**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

**Quarterly Report Pursuant To Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the Quarter Ended June 30, 2005**

 

**CommissionFile Number 1-32375**

** **

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** **

**ComstockHomebuilding Companies, 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  5th Floor  Reston, Virginia 20190  (703) 883-1700**                           |
| (Address including zip  code, and telephone number, including area  code, of principal executive offices) |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

YES  ý  NO  o

 

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

YES  o  NO  ý

 

As of August [   ], 2005, 11,252,690 shares of the Class Acommon stock, par value $.01 per share, of the Registrant were outstanding.

 

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. ANDSUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 
| **PART I – FINANCIAL INFORMATION**                                                                |                                                                                         |
|-------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                                                                        |                                                                                         |
| ITEM 1. FINANCIAL STATEMENTS:                                                                               | ** **                                                                                   |
|                                                                                                        |                                                                                         |
| Consolidated Balance Sheets (unaudited) -  June 30, 2005 and December 31, 2004                    |                                                                                         |
|                                                                                                        |                                                                                         |
| Consolidated Statements of Operations (unaudited) -  Three and Six Months Ended June 30, 2005 and 2004 |                                                                                         |
|                                                                                                        |                                                                                         |
| Consolidated Statements of Cash Flows (unaudited) -  Three and Six Months Ended June 30, 2005 and 2004 |                                                                                         |
|                                                                                                        |                                                                                         |
| Notes to Consolidated Financial Statements                                                                  |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 2.                                                                                                     | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS |   |
|                                                                                                        |                                                                                         |   |
| ITEM 3.                                                                                                     | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                  |   |
|                                                                                                        |                                                                                         |   |
| ITEM 4.                                                                                                     | CONTROLS AND PROCEDURES                                                                      |   |
|                                                                                                        |                                                                                         |
| **PART II – OTHER INFORMATION**                                                                   |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 1. LEGAL PROCEEDINGS                                                                                   |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                        |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                     |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 5. OTHER INFORMATION                                                                                   |                                                                                         |
|                                                                                                        |                                                                                         |
| ITEM 6. EXHIBITS                                                                                            |                                                                                         |
|                                                                                                        |                                                                                         |
| SIGNATURES                                                                                                  |                                                                                         |

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONSOLIDATED BALANCESHEETS**

**(Amounts in thousands, except share data)**

 
| ** **                                                                                                    | ** ** | **June 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                                    | ** ** | ** **             | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                        |       |                   |       |                        |       |
| Cash and cash  equivalents                                                                                    |       | $                      | 70,397     |                        | $          | 67,559 |   |
| Restricted cash                                                                                               |       | 13,336                 |       | 7,500                       |       |
| Receivables                                                                                                   |       | 5,312                  |       | 239                         |       |
| Due from related  parties                                                                                     |       | 1,650                  |       | 1,447                       |       |
| Real estate held for  development and sale                                                                    |       | 213,819                |       | 104,326                     |       |
| Inventory not owned -  variable interest entities                                                             |       | 33,640                 |       | 118,558                     |       |
| Property, plant and  equipment                                                                                |       | 519                    |       | 488                         |       |
| Investment in real  estate partnerships                                                                       |       | 1,003                  |       | 1,029                       |       |
| Deferred income tax                                                                                           |       | 1,149                  |       | 821                         |       |
| Other assets                                                                                                  |       | 3,091                  |       | 2,540                       |       |
| TOTAL ASSETS                                                                                                  |       | $                      | 343,916    |                        | $          | 304,507 |   |
|                                                                                                          |       |                   |       |                        |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                    |       |                   |       |                        |       |
| Accounts payable and  accrued liabilities                                                                     |       | $                      | 44,652     |                        | $          | 35,532 |   |
| Income taxes payable                                                                                          |       | 1,153                  |       | 290                         |       |
| Due to related parties                                                                                        |       | 77                     |       | 148                         |       |
| Obligations related to  inventory not owned                                                                   |       | 33,215                 |       | 114,333                     |       |
| Notes payable                                                                                                 |       | 131,804                |       | 65,684                      |       |
| Notes payable—related  parties                                                                           |       | 3,263                  |       | 10,944                      |       |
| Distribution payable                                                                                          |       | 6,346                  |       | 12,655                      |       |
| TOTAL LIABILITIES                                                                                             |       | 220,510                |       | 239,586                     |       |
|                                                                                                          |       |                   |       |                        |       |
| Commitments and  contingencies (Note 12)                                                                      |       |                   |       |                        |       |
|                                                                                                          |       |                   |       |                        |       |
| Minority interest                                                                                             |       | 372                    |       | 2,695                       |       |
|                                                                                                          |       |                   |       |                        |       |
| SHAREHOLDERS’ EQUITY                                                                                     |       |                   |       |                        |       |
| Class A common  stock, $0.01 par value, 77,266,500 shares authorized, 11,536,064 issued and  outstanding |       | 115                    |       | 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                                                                                   |       | 128,776                |       | 75,510                      |       |
| Unearned compensation                                                                                         |       | (3,671                 | )          | (4,314                      | )          |
| Retained earnings  (accumulated deficit)                                                                      |       | (2,213                 | )          | (9,089                      | )          |
| TOTAL SHAREHOLDERS’  EQUITY                                                                              |       | 123,034                |       | 62,226                      |       |
|                                                                                                          |       |                   |       |                        |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY (DEFICIT)                                                    |       | $                      | 343,916    |                        | $          | 304,507 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONSOLIDATED STATEMENTSOF OPERATIONS**

(Amounts in thousands, except share data)

 
| ** **                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | ** **                           | ** ** | **Predecessor**                    | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
| Revenues                                                                            |       |                                 |       |                               |       |   |   |   |   |
| Sale of real  estate—homes                                                     |       | $                                    | 39,599     |                               | $          | 29,118 |   | $ | 68,064 |   | $ | 44,254 |   |
| Other revenue                                                                       |       | 312                                  |       | 1,983                              |       | 576 |   | 4,728 |   |
| Total revenue                                                                       |       | 39,911                               |       | 31,101                             |       | 68,640 |   | 48,982 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Expenses                                                                            |       |                                 |       |                               |       |   |   |   |   |
| Cost of sales of real  estate                                                       |       | 29,658                               |       | 20,455                             |       | 47,249 |   | 30,768 |   |
| Cost of sales of other                                                              |       | 9                                    |       | 1,498                              |       | 20 |   | 3,646 |   |
| Selling, general and  administrative                                                |       | 5,608                                |       | 4,479                              |       | 10,660 |   | 6,910 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Operating income                                                                    |       | 4,636                                |       | 4,669                              |       | 10,711 |   | 7,658 |   |
| Other (income) expense,  net                                                        |       | (154                                 | )          | (3                                 | )          | (190 | ) | 60 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Income before minority  interest and equity in earnings of real estate partnerships |       | 4,790                                |       | 4,672                              |       | 10,901 |   | 7,598 |   |
| Minority interest                                                                   |       | 7                                    |       | 1,700                              |       | 8 |   | 2,548 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Income before equity in  earnings of real estate partnerships                       |       | 4,783                                |       | 2,972                              |       | 10,893 |   | 5,050 |   |
| Equity in earnings of  real estate partnerships                                     |       | 4                                    |       | 30                                 |       | 34 |   | 58 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Total pre tax income                                                                |       | 4,787                                |       | 3,002                              |       | 10,927 |   | 5,108 |   |
| Income taxes                                                                        |       | 1,721                                |       | —                             |       | 4,052 |   | — |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                                          |       | $                                    | 3,066      |                               | $          | 3,002 |   | $ | 6,875 |   | $ | 5,108 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Basic earnings per  share                                                           |       | 0.26                                 |       | 0.42                               |       | 0.59 |   | 0.72 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Basic weighted average  shares outstanding                                          |       | 11,831                               |       | 7,067                              |       | 11,727 |   | 7,067 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Diluted earnings per  share                                                         |       | 0.26                                 |       | 0.42                               |       | 0.58 |   | 0.72 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Diluted weighted  average shares outstanding                                        |       | 11,993                               |       | 7,067                              |       | 11,882 |   | 7,067 |   |

 

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

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONSOLIDATED STATEMENTSOF CASH FLOWS**

(Amounts in thousands, except share data)

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                           |       |                               |       |   |   |
| Net income                                                                       |       | $                                  | 6,875      |   | $ | 5,108 |   |
| Adjustment to reconcile  net income to net cash provided by operating activities |       |                               |       |   |   |
| Depreciation                                                                     |       | 81                                 |       | 47 |   |
| Loss on disposal of  assets                                                      |       | 9                                  |       | — |   |
| Minority interest                                                                |       | 8                                  |       | 2,548 |   |
| Equity in earnings of  real estate partnerships                                  |       | (34                                | )          | (58 | ) |
| Amortization of stock  compensation                                              |       | 1,086                              |       | — |   |
| Deferred income tax                                                              |       | (328                               | )          | — |   |
| Changes in operating  assets and liabilities:                                    |       |                               |       |   |   |
| Restricted Cash                                                                  |       | (5,836                             | )          | — |   |
| Receivables                                                                      |       | (5,073                             | )          | (454 | ) |
| Due from related  parties                                                        |       | (203                               | )          | (965 | ) |
| Real estate held for  development and sale                                       |       | (109,493                           | )          | (5,727 | ) |
| Other assets                                                                     |       | 3,249                              |       | (1,703 | ) |
| Accounts payable and  accrued liabilities                                        |       | 9,120                              |       | 8,452 |   |
| Income tax payable                                                               |       | 863                                |       | — |   |
| Due to related parties                                                           |       | (71                                | )          | (24 | ) |
| Net cash (used in)  provided by operating activities                             |       | (99,747                            | )          | 7,224 |   |
|                                                                             |       |                               |       |   |   |
| Cash flows from  investing activities:                                           |       |                               |       |   |   |
| Purchase of property,  plant, and equipment                                      |       | (121                               | )          | (158 | ) |
| Distributions from  investments in real estate partnerships                      |       | 60                                 |       | 60 |   |
| Net cash (used in)  provided by investing activities                             |       | (61                                | )          | (98 | ) |
|                                                                             |       |                               |       |   |   |
| Cash flows from  financing activities:                                           |       |                               |       |   |   |
| Proceeds from notes  payable                                                     |       | 116,276                            |       | 33,351 |   |
| Proceeds from related  party notes payable                                       |       | 444                                |       | 5,219 |   |
| Payments on notes  payable                                                       |       | (50,156                            | )          | (32,992 | ) |
| Payments on related  party notes payable                                         |       | (8,125                             | )          | — |   |
| Contribution from  minority shareholders                                         |       | 79                                 |       | — |   |
| Payment of distribution  payable                                                 |       | (6,309                             | )          |   |   |
| Distributions paid to  minority shareholders                                     |       | (2,409                             | )          | (5,218 | ) |
| Distributions paid to  shareholders                                              |       |                               |       | (2,900 | ) |
| Proceeds from shares  issued under employee stock purchase plan                  |       | 36                                 |       |   |   |
| Net proceeds from  follow on offering                                            |       | 52,810                             |       |   |   |
| Net cash provided by  (used in) financing activities                             |       | 102,646                            |       | (2,540 | ) |
|                                                                             |       |                               |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                            |       | 2,838                              |       | 4,586 |   |
| Cash and cash equivalents,  beginning of period                                  |       | 67,559                             |       | 17,160 |   |
| Cash and cash  equivalents, end of period                                        |       | $                                  | 70,397     |   | $ | 21,746 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Amounts in thousands, per share data)

 

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

 

Comstock Companies, Inc.(the “Company”) was incorporated on May 24, 2004 as a Delawarecorporation. On June 30, 2004, the Company changed its name to ComstockHomebuilding Companies, Inc.

 

On December 17,2004, as a result of completing its initial public offering (“IPO”) of its Class ACommon Stock, the Company acquired 100% of the outstanding capital stock ofComstock Holding Company, Inc. and subsidiaries (“Comstock Holdings”) bymerger, which followed a consolidation that took place immediately prior to theclosing of the IPO (the “Consolidation”). The Consolidation was effectedthrough the mergers of Sunset Investment Corp., Inc. and subsidiaries, 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 of Class A and B Common Stock ofthe Company, respectively. Both Class A and B Common Stock shares bear thesame economic rights. However, for voting purposes, Class A stock holdersare entitled to one vote for each share held while Class B stock holdersare entitled to fifteen votes for each share held.

 

As a result of theIPO, the Company sold 3,960 Class A Common Shares at $16.00 per share,raising proceeds, net of the underwriting discount, of approximately$56.0 million. On December 28, 2004, pursuant to the underwriters’exercise of their over-allotment option, the Company sold an additional594 shares resulting in additional proceeds, net of underwriting discount,of approximately $8.8 million.

 

On June 22, 2005 the Company completed a followon offering in which 2,360 shares of Class A Common stock were sold to thepublic at a price of $23.90 per share. The offering resulted in total proceeds to the Company, net of underwritingdiscounts, of approximately $53.4 million.

 

Our common stockis traded on the NASDAQ National Market under the symbol “CHCI”. We have nopublic trading history prior to December 17, 2004.

 

The consolidatedfinancial statements and notes of the Company as of June 30, 2005 and forthe three months ended June 30, 2005 and 2004 have been prepared bymanagement without audit, pursuant to rules and regulations of theSecurities and Exchange Commission and should be read in conjunction with the December 31,2004 audited financial statements contained in the Company’s Annual Report on Form 10-Kfor the year then ended. In the opinion of management, all normal, recurringadjustments necessary for the fair presentation of such financial informationhave been included. The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted. Certain amountsin the prior year’s financial statements have been reclassified to conform tothe current year’s presentation with no effect on previously reported netincome 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 June 30, 2005 is not necessarily indicative of the results tobe 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 tothe 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.

 

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

 

Real estate heldfor development and sale includes land, land development costs, interest andother construction costs and is stated at cost or, when circumstances or eventsindicate that the real estate held for development or sale is impaired, atestimated fair value.

 

Land, landdevelopment and indirect land development costs are accumulated by specificarea and allocated to various lots or housing units using specificidentification and allocation based upon the relative sales value, unit or areamethods. Direct construction costs are assigned to housing units based onspecific identification. Construction costs primarily include directconstruction costs and capitalized field overhead. Other costs are comprised ofprepaid local government fees and capitalized interest and real estate taxes.Selling costs are expensed as incurred.

 

Estimated fairvalue is based on comparable sales of real estate in the normal course ofbusiness under existing and anticipated market conditions. The evaluation takesinto consideration the current status of the property, various restrictions,carrying costs, costs of disposition and any other circumstances which mayaffect fair value including management’s plans for the property. Due to thelarge acreage of certain land holdings, disposition in the normal course ofbusiness is expected to extend over a number of years. A write-down toestimated fair value is recorded when the carrying value of the propertyexceeds its estimated fair value. These evaluations are made on aproperty-by-property basis. The Company assesses the impairment of real estateassets whenever events or changes in circumstances indicate that the net bookvalue may not be recoverable.

 

Real estate held for development and sale consists ofthe following: 

 
| ** **                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Land and land  development costs                                             |       | $                 | 83,076     |                  | $          | 65,545 |   |
| Cost of construction  (including capitalized interest and real estate taxes) |       | 130,743           |       | 38,781                |       |
|                                                                         |       | $                 | 213,819    |                  | $          | 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 deposit pursuantto the liquidated damages provision contained within the purchase agreement. Asa result, none of the creditors of any of the entities with which the Companyenters into forward fixed price purchase agreements have recourse to thegeneral credit of the Company. The Company also does not share in an allocationof either the profit earned or loss incurred by any of these entities withwhich 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 becausethe Company has been deemed to have provided subordinated financial support,which refers 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 forpossible 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. Thiscalculation requires substantial management judgments and estimates. Inaddition, because the Company does not have any

 

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contractual orownership interests in the entities with which it contracts to buy the land,the Company does not have the ability to compel these development entities toprovide financial or other data to assist the Company in the performance of theprimary 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, at December 31,2004, the Company has consolidated five entities in the accompanyingconsolidated balance sheet. The effect of the consolidation at December 31,2004 was the inclusion of $118,558 in “Inventory not owned—variable interestentities” with a corresponding inclusion of $114,333 (net of land deposits paidof $4,225) to “Obligations related to inventory not owned.” During the sixmonths ended June 30, 2005, the Company acquired three entities, whichwere previously consolidated under FIN 46-R at December 31, 2004.The effect of the consolidation at June 30, 2005 was the inclusion of$33,640 in “Inventory not owned—variable interest entities” with a correspondinginclusion of $33,215 (net of land deposits paid of $425) to “Obligationsrelated to inventory not owned.”  Creditors, if any, of these variableinterest entities have no recourse against the Company.

 

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

 

Warranty reservesfor houses sold are established to cover potential costs for materials andlabor with regard to warranty-type claims expected to arise during the one-yearwarranty period provided by the Company or within the five-year statutorilymandated structural warranty period. Since the Company subcontracts itshomebuilding work, subcontractors are required to provide the Company with anindemnity and a certificate of insurance prior to receiving payments for theirwork. Claims relating to workmanship and materials are generally the primaryresponsibility of the subcontractors and product manufacturers. The warrantyreserve is established at the time of closing, and is calculated based uponhistorical warranty cost experience and current business factors. Variablesused in the calculation of the reserve, as well as the adequacy of the reservebased on the number of homes still under warranty, are reviewed on a periodicbasis. Warranty claims are directly charged to the reserve as they arise. Thefollowing table is a summary of warranty reserve activity which is included inaccounts payable and accrued liabilities for the three months ending June 30,2005 and 2004:

 

| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at beginning of  period   |       | $                                    | 954        |                               | $          | 671 |   | $ | 916 |   | $ | 541 |   |
| Additions                         |       | 153                                  |       | 251                                |       | 309 |   | 418 |   |
| Releases and/or charges  incurred |       | (162                                 | )          | (171                               | )          | (280 | ) | (208 | ) |
| Balance at end of  period         |       | $                                    | 945        |                               | $          | 751 |   | $ | 945 |   | $ | 751 |   |

 

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

 

Interest and realestate taxes incurred relating to the development of lots and parcels arecapitalized to real estate held for development and sale during the activedevelopment period, which generally commences when borrowings are used toacquire real estate assets and ends when the properties are substantiallycomplete. Interest is capitalized based on the interest rate applicable tospecific borrowings or the weighted average of the rates applicable to otherborrowings during the period. Interest and real estate taxes capitalized toreal estate held for development and sale are expensed as a component of costof sales as related units are sold.

 

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The following table is a summary of interest incurredand capitalized: 

 

| ** **                                               | ** ** | **Three Months Ended June  30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **2005**                         | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total interest incurred                                  |       | $                                | 3,254      |                               | $          | 907 |   | $ | 5,767 |   | $ | 1,938 |   |
| Beginning interest  capitalized                          |       | 5,987                            |       | $                                  | 2,203      |   | 4,524 |   | $ | 1,428 |   |
| Plus: Interest incurred  on notes payable                |       | 2,993                            |       | 532                                |       | 5,096 |   | 1,212 |   |
| Plus: Interest incurred  on related party notes payable  |       | 188                              |       | 426                                |       | 269 |   | 771 |   |
| Less: Interest expensed  as a component of cost of sales |       | (1,159                           | )          | (365                               | )          | (1,880 | ) | (615 | ) |
| Ending interest  capitalized                             |       | $                                | 8,009      |                               | $          | 2,796 |   | $ | 8,009 |   | $ | 2,796 |   |

 

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

 

The following weighted average shares and shareequivalents are used to calculate basic and diluted EPS for the three and six monthsended June 30, 2005 and 2004: 

 

| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic earnings per  share                     | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                                    |       | $                                    | 3,066      |                               | $          | 3,002 |   | $ | 6,875 |   | $ | 5,108 |   |
| Basic weighted-average  shares outstanding    |       | 11,831                               |       | 7,067                              |       | 11,727 |   | 7,067 |   |
| Per share amounts                             |       | $                                    | 0.26       |                               | $          | 0.42 |   | $ | 0.59 |   | $ | 0.72 |   |
| Dilutive earnings per  share                  |       |                                 |       |                               |       |   |   |   |   |
| Net income                                    |       | $                                    | 3,066      |                               | $          | 3,002 |   | $ | 6,875 |   | $ | 5,108 |   |
| Basic weighted-average  shares outstanding    |       | 11,831                               |       | 7,067                              |       | 11,727 |   | 7,067 |   |
| Stock options and  restricted stock grants    |       | 162                                  |       | —                             |       | 155 |   | — |   |
| Dilutive  weighted-average shares outstanding |       | 11,993                               |       | 7,067                              |       | 11,882 |   | 7,067 |   |
| Per share amounts                             |       | $                                    | 0.26       |                               | $          | 0.42 |   | $ | 0.58 |   | $ | 0.72 |   |

 

9

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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 three and six monthsended June 30, 2005 and 2004, comprehensive income equaled net income;therefore, a separate statement of comprehensive income is not included in theaccompanying combined consolidated financial statements.

 

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

 

During March 2005,the Company purchased certain noncontrolling minority interests in itsconsolidated subsidiaries for a total purchase price of $2,242.  Becausethe underlying book value of the minority interests was $2,360, the Companyallocated $118 as a reduction in the subsidiary’s real estate held fordevelopment and sale accounts.

 

**8.****              INVESTMENT IN REALESTATE PARTNERSHIPS**

 

Prior to the Company’s acquisition of Comstock Service as discussed inNote 1, Comstock Service in 2001 had invested $41 in North Shore Investors, LLCfor a 50% ownership interest. North Shore Investors, LLC was formed to acquireand develop residential lots and construct single family and townhouse units.In 2002, as a result of recognizing its share of net losses incurred by NorthShore Investors, LLC, Comstock Service reduced its investment in North ShoreInvestors, LLC, to $0.

 

Since theinception to June 30, 2005, the partnership has incurred losses ofapproximately $2,000.  On June 28,2005 the Company received a capital call from North Shore in the amount of $719so that North Shore may comply with certain debt repayments.  Because the Company may be obligated to providefuture financial support, the Company, during the six months ended June 30,2005 recorded its share of losses incurred by North Shore in the accompanyingfinancial statements in the amount of $26. As of June 30, 2005 the Company carried the following amounts inits financial statements related to North Shore:

 
| Investment in real  estate partnerships |   | $ | (26   | )      |
|-----------------------------------------|--------|---|-------|--------|
| Due from affiliates                     |   | $ | 1,496 |   |

 

In addition theCompany may be obligated in certain circumstances to provide additional capitalin the amount of $2 million. As of August 8, 2005 the Company has not paid itsshare of the capital call and is exploring alternatives with all partiesinvolved to reorganize or restructure the partnership in order to maximizepotential returns. The Company has evaluated the carrying value of itsinvestment in and receivable from North Shore. Based on current negotiationswith the members of the partnership and the developer  of the community, as well as a no-fee optionthe Company has secured to unilaterally purchase the outstanding obligation ofthe partnership to Royal Bank of Canada, at par value, in the event of adefault, the Company does not believe an impairment reserve is warranted atthis time.  However, it is possible thismay change in future periods, or, based on results of negotiations, the Companymay, in the future be required to consolidate the North Shore entity.

 

10

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**9.****              DEBT**

 

In February 2005,the Company completed a purchase of a 424 unit Condominium conversion projectlocated in Fairfax, Virginia. To finance this transaction, the Company enteredinto a promissory note agreement relating to $67,000 of indebtedness bearinginterest at a rate equal to the greater of: (i) 5.50% or (ii) 3.50% + thethree month LIBOR rate. At June 30, 2005, the Company owed a total of$42,474.

 

In March 2005,as a result of purchasing three real estate projects known as Countryside,Barrington and Blake, the Company entered into promissory note agreementsrelating to an aggregate of $29,282 of indebtedness bearing a weighted averageinterest rate of approximately 5.42% to finance the purchases and futuredevelopment needs. On June 30, the Company owed a total of $18,798.

 

**10.****       INCOME TAX**

 

Prior to December 17,2004, the Predecessor had elected to be treated as an S corporation underSubchapter S of the Internal Revenue Code and therefore was not subject toincome taxes. Taxable income or loss was passed through and reported by theindividual shareholders. Subsequent to the Consolidation, the Company wasreorganized as a C corporation under which income taxes are accounted for underthe asset and liability method in accordance with SFAS 109 “Accounting forIncome Taxes.” Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax basis. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton the deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

Income Tax provision consists of the following as of June 30,2005: 

 
| Current:                  |   |   |   |
|---------------------------|--------|--------|--------|
| Federal                   |   | 3,778  |   |
| State                     |   | 449    |   |
|                      |   | 4,227  |   |
| Deferred:                 |   |   |   |
| Federal                   |   | (156   | )      |
| State                     |   | (19    | )      |
|                      |   | (175   | )      |
| Total income tax  expense |   | 4,052  |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Components of the Company’s deferred taxassets and liabilities at June 30, 2005 were as follows:

 

11

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| ** **                      | ** ** | **June 30, 2005** | ** ** |
|---------------------------------|------------|------------------------|------------|
| Deferred Tax Assets:            |       |                   |       |
| Inventory                       |       | 1,974                  |       |
| Warranty                        |       | 303                    |       |
| Deferred rent                   |       | 13                     |       |
| Accrued expenses                |       | 94                     |       |
| Stock-based  compensation       |       | 315                    |       |
|                            |       | 2,699                  |       |
| Less — valuation allowance |       | (1,301                 | )          |
| Net deferred tax assets         |       | 1,398                  |       |
| Deferred tax  liabilities:      |       |                   |       |
| Depreciation and  amortization  |       | (249                   | )          |
| Net deferred tax  liabilities   |       | (249                   | )          |
| Net deferred tax assets         |       | 1,149                  |       |

 

The Company hasadequately provided for contingencies related to income taxes in accordancewith SFAS No. 5.  At June 30, 2005, the Company recorded a $278income tax reserve which is on the balance sheet.  This tax reserverelates predominately to a potential dispute by taxing authorities over taxbenefits resulting from additional income tax basis in certain residentialhousing development projects.  The Company has also determined that avaluation allowance of approximately $1,301 as of June 30, 2005 related toa deferred tax asset of approximately $1,301 resulting from additional taxbasis in residential real estate development projects.  In analyzing theneed for the provision of tax contingency reserves and the valuation allowance,management reviewed applicable statutes, rules, regulations and interpretationsand established these reserves based on past experience and judgments aboutpotential actions by taxing jurisdictions.

 

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

 

On December 13,2004, the Company adopted the 2004 Long-Term Incentive Compensation Plan, (the “Plan”)provides for the issuance of stock options, stock appreciation rights, or SARs,restricted stock, deferred stock, dividend equivalents, bonus stock and awardsin lieu of cash compensation, other stock-based awards and performance awards.The Plan provided for an initial authorization of 1,550 shares of Class ACommon stock for issuance thereunder, plus an additional annual authorizationeffective January 1, 2006 equal to the lesser of (i) 3% of the

 

Class ACommon Stock outstanding on the date of determination, (ii) 500,000 sharesor (iii) such lesser as may be determined by the Company’s Board ofDirectors.

 

Effective January 1,2004, the Company adopted SFAS No. 123R (revised 2004), “Share-BasedPayment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”) and supercedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS 123R requires allshare-based payments to employees, including grants of employee stock options, tobe recognized in the financial statements over the vesting period based ontheir fair values at the date of grant.  In accordance with the provisionsof SFAS No. 123(R) and SFAS No. 148, $561 and $0 was recordedfor total stock-based compensation expense for the three months ended June 30,2005 and 2004 respectively and $1,097 and $0 respectively for the six monthsended June 30, 2005 and 2004.  Of this amount $55 and $110 wasrelated to stock option grants for the three and six months ended June 30,2005 and the remainder was related to restricted stock grants.

 

On June 30, 2005 the following amounts wereavailable for issuance:

 
| Shares Available for  issuance at December 31, 2004 |   | 1,168  |   |
|----------------------------------------------------------|--------|--------|--------|
| Adjustments:                                             |   |   |   |
| Restricted Stock Grants  – Issued                   |   | (16    | )      |
| Restricted Stock Grants  – Forfeited                |   | 4      |   |
| Shares Available for  issuance at March 31, 2005    |   | 1,156  |   |

 

12

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**12.****       COMMITMENTS ANDCONTINGENCIES**

 

**Litigation**

 

In the normalcourse of its business, the Company and/or its subsidiaries are named asdefendants in certain legal actions arising from its normal businessactivities. Management believes that none of the litigation matters in whichthe Company or any subsidiary is involved would have a material adverse effecton the consolidated financial condition or operations of the Company.

 

**Lettersof credit and performance bonds**

 

The Company hascommitments as a result of contracts entered into with certain third parties tomeet certain performance criteria as outlined in such contracts. The Company isrequired to issue letters of credit and performance bonds to these thirdparties as a way of ensuring that such commitments entered into are met by theCompany. At June 30, 2005, the Company has outstanding $8,186 in lettersof credit and $12,193 in performance and payment bonds to these third parties.No amounts have been drawn against these letters of credit and performancebonds.

 

**Operatingleases**

 

The Company leasesoffice space under non-cancelable operating leases. Minimum annual lease paymentsunder these leases at June 30, 2005 approximate:

 
| **Year Ended: Amount** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| 2005                   |       | $          | 324        |   |
| 2006                   |       | 629        |       |
| 2007                   |       | 642        |       |
| 2008                   |       | 667        |       |
| 2009                   |       | 547        |       |
| 2010                   |       | 10         |       |
| Thereafter             |       | —     |       |
| Total                  |       | $          | 2,819      |   |
|                        |            |            |            |  |  |

 

Operating leaserental expense aggregated $301 and $170, respectively, for six months ended June 30,2005 and 2004.

 

**13.****       RELATED PARTY TRANSACTIONS**

 

In June 2002,the Predecessor entered into a promissory note agreement with TCG Fund I, LC tofund development projects. TCG Fund I, LC, is a related party in which theCompany has an equity investment. The promissory note agreement allows for theCompany to borrow up to $4 million. The note bears interest at 12% per annumand was paid in full during June 2005. As of June 30, 2005 and December 31,2004, the amount owed to TCG Fund I amounted to $0 and approximately $3.3million, respectively. Accrued interest payable on this note totaled $0 and$106 at June 30, 2005 and December 31, 2004, respectively.

 

In September 2004,the Predecessor entered into a promissory note agreement with TCG Fund II, LCto fund development projects. TCG Fund II, LC is an entity which the companymanages as a non-member. The promissory note agreement allows the Company toborrow up to $10 million. The note bears interest at 12% per annum and is dueon September 7, 2007. As of June 30, 2005 and December 31, 2004the Company owed $2.6 and $2.4 million, respectively, under thispromissory agreement. Accrued interest payable on this note totaled $4 and $49at June 30, 2005 and December 31, 2004, respectively.

 

13

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In April 2002and January 2004, the Predecessor entered into lease agreements forapproximately 7.7 and 8.8 square feet, respectively, for its corporateheadquarters at 11465 Sunset Hills Road, Reston, Virginia from ComstockPartners, L.C., an affiliate of our predecessor in which executive officers ofthe Company 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 and six months ended June 30,2004, total payments made under this lease agreement were $77 and $141,respectively.  On September 30, 2004 the lease agreements werecanceled and replaced with new leases for a total of 20.6 square feet withComstock Asset Management, L.C., an entity owned by Christopher Clemente. For the three months and six months ended June 30, 2005, total paymentsmade under this lease agreement were $142 and $277, respectively.

 

In May 2003,the Predecessor hired a construction company, in which Christopher Clemente’sbrother, Louis Clemente, serves as the President and is a significantshareholder, to provide construction services and act as a general contractorat one of the Company’s developments.  TheCompany paid $6.3 million and $1.9 million to this construction company duringthe six months ended June 30, 2005 and 2004, respectively.

 

At June 30,2005 and December 31, 2004, the Company had an outstanding note receivablefrom Investors Management, LLC of $0 and $163 respectively, which accruesinterest at a rate of 10% per annum. Investors Management, LLC is a relatedparty, which is owned partially by Christopher Clemente, Gregory Benson and BruceLabovitz (executive officers and/or shareholders of the Company).  At December 31,2004 accrued interest receivable on this note totaled $5. During February 2005the Company received payment in full on this note.

 

ChristopherClemente’s mother-in-law, Janice Schar, and Gary Martin each invested $100 asminority shareholders in one of our subsidiaries, and Judah and Deborah Labovitz,the parents of Bruce Labovitz, loaned approximately $300 to another of oursubsidiaries.  During the first quarter 2005, the Company repurchased theminority interests of Janice Schar and Gary Martin for an approximate purchaseprice of $136.  In April 2005, the Company paid the $300 loan toJudah and Deborah Labovitz in full.

 

During 2003, thePredecessor entered into agreements with I-Connect, L.C., a company in whichInvestors Management, LLC holds a 25% interest, for information technology consultingservices and the right to use certain customized enterprise software developedwith input from the Company. The intellectual property rights associated withthe software solution that was developed by I-Connect along with anyimprovements made thereto by the Company remained the property of I-Connect.For the three months ended June 30, 2005 and 2004, the Company paid $155and $127, respectively, to I-Connect. During the six months ended June 30, 2005 and 2004, the Companypaid $260 and $239, 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 and six months June 30, 2005 and 2004. On June 24, 2003, theI-Connect, L.C. sublease was assigned to Comstock Partners, L.C. (as landlord).The space sharing agreement with I-Connect ended on September 30, 2004.

 

For three monthsended June 30, 2005 and 2004, the Predecessor received revenue ofapproximately $0 and $1.3 million, respectively, by providing administrativeand sales support to Comstock Service Corp., Inc., a related party ownedby Christopher Clemente and Gregory Benson. During the six months ended June 30,2005 and 2004, the Company received revenue of approximately $0 and $2.1million, respectively.

 

In October 2004,the Predecessor entered into an agreement with Comstock Asset Management Inc.,in which the Company would provide management services for a fee of $20 amonth.  For the three months and six months ended June 30, 2005 theCompany recorded $60 and $120, respectively, in revenue. At both June 30,2005 and December

 

14

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31, 2004 thePredecessor recorded a receivable for $60, from this entity. In addition, theCompany in November 2004, entered into an agreement with Comstock AssetManagement to sell certain retail condominium units at Potomac Yard for a totalpurchase price of $14,500. In connection with this sale, the Company received adeposit of $8,000 upon execution of this agreement.

 

During the threemonths ended March 31, 2005 and 2004, the Company provided bookkeepingservices to certain related party entities at no charge.

 

In August 2004,the Predecessor entered into a $2,400 promissory note agreement with BelmontModels I, L.C., an entity managed by Investors Management. The note bearsan interest rate of 12%, which is payable monthly and matures in July 2005. In March 2005, the Company sold four condominium units to Belmont ModelsI, L.C. under a sale and leaseback arrangement. The four condominium units weredelivered for a total purchase price of $2,000 and leased back at a rate of $20per month.  The Company expects the lease to continue for a period oftwenty-four months.  As a result of the deliveries, the promissory notewas reduced by the total purchase price.  At June 30, 2005 and December 31,2004 the Company owed $663 and $2,400, respectively. Accrued interest payableon this note totaled $13 and $49, respectively, at June 30, 2005 and December 31,2004.

 

During six monthsended June 30, 2005 and 2004 the Predecessor entered into sales contractsto sell homes to certain employees of the Company.  The Company, in orderto attract, retain, and motivate employees maintains a home ownership benefitprogram.  Under the home ownership benefits, an employee receives certaincost benefits provided by us when purchasing a home or having one built byus.  Sales of homes to employees for investment purposes are conducted atmarket prices.

 

15

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**ITEM2.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

FORWARD-LOOKINGSTATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

 

The followingdiscussion of our financial condition and results of operations should be readin conjunction with the accompanying unaudited consolidated interim financialstatements and the notes thereto appearing elsewhere in the this report and ouraudited consolidated and combined financial statements and the notes theretofor the year ended December 31, 2004, appearing in our Annual Report on Form 10-Kfor the year then ended (The “2004 Form 10-K”)

 

This reportincludes forward-looking statements that are made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements can be identified by the use of words such as “anticipate,”“believe,” “estimate,” “may,” “intend,” “expect,” “will,” “should,” “seeks” orother similar expressions. Forward-looking statements are based largely on ourexpectations and involve inherent risks and uncertainties, many of which arebeyond our control. You should not place undue reliance on any forward-lookingstatement, which speaks only as of the date made. Some factors which may affectthe accuracy of the forward-looking statements apply generally to the realestate industry, while other factors apply directly to us. Any number ofimportant factors which could cause actual results to differ materially fromthose in the forward-looking statements include, without limitation: generaleconomic and market conditions, including interest rate levels; our ability toservice our substantial debt; inherent risks in investment in real estate; ourability to compete in the Washington, D.C. and Raleigh, North Carolina realestate and home building markets; regulatory actions; fluctuations in operatingresults; our anticipated growth strategies; shortages and increased costs oflabor or building materials; the availability and cost of land in desirableareas; natural disasters; our ability to raise debt and equity capital and growour operations 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 2004 Form 10-K.Our actual results could differ materially from these projected or suggested bythe forward-looking statements.

 

**Overview**

 

We engage in thebusiness of residential land development, production home building andhigh-rise condominium development in the greater Washington, D.C. and Raleigh,North Carolina markets. Our business was started in 1985 by ChristopherClemente, our Chief Executive Officer, as a residential land developer and homebuilder focused on the luxury home market in the northern Virginia suburbs of Washington,D.C. In 1992, we repositioned ourselves as a production home builder focused onmoderately priced homes in areas where we could more readily purchase finishedbuilding lots through option contracts. In 1997, we entered the Raleigh, NorthCarolina market.

 

The followingtable summarizes certain information related to new orders, settlements, and backlogfor the three and six month periods ended June 30 2005 and 2004:

 

16

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| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| New orders                |       | 160                                  |       | 71                                 |       | 406 |   | 203 |   |
| New order revenues        |       | $                                    | 59,134     |                               | $          | 26,063 |   | $ | 162,417 |   | $ | 73,160 |   |
| Average new order price   |       | $                                    | 370        |                               | $          | 367 |   | $ | 400 |   | $ | 360 |   |
|                      |       |                                 |       |                               |       |   |   |   |   |
| Settlements               |       | 123                                  |       | 88                                 |       | 201 |   | 134 |   |
| Settlement revenue        |       | $                                    | 39,599     |                               | $          | 29,118 |   | $ | 68,064 |   | $ | 44,254 |   |
| Average settlement  price |       | $                                    | 322        |                               | $          | 331 |   | $ | 339 |   | $ | 330 |   |
|                      |       |                                 |       |                               |       |   |   |   |   |
| Backlog                   |       | $                                    | 268,579    |                               | $          | 60,433 |   | $ | 268,579 |   | $ | 60,433 |   |

 

***Note: For the six months ended June 30, 2005 there were anadditional 10 new orders with corresponding new order revenue of $2.6 millionat the Company’s North Shore joint venture.***

 

At June 30,2005, we either owned or controlled under option agreements or non-bindingletters of intent over 5,700 building lots including non-consolidating jointventures in which we are the manager.  We currently have communities underdevelopment in Arlington, Fairfax, Loudoun, Culpepper and Prince Williamcounties in Virginia. In Maryland we are currently active in Frederick County.In North Carolina we have active communities in Raleigh and Wake counties. Thefollowing chart summarizes certain information for our current and plannedcommunities as of June 30, 2005:

 

17

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| ** **                                       | ** ** | **As of June 30, 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’                          |       | Completed                    |       | 91 |   | 91 |   | — |   | — |   | — |   | $ | 275,118 |   |
| Blooms Mill TH 22’                          |       | Active                       |       | 113 |   | 43 |   | 38 |   | 32 |   | — |   | $ | 421,386 |   |
| Blooms Mill Carriage                             |       | Active                       |       | 91 |   | 34 |   | 47 |   | 10 |   | — |   | $ | 450,067 |   |
| Blooms Mill Singles                              |       | Completed                    |       | 35 |   | 35 |   | — |   | — |   | — |   | $ | 497,226 |   |
| Commons on Potomac Sq                            |       | Active                       |       | 192 |   | — |   | 20 |   | 172 |   | — |   | $ | 232,260 |   |
| Commons on Williams Sq                           |       | Active                       |       | 180 |   | — |   | 74 |   | 106 |   | — |   | $ | 357,702 |   |
| Countryside                                      |       | Active                       |       | 102 |   | — |   | — |   | 102 |   | — |   | n/a |   |
| The Eclipse on Center  Park                      |       | Active                       |       | 465 |   | — |   | 371 |   | 94 |   | — |   | $ | 393,841 |   |
| Penderbrook                                      |       | Active                       |       | 424 |   | 74 |   | 12 |   | 338 |   | — |   | $ | 249,608 |   |
| River Club at Belmont  Bay 5                     |       | Active                       |       | 84 |   | 35 |   | 36 |   | 13 |   | — |   | $ | 448,177 |   |
| Woodlands at Round Hill                          |       | Active                       |       | 65 |   | 4 |   | 22 |   | 39 |   | — |   | $ | 735,034 |   |
| Wescott Ridge - ADUs(3)                          |       | Completed                    |       | 37 |   | 37 |   | — |   | — |   | — |   | $ | 76,920 |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total VA Active and  Completed                   |       |                         |       | 1,879 |   | 353 |   | 620 |   | 906 |   | — |   | $ | 376,122 |   |
| Total VA Active and  Completed Weighted Avg(4)   |       |                         |       |   |   |   |   |   |   |   |   |   |   | $ | 347,345 |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aldie Singles                                    |       | Development                  |       | 15 |   | — |   | — |   | — |   | 15 |   | n/a |   |
| Barrington Park                                  |       | Development                  |       | 148 |   | — |   | — |   | 134 |   | 14 |   | 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                             |       |                         |       | 1,727 |   | — |   | — |   | 264 |   | 1,463 |   |   |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Virginia**                              | ** ** | ** **                   | ** ** | **3,606** | ** ** | **353** | ** ** | **620** | ** ** | **1,170** | ** ** | **1,463** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Maryland**                                     |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Emerald Farm                                     |       | Active                       |       | 84 |   | 45 |   | 19 |   | 20 |   | — |   | $ | 427,675 |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Maryland**                              | ** ** | ** **                   | ** ** | **84** | ** ** | **45** | ** ** | **19** | ** ** | **20** | ** ** | **—** | ** ** | ** ** | ** ** |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **North  Carolina**                              |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allyn’s Landing                             |       | Active                       |       | 117 |   | 11 |   | 2 |   | 104 |   | — |   | $ | 222,824 |   |
| Beckett Crossing                                 |       | Active                       |       | 115 |   | 106 |   | 6 |   | 3 |   | — |   | $ | 313,134 |   |
| Delta Rdge II Townhomes                          |       | Active                       |       | 41 |   | 40 |   | — |   | 1 |   | — |   | $ | 174,256 |   |
| Kelton at Preston                                |       | Active                       |       | 56 |   | 26 |   | 3 |   | 27 |   | — |   | $ | 306,570 |   |
| Wakefield Plantation                             |       | Active                       |       | 57 |   | 29 |   | 3 |   | 25 |   | — |   | $ | 471,817 |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total North Carolina  Active                     |       |                         |       | 386 |   | 212 |   | 14 |   | 160 |   | — |   | $ | 297,720 |   |
| Total North Carolina  Active Weighted Average(4) |       |                         |       |   |   |   |   |   |   |   |   |   |   | $ | 293,489 |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Holland Road                                     |       | Development                  |       | 90 |   | — |   | — |   | — |   | 90 |   | n/a |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total North Carolina  Development                |       |                         |       | 90 |   | — |   | — |   | — |   | 90 |   |   |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total North Carolina                             |       |                         |       | 476 |   | 212 |   | 14 |   | 160 |   | 90 |   |   |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL ACTIVE AND  COMPLETED                      |       |                         |       | 2,349 |   | 610 |   | 653 |   | 1,086 |   | — |   |   |   |
| TOTAL DEVELOPMENT                                |       |                         |       | 1,817 |   | — |   | — |   | 264 |   | 1,553 |   |   |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                            |       |                         |       | 4,166 |   | 610 |   | 653 |   | 1,350 |   | 1,553 |   |   |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Joint  Ventures**                              |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| North Shore Condominiums                         |       | Active                       |       | 196 |   | — |   | 4 |   | 192 |   | — |   | $ | 309,445 |   |
| North Shore Townhomes                            |       | Active                       |       | 163 |   | 23 |   | 9 |   | 131 |   | — |   | $ | 238,240 |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Joint Ventures                             |       |                         |       | 359 |   | 23 |   | 13 |   | 323 |   | — |   |   |   |
|                                             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **GRAND TOTAL**                                  | ** ** | ** **                   | ** ** | **4,525** | ** ** | **633** | ** ** | **666** | ** ** | **1,673** | ** ** | **1,553** |   |   |   |

 

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(1) “Active” communities are open for sales. “Development”communities are in the development process and have not yet opened for sales. “Completed”communities have settled all units during the three months ended June 30,2005.

(2) “Backlog” means we have an executed order with abuyer, inclusive of lot sales, but the settlement has not yet taken place.

(3) “ADUs” are affordable dwelling units.

(4) Weighted average is calculated as total estimatedhomes at completion for projects with average sales prices multiplied by Averagesales price divided by total of estimated homes at completion (i.e.: sum of (estimatedhomes at completion x average sales price) ÷ sum of estimated homes atcompletion).

 

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**Resultsof Operations**

 

***Three and six months ended June 30, 2005 compared tothree and six months ended June 30, 2004***

 

*Ordersand Backlog*

 

New orders for thethree months ended June 30, 2005 increased $33.1 million, or 126.9%, to$59.1 million on 160 homes as compared to $26.0 million on 71 homesfor the three months ended June 30, 2004. This increase in new orders wasprimarily attributable to an increase in saleable inventory resulting from newprojects including Penderbrook (86 sales), Commons on William Square (12sales), Blooms Mill (25 sales) and Eclipse at Potomac Yard (16 sales).

 

New orders for thesix months ended June 30, 2005 increased $89.8 million, or 122.8%, to$162.4 million on 406 homes as compared to $73.1 million on 203 homesfor the six months ended June 30, 2004. This increase in new orders wasprimarily attributable to an increase in saleable inventory resulting from theopening of new projects including Penderbrook (86 sales), Commons on WilliamsSquare (59 Units) and the Eclipse at Potomac Yard (60 sales).

 

The followingtable summarizes our new orders by project for the three and six months ended June 30,2005:

 
| ** **                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **June 30, 2005** | ** ** |
| ** **                   | ** ** | ** **             | ** ** | ** **           | ** ** |
| River Club as Belmont  Bay 5 |       | 3                      |       | 14                   |       |
| Blooms Mill Carriage         |       | 8                      |       | 37                   |       |
| Blooms Mill TH 22’      |       | 13                     |       | 45                   |       |
| Blooms Mill Singles          |       | 2                      |       | 1                    |       |
| Blooms Mill TH 20’      |       | 2                      |       | 2                    |       |
|                         |       |                   |       |                 |       |
| Emerald Farm                 |       | 1                      |       | 6                    |       |
| Wescott Ridge                |       | —                 |       | 3                    |       |
|                         |       |                   |       |                 |       |
| Commoms on Williams Sq       |       | 12                     |       | 59                   |       |
| Commons on Potomac Sq        |       |                   |       | 20                   |       |
|                         |       |                   |       |                 |       |
| The Eclipse on Center  Park  |       | 16                     |       | 90                   |       |
| Woodlands at Round Hill      |       | 9                      |       | 21                   |       |
|                         |       |                   |       |                 |       |
| Penderbrook                  |       | 86                     |       | 86                   |       |
| Wakefield Plantation         |       | 2                      |       | 4                    |       |
|                         |       |                   |       |                 |       |
| Kelton at Preston            |       | 3                      |       | 6                    |       |
| Delta Ridge II  Townhomes    |       | —                 |       | 3                    |       |
|                         |       |                   |       |                 |       |
| Beckett Crossing             |       | 3                      |       | 9                    |       |
| Total                        |       | 160                    |       | 406                  |       |

 

The average saleprice per new order for the three months ended June 30, 2005 increased by$3,000 to $370,000 as compared to $367,000 for the three months ended June 30,2004. The increase was attributable to general price appreciation in theWashington, DC area and a shift in product mix that included a significantnumber of higher-priced condominium and single family sales.  The increase was offset by the commencementof unit sales at our Penderbrook project, a condominium conversion project, inwhich existing apartment units are being converted to for-sale condominiums. Ourstrategy with respect to conversion projects, is to identify assets where wecan offer lower priced, affordable product to first time home buyers.  We focus on older assets where we can addvalue while maintaining price points which are more attractive to our targetbuyers. Because of the lower per unit costs involved in a conversion projectand the ability to convert and sell units quickly, as compared to building anew

 

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condominium,average new order prices are lower. Exclusive of Penderbook, our average salesprice per new order was $509,000 for the three months ended June 30, 2005.

 

The average saleprice per new order for the six months ended June 30, 2005 increased by$40,000 to $400,000 as compared to $360,000 for the six months ended June 30,2004. The increase was attributable to general price appreciation in theWashington, DC area, a shift in product mix that included a significant numberof higher-priced condominium and single family sales.  Although selling prices have generallyincreased in the markets the Company is in, the decrease in the average sellingprice is a result of the Penderbrook project, a new condominium conversionproject in which existing apartment units are being converted tocondominiums.   Sales prices tend to belower in these conversion projects as compared to our new construction condominiumprojects.  Exclusive of Penderbook, ouraverage sales price per new order was $441,000 for the six months ended June 30,2005

 

The followingtable summarizes our average new order sales price by product type for the threeand six months ended June 30, 2005 and 2004:

 
| ** **             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **             | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **             | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Townhome               |       | $                                    | 494        |                               | $          | 347 |   | $ | 451 |   | $ | 332 |   |
| Single family          |       | 670                                  |       | 596                                |       | 623 |   | 492 |   |
| Condominium            |       | 444                                  |       | 360                                |       | 399 |   | 364 |   |
| Condominium conversion |       | 250                                  |       | n/a                                |       | 250 |   | n/a |   |
|                        |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

Our backlog at June 30,2005 increased $208.1 million, or 344.4%, to $268.6 million on 653 homesas compared to our backlog at June 30, 2004 of $60.4 million on 162homes. This increase in backlog is a result of new projects and new orders whichexceeded delivered homes. Increases in backlog were realized at Penderbrook($3.0), the Eclipse ($146.1 million), Commons on William Square ($26.5 million)and Woodlands at Round Hill ($16.0 million). In addition, as a result of our merger with Comstock Service on December 17,2004, our Raleigh operation, which had not previously been included in ourreported backlog, represented backlog of $9.1 million at June 30, 2005.

 

*Revenues.*

 

The number ofhomes delivered for the three months ended June 30, 2005 increased by 39.8%to 123 from 88 homes for the three months ended June 30, 2004. Averagerevenue per home delivered decreased by approximately $9,000 to $322,000 forthe three months ended June 30, 2005 as compared to $331,000 for the threemonths ended June 30, 2004. Home building revenues increased by$10.4 million, or 36.0%, to $39.6 million for the three months ended June 30,2005 as compared to $29.1 million for the three months ended June 30,2004. The increase in deliveries and revenues for the three months ended June 30,2005 is primarily attributable to the Company’s Penderbrook project and themerger with Comstock Service.  ThePenderbrook project and the merger of Comstock Service added 74 and 11settlements respectively, for the three months ended June 30, 2005.  Although selling prices have generallyincreased in the markets the Company is in, the decrease in the average sellingprice is a result of the Penderbrook project, a new condominium conversionproject in which existing apartment units are being converted to condominiums.   Sales prices tend to be lower in these conversionprojects as compared to our new construction condominium projects.

 

The number ofhomes delivered for the six months ended June 30, 2005 increased by 50.0%to 201 from 134 homes for the six months ended June 30, 2004. Average revenueper home delivered increased by approximately $8,000 to $339,000 for the sixmonths ended June 30, 2005 as compared to $330,000 for the six monthsended June 30, 2004. Home building revenues increased by $23.8 million,or 53.8%, to $68.0 million for the six months ended June 30, 2005 ascompared to $44.2 million for the six months ended June 30, 2004. Theincrease in deliveries and revenues for the three months ended June 30,2005 is primarily attributable to the opening of the Company’s Penderbrookproject and the merger with Comstock Service. The Penderbrook project and the merger of Comstock Services added 74 and18 settlements respectively, for the six months ended June 30, 2005.  The increase in average sales price was dueto general price appreciation and shift in product mix which in turn waspartially offset by the

 

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Penderbrookproject as discussed above.

 

*OtherRevenue*

 

Other revenue for the three and six months ended June 30, 2005decreased by $1.7 and $4.2, respectively, from the comparable periods in 2004.Other revenue for the three and six months ended June 30, 2004 includedrevenues associated with lot sales made to a third party and revenue associatedwith the management of Comstock Service, which was merged into ComstockHomebuilding on December 17, 2004. For the three and six months ended June 30, 2005 other revenueincluded only revenue associated with the Company’s Settlement Title Services division,management fees received from Comstock Asset Management Inc. (as discussed inNote 13), and revenue received from a marketing services alliance.

 

*Costof sales*

 

Cost of sales forthe three months ended June 30, 2005 increased $9.2 million, or 45.0%,to $29.7 million, or 74.9% of revenue, as compared to $20.4 million,or 70.2% of revenue, for the three months ended June 30, 2004.

 

The 4.7 percentagepoint increase in cost of sales as a percentage of revenue, for the threemonths ended June 30, 2005 is primarily attributable to lower margins onsales in the North Carolina market and the Company’s Penderbrook project. Asdiscussed above, Comstock Service, the Company’s North Carolina division, wasmerged into Comstock Homebuilding on December 17, 2004.  Due to current market conditions in the NorthCarolina market, which have caused extended hold and carry periods betweenacquisition and delivery, the Company experienced lower margins on its NorthCarolina settlements primarily due to increasing interest carrying costs andmodest revenue concessions. In addition, the Company’s newly opened Penderbrookproject, a condo conversion project, experienced lower margins due to thenature of a conversion project in which the Company buys an existing structureand adds value through upgrades.  As aresult, costs of sales tend to be higher as a percentage of revenue than ournew construction projects.

 

For the six monthsended June 30, 2005 cost of sales increased $16.5 million, or 53.6%, to$47.2 million, or 69.4% of revenue, as compared to $30.8 million, or69.5% of revenue, for the six months ended June 30, 2004.  Cost of sales for the six months ended June 30,2005 was consistent with the prior comparable period at approximately 69.4% ofrevenue.  For the six months ended June 30,2005 the Company experienced higher gross margins as a result of higher salesprices and a reduction of cost estimates in the Company’s Blooms Mill project.These higher margins were offset by lower margins in the Company’s North Carolinadivision and the Company’s Penderbrook project for reasons discussedabove.  Because Penderbrook was not assignificant a percentage of total deliveries for the six months ended June 30,2005 as it was for the three months ended June 30 2005, it did not have amaterial negative impact on overall gross margins

 

*Costof sales other*

 

Cost of salesother for the three and six months ended June 30, 2005 decreased $1.5 and$3.6 million, respectively, from the comparable periods in 2004. Cost of salesfor the three and six months ended June 2004 included $1.5 and $3.6million related to expenses associated with lot sales made to a third party andexpenses associated with the management of Comstock Service, which was mergedinto Comstock Homebuilding on December 17, 2004.  For the three and six months ended June 30,2005 cost of sales other only includes expenses associated with the managementof the Company’s Settlement Title Services division.

 

*Selling,general and administrative*

 

Selling, generaland administrative costs for the three months ended June 30, 2005increased $1.1 million or 25.2% to $5.6 million, as compared to$4.5 million for the three months ended June 30, 2004. Selling,general and administrative expenses represented 11.6% of total revenue for thethree months ended June 30, 2005, as compared to 15.0% for the threemonths ended June 30, 2004.

 

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This increase forthe three months ended June 30, was the result of bonuses under ourincentive plans ($400,000), computer and legal expenses ($200,000), board feesand stock compensation ($75,000), commission fees ($150,000), promotion andmodel rent ($250,000) and other miscellaneous expenses associated with ourgrowth in staffing and land acquisition efforts ($100,000).

 

Selling, generaland administrative costs for the six months ended June 30, 2005 increased$3.8 million, or 54.3% to $10.7 million, as compared to $6.9 million,for the six months ended June 30, 2004.

 

This increase forthe six months ended June 30, was the result of additional staffing costsand compensation ($1.4 million), legal expenses ($300,000), board fees andstock compensation ($940,000), insurance costs ($200,000), consulting fees($175,000) promotion ($100,000) and other miscellaneous expenses associatedwith our growth in staffing and land acquisition efforts ($400,000). Inaddition, our consolidation with Comstock Service increased our selling,general and administrative expenses by $400,000.  Selling, general andadministrative expenses represented 15.6% of total revenue for both the sixmonths ended June 30, 2005 and 2004.

 

 *Operatingincome*

 

Operating incomefor the three months ended June 30, 2005 decreased $33,000 to $4.6 million,as compared to $4.7 million for the three months ended June 30, 2004.Operating margin for the three months ended June 31, 2005 was 11.6%, ascompared with 15.0% for the three months ended June 30, 2004. The 3.4percentage point decrease in operating margin is primarily attributableincrease in cost of sales as a percentage of revenue as discussed above.

 

Operating incomefor the six month ended June 30, 2005 increased $3.0 to$10.7 million, as compared to $7.7 million for the six months ended June 30,2004. Operating income for the six months ended June 30, 2005 wasconsistent with the prior comparable period at approximately 15.6%.

 

*Other(income) expense, net*

 

Other (income)expense, net increased by $151,000 to a net income of $154,000 for the threemonths ended June 30, 2005, as compared to of $3,000 for the three monthsended June 30, 2004. For the six months ended June 30, 2005 other(income) expense, net increased by $250,000 to a net income of $190,000 for thesix months ended June 30, 2005 as compared to net expense of $60,000 forthe six months ended June 30, 2004. The increase in other (income) expensenet is primarily attributable to interest earned on the Company’s cash balancesgenerated as a result of the proceeds from the Company’s initial andfollow on public offering.

 

*Minorityinterest*

 

Minority interestexpense decreased by $1.7 million to $7,000 for the three months ended June 30,2005, as compared to the three months ended June 30, 2004. For the sixmonths ended June 30, 2005 minority interest expense decreased by$2.5 million to $8,000, as compared to the six months ended June 30,2004. This decrease is the result of our repurchase or redemption ofsubstantially all of the minority interests in four of our limited liabilitycompany subsidiaries including Comstock Investors V, L.C., Comstock InvestorsVI, L.C., Comstock Potomac Yard, L.C. and Comstock North Carolina, L.L.C.

 

*Incometaxes*

 

On December 17,2004, the Company reorganized from a group of S corporations to a Ccorporation. As a result, income tax expense increased $1.7 and $4.0 million forthe three and six months ended June 30, 2005, as compared to no income taxexpense for the three and six months ended June 30, 2004.  TheCompany’s combined effective tax rate including both current and deferredprovisions for this three and six months ended June 30, 2005 was 36% and37.1%, respectively.

 

22

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**Liquidityand Capital Resources**

 

We require capitalto post deposits on new deals, to purchase and develop land, to constructhomes, to fund related carrying costs and overhead and to fund variousadvertising and marketing programs to facilitate sales. These expendituresinclude engineering, entitlement, architecture, site preparation, roads, waterand sewer lines, impact fees and earthwork, as well as the construction costsof the homes and amenities. Our sources of capital include, and we anticipatewill continue to include, funds derived from various secured and unsecuredborrowings, operations which include the sale of constructed homes and finishedlots, and the sale of equity securities. Our currently owned and controlledinventory of home sites will require substantial capital to develop andconstruct.

 

In production homebuilding, it is common for builders such as us to employ revolving creditfacilities whereby the maximum funding available under the facility exceeds themaximum outstanding balance allowed at any given time. Our overall borrowingcapacity may be constrained by loan covenants which limit the ratio of ourtotal liabilities to our total equity. This revolving debt will typicallyprovide for funding of an amount up to a pre-determined percentage of the costof each asset funded. The balance of the funding for that asset is provided forby us as equity. The efficiency of revolving debt in production home buildingallows us to operate with less overall debt capital than would be required ifwe built each project with long-term amortizing debt. At June 30, 2005, wehad approximately $141.4 million of debt financing (including our distributionpayable to our pre-initial public offering stockholders) and $70.4 million of unrestrictedcash. As discussed in more detail below, we believe that funds generated fromthe sale of our equity securities, operations and borrowings under our creditfacilities will provide us with sufficient capital to meet our existing andexpected capital needs.

 

***Credit Facilities***

 

At June 30,2005, we had approximately $149.3 million available under existing securedrevolving development and construction loans for planned construction anddevelopment expenditures. A majority of our debt is variable rate, based onLIBOR or the prime rate plus a specified number of basis points, typicallyranging from 275 to 375 basis points over the LIBOR rate and 50 basis pointsover the prime rate. As a result, we are exposed to market risk in the area ofinterest rate changes. At June 30, 2005, the one-month LIBOR and primerates of interest were 3.34% and 6.25%, respectively, and the interest rates ineffect under our existing secured revolving development and construction creditfacilities ranged from 5.54% to 9.35%. For information regarding risksassociated with our level of debt and changes in interest rates, see Item 3 “Quantitativeand Qualitative Disclosures about Market Risk.”

 

We have generallyfinanced our development and construction activities on a project basis sothat, for each project we develop and build, we have a separate creditfacility. Accordingly, we have numerous credit facilities. While the loan agreementsrelating to these various facilities contain certain covenants, they generallycontain few, if any, material financial covenants.  As of June 30,2005, we were in compliance with the financial covenants set forth in our loanagreements.

 

From time to time,we employ subordinated and unsecured credit facilities to supplement ourcapital resources or a particular project or group of projects. Our lendersunder these credit facilities will typically charge interest rates that aresubstantially higher than those charged by the lenders under our senior andsecured credit facilities. These credit facilities will vary with respect toterms and costs. As of June 30, 2005, the annual rate of interest on thesefacilities ranged from 5.4% to 16%. At June 30, 2005, we had approximately$29.7 million outstanding under these subordinate and unsecured facilities. Weintend to continue to use these types of facilities on a selected basis tosupplement our capital resources.

 

We are consideringreplacing our credit facilities with one or more larger facilities, which mayreduce our aggregate debt financing costs. We would be the borrower and primaryobligor under this larger facility or facilities, and we anticipate theindebtedness would be secured, nonrecourse and based on an available borrowingbase.

 

***Cash Flow***

 

Net cash providedby/(used in) operating activities was ($99.7) million for the six months ended June 30,2005, as compared to $7.2 million for the six months ended June 30, 2004. Forthe six months ended June 30, 2005, the

 

23

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decrease in cashwas primarily attributable to investment in real estate held for developmentand sale.  For the six months ended June 30, 2004, the increase incash from operating activities was primarily attributable to increases in accountspayable.

 

Net cash providedby/ (used in) investing activities was $(61,000) for the six months ended June 30,2005 and $(98,000) for the six months ended June 30, 2004. For the sixmonths ended June 30, 2005 and 2004, the decrease in cash from investingactivities was primarily attributable to the purchase of property, plant andequipment.

 

Net cash providedby/ (used in) financing activities was $102.6 million for the six months ended June 30,2005 and $(2.5 million) for the six months ended June 30, 2004.  Theincrease in cash from financing activities for the six months ended June 30,2005, was primarily attributable to proceeds from our follow on offering andproceeds from notes payable to finance our acquisitions of real estate held fordevelopment and sale. The decrease in cash from financing activities for thesix months ended June 30, 2004 was primarily attributable to the paymentsmade on notes payable.

 

***Material Acquisitions & Subsequent Events***

 

We are currently party to the following option contracts andnon-binding letters of intent:

 

•                  In July 2005we acquired a parcel containing 14 condominium units contiguous toour existing Barrington property which will be annexed into Barrington and includedin that project’s lot counts starting the third quarter of 2005;

 

•                  In June 2005we entered into an option contract to purchase an existing 258 unitapartment complex in Reston, Virginia to be converted into affordablecondominiums;

 

•                  In July 2005we entered into an option contract to purchase an undeveloped parceldesigned for 190 single family homes in Culpeper County, Virginia;

 

•                  In August 2005we entered into an option contract to purchase an undeveloped 10 unitsingle family home project in Western Loudoun County, Virginia;

 

•                  In August 2005we expect to enter into an option contract to purchase an undeveloped 150 unittwo over two stacked townhouse project in Ocean City, Maryland;

 

•                  In August 2005we expect to enter into an option contract to purchase a 232 unitto-be-built high rise project in the southern part of Fairfax County, Virginia;

 

•                  In August 2005we expect to enter into an option contract to purchase anexisting 316 unit apartment complex in Leesburg, Virginia to be convertedto affordable condominiums.

 

There is no guarantee that we will execute a purchase contract withrespect to any of these properties or that we will complete any of theseacquisitions.

 

***Recent Accounting Pronouncements***

 

FAS 154 AccountingChanges and Error replace APB Opinion No. 20, and FASB Statement No. 3.Opinion 20 previously required that most voluntary changes in accountingprinciple be recognized by including in net income of

 

24

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the period of thechange the cumulative effect of changing to the new accounting principle. ThisStatement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange. When it is impracticable to determine the period-specific effects of anaccounting change on one or more individual prior periods presented, thisStatement requires that the new accounting principle be applied to the balancesof assets and liabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a corresponding adjustment bemade to the opening balance of retained earnings (or other appropriate componentsof equity or net assets in the statement of financial position) for that periodrather than being reported in an income statement. When it is impracticable todetermine the cumulative effect of applying a change in accounting principle toall prior periods, this Statement requires that the new accounting principle beapplied as if it were adopted prospectively from the earliest date practicable.

 

25

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**ITEM3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market riskrepresents the risk of loss that may impact our financial position, results ofoperations or cash flows, due to adverse changes in financial and commoditymarket prices and interest rates. We are exposed to market risk in the area ofinterest rate changes. A majority of our debt is variable rate based on LIBORand prime rate, and, therefore, affected by changes in market interest rates.Based on current operations, as of June 30, 2005, an increase/decrease ininterest rates of 100 basis points on our variable rate debt would haveresulted in a corresponding increase/decrease in interest actually incurred byus of approximately $1.1 million in a fiscal year, a significant portion ofwhich would be capitalized and included in cost of sales as homes aredelivered. As a result, the effect on net income would be deferred until theunderlying units settled and the interest was released to cost of goods sold.Changes in the prices of commodities that are a significant component of homeconstruction costs, particularly lumber, may result in unexpected short-termincreases in construction costs. Because the sales price of our homes is fixedat the time a buyer enters into a contract to acquire a home and we generallycontract to sell our homes before construction begins, any increase in costs inexcess of those anticipated at the time of each sale may result in lowerconsolidated operating income for the homes in our backlog. We attempt tomitigate the market risks of the price fluctuation of commodities by enteringinto fixed price option contracts with our subcontractors and materialsuppliers for a specified period of time, generally commensurate with thebuilding cycle. These contracts afford us the option to purchase materials atfixed prices but do not obligate us to any specified level of purchasing.

 

**ITEM4.                 CONTROLS AND 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 employees.  Based on their evaluation, our Chairman and ChiefExecutive Officer and Chief Financial Officer have each concluded that ourdisclosure controls and procedures are effective and sufficient to ensure thatwe record, process, summarize, and report information required to be disclosedby us in our periodic reports filed under the Securities Exchange Act withinthe time periods specified by the Securities and Exchange Commission’s rules andforms.  During the quarterly period covered by this report, there have notbeen any 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, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, with the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people or by managementoverride 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.

 

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**PART II– OTHER INFORMATION**

 

**ITEM1.                 LEGAL PROCEEDINGS.**

 

We are notcurrently subject to any material legal proceedings. From time to time,however, we are named as a defendant in legal actions arising from our normalbusiness activities. Although we cannot accurately predict the amount of ourliability, if any, that could arise with respect to legal actions currentlypending against us, we do not expect that any such liability will have amaterial adverse effect on our financial position, operating results or cashflows.

 

We believe that wehave obtained adequate insurance coverage or rights to indemnification, or whereappropriate, have established reserves in connection with these legalproceedings.

 

**ITEM2.                 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

None.

 

**ITEM3.                 DEFAULTS UPON SENIOR SECURITIES.**

 

None.

 

**ITEM 4.                 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

The 2005 AnnualMeeting of Stockholders of theCompany was held on April 7, 2005, at which the following matters setforth in the Company’s Proxy Statement dated February 14, 2005, which wasfiled with the Securities and Exchange Commission pursuant toRegulation 14A under the Securities Exchange Act of 1934, were voted uponwith the results indicated below. All numbers reported are shares of theCompany’s common stock.

 

1.               The nominees listedbelow were elected directors with the respective votes set forth opposite theirnames:

 
| **Nominee**                    | ** ** | **For**    | ** ** | **Authority Withheld** | ** ** |
|--------------------------------|------------|------------|------------|------------------------|------------|
| Mr. James A.  MacCutcheon |       | 46,947,874 |       | 236,612                |       |
| Mr. David M.  Guernsey    |       | 46,948,374 |       | 236,112                |       |
| Mr. Robert P.  Pincus     |       | 46,948,774 |       | 235,712                |       |
| Mr. Socrates  Verses      |       | 46,948,674 |       | 235,812                |       |

 

Messrs.  MacCutcheon, Guernsey, and Pincus haveeach been elected for three-year terms expiring in 2008.  Socrates Verses has been elected for aone-year term expiring in 2006.

 

Gregory V. Benson and Gary Martin are in the class ofdirectors whose term will expire in 2006. Christopher Clemente and A. ClaytonPerfall are in the class of directors whose terms will expire in 2007.

 

2.     Theappointment of PricewaterhouseCoopers LLP as the independent registered publicaccounting firm of our Company for the fiscal year ending December 31,2005 was ratified with 47,180,275 votes for the proposal, 3,211 votes againstand 1,000 votes abstaining.

 

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**ITEM 5.                 OTHER INFORMATION.**

 

None.

 

 

**ITEM6.                 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) |
|                    |       |                                                                                                                                                                                                                                              |
| 10.1                    |       | Life Insurance Reimbursement Agreement with William  P. Bensten                                                                                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                              |
| 10.2                    |       | Life Insurance Reimbursement Agreement with Bruce J.  Labovitz                                                                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                              |
| 10.3                    |       | Description of Reimbursement and Indemnification  Arrangement with Christopher Clemente and Gregory Benson.                                                                                                                                       |
|                    |       |                                                                                                                                                                                                                                              |
| 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 SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                      | COMSTOCK HOMEBUILDING COMPANIES, INC. |                                 |
|---------------------------|---------------------------------------|--------------------------------------|
|                      |                                  |                                 |
|                      |                                  |                                 |
| Date: August 9, 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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