In 1992, we repositionedourselves as a production home builder focused on moderately priced homes inareas where we could more readily purchase finished building lots throughoption contracts. In 1997, we entered the Raleigh, North Carolina market.

 

For the three month period ended March 31, asindicated below, the approximate average order prices for our market rate homes(which excludes county government mandated affordable housing program unitssold at a discount) were as follows:

 
| ** **    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Townhouse     |       | $                                | 400,700    |   | $ | 324,400 |   |
| Single Family |       | 616,400                          |       | 419,300 |   |
| Condominium   |       | 414,900                          |       | 369,000 |   |
|               |            |                                  |            |  |  |  |  |

 

AtMarch 31, 2005, we either owned or controlled under option agreements over4,000 building lots including non-consolidating joint ventures in which we arethe manager.  We currently havecommunities under development in Arlington, Fairfax, Loudoun, Culpepper andPrince William counties in Virginia. In Maryland we are currently active inFrederick County. In North Carolina we have active communities in Raleigh andWake counties. The following chart summarizes certain information for ourcurrent and planned communities as of March 31, 2005:

 

15

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| ** **                                       | ** ** | **As of March 31, 2005** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|
| **Project**                                      | ** ** | **Status (1)**           | ** ** | **Estimated  Units at  Completion** | ** ** | **Units  Settled** | ** ** | **Backlog (2)** | ** ** | **Lots  Owned  Unsold** | ** ** | **Lots under  Option  Agreement  Unsold** | ** ** | **Average  Sales Price** | ** ** |
| **Virginia**                                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Blooms Mill TH 20°                          |       | Active                   |       | 91 |   | 89 |   | — |   | 2 |   | — |   | $ | 272,202 |   |
| Blooms Mill TH 22°                          |       | Active                   |       | 113 |   | 29 |   | 39 |   | 45 |   | — |   | $ | 406,657 |   |
| Blooms Mill Carriage                             |       | Active                   |       | 91 |   | 33 |   | 40 |   | 18 |   | — |   | $ | 439,745 |   |
| Blooms Mill Singles                              |       | Active                   |       | 35 |   | 33 |   | — |   | 2 |   | — |   | $ | 486,785 |   |
| Commons on Potomac Sq                            |       | Active                   |       | 192 |   | — |   | 20 |   | 172 |   | — |   | $ | 232,260 |   |
| Commons on Williams Sq                           |       | Active                   |       | 180 |   | — |   | 62 |   | 118 |   | — |   | $ | 346,585 |   |
| Countryside                                      |       | Active                   |       | 102 |   | — |   | — |   | 102 |   | — |   | n/a |   |
| The Eclipse on Center Park                       |       | Active                   |       | 465 |   | — |   | 355 |   | 110 |   | — |   | $ | 390,379 |   |
| Penderbrook                                      |       | Active                   |       | 424 |   | — |   | — |   | 424 |   | — |   | n/a |   |
| River Club at Belmont Bay 5                      |       | Active                   |       | 84 |   | 27 |   | 41 |   | 16 |   | — |   | $ | 448,719 |   |
| Woodlands at Round Hill                          |       | Active                   |       | 65 |   | 1 |   | 16 |   | 48 |   | — |   | $ | 705,781 |   |
| Wescott Ridge - ADUs (3)                         |       | Active                   |       | 37 |   | 34 |   | 3 |   | — |   | — |   | $ | 76,920 |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total VA Active                                  |       |                     |       | 1,879 |   | 246 |   | 576 |   | 1,057 |   | — |   | $ | 380,603 |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total VA Active Weighted Avg (4)                 |       |                     |       |   |   |   |   |   |   |   |   |   |   | $ | 243,801 |   |
| ** **                                       | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aldie Singles                                    |       | Development              |       | 15 |   | — |   | — |   | — |   | 15 |   | n/a |   |
| Barrington Park                                  |       | Development              |       | 134 |   | — |   | — |   | — |   | 134 |   | n/a |   |
| Blakes Crossing                                  |       | Development              |       | 130 |   | — |   | — |   | — |   | 130 |   | n/a |   |
| Brandy Station                                   |       | Development              |       | 350 |   | — |   | — |   | — |   | 350 |   | n/a |   |
| Loudoun Station Condominiums                     |       | Development              |       | 484 |   | — |   | — |   | — |   | 484 |   | n/a |   |
| River Club at Belmont Bay 8&9                |       | Development              |       | 600 |   | — |   | — |   | — |   | 600 |   | n/a |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total VA Development                             |       |                     |       | 1,713 |   | — |   | — |   | — |   | 1,713 |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Virginia**                               | ** ** | ** **               | ** ** | **3,592** | ** ** | **246** | ** ** | **576** | ** ** | **1,057** | ** ** | **1,713** | ** ** | ** ** | ** ** |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Maryland**                                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Emerald Farm                                     |       | Active                   |       | 84 |   | 40 |   | 23 |   | 21 |   | — |   | $ | 423,594 |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Maryland**                               | ** ** | ** **               | ** ** | **84** | ** ** | **40** | ** ** | **23** | ** ** | **21** | ** ** | **—** | ** ** | ** ** | ** ** |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **North Carolina**                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allyn’s Landing                             |       | Active                   |       | 117 |   | 11 |   | 2 |   | 104 |   | — |   | $ | 222,824 |   |
| Beckett Crossing                                 |       | Active                   |       | 115 |   | 101 |   | 8 |   | 6 |   | — |   | $ | 311,994 |   |
| Delta Rdge II Townhomes                          |       | Active                   |       | 41 |   | 40 |   | — |   | 1 |   | — |   | $ | 174,256 |   |
| Kelton at Preston                                |       | Active                   |       | 56 |   | 22 |   | 4 |   | 30 |   | — |   | $ | 304,356 |   |
| Wakefield Plantation                             |       | Active                   |       | 57 |   | 27 |   | 2 |   | 28 |   | — |   | $ | 458,538 |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total North Carolina Active                      |       |                     |       | 386 |   | 201 |   | 16 |   | 169 |   | — |   | $ | 294,394 |   |
| Total North Carolina Active Weighted Average (4) |       |                     |       |   |   |   |   |   |   |   |   |   |   | $ | 290,868 |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Holland Road                                     |       | Development              |       | 90 |   | — |   | — |   | — |   | 90 |   | n/a |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total North Carolina Development                 |       |                     |       | 90 |   | — |   | — |   | — |   | 90 |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total North Carolina                             |       |                     |       | 476 |   | 201 |   | 16 |   | 169 |   | 90 |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL ACTIVE                                     |       |                     |       | 2,349 |   | 487 |   | 615 |   | 1,247 |   | — |   |   |   |
| TOTAL DEVELOPMENT                                |       |                     |       | 1,803 |   | — |   | — |   | — |   | 1,803 |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                            |       |                     |       | 4,152 |   | 487 |   | 615 |   | 1,247 |   | 1,803 |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Joint Ventures**                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| North Shore Condominiums                         |       | Active                   |       | 196 |   | — |   | 5 |   | 191 |   | — |   | $ | 294,422 |   |
| North Shore Townhomes                            |       | Active                   |       | 163 |   | 20 |   | 1 |   | 142 |   | — |   | $ | 236,152 |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Joint Ventures                             |       |                     |       | 359 |   | 20 |   | 6 |   | 333 |   | — |   |   |   |
|                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **GRAND TOTAL**                                  | ** ** | ** **               | ** ** | **4,511** | ** ** | **507** | ** ** | **621** | ** ** | **1,580** | ** ** | **1,803** | ** ** | ** ** | ** ** |

----

Key—for purposesof this chart:

(1)    "Active" communities are open forsales. "Development" communities are in the development process andhave not yet opened for sales.

**(2)    "Backlog"means we have an executed order with a buyer, inclusive of lot sales, but thesettlement has not yet taken place.**

(3)    "ADUs" are affordable dwellingunits.

(4)    Weighted average is calculated as totalestimated homes at completion for projects with average sales prices multipliedby average sales price divided by total of estimated homes at completion. (i.e.S (estimated homes at completion x average sales price) ÷ S estimated homes atcompletion).

** **

**Results of Operations**

 

***Three months ended March 31, 2005 compared to three months endedMarch 31, 2004***

 

*Ordersand Backlog*

 

New orders for the three months ended March31, 2005 increased $56.2 million, or 119.2%, to $103.3 million on 246 homesas compared to $47.1 million on 132 homes for the three months ended March31, 2004. This increase in new orders was primarily attributable to an increasein saleable inventory resulting from the opening of new projects including theCommons at Williams Square (47 sales), the Woodlands at Round Hill (12 sales),the Commons on Potomac Square (20 sales) and the Eclipse at Potomac Yard (74sales).

 

The average sale price per new order for thethree months ended March 31, 2005 increased by $63,000 to $420,000 as comparedto $357,000 for the three months ended March 31, 2004. This change wasattributable to both

 

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a shift in product mix that included a significant number ofhigher-priced condominium sales derived from the opening at our Eclipse atPotomac Yard project, the opening of our new large-lot single family homecommunity at the Woodlands at Round Hill and general price appreciation in theWashington, DC area, especially in the townhouse market where we took neworders for 61 townhouses at an average price of $451,000. On average, the saleprice of townhouses increased $76,300 to $400,700 for the three months endedMarch 31, 2005 as compared to $324,400 for the three months endedMarch 31, 2004. On average, the sale price of our single-family homesincreased by approximately $197,100 during the three months endedMarch 31, 2005 to $616,400 from $419,300 for the three months endedMarch 31, 2004. The average sale price of our condominiums increased by$45,900 to $414,900 for the three months ended March 31, 2005 as comparedto $369,000 for the three months ended March 31, 2004.

 

Ourbacklog at March 31, 2005 increased $184.8 million, or 291.1%, to$248.3 million on 615 homes as compared to our backlog at March 31,2004 of $63.5 million on 93 homes. This increase in backlog is primarilyattributable to sales at the Eclipse project in Arlington, Virginia whichrepresented approximately $138.6 million of the backlog at March 31,2005.  In addition, backlog increased dueto delays the Company experienced in obtaining building permits as a result ofthe adoption of new building code standards. The delays in permitting caused delays in home starts which delayed therelease of sold units from backlog.   Inaddition, as a result of our acquisition of Comstock Service on December 17,2004, our Raleigh operation, which had not previously been included in ourreported backlog, represented backlog of $5.8 million at March 31, 2005.

 

*Revenues.*

 

Thenumber of homes delivered for the three months ended March 31, 2005increased by 69.6% to 78 from 46 homes for the three months ended March 31,2004. Average per settlement revenue increased by approximately $36,000 to$365,000 for the three months ended March 31, 2005 as compared to $329,000for the three months ended March 31, 2004. Home building revenuesincreased by $13.4 million, or 88.1%, to $28.5 million for the threemonths ended March 31, 2005 as compared to $15.1 million for thethree months ended March 31, 2004. Total revenue increased$10.8 million to $28.7 million for the three months ended March 31,2005 as compared to $17.9 million in the three months ended March 31,2004. The increase in deliveries and revenue for the three months ended March 31,2005 is in large part attributable to the completion of the first mid-risecondominium building at River Club at Belmont Bay 5 (16 settlements), thecontinued development at projects such as Blooms Mill (18 settlements) and thedelivery of the final mid-rise buildings at Wescott Ridge (27 settlements).Total revenue increases were in part offset by a $2.5 million reduction inother revenue for the three months ended March 31, 2005 as compared to thethree months ended March 31, 2004. This reduction is the result of our consolidation with Comstock Servicewhich eliminated inter-company administrative and production other revenue.

 

*Cost of sales and selling, general andadministrative expenses.*

 

Costof sales for the three months ended March 31, 2005 increased$5.1 million, or 41.3%, to $17.6 million, or 61.3% of revenue, ascompared to $12.5 million, or 69.7% of revenue, for the three months endedMarch 31, 2004. The increase in cost of goods sold during the three monthsended March 31, 2005 as compared to the three months ended March 31,2004 is directly attributable to the increase in deliveries. The increase of8.4 percentage points in cost of goods sold as a percentage of revenue isprimarily attributable to low cost of sales as a percentage of revenue atBlooms Mill and Wescott Ridge where we were able to reduce our estimated coststo complete for development and thereby lower development allocations on theunits which settled at there projects during the three months ended March 31,2005.  Gross margin at Blooms Mill for thethree months ended March 31, 2005 was 40.9% and the gross margin atWescott Ridge for the three months ended March 31, 2005 was 50.2%.  In addition, our consolidation with ComstockService eliminated inter-company other revenue which represented lower grossmargins than those generated from homebuilding. This elimination helpedincrease overall gross margins.

 

Selling,general and administrative costs for the three months ended March 31, 2005increased $2.6 million or 107.8% to $5.0 million as compared to$2.4 million for the three months ended March 31, 2004. This increasewas the result of additional staffing costs ($500,000) accounting and legalexpenses ($400,850) board fees and stock compensation ($400,000), insurancecosts ($200,000), consulting fees ($200,000) promotion ($100,000) and othermiscellaneous expenses associated with our growth in staffing and landacquisition efforts ($400,850). In addition, our consolidation with ComstockService increased our selling, general and administrative

 

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expenses by $400,000.  Selling,general and administrative expenses represented 17.6% of total revenue for thethree months ended March 31, 2005 as compared to 13.6% for the threemonths ended March 31, 2004.

 

*Operating income*

 

Operatingincome for the three months ended March 31, 2005 increased$3.1 million to $6.1 million, as compared to $2.9 million forthe three months ended March 31, 2004. Operating margin for the threemonths ended March 31, 2005 was 21.1% as compared with 16.7% for the threemonths ended March 31, 2004. The 4.4 percentage point increase inoperating margin is primarily attributable to the 8.4 percentage point increasein gross margin which outpaced the 4.5 percentage point increase in selling,general and administrative expenses as a percentage of total revenue.

 

*Other (income) expense, net*

 

Other(income) expense, net increased by $0.1 million to a net income of $36 for thethree months ended March 31, 2005 as compared to net expense of $63 forthe three months ended March 31, 2004. The increase in other (income)expense net is primarily attributable to interest earned on the Company’s cashbalances generated as a result of the proceeds from the Company’s  initial public offering.

 

*Income before minority interest*

 

Ourincome before minority interest increased by $3.2 million, or 108.9%, to$6.1 million for the three months ended March 31, 2005 as compared to$2.9 million for the three months ended March 31, 2004. Net marginbefore minority interest as a percentage of revenues increased by 4.9percentage points to 21.3% for the three months ended March 31, 2005, ascompared to 16.4% for the three months ended March 31, 2004. The increasein net income before minority interests was a result of the increase inoperating income ($3.0 million) and a reduction in other (income) expenses, netof $0.2 million.

 

*Minority interest*

 

Minorityinterest expense decreased by $0.8 million, or 100.0%, to $1,000 for thethree months ended March 31, 2005 as compared to $0.8 million for thethree months ended March 31, 2004. This decrease is the result of our repurchaseor redeemption the minority interest in four of our limited liability companysubsidiaries including Comstock Investors V, L.C., Comstock Investors VI, L.C.,Comstock Potomac Yard, L.C. and Comstock North Carolina, L.L.C.

 

*Incometaxes*

* *

OnDecember 17, 2004, the Company reorganized from a group of S corporationsto a C corporation. As a result, income tax expense increased $2.3 million forthe three months ended March 31, 2005 as compared to no income tax expensefor the three months ended March 31, 2004. The Company’s combined effective tax rate both current and deferredprovisions for this period was 38.0%.

 

**Liquidity and Capital Resources**

 

Werequire capital to post deposits on new deals, to purchase and develop land, toconstruct homes, to fund related carrying costs and overhead and to fundvarious advertising and marketing programs to facilitate sales. Theseexpenditures include engineering, entitlement, architecture, site preparation,roads, water and sewer lines, impact fees and earthwork, as well as theconstruction costs of the homes and amenities. Our sources of capital include,and we anticipate will continue to include, funds derived from various securedand unsecured borrowings, operations which include the sale of constructedhomes and finished lots, and the sale of equity securities. Our currently ownedand controlled inventory of home sites will require substantial capital todevelop and construct.

 

Inproduction home building, it is common for builders such as us to employrevolving credit facilities whereby the maximum funding available under thefacility exceeds the maximum outstanding balance allowed at any given time. Ouroverall borrowing capacity may be constrained by loan covenants which limit theratio of our total liabilities to our total equity. This revolving debt willtypically provide for funding of an amount up to a pre-determined percentage ofthe cost of each asset funded. The balance of the funding for that asset isprovided for

 

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by us as equity. Theefficiency of revolving debt in production home building allows us to operatewith less overall debt capital than would be required if we built each projectwith long-term amortizing debt. At March 31, 2005, we had approximately$66.6 million of equity financing, $161.7 million of debt financing (includingour distribution payable to our pre-initial public offering stockholders) and$48.0 million of cash. As discussed in more detail below, we believe that fundsgenerated from the sale of our equity securities, operations and borrowingsunder our credit facilities will provide us with sufficient capital to meet ourexisting and expected capital needs.

 

***CreditFacilities***

 

At March 31, 2005, we had approximately$294.4 million available under existing secured revolving development andconstruction loans for planned construction and development expenditures. Amajority of our debt is variable rate, based on LIBOR or the prime rate plus aspecified number of basis points, typically ranging from 100 to 375 basispoints over the LIBOR rate and 50 to 100 basis points over the prime rate. As aresult, we are exposed to market risk in the area of interest rate changes. At March 31,2004, the one-month LIBOR and prime rates of interest were 2.87% and 5.75%,respectively, and the interest rates in effect under our existing securedrevolving development and construction credit facilities ranged from 5.07% to 6.87%.For information regarding risks associated with our level of debt and changesin interest rates, see Item 3 “Quantitative and Qualitative Disclosures AboutMarket Risk.”

 

We have generally financed our developmentand construction activities on a project basis so that, for each project wedevelop and build, we have a separate credit facility. Accordingly, we havenumerous credit facilities. While the loan agreements relating to these variousfacilities contain certain covenants, they generally contain few, if any,material financial covenants.  As ofMarch 31, 2005, that we were in compliance with the financial covenantsset forth in our loan agreements.

 

In order to obtain some of our current creditfacilities, which were entered into in some cases by us and in other cases byour project-based subsidiaries, we were generally required to obtain guarantiesby one or more of the now-consolidated primary holding companies as well asChristopher Clemente, our Chief Executive Officer, and Gregory Benson, ourPresident and Chief Operating Officer, in their personal capacities. AtMarch 31, 2005, such parties guaranteed approximately $76.1 million underour credit facilities. We are in the process of replacing the guaranteesprovided by Messrs. Clemente and Benson with guarantees provided by theCompany.

 

From time to time, we employ subordinated andunsecured credit facilities to supplement our capital resources or a particularproject or group of projects. Our lenders under these credit facilities willtypically charge interest rates that are substantially higher than thosecharged by the lenders under our senior and secured credit facilities. Thesecredit facilities will vary with respect to terms and costs. As ofMarch 31, 2005, the annual rate of interest on these facilities rangedfrom 12% to 14%. At March 31, 2005, we had approximately $8.9 millionoutstanding under these subordinate and unsecured facilities. We intend tocontinue to use these types of facilities on a selected basis to supplement ourcapital resources.

 

We are considering replacing our creditfacilities with one or more larger facilities, which may reduce our aggregatedebt financing costs. We would be the borrower and primary obligor under thislarger facility or facilities, and we anticipate the indebtedness would besecured, nonrecourse and based on an available borrowing base.

 

***CashFlow***

 

Net cash provided by/(used in) operatingactivities was $(100.2) million for the three months ended March 31, 2004,as compared to $2.3 million for the three months ended March 31, 2004. Forthe three months ended March 31, 2005, the decrease in cash was primarilyattributable to investment in real estate held for development and sale.  For the three months ended March 31, 2004,the increase in cash from operating activities was primarily attributable toincreases in accounts payable and receivables.

 

Net cash provided by/(used in) investingactivities was $(25,000) for the three months ended March 31, 2005 and$(0.1 million) for the three months ended March 31, 2004. For the three monthsended March 31, 2005, the decrease in cash from investing activities wasprimarily attributable to the purchase of property, plant and equipment. Forthe three months ended March 31, 2004, the decrease in cash from investingactivities was primarily attributable to an investment in property, plant andequipment.

 

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Net cash provided by/(used in) by financingactivities was $70.0 million for the three months ended March 31, 2005 and$(0.6 million) for the three months ended March 31, 2004.  The increase in cash from financingactivities for the three months ended March 31, 2005, was primarilyattributable to proceeds from notes payable to finance our acquisitions of realestate held for development and sale. The decrease in cash from financingactivities for the three months ended March 31, 2004 was primarilyattributable to the payment of notes payable.

 

**ITEM 3.                  QUANTITATIVE AND QUALITATIVE****DISCLOSURES ABOUT MARKET RISK**

 

Market risk represents the risk of loss thatmay impact our financial position, results of operations or cash flows, due toadverse changes in financial and commodity market prices and interest rates. Weare exposed to market risk in the area of interest rate changes. A majority ofour debt is variable rate based on LIBOR and prime rate, and, therefore,affected by changes in market interest rates. Based on current operations, asof March 31, 2005, an increase/decrease in interest rates of 100 basispoints on our variable rate debt would have resulted in a correspondingincrease/decrease in interest actually incurred by us of approximately $680,000in a fiscal year, a significant portion of which would be capitalized andincluded in cost of sales as homes are delivered. As a result, the effect onnet income would be deferred until the underlying units settled and theinterest was released to cost of goods sold. Changes in the prices ofcommodities that are a significant component of home construction costs,particularly lumber, may result in unexpected short-term increases inconstruction costs. Because the sales price of our homes is fixed at the time abuyer enters into a contract to acquire a home and we generally contract tosell our homes before construction begins, any increase in costs in excess ofthose anticipated at the time of each sale may result in lower consolidatedoperating income for the homes in our backlog. We attempt to mitigate themarket risks of the price fluctuation of commodities by entering into fixedprice option contracts with our subcontractors and material suppliers for aspecified period of time, generally commensurate with the building cycle. Thesecontracts afford us the option to purchase materials at fixed prices but do notobligate us to any specified level of purchasing.

** **

**ITEM 4.                  CONTROLSAND PROCEDURES**

 

As of the end ofthe period covered by this report, our Chairman and Chief Executive Officer andChief Financial Officer have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures, which included inquiries made to certainother of our employees.  Based on theirevaluation, our Chairman and Chief Executive Officer and Chief FinancialOfficer have each concluded that our disclosure controls and procedures areeffective and sufficient to ensure that we record, process, summarize, andreport information required to be disclosed by us in our periodic reports filedunder the Securities Exchange Act within the time periods specified by the Securitiesand Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not beenany changes in our internal controls over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

We do not expectthat our disclosure controls and internal controls will prevent all error andall fraud. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, with the Company havebeen detected. These inherent limitations include the realities that judgmentsin decision-making can be faulty and that breakdowns can occur because ofsimple error or mistake. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people or bymanagement override of the controls.

 

The design of anysystem of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, a control may become inadequate because of changes in conditions orthe degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and may not be detected.

 

**PART II – OTHER INFORMATION**

** **

**ITEM 1.                  LEGAL PROCEEDINGS****.**

 

We are not currently subject to any materiallegal proceedings. From time to time, however, we are named as a defendant inlegal actions arising from our normal business activities. Although we cannotaccurately predict the amount of our liability, if any, that could arise withrespect to legal actions currently pending against us, we do not expect thatany such liability will have a material adverse effect on our financialposition, operating results or cash flows.

 

We believe that we have obtained adequateinsurance coverage or rights to indemnification, or where appropriate, haveestablished reserves in connection with these legal proceedings.

 

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**ITEM 2.                  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS****.**

 

None.

** **

**ITEM 3.                  DEFAULTS UPON SENIOR SECURITIES.**

 

None.

** **

**ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

None.

** **

**ITEM 5.                  OTHER INFORMATION.**

 

None.

** **

**ITEM 6.                  EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                              |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                     |
| 3.1                 |       | Amended and  Restated Certificate of Incorporation (incorporated by reference to an  exhibit to the Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2004)                                  |
|                |       |                                                                                                                                                                                                                     |
| 3.2                 |       | Amended and  Restated Bylaws (incorporated by reference to an exhibit to the Registrant’s  Annual Report on Form 10-K for the year ended December 31, 2004)                                                         |
|                |       |                                                                                                                                                                                                                     |
| 4.1                 |       | Specimen Stock  Certificate (incorporated by reference to an exhibit to the Registrant’s Amendment  No. 6 to the Registration Statement on Form S-1 filed with the Commission on  December 9, 2004 (No. 333-118193) |
|                |       |                                                                                                                                                                                                                     |
| 31.1                |       | Certification of  Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule  15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended                                                 |
|                |       |                                                                                                                                                                                                                     |
| 31.2                |       | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),  promulgated under the Securities Act of 1934, as amended                                                                       |
|                |       |                                                                                                                                                                                                                     |
| 32.1                |       | Certification of  Chairman and Chief Executive Officer and Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                            |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|                | COMSTOCK  HOMEBUILDING COMPANIES, INC. |
|---------------------|----------------------------------------|
|                |                                   |
|                |                                   |
| Date: May 16,  2005 | By:                                    | /s/ Christopher  Clemente |
|                |                                   | Christopher  Clemente |
|                |                                   | Chairman and  Chief Executive Officer |
|                |                                   |
|                |                                   |
|                | By:                                    | /s/ Bruce J.  Labovitz |
|                |                                   | Bruce J.  Labovitz |
|                |                                   | Chief Financial  Officer |
|                     |                                        |  |  |

 

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