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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
Commission file number 1-32375
Comstock Homebuilding
Companies, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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20-1164345
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification
No.)
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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)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Class A
common stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o
No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (check one) Large Accelerated filer
o Accelerated filer
þ Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of The Act). Yes o No
þ
The aggregate market value of voting and non-voting common
equity held by nonaffiliates of the registrant
(9,279,883 shares) based on the last reported sale price of
the registrants common equity on the NASDAQ Global Market
on June 30, 2006, which was the last business day of the
registrants most recently completed second fiscal quarter,
was $58,741,659. For purposes of this computation, all officers,
directors, and 10% beneficial owners of the registrant are
deemed to be affiliates. Such determination should not be deemed
to be an admission that such officers, directors, or 10%
beneficial owners are, in fact, affiliates of the registrant.
As of February 28, 2007, there were outstanding
13,552,567 shares of the registrants Class A
common stock, par value $.01 per share, and 2,733,500 shares of
the registrants Class B common stock, par value $.01
per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
the 2007 Annual Meeting of Stockholders are incorporated by
reference into Part III of this
Form 10-K.
COMSTOCK
HOMEBUILDING COMPANIES, INC.
ANNUAL REPORT ON FORM
10-K
For the Fiscal Year Ended December 31, 2006
TABLE OF
CONTENTS
1
PART I
Item 1.
Business
Overview
We are a real estate developer that has substantial experience
building a diverse range of products including single-family
homes, townhouses, mid-rise condominiums, high-rise multi-family
buildings and mixed-use (residential and commercial)
developments in suburban communities and high density urban
infill areas. We build projects with the intent that they be
sold either as fee-simple properties, condominiums, or
stabilized investment properties. We focus on geographic areas,
products and price points where we believe there is significant
demand for new housing and potential for attractive returns. We
currently develop and build in the Washington, D.C., Raleigh,
North Carolina, and Atlanta, Georgia markets where we target a
diverse range of home buyers, including first-time, early
move-up, secondary move-up, empty nester move-down and active
adult home buyers. We focus on what we call the
middle-market meaning that we tend to build in the
middle price points in each market, avoiding low end and upper
end products. We believe that these price points cater to a
significant and stable segment of the home buyers in our
markets. Since our founding in 1985 and as of December 31,
2006, we have built and delivered over 4,000 homes valued at
over $1.0 billion.
Our markets have generally been characterized by strong
population and economic growth trends that have led to strong
demand for traditional housing. While we prefer to purchase
building lots that are developed by others when practical, our
core capabilities include the ability to manage the entitlement
and development of land for our home building operations. We
believe this is a complement to the purchasing of finished
building lots developed by others because it enables us to
pursue projects that have potentially higher returns. In
addition, our business includes the development, redevelopment
and construction of residential mid-rise and high-rise
condominium complexes. The majority of our multi-family projects
are in our core market of the greater Washington, D.C. area. We
believe that the demographics and housing trends in the
Washington, DC area will continue to produce significant demand
for high density housing and mixed-use developments. In our
other markets, Raleigh, North Carolina and Atlanta, Georgia, we
are currently focused on lower density housing such as single
family homes and townhomes.
We were incorporated in Delaware in May 2004. Our business was
founded in 1985 by Christopher Clemente, our current Chief
Executive Officer, as a residential land developer and home
builder focused on the move-up home market in the northern
Virginia suburbs of Washington, D.C. Prior to our initial public
offering in December 2004, we operated our business through four
primary holding companies. In connection with our initial public
offering, these primary holding companies were consolidated and
merged into Comstock Homebuilding Companies, Inc. Our principal
executive offices are located at 11465 Sunset Hills Road, 5th
floor, Reston, Virginia 20190, and our telephone number is
(703) 883-1700. Our Web site is
www.comstockhomebuilding.com. References to
Comstock, we, our and
us refer to Comstock Homebuilding Companies, Inc.
together in each case with our subsidiaries and any predecessor
entities unless the context suggests otherwise.
Our
Markets
We operate in the greater Washington, D.C., Raleigh, North
Carolina and Atlanta, Georgia markets. We believe that the new
home industry in our core markets is, over the long term,
characterized by consistent demand and a limited supply of
affordable new housing. Based on our experience, we believe that
in the home building industry, local economic trends and
influences have a more significant impact on supply and demand,
and therefore on profitability, than national economic trends
and influences. We believe the leading economic indicator of
housing demand is job growth. Each of our primary markets
experienced strong job growth in recent years. We believe that
where there is strong job growth there will be population growth
which will result in demand for new housing. According to the
National Association of Home Builders, the Washington, D.C.,
Raleigh, North Carolina and Atlanta, Georgia metropolitan areas
were each ranked in the top 20 housing markets in the country
based upon single-family residential building permits issued in
2006. The Washington, D.C. metropolitan area was ranked as the
#10 housing market in the country based upon multi-family
building permits issued in 2006, and the Atlanta, Georgia market
was ranked #2 in the country based upon residential building
permits issued in 2006.
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Our
Business Strategy
Our general business strategy is to focus on for-sale
residential real estate development opportunities in the
southeastern United States that afford us the ability to produce
products at price points where we believe there is significant
and consistent long-term demand for new housing. We believe the
housing industry is cyclical in nature. We recognize that
current market conditions are extremely challenging.
Accordingly, we have adapted our business plan and strategy with
the goal of protecting liquidity, enhancing our balance sheet
and positioning the Company for future growth when market
conditions improve. In connection with this strategy, we have
adopted a conservative approach to land acquisition and
investment and have taken a patient approach with respect to
market expansion. We believe that by doing so we are enhancing
our ability to take advantage of attractive real estate
investment opportunities in our core markets as market
conditions improve. Our general operating business strategy has
the following key elements:
Attract and retain experienced personnel at all
levels. We believe the key to success in our
business is attracting and retaining experienced professionals
at all levels within the organization. This is just as important
with sales and field supervisor positions as it is with
management level positions. We work to identify, recruit, train
and retain the most qualified management and support personnel
available.
Build in and expand with the strong growth markets of the
Mid-Atlantic and Southeast region of the United States. We
believe there are significant opportunities for long term growth
in our existing markets and region. Our strategy is to operate
our business in our current markets and region to capitalize on
the robust economies and continued population growth of these
areas. We expect the economic growth in these markets to
continue. We plan to utilize our strong regional presence and
our extensive experience in these markets to expand our
operations in these markets through acquisition of both finished
and raw land as well as acquisition of local home builders whose
operations would complement ours and enhance our competitive
position in the marketplace. With regards to such corporate
acquisitions we look for homebuilders that have strategic land
positions, strong local management teams, access to additional
land supply and good relationships with local subcontractors. We
expect to target new markets within our core region that have
favorable demographic and economic trends where we believe we
will be able to achieve sufficient scale over time to
successfully implement our business strategy.
Manage our land inventory to provide the most attractive
margins or returns possible. We believe that our market
knowledge and experience in land entitlement and development
enable us to successfully identify attractive land acquisition
opportunities, efficiently manage the process of obtaining
development rights and maximize land value. We have the
expertise needed to acquire land positions in various stages of
the entitlement and development process, which we believe
provides us more opportunities to acquire development
opportunities than many of our competitors. We believe we are
able to utilize our capabilities in land acquisition, land
planning, and land development to maximize the potential return
achieved from developing each property. As a complement to this
approach we also seek to acquire finished building lots that
have been developed by others for our home building operation.
We believe our network of relationships and broad recognition in
our core markets gives us an advantage over some of our
competitors in acquiring finished lots. Because in the case of
finished lots we can often acquire options on large numbers of
lots with relatively small deposits in relation to the total
land purchase price, this strategy of purchasing finished lots
allows us to cost-efficiently control significant land positions
with reduced capital risk. As such, we intend to continue to
option land positions whenever possible.
Create opportunities in areas overlooked by our competitors.
We believe there is a significant market opportunity for
well-designed, quality homes and condominiums in urban and
suburban areas in close proximity to transportation facilities.
Local governments in our markets, especially the greater
Washington, D.C. market, have modified zoning codes in response
to mounting traffic concerns to allow for high-density
residential development near transportation improvements. In our
experience, buyers place a premium on new homes in developments
within these areas. We believe that our high density townhouse
and condominium products, along with our substantial experience
in dealing with both the market and regulatory requirements of
urban mixed-use developments, enable us to identify and create
value in land parcels often overlooked by traditional home
builders. As a result, we believe we have an opportunity to
generate profit in more ways than some of our larger
competitors. We plan to continue to focus on developing and
creating these opportunities within our core markets.
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Focus on a broad segment of the home buying market, the
middle of the market. Our single-family homes,
townhouses and condominiums are deliberately designed and priced
to appeal to a broad segment of the home buying market. We serve
a diverse customer base including first-time, early move-up,
secondary move-up, empty nester move-down and active adult home
buyers. We refer to customers in these demographics as
middle market homebuyers. We believe first-time and
early move-up home buyers represent a significant portion of
home buyers and have in the past, we believe, been more
resistant to market downturns and more responsive to market
rebounds. We believe that the aging of the American population
makes it more likely that a significant percentage of the
population will continue to be attracted to secondary move-up,
empty nester move-down and active adult housing products as
well. We expect our diversified product offerings to position us
to benefit from the projected population growth in our core
markets and provide long term protection against periodic market
fluctuations.
Position our inventory for the growing active adult market.
We expect the large and aging baby boom population in the
United States to fuel growth in the active adult market of the
home building industry. As the baby boom generation ages, we
anticipate that housing developments focused on this population
will capture a larger share of the market. We believe this
growing segment of the population will also likely be attracted
to the convenience and activities available in upscale urban
mixed-use active adult developments. Active adult developments
are often favored by local governments because they increase the
tax base while requiring fewer government-funded services and
infrastructure, such as schools and summer programs, as compared
to traditional developments that attract younger families. We
believe that because of our experience and capabilities and our
focus on the southeastern United States that we are well
positioned to benefit from this growing demand.
Maximize our economies of scale. We apply a
production home builder approach to all of our product
categories. In many instances, we utilize plans across multiple
markets which we have built numerous times. This repetitive
manufacturing process allows us to minimize cost through value
engineering resulting from previous field experience. We are
also able to coordinate labor and material purchasing under bulk
contracts thereby reducing unit costs. As a result, we are able
to realize economies of scale in the purchase of raw materials,
supplies, manufactured inputs and labor. As we expand, we will
seek to maximize these benefits through purchasing arrangements
with national and regional vendors.
In light of current depressed market conditions in the
homebuilding industry we have adopted the following additional
business strategies which we will focus on throughout 2007 and
into 2008:
Protect liquidity and maximize capital
availability. For so long as market demand for
housing remains depressed we will remain highly focused on
maintaining liquidity by limiting our investments in long term
real estate projects. We will build our pipeline of new
development opportunities through a cautious and measured
approach. When available, we will focus on the acquisition of
finished building lots and parcels with shorter times to market
that often have reduced equity requirements as compared to raw
land parcels that require entitlement and development. In
addition, in order to maintain sufficient operating liquidity
and capital availability we will continue to sell certain assets
that are either highly leveraged or have significant cash equity.
Invest in creating a highly qualified sales force capable of
closing sales in difficult times. We believe that enhancing
the capabilities of our sales force is critical to success in a
difficult market. Accordingly, we have initiated an organized
recruiting effort and enhanced our training programs to ensure
that we have the best possible sales force. We believe this will
increase conversion ratios, decrease cancellations, and improve
pricing power.
Maximize the realized value of our real estate
owned. Because of the our depth of experience in
many different aspects of real estate development we believe
that we are able to continuously evaluate and re-evaluate the
use of the real estate we own and therefore are well positioned
to identify alternative uses for the inventory we own that may
increase the value of such properties. This effort is currently
primarily focused on our multi-family assets in the greater
Washington, D.C. area where the demand for such products has
been temporarily depressed as a result of over building and high
price appreciation. One manner in which we are addressing this
is by selling certain condominium projects in part, or in whole,
to buyers of for-rent properties. As a result of the very low
vacancy rates in the apartment inventory in the Washington, D.C.
area the values of for-rent apartment properties continue to be
enhanced. We have been successful in selling certain condominium
assets as for-rent property and may continue our efforts in that
regard to ensure that we are taking steps that we believe will
enhance our balance sheet and liquidity. Our effort in this
regard tends to be with respect to certain inventory that is
either underperforming or holds a higher
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total value for a rental property owner that it otherwise would
for individual homeowners in the aggregate. In properties where
a bulk sale is impractical we have initiated our own internal
bridge rental operations to maximize short term cash
flow from the property and minimize net debt service obligations
while we wait for market conditions to improve.
Concentrate on finished lot option takedown opportunities.
In an effort to minimize the equity required in an
acquisition of building lots and shorten our asset turn cycles
we have increased our focus on finished building lots sold by
developers on an option takedown basis.
Identify and capitalize on undervalued and/or distressed real
estate assets. We believe that in every real estate downturn
there are opportunities to acquire properties for development
that have the potential of delivering above average returns in
the future. Because of our extensive experience in real estate
development and our experience in managing more then one
cyclical downturn and cyclical upturn, we believe that we are
well positioned to identify attractive opportunities. By
intensely focusing in the short term on our liquidity and by
taking steps to enhance our balance sheet and cash reserves, we
believe that we will be well positioned to capitalize on such
opportunities.
Capitalize on our public status to attract capital and build
a sustainable pipeline for future growth. We believe that as
a public homebuilder we have advantages over our private peers
when it comes to access to capital by virtue of our public
status. We intend to capitalize on the transparent nature of our
financial reporting and utilize our public currency to attract
alternative sources of capital into the company and acquire
growth assets without depleting our liquidity.
Invest in technology to streamline operations, increase our
ability to communicate with customers and facilitate growth.
During 2006 we invested in the upgrade of our information
management and accounting systems. This new platform will allow
us to manage our business more efficiently and better control
our costs as we grow. The platform we have created will help
position us to better utilize technology to facilitate the sale
of our products, communicate with customers and enhance
operating results.
Our
Operations
We integrate the process of building a home by carefully
controlling each phase of the process from land acquisition to
the construction, marketing and sale of a home. During every
stage of the process we manage risk and focus on products,
geographic areas and price points in an effort to maximize our
revenue and profit opportunities.
Land
Identification and Acquisition
We believe that by controlling and managing a significant
portion of our land inventory through options we will be better
able to manage our growth in accordance with our business plan
and long term growth objectives.
In the past we have acquired land for our home building
operations both as finished building lots and as raw land that
we develop. Today we seek to acquire land that will be delivered
to us as finished building lots and/or developed building pads
whenever practical. Our goal is to contract to purchase land
from land developers who will maintain ownership of the land
through the entitlement and development process. When we
contract to purchase land in this manner we typically will
provide our home building and entitlement expertise to the
seller in order to ensure the land is developed in a manner
consistent with our plans for the project. By contracting to
purchase land during the entitlement and development process
that will deliver upon completion of development we reduce the
financial risks associated with seeking entitlements and
performing land development.
We currently own and buy land that we develop into building lots
ourselves. We will generally buy undeveloped land when we are
developing high-density projects because the product design is
often integrated into the site development operations. We also
buy land that we develop into traditional building lots when we
believe the capital outlay and additional risk associated with
developing the land is manageable and the return on investment
will be enhanced. When we purchase these types of sites, it is
after the development rights have been secured, which eliminates
or substantially reduces risks associated with seeking
entitlements.
We also engage in the business of converting existing rental
apartment properties to for-sale condominium projects. This
process involves the purchase of existing structures which are
occupied by tenants with leases of
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varying duration. When we purchase these properties we subdivide
the units and form a condominium association. In these projects
we have and continue to invest capital in the improvement of the
common areas and exteriors. In the past, our strategy was that
as the tenants leases expired we renovated the interiors
of the apartments and then sold each apartment as an individual
condominium unit. In recent months our business model has
changed due to market conditions. In response to slowed
absorption at these projects we have elected to continue to
lease unsold inventory to renters. We have not abandoned our
intent to sell the units as condominiums over time but we have
chosen to temporarily manage the properties as rental assets to
offset the debt service associated with holding the assets for
sale. In certain cases we have sold condo conversion units in
bulk to rental project investors and operators. We do not
currently expect to continue to acquire additional condominium
conversion and similar projects.
Our land acquisition and development process is overseen by an
executive land committee that includes representatives from our
various business departments. This committee meets regularly to
evaluate prospective land acquisitions and underperforming
assets. The committee evaluates several factors that could
affect the outcome of a project under consideration. These
factors include:
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supply and absorption rates of similar new home projects;
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supply and absorption rates of existing homes in the area;
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projected equity requirements;
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projected return on invested capital;
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status of land development entitlements;
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projected net margins of homes to be sold by us;
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projected absorption rates;
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demographics, school districts, transportation facilities and
other locational factors; and
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competitive market positioning.
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We focus on acquiring new projects that we believe have the
potential to generate revenue on home sales as well as
appreciation in land value through the application of our
entitlement and development expertise. Many of the sites we
choose to invest in have been overlooked by large, national
competitors due to the complexity of zoning and entitlement
issues or other development characteristics. Our acquisition due
diligence process involves a high level of scrutiny which
includes a variety of analyses, including land title
examination, applicable zoning evaluations, environmental
analysis, soil analysis, utility availability studies, and
marketing studies that review population and employment trends,
school districts, access to regional transportation facilities,
prospective home buyer profiles, sales forecasts, projected
construction costs, labor and material availability, assessment
of political risks and other factors. While we make assumptions
about costs of development and construction as well as sales
pricing, we often will not know these items for sure until after
we have committed to or purchased the project.
Land
Entitlement and Development
We manage development opportunities and risks through our
in-house entitlement processing group.
We have extensive knowledge and experience in all aspects of the
site selection, land planning, entitlement and land development
processes. Specifically, we have significant experience in
dealing with the governmental and regulatory authorities that
govern the site selection, development and zoning processes.
Entitlement is the process by which a local government
determines the density it will permit to be developed on a
particular property. Entitlements and development permits are
often obtained through negotiations with local governmental
authorities. This process often involves consultation with
various parties, including the local homeowner associations,
federal governmental agencies and environmental protection
groups. Infrastructure improvements, such as sewers, roads,
utilities and transportation improvements are often required to
be built in connection with the development of a parcel of land.
Our experience and knowledge allow us to effectively negotiate
with all concerned parties in an attempt to ensure the costs of
the improvements associated with obtaining entitlements are
commensurate with the
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development potential of the subject property. We can quickly
assess the likely approvals on a particular property in the
early stages of our due diligence process. As a result, we can
control the details of development, from the design of each
community entryway to the placement of streets, utilities and
amenities, in order to efficiently design a development that we
expect will improve our ability to maximize the potential return
on our investment in the property. We seek to manage development
risk by acquiring options to purchase properties after the
approval of the necessary entitlements, while assuming control
of their entitlement process, thereby deferring acquisition of
the property until all necessary entitlements are obtained.
Our goal is to maximize returns on assets we control or own. As
such we may, from time to time, sell lots and parcels within our
developments to other home builders. This strategy enables us to
better balance our inventory and create a more well-rounded
community. With respect to our inventory, our goal is to
purchase our inventory when it is ready for a home to be built
but we also buy raw land that is entitled. Typically we will own
approximately 50% of the total land we have under our control at
any given time. Our goal in 2007 is to reduce that to 30-40% on
average so that we reduce the risk associated with ownership of
the land under our control. We expect to expand our control of
building lots through more option contracts for finished
building lots and developed sites. As of December 31, 2006,
we controlled over 4,000 building lots in our markets.
Sales,
Marketing and Production
Our primary target markets are first-time; early-move up and
first move-down home buyers. We have a wide variety of product
lines and custom options for our products that enable us to meet
the specific needs of each of our markets and each of our home
buyers. We believe that our diversified product strategy enables
us to best serve a wide range of home buyers in our target
demographics and adapt quickly to changing market conditions. We
continually reevaluate and improve upon our existing product
designs and develop new product offerings to keep up with
changing consumer demands and emerging market trends.
Our single-family homes range in size from approximately 1,400
square feet to over 6,000 square feet with target pricing from
the $100,000s to the $700,000s. Our townhouses range in size
from approximately 1,200 square feet to over 4,500 square feet
and are typically priced from the $100,000s to the $600,000s.
Unlike many of our traditional home building competitors, we
also design, sell and build mid-rise and high-rise condominiums.
We believe that our condominium products are particularly
well-suited to the high-density, infill and active adult home
buyer markets. Our condominiums range in size from approximately
400 square feet to over 2,400 square feet and are priced from
the $100,000s to over $1 million. Our average new order
price over all product types, was $245,000, $365,000 and
$369,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
We typically act as the general contractor in the construction
of our wood frame single-family homes, townhouses and mid-rise
condominium buildings. On projects where we offer these product
lines our employees provide land development management,
construction management, material purchasing and quality control
supervision on the homes we build. Substantially all
construction work on these types of projects is done by
subcontractors that contract directly with us and with whom we
typically have an established relationship. On our high-rise and
mixed-use developments where we typically build concrete
structures, we engage a general contractor for the site
preparation and construction management, and typically we have a
fixed price or a gross maximum price bonded contract with the
selected general contractor. In these instances the
subcontractors that perform the construction work are typically
contracted directly by the general contractor that we select. On
projects where we offer these product lines our employees
provide land development oversight management, construction
quality supervision and construction management services. In all
instances we follow generally accepted management procedures and
construction techniques which are consistent with local market
practices. We believe that we comply with local and state
building codes on all of our developments.
Our goal is to commence construction on a majority of our
single-family homes after a contract is signed and mortgage
approval has been obtained by the home buyer. We generally begin
construction of our townhouses and condominiums after we have
obtained customer pre-sale commitments for a significant
percentage of the units in the building. Depending on the market
conditions and the specific community, we may also build
speculative homes. Most of these homes are sold while under
construction or are used as model homes during the marketing
phase of the project. We closely monitor our inventory of
speculative units applying a measured approach to unit
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production in keeping with sales absorption. In recent months we
have experienced increases in cancellation rates which have
caused us to have more constructed speculative inventory. We
have suspended additional speculative building at most of our
projects as we work through the process of selling existing
inventory first. On occasion we will sell a completed model home
to a third party investor purchaser who is willing to lease back
the home to us for use during the marketing phase of a project.
To facilitate the sale of our products, we normally build,
decorate, furnish and landscape model homes for each product
line and maintain onsite sales offices. In most cases, we employ
in-house commissioned sales personnel to sell our homes. On
occasion we will contract for marketing services with a third
party brokerage firm. All personnel engaged in the sale of
Comstock homes receive extensive training in the sales process
from our in-house sales training group. We strive to provide a
high level of customer service during the sales process. Through
multi lingual home buying seminars, relationships with preferred
mortgage lenders and utilization of a series of proprietary
custom marketing programs, we are able to educate our prospects,
prepare our customers for home ownership and help our homebuyers
obtain a mortgage tailored to their specific needs.
Our unique
NextHometm
programs are designed to assist our customers in many aspects of
purchasing a Comstock home, as follows:
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DownRighttm
a program designed to help identify ways to meet the down
payment requirements of a new home purchase;
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Tailor
Madetm
a program with unique financing products and agreements with
major lenders that tailor a monthly payment in order to make
home ownership affordable in any interest rate climate;
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Get It
Soldtm
a program designed to help our customers sell their current home
quickly and efficiently in order to facilitate their purchase of
a new Comstock home;
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All@Hometm
a program enabling our customers to design technology solutions
for their new Comstock home to meet their individual
specifications;
|
|
|
|
Built
Righttm
a quality assurance program incorporating quality assurance
inspections with high-quality materials; and
|
|
|
|
Home
Styletm
an optional upgrade program providing hundreds of options to
choose from to customize a new Comstock home to suit the
specific desires of our customers.
|
All personnel involved in the sale of our homes receive
extensive training on the product they are selling. In addition,
our sales professionals are trained on the specialized programs
offered by us in connection with the purchasing, customizing and
financing of a Comstock home and the warranty we provide. We
employ in-house commissioned sales personnel to sell our homes.
We intend to employ our sales personnel on a long-term basis,
rather than a
project-by-project
basis, which we believe results in a more committed and
motivated sales force with better product knowledge. We believe
that this has a positive impact on sales and conversion.
Our corporate and local marketing directors work with local
project and sales managers to develop marketing objectives,
sales strategies and advertising and public relations programs
for our communities. These objectives, strategies and home
pricing decisions are subject to approval by senior management.
We typically build, decorate, furnish and landscape model homes
for each product line and maintain onsite sales offices, which
are open seven days a week. We believe that model homes play a
critical role in our marketing efforts.
Our homes are typically sold before or during construction
through sales contracts that are accompanied by a cash deposit.
Such sales contracts are usually subject to certain
contingencies such as the home buyers ability to qualify
for financing. Cancellation rates are subject to a variety of
factors beyond our control such as consumer confidence, media
hype relating to homebuilding and adverse economic conditions
which lower consumer confidence, increase mortgage interest
rates and negatively affect the sale of our existing homes.
During 2006 our cancellation rate increased across all or our
products in all of our markets. Cancellations and other factors
can increase the level of speculative inventory we hold from
time to time.
In 2006, we opened an innovative sales center located in Reston,
Virginia. Unlike the typical builder design center, this
facility does not sell options; rather it supports cross-product
and cross-community shopping in one
8
central location. In the Comstock NextHome store prospects are
able to see multiple Comstock projects within multiple markets,
arrange for financing and shop for options all in one location.
While this location does not replace
on-site
models, it allows us to shorten a projects
time-to-market
and it provides a permanent location where projects are
previewed and prospects are introduced to the Comstock
experience.
Our
Communities
We currently have active communities under development in the
following states and counties:
|
|
|
State
|
|
County
|
Georgia
|
|
Forsyth, Gwynett, Fulton,
Paulding, Jackson, Cherokee
|
Maryland
|
|
Frederick
|
North Carolina
|
|
Wake, Raleigh, Johnston, Durham
|
District of Columbia
|
|
Washington, DC
|
Virginia
|
|
Arlington, Fairfax Loudon, Prince
William, Culpepper
|
The following chart summarizes certain information for our
current and planned communities at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lots
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Lots
|
|
|
Option
|
|
|
New
|
|
|
|
|
|
|
Product
|
|
|
Units at
|
|
|
Units
|
|
|
|
|
|
Owned
|
|
|
Agreement
|
|
|
Order
|
|
Project
|
|
State
|
|
|
Type(2)
|
|
|
Completion
|
|
|
Settled
|
|
|
Backlog(3)
|
|
|
Unsold
|
|
|
Unsold
|
|
|
Revenue to Date
|
|
Status: Active(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen Creek
|
|
|
GA
|
|
|
|
SF
|
|
|
|
26
|
|
|
|
18
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
$
|
210,272
|
|
Arcanum
|
|
|
GA
|
|
|
|
SF
|
|
|
|
34
|
|
|
|
11
|
|
|
|
1
|
|
|
|
22
|
|
|
|
|
|
|
$
|
438,858
|
|
Brentwood Estates
|
|
|
GA
|
|
|
|
SF
|
|
|
|
33
|
|
|
|
19
|
|
|
|
1
|
|
|
|
11
|
|
|
|
2
|
|
|
$
|
145,072
|
|
Falling Water
|
|
|
GA
|
|
|
|
SF
|
|
|
|
23
|
|
|
|
7
|
|
|
|
4
|
|
|
|
12
|
|
|
|
|
|
|
$
|
571,155
|
|
Gates of Luberon
|
|
|
GA
|
|
|
|
SF
|
|
|
|
32
|
|
|
|
1
|
|
|
|
1
|
|
|
|
30
|
|
|
|
|
|
|
$
|
609,000
|
|
Glenn Ivey
|
|
|
GA
|
|
|
|
SF
|
|
|
|
65
|
|
|
|
10
|
|
|
|
5
|
|
|
|
50
|
|
|
|
|
|
|
$
|
306,864
|
|
Highland Station
|
|
|
GA
|
|
|
|
SF
|
|
|
|
105
|
|
|
|
22
|
|
|
|
4
|
|
|
|
79
|
|
|
|
|
|
|
$
|
341,192
|
|
Maristone
|
|
|
GA
|
|
|
|
SF
|
|
|
|
40
|
|
|
|
3
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
$
|
264,930
|
|
Senators Ridge
|
|
|
GA
|
|
|
|
SF
|
|
|
|
60
|
|
|
|
16
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
$
|
244,618
|
|
Wyngate
|
|
|
GA
|
|
|
|
SF
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
n/a
|
|
Traditions
|
|
|
GA
|
|
|
|
SF
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
n/a
|
|
|
|
Sub-Total/Weighted Average (4):
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
107
|
|
|
|
16
|
|
|
|
325
|
|
|
|
2
|
|
|
$
|
305,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerald Farm
|
|
|
MD
|
|
|
|
SF
|
|
|
|
84
|
|
|
|
77
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
$
|
457,625
|
|
|
|
Sub-Total/Weighted Average:
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
77
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
$
|
457,625
|
|
Allyns Landing
|
|
|
NC
|
|
|
|
TH
|
|
|
|
116
|
|
|
|
39
|
|
|
|
18
|
|
|
|
59
|
|
|
|
|
|
|
$
|
307,321
|
|
Brookfield Station
|
|
|
NC
|
|
|
|
SF
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
n/a
|
|
Carpenter Pointe
|
|
|
NC
|
|
|
|
SF
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
$
|
142,280
|
|
Haddon Hall
|
|
|
NC
|
|
|
|
Condo
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
n/a
|
|
Kelton at Preston
|
|
|
NC
|
|
|
|
TH
|
|
|
|
56
|
|
|
|
39
|
|
|
|
4
|
|
|
|
16
|
|
|
|
|
|
|
$
|
340,589
|
|
North Farms
|
|
|
NC
|
|
|
|
SF
|
|
|
|
138
|
|
|
|
29
|
|
|
|
2
|
|
|
|
11
|
|
|
|
96
|
|
|
$
|
190,958
|
|
Pine Hollow
|
|
|
NC
|
|
|
|
SF
|
|
|
|
10
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
$
|
168,908
|
|
Providence-SF
|
|
|
NC
|
|
|
|
SF
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
114
|
|
|
|
n/a
|
|
Riverbrooke
|
|
|
NC
|
|
|
|
SF
|
|
|
|
68
|
|
|
|
30
|
|
|
|
1
|
|
|
|
37
|
|
|
|
|
|
|
$
|
171,171
|
|
Strathaven
|
|
|
NC
|
|
|
|
SF
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
382,402
|
|
Wakefield Plantation
|
|
|
NC
|
|
|
|
TH
|
|
|
|
77
|
|
|
|
40
|
|
|
|
1
|
|
|
|
16
|
|
|
|
20
|
|
|
$
|
504,593
|
|
Wheatleigh Preserve
|
|
|
NC
|
|
|
|
SF
|
|
|
|
28
|
|
|
|
12
|
|
|
|
3
|
|
|
|
13
|
|
|
|
|
|
|
$
|
330,419
|
|
|
|
Sub-Total/Weighted Average (4):
|
|
|
|
|
|
|
|
|
|
|
872
|
|
|
|
203
|
|
|
|
29
|
|
|
|
278
|
|
|
|
367
|
|
|
$
|
312,697
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lots
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Lots
|
|
|
Option
|
|
|
New
|
|
|
|
|
|
|
Product
|
|
|
Units at
|
|
|
Units
|
|
|
|
|
|
Owned
|
|
|
Agreement
|
|
|
Order
|
|
Project
|
|
State
|
|
|
Type(2)
|
|
|
Completion
|
|
|
Settled
|
|
|
Backlog(3)
|
|
|
Unsold
|
|
|
Unsold
|
|
|
Revenue to Date
|
|
Barrington Park
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
$
|
|
|
Beacon Park at Belmont Bay 8&9
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
488
|
|
|
$
|
|
|
Blooms Mill Carriage
|
|
|
VA
|
|
|
|
TH
|
|
|
|
91
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
453,642
|
|
Carter Lake
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
258
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
155,040
|
|
Commons at Bellemeade
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
316
|
|
|
|
58
|
|
|
|
3
|
|
|
|
255
|
|
|
|
|
|
|
$
|
236,083
|
|
Commons on Potomac Sq
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
192
|
|
|
|
40
|
|
|
|
2
|
|
|
|
150
|
|
|
|
|
|
|
$
|
275,570
|
|
Commons on Williams Sq
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
180
|
|
|
|
104
|
|
|
|
2
|
|
|
|
74
|
|
|
|
|
|
|
$
|
358,662
|
|
Penderbrook
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
424
|
|
|
|
239
|
|
|
|
7
|
|
|
|
178
|
|
|
|
|
|
|
$
|
265,946
|
|
River Club at Belmont Bay 5
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
84
|
|
|
|
82
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
$
|
449,210
|
|
The Eclipse on Center Park
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
465
|
|
|
|
134
|
|
|
|
258
|
|
|
|
73
|
|
|
|
|
|
|
$
|
711,960
|
|
Woodlands at Round Hill
|
|
|
VA
|
|
|
|
SF
|
|
|
|
46
|
|
|
|
24
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
$
|
757,118
|
|
|
|
Sub-Total/Weighted Average:
|
|
|
|
|
|
|
|
|
|
|
2,804
|
|
|
|
1,030
|
|
|
|
272
|
|
|
|
1,014
|
|
|
|
488
|
|
|
$
|
418,427
|
|
|
|
Total Active
|
|
|
|
|
|
|
|
|
|
|
4,210
|
|
|
|
1,417
|
|
|
|
317
|
|
|
|
1,624
|
|
|
|
857
|
|
|
$
|
398,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Status: Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Capitol
|
|
|
DC
|
|
|
|
Condo
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
n/a
|
|
|
|
Sub-Total:
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
Cedars Road
|
|
|
GA
|
|
|
|
SF
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
n/a
|
|
Highland Avenue
|
|
|
GA
|
|
|
|
SF
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
n/a
|
|
James Road
|
|
|
GA
|
|
|
|
SF
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
n/a
|
|
Kelly Mill Road
|
|
|
GA
|
|
|
|
SF
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
n/a
|
|
Post Road
|
|
|
GA
|
|
|
|
SF
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
n/a
|
|
Post Road II
|
|
|
GA
|
|
|
|
TH
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
n/a
|
|
Settingdown Circle
|
|
|
GA
|
|
|
|
SF
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
n/a
|
|
Shiloh Road
|
|
|
GA
|
|
|
|
SF
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
n/a
|
|
Tribble Lakes
|
|
|
GA
|
|
|
|
SF
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
n/a
|
|
|
|
Sub-Total:
|
|
|
|
|
|
|
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
572
|
|
|
|
191
|
|
|
|
|
|
|
|
Massey Preserve
|
|
|
NC
|
|
|
|
SF
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
297
|
|
|
|
|
|
|
|
n/a
|
|
Holland Road
|
|
|
NC
|
|
|
|
SF
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
n/a
|
|
Providence-TH
|
|
|
NC
|
|
|
|
TH
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
n/a
|
|
Boyce Road
|
|
|
NC
|
|
|
|
SF
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
n/a
|
|
Lakeshore Hills
|
|
|
NC
|
|
|
|
SF
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
n/a
|
|
Stowe Road
|
|
|
NC
|
|
|
|
SF
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
n/a
|
|
|
|
Sub-Total:
|
|
|
|
|
|
|
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
378
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aldie Singles
|
|
|
VA
|
|
|
|
SF
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
n/a
|
|
Blake Crossing
|
|
|
VA
|
|
|
|
TH
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
n/a
|
|
Brandy Station
|
|
|
VA
|
|
|
|
SF
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
n/a
|
|
Loudoun Station Condominiums
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
n/a
|
|
Station View
|
|
|
VA
|
|
|
|
TH
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
n/a
|
|
|
|
Sub-Total:
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
849
|
|
|
|
|
|
|
|
Total Development
|
|
|
|
|
|
|
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
1,257
|
|
|
|
1,297
|
|
|
|
n/a
|
|
|
|
|
Total Active &
Development
|
|
|
|
|
|
|
|
|
|
|
6,764
|
|
|
|
1,417
|
|
|
|
317
|
|
|
|
2,881
|
|
|
|
2,154
|
|
|
$
|
398,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Status: Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Shore Condominiums(5)
|
|
|
NC
|
|
|
|
Condo
|
|
|
|
196
|
|
|
|
|
|
|
|
7
|
|
|
|
189
|
|
|
|
|
|
|
$
|
286,361
|
|
North Shore Townhomes(5)
|
|
|
NC
|
|
|
|
TH
|
|
|
|
163
|
|
|
|
33
|
|
|
|
7
|
|
|
|
123
|
|
|
|
|
|
|
$
|
239,107
|
|
Countryside(6)
|
|
|
VA
|
|
|
|
Condo
|
|
|
|
102
|
|
|
|
67
|
|
|
|
2
|
|
|
|
33
|
|
|
|
|
|
|
$
|
274,816
|
|
|
|
Total Joint Venture
|
|
|
|
|
|
|
|
|
|
|
461
|
|
|
|
100
|
|
|
|
16
|
|
|
|
345
|
|
|
|
|
|
|
$
|
263,199
|
|
|
|
10
|
|
(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 year ended
December 31, 2006.
|
|
(2)
|
SF means single family home, TH means
townhouse and Condo means condominium.
|
|
(3)
|
Backlog means we have an executed order with a
buyer, inclusive of lot sales, but the settlement has not yet
taken place.
|
|
(4)
|
Weighted Average means the weighted average new
order sale price
|
|
(5)
|
Not consolidated
|
|
(6)
|
Consolidated, under Fin 46
|
Greater
Washington, DC Area
Northern
Virginia Market
Aldie Singles is planned to be a 15-unit in development
in Aldie, Virginia. The community is planned to have 15 single
family homes on 3 acre and above home sites. At
December 31, 2004 the project was under contract. The
project is expected to be ready to open for sales in 2007 with
settlements expected to begin in late 2007. We are currently in
default of our option contract and are attempting to renegotiate
terms with the sellers.
Barrington Park is a 148-unit mid-rise, walk-up, garden
style condominium development in Manassas Park, Virginia. We
completed the acquisition of the land in late 2005. Sales at the
project were slow during the course of 2006 so we decided to
postpone settlements in order to preserve the value of the
project as an intact rental community. In early 2007 we
initiated rental operations at the project while we wait for
either an offer to purchase in bulk or an improvement in the
condominium market. We have postponed the start of construction
on the remaining buildings at the community.
Beacon Park at Belmont Bay is planned as a 600-unit
active adult condominium community located at the convergence of
the Potomac and Occoquan Rivers at Belmont Bay in Woodbridge,
Virginia. This development is designed as a combination of nine
and five-story buildings with open rooftop decks overlooking the
water and golf course. The project is deed-restricted such that
one of the buyers for each unit must be 55 years of age or
older and will include active adult lifestyle amenities, such as
a health and wellness center, a business center, guest
accommodations and swimming pools. We currently own 112 lots for
4 buildings of 28 units each with a long term option on the
remaining 499 lots. Sales opened in March 2007.
Blakes Crossing is a parcel we own in Culpeper, Virginia
designed for 130-unit townhouses. The project is currently under
contract to be sold for commercial development.
Blooms Mill is a 377-unit development in Manassas,
Virginia. This development offers a mix of single-family homes,
attached carriage homes and townhouses. The developments
amenities include a community club, swimming pool and
family friendly street plan all in a traditional
village setting. At December 31, 2006, the single family
homes were sold out and fully delivered.
Brandy Station is a 350-unit single-family home
development in Culpeper, Virginia. The project is currently
under option takedown contract while we manage it through the
entitlement process. We will close on the property when
approvals have been received if we are still confident that the
option price in place makes sense given market conditions at the
time. We expect to open this project for sales in 2008.
Commons at Bellemeade is a 316-unit condominium
conversion located in Leesburg, Virginia. We acquired the
property in September 2005 and immediately began the process of
sub-dividing the units into condominiums. We are in the process
of renovating the common areas and the unit interiors. We opened
the project for sales to existing tenants in October 2005 and to
the general public in November 2005. The project began settling
units in late 2005 and is expected to continue settling units
into 2009.
Commons on Potomac Square is a 192-unit mid-rise
condominium complex in Loudoun County, Virginia. The complex
will consist of four buildings. The project is positioned for
first-time homeowners and is intended to offer
11
significant appeal to renters in the market seeking to move up
to home ownership. Sales opened in late 2004 and settlements
began in early 2006 and will contine into 2008.
Commons on the Park was a 258-unit condominium conversion
project in Reston, Virginia. We purchased the project in January
2006 and sold it to a rental property owner in November 2006.
Commons on William Square is a 180-unit
two-over-two
townhouse condominium development in Prince William County,
Virginia. Sales opened in the fourth quarter of 2004 and
settlements began in the second half of 2005 and we expect sales
and settlements to continue throughout 2007 and perhaps into
2008.
Countryside is a 102-unit apartment complex in Sterling,
Virginia that we converted to condominiums. We acquired the
property in March 2005. We completed improvements to the common
areas and exteriors of the buildings. Sales opened during the
third quarter of 2005 with settlements beginning in the fourth
quarter 2005. In December 2006 we sold the balance of the unsold
units in a bulk transaction. We entered into a marketing
services agreement whereby we continued to manage sales in the
community and earn a commission on the resale of those units
individually.
The Eclipse on Center Park is a 465-unit high-rise
condominium complex in Arlington County, Virginia. Located at
Potomac Yard, just minutes from downtown Washington, D.C., the
Pentagon and Reagan National Airport, the project is designed as
an upscale, urban-style mixed-use complex with residential
condominiums being built above an 80,000 square foot retail
complex that will host a grocery store and other convenience
oriented retailers. Upper floors will have views of the Potomac
River and the monuments in Washington, D.C. Sales for Phase I
opened in the second quarter of 2004. Sales for Phase II began
in December 2005 and continued throughout 2006. Settlements
began in November 2006 and will continue throughout 2007 and
possibly into 2008.
Loudoun Station Condominiums is planned as an up to 484
unit mid-rise condominium complex located in Ashburn, Virginia.
The project is part of a high-density, transit-oriented,
mixed-use development which is modeled after the successful
Reston Town Center in Reston, Virginia. The project is at the
terminus of the planned Metro extension past Washington Dulles
International Airport. The project will have 1,500 multi-family
residential units between condominiums and rentals and will have
over one million square feet of retail and commercial space. In
light of current market conditions we have delayed the closing
on the land and the opening of this project indefinitely.
Because of our continuing involvement in this project we are
still carrying approximately $1.2 million of real estate
cost in our real estate held for development and sale. If we are
unsuccessful at selling the remaining units for a profit we may
be required to writedown our carrying value.
Penderbrook Square is a 424-unit rental apartment complex
which we are converting to condominiums in the Fair Oaks area of
Fairfax County, Virginia. We acquired the property in February
2005. We have made a significant investment in renovations at
this project including common areas, building exteriors and
units heating systems. Sales opened in April 2005 with
settlements beginning in June 2005 and continuing to date. We
are currently managing both for-sale and rental programs at this
project to help offset carrying costs until the market improves.
River Club at Belmont Bay 5 is a three-building, 84-unit
condominium development located at the convergence of the
Potomac and Occoquan Rivers at Belmont Bay in Woodbridge,
Virginia. Settlements began in 2005 and will conclude in 2007.
Woodlands at Round Hill is located in western Loudoun
County, Virginia, one of the fastest growing counties in the
United States. This large lot single-family home development has
65 lots of three or more acres each. We are acting as the
developer of the site, and we are currently building road and
utility infrastructure for the home sites. This project opened
for sales in 2004. Settlements began in early 2005 and will
continue into 2008 and possibly into 2009. In September 2005, we
sold 19 lots to another homebuilder who is now open to sales in
the community.
Maryland
Emerald Farm is an 84-unit development of single-family
homes in Frederick, Maryland. The development is conveniently
located near major transportation routes. Frederick, Maryland is
currently experiencing a water moratorium that has shut down
development in the area. The project has been open for sales
since 2000 and is expected to be completed in 2007 or 2008.
12
North
Carolina Market
Raleigh,
North Carolina
Allyns Landing is a 117-unit townhouse development
located in the heart of Raleigh, North Carolina near Research
Triangle Park and the Raleigh-Durham International Airport. The
project overlooks an eight-acre lake and includes amenities such
as a fountain, gazebo, walking trails and canoe rack. In 2006 we
repositioned the project by changing product types. The project
is currently open for sales and is delivering homes. Deliveries
are expected to continue into 2008.
Holland Road is a 81-unit single family homes development
in Raleigh, North Carolina which is opened for sales and
expected to began deliveries in the second half of 2007.
Kelton at Preston is a 56-unit upscale townhouse
development in the prestigious Kelton golf course community of
Cary, North Carolina. This project has three 18-hole courses, a
swimming complex and a clubhouse with fitness, tennis and dining
facilities. Many of our home sites have golf course views. This
project is currently open for sales and is delivering homes.
Deliveries are expected to continue into 2008.
North Shore is a unique community located on the
Centennial Campus of North Carolina State University. It
consists of 163 townhouses and 196 mid-rise condominium units.
The mid-rise condominium residences are five-story elevator
buildings with structured garage parking. The townhouse
residences feature four finished levels, private garages, a rear
deck and a rooftop terrace. This project is owned through a
50/50 joint venture with Raleigh Property Group II, LLC and as
such is reported through the equity method and excluded from our
home building revenue and backlog. (See Note 7 of notes to our
consolidated and combined financial statements as of
December 31, 2006). This project is not currently open for
sales pending resolution of litigation between us and our joint
venture partner.
Wakefield Plantation is a 77-unit development in Raleigh,
North Carolina consisting of townhouses and carriage homes. Our
unique carriage homes at Wakefield are attached homes with as
much as 5,300 square feet of finished living space in three and
four-unit configurations with two-car garages and interior court
yards. This project is currently open for sales and is
delivering homes. Deliveries are expected to continue into early
2008.
Brookfield is a 130-unit single family development in
Raleigh, North Carolina. This development, with its projected
swimming pool complex, is conveniently located near Rt. 264
in Raleigh. This development is projected to open for sales in
the end of 2007 and is expected to be completed in 2009.
Haddon Hall is a three building 90-unit condominium
development located in Apex, North Carolina. This development is
currently open for sales and expected to begin deliveries in the
end of 2007.
Massey Preserve is a 297-unit single family development
in Raleigh, North Carolina. These 2,600 to 3,000 square
foot homes are conveniently located to the new I-540 by pass as
well as a new elementary school in walking distance. This
development is now open for sales and is expected to be
completed in 2008 or 2009.
North Farm is a 138-unit single family homes development
in Clayton, North Carolina. These spacious craftsman-style homes
are located within the Flower Plantation community with shopping
and recreation facilities in walking distance.
Pine Hollow is a 7-unit single family development in
Raleigh, North Carolina. This development has an
18-hole golf
course, tennis center and community pool complex. This
development is expected to be completed by mid 2007.
Providence single family is a 148-unit single family
development in Raleigh, North Carolina. This development is
convenient to downtown Raleigh as well as walking distance to
both North Hill and Crabtree Valley Malls. This development is
now open for sale.
Providence townhomes is an 80-unit single family
development in Raleigh, North Carolina. This development is
conveniently located to downtown Raleigh as well as walking
distance to both North Hill and Crabtree Valley Malls.
13
Riverbrooke II is the second phase of a 68-unit single
family development in Raleigh, North Carolina. This
developments easy accessibility to interstates I-40 and
I-440 make for quick commuting around the city of Raleigh.
Wheatleigh Preserve is a 28-unit single family
development in Raleigh, North Carolina. These quarter-acre lots
are fully amenitized, with a community pool, tree-lined hiking
trails and playgrounds. This development is currently open for
sale.
Charlotte,
North Carolina Market
In early 2007 we made the decision to withdraw from the
Charlotte, North Carolina market. This decision affected Boyce
Road, Stowe Village and Fairhills, which we now no longer plan
to open for sales.
Greater
Atlanta Market
Atlanta,
Georgia
Allen Creek- is a 26-unit single family home development
in the suburbs of Atlanta, Georgia. These single family homes
have brick or stacked-stone exteriors and a hardwood foyer,
chair rails, shadow-box trim and tray ceilings in the master
suite. This development is currently open for sales and should
be completed by the end of 2007.
Arcanum- is a 34-unit single family home development in
the suburbs of Atlanta, Georgia. These single family homes have
brick, stone and shake exteriors and a hardwood floors in the
interior. This development has access to the Polo Country Club.
This development is currently delivering homes and is projected
to be closed out in 2007.
Brentwood Estates- is a 26-unit single family home
development in the suburbs of Atlanta, Georgia. These single
family homes have brick or stacked-stone exteriors and a
hardwood foyer, chair rails, shadow-box trim and trey ceilings
in the master suite. This development is currently open for
sales and should be completed by the end of 2007.
Falling Water- is a 23-unit single family home
development in Woodstock, Georgia a suburb of Atlanta. These
single family homes have brick, stone and shake exteriors. This
development is currently delivering homes and is projected to be
closed out in 2007.
Gates of Luberon- is a 32-unit single family home
development in the suburbs of Atlanta, Georgia. The homes in
this development are some of the largest homes Comstock
Homebuilding of Atlanta has built in Atlanta. The single family
homes have brick, stone and shake exteriors and spacious floor
plan. The development has easy access downtown Atlanta via Hwy.
141. This development is currently delivering homes and is
projected to be closed out in 2007.
Glen Ivey- is a 65-unit single family home development in the
suburbs of Atlanta, Georgia. Homes in this project have a
spacious layout. The development has a community pool complex
and nature trails as well as being located near Lake Lanier.
This development is delivering homes currently and is projected
to be closed out in mid-year 2008.
Highland Ave- is a 30-unit single family home development
in the Inman Park section of downtown Atlanta, Georgia. The
development is currently under development and is projected to
begin selling homes in mid 2008.
Highland Station- is a 105-unit single family home
development in Suwanee, Georgia a suburb of Atlanta. The homes
in this development are appointed with 9 ceilings,
hardwood floors and Corian countertops as standard. The
development also has a pool complex with cabana. This
development is delivering homes currently and is projected to be
closed out in 2008.
James Road- is a 50-unit single family home development
in the suburbs of Atlanta, Georgia. The development is currently
under development and is projected to begin selling homes in mid
2008.
Maristone- is a 40-unit single family home development in
the suburbs of Atlanta, Georgia. The development is complete
with tennis courts, swimming complex and a cabana. This
development is currently open for sale and is projected is
scheduled to be closed out in mid-year 2008.
14
Post Road- is a 59-unit single family home development in
the suburbs of Atlanta, Georgia. The development is currently
under development and is projected to begin selling homes in
2007.
Post Road II- is a 54-unit townhouse development located
in the suburbs of Atlanta, Georgia. Development of this
development is projected to start at the end of 2007 and be open
for sales in 2008.
Senators Ridge- is a 60-unit single family home
development in the western suburbs of Atlanta, Georgia. The
development offers extensive amenities like a clubhouse,
swimming pool, tennis courts and basketball courts. This
development is currently delivering homes and is projected to be
closed out in 2007.
Settingdown Circle- is a 172-unit single family home
development in the suburbs of Atlanta, Georgia. Development of
this development is projected to start at the end of 2007 and is
expected to be open for sales in 2008.
Shiloh Road- is a 61-unit single family home development
in the suburbs of Atlanta, Georgia. The development is currently
under development and is projected to begin selling homes in
2007.
Traditions at Braselton-is a 4-unit single family home
development in the outskirts of Atlanta, Georgia. These estate
homes are located directly on a championship 18-hole golf course
with many other amenities. These homes that start at 4,500
square feet, have bountiful views of the course. This
development is currently open for sales and is projected to be
closed out in 2007.
Tribble Lakes- is a 200-unit single family home
development in the suburbs of Atlanta, Georgia. This development
will have a wide array of amenities strategically located around
the beautiful lake. The development is currently under
development and is projected to begin selling homes in 2008.
Wyngate- is a 28-unit single family home development in
the suburbs of Atlanta, Georgia. This development is currently
open for sales and is projected to be closed out in 2007.
South
Carolina Market
Myrtle
Beach, South Carolina
In September 2006 we sold our Carolina Waterway community in the
Myrtle Beach area, our only project in South Carolina. We no
longer operate in the South Carolina market.
Warranty
We provide our single-family and townhouse home buyers with a
one-year limited warranty covering workmanship and materials.
The limited warranty is transferable to subsequent buyers not
under direct contract with us and requires that home buyers
agree to the definitions and procedures set forth in the
warranty. Our condominium home buyers typically have a statutory
two-year warranty on their purchases. In addition, we provide a
five-year structural warranty pursuant to statutory
requirements. From time to time, we assess the appropriateness
of our warranty reserves and adjust future accruals as
necessary. When deemed appropriate by us, we will accrue
additional warranty reserves. We rely on our sub-contractors to
warrant their work and they are contractually obligated to fix
defects in their work. Beyond our sub-contractor warranties we
self-insure the balance of all of our warranties.
Competition
The real estate development and home building industries are
highly competitive and fragmented. Competitive overbuilding in
local markets, among other competitive factors, could materially
adversely affect home builders in those markets. Home builders
compete for financing, raw materials and skilled labor, as well
as for the sale of homes. Additionally, competition for prime
properties is intense and the acquisition of such properties may
become more expensive in the future to the extent demand and
competition increase. We compete with other local, regional and
national real estate companies and home builders. Some of our
competitors have greater financial, marketing, sales and other
resources than we have.
15
The principal competition we faced in each of our markets, as of
December 31, 2006, was as follows:
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Atlanta, Georgia. In the Atlanta, Georgia
market we compete against approximately 10 to 15 publicly-traded
national home builders, approximately 10 to 15 privately-owned
regional home builders, and a large number of small, local home
builders.
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Raleigh, North Carolina. In the Raleigh, North
Carolina market we compete against approximately 10 to 15
publicly-traded national home builders, approximately 10 to 15
privately-owned regional home builders, and a large number of
small, local home builders.
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Washington, D.C. In the greater Washington, D.C.
metropolitan market we compete against approximately 15 to 20
publicly-traded national home builders, approximately 10 to 15
privately-owned regional home builders, and many local home
builders, some of whom are very small and may build as few as
five to 25 homes per year.
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We do not compete against all of the builders in our geographic
markets in all of our product types or submarkets, as some
builders focus on particular types of projects within those
markets, such as large estate homes, that are not in competition
with our communities. We believe the factors that home buyers
consider in deciding whether to purchase from us include the
location, value and design of our products. We believe that we
typically build attractive, innovative products in sought-after
locations that are perceived as good values by customers.
Accordingly, we believe that we compare favorably on these
factors.
We also compete with resale of existing homes and condominiums
and available rental housing.
Regulation
We and our competitors are subject to various local, state and
federal statutes, ordinances, rules and regulations concerning
zoning, building design, construction and similar matters,
including local regulation, which imposes restrictive zoning and
density requirements in order to limit the number of homes that
can ultimately be built within the boundaries of a particular
project. We and our competitors may also be subject to periodic
delays or may be precluded entirely from developing in certain
communities due to building moratoriums or
slow-growth or no-growth initiatives
that could be implemented in the future in the states in which
we operate. Local and state governments also have broad
discretion regarding the imposition of development fees for
projects in their jurisdiction.
We and our competitors are also subject to a variety of local,
state and federal statutes, ordinances, rules and regulations
concerning protection of the environment. Some of the laws to
which we and our properties are subject may impose requirements
concerning development in waters of the United States, including
wetlands, the closure of water supply wells, management of
asbestos-containing materials, exposure to radon, and similar
issues. The particular environmental laws that apply to any
given community vary greatly according to the community site,
the sites environmental conditions and the present and
former uses of the site. These environmental laws may result in
delays, may cause us and our competitors to incur substantial
compliance and other costs, and may prohibit or severely
restrict development in certain environmentally sensitive
regions or areas. However, environmental laws have not, to date,
had a material adverse impact on our operations.
Technology
We are committed to the use of Internet-based technology for
managing our business and communicating with our customers. For
customer relationship management, we use Builders
Co-Pilot, a management information system that was custom
developed in accordance with our needs and requirements. This
system allows for online and collaborative efforts between our
sales and marketing functions and integrates our sales,
production and divisional office operations in tracking the
progress of construction on each of our projects. We believe
that real-time access to our construction progress and our sales
and marketing data and documents through our systems increases
the effectiveness of our sales and marketing efforts as well as
managements ability to monitor our business. Through our
Web site, www.comstockhomebuilding.com, our customers and
prospects receive automatic electronic communications from us on
a regular basis. We believe this application of technology has
and will continue to greatly enhance our conversion rates.
16
In April 2006 we commenced preparations for the conversion of
our accounting and purchasing management software to the JD
Edwards, Enterprise One software system. We effected the
conversion to the JD Edwards software in January 2007. This
highly scaleable purchasing and accounting system will position
us to be more cost competitive and will, we hope, contribute to
future margin expansion.
Intellectual
Property and Other Proprietary Rights
We rely primarily on a combination of copyright, trade secret
and trademark laws to protect our proprietary rights. We do not
own the Comstock brand or trademark. Christopher
Clemente owns the Comstock brand and trademark and
has licensed them to us under a perpetual, royalty-free license
agreement. We have filed a U.S. federal trademark application
with respect to Comstock Homes Worthy of the
Investment and we will file a U.S. federal trademark
application with respect to Comstock Homebuilding
Companies. We believe the strength of these trademarks
benefits our business. In addition, as a result of recent
acquisitions, we now own the Capitol Homes and Parker-Chandler
brands which we do not currently use in our marketing efforts.
Employees
At December 31, 2006, we had 205 full-time and part-time
employees. Our employees are not represented by any collective
bargaining agreement and we have never experienced a work
stoppage. We believe we have good relations with our employees.
Executive
Officers
Our executive officers and other management employees and their
respective ages and positions as of December 31, 2006 are
as follows:
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Name
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Age
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Position
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Christopher Clemente*
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Chairman and Chief Executive Officer
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Gregory V. Benson*
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Regional President, Southeast
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Bruce J. Labovitz*
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Chief Financial Officer
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Jason Parikh*
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Chief Accounting Officer
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Jubal R. Thompson
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General Counsel and Secretary
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Executive
Officers and Key Employees
Christopher Clemente founded Comstock in 1985 and has
been director since May 2004. Since 1992, Mr. Clemente has
served as our Chairman and Chief Executive Officer.
Mr. Clemente has over 20 years of experience in all
aspects of real estate development and home building, and
25 years of experience as an entrepreneur.
Gregory V. Benson joined us in 1991 as President and
Chief Operating Officer and has been director since May 2004.
Mr. Benson is also a member of our board of directors.
Mr. Benson has over 30 years of home building
experience including over 13 years at national home
builders, including NVHomes, Ryan Homes and Centex Homes.
Bruce J. Labovitz has served as our Chief Financial
Officer since January 2004, after serving as our Vice
President Finance from April 2002 to January 2004
and Vice President Investment Finance from January
2002 to April 2002. From June 2001 to January 2002,
Mr. Labovitz was a Vice President of Viking Communications,
a telecommunications company. From November 2000 to June 2001,
Mr. Labovitz was the President, Marketing &
Services of Inlec Communications, a telecommunications company.
Prior to that, from May 1996 to November 2000, Mr. Labovitz
was Executive Vice President/ Chief Operating Officer of BMK
Advertising, an advertising agency.
17
Jason Parikh has served as our Chief Accounting Officer
since April 2004. Mr. Parikh was Chief Financial Officer
and Secretary of
On-Site
Sourcing, Inc. from May 2000 to April 2004 and Controller from
July 1997 to May 2000. From July 1994 until July 1997,
Mr. Parikh was Controller of Shirt Explosion Inc., a
clothing manufacturer.
Jubal R. Thompson has served as our General Counsel since
October 1998 and our Secretary as of December 2004. From April
2002 to April 2003, Mr. Thompson also served as our Vice
President Finance. From 1995 to 1998,
Mr. Thompson was associated with Robert Weed &
Associates, PLLC, a law firm.
Other
Information
We file annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange
Commission (SEC) under the Securities Exchange Act
of 1934 (the Exchange Act). The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, DC 20549.
The public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information
regarding issuers, including us, that file electronically with
the SEC. The public can obtain any documents that we file with
the SEC at http://www.sec.gov.
We also make available, free of charge, at our Internet website
located at www.comstockhomebuilding.com, our annual
reports on
Form 10-K,
our proxy statements, our quarterly reports on
Form 10-Q,
and our current reports on
Form 8-K
as well as Form 3, Form 4, and Form 5 Reports for
our directors, officers, and principal stockholders, together
with amendments to those reports filed or furnished pursuant to
Section 13(a), 15(d), or 16 under the Exchange Act. These
reports are available as soon as reasonably practicable after
their electronic filing with the Securities and Exchange
Commission.
CAUTIONARY
NOTES REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report include
forward-looking statements. These forward-looking statements can
be identified by the use of words such as
anticipate, believe,
estimate, may, intend,
expect, will, should,
seeks or other similar expressions. Forward-looking
statements are based largely on our expectations and involve
inherent risks and uncertainties including certain risks
described in this report. When considering those forward-looking
statements, you should keep in mind the risks, uncertainties and
other cautionary statements made in this report. You should not
place undue reliance on any forward-looking statement, which
speaks only as of the date made. Some factors which may affect
the accuracy of the forward-looking statements apply generally
to the real estate industry, while other factors apply directly
to us. Any number of important factors which could cause actual
results to differ materially from those in the forward-looking
statements include, without limitation: general economic and
market conditions, including interest rate levels; our ability
to service our substantial debt; inherent risks in investment in
real estate; our ability to compete in the markets in which we
operate; regulatory actions; fluctuations in operating results;
our anticipated growth strategies; shortages and increased costs
of labor or building materials; the availability and cost of
land in desirable areas; natural disasters; our ability to raise
debt and equity capital and grow our operations on a profitable
basis; and our continuing relationships with affiliates.
Many of these factors are beyond our control. For a discussion
of factors that could cause actual results to differ, please see
the discussion in this report under the heading Risk
Factors in Item 1A.
Item 1A.
Risk Factors
Risks
Relating to Our Business
We
engage in construction and real estate activities which are
speculative and involve a high degree of risk.
The home building industry is speculative and is significantly
affected by changes in economic and other conditions, such as:
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availability of financing;
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interest rates; and
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consumer confidence.
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These factors can negatively affect the demand for and pricing
of our homes and our margin on sale. We are also subject to a
number of risks, many of which are beyond our control, including:
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delays in construction schedules;
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cost overruns;
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changes in governmental regulations (such as slow- or no-growth
initiatives);
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increases in real estate taxes and other local government fees;
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labor strikes;
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transportation costs for delivery of materials; and
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increases and/or shortages in raw materials and labor costs.
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Failure
to successfully negotiate extensions to our credit facilities
could adversely affect our liquidity.
Our subsidiaries have a significant amount of secured debt which
matures during 2007. In our industry it is customary for lenders
to renew and extend project facilities until the project is
complete. Since we are the guarantor of our subsidiaries
debt, any significant failure to negotiate renewals and
extensions to this debt would severely compromise our liquidity
and could jeopardize our ability to satisfy our capital
requirements. Our recently reported and cured loan covenant
violations, may impact our ability to renew and extend our debt.
Fluctuations
in market conditions may affect our ability to sell our land and
home inventories at expected prices, if at all, which could
adversely affect our revenues, earnings and cash
flows.
We are subject to the potential for significant fluctuations in
the market value of our land and home inventories. We must
constantly locate and acquire new tracts of undeveloped and
developed land to support our home building operations. There is
a lag between the time we acquire control of undeveloped land or
developed home sites and the time that we can bring the
communities built on that land to market and deliver our homes.
This lag time varies from site to site as it is impossible to
determine in advance the length of time it will take to obtain
governmental approvals and building permits. The risk of owning
undeveloped land, developed land and homes can be substantial.
The market value of undeveloped land, buildable lots and housing
inventories can fluctuate significantly as a result of changing
economic and market conditions. Inventory carrying costs can be
significant and can result in losses in a poorly performing
development or market. Material write-downs of the estimated
value of our land and home inventories could occur if market
conditions deteriorate or if we purchase land or build home
inventories at higher prices during stronger economic periods
and the value of those land or home inventories subsequently
declines during weaker economic periods. We could also be forced
to sell homes, land or lots for prices that generate lower
profit than we anticipate, or at a loss, and may not be able to
dispose of an investment in a timely manner when we find
dispositions advantageous or necessary. Furthermore, a decline
in the market value of our land or home inventories may give
rise to additional impairments of our inventory and write-offs
of contract deposits and feasibility cost, which may result in a
breach of financial covenants contained in one or more of our
credit facilities, which could cause a default under those
credit facilities.
Home
prices and sales activities in the Washington, D.C., Raleigh,
North Carolina and Atlanta, Georgia geographic markets have a
large impact on our results of operations because we conduct
substantially all of our business in these
markets.
Home prices and sales activities in the Washington, D.C.,
Raleigh, North Carolina and Atlanta, Georgia geographic markets
have a large impact on our results of operations because we
conduct substantially all of our business in these markets.
Although demand in these geographic areas historically has been
strong, decreased rates of home price appreciation may reduce
the likelihood of consumers seeking to purchase new homes which
would
19
likely have a negative impact on the pace at which we receive
orders for our new homes. This could adversely affect our
results of operations and cash flows.
Because
our business depends on the acquisition of new land, the
potential limitations on the supply of land could reduce our
revenues or negatively impact our results of operations and cash
flows.
Due to continued demand for new homes, we experience competition
for available land and developed home sites in the Washington,
D.C., Raleigh, North Carolina and Atlanta, Georgia markets. In
these markets, we have experienced competition for home sites
from other, sometimes better capitalized, home builders. In the
Raleigh, North Carolina market, we have recently experienced
competition from large, national home builders entering the
market. Our ability to continue our home building activities
over the long term depends upon our ability to locate and
acquire suitable parcels of land or developed home sites to
support our home building operations. As competition for land
increases, the cost of acquiring it may rise, and the
availability of suitable parcels at acceptable prices may
decline. The increased cost of land requires us to increase the
prices of our homes. This increased pricing could increase the
rate at which consumer demand for our homes declines and,
consequently, reduce the number of homes we sell and lead to a
decrease in our revenues, earnings and cash flows.
Our
business is subject to governmental regulations that may delay,
increase the cost of, prohibit or severely restrict our
development and home building projects and reduce our revenues
and cash flows.
We are subject to extensive and complex laws and regulations
that affect the land development and home building process,
including laws and regulations related to zoning, permitted land
uses, levels of density (number of dwelling units per acre),
building design, access to water and other utilities, water and
waste disposal and use of open spaces. In addition, we and our
subcontractors are subject to laws and regulations relating to
worker health and safety. We also are subject to a variety of
local, state and federal laws and regulations concerning the
protection of health and the environment. In some of our
markets, we are required to pay environmental impact fees, use
energy saving construction materials and give commitments to
provide certain infrastructure such as roads and sewage systems.
We must also obtain permits and approvals from local authorities
to complete residential development or home construction. The
laws and regulations under which we and our subcontractors
operate, and our and their obligations to comply with them, may
result in delays in construction and development, cause us to
incur substantial compliance and other increased costs, and
prohibit or severely restrict development and home building
activity in certain areas in which we operate. If we are unable
to continue to develop communities and build and deliver homes
as a result of these restrictions or if our compliance costs
increase substantially, our revenues, earnings and cash flows
may be reduced.
Cities
and counties in which we operate have adopted, or may adopt,
slow or no-growth initiatives that would reduce our ability to
build and sell homes in these areas and could adversely affect
our revenues, earnings and cash flows.
From time to time, certain cities and counties in which we
operate have approved, and others in which we operate may
approve, various slow-growth or
no-growth initiatives and other similar ballot
measures. Such initiatives restrict development within
localities by, for example, limiting the number of building
permits available in a given year. Approval of slow- or
no-growth measures could reduce our ability to acquire land,
obtain building permits and build and sell homes in the affected
markets and could create additional costs and administration
requirements, which in turn could have an adverse effect on our
revenues, earnings and cash flows.
Increased regulation in the housing industry increases the time
required to obtain the necessary approvals to begin construction
and has prolonged the time between the initial acquisition of
land or land options and the commencement and completion of
construction. These delays increase our costs, decrease our
profitability and increase the risks associated with the land
inventories we maintain.
Municipalities may restrict or place moratoriums on the
availability of utilities, such as water and sewer taps. If
municipalities in which we operate take actions like these, it
could have an adverse effect on our business by causing delays,
increasing our costs or limiting our ability to build in those
municipalities. This, in turn, could reduce the number of homes
we sell and decrease our revenues, earnings and cash flows.
20
Our
ability to sell homes, and, accordingly, our results of
operations, will be affected by the availability of financing to
potential home buyers.
Most home buyers finance their purchases through third-party
mortgage financing. Real estate demand is generally adversely
affected by:
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increases in interest rates and/or related fees;
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increases in real estate transaction closing costs;
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decreases in the availability of mortgage financing;
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increasing housing costs;
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unemployment; and
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changes in federally sponsored financing programs.
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Increases in interest rates or decreases in the availability of
mortgage financing could depress the market for new homes
because of the increased monthly mortgage costs or the
unavailability of financing to potential home buyers. Even if
potential home buyers do not need financing, increases in
interest rates and decreased mortgage availability could make it
harder for them to sell their homes. This could adversely affect
our operating results and financial condition.
The
competitive conditions in the home building industry could
increase our costs, reduce our revenues and earnings and
otherwise adversely affect our results of operations and cash
flows.
The home building industry is highly competitive and fragmented.
We compete in each of our markets with a number of national,
regional and local builders for customers, undeveloped land and
home sites, raw materials and labor. For example, in the
Washington, D.C. market, we compete against approximately 15 to
20 publicly-traded national home builders, approximately 10 to
15 privately-owned regional home builders, and many local home
builders, some of whom are very small and may build as few as
five to 25 homes per year. We do not compete against all of the
builders in our geographic markets in all of our product types
or submarkets, as some builders focus on particular types of
projects within those markets, such as large estate homes, that
are not in competition with our projects.
We compete primarily on the basis of price, location, design,
quality, service and reputation. Some of our competitors have
greater financial resources, more established market positions
and better opportunities for land and home site acquisitions
than we do and have lower costs of capital, labor and material
than us. The competitive conditions in the home building
industry could, among other things:
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make it difficult for us to acquire suitable land or home sites
in desirable locations at acceptable prices and terms, which
could adversely affect our ability to build homes;
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require us to increase selling commissions and other incentives,
which could reduce our profit margins;
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result in delays in construction if we experience delays in
procuring materials or hiring trades people or laborers;
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result in lower sales volume and revenues; and
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increase our costs and reduce our earnings.
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We also compete with resales of existing homes and condominiums
and available rental housing. An oversupply of competitively
priced resale or rental homes in our markets could adversely
affect our ability to sell homes profitably.
Our
business is concentrated in a few geographic areas which
increases our exposure to localized risks.
We currently develop and sell homes principally in the
Washington, D.C., Raleigh, North Carolina and Atlanta, Georgia
markets. Our limited geographic diversity means that adverse
general economic, weather or other
21
conditions in either of these markets could adversely affect our
results of operations and cash flows or our ability to grow our
business.
Our
growth strategy to expand into new geographic areas poses
risks.
We may expand our business into new geographic areas outside of
the Washington, D.C., Raleigh, North Carolina and Atlanta,
Georgia markets. We will face additional risks if we develop
communities in geographic areas or climates in which we do not
have experience or if we develop a different size or style of
community than those currently being developed, including:
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adjusting our construction methods to different geographies and
climates;
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obtaining the necessary construction materials and labor in
sufficient amounts and on acceptable terms;
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obtaining necessary entitlements and permits under unfamiliar
regulatory regimes;
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attracting potential customers in a market in which we do not
have significant experience; and
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the cost of hiring new employees and increased infrastructure
costs.
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We may not be able to successfully manage the risks of such an
expansion, which could have a material adverse effect on our
revenues, earnings, cash flows and financial condition.
We may
not be able to successfully identify, complete or integrate
acquisitions.
As part of our business strategy, we expect to continue to
review acquisition prospects in our existing markets and in new
markets in the Mid-Atlantic and Southeast region or elsewhere
that would complement our existing business, or that might
otherwise offer growth opportunities. The identification,
underwriting and negotiation of such deals is an ongoing
process. We recently completed the acquisitions of Parker
Chandler Homes, Inc. and Capitol Homes, Inc. While we are not
currently engaged in either discussions, negotiation or due
diligence with other homebuilders we may resume those activities
at any time. To the extent we complete acquisitions, we may be
unable to realize the anticipated benefits because of
operational factors or difficulties in integrating the
acquisitions with our existing business. Acquisitions entail
numerous risks, including, but not limited to:
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difficulties in assimilating acquired management and operations;
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risks associated with investing the necessary resources in order
to achieve profitability;
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the incurrence of significant due diligence expenses relating to
acquisitions that are not completed;
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unforeseen expenses and liabilities;
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risks associated with entering new markets or sub-markets in
which we have limited or no prior experience;
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the diversion of our managements attention from our
current business;
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the potential loss of key employees, including senior
executives, of acquired organizations; and
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risks associated with transferred assets and liabilities.
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We may not be able to acquire or manage profitably additional
businesses, or to integrate successfully any acquired
businesses, properties or personnel into our business, without
substantial costs, delays or other operational or financial
difficulties. Our failure to do so could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
We are
dependent on the services of certain key employees and the loss
of their services could harm our business.
Our success largely depends on the continuing services of
certain key employees, including our Chairman and Chief
Executive Officer, Christopher Clemente, Gregory Benson, our
President and Chief Operating Officer, and Bruce Labovitz, our
Chief Financial Officer. Our continued success also depends on
our ability to attract and retain qualified personnel. We
believe that Messrs. Clemente, Benson and Labovitz each
possesses valuable industry
22
knowledge, experience and leadership abilities that would be
difficult in the short term to replicate. The loss of these or
other key employees could harm our operations, business plans
and cash flows.
Our
growth requires additional capital, which may not be
available.
The real estate development industry is capital intensive and
requires significant expenditures for land purchases, land
development and construction as well as potential acquisitions
of other homebuilders. In order to execute our growth strategy,
we anticipate that we will need to obtain additional financing
as we expand our operations. These funds may be obtained through
public or private debt or equity financings, additional bank
borrowings or from strategic alliances or joint ventures. We may
not be successful in obtaining additional funds in a timely
manner, on favorable terms or at all. Moreover, certain of our
bank financing agreements contain provisions that limit the type
and amount of debt we may incur in the future without our
lenders consent. In addition, the availability of borrowed
funds, especially for land acquisition and construction
financing, may be greatly reduced, and lenders may require us to
invest increased amounts of equity in a project in connection
with both new loans and the extension of existing loans. If we
do not have access to additional capital, we may be required to
delay, scale back or abandon some or all of our acquisition
plans or growth strategies or reduce capital expenditures and
the size of our operations and as a result may experience a
material adverse affect on our business, results of operations
and cash flows.
Our
growth depends on the availability of construction, acquisition
and development loans.
Currently, we have multiple construction, acquisition and
development loans. These credit facilities tend to be
project-oriented and generally have higher costs and require
significant management time to administer them. Additionally, if
financial institutions decide to discontinue providing these
facilities to us, we would lose our primary source of financing
our operations or the cost of retaining or replacing these
credit facilities could increase dramatically. Further, this
type of financing is typically characterized by short-term loans
which are subject to call. If our primary financing becomes
unavailable or accelerated repayment is demanded, we may not be
able to meet our obligations.
A
significant portion of our business plan involves construction
of mixed-use developments and high-rise projects with which we
have less experience.
We expect to increase our construction and development of
mixed-use and high-rise residential projects. Our experience is
largely based on smaller wood-framed structures that are less
complex than high-rise construction or the development of
mixed-use projects. A mixed-use project is one that integrates
residential and non-residential uses in the same structure or in
close proximity to each other, on the same land. As we expand
into these new product types, we expect to encounter operating,
marketing, customer service, warranty and management challenges
with which we have less familiarity. Although we have expanded
our management team to include individuals with significant
experience in this type of real estate development, we have not
completed any projects managed by these persons. If we are
unable to successfully manage the challenges of this portion of
our business, we may incur additional costs and our results of
operations and cash flows could be adversely affected.
If we
experience shortages of labor or supplies or other circumstances
beyond our control, there could be delays or increased costs in
developing our projects, which would adversely affect our
operating results and cash flows.
We and the home building industry from time to time may be
affected by circumstances beyond our control, including:
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work stoppages, labor disputes and shortages of qualified trades
people, such as carpenters, roofers, electricians and plumbers;
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lack of availability of adequate utility infrastructure and
services;
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transportation cost increases;
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23
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our need to rely on local subcontractors who may not be
adequately capitalized or insured; and
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shortages or fluctuations in prices of building materials.
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These difficulties have caused and likely will cause unexpected
construction delays and short-term increases in construction
costs. In an attempt to protect the margins on our projects, we
often purchase certain building materials with commitments that
lock in the prices of these materials for 90 to 120 days or
more. However, once the supply of building materials subject to
these commitments is exhausted, we are again subject to market
fluctuations and shortages. We may not be able to recover
unexpected increases in construction or materials costs by
raising our home prices because, typically, the price of each
home is established at the time a customer executes a home sale
contract. Furthermore, sustained increases in construction costs
may, over time, erode our profit margins and may adversely
affect our results of operations and cash flows.
We
depend on the availability and skill of
subcontractors.
Substantially all of our construction work is done by
subcontractors with us acting as the general contractor or by
subcontractors working for a general contractor we select for a
particular project. Accordingly, the timing and quality of our
construction depends on the availability and skill of those
subcontractors. We do not have long-term contractual commitments
with subcontractors or suppliers. Although we believe that our
relationships with our suppliers and subcontractors are good, we
cannot assure that skilled subcontractors will continue to be
available at reasonable rates and in the areas in which we
conduct our operations. The inability to contract with skilled
subcontractors or general contractors at reasonable costs on a
timely basis could limit our ability to build and deliver homes
and could erode our profit margins and adversely affect our
results of operations and cash flows.
Product
liability litigation and claims that arise in the ordinary
course of business may be costly or negatively impact sales,
which could adversely affect our results of operations and cash
flows.
Our home building business is subject to construction defect and
product liability claims arising in the ordinary course of
business. These claims are common in the home building industry
and can be costly. Among the claims for which developers and
builders have financial exposure are property damage,
environmental claims and bodily injury claims. Damages awarded
under these suits may include the costs of remediation, loss of
property and health-related bodily injury. In response to
increased litigation, insurance underwriters have attempted to
limit their risk by excluding coverage for certain claims
associated with environmental conditions, pollution and product
and workmanship defects. As a developer and a home builder, we
may be at risk of loss for mold-related property, bodily injury
and other claims in amounts that exceed available limits on our
comprehensive general liability policies. In addition, the costs
of insuring against construction defect and product liability
claims are high and the amount of coverage offered by insurance
companies is limited. Uninsured product liability and similar
claims, claims in excess of the limits under our insurance
policies and the costs of obtaining insurance to cover such
claims could have a material adverse effect on our revenues,
earnings and cash flows.
Increased
insurance risk could negatively affect our business, results of
operations and cash flows.
Insurance and surety companies have reassessed many aspects of
their business and, as a result, may take actions that could
negatively affect our business. These actions could include
increasing insurance premiums, requiring higher self-insured
retentions and deductibles, requiring additional collateral on
surety bonds, reducing limits, restricting coverages, imposing
exclusions, and refusing to underwrite certain risks and classes
of business. Any of these actions may adversely affect our
ability to obtain appropriate insurance coverage at reasonable
costs, which could have a material adverse effect on our
business. Additionally, coverage for certain types of claims,
such as claims relating to mold, is generally unavailable.
Further, we rely on surety bonds, typically provided by
insurance companies, as a means of limiting the amount of
capital utilized in connection with the public improvement
sureties that we are required to post with governmental
authorities in connection with land development and construction
activities. The cost of obtaining these surety bonds is, from
time to time, unpredictable and on occasion these surety bonds
are unavailable. These factors can delay commencement of
development projects and adversely affect revenue, earnings and
cash flows.
24
We are
subject to warranty claims arising in the ordinary course of
business that could be costly.
We provide service warranties on our homes for a period of one
year or more post closing and a structural warranty for five
years post closing. We self-insure all of our warranties and
reserve an amount we believe will be sufficient to satisfy any
warranty claims on homes we sell. We also attempt to pass much
of the risk associated with potential defects in materials and
workmanship on to the subcontractors performing the work and the
suppliers and manufacturers of the materials. In such cases, we
still may incur unanticipated costs if a subcontractor, supplier
or manufacturer fails to honor its obligations regarding the
work or materials it supplies to our projects. If the amount of
actual claims materially exceeds our aggregate warranty reserves
and/or the amounts we can recover from our subcontractors and
suppliers, our operating results and cash flows would be
adversely affected.
Our
business, revenues, earnings and cash flows may be adversely
affected by adverse weather conditions or natural
disasters.
Adverse weather conditions, such as extended periods of rain,
snow or cold temperatures, and natural disasters, such as
hurricanes, tornadoes, floods and fires, can delay completion
and sale of homes, damage partially complete or other unsold
homes in our inventory and/or decrease the demand for homes or
increase the cost of building homes. To the extent that natural
disasters or adverse weather events occur, our business and
results may be adversely affected. To the extent our insurance
is not adequate to cover business interruption losses or repair
costs resulting from these events, our revenues, earnings and
cash flows may be adversely affected.
We are
subject to certain environmental laws and the cost of compliance
could adversely affect our business, results of operations and
cash flows.
As a current or previous owner or operator of real property, we
may be liable under federal, state, and local environmental
laws, ordinances and regulations for the costs of removal or
remediation of hazardous or toxic substances on, under or in the
properties or in the proximity of the properties we develop.
These laws often impose liability whether or not we knew of, or
were responsible for, the presence of such hazardous or toxic
substances. The cost of investigating, remediating or removing
such hazardous or toxic substances may be substantial. The
presence of any such substance, or the failure promptly to
remediate any such substance, may adversely affect our ability
to sell the property, to use the property for our intended
purpose, or to borrow funds using the property as collateral. In
addition, the construction process involves the use of hazardous
and toxic materials. We could be held liable under environmental
laws for the costs of removal or remediation of such materials.
In addition, our existing credit facilities also restrict our
access to the loan proceeds if the properties that are used to
collateralize the loans are contaminated by hazardous substances
and require us to indemnify the bank against losses resulting
from such occurrence for significant periods of time, even after
the loan is fully repaid.
Our Eclipse project is part of a larger development located at
Potomac Yard in northern Virginia. Potomac Yard was formerly
part of a railroad switching yard contaminated by rail-related
activities. Remediation of the property was conducted under
supervision of the U.S. Environmental Protection Agency, or EPA,
in coordination with state and local authorities. In 1998,
federal, state and local government agencies authorized
redevelopment of the property. Our plans for development of our
portion of the project are consistent with those authorizations.
Although concentrations of contaminants remain on the property
under the EPA-approved remediation work plan, the EPA has
determined that they do not present an unacceptable risk to
human health or the environment. However, it is possible that we
could incur some costs to defend against any claims that might
be brought in the future relating to any such contaminants.
If we
are not able to develop our communities successfully, our
earnings and cash flows could be diminished.
Before a community generates any revenues, material expenditures
are required to acquire land, to obtain development approvals
and to construct significant portions of project infrastructure,
amenities, model homes and sales facilities. It can take a year
or more for a community development to achieve cumulative
positive cash flow. Our inability to develop and market our
communities successfully and to generate positive cash flows
from these
25
operations in a timely manner would have a material adverse
effect on our ability to service our debt and to meet our
working capital requirements.
Our
operating results may vary.
We expect to experience variability in our revenues and net
income. Factors expected to contribute to this variability
include, among other things:
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the uncertain timing of real estate closings;
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our ability to continue to acquire additional land or options
thereon on acceptable terms and the timing of all necessary
regulatory approvals required for development;
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the condition of the real estate market and the general economy
in the markets in which we operate;
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the cyclical nature of the home building industry;
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the changing regulatory environment concerning real estate
development and home building;
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changes in prevailing interests rates and the availability of
mortgage financing; and
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costs of material and labor and delays in construction schedules.
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The volume of sales contracts and closings typically varies from
month to month and from quarter to quarter depending on several
factors, including the stages of development of our projects,
weather and other factors beyond our control. In the early
stages of a projects development, we incur significant
start-up
costs associated with, among other things, project design, land
acquisition and development, construction and marketing
expenses. Since revenues from sales of properties are generally
recognized only upon the transfer of title at the closing of a
sale, no revenue is recognized during the early stages of a
project unless land parcels or residential homesites are sold to
other developers. Periodic sales of properties may be
insufficient to fund operating expenses. Further, if sales and
other revenues are not adequate to cover operating expenses, we
will be required to seek sources of additional operating funds.
Accordingly, our financial results will vary from community to
community and from time to time.
Acts
of war or terrorism may seriously harm our
business.
Acts of war, any outbreak or escalation of hostilities between
the United States and any foreign power or acts of terrorism,
may cause disruption to the U.S. economy, or the local economies
of the markets in which we operate, cause shortages of building
materials, increase costs associated with obtaining building
materials, result in building code changes that could increase
costs of construction, affect job growth and consumer
confidence, or cause economic changes that we cannot anticipate,
all of which could reduce demand for our homes and adversely
impact our revenues, earnings and cash flows.
We do
not own the Comstock brand or trademark, but use the brand and
trademark pursuant to the terms of a perpetual license granted
by Christopher Clemente, our Chief Executive Officer and
Chairman of the Board.
Our Chief Executive Officer and Chairman of the Board,
Christopher Clemente, has licensed the Comstock
brand and trademark to us in perpetuity and free of charge. We
do not own the brand or the trademark and may be unable to
protect it against infringement from third parties. However,
Mr. Clemente retains the right to continue using the
Comstock brand and trademark individually and
through affiliates, including in real estate development
projects in our current or future markets. We will be unable to
control the quality of projects undertaken by Mr. Clemente
or others using the Comstock brand and trademark and
therefore will be unable to prevent any damage to its goodwill
that may occur. We will further be unable to preclude
Mr. Clemente from licensing or transferring the ownership
of the Comstock trademark to third parties, some of
whom may compete against us. Consequently, we are at risk that
our brand could be damaged which could have a material adverse
effect on our business, operations and cash flows.
26
Risks
Related to our Common Stock and the Securities Markets
Volatility
of our stock price could adversely affect
stockholders.
The market price of our Class A common stock could
fluctuate significantly as a result of:
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quarterly variations in our operating results;
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general conditions in the home building industry;
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interest rate changes;
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changes in the markets expectations about our operating
results;
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our operating results failing to meet the expectation of
securities analysts or investors in a particular period;
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changes in financial estimates and recommendations by securities
analysts concerning our Company or the home building industry in
general;
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operating and stock price performance of other companies that
investors deem comparable to us;
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news reports relating to trends in our markets;
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changes in laws and regulations affecting our business;
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material announcements by us or our competitors;
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material announcements by our construction lenders or the
manufacturers and suppliers we use;
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sales of substantial amounts of Class A common stock by our
directors, executive officers or significant stockholders or the
perception that such sales could occur; and
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general economic and political conditions such as recessions and
acts of war or terrorism.
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Investors may not be able to resell their shares of our
Class A common stock following periods of volatility
because of the markets adverse reaction to that
volatility. Our Class A common stock may not trade at the
same levels as the stock of other homebuilders, and the market
in general may not sustain its current prices.
Investors
in our Class A common stock may experience dilution with
the future exercise of stock options and warrants, the grant of
restricted stock and issuance of stock in connection with our
acquisitions of other homebuilders.
From time to time, we have issued and we will continue to issue
stock options or restricted stock grants to employees and
non-employee directors pursuant to our equity incentive plan. We
expect that these options or restricted stock grants will
generally vest commencing one year from the date of grant and
continue vesting over a three-year period. Investors may
experience dilution as the options vest and are exercised by
their holders and the restrictions lapse on the restricted stock
grants. In addition, we may issue stock in connection with
acquisitions of other homebuilders, which may result in
investors experiencing dilution.
Substantial
sales of our Class A common stock, or the perception that
such sales might occur, could depress the market price of our
Class A common stock.
A substantial amount of the shares of our Class A common
stock are eligible for immediate resale in the public market.
Any sales of substantial amounts of our Class A common
stock in the public market, or the perception that such sales
might occur, could depress the market price of our Class A
common stock.
The
holders of our Class B common stock exert control over us
and thus limit the ability of other stockholders to influence
corporate matters.
Messrs. Clemente and Benson own 100% of our outstanding
Class B common stock, which, together with their shares of
Class A common stock, represent approximately 79.4% of the
combined voting power of all classes of our voting stock. As a
result, Messrs. Clemente and Benson, acting together, have
control over us, the election of our
27
board of directors and our management and policies.
Messrs. Clemente and Benson, acting together, also have
control over all matters requiring stockholder approval,
including the amendment of certain provisions of our certificate
of incorporation and bylaws, the approval of any equity-based
employee compensation plans and the approval of fundamental
corporate transactions, including mergers. In light of this
control, other companies could be discouraged from initiating a
potential merger, takeover or any other transaction resulting in
a change of control. Such a transaction potentially could be
beneficial to our business or to our stockholders. This may in
turn reduce the price that investors are willing to pay in the
future for shares of our Class A common stock.
The
limited voting rights of our Class A common stock could
impact its attractiveness to investors and its liquidity and, as
a result, its market value.
The holders of our Class A and Class B common stock
generally have identical rights, except that holders of our
Class A common stock are entitled to one vote per share and
holders of our Class B common stock are entitled to 15
votes per share on all matters to be voted on by stockholders.
The difference in the voting rights of the Class A and
Class B common stock could diminish the value of the
Class A common stock to the extent that investors or any
potential future purchasers of our Class A common stock
ascribe value to the superior voting rights of the Class B
common stock.
It may
be difficult for a third party to acquire us, which could
inhibit stockholders from realizing a premium on their stock
price.
We are subject to the Delaware anti-takeover laws regulating
corporate takeovers. These anti-takeover laws prevent Delaware
corporations from engaging in business combinations with any
stockholder, including all affiliates and employees of the
stockholder, who owns 15% or more of the corporations
outstanding voting stock, for three years following the date
that the stockholder acquired 15% or more of the
corporations voting stock unless specified conditions are
met.
Our amended and restated certificate of incorporation and bylaws
contain provisions that have the effect of delaying, deferring
or preventing a change in control of us that stockholders may
consider favorable or beneficial. These provisions could
discourage proxy contests and make it more difficult for
stockholders to elect directors and take other corporate
actions. These provisions could also limit the price that
investors might be willing to pay in the future for shares of
our common stock. These provisions include:
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a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
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a prohibition of stockholder action by written consent; and
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advance notice requirements for the submission by stockholders
of nominations for election to the board of directors and for
proposing matters that can be acted upon by stockholders at a
meeting.
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Our
issuance of shares of preferred stock could delay or prevent a
change of control of us.
Our Board of Directors has the authority to cause us to issue,
without any further vote or action by the stockholders, up to
20,000,000 shares of preferred stock, par value $.01 per
share, in one or more series, to designate the number of shares
constituting any series, and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights,
voting rights, rights and terms of redemption, redemption price
or prices and liquidation preferences of such series. The
issuance of shares of preferred stock may have the effect of
delaying, deferring or preventing a change in control of us
without further action by the stockholders, even where
stockholders are offered a premium for their shares. The
issuance of shares of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of
Class A common stock, including the loss of voting control.
We have no present plans to issue any shares of preferred stock.
Item 1B.
Unresolved Staff Comments
None.
28
Item 2.
Properties
Our principal administrative, sales and marketing facilities are
located at our headquarters in Reston, Virginia. We currently
lease 29,033 square feet of office space in the Reston facility
from Comstock Asset Management, L.C., an affiliate wholly-owned
by Christopher Clemente. Pursuant to this five-year headquarters
lease which we entered into on October 1, 2004 and modified
on August 1, 2005 for an additional 8,424 square feet, we
pay annual rental rates of $709,567, subject to a 4% annual
increase. We also lease office space in Raleigh, North Carolina
where we occupy approximately 3,300 square feet of office space.
On October 1, 2005 we entered into a five-year lease
agreement for a new sales office in Reston, Virginia, which we
occupy approximately 4,351 square feet of office space. We
believe these facilities are suitable and provide the
appropriate level of capacity for our current operations.
Item 3.
Legal Proceedings
As manager of an affiliated entity, we exercised our option
rights to purchase the project acquisition, development and
construction loans made for the benefit of the North Shore
project located in Raleigh, North Carolina. We subsequently
issued a notice of default under the acquisition and development
loan at maturity on September 30, 2005 and thereafter filed
suit for collection of the loans against one of the individual
guarantors under the loan on or about October 21, 2005 for
a claim amount of $1.8 million as of the date of the
filing. We finalized the purchase of the loans on or about
September 8, 2005, issued a notice of default under the
acquisition and development loan at maturity on
September 30, 2005 and subsequently filed suit for
collection of the loans against one of the individual guarantors
under the loan on or about October 21, 2005 and initiated
foreclosure proceedings on or about November 18, 2005. On
or about December 22, 2005, the individual guarantor
subject to the earlier suit filed a countersuit against two of
our officers who were also individual guarantors under loans. We
set and held a foreclosure sale on March 24, 2006 in which
we were the high bidder. However, transfer of title to the
property has been delayed pending judicial resolution of a suit
filed on March 24, 2006 by the non-affiliated 50% owner of
North Shore. On June 30, 2006, we, on our own behalf and on
behalf of affiliates, filed an additional lawsuit expanding the
number of party defendants, demanding equitable relief and
demanding $33.0 million in damages. We have had settlement
discussions with respect to resolving all of the lawsuits
existing with respect to the North share project but no
definitive settlement transaction resulting on dismissal of the
lawsuits has been consumated.
On August 11, 2005, we were served with a motion to compel
arbitration resulting from an allegation of a loan brokerage fee
being owed for placement of a $147.0 million project loan
for the Eclipse at Potomac Yard project and a $67 million
project loan at Penderbrook. The claim was arbitrated in
November 2006 and in February 2007 we received a ruling of the
panel of arbitrators ordering payment of $3.0 million to
the claimant. We are assessing our rights of appeal with respect
to this decision.
Other than the foregoing, we are not currently subject to any
material legal proceedings. From time to time, however, we are
named as a defendant in legal actions arising from our normal
business activities. Although we cannot accurately predict the
amount of our liability, if any, that could arise with respect
to legal actions currently pending against us, we do not expect
that any such liability will have a material adverse effect on
our financial position, operating results or cash flows after
taking into account insurance coverage, rights to
indemnification, or where appropriate, established reserves in
connection with these legal proceedings.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
29
PART II
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Item 5.
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Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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Market
for Common Stock
Our Class A common stock has been traded on the Nasdaq
Global Market under the symbol CHCI since our
initial public offering on December 14, 2004. The following
table sets forth the high and low sale prices of our
Class A common stock, as reported on Nasdaq, for the
periods indicated:
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High
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Low
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Fiscal Year Ended
2004
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Fourth quarter
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$
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22.10
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$
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16.00
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Fiscal Year Ended
2005
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First quarter
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$
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31.00
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$
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18.39
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Second quarter
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$
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27.03
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$
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18.80
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Third quarter
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$
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29.42
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$
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17.76
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Fourth quarter
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$
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19.97
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$
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13.34
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Fiscal Year Ended
2006
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First quarter
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$
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14.69
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$
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8.77
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Second quarter
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$
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11.60
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$
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5.45
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Third quarter
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$
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7.20
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$
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3.65
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Fourth quarter
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$
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6.24
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$
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3.94
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On February 28, 2007, there were approximately 26 record
holders and approximately 5,074 beneficial owners of our
Class A common stock. On February 28, 2007 there were
two holders of our Class B common stock.
Dividends
We have never paid any cash dividends on our common stock. From
time to time, our board of directors evaluates the desirability
of paying cash dividends. The further payment and amount of cash
dividends will depend upon our financial condition and results
of operations, applicable loan covenants and other factors
deemed relevant by our board of directors.
Issuer
Purchases of Equity Securities
Our board of directors has previously authorized the repurchase
of up to 1 million shares of our Class A common stock
in one or more open market or privately negotiated transactions.
During the three months ended December 31, 2006, we did not
repurchase any of our outstanding Class A common stock.
Stock
Performance Graph
The following line graph compares cumulative total stockholder
returns for the period from December 14, 2004, the date of
our initial public offering, through December 31, 2006 for
(1) our Class A common stock; (2) the Nasdaq
Stock Market (U.S.) Index; and (3) the Standard &
Poors Homebuilding Index. The graph assumes an investment
of $100 on December 14, 2004, which was the first day on
which our stock was listed on the Nasdaq Global Market. The
calculations of cumulative stockholder return on the Nasdaq
Stock Market (U.S.) Index and Standard & Poors
Homebuilding Index include reinvestment of dividends, but the
calculation of cumulative stockholder return on our Class A
common stock does not include reinvestment of dividends because
we did not pay dividends during the measurement period. The
performance shown is not necessarily indicative of future
performance.
30
COMPARISON
OF CUMULATIVE TOTAL RETURN
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Base
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Indexed Returns Years Ending
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Period
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Company/Index
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12/14/04
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12/31/04
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12/31/05
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12/31/06
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COMSTOCK HOMEBUILDING
COS
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100
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137.31
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88.19
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35.94
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NASDAQ U.S. INDEX
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100
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100.73
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102.87
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113.02
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S&P 500 HOMEBUILDING
INDEX
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100
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104.68
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132.52
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106.01
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Item 6.
Selected Financial Data
The following table contains selected consolidated and combined
financial information and is supplemented by the more detailed
financial statements and notes thereto included elsewhere in
this report. We derived the selected historical financial data
shown below for 2006, 2005, 2004, 2003 and 2002 from our audited
financial statements. You should read the following financial
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Business and our combined
consolidated financial statements and the related notes,
included elsewhere in this report.
31
FIVE YEAR
COMPARISON OF SELECTED FINANCIAL DATA
Dollars
in thousands (except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Revenues
|
|
$
|
245,881
|
|
|
$
|
224,305
|
|
|
$
|
96,045
|
|
|
$
|
55,521
|
|
|
$
|
34,752
|
|
Expenses Cost of sales
|
|
|
216,657
|
|
|
|
156,490
|
|
|
|
63,993
|
|
|
|
41,756
|
|
|
|
26,820
|
|
Impairments and write-offs (1)
|
|
|
57,426
|
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
37,500
|
|
|
|
24,190
|
|
|
|
11,940
|
|
|
|
5,712
|
|
|
|
3,725
|
|
Operating (loss) income
|
|
|
(65,702
|
)
|
|
|
42,409
|
|
|
|
20,112
|
|
|
|
8,053
|
|
|
|
4,207
|
|
Other (income) expense, net
|
|
|
(1,487
|
)
|
|
|
(1,450
|
)
|
|
|
908
|
|
|
|
(44
|
)
|
|
|
10
|
|
(Loss) Income before minority
interest and equity in earnings of real estate partnerships
|
|
|
(64,215
|
)
|
|
|
43,859
|
|
|
|
19,204
|
|
|
|
8,097
|
|
|
|
4,197
|
|
Minority interest
|
|
|
15
|
|
|
|
30
|
|
|
|
5,260
|
|
|
|
2,297
|
|
|
|
664
|
|
(Loss) Income before equity in
(loss) earnings of real estate partnerships
|
|
|
(64,230
|
)
|
|
|
43,829
|
|
|
|
13,944
|
|
|
|
5,800
|
|
|
|
3,533
|
|
Equity in (loss) earnings of real
estate partnerships
|
|
|
(135
|
)
|
|
|
99
|
|
|
|
118
|
|
|
|
139
|
|
|
|
51
|
|
Total pre-tax (loss) income
|
|
|
(64,365
|
)
|
|
|
43,928
|
|
|
|
14,062
|
|
|
|
5,939
|
|
|
|
3,584
|
|
Income tax (benefit) provision
|
|
|
(24,520
|
)
|
|
|
16,366
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(39,845
|
)
|
|
$
|
27,562
|
|
|
$
|
14,303
|
|
|
$
|
5,939
|
|
|
$
|
3,584
|
|
Basic (loss) earnings per share
|
|
$
|
(2.63
|
)
|
|
$
|
2.14
|
|
|
$
|
1.95
|
|
|
$
|
0.84
|
|
|
$
|
0.59
|
|
Basic weighted average shares
outstanding (2)
|
|
|
15,148
|
|
|
|
12,870
|
|
|
|
7,347
|
|
|
|
7,067
|
|
|
|
6,074
|
|
Dilutive (loss) earnings per share
|
|
$
|
(2.63
|
)
|
|
$
|
2.12
|
|
|
$
|
1.95
|
|
|
$
|
0.84
|
|
|
$
|
0.59
|
|
Dilutive weighted average shares
outstanding (2)
|
|
|
15,148
|
|
|
|
13,022
|
|
|
|
7,351
|
|
|
|
7,067
|
|
|
|
6,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,263
|
|
|
$
|
42,167
|
|
|
$
|
67,559
|
|
|
$
|
17,160
|
|
|
$
|
8,695
|
|
Real estate held for development
and sale (1)(3)
|
|
|
405,144
|
|
|
|
263,802
|
|
|
|
104,326
|
|
|
|
65,272
|
|
|
|
20,192
|
|
Total assets
|
|
|
517,429
|
|
|
|
431,319
|
|
|
|
304,507
|
|
|
|
90,184
|
|
|
|
33,971
|
|
Notes payable
|
|
|
265,403
|
|
|
|
143,657
|
|
|
|
76,628
|
|
|
|
61,062
|
|
|
|
17,203
|
|
Subordinated debt
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
393,173
|
|
|
|
285,843
|
|
|
|
239,586
|
|
|
|
71,746
|
|
|
|
21,574
|
|
Minority interest
|
|
|
371
|
|
|
|
400
|
|
|
|
2,695
|
|
|
|
11,413
|
|
|
|
8,790
|
|
|
|
(1)
|
During the year ended December 31, 2006 the Company
recorded impairment charges and write-offs of option deposits
and related feasibility costs. The inclusion of these charges
makes year to year comparisons difficult and should be
considered when evaluating results of operations in relation to
earlier years.
|
|
(2)
|
Shares outstanding of our predecessor for prior years have been
adjusted to account for shares issued to the owners of our
predecessor in connection with the initial public offering of
our common stock.
|
|
(3)
|
During 2006 the Company acquired Parker Chandler Homes, Inc. in
Atlanta, GA and Capitol Homes, Inc. in Raleigh, NC.
|
32
Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with
Selected Financial and Other Data and our
consolidated and combined financial statements and related notes
appearing elsewhere in this report. Other than in the
Overview below, this discussion and analysis does
not incorporate the financial condition and results of
operations of Comstock Service, Inc., under which entity we
previously conducted our Raleigh, North Carolina operations
before the merger of Comstock Service, Inc. into Comstock
Homebuilding Companies, Inc. The merger of Comstock Service,
Inc. was treated as an acquisition for accounting purposes. This
discussion and analysis contains forward-looking statements that
involve risks and uncertainties. Please see Cautionary
Notes Regarding Forward-looking Statements for more
information. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of various factors including, but not limited to, those
discussed below and elsewhere in this report, particularly under
the headings Risk Factors and Cautionary
Notes Regarding Forward-looking Statements.
Overview
We engage in the business of residential land development,
production home building and high-rise condominium development
in the greater Washington, D.C., Raleigh, North Carolina, and
Atlanta, Georgia markets. Our business was started in 1985 by
Christopher Clemente, our Chief Executive Officer, as a
residential land developer and home builder 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 on moderately priced homes in
areas where we could more readily purchase finished building
lots through option contracts. In 1997, we entered the Raleigh,
North Carolina market. In 2006, we entered the Charlotte, North
Carolina, Myrtle Beach, South Carolina and Atlanta, Georgia
markets through the acquisition of Parker Chandler Homes, Inc.
In late 2006 we exited the Myrtle Beach, SC market and in early
2007 we plan to exit the Charlotte, NC market.
In the late 1990s, in response to increasing competition for
finished lots, we diversified our product base to include
multiple product types and home designs and we rebuilt our
in-house land development department to include significant
experience in both land development operations and land
entitlement expertise. Our strategic goal was to secure and
control a pipeline of diversified land inventory at various
stages of entitlement, thus reducing our dependence on other
land developers for finished building lots and improving our
ability to control our growth.
In 2005 we became involved in the business of converting
existing rental apartment properties to for-sale condominium
projects. This process involves the purchase of existing
structures which are occupied by tenants with leases of varying
duration. When we purchase these properties we subdivide the
units and form a condominium association. In these projects we
have and continue to invest capital in the improvement of the
common areas and exteriors. In the past, our strategy was that
as the tenants leases expired we renovated the interiors
of the apartments and then sold each apartment as an individual
condominium unit. In recent months our business model has
changed due to market conditions. In response to slowed
absorption at these projects we have elected to continue to
lease unsold inventory to renters. We have not abandoned our
intent to sell the units as condominiums over time but we have
chosen to manage the properties as rental assets to offset the
debt service associated with holding the assets for sale. In
certain cases we have sold condo conversion units in bulk to
rental project investors and operators. We do not expect to
continue to acquire additional condominium conversion and
similar projects.
In recent years, our financial results have been influenced
significantly by the availability of building lots, the timing
of entitlement processes, the mix of products available for sale
and the timing of settlements. The amount of time that it takes
to bring a new development to market varies greatly depending
on, among other things, the location and jurisdiction,
governmental zoning and permitting processes, site development
conditions, weather conditions, and the type of product to be
constructed on the subject site. There can be a six to
36-month lag
time between the time we contract to purchase a site and the
time we begin developing and/or delivering homes on the site.
For example, a site that requires entitlement processing takes
longer than a site where we purchase finished building lots.
Additionally, condominium homes take longer to construct than
townhouses and single-family homes and high-rise developments
take longer to construct than low-rise developments. As a result
of this lag, it has been our experience that an increasing lot
inventory in one period does not necessarily correlate to
increasing sales in the
33
immediately following periods. Thus, there are both market risks
and benefits associated with the lag time between controlling a
property and realizing revenue from the property.
We can experience significant variation from one period to the
next with respect to average price per new order and average
settlement revenue. This variation often results from shifts in
the mix of products being sold during the period. While it is
most typical that single-family homes are priced higher than
townhouses or condominiums, it is possible that during a given
period, orders and deliveries may include townhouses, based on
location, that price higher than single-family homes. Likewise,
in any project in any period, condominium units may produce
higher average per unit sales prices and/or settlement revenues.
Lower average per unit orders or settlements does not
necessarily indicate that margins have been eroded or that
profits have been reduced. Average settlement revenue can be
both higher and lower than average price per new order in the
prior period based on the mix of available product for sale.
Our general business strategy is to focus on for sale
residential real estate development opportunities in the
southeastern United States that afford us the ability to produce
products at price points where we believe there is significant
and consistent long-term demand for new housing. We believe the
housing industry is cyclical in nature. We recognize that
current market conditions are extremely challenging.
Accordingly, we have adapted our business plan and strategy with
the goal of protecting liquidity, enhancing our balance sheet
and positioning the Company for future growth when market
conditions improve. In order to protect our liquidity we have
adopted a conservative approach to land acquisition and
investment and have taken a patient approach with respect to
market expansion. We believe that by doing so we are enhancing
our ability to take advantage of attractive real estate
investment opportunities in our core markets as market
conditions improve. At December 31, 2006, we either owned
or controlled under option agreements over 5,700 building lots.
For the 12 month periods ended December 31, the
approximate average order prices for our market rate homes
(which exclude county government mandated affordable housing
program units required to be sold at a discount) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2006
|
|
|
|
Washington Metro
|
|
|
North
|
|
|
|
|
|
|
|
|
|
Area
|
|
|
Carolina
|
|
|
Georgia
|
|
|
Total
|
|
|
New orders
|
|
|
503
|
|
|
|
169
|
|
|
|
122
|
|
|
|
794
|
|
New order revenues
|
|
$
|
119,877
|
|
|
$
|
42,257
|
|
|
$
|
32,605
|
|
|
$
|
194,739
|
|
Average new order price
|
|
$
|
238
|
|
|
$
|
250
|
|
|
$
|
267
|
|
|
$
|
245
|
|
Settlements
|
|
|
675
|
|
|
|
132
|
|
|
|
107
|
|
|
|
914
|
|
Settlement revenue
|
|
$
|
180,182
|
|
|
$
|
32,255
|
|
|
$
|
27,657
|
|
|
$
|
240,094
|
|
Average settlement price
|
|
$
|
267
|
|
|
$
|
244
|
|
|
$
|
258
|
|
|
$
|
263
|
|
Backlog units
|
|
|
285
|
|
|
|
45
|
|
|
|
15
|
|
|
|
345
|
|
Backlog
|
|
$
|
123,081
|
|
|
$
|
13,245
|
|
|
$
|
4,948
|
|
|
$
|
141,274
|
|
Average backlog price
|
|
$
|
432
|
|
|
$
|
294
|
|
|
$
|
330
|
|
|
$
|
409
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Washington Metro
|
|
|
North
|
|
|
|
|
|
|
|
|
|
Area
|
|
|
Carolina
|
|
|
Georgia
|
|
|
Total
|
|
|
New orders
|
|
|
598
|
|
|
|
33
|
|
|
|
|
|
|
|
631
|
|
New order revenues
|
|
$
|
218,684
|
|
|
$
|
11,575
|
|
|
|
|
|
|
$
|
230,259
|
|
Average new order price
|
|
$
|
366
|
|
|
$
|
351
|
|
|
|
|
|
|
$
|
365
|
|
Settlements
|
|
|
570
|
|
|
|
33
|
|
|
|
|
|
|
|
603
|
|
Settlement revenue
|
|
$
|
204,933
|
|
|
$
|
11,330
|
|
|
|
|
|
|
$
|
216,263
|
|
Average settlement price
|
|
$
|
360
|
|
|
$
|
343
|
|
|
|
|
|
|
$
|
359
|
|
Backlog units
|
|
|
438
|
|
|
|
37
|
|
|
|
|
|
|
|
475
|
|
Backlog
|
|
$
|
190,378
|
|
|
$
|
3,443
|
|
|
|
|
|
|
$
|
193,821
|
|
Average backlog price
|
|
$
|
435
|
|
|
$
|
93
|
|
|
|
|
|
|
$
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Washington Metro
|
|
|
North
|
|
|
|
|
|
|
|
|
|
Area
|
|
|
Carolina
|
|
|
Georgia
|
|
|
Total
|
|
|
New orders
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
608
|
|
New order revenues
|
|
$
|
224,292
|
|
|
|
|
|
|
|
|
|
|
$
|
224,292
|
|
Average new order price
|
|
$
|
369
|
|
|
|
|
|
|
|
|
|
|
$
|
369
|
|
Settlements
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
263
|
|
Settlement revenue
|
|
$
|
87,008
|
|
|
|
|
|
|
|
|
|
|
$
|
87,008
|
|
Average settlement price
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
$
|
331
|
|
Backlog units
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
Backlog
|
|
$
|
174,600
|
|
|
|
|
|
|
|
|
|
|
$
|
174,600
|
|
Average backlog price
|
|
$
|
531
|
|
|
|
|
|
|
|
|
|
|
$
|
531
|
|
Recent
accounting pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company is currently reviewing the effect of
SFAS 157 on its consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109, Accounting for
Income Taxes (FIN 48), to create a single
model to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on
de-recognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company will adopt FIN 48
as of January 1, 2007, as required. The cumulative effect
of adopting FIN 48 will be recorded as an adjustment to the
opening balance of retained earnings and is not expected to have
a significant impact on the Companys consolidated
financial position. The adoption of FIN 48 may cause
greater volatility in the effective tax rate going forward. The
Company expects to record a benefit of approximately $1,194 as a
benefit to opening retained earnings as a result of the adoption
of FIN 48.
Critical
Accounting Policies and Estimates
Our consolidated and combined financial statements are prepared
in accordance with generally accepted accounting principles,
which require us to make certain estimates and judgments that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the
35
reported amounts of revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our estimates,
including those related to the consolidation of variable
interest entities, revenue recognition, impairment of real
estate held for development and sale, warranty reserve and our
environmental liability exposure. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results
may differ materially from these estimates.
A summary of significant accounting policies is provided in
Note 2 to our audited consolidated and combined
financial statements. The following section is a summary of
certain aspects of those accounting policies that require our
most difficult, subjective or complex judgments and estimates.
Consolidation
of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, or
FIN 46. FIN 46 requires the primary beneficiary of a
variable interest entity to consolidate that entity. A variable
interest entity is created when (i) the equity investment
at risk is not sufficient to permit the entity from financing
its activities without additional subordinated financial support
from other parties or (ii) equity holders either
(a) lack direct or indirect ability to make decisions about
the entity, (b) are not obligated to absorb expected losses
of the entity or (c) do not have the right to receive
expected residual returns of the entity if they occur. The
primary beneficiary of a variable interest entity is the party
that absorbs a majority of the variable interest entitys
expected losses, receives a majority of the entitys
expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Expected
losses are the expected negative variability of an entitys
net assets exclusive of its variable interests, and expected
residual returns are the expected positive variability in the
fair value of an entitys assets, exclusive of variable
interests. Prior to the issuance of FIN 46, an enterprise
generally consolidated an entity when the enterprise had a
controlling financial interest in the entity through ownership
of a majority voting interest.
In December 2003, the FASB issued a revision of FIN 46
(FIN 46-R),
clarifying certain provisions of FIN 46. We adopted the
provisions of
FIN 46-R
on February 1, 2003 to the extent that they related to
variable interest entities created on or after that date. For
variable interest entities created before January 31, 2003,
FIN 46-R
was deferred to the end of the first interim or annual period
ending after March 15, 2004. We fully adopted
FIN 46-R
effective March 31, 2004. Based on the provisions of
FIN 46-R,
we have concluded that whenever we option land or lots from an
entity and pay a significant nonrefundable deposit, a variable
interest entity is created under condition (ii) (b) of the
previous paragraph. This is because we have been deemed to have
provided subordinated financial support, which refers to
variable interests that will absorb some or all of an
entitys expected theoretical losses if they occur.
Therefore, for each variable interest entity created, we compute
the expected losses and residual returns based on the
probability of future cash flows as outlined in FIN 46 to
determine if we are deemed to be the primary beneficiary of the
variable interest entity.
The methodology used to evaluate our primary beneficiary status
requires substantial management judgment and estimation. These
judgments and estimates involve assigning probabilities to
various estimated cash flow possibilities relative to the
selling entitys expected profits and losses and the cash
flows associated with changes in the fair value of the land
under contract. Because we do not have any ownership interests
in the entities with which we contract to buy land (such as
LLCs), we may not have the ability to compel these entities to
provide financial or other data to assist us in the performance
of the primary beneficiary evaluation. This lack of direct
information from the contracting entities may result in our
evaluation being conducted solely based on the aforementioned
management judgments and estimates. Further, where we deem
ourselves to be the primary beneficiary of such an entity
created after December 31, 2003 and that entity refuses to
provide financial statements, we utilize estimation techniques
to perform the consolidation. While management believes that our
estimation techniques provide a reasonable basis for determining
the financial condition of an entity that refuses to provide
financial statements, the actual financial condition of the
entity could differ from that reported. In addition, although
management believes that our accounting policy is designed to
properly assess our primary beneficiary status relative to our
involvement with the entities from which we acquire land,
changes to the probabilities and the cash flow possibilities
used in our evaluation could produce different conclusions
regarding our primary beneficiary status.
36
Revenue
Recognition
We primarily derive our earned revenues from the sale of
residential property. We recognize residential revenue and all
related costs and expenses when full payment has been received,
title and possession of the property has been conveyed and risks
and rewards of ownership transfer to the buyer and other sale
and profit recognition criteria are satisfied. Management
estimates of future costs to be incurred after the completion of
each sale are included in cost of sales. A change in
circumstances that causes these estimates of future costs to
increase or revenues to decrease would significantly affect the
profit recognized on these sales.
Impairment
of Real Estate Held for Development and Sale
Real estate held for development and sale includes land, land
development costs, interest and other construction costs and is
stated at cost or, when circumstances or events indicate that
the real estate held for development or sale is impaired, at
estimated fair value. Circumstances or events we consider
important which could trigger an impairment review include the
following:
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significant negative industry or economic trends;
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a significant underperformance relative to historical or
projected future operating results;
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a significant change in the manner in which an asset is used; and
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an accumulation of costs significantly in excess of the amount
originally expected to construct an asset.
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Real estate is stated at the lower of cost or estimated fair
value using the methodology described as follows. A write-down
to estimated fair value is recorded when we determine that the
net book value exceeds the estimated selling prices less cost to
sell. These evaluations are made on a
property-by-property
basis. When we determine that the net book value of an asset may
not be recoverable based upon the estimated undiscounted cash
flow, an impairment write-down is recorded. The evaluation of
future cash flows and fair value of individual properties
requires significant judgment and assumptions, including
estimates regarding expected sales prices, development
absorption and remaining development costs. Significant adverse
changes in circumstances affecting these judgments and
assumptions in future periods could cause a significant
impairment adjustment to be recorded. As discussed in
Note 5 in the accompanying financial statements, we
recorded impairment charges of $9.5 million in second quarter
2006, $1.8 million in third quarter 2006 and $39.9 million
during the fourth quarter of 2006.
Warranty
Reserve
Warranty reserves for houses sold are established to cover
potential costs for materials and labor with regard to
warranty-type claims expected to arise during the one-year
warranty period provided by us or within the five-year
statutorily mandated structural warranty period. Since we
generally subcontract our home building work, subcontractors are
required to provide us with an indemnity and a certificate of
insurance prior to receiving payments for their work. Claims
relating to workmanship and materials are generally the primary
responsibility of the subcontractors and product manufacturers.
The warranty reserve is established at the time of closing, and
is calculated based upon historical warranty cost experience and
current business factors. Variables used in the calculation of
the reserve, as well as the adequacy of the reserve based on the
number of homes still under warranty, are reviewed on a periodic
basis. Although management considers the warranty reserve to be
adequate, there can be no assurance that this reserve will prove
to be adequate over time to cover losses due to increased costs
for material and labor, the inability or refusal of
manufacturers or subcontractors to financially participate in
corrective action, unanticipated adverse legal settlements, or
other unanticipated changes to the assumptions used to estimate
the warranty reserve.
Environmental
Liability Exposure
Development and sale of real property creates a potential for
environmental liability on our part as owner and developer, for
our own acts as well as the acts of prior owners of the subject
property or owners or past owners of adjacent parcels. If
hazardous substances are discovered on or emanating from any of
our properties, we and prior owners may be held liable for costs
and liabilities relating to those hazardous substances. We
generally undertake
37
environmental studies in connection with our property
acquisitions, when warranted. If we incur environmental
remediation costs in connection with properties we previously
sold, including clean up costs, consulting fees for
environmental studies and investigations, monitoring costs, and
legal costs relating to clean up, litigation defense and the
pursuit of responsible third parties, they are expensed. We
capitalize costs relating to land under development and
undeveloped land as part of development costs. Costs incurred
for properties to be sold are deferred and charged to cost of
sales when the properties are sold. Should a previously
undetected, substantial environmental hazard be found on our
properties, significant liquidity could be consumed by the
resulting clean up requirements and a material expense may be
recorded. Further, governmental regulation on environmental
matters affecting residential development could impose
substantial additional expense on us, which could adversely
affect our results of operations or the value of properties
owned under contract, or purchased by us. For additional
information regarding risks associated with environmental
hazards and environmental regulation, see
Business Risk Factors We are
Subject to Certain Environmental Laws and the Cost of Compliance
Could Adversely Affect our Business.
Results
of Operations
Year
ended December 31, 2006 compared to year ended
December 31, 2005
Orders,
backlog and cancellations
Net new orders for the year ended December 31, 2006
decreased $35.5 million, or 15.4%, to $194.7 million
on 794 homes as compared to $230.3 million on 631
homes for the year ended December 31, 2005. The 187 unit
increase in new orders was primarily attributable to increased
condominium and bulk condominium conversion sales at Carter Lake
and Countryside which were offset by decreases in sales at our
Eclipse project which was substantially pre-sold in 2005. The
Companys 2006 acquisitions of Parker Chandler Homes Inc.,
and Capitol Homes Inc., in the Georgia and North Carolina
markets, contributed approximately 122 and 91 new order units,
respectively.
The average sale price per new order for the year ended
December 31, 2006 decreased by $120,000 to $245,000 as
compared to $365,000 for the year ended December 31, 2005.
The decrease in average sales price per new order is
attributable to lower priced product offerings in our North
Carolina and Georgia markets, higher sales of lower priced
condominiums, discounted bulk sales of condominium conversion
units and general price decreases throughout in response to
slower demand throughout our markets as compared to 2005. Our
backlog at December 31, 2006 decreased $49.1 million,
or 27.4%, to $141.3 million on 345 homes as compared to our
backlog at December 31, 2005 of $190.4 million on 475
homes. Of the Companys December 31, 2006 backlog,
approximately $116.5 million is derived from 258 orders at
the Companys Eclipse on Center Park at Potomac Yard
project, of which $46.1 million on 134 units settled in the
fourth quarter of 2006.
Our average cancellation rate for the year ended
December 31, 2006 was approximately 17.3% on 989 gross new
orders compared to cancellation rate of 14.6% on 730 gross new
orders for the comparable period in 2005. Cancellations were
most prevalent in the greater Washington, DC market where we
experienced 122 cancellations on 665 gross new orders or 18.8%.
At the Eclipse project we experienced 35 cancellations on 46 new
orders although most of the cancellations we related to
contracts entered into in 2004. In the Raleigh market our
cancellation rate was 3.4% on six cancellations out of 175 gross
new orders and in the Atlanta market our cancellation rate was
26.2% on 43 cancellations out of 164 gross new orders. We
believe that the high rate of cancellations in our Atlanta
market was due in part to the first-time buyer orientation of
our products as well as a slowing of the resale market for our
move-up
buyers.
Revenues
The number of homes delivered in the year ended
December 31, 2006 increased by 51.6%, or 311 homes, to 914
from 603 homes in the year ended December 31, 2005. Average
revenue per home delivered decreased by approximately $96,000 or
27% to $263,000 for the year ended December 31, 2006 as
compared to $359,000 for the year ended December 31, 2005.
In December 2006, the Company delivered an additional 30 bulk
sale units at its Countryside condominium project to a related
party purchaser who is a former officer of the Company for
$4.2 million and subsequently entered into a marketing and
sales agreement with the buyer to sell the units on his
38
behalf. Because the Company will participate in the profits of
the sales, the Company is deemed to have an on-going involvement
and as such the revenue from the sale of these units was
deferred and will be recognized along with the revenue generated
from the marketing agreement as Other Revenue at the time the
units are delivered to subsequent purchasers.
Homebuilding revenues increased by $23.8 million, or 11.0%,
to $240.1 million for the year ended December 31, 2006
as compared to $216.3 million for the year ended
December 31, 2005. The total number of homes delivered and
total homebuilding revenue for the year ended December 31,
2006 includes 259 homes and $40.0 in revenue related to the bulk
sale of the Companys Carter Lake condominium conversion
project. The Company delivered this project in its entirety to a
rental operator during November 2006.
Excluding the sale of Carter Lake, the increase in the number of
units delivered is attributable to the companys Eclipse
project which delivered 134 units, and the Companys
expansion in the North Carolina and Atlanta markets as a result
of the acquisition of Capitol Homes Inc. and Parker Chandler
Homes Inc. During the year ended December 31, 2006 we delivered
705 homes in Raleigh and 107 homes in Atlanta as compared to
132 homes in Raleigh and 0 homes in Atlanta for the year
ended December 31, 2005. The decrease in revenues and
average revenue per home is attributable to lower priced product
offerings in our North Carolina and Georgia markets, higher
sales of lower priced condominiums and condominium conversion
units and general decreases in the prices of homes as compared
to 2005.
Other
Revenues
Other revenue for the year ended December 31, 2006
decreased by $2.2 million, or 27.5% to $5.8 million,
as compared to $8.0 million for the year ended
December 31, 2005. Other revenue for the year ended
December 31, 2005 and 2004 includes lot sales made to third
parties, revenue associated with the Companys Settlement
Title Services division, management fees received from
Comstock Asset Management Inc. (as discussed in Note 12),
and revenue received from a marketing services alliance. The
decrease is attributable to lower overall lot sales during 2006
as compared to 2005. The Company considers a sale to be from
homebuilding when there is a structure built on the lot when it
is sold. Sales of lots occur, and are included in Other
Revenues, when the Company sells raw or finished home sites in
advance of any substantial home construction.
Cost of
Sales and Cost of sales other
Cost of sales for the year ended December 31, 2006
increased $57.4 million, or 37.2%, to $211.4 million,
or 88.1% of homebuilding revenue, as compared to
$152.9 million, or 70.7% of revenue, for the year ended
December 31, 2005. The 17.4 percentage point increase
in cost of sales as a percentage of homebuilding revenue for the
year ended December 31, 2006 is attributable to several
factors. Due to weakening market conditions, we have extended
the sales cycle of many of our projects, which in turn has
increased direct costs per unit by increasing the amount of real
estate tax, interest and overhead capitalized to the project. In
many cases, since we relive our capitalized costs pro-rata to
the individual lots, fewer remaining lots must absorb increased
costs. In addition, we have experienced pricing concessions and
increases in material and labor costs throughout our markets.
Due to the factors stated above, the Company expects costs of
sales as a percentage of revenue to continue to face additional
upward pressure until general market conditions improve, costs
of materials moderate and new inventory is acquired. Cost of
sales other for the year ended December 31, 2006 increased
by $1.6 million, or 44.4% to $5.2 million, as compared
to $3.6 million for the year ended December 31, 2005.
Cost of sales other for the year ended December 2006 and 2005
includes expenses associated with lot sales made to third
parties and expenses associated with the management of the
Companys Settlement Title Services division. Cost of
sales other as a percentage of other revenue was 89.7% and 45.0%
for the year ended December 31, 2006 and 2005 respectively.
The 44.7 percentage point increase in cost of sales other as a
percentage of other revenue is due to the Company selling lots
at book value to exit underperforming projects as compared to
sales of lots for a gain in 2005.
Impairments
and write-offs
As discussed in Note 3 in the accompanying notes to the
financial statements, the Company, for the year ended
December 31, 2006 and 2005, recorded impairment charges of
$51.2 and $1.2 million, respectively. For the year
39
ended December 31, 2006 the Company wrote-off
$6.2 million related to deposits on forfeited option
contacts, value assigned to forfeited option contracts and
related feasibility costs. Based on managements assessment
of current market conditions and estimates for the future, the
Company believes there are no additional impairments warranted
at this time. However, if market conditions continue to
deteriorate or actual costs are higher than budgeted, the
Company would be required to re-evaluate the recoverability of
its real estate held for development and sale and may incur
additional impairment charges. Total impairments and write-offs
were taken in all of our geographic regions, with approximately
$26.8 million, $7.5 million and $23.1 million in
the Washington metro area, North and South Carolina and Georgia,
respectively. The bulk of the Companys impairments, $36.4
million, were recorded at December 31, 2006 based on the
continuing need for price concession the weakening of pricing
power and increasing inventory costs resulting from the
capitalization of interest, overheads and real estate taxes.
At December 31, 2006, the Company had approximately
$3.8 million related to non-refundable option deposits to
purchase real estate. In addition, the Company has approximately
$7.9 million related to feasibility costs incurred on
projects under option agreements or under feasibility study
periods. The Company is in the process of re-negotiating its
remaining option contracts for both price concessions and
deferral of scheduled lot purchases. The Company could incur
additional write downs in the event the Company is not
successful in renegotiating terms of existing option contracts
and choose to cancel its option and not close on the underlying
land.
Selling,
general and administrative expenses
Selling, general and administrative costs for the year ended
December 31, 2006, increased $13.3 million or 55.0% to $37.5
million, as compared to $24.2 million for the year ended
December 31, 2005. Selling, general and administrative expenses
represented 15.3% of total revenue for the year ended December
31, 2006, as compared to 10.8% for the year ended December 31,
2005.
This increase was the result of additional staffing and related
compensation costs of $5.2 million, increased media and other
marketing related costs of $2.5 million, office and model rent
of $1.2 million, feasibility and consulting fees of $2.4
million, and legal fees of $ 0.4 million, and general
administrative expenses including depreciation and amortization
of $1.6 million.
In addition, our acquisition during the year of both Parker
Chandler Homes and Capitol Homes increased our selling, general
and administrative expenses by $4.7 million and $1.2 million,
respectively.
Operating
income
Operating income for the year ended December 31, 2006
decreased $108.1 million to $(65.7) million as compared to
$42.4 million for the year ended December 31, 2005.
Operating margin for the year ended December 31, 2006 was
(26.7%) compared to 18.9% for the year ended December 31,
2005. The decrease in operating margin is primarily attributable
to $57.4 million of impairments and write-offs for the year
ended December 31, 2006 as compared to $1.2 million
for the year ended December 31, 2005. Net of impairments
and write-offs, operating loss for the year ended
December 31, 2006 was $(8.3) million which represents a
decrease of $50.7 million as compared to the year ended
December 31, 2005. The additional decrease over the
impairments and write-offs is attributable to higher costs of
sales as a percentage of revenue and increased selling, general
and administrative expenses as a percentage of total revenue.
Other
(income) expense, net
Other (income) expense, net increased by $37,000 to net other
income of $1.5 million for the year ended December 31,
2006 as compared to net other income of $1.5 million for
the year ended December 31, 2005.
Income
before minority interest
Income before minority interest decreased by
$106.1 million, or 241.8%, to $(64.2) million for the year
ended December 31, 2006 as compared to $43.9 million
for the year ended December 31, 2005. The decrease is
consistent with the decrease in Operating Income detailed above.
40
Minority
interest
Minority interest expense decreased by $15,000 to $15,000 for
the year ended December 31, 2006 as compared to $30,000 for
the year ended December 31, 2005. This decrease is the
primarily the result of a slower pace of deliveries at the
Companys Comstock North Carolina subsidiary in which there
is a small minority partner who retained its interest at the
initial public offering when all other minority interests were
purchased by Comstock Homebuilding Companies, Inc.
Income
taxes
Income tax (benefit) expense for the year ended
December 31, 2006 was $(24.5) million compared to
$16.4 million for the year ended December 31, 2005.
Our combined effective tax rate including both current and
deferred provisions for the year ended December 31, 2006
was 38.1% as compared to 37.3% for the year ended
December 31, 2005.
Year
ended December 31, 2005 compared to year ended
December 31, 2004
Orders
and Backlog
New orders for the year ended December 31, 2005 increased
$5.9 million, or 2.7%, to $230.3 million on 631 homes
as compared to $224.2 million on 608 homes for the year
ended December 31, 2004. This increase in new orders was
primarily attributable to an increase in saleable inventory
resulting from the opening of new projects including Penderbrook
(183 sales), Villas at Countryside (58 sales) and Commons on
Potomac Square (19 sales).
The average sale price per new order for the year ended
December 31, 2005 decreased by $4,000 to $365,000 as
compared to $369,000 for the year ended December 31, 2004.
The decrease was a result of significant amount of unit sales at
our Penderbrook, Villas at Countryside and Bellemeade Farms
condominium conversion projects, in which existing apartment
units are being converted to condominiums. By design, sales
prices tend to be lower in these conversion projects as compared
to our new construction projects. Our strategy with respect to
conversion projects is to identify assets where we can offer
lower priced, affordable product to first time home buyers. We
focus on older assets where we can add value while maintaining
price points which are more attractive to our target buyers.
Because we tend to be buying, renovating, and selling older
assets that are in prime locations we are able to position the
assets to be more affordable, and therefore, average new order
prices are lower. On average, the sale price of our townhouses
increased by approximately $81,900 during the year ended
December 31, 2005 to $443,600 from $361,700 at
December 31, 2004. On average, the sale price of our
single-family homes increased by approximately $89,500 during
the year ended December 31, 2005 to $598,200 from $508,700
at December 31, 2004. The average sale price of our
condominiums increased by $32,100 to $413,100 for the period
ending December 31, 2005 as compared to $381,000 for the
period ended December 31, 2004.
Our backlog at December 31, 2005 increased
$15.8 million, or 9.1%, to $190.4 million on 475 homes
as compared to our backlog at December 31, 2004 of
$174.6 million on 329 homes. Of our December 31, 2005
backlog, approximately $157.6 million is derived from 390
sold units at our Eclipse on Center Park at Potomac Yard project.
Revenues
The number of homes delivered in the year ended
December 31, 2005 increased by 129.3.0% to 603 from 263
homes in the year ended December 31, 2004. Average revenue
per home delivered increased by approximately $28,000 to
$359,000 for the year ended December 31, 2005 as compared
to $331,000 for the year ended December 31, 2004.
Homebuilding revenues increased by $129.3 million, or
148.6%, to $216.3 million for the year ended
December 31, 2005 as compared to $87.0 million for the
year ended December 31, 2004. The increase in deliveries
and revenues from December 31, 2004 to December 31,
2005 is primarily attributable to settlements from the opening
of new communities and the release of inventory for sale at
projects such as Penderbrook (180 units), Villas at Countryside
(53 units), Bellemeade Farms (21 units), Woodlands at Round Hill
(17 units) and Commons on William Square (56 units). In
addition, we generated 33 settlements in 2005, as a result of
its merger with Comstock Service in December 2004.
41
Other
Revenue
Other revenue for the year ended December 31, 2005
decreased by $1.0 million, or 11% to $8.0 million, as
compared to $9.0 million for the year ended
December 31, 2004. Other revenue for the year ended
December 31, 2005 and 2004 includes lot sales made to third
parties, revenue associated with our Settlement
Title Services division, management fees received from
Comstock Asset Management Inc. (as discussed in Note 12),
and revenue received from a marketing services alliance. For the
year ended December 31, 2004, other revenue included
revenues associated with the management of Comstock Service. The
decrease in other revenue was primarily the result of not
recording management revenues from Comstock Service, which was
merged into Comstock Homebuilding on December 17, 2004.
Cost of
sales and selling, general and administrative
expenses.
Cost of sales for the year ended December 31, 2005
increased $96.7 million, or 168.8%, to $154.1 million,
or 71.3% of homebuilding revenue, as compared to
$57.3 million, or 65.9% of revenue, for the year ended
December 31, 2004. The 5.4 percentage point increase
in cost of sales for the year ended December 31, 2005 is
primarily attributable to lower margins on sales in the North
Carolina market and the increase in settlements from the opening
of our condominium conversion projects.
As discussed above, Comstock Service, our North Carolina
division, was merged into Comstock Homebuilding on
December 17, 2004. Due to current market conditions in the
North Carolina market, which have caused extended hold and carry
periods between acquisition and delivery, we experienced lower
margins on its North Carolina settlements, as compared to
margins in the Washington, DC market, primarily due to
increasing interest and overhead carrying costs and modest
revenue concessions. In addition, as discussed in Note 5 in
the accompanying financial statements, we recorded a
$1.2 million impairment charge on the carrying value of
real estate held for development and sale at Kelton II, a
townhouse community in Raleigh, North Carolina. For 2005, our
North Carolinas projects accounted for 5.5% of our total
settlements and 5.2% of total homebuilding revenues. Cost of
sales as a percentage of revenue for our North Carolina division
was approximately 84.2%
In addition, our newly opened condo conversion projects
experienced lower margins than our traditional homebuilding
projects due to the nature of a conversion project in which we
buy an existing structure, adds value through upgrades and sells
the renovated units with a focus on affordability. As a result,
costs of sales tend to be higher as a percentage of revenue than
our new construction projects. For 2005, our condo conversion
projects accounted for 42.1% of our total settlements and 30.1%
of total homebuilding revenues. Cost of sales as a percentage of
revenue for our condo conversion projects was approximately
86.1%.
Cost of sales other for the year ended December 31, 2005
decreased by $3.1 million, or 45.8% to $3.6 million,
as compared to $6.7 million for the year ended
December 31, 2004. Cost of sales for the year ended
December 2005 and 2004 includes expenses associated with lot
sales made to third parties and expenses associated with the
management of our Settlement Title Services division. For
the year ended December 2004, cost of sales other also included
expenses associated with the management of Comstock Service,
which was merged into Comstock Homebuilding on December 17,
2004. The decrease for the year ended December 31, 2005, as
compared to 2004, was primarily the result not recording costs
associated with the management of Comstock Service.
Selling, general and administrative costs for the year ended
December 31, 2005 increased $12.3 million to
$24.1 million from $11.9 million for the year ended
December 31, 2004. As a percentage of revenue, selling,
general and administrative expenses represented 10.8% and 12.4%
of total revenue during the year ended December 31, 2005
and 2004, respectively. This increase was the result of
additional staffing costs and compensation of $5.5 million
to support our growth, increased advertising expenses of
$740,000, board fees and stock compensation of
$2.0 million, office and model rent of $1.2 million,
consulting fees of $928,000, legal and computer expenses of
$458,000, insurance costs of $268,000 and other miscellaneous
expenses associated with our growth in staffing and land
acquisition efforts of $1.1 million.
42
Operating
income
Operating income for the year ended December 31, 2005
increased $22.3 million to $42.4 million as compared
to $20.1 million for the year ended December 31, 2004.
Operating margin for the year ended December 31, 2005 was
18.9% compared to 20.9% for the year ended December 31,
2004. The decrease in operating margin is primarily attributable
to an increase in cost of sales as a percentage of revenue as
discussed above.
Other
(income) expense, net
Other (income) expense, net increased by $2.4 million to
net other income of $1.5 million for the year ended
December 31, 2005 as compared to net other expense of
908,000 for the year ended December 31, 2004. The increase
in other (income) expense is primarily attributable to interest
earned on our cash balances generated as a result of the
proceeds from our initial and follow on public offering.
Income
before minority interest
Our income before minority interest increased by
$24.7 million, or 228%, to $43.9 million for the year
ended December 31, 2005 as compared to $19.2 million
for the year ended December 31, 2004. Net margins as a
percentage of revenues remained consistent at approximately 20%
for the year ended December 31, 2005 and 2004.
Minority
interest
Minority interest expense decreased by $5.2 million to
$30,000 for the year ended December 31, 2005 as compared to
$5.3 million for the year ended December 31, 2004.
This decrease is the result of our repurchase or redemption of
substantially all of the minority interests in four of our
limited liability company subsidiaries including Comstock
Investors V, L.C., Comstock Investors VI, L.C., Comstock Potomac
Yard, L.C. and Comstock North Carolina, L.L.C. subsequent to our
initial public offering in December 2004.
Income
taxes
On December 17, 2004, we reorganized from a group of
S-corporations to a C-corporation. As a result, we were subject
to income taxes for only 14 days during 2004. Income tax
expense for the year ended December 31, 2005 was
$16.4 million compared to $(241,000) for the year ended
December 31, 2004. Our combined effective tax rate
including both current and deferred provisions for the year
ended December 31, 2005 was 37.3%.
Liquidity
and Capital Resources
We require capital to post deposits on new deals, to purchase
and develop land, to construct homes, to fund related carrying
costs and overhead and to fund various advertising and marketing
programs to facilitate sales. These expenditures include
engineering, entitlement, architecture, site preparation, roads,
water and sewer lines, impact fees and earthwork, as well as the
construction costs of the homes and amenities. Our sources of
capital include, and will continue to include, funds derived
from various secured and unsecured borrowings, operations which
include the sale of constructed homes and finished lots, and the
sale of equity securities. Our currently owned and controlled
inventory of home sites will require substantial capital to
develop and construct.
In production home building, it is common for builders such as
us to employ revolving credit facilities whereby the maximum
funding available under the facility exceeds the maximum
outstanding balance allowed at any given time. Our overall
borrowing capacity may be constrained by loan covenants which
limit the ratio of our total liabilities to our total equity.
This revolving debt will typically provide for funding of an
amount up to a pre-determined percentage of the cost of each
asset funded. The balance of the funding for that asset is
provided for by us as equity. The efficiency of revolving debt
in production home building allows us to operate with less
overall debt capital than would be required if we built each
project with long-term amortizing debt. At December 31,
2006, we had approximately $ 295.4 million of debt
financing and $21.3 million of unrestricted cash. Credit
markets are tightening as a result of the slowing of demand for
residential for-sale housing and the oversupply of speculative
inventory in the market. In spite of this, we believe that
internally generated cash, borrowings available under
43
existing and new credit facilities and access to public debt and
equity markets will provide us with sufficient access to capital
to meet our existing and expected capital needs.
Credit
Facilities
A majority of our debt is variable rate, based on LIBOR or the
prime rate plus a specified number of basis points, typically
ranging from 190 to 375 basis points over the LIBOR rate and
from 25 to 100 basis points over the prime rate. As a result, we
are exposed to market risk in the area of interest rate changes.
At December 31, 2006, the one-month LIBOR and prime rates
of interest were 5.32% and 7.25%, respectively, and the interest
rates in effect under our existing secured revolving
acquisition, development and construction credit facilities
ranged from 7.22% to 9.07 %. For information regarding risks
associated with our level of debt and changes in interest rates,
see Business-Risk Factors and Quantitative and
Qualitative Disclosures About Market Risk.
On May 26, 2006 we entered into $40 million Secured
Revolving Borrowing Base Credit Facility for the financing of
entitled land, land under development, construction and letters
of credit. All letters of credit issued will also be secured by
collateral in the facility. Funding availability will be limited
to compliance with a borrowing base and facility covenants. As
of December 31, 2006, $40.0 million was outstanding
with this facility. At December 31, 2006 we were not in
compliance with the financial covenants of this credit facility,
however the lender did not issue a notice of default as was
their right. In February 2007 we entered into a Forbearance
Agreement with the lender which reduced the covenants and
eliminated the ability of the lender to claim an event of
default as a result of non-compliance with the financial
covenants of the original loan. The Forbearance Agreement runs
through March 2008.
On May 4, 2006 we closed on a $30 million Junior
Subordinated Note Offering. The term of the note was thirty
years and it could be retired after five years with no penalty.
The rate was fixed at 9.72% the first five years and LIBOR plus
420 basis points the remaining twenty-five years. As of
December 31, 2006, we were not in compliance with the
financial covenants of the Note, however the lender did not
issue a notice of default as was their right. In March 2007 we
retired the original notes and entered into a new
10-year
$30 million Senior Secured Note Offering with the same
lender at the same interest rate. We are in compliance with all
covenants associated with the new notes.
As of December 31, 2006, we had $8.1 million
outstanding to Key Bank. Under the terms of the loan agreement,
we are required to maintain certain covenants. As of
December 31, 2006 we were not in compliance with the
interest coverage covenant of the loans by which we are required
to maintain a specified EBITDA to debt service ratio, however
the lender did not issue a notice of default as was their right.
In January 2007 we entered into loan modification agreements
lower the interest coverage ratio. We are in compliance with the
loans as modified.
As of December 31, 2006 we had $10.3 million
outstanding to M&T Bank. Under the terms of the loan
agreement, we are required to maintain certain covenants. As of
December 31, 2006 we were not incompliance with both the
interest coverage covenant of the loans by which we are required
to maintain a specified EBITDA to debt service ratio and the
minimum tangible net worth covenant, however the lender did not
issue a notice of default as was their right. In March 2007 we
entered into loan modification agreements lower the interest
coverage ratio and the tangible net worth covenant. We are in
compliance with the loans as modified.
On October 24, 2006 we received a purported notice of
default under a $46 million credit facility with Bank of
America related to our Bellemeade condominium project in
Leesburg, Virginia. We disputed the notice and received a
stand-still agreement from Bank of America until
December 29, 2006. During the term of the stand-still
agreement we had a $26 million secured loan and a
$10 million unsecured loan mature. Prior to the expiration
of the stand-still agreement we negotiated a settlement with
Bank of America whereby the bank withdrew the purported notice
of default in connection with a $26 million reduction in
the secured loan (from proceeds of the $40 million sale of
the collateral) and a $5 million reduction in the
outstanding balance of the unsecured loan. All other
curtailments were extended. All financial covenants of the
Company with Bank of America were removed as part of the
settlement.
In December 2005 the Company entered into a $147 million
secured, limited recourse loan with Corus Bank related to our
Eclipse project. Under the terms of the loan there is a single
deed of trust covering two loan traunches.
44
The two traunches have varying interest rates with Traunche A at
LIBOR plus 375 basis points and Traunche B at 16.0%. At
December 31, 2006 our outstanding balance under this loan
was $85.7 million.
From time to time, we employ subordinated and unsecured credit
facilities to supplement our capital resources or a particular
project or group of projects. Our lenders under these credit
facilities will typically charge interest rates that are
substantially higher than those charged by the lenders under our
senior and secured credit facilities. These credit facilities
will vary with respect to terms and costs. As of
December 31, 2006, only one unsecured credit facility
remained in place. And at December 31, 2006 the annual
variable interest rate on the facility was 7.52% and
$5.0 million was outstanding under the facility. We intend
to continue to use these types of facilities on a selected basis
to supplement our capital resources.
Many of our loan facilities contains Material Adverse Effect
Clauses which if invoked could create an event of default under
the loan. In the event all our loans were deemed to be in
default as a result of a Material Adverse Effect, our ability to
meet our capital and debt obligations would be compromised.
As illustrated by the following debt maturity schedule, we have
a significant amount of debt maturing in 2007. In our industry,
it is customary for secured debt to be renewed until a project
is complete but we have no assurance that this will be the case
with our debts. Our recently reported and cured loan covenant
violations, may impact our ability to renew and extend our debt.
As of December 31, 2006, future maturities of our
borrowings are as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2007
|
|
$
|
205,922
|
|
2008
|
|
|
16,986
|
|
2009
|
|
|
39,981
|
|
2010
|
|
|
2,514
|
|
2011 and thereafter
|
|
|
30,000
|
|
|
|
|
|
|
Total
|
|
$
|
295,403
|
|
|
|
|
|
|
We are considering replacing our credit facilities with one or
more larger facilities, which may reduce our aggregate debt
financing costs. We would be the borrower and primary obligor
under this larger facility or facilities, and we anticipate the
indebtedness would be secured, non-recourse and based on an
available borrowing base.
Cash
Flow
Net cash provided by/(used in) operating activities was
$(86.4) million for the year ended December 31, 2006,
$(131.1 million) for the year ended December 31, 2005
and $11.1 million for the year ended December 31,
2004. In 2006, the primary source for the decrease in cash used
in operating activities was attributable to investment in real
estate held for development and sale resulting from our
acquisitions of Parker Chandler Homes, Inc. and Capitol Homes,
Inc. as well as our continued construction of our Eclipse
project. In 2005, the primary source for the increase in cash
used in operating activities was attributable to increased
investments in real estate held for development and sale. In
2004, the primary source of the increase in cash from operating
activities was attributable to increases in net income and
accounts payable which were only partially offset by increased
investments in real estate held for development and sale.
Net cash provided by/(used in) investing activities was $(17.8)
million for the year ended December 31, 2006,
$0.7 million for the year ended December 31, 2005 and
$1.0 million for the year ended December 31, 2004. In
2006, the primary source of the decrease in cash from investing
activities was attributable to business acquisitions, net of
cash acquired. In 2005, the primary source of the increase in
cash from investing activities was attributable to the return of
capital in the amount of $1.0 million upon the redemption
of our investment in TCG Fund I. In 2004, the primary
source of the increase in cash from investing activities was
attributable to cash received from the acquisition of Comstock
Service as discussed in Note 1 of the accompanying notes to
consolidated financial statements.
45
Net cash provided by/(used in) financing activities was
$83.3 million for the year ended December 31, 2006,
$105.0 million for the year ended December 31, 2005
and $38.3 million for the year ended December 31,
2004. The primary source of the increase in cash from financing
activities for the year ended December 31, 2006 was the
proceeds from notes and other indebtedness as well as the
proceeds an equity offering in May 2006. The primary source of
the increase in cash from financing activities for the period
ended December 31, 2005 was attributable to net proceeds
from our follow on public offering and increased borrowings from
our credit facilities The primary source of the increase in cash
from financing activities for the period ended December 31,
2004 was the net proceeds received from our initial public
offering which were partially offset by distributions paid to
stockholders.
Recent
Acquisitions
In May 2006, we completed the acquisition of Capitol Homes,
Inc., in the Raleigh, North Carolina area. The acquisition price
was approximately $7.5 million plus the assumption of
approximately $20.6 million in liabilities. The results of
Capitol Homes, Inc. are included in the accompanying financial
statements from the period May 5, 2006 to
September 30, 2006. The acquisition added approximately
1,350 lots in 13 communities to our inventory of controlled land.
In January 2006, we completed the acquisition of Parker Chandler
Homes, Inc. in the Atlanta, Georgia area. The acquisition price
was approximately $10.4 million plus the assumption of
approximately $63.8 million in debt. The results of Parker
Chandler, Inc. are included in the accompanying financial
statements from the period January 19, 2006 to
December 31, 2006. The acquisition added over 1,500 lots to
our inventory of controlled land.
Subsequent
Events
In February 2007 we received a ruling from a panel of
arbitrators ordering payment of approximately $3.0 million
with respect to an allegation of a loan brokerage fee being owed
for placement of a $147.0 million project loan for the
Eclipse at Potomac Yard project and a $67.0 million project
loan at Penderbrook. We are assessing our rights of appeal with
respect to this decision.
In February 2007 we entered into a limited recourse
$28.0 million loan agreement with Guggenheim Capital
Partners to refinance an existing loan with Corus Bank. The new
loan has a term of 3 years and bears a floating interest
rate of LIBOR + 500 basis points.
In January 2007 we entered into a contract to sell 110 lots at
our Massey Preserve project in Raleigh, NC to another builder in
two takedowns. The first closing on 55 lots occurred in February
2007 for proceeds of $3.6 million. The second takedown is
scheduled to occur in July 2007.
On May 4, 2006 we closed on a $30 million Junior
Subordinated Note Offering. The term of the note was thirty
years which could be retired after five years with no penalty.
The rate was fixed at 9.72% the first five years and LIBOR plus
420 basis points for the remaining twenty-five years. In March
2007 we retired the original Junior Subordinated Note and
entered into a new 10-year $30 million Senior Secured Note
Offering with the same lender at the same interest rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
3-5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Notes payable(1)
|
|
$
|
295,403
|
|
|
$
|
205,922
|
|
|
$
|
59,481
|
|
|
$
|
|
|
|
$
|
30,000
|
|
Operating leases
|
|
$
|
3,423
|
|
|
$
|
1,231
|
|
|
$
|
2,187
|
|
|
$
|
5
|
|
|
$
|
|
|
Capital leases
|
|
$
|
237
|
|
|
$
|
86
|
|
|
$
|
151
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
299,063
|
|
|
$
|
207,239
|
|
|
$
|
61,819
|
|
|
$
|
5
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Notes payable includes estimated interest payments based on
interest rates in effect at December 31, 2006.
|
Notes payable have an undefined repayment due date and are
typically due and payable as homes are settled.
46
We are not an obligor under, or guarantor of, any indebtedness
of any party other than for obligations entered into by the
subsidiaries of one of the now-consolidated primary holding
companies.
We have no off-balance sheet arrangements except for the
operating leases described above.
As discussed in Note 3 in the accompanying consolidated
financial statements as of December 31, 2006, the Company
has posted aggregate non-refundable deposits of
$3.8 million on $37.0 million worth of land purchase
options.
Seasonality
and Weather
Our business is affected by seasonality with respect to orders
and deliveries. In the markets in which we operate, the primary
selling seasons are from January through May as well as
September and October. Orders in other months typically are
lower. In addition, the markets in which we operate are
four-season markets that experience significant periods of rain
and snow. Construction cycles and efforts are often adversely
affected by severe weather.
Inflation
Inflation can have a significant impact on our business
performance and the home building industry in general. Rising
costs of land, transportation costs, utility costs, materials,
labor, overhead, administrative costs and interest rates on
floating credit facilities can adversely affect our business
performance. In addition, rising costs of certain items, such as
lumber, can adversely affect the expected profitability of our
backlog. Generally, we have been able to recover any increases
in costs through increased selling prices. However, there is no
assurance we will be able to increase selling prices in the
future to cover the effects of inflation and other cost
increases.
Item 7A.
Quantitative and Qualitative Disclosures about Market
Risk
Market risk represents the risk of loss that may impact our
financial position, results of operations or cash flows, due to
adverse changes in financial and commodity market prices and
interest rates. We are exposed to market risk in the area of
interest rate changes. A majority of our debt is variable rate
based on LIBOR and prime rate, and, therefore, affected by
changes in market interest rates. Based on current operations,
as of December 31, 2006, an increase/decrease in interest
rates of 100 basis points on our variable rate debt would have
resulted in a corresponding increase/decrease in interest
actually incurred by us of approximately $2.4 million in a
fiscal year, which would be capitalized and included in cost of
sales as homes are delivered. As a result, the effect on net
income would be deferred until the underlying units settled and
the interest was released to cost of goods sold. Changes in the
prices of commodities that are a significant component of home
construction costs, particularly lumber, may result in
unexpected short-term increases in construction costs. Because
the sales price of our homes is fixed at the time a buyer enters
into a contract to acquire a home and we generally contract to
sell our homes before construction begins, any increase in costs
in excess of those anticipated at the time of each sale may
result in lower consolidated operating income for the homes in
our backlog. We attempt to mitigate the market risks of the
price fluctuation of commodities by entering into fixed price
option contracts with our subcontractors and material suppliers
for a specified period of time, generally commensurate with the
building cycle. These contracts afford us the option to purchase
materials at fixed prices but do not obligate us to any
specified level of purchasing.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Reference is made to the financial statements, the notes
thereto, and the report thereon, commencing on
page F-1
of this report, which financial statements, notes, and report
are incorporated herein by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
47
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have evaluated, with the participation of our Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer,
the effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and 15d-15(e) of the Exchange Act as of December 31, 2006.
Based on this evaluation, our Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer have each
concluded that our disclosure controls and procedures as of
December 31, 2006 are functioning effectively to provide
reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange
Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and (ii) accumulated and communicated to
our management, including our principal executive and principal
financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
Limitations
on the Effectiveness of Controls
We do not expect that our disclosure controls and internal
controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because
of changes in conditions or the 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.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2006,
based on criteria set forth in the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a
conclusion on this evaluation. Our management determined that,
as of December 31, 2006, our internal control over
financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, has issued an audit report on managements
assessment of our internal control over financial reporting as
of December 31, 2006, which is included herein.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item relating to our directors
is incorporated herein by reference to the definitive Proxy
Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2007 Annual
48
Meeting of Stockholders. The information required by this Item
relating to our executive officers is included in Item 1,
Business Executive Officers of this
report.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
PART IV
|
|
Item 15.
|
Exhibit
and Financial Statement Schedules
|
(a) Financial Statements
(1) Financial Statements are listed in the Index to
Financial Statements on
page F-1
of this report.
(2) Schedules have been omitted because they are not
applicable or because the information required to be set forth
therein is included in the consolidated and combined financial
statements or notes thereto.
(b) Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
3.1(2)
|
|
Amended and Restated Certificate
of Incorporation
|
3.2(2)
|
|
Amended and Restated Bylaws
|
4.1(1)
|
|
Specimen Stock Certificate
|
10.1(1)
|
|
Lease Agreement, dated as of
January 31, 2004, with Comstock Partners, L.C.
|
10.2(1)
|
|
Agreement of Sublease, dated as of
October 1, 2004, with Comstock Asset Management, L.C.
|
10.3(1)
|
|
Loan Agreement, dated
December 17, 1997, as amended, with Bank of America, N.A.
|
10.4(1)
|
|
Disbursement and Construction Loan
Agreement and Disbursement and Development Loan Agreement, each
dated October 10, 2002 and as amended, with Branch Banking
and Trust Company of Virginia
|
10.5(1)
|
|
Disbursement and Construction Loan
Agreement and Acquisition, Disbursement and Development Loan
Agreement, each dated July 25, 2003, with Branch Banking
and Trust Company of Virginia
|
10.6(2)
|
|
Loan Agreement, dated
January 25, 2005, with Corus Bank, N.A.
|
10.7(2)
|
|
Completion Guaranty, dated
January 25, 2005 in favor of Corus Bank, N.A.
|
10.8(2)
|
|
Carve-Out Guaranty, dated
January 25, 2005, in favor of Corus Bank, N.A.
|
10.9(1)
|
|
Form of Indemnification Agreement
|
49
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
10.10(1)
|
|
Form of Promissory Note to be
issued to each of Christopher Clemente, Gregory Benson, James
Keena and Lawrence Golub by each of Comstock Holding Company,
Inc., Comstock Homes, Inc., Sunset Investment Corp., Inc. and
Comstock Service Corp., Inc.
|
10.11(1)
|
|
Form of Tax Indemnification
Agreement to be entered into by each of Christopher Clemente,
Gregory Benson, James Keena and Lawrence Golub with each of
Comstock Holding Company, Inc., Comstock Homes, Inc., Sunset
Investment Corp., Inc. and Comstock Service Corp., Inc.
|
10.12(1)
|
|
2004 Long-Term Incentive
Compensation Plan
|
10.13(1)
|
|
Form of Stock Option Agreement
under the 2004 Long-Term Incentive Compensation Plan
|
10.14(2)
|
|
Form of Restricted Stock Grant
Agreement under the 2004 Long-Term Incentive Compensation Plan
|
10.15(1)
|
|
Employee Stock Purchase Plan
|
10.16(1)
|
|
Purchase and Sale Agreement, dated
as of April 25, 2003, as amended, with Crescent Potomac
Yard Development, LLC
|
10.17(2)
|
|
Purchase and Sale Agreement, dated
as of November 9, 2004, as amended, with Fair Oaks
Penderbrook Apartments L.L.C.
|
10.18(2)
|
|
Real Estate Purchase Contract,
dated as of February 4, 2005, with Westwick Apartments LLC
|
10.19(2)
|
|
Services Agreement, dated
March 4, 2005, with Comstock Asset Management, L.C.
|
10.20(1)
|
|
Employment Agreement with
Christopher Clemente
|
10.21(1)
|
|
Employment Agreement with Gregory
Benson
|
10.22(1)
|
|
Employment Agreement with Bruce
Labovitz
|
10.23(1)
|
|
Confidentiality and
Non-Competition Agreement with Christopher Clemente
|
10.24(1)
|
|
Confidentiality and
Non-Competition Agreement with Gregory Benson
|
10.25(1)
|
|
Confidentiality and
Non-Competition Agreement with Bruce Labovitz
|
10.26(2)
|
|
Description of Arrangements with
William Bensten
|
10.27(2)
|
|
Description of Arrangements with
David Howell
|
10.28(1)
|
|
Trademark License Agreement
|
10.29(2)
|
|
Purchase Agreement, dated as of
November 12, 2004 with Comstock Asset Management, L.C.
|
10.30(3)
|
|
Agreement of Purchase and Sale,
dated June 23, 2005, by and between Comstock Carter Lake,
L.C. and E.R. Carter, L.L.C.
|
10.31(3)
|
|
Agreement of Purchase and Sale,
dated September 28, 2005, by and between Comstock
Bellemeade, L.C. and Bellemeade Farms Investors, LLC et. al.
|
10.32(3)
|
|
Loan Agreement, dated
September 28, 2005, by and between Comstock Bellemeade,
L.C. and Bank of America, N.A.
|
10.33(3)
|
|
Guaranty Agreement, dated
September 28, 2005, by the Registrant in favor of Bank of
America, N.A.
|
10.34(4)
|
|
Life Insurance Reimbursement
Agreement with William P. Bensten
|
10.35(4)
|
|
Life Insurance Reimbursement
Agreement with Bruce Labovitz
|
10.36(4)
|
|
Description of Reimbursement and
Indemnification Arrangement with Christopher Clemente and
Gregory Benson
|
10.37(3)
|
|
Agreement of Purchase and Sale,
dated June 23, 2005, by and between Comstock Carter Lake,
L.C. and E.R. Carter, L.L.C.
|
10.38(5)
|
|
Stock Purchase Agreement with
Parker-Chandler Homes, Inc. and the Selling Stockholders
identified therein, dated as of January 19, 2006
|
10.39(5)
|
|
Loan Agreement, dated
January 31, 2006, by and between Comstock Carter Lake, L.C.
and Bank of America, N.A.
|
10.40(5)
|
|
Guaranty Agreement, dated
January 31, 2006, by the Registrant in favor of Bank of
America, N.A.
|
50
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
10.41(6)
|
|
Form of purchase agreement, dated
as of May 5, 2006, as amended as of May 9, 2006, by
and between the Company and the purchasers identified therein
|
10.42(6)
|
|
Form of warrant.
|
10.43(7)
|
|
Note Purchase Agreement with
Kodiak Warehouse LLC, dated as of May 4, 2006
|
10.44(7)
|
|
Junior Subordinated Indenture with
Wells Fargo Bank, N.A., dated as of May 4, 2006
|
10.45(7)
|
|
Credit Agreement with Wachovia
Bank, N.A., dated as of May 26, 2006
|
10.46(7)
|
|
Stock Purchase Agreement with
Capitol Homes, Inc. and the Selling Shareholders identified
therein, dated as of May 1, 2006
|
10.47*
|
|
Letter, dated October 18,
2007, from Friedlander, Misler, Sloan, Kletzkin &
Ochsman, PLLC to the Registrant and Comstock Bellemeade, L.C.
|
10.48*
|
|
Purchase and Sale Agreement by and
between Comstock Countryside L.C. and Merion-Loudon, LC, dated
as of December 21, 2006
|
10.49*
|
|
Marketing and Sale Agreement by
and between Comstock Countryside LC and Merion-Loudon, LC, dated
as of December 21, 2006
|
10.50*
|
|
Consulting Agreement with The
Merion Group, L.C., dated as of December 21, 2006
|
10.51*
|
|
Loan Modification Agreement, dated
as of December 2006, by and among the Registrant, Highland
Avenue Properties, LLC and Bank of America, N.A.
|
10.52*
|
|
Amended and Restated Guaranty
Agreement, dated December 2006, by the Registrant in favor of
Bank of America, N.A.
|
10.53*
|
|
Loan Modification Agreement, dated
as of December 2006, by and among the Registrant, Comstock Homes
of Atlanta, LLC, Comstock Homes of Myrtle Beach, LLC and Bank of
America, N.A.
|
10.54*
|
|
Amended and Restated Guaranty
Agreement, dated December 2006, by the Registrant in favor of
Bank of America, N.A.
|
10.55*
|
|
First Loan Modification Agreement,
dated as of December 2006, by and among the Registrant, Comstock
Bellemeade, L.C., Bank of America, N.A. and Lenka E. Lundsten
|
10.56*
|
|
Second Loan Modification
Agreement, dated as of December 22, 2006, by and between
the Registrant and Bank of America, N.A.
|
14.1(2)
|
|
Code of Ethics
|
21.1*
|
|
List of subsidiaries
|
23.1*
|
|
Consent of PricewaterhouseCoopers
LLP
|
24.1*
|
|
Power of Attorney (see signature
page to this Annual Report on
Form 10-K.)
|
31.1*
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
|
31.2*
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
|
32.1*
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
|
* Filed herewith.
|
|
|
(1) |
|
Incorporated by reference to an exhibit to the Registrants
Registration Statement on
Form S-1,
as amended, initially filed with the Commission on
August 13, 2004
(No. 333-118193). |
|
(2) |
|
Incorporated by reference to an exhibit to the Registrants
Annual Report on
Form 10-K
filed with the Commission on March 31, 2005. |
|
(3) |
|
Incorporated by reference to an exhibit to the Registrants
Quarterly Report on
Form 10-Q
filed with the Commission on November 14, 2005. |
|
(4) |
|
Incorporated by reference to an exhibit to the Registrants
Quarterly Report on
Form 10-Q
filed with the Commission on August 9, 2005. |
51
|
|
|
(5) |
|
Incorporated by reference to an exhibit to the Registrants
Annual Report on
Form 10-K
filed with the Commission on March 16, 2006. |
|
(6) |
|
Incorporated by reference to an exhibit to the Current Report on
Form 8-K
of the Registrant filed with the Commission on May 10, 2005. |
|
(7) |
|
Incorporated by reference to an exhibit to the Registrants
Quarterly Report on
Form 10-Q
filed with the Commission on August 9, 2006. |
52
Report of
Independent Registered Public Accounting Firm
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Comstock
Homebuilding Companies, Inc.
We have completed integrated audits of Comstock Homebuilding
Companies, Inc.s 2006 and 2005 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2006, and an audit of its 2004
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Comstock Homebuilding Companies, Inc.
at December 31, 2006 and December 31, 2005, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable
F-2
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
McLean, Virginia
March 16, 2007
F-3
COMSTOCK
HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
21,263
|
|
|
$
|
42,167
|
|
Restricted cash
|
|
|
12,326
|
|
|
|
10,800
|
|
Receivables
|
|
|
4,555
|
|
|
|
6,365
|
|
Note receivables
|
|
|
|
|
|
|
1,250
|
|
Due from related parties
|
|
|
4,053
|
|
|
|
2,899
|
|
Real estate held for development
and sale
|
|
|
405,144
|
|
|
|
263,802
|
|
Inventory not owned
variable interest entities
|
|
|
43,234
|
|
|
|
89,890
|
|
Property, plant and equipment, net
|
|
|
2,723
|
|
|
|
605
|
|
Investment in real estate
partnership
|
|
|
(171
|
)
|
|
|
(35
|
)
|
Deferred income tax
|
|
|
10,188
|
|
|
|
2,545
|
|
Other assets
|
|
|
14,114
|
|
|
|
11,031
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
517,429
|
|
|
$
|
431,319
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Accounts payable and accrued
liabilities
|
|
|
55,680
|
|
|
|
59,131
|
|
Due to related parties
|
|
|
1,140
|
|
|
|
40
|
|
Obligations related to inventory
not owned
|
|
|
40,950
|
|
|
|
83,015
|
|
Notes payable
|
|
|
265,403
|
|
|
|
142,994
|
|
Junior subordinated debt
|
|
|
30,000
|
|
|
|
|
|
Notes payable related
parties
|
|
|
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
393,173
|
|
|
|
285,843
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 15)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
371
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
Class A common stock,
$0.01 par value, 77,266,500 shares authorized, 14,129,081
and 11,532,442 issued and outstanding, respectively
|
|
|
141
|
|
|
|
115
|
|
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
|
|
|
147,528
|
|
|
|
126,461
|
|
Treasury stock, at cost (391,400
Class A common stock)
|
|
|
(2,439
|
)
|
|
|
|
|
(Accumulated deficit) retained
earnings
|
|
|
(21,372
|
)
|
|
|
18,473
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
123,885
|
|
|
|
145,076
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
$
|
517,429
|
|
|
$
|
431,319
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
COMSTOCK
HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of real estate
Homes
|
|
$
|
240,093
|
|
|
$
|
216,265
|
|
|
$
|
87,003
|
|
Other revenue
|
|
|
5,788
|
|
|
|
8,040
|
|
|
|
9,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
245,881
|
|
|
|
224,305
|
|
|
|
96,045
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales of real estate
|
|
|
211,408
|
|
|
|
152,886
|
|
|
|
57,339
|
|
Cost of sales of other
|
|
|
5,249
|
|
|
|
3,604
|
|
|
|
6,654
|
|
Impairments and write-offs
|
|
|
57,426
|
|
|
|
1,216
|
|
|
|
|
|
Selling, general and administrative
|
|
|
37,500
|
|
|
|
24,190
|
|
|
|
11,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(65,702
|
)
|
|
|
42,409
|
|
|
|
20,112
|
|
Other (income) expense, net
|
|
|
(1,487
|
)
|
|
|
(1,450
|
)
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority
interest and equity in (loss) earnings of real estate partnership
|
|
|
(64,215
|
)
|
|
|
43,859
|
|
|
|
19,204
|
|
Minority interest
|
|
|
15
|
|
|
|
30
|
|
|
|
5,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in
(loss) earnings of real estate partnership
|
|
|
(64,230
|
)
|
|
|
43,829
|
|
|
|
13,944
|
|
Equity in (loss) earnings of real
estate partnership
|
|
|
(135
|
)
|
|
|
99
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre tax (loss) income
|
|
|
(64,365
|
)
|
|
|
43,928
|
|
|
|
14,062
|
|
Income taxes (benefit) provision
|
|
|
(24,520
|
)
|
|
|
16,366
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(39,845
|
)
|
|
$
|
27,562
|
|
|
$
|
14,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(2.63
|
)
|
|
$
|
2.14
|
|
|
$
|
1.95
|
|
Basic weighted average shares
outstanding
|
|
|
15,148
|
|
|
|
12,870
|
|
|
|
7,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(2.63
|
)
|
|
$
|
2.12
|
|
|
$
|
1.95
|
|
Diluted weighted average shares
outstanding
|
|
|
15,148
|
|
|
|
13,022
|
|
|
|
7,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
COMSTOCK
HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
The Comstock Companies
|
|
|
Class A
|
|
|
Class B
|
|
|
paid-in
|
|
|
Treasury
|
|
|
earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
stock
|
|
|
(deficit)
|
|
|
Total
|
|
|
Balance at December 31,
2003
|
|
|
3,558
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,493
|
|
|
$
|
|
|
|
$
|
5,529
|
|
|
$
|
7,025
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,668
|
)
|
|
|
(5,668
|
)
|
Issuance of common stock in
Homebuilding on June 7, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization by virtue of merger
|
|
|
(3,558
|
)
|
|
|
(3
|
)
|
|
|
4,333
|
|
|
|
43
|
|
|
|
2,733
|
|
|
|
27
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Acquisition of Comstock Service on
December 17, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,756
|
|
|
|
|
|
|
|
|
|
|
|
4,756
|
|
Issuance of common stock of
Homebuilding on December 17, 2004 (less transaction costs)
|
|
|
|
|
|
|
|
|
|
|
3,960
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
56,012
|
|
|
|
|
|
|
|
|
|
|
|
56,052
|
|
Issuance of common
stock overallotment
|
|
|
|
|
|
|
|
|
|
|
594
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
8,833
|
|
|
|
|
|
|
|
|
|
|
|
8,839
|
|
Distribution following IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,253
|
)
|
|
|
(23,253
|
)
|
Issuance of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation and issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,303
|
|
|
|
14,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
9,162
|
|
|
|
92
|
|
|
|
2,733
|
|
|
|
27
|
|
|
|
71,196
|
|
|
|
|
|
|
|
(9,089
|
)
|
|
|
62,226
|
|
Stock compensation and issuances
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
2,346
|
|
Issuance of common stock under
employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
Issuances of common stock in follow
on offering on June 22, 2005 (less transaction costs)
|
|
|
|
|
|
|
|
|
|
|
2,360
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
52,786
|
|
|
|
|
|
|
|
|
|
|
|
52,809
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,562
|
|
|
|
27,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
11,533
|
|
|
|
115
|
|
|
|
2,733
|
|
|
|
27
|
|
|
|
126,461
|
|
|
|
|
|
|
|
18,473
|
|
|
|
145,076
|
|
Stock compensation and issuances
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
2,386
|
|
|
|
|
|
|
|
|
|
|
|
2,391
|
|
Issuance of common stock under
employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,439
|
)
|
|
|
|
|
|
|
(2,439
|
)
|
Share issuance private
placement of equity (less transaction costs)
|
|
|
|
|
|
|
|
|
|
|
2,121
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
18,539
|
|
|
|
|
|
|
|
|
|
|
|
18,560
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,845
|
)
|
|
|
(39,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
|
|
|
|
$
|
|
|
|
|
14,129
|
|
|
$
|
141
|
|
|
|
2,733
|
|
|
$
|
27
|
|
|
$
|
147,528
|
|
|
$
|
(2,439
|
)
|
|
$
|
(21,372
|
)
|
|
$
|
123,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
COMSTOCK
HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(39,845
|
)
|
|
$
|
27,562
|
|
|
$
|
14,303
|
|
Adjustment to reconcile net (loss)
income to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
1,080
|
|
|
|
172
|
|
|
|
106
|
|
Write-down of land, deposits and
pre-acquisition costs
|
|
|
57,426
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
24
|
|
|
|
9
|
|
|
|
1
|
|
Minority interest
|
|
|
15
|
|
|
|
30
|
|
|
|
5,260
|
|
Equity in (loss) earnings of real
estate partnership
|
|
|
136
|
|
|
|
(99
|
)
|
|
|
(118
|
)
|
Distributions from investment in
real estate partnership
|
|
|
|
|
|
|
163
|
|
|
|
|
|
Amortization of stock compensation
|
|
|
2,390
|
|
|
|
2,346
|
|
|
|
101
|
|
Deferred income tax
|
|
|
(21,816
|
)
|
|
|
(1,724
|
)
|
|
|
(531
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,526
|
)
|
|
|
(3,300
|
)
|
|
|
(7,500
|
)
|
Receivables
|
|
|
3,593
|
|
|
|
(7,376
|
)
|
|
|
2,107
|
|
Due from related parties
|
|
|
(1,154
|
)
|
|
|
(1,452
|
)
|
|
|
1,693
|
|
Real estate held for development
and sale
|
|
|
(71,444
|
)
|
|
|
(159,476
|
)
|
|
|
(23,081
|
)
|
Other assets
|
|
|
1,338
|
|
|
|
(11,141
|
)
|
|
|
(5,428
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(14,247
|
)
|
|
|
23,599
|
|
|
|
24,025
|
|
Income tax payable
|
|
|
|
|
|
|
(290
|
)
|
|
|
290
|
|
Due to related parties
|
|
|
(2,333
|
)
|
|
|
(108
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(86,363
|
)
|
|
|
(131,085
|
)
|
|
|
11,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and
equipment
|
|
|
(2,392
|
)
|
|
|
(298
|
)
|
|
|
(372
|
)
|
Distributions of capital from
investment in real estate partnership
|
|
|
|
|
|
|
1,000
|
|
|
|
120
|
|
Business acquisitions, net of cash
acquired
|
|
|
(15,490
|
)
|
|
|
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(17,882
|
)
|
|
|
702
|
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
216,551
|
|
|
|
212,408
|
|
|
|
81,747
|
|
Proceeds from junior subordinated
debt
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
Proceeds from related party notes
payable
|
|
|
4,200
|
|
|
|
444
|
|
|
|
4,646
|
|
Payments on notes payable
|
|
|
(182,199
|
)
|
|
|
(135,098
|
)
|
|
|
(78,716
|
)
|
Payments on related party notes
payable
|
|
|
(1,430
|
)
|
|
|
(10,725
|
)
|
|
|
(6,000
|
)
|
Contribution from minority
shareholders
|
|
|
|
|
|
|
87
|
|
|
|
|
|
Payment of distribution payable
|
|
|
|
|
|
|
(12,655
|
)
|
|
|
|
|
Distributions paid to minority
shareholders
|
|
|
(44
|
)
|
|
|
(2,412
|
)
|
|
|
(14,181
|
)
|
Distributions paid to shareholders
|
|
|
|
|
|
|
|
|
|
|
(14,168
|
)
|
Proceeds from shares issued under
employee stock purchase plan
|
|
|
141
|
|
|
|
133
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(2,438
|
)
|
|
|
|
|
|
|
|
|
Net proceeds from equity offerings
|
|
|
18,561
|
|
|
|
52,809
|
|
|
|
64,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
83,342
|
|
|
|
104,991
|
|
|
|
38,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(20,904
|
)
|
|
|
(25,392
|
)
|
|
|
50,399
|
|
Cash and cash equivalents,
beginning of period
|
|
|
42,167
|
|
|
|
67,559
|
|
|
|
17,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
21,263
|
|
|
$
|
42,167
|
|
|
$
|
67,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid (net of interest
capitalized)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Income taxes paid
|
|
$
|
45
|
|
|
$
|
22,274
|
|
|
|
|
|
Supplemental disclosure for
non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest incurred but not paid in
cash
|
|
$
|
13,689
|
|
|
$
|
8,036
|
|
|
$
|
2,760
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
COMSTOCK
HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Comstock Companies, Inc. (the Company) was
incorporated on May 24, 2004 as a Delaware corporation. On
June 30, 2004, the Company changed its name to Comstock
Homebuilding Companies, Inc.
On December 17, 2004, as a result of completing its initial
public offering (IPO) of its Class A common
stock, the Company acquired 100% of the outstanding capital
stock of Comstock Holding Company, Inc. and subsidiaries
(Comstock Holdings) by merger, which followed a
consolidation that took place immediately prior to the closing
of the IPO (the Consolidation). The Consolidation
was effected through the mergers of Sunset Investment Corp.,
Inc. and subsidiaries and Comstock Homes, Inc. and subsidiaries
and Comstock Service Corp., Inc and subsidiaries (Comstock
Service) with and into Comstock Holdings. Pursuant to the
terms of the merger agreement, shares of Comstock Holdings were
canceled and replaced by 4,333 and 2,734 shares
Class A and B common stock of the Company, respectively.
Both Class A and B common stock shares bear the same
economic rights. However, for voting purposes, Class A
stock holders are entitled to one vote for each share held while
Class B stock holders are entitled to fifteen votes for
each share held.
The mergers of Sunset Investment Corp., Inc. and subsidiaries
and Comstock Homes, Inc. and subsidiaries with and into Comstock
Holdings (collectively the Comstock Companies or
Predecessor) and the Companys acquisition of
Comstock Holdings was accounted for using the Comstock
Companies historical carrying values of accounting as
these mergers were not deemed to be substantive exchanges. The
merger of Comstock Service was accounted for using the purchase
method of accounting (see Note 2) as this was deemed
to be a substantive exchange due to the disparity in ownership.
Our Class A common stock is traded on the NASDAQ National
market under the symbol CHCI. We have no public
trading history prior to December 17, 2004.
The Company develops, builds and markets single-family homes,
townhouses and condominiums in the Washington D.C., North
Carolina and Georgia metropolitan markets. The Company also
provides certain management and administrative support services
to certain related parties.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
A summary of the significant accounting policies and practices
used in the preparation of the consolidated financial statements
is as follows:
Basis
of presentation
As discussed in Note 1, the Company and the Predecessor
effected the Consolidation on December 17, 2004. The
Company and the Predecessor were entities that had a high degree
of common ownership, common management and common corporate
governance as they were owned by the same individuals each
holding substantially the same ownership. As a result, the
Company has determined that, based on the high degree of common
ownership that resulted in substantially the same ownership
interests before and after the transaction, the common nature of
the businesses, the long-term business relationships between the
companies and other related factors, the exchange lacked
substance, and therefore, they accounted for the consolidation
on a historical cost basis in accordance with FASB Technical
Bulletin FTB
85-5,
Issues Related to Accounting for Business
Combinations. Further, Statement of Financial
Accounting Standards No. 141, Business Combinations
(SFAS 141) states that, in transactions
between parties under common control, the receiving entity
should account for the assets and liabilities received at their
historical carrying values. Additionally, such transfers should
be accounted for by the receiving entity as of the beginning of
the period in which the transaction occurs. Accordingly, the
Company has reflected the assets and liabilities acquired in the
transaction at their historical carrying values and the results
of operations are presented as if the transaction occurred on
January 1, 2004.
F-8
As further discussed in Note 4, the Predecessor merged with
Comstock Service on December 17, 2004. Due to a disparity
in ownership as compared to the other entities which comprised
the Predecessor, Comstock Service was not under common control
with the Predecessor and as such the consolidation transaction
was considered a substantive exchange. Accordingly, the Company
has accounted for the consolidation of Comstock Service as an
acquisition using the purchase method of accounting as required
by SFAS 141. As a result, the assets and liabilities
acquired have been recorded at fair value in the accompanying
financial statements on the date of the transaction. No goodwill
was recognized in connection with this transaction.
Principles
of consolidation
The consolidated financial statements include all controlled
subsidiaries. In addition, the Company reviews its relationships
with other entities to assess whether the Company is the primary
beneficiary of a variable interest entity. If the determination
is made that the Company is the primary beneficiary, then that
entity is consolidated in accordance with FASB Interpretation
No. 46-R:
Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51
(FIN 46-R).
See Note 3 for additional discussion on the consolidation
of variable interest entities. Minority interest reflects third
parties ownership interest in entities the Company has
consolidated. All material inter-company balances and
transactions are eliminated in consolidation.
Reclassification
Certain amounts in the prior years financial statements
have been reclassified to conform to the current years
presentation. For the twelve months ended December 31, 2005
on the consolidated statement of operations, $1,216 was
reclassified from cost of sales real estate into the impairments
and write-offs. This reclassification has no impact on
previously reported net income.
Cash
and cash equivalents and restricted cash
Cash and cash equivalents are comprised of cash and short-term
investments with maturities when purchased of three months or
less. At times, the Company may have deposits with institutions
in excess of federally insured limits. Banking institutions with
which the Company does business are considered credit worthy;
therefore, credit risk associated with cash and cash equivalents
is considered low.
At December 31, 2006 and 2005, the Company had restricted
cash of $12,326 and $10,800, respectively, which primarily
includes certain customer deposits related to future home sales.
Receivables
Receivables include amounts in transit or due from title and
settlement companies for residential property closings. The
Company has determined that all amounts are collectible at
December 31, 2006 and 2005 based on a review of the
individual accounts.
Real
estate held for development and sale
Real estate held for development and sale includes land, land
development costs, interest and other construction costs and is
stated at cost or, when circumstances or events indicate that
the real estate held for development or sale is impaired, at
estimated fair value.
Land, land development and indirect land development costs are
accumulated by specific area and allocated to various lots or
housing units based upon the relative sales value, unit or area
methods. Direct construction costs are assigned to housing units
based on specific identification. Construction costs primarily
include direct construction costs and capitalized field
overhead. Other costs are comprised of prepaid local government
fees and capitalized interest and real estate taxes, and are
assigned based upon the relative sales value, unit or area
methods. Selling costs
are expensed as incurred.
Estimated fair value is based on comparable sales of real estate
in the normal course of business under existing and anticipated
market conditions. The evaluation takes into consideration the
current status of the property, various restrictions, carrying
costs, costs of disposition and any other circumstances, which
may affect fair value including
F-9
managements plans for the property. Due to the large
acreage of certain land holdings, disposition in the normal
course of business is expected to extend over a number of years.
A write-down to estimated fair value is recorded when the
carrying value of the property exceeds its estimated fair value.
These evaluations are made on a
property-by-property
basis. The Company assesses the impairment of real estate assets
whenever events or changes in circumstances indicate that the
net book value may not be recoverable. (See Note 5)
Capitalized
interest and real estate taxes
Interest and real estate taxes incurred relating to the
development of lots and parcels are capitalized to real estate
held for development and sale during the active development
period, which generally commences when borrowings are used to
acquire real estate assets and ends when the properties are
substantially complete. Interest is capitalized based on the
interest rate applicable to specific borrowings or the weighted
average of the rates applicable to other borrowings during the
period. Interest and real estate taxes capitalized to real
estate held for development and sale are expensed as a component
of cost of sales as related units are sold.
The following table is a summary of interest incurred and
capitalized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total interest incurred
|
|
$
|
27,758
|
|
|
$
|
12,272
|
|
|
$
|
4,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning interest capitalized
|
|
$
|
11,590
|
|
|
$
|
4,524
|
|
|
$
|
1,428
|
|
Plus: Interest incurred on notes
payable and junior subordinated debt
|
|
|
27,718
|
|
|
|
11,752
|
|
|
|
2,847
|
|
Plus: Interest incurred on related
party notes payable
|
|
|
40
|
|
|
|
310
|
|
|
|
1,461
|
|
Less: Interest expensed as a
component of cost of sales
|
|
|
(12,094
|
)
|
|
|
(4,996
|
)
|
|
|
(1,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending interest capitalized
|
|
$
|
27,254
|
|
|
$
|
11,590
|
|
|
$
|
4,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
Property, plant and equipment are carried at cost less
accumulated depreciation and are depreciated on the
straight-line method over their estimated useful lives as
follows:
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
|
|
|
|
7 years
|
|
Office equipment
|
|
|
|
|
|
|
5 years
|
|
Computer equipment and capitalized
software
|
|
|
|
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
|
|
|
|
Life of related lease
|
|
When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from their separate
accounts and any gain or loss on sale is reflected in
operations. Expenditures for maintenance and repairs are charged
to expense as incurred.
Investment
in real estate partnerships
Real estate partnerships in which the Company has significant
influence but has less than a controlling interest, and is not
the primary beneficiary under
FIN 46-R,
are accounted for under the equity method. Under the equity
method, the Companys initial investment is recorded at
cost and is subsequently adjusted to recognize its share of
earnings and losses. Distributions received reduce the carrying
amount of the investment. (See Note 5).
Warranty
reserve
Warranty reserves for houses sold are established to cover
potential costs for materials and labor with regard to
warranty-type claims expected to arise during the one-year
warranty period provided by the Company or within the five-year
statutorily mandated structural warranty period. Since the
Company subcontracts its homebuilding work, subcontractors are
required to provide the Company with an indemnity and a
certificate of insurance prior to receiving payments for their
work. Claims relating to workmanship and materials are generally
the primary
F-10
responsibility of the subcontractors and product manufacturers.
The warranty reserve is established at the time of closing, and
is calculated based upon historical warranty cost experience and
current business factors. Variables used in the calculation of
the reserve, as well as the adequacy of the reserve based on the
number of homes still under warranty, are reviewed on a periodic
basis. Warranty claims are directly charged to the reserve as
they arise. The following table is a summary of warranty reserve
activity which is included in accounts payable and accrued
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance at beginning of period
|
|
$
|
1,206
|
|
|
$
|
916
|
|
|
$
|
541
|
|
Additions(a)
|
|
|
1,524
|
|
|
|
888
|
|
|
|
823
|
|
Releases
and/or
charges incurred
|
|
|
(1,061
|
)
|
|
|
(598
|
)
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,669
|
|
|
$
|
1,206
|
|
|
$
|
916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As discussed in Note 4, 2006 includes additions of $360,
assumed in connection with the acquisition of Parker Chandler
Homes. Inc. and Capitol Homes Inc. |
Revenue
recognition
The Company recognizes revenues and related profits from the
sale of residential properties, including multiple units to the
same buyer, and finished lots when closing has occurred, full
payment has been received, title and possession of the property
transfer to the buyer and the Company has no significant
continuing involvement in the property.
Other revenues include revenue from land sales and from
management and administrative support services provided to
related parties, which are recognized as the services are
provided.
Advertising
costs
The total amount of advertising costs charged to general,
selling and administrative expense was $4,223, $1,602 and $863
for the years ended December 31, 2006, 2005 and 2004,
respectively.
Stock
compensation
As discussed in Note 14, the Company currently sponsors
stock option plans and restricted stock award plans. Prior to
December 14, 2004, the Company did not sponsor any such
plans. Effective January 1, 2004, the Company prospectively
adopted Statement of Financial Accounting Standards
No. 123R (revised 2004), Share-Based Payment
(SFAS 123R), which supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees.
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements over the vesting period based on their
fair values at the date of grant. A portion of the costs
associated with stock-based compensation is capitalized to real
estate held for development and sale and the remainder is
allocated to selling, general and administrative expenses.
Income
taxes
Prior to December 17, 2004, the Predecessor company had
elected to be treated as an S corporation under Subchapter
S of the Internal Revenue Code and therefore was not subject to
income taxes. Taxable income or loss was passed through to and
reported by the individual shareholders. Subsequent to the
consolidation the company was reorganized as a C corporation
under which income taxes are accounted for under the asset and
liability method in accordance with Statement of Financial
Accounting Standards No. 109 Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to the differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on the deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
F-11
Earnings
per share
The following weighted average shares and share equivalents are
used to calculate basic and diluted EPS for the years ended
December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Basic earnings per share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net (loss) income
|
|
$
|
(39,845
|
)
|
|
$
|
27,562
|
|
|
$
|
14,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
outstanding
|
|
|
15,148
|
|
|
|
12,870
|
|
|
|
7,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts
|
|
$
|
(2.63
|
)
|
|
$
|
2.14
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(39,845
|
)
|
|
$
|
27,562
|
|
|
$
|
14,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
outstanding
|
|
|
15,148
|
|
|
|
12,870
|
|
|
|
7,347
|
|
Stock options and restricted stock
grants
|
|
|
|
|
|
|
152
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average shares
outstanding
|
|
|
15,148
|
|
|
|
13,022
|
|
|
|
7,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts
|
|
$
|
(2.63
|
)
|
|
$
|
2.12
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006 stock grant issuances
in the amount of 587 shares and options and warrants to
purchase 843 shares of Class A common stock were
excluded from the calculation of dilutive earnings per share.
The exclusion was due to the options and warrants having an
exercise price greater than the average market price of the
common shares. In addition, as a result of a net loss for the
year ended December 31, 2006, stock grant issuances were
excluded from the computation of dilutive earnings per share,
because their inclusion would have been anti-dilutive. For the
year ended December 31, 2005, options to purchase
107 shares of Class A common stock were excluded from
the calculation of dilutive earnings per share. There were no
equity instruments which were excluded from the computation of
diluted earnings per share for the year ended December 31,
2004
Comprehensive
income
For the years ended December 31, 2006, 2005 and 2004,
comprehensive income equaled net income; therefore, a separate
statement of comprehensive income is not included in the
accompanying consolidated financial statements.
Segment
reporting
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131) establishes
standards for the manner in which companies report information
about operating segments. The Company determined it provides one
single type of business activity, homebuilding, which operates
in multiple geographic or economic environments. In addition, as
a result of the Companys acquisitions in Georgia and North
Carolina, which became fully integrated in the fourth quarter of
2006, the Company modified how it analyzes its business during
the fourth quarter of 2006. As such, the Company has
determined that its homebuilding operations now primarily
involve three reportable geographic segments: Washington DC
Metropolitan Area, North and South Carolina, and Georgia. The
aggregation criteria is based on the similar economic
characteristics of the projects located in each of these regions.
F-12
The table below summarizes revenue and operating (loss) income
for each of the Companys geographic segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington DC Metropolitan Area
|
|
$
|
181,058
|
|
|
$
|
212,973
|
|
|
$
|
96,045
|
|
North and South Carolina(a)
|
|
|
32,297
|
|
|
|
11,332
|
|
|
|
|
|
Georgia(b)
|
|
|
32,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
245,881
|
|
|
$
|
224,305
|
|
|
$
|
96,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington DC Metropolitan Area
|
|
|
(10,729
|
)
|
|
|
57,738
|
|
|
|
22,940
|
|
North and South Carolina
|
|
|
(7,811
|
)
|
|
|
(1,022
|
)
|
|
|
|
|
Georgia
|
|
|
(29,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating (loss) income
|
|
|
(47,661
|
)
|
|
|
56,716
|
|
|
|
22,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses unallocated
|
|
|
(18,041
|
)
|
|
|
(14,307
|
)
|
|
|
(2,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (loss) income
|
|
|
(65,702
|
)
|
|
|
42,409
|
|
|
|
20,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
1,487
|
|
|
|
1,450
|
|
|
|
(908
|
)
|
Equity in (losses) earnings of
real estate partnership
|
|
|
(135
|
)
|
|
|
99
|
|
|
|
118
|
|
Minority interest expense
|
|
|
(15
|
)
|
|
|
(30
|
)
|
|
|
(5,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(64,365
|
)
|
|
$
|
43,928
|
|
|
$
|
14,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As discussed in Note 1, the Company entered the North and
South Carolina market on December 14, 2004 as a result of
the merger with Comstock Service. Due to their immateriality,
the results of the North and South Carolina region, for the
period December 14, 2004 to December 31, 2004 have
been included in the Washington DC Metropolitan Area. In
May of 2006, the Company acquired Capital Homes Inc. and
expanded its presence in the North and South Carolina region. |
|
(b) |
|
In January of 2006, the Company entered the Georgia region, by
acquiring Parker Chandler Homes Inc. |
The table below summarizes total assets for each of the
Companys segments at December 31,
|
|
|
|
|
|
|
|
|
Total Assets
|
|
2006
|
|
|
2005
|
|
|
Washington DC Metropolitan Area
|
|
$
|
317,349
|
|
|
$
|
350,970
|
|
North and South Carolina
|
|
|
61,617
|
|
|
|
19,930
|
|
Georgia
|
|
|
94,133
|
|
|
|
|
|
Corporate
|
|
|
44,330
|
|
|
|
60,419
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
517,429
|
|
|
$
|
431,319
|
|
|
|
|
|
|
|
|
|
|
Use of
estimates
The preparation of the financial statements, in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions
that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Material estimates are utilized in the valuation of
real estate held for development and sale, capitalization of
costs, consolidation of variable interest entities and warranty
reserves.
F-13
Recent
accounting pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company is currently reviewing the effect of
SFAS 157 on its consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109, Accounting for
Income Taxes (FIN 48), to create a single
model to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on
de-recognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company will adopt FIN 48
as of January 1, 2007, as required. The cumulative effect
of adopting FIN 48 will be recorded as an adjustment to the
opening balance of retained earnings and is not expected to have
a significant impact on the Companys consolidated
financial position. The adoption of FIN 48 may cause
greater volatility in the effective tax rate going forward. The
Company expects to record a benefit of approximately $1,194 to
opening retained earnings as a result of the adoption of
FIN 48.
|
|
3.
|
CONSOLIDATION
OF VARIABLE INTEREST ENTITIES
|
The Company typically acquires land for development at market
prices from various entities under fixed price purchase
agreements. The purchase agreements require deposits that may be
forfeited if the Company fails to perform under the agreements.
The deposits required under the purchase agreements are in the
form of cash or letters of credit in varying amounts. The
Company may, at its option, choose for any reason and at any
time not to perform under these purchase agreements by
delivering notice of its intent not to acquire the land under
contract. The Companys sole legal obligation and economic
loss for failure to perform under these purchase agreements is
typically limited to the amount of the deposit pursuant to the
liquidated damages provision contained within the purchase
agreement. As a result, none of the creditors of any of the
entities with which the Company enters into forward fixed price
purchase agreements have recourse to the general credit of the
Company.
The Company also does not share in an allocation of either the
profit earned or loss incurred by any of these entities with
which the Company has fixed price purchase agreements. The
Company has concluded that whenever it options land or lots from
an entity and pays a significant non-refundable deposit as
described above, a variable interest entity is created under the
provisions of
FIN 46-R.
This is because the Company has been deemed to have provided
subordinated financial support, which creates a variable
interest which limits the equity holders returns and may
absorb some or all of an entitys expected theoretical
losses if they occur. The Company, therefore, examines the
entities with which it has fixed price purchase agreements for
possible consolidation by the Company under
FIN 46-R.
This requires the Company to compute expected losses and
expected residual returns based on the probability of future
cash flows as outlined in
FIN 46-R.
This calculation requires substantial management judgments and
estimates. In addition, because the Company does not have any
contractual or ownership interests in the entities with which it
contracts to buy the land, the Company does not have the ability
to compel these development entities to provide financial or
other data to assist the Company in the performance of the
primary beneficiary evaluation.
The Company has evaluated all of its fixed price purchase
agreements and has determined that it is the primary beneficiary
of some of those entities. As a result, at December 31,
2006 and 2005, the Company has consolidated 9 entities and
5 entities, respectively in the accompanying consolidated
balance sheets. The effect of the consolidation at
December 31, 2006 and 2005 was the inclusion of $39,634 and
$89,890, respectively, in Inventory not owned
Variable Interest Entities with a corresponding inclusion
of $37,350 (net of land deposits paid of $2,284) and $83,015
(net of land deposits paid of $6,875), respectively, to
Obligations related to inventory not owned.
Creditors, if any, of these Variable Interest Entities have no
recourse against the Company.
F-14
As discussed in Note 12, the company has consolidated an
entity that is wholly owned and controlled by a former executive
of the Company.
On January 19, 2006, the Company acquired all of the issued
and outstanding capital stock of Parker Chandler Homes, Inc., a
homebuilder in the Atlanta, Georgia metropolitan market, for a
cash purchase price of $10,400 (including transaction costs) and
the assumption of $63,800 in liabilities. The results of Parker
Chandler Homes are included in the accompanying consolidated
financial statements beginning January 19, 2006. The
Company accounted for this transaction in accordance with
SFAS 141. Approximately $700 of the purchase price was
allocated to intangibles with a weighted average life of
4.6 years. The intangibles are related to the Parker
Chandler trade name, employment and non-compete agreements
entered into with certain selling shareholders. The remainder of
the purchase price was allocated to real estate held for
development and sale and land option agreements. There was no
goodwill associated with the transaction.
On May 5, 2006, the Company acquired all of the issued and
outstanding capital stock of Capitol Homes, Inc., a homebuilder
in North Carolina, for a cash purchase price of $7,500
(including transaction costs) and the assumption of $20,600 in
liabilities. The results of Capitol Homes are included in the
accompanying financial statements beginning May 5, 2006.
The Company also accounted for this transaction in accordance
with SFAS 141. Approximately $251 of the purchase price was
allocated to intangibles with a weighted average life of
2.7 years. The intangibles are related to the Capitol Homes
trade name, employment and non-compete agreements entered into
with certain selling shareholders. The remainder of the purchase
price was allocated to real estate held for development and sale
and land option agreements. There was no goodwill associated
with the transaction. In accordance with SFAS 141, and as
part of the initial purchase accounting, the Company recorded,
an earn-out payable in the amount $2,463. Subsequent to the
acquisition, employment with certain selling shareholders
terminated and the Company negotiated a release of all earn-out
provisions. As a result, the original purchase accounting entry
recorded as a step-up to the basis of real estate held for
development and sale was reversed.
Subsequent to each acquisition, as a result of the Company
releasing the restrictive terms under the employment and
non-complete agreements and the decision to no longer use the
respective trade names, all amounts assigned to intangibles were
written off.
|
|
5.
|
REAL
ESTATE HELD FOR DEVELOPMENT AND SALE
|
During 2006, the Company continued to experience a slowdown in
demand for homes at several of the Companys communities.
This slowdown in demand resulted in low overall sales volume,
reduced selling prices, cost overruns and increases in
concessions being offered to our customers. Where deemed
appropriate, the Company evaluated its projects to determine if
recorded carrying amounts were recoverable. This evaluation
resulted in impairment charges of $51,200 and
$1,200 million for the years ended December 31, 2006
and 2005. Of the $51,200 in impairment charges during 2006,
$39.9 was incurred during the fourth quarter of 2006. The
impairment charge was calculated using a discounted cash flow
analysis model which is dependent on several subjective factors,
including the selection of an appropriate discount rate,
estimated future selling prices, estimated costs and estimated
absorption rates. The estimates used by the Company are based on
the best available information at the time the estimates are
made. Adverse changes to these estimates in future periods could
cause additional impairment amounts to be recorded.
Total impairments by our reportable segments were as follows:
|
|
|
|
|
Washington DC Metropolitan Area
|
|
$
|
19,900
|
|
North and South Carolina
|
|
$
|
4,700
|
|
Georgia
|
|
$
|
15,200
|
|
F-15
Real estate held for development and sale consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land and land development costs
|
|
$
|
232,693
|
|
|
$
|
119,530
|
|
Cost of construction (including
capitalized interest and real estate taxes)
|
|
|
172,451
|
|
|
|
144,272
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
405,144
|
|
|
$
|
263,802
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Computer equipment and capitalized
software
|
|
$
|
2,228
|
|
|
$
|
540
|
|
Furniture and fixtures
|
|
|
371
|
|
|
|
296
|
|
Office equipment
|
|
|
282
|
|
|
|
243
|
|
Leasehold improvements
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,746
|
|
|
|
1,079
|
|
Less: accumulated depreciation
|
|
|
(798
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,723
|
|
|
$
|
605
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense, included in selling, general, and
administrative in the consolidated and combined financial
statements of operations, amounted to $357, $172 and $106 for
the years ended December 31, 2006, 2005 and 2004,
respectively.
During 2006 the Company capitalized costs totaling approximately
$1,195 related to software and related implementation costs, of
the Companys new enterprise wide accounting and production
management system. The costs were capitalized in accordance with
Statement of
Position 98-1
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. At December 31, 2006 all of
these costs were unamortized as a result of the software go-live
date occurring in January 2007.
|
|
7.
|
INVESTMENT
IN REAL ESTATE PARTNERSHIP
|
In 2001, prior to the Companys acquisition of Comstock
Service in December of 2004, Comstock Service had invested $41
in North Shore Investors, LLC (North Shore) for a
50% ownership interest. North Shore was formed to acquire and
develop residential lots and construct single family and
townhouse units. In 2002, as a result of recognizing its share
of net losses incurred by North Shore, Comstock Service reduced
its investment in North Shore, to $0. The Company, as part of
the acquisition of Comstock Service in December 2004, recorded
this investment in North Shore at $0.
On June 28, 2005 the Company received a capital call from
North Shore in the amount of $719 so that North Shore could
comply with certain debt repayments. Because the Company may be
obligated to provide future financial support to cover certain
debt repayments, the Company is recording its share of losses
incurred by North Shore in the accompanying financial statements
in the amount of $(171) and $(35) for the years ended
December 31, 2006 and 2005, respectively.
During the third quarter of 2005, the Company, as manager of an
affiliated entity, exercised its option rights to purchase the
project acquisition, development and construction loan made for
the benefit of North Shore. The Company finalized the purchase
of the loans on or about September 8, 2005, and issued a
notice of default under the acquisition and development loan at
maturity on September 30, 2005. The Company then filed suit
for collection of the loans against one of the individual
guarantors under the loan on or about October 21, 2005 and
initiated foreclosure proceedings on or about November 18,
2005. On or about December 22, 2005, the individual
guarantor
F-16
subject to the earlier suit filed a countersuit against two of
the officers of the Company who were also individual guarantors
under the acquisition and development loan.
The Company has agreed to indemnify these officers. The Company,
as manager of an affiliated entity, set and held a foreclosure
sale on March 24, 2006 in which it was the highest bidder.
However, transfer of title to the property has been delayed
pending judicial resolution of a suit filed on March 24,
2006 by the non-affiliated 50% owner of North Shore. On
June 30, 2006, the Company, on its own behalf and on behalf
of affiliates, filed an additional lawsuit expanding the number
of party defendants, demanding equitable relief, and demanding
$33,000 in damages. A meeting of the parties to the lawsuit is
scheduled for March 2007 to discuss an acceptable resolution to
the matter.
As of December 31, the Company carried the following
amounts in its financial statements related to North Shore:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Investment in real estate
partnership
|
|
$
|
(171
|
)
|
|
$
|
(35
|
)
|
Development and construction loan
receivable
|
|
$
|
3,477
|
|
|
$
|
2,835
|
|
The Company has evaluated the carrying value of its investment
in and receivables from North Shore. At this time, the Company
does not believe an impairment reserve is warranted. However, it
is possible this may change in future periods. In addition,
based on results of negotiations, the Company may, in the future
be required to consolidate the North Shore entity.
The condensed combined balance sheets and the statements of
operations for the real estate property partnerships accounted
for using the equity method are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Real estate held for development
and sale
|
|
$
|
13,081
|
|
|
$
|
11,263
|
|
Other assets
|
|
|
22
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,103
|
|
|
$
|
11,338
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable
|
|
$
|
14,353
|
|
|
$
|
10,921
|
|
Notes payable to related parties
|
|
|
350
|
|
|
|
1,547
|
|
Other liabilities
|
|
|
64
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,767
|
|
|
|
12,611
|
|
Partners deficit
|
|
|
(1,664
|
)
|
|
|
(1,273
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
partners deficit
|
|
$
|
13,103
|
|
|
$
|
11,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Combined Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
3,920
|
|
|
$
|
22,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(241
|
)
|
|
|
111
|
|
|
|
4,573
|
|
Other expense
|
|
|
141
|
|
|
|
7
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(382
|
)
|
|
$
|
104
|
|
|
$
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of net (loss)
income
|
|
$
|
(135
|
)
|
|
$
|
99
|
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Contract land deposits
|
|
$
|
2,528
|
|
|
$
|
2,825
|
|
Restricted escrow deposits
|
|
|
2,231
|
|
|
|
1,915
|
|
Prepaid income taxes(1)
|
|
|
4,460
|
|
|
|
4,708
|
|
Miscellaneous prepaid and other
|
|
|
4,895
|
|
|
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,114
|
|
|
$
|
11,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prepaid income taxes includes approximately $2,705 in expected
tax benefits as a result of a taxable loss incurred for the
twelve months ended December 31, 2006. The company expects
to carry back this benefit and apply it against 2005 taxable
income. |
|
|
9.
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Trade payables
|
|
$
|
32,990
|
|
|
$
|
35,163
|
|
Warranty
|
|
|
1,672
|
|
|
|
1,206
|
|
Customer deposits
|
|
|
14,932
|
|
|
|
17,817
|
|
Other
|
|
|
6,086
|
|
|
|
4,945
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,680
|
|
|
$
|
59,131
|
|
|
|
|
|
|
|
|
|
|
10. NOTES PAYABLE,
JUNIOR SUBORDINATED DEBT AND COVENANTS
The Company has outstanding borrowings with various financial
institutions and other lenders which have been used to finance
the acquisition, development and construction of real estate
property. Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Debt
|
|
Due
|
|
2006
|
|
|
2005
|
|
|
Secured acquisition, development
and construction notes(a)
|
|
Various
|
|
$
|
218,461
|
|
|
$
|
138,097
|
|
Secured revolving credit line(b)
|
|
May 2009
|
|
|
39,981
|
|
|
|
2,046
|
|
Junior subordinated note(c)
|
|
June 2036
|
|
|
30,000
|
|
|
|
|
|
Unsecured term loans(d)
|
|
Various
|
|
|
6,764
|
|
|
|
|
|
Subordinate secured notes(e)
|
|
Various
|
|
|
197
|
|
|
|
2,851
|
|
Sub-total
|
|
|
|
|
295,403
|
|
|
|
142,994
|
|
|
|
|
|
|
|
|
|
|
|
|
Other notes payable
related party
|
|
|
|
|
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
295,403
|
|
|
$
|
143,657
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Secured
acquisition, development and construction notes
We have several loans with various banks that provide us with
specific project financing. These loans are secured by specific
project assets and are used for land acquisition, development
and construction. The loans bear interest at various rates,
based on Prime or LIBOR benchmarks with a certain amount of
additional basis points added. At December 31, 2006 the
weighted average stated rate was approximately 9.21%. The
Company is required to maintain certain financial covenants with
these various institutions. Under the terms of the agreement,
the
F-18
Company is required to maintain a specified EBITDA to debt
service ratio, a minimum tangible net worth, a maximum leverage
ratio and a global sold to unsold ratio. At December 31,
2006, the Company was not in compliance with the covenants. In
February and March of 2007 the Company successfully
re-negotiated all covenants for the period covering
December 31, 2006 and all future periods. The Company is in
compliance will all covenants as revised. The notes mature at
various times between March 2007 and December 2007.
(b) Secured
revolving credit lines
In May 2006 the Company entered into a $40 million
borrowing base revolving credit agreement secured by certain
project assets. The interest rate is 30 day LIBOR plus
2.25% maturing May 2009. At December 31, 2006 the interest
rate was 7.57%. Under the terms of the agreement, the Company is
required to maintain a specified EBITDA to debt service ratio, a
minimum tangible net worth, a maximum leverage ratio and a
global sold to unsold ratio. At December 31, 2006, the
Company was not in compliance with the covenants as defined. In
March of 2007 the Company successfully re-negotiated all
covenants for the period covering December 31, 2006 and
entered into a forbearance agreement against existing and future
defaults through March 2008. The Company is in compliance with
all covenants of the forbearance agreement. The forbearance
agreement provides that the bank will not enforce any
remedys that are available to it, for a period up to March
2008, in the event of a default by the Company.
(c) Junior
subordinated note
In May 2006 the company closed on a $30 million junior
subordinated note offering. The term of the note was thirty
years, maturing June 2036, and could have been retired after
five years with no penalty. The interest rate was fixed at 9.72%
for the first five years after which it converted to a floating
rate of LIBOR plus 4.2% for the remaining twenty-five years. The
Company was required to maintain certain financial covenants
under the terms of the indenture, including a minimum tangible
net worth, fixed charge coverage ratio and maximum leverage
ratio. At December 31, 2006, the Company was not in
compliance with the fixed charge coverage ratio. In March of
2007, the Company retired the notes and closed on a new Senior
Unsecured note offering with the same lender in the same amount
at the same rate of interest. The new $30 million note has
a term of 10 years and requires a lower fixed charge
coverage ratio and a lower tangible net worth with a phased
increase to levels consistent with the original junior
subordinated note. He new notes also require the Company to
create and maintain an interest reserves in the amount
equivalent to three quarters of interest payments until the
original fixed charge coverage ratio is sustained for four
consecutive quarters. The original purchasers of the newly
issued note have a right, at their option, to force a $2,000 pay
down on or after September 30, 2007 for so long as they are
the owners of the notes.
(d) Unsecured
term loans
At December 31, 2006 we had $6,764 outstanding under
unsecured term loan agreements with two financial institutions.
These unsecured loans have a weighted average stated rate of
interest of approximately 8.37%. There are no financial
covenants associated with these loans. The notes mature at
various times between March 2007 and December 2007.
(e) Subordinated
secured notes
The Companys subordinated second trust loans are
collateralized by subordinate liens on specific assets held for
development and construction. These subordinate liens are
subject to inter-creditor agreements with the senior lenders and
are used by the Company to satisfy all or a portion of the
equity requirements of its senior lenders. The interest rates
range from 8.0% to 8.4% with various maturity dates. At
December 31, 2006 the weighted average stated rate was
approximately 9.21%. There are no financial covenants associated
with these loans. These notes mature at various times between
June 2007 and March 2008.
F-19
The Company expects to comply with the financial covenants under
the amended credit agreements for the next twelve months.
Non-compliance with such covenants would allow the lenders to
demand immediate repayment of all outstanding borrowings under
the facility. The inability of the Company to comply with its
financial covenants, obtain waivers for non-compliance or obtain
alternative financing to replace the current credit facility
could have a material adverse effect on the Companys
financial position, results of operations and cash flows.
As of December 31, 2006, future maturities of our
borrowings are as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2007
|
|
$
|
205,922
|
|
2008
|
|
|
16,986
|
|
2009
|
|
|
39,981
|
|
2010
|
|
|
2,514
|
|
2011 and thereafter
|
|
|
30,000
|
|
|
|
|
|
|
Total
|
|
$
|
295,403
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004,
aggregate debt had a weighted average annual effective interest
rate of 9.7%, 9.2%, and 6.9%, respectively.
11. COMMON
STOCK
As discussed in Note 1, the Company immediately prior to
the IPO as a result of its merger with Comstock Holdings, had
4,333 and 2,734 shares Class A and B Common Stock
outstanding. Class A and B Common Stock shares bear the
same economic rights. However for voting purposes, Class A
stock holders are entitled to one vote for each share held while
Class B stock holders are entitled to fifteen votes for
each share held.
As a result of the IPO, the Company sold 3,960 Class A
shares of Common Stock. The Company also sold an additional
594 shares of Class A Common Stock pursuant to the
underwriters exercise of their over-allotment option.
On June 22, 2005 the Company completed a follow-on offering
in which 2,360 shares of Class A Common stock were
sold