Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

or

For the transition period from                      to                     

Commission File Number: 0-23270

Dominion Homes, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 614-356-5000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: common shares without par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

Indicate by check mark whether the registrant is an accelerated filer.    Yes   x    No   ¨

The aggregate market value of our common shares held by non-affiliates was $84,555,453 on June 30, 2003.

As of March 12, 2004, there were 8,220,465 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated by reference in Part III.

TABLE OF CONTENTS

PART I

PART I

All references to “we,” “us,” and “our”, “Dominion,” or the “Company” in this Annual Report on Form 10-K mean Dominion Homes, Inc. and its consolidated subsidiaries, except where it is made clear that the term only means the parent company.

Overview

We are a leading builder of high-quality homes in Central Ohio and Louisville, Kentucky. We are expanding our presence in Kentucky by entering the Lexington market and expect to begin selling homes in Lexington during the second quarter of 2004 and to begin delivering homes there during the fourth quarter of 2004. Our customer-driven focus targets entry-level and move-up home buyers. We offer a variety of homes that are differentiated by price, size, standard features and available options. Our homes range in price from approximately $100,000 to more than $350,000 and in size from approximately 1,000 to 3,500 square feet.

We trace our homebuilding roots to 1952 when Donald A. Borror, our Chairman Emeritus, built his first home in Columbus, Ohio. Donald Borror and the Borror family grew the homebuilding business, and operated it as part of the homebuilding and related divisions of BRC Properties Inc. (“BRC”). We were organized as an Ohio corporation in October 1993 under the name Borror Corporation in anticipation of our initial public offering, which we completed in March 1994. In connection with the initial public offering, we acquired from BRC, our predecessor company and our largest shareholder, its homebuilding operations. BRC is primarily owned and controlled by the Borror family. In May 1997, we changed our name to Dominion Homes, Inc.

Our principal corporate offices are located at 5000 Tuttle Crossing Blvd., Dublin, Ohio 43016. The telephone number of our principal corporate offices is (614) 356-5000 and our web site address is www.dominionhomes.com.

Our Markets

We presently build homes in Central Ohio and Louisville, Kentucky. We announced our entry into the Lexington, Kentucky market in late 2003 and expect to begin delivering homes in the Lexington, Kentucky market in the fourth quarter 2004. Our markets have diverse economic and employment bases with steady population growth over the last 10 years. We believe we are the largest homebuilding company in both Central Ohio and Louisville, Kentucky, based on the number of new homes delivered.

In 2003, we delivered approximately 32% of all new homes in the Central Ohio market. Columbus is the capital of Ohio, the county seat of Franklin County and the largest city in Ohio. The Columbus Metropolitan Statistical Area (the “Columbus MSA”) has a population of approximately 1.7 million. As of December 2003, the unemployment rate in the Columbus MSA was 4.1% and the national average was 5.7%. Columbus is the home of The Ohio State University. In addition, a number of notable organizations have their headquarters in Central

Ohio, including Honda of America Manufacturing, Inc., American Electric Power Company, Inc., The Limited, Inc., Nationwide Insurance Company, Wendy’s International, Inc., Battelle Memorial Institute, The Scotts Company and Cardinal Health, Inc. The Columbus MSA includes Franklin, Pickaway, Madison, Fairfield, Delaware, Licking, Union and Morrow County. We build homes in all of these counties, except Morrow County.

In 1998, we expanded our operations into Louisville, Kentucky. The Louisville Metropolitan Statistical Area (the “Louisville MSA”) has a population of approximately 1.0 million. As of December 2003, the unemployment rate in the Louisville MSA was 4.5%. Louisville is the home of the University of Louisville and the headquarters for major corporations such as Humana, Inc., Yum! Brands, Inc. and KFC Corporation. Other major employers in Louisville include GE Appliance, Ford Motor Company and United Parcel Service, Inc. The Louisville MSA consists of Jefferson, Oldham, Bullitt, Trimble, Nelson, Meade, Spencer, Shelby and Henry Counties in Kentucky and Harrison, Floyd, Clark and Washington Counties in Southern Indiana. We are presently building homes in Jefferson and Oldham counties and expect to begin building homes in Shelby and Clarke counties during 2004.

In the fourth quarter of 2003, we announced our expansion into Lexington, Kentucky. We chose Lexington because of its strong economy, its proximity to our existing operations in Louisville and our ability to share many systems and personnel in developing communities and building homes in both of our Kentucky locations. The Lexington Metropolitan Statistical Area (the “Lexington MSA”) has a population of approximately 486,000. At December 31, 2003, the unemployment rate in the Lexington MSA was 3.5%. Lexington is the home of the University of Kentucky, Toyota Motor Manufacturing and Lexmark International.

Our Products

We focus on providing high-quality, affordably priced single-family homes primarily for entry-level and first-time move-up home buyers. We currently offer three distinct series of homes, which are differentiated by price, size, standard features and available options.

$220,000 and in size from approximately 1,200 to 2,300 square feet. Homes in our Celebration Series are efficiently designed and incorporate many popular features that are typically offered as options by our competitors. Standardizing these features results in efficiencies that lower the overall cost of our homes and provides us with a competitive price advantage.

We also regularly experiment with new types of homes and communities that are aimed at expanding our target markets.

Community Development

The community development process generally consists of two phases: (1) land acquisition and development, and (2) home construction.

Land Acquisition and Development. One of our key strengths is our ability to identify and economically acquire land to be developed for our homebuilding operations. We are the developer of approximately 90% of the communities in which we build homes. This practice enables us to: (1) improve our profit margins by reducing the cost of finished lots, (2) maintain an adequate supply of finished lots to meet market demand, (3) control the details of development in order to create a distinctive look and feel in our communities, and (4) streamline and coordinate the construction process.

We believe that our understanding of our homebuilding markets gives us an advantage in identifying and acquiring unimproved land with good market potential. In considering the suitability of unimproved land for development, we review factors such as: (1) availability of existing community services such as sewers, water, gas and electricity, (2) estimated costs of development, (3) the quality of surrounding school systems, (4) population growth patterns, (5) proximity to developed residential and retail areas, (6) employment growth rates, (7) anticipated absorption rates for new housing, and (8) availability of transportation.

To limit our risk, we generally attempt to control land through the use of option and contingent purchase contracts when purchasing land. These contingent purchase contracts condition our obligation to purchase land subject to our review and approval of such matters as zoning, utilities, soil and subsurface conditions, environmental and wetland conditions, title matters, economic feasibility of development and other property-related criteria. We generally do not acquire unimproved land until necessary environmental studies and zoning permits have been obtained and the land is served by utilities. Our engineering and design professionals plan and engineer the land and oversee the construction of streets, sewers, water and drainage facilities and other improvements to meet our specifications. In developing land, we are required by some municipalities and other governmental authorities to provide letters of credit or performance bonds to secure performance of our obligations to install sewers, streets and other improvements.

Through our control of the development process, from the design of each community entryway to the placement of streets and amenities, we create a distinctive look and feel in each of our communities. We generally complete the sale of homes in our communities in time periods that range from three to five years from first to last sale, with smaller communities generally taking less time to complete than larger communities. Certain large communities can take more than five years to complete. In addition, we typically incorporate an association of the homeowners to ensure the continued maintenance of the common areas after the community is developed.

We selectively enter into joint ventures with other homebuilders to own and develop communities. Development costs of the joint ventures generally are funded by the participants. The participants in the joint ventures acquire substantially all of the developed lots. At December 31, 2003, we were actively participating in 12 joint ventures.

Land inventory that we own consists of either (1) land titled in our name or (2) our pro rata share of land titled in the name of one of our joint ventures. Land inventory that we control consists of land that we have committed to purchase or have the right to acquire under contingent purchase or option contracts. We expect that a portion of our contingent contracts will not be executed for various reasons. We continually review our land inventory and contingent contracts to determine which contracts are reasonably likely to result in an executed land purchase.

The following table sets forth an estimate of our land inventory as of December 31, 2003 and includes only land under contingent contracts which we believe are reasonably likely to result in an executed land purchase:

Home Construction. To further improve our building efficiency and to better control our supply and cost of raw materials, we operate our own lumber and construction products distribution centers. The distribution centers enable us to provide just-in-time delivery of materials to our Central Ohio job sites, and to purchase high-quality lumber products and other building materials, including shingles, doors and windows, directly from mills and wholesalers at more attractive prices than are available to many of our competitors. We occasionally purchase lumber for delayed delivery to ensure adequate supply and predictable costs. Substantially all of the lumber and other building materials maintained at our distribution centers are for our own use. In addition to buying and delivering building materials, most of the floor trusses used in our Central Ohio homes are manufactured at our primary distribution center.

We act as the general contractor for the construction of our homes. Our construction superintendents, together with the construction managers to whom they report, monitor

construction, coordinate the activities of subcontractors and suppliers, maintain quality and cost controls, and monitor compliance with zoning and building codes. We use subcontractors to minimize our employment cost, equipment and building supply inventory. This practice also increases our ability to respond to changes in the demand for housing. We have longstanding business relationships with many of our subcontractors. These relationships, combined with our building volume, year-round construction schedule, and efficient home designs, have enabled us to negotiate favorable agreements with our subcontractors and allow us to better control the costs of skilled labor.

We maintain information and administrative systems to support our construction operations. These systems allow us to control construction costs by providing us the information necessary to monitor subcontractor performance and expenditures on each home. Subcontracted work is authorized by work orders. The cost of deviations from the work order must be approved for payment by our construction superintendents and we investigate significant cost variances. These information systems also integrate our sales reporting, contract management and material distribution systems into the construction process.

Our general practice is to start construction of a Celebration or Tradition Series home when we have obtained an executed sales contract. However, we selectively start construction of a limited number of homes in these series without a sales contract in anticipation of seasonal demand and to attract customers, such as corporate transferees, who need homes in 60 to 90 days. Also, our Independence Series homes’ production method dictates that we start a limited number of these homes without a sales contract. We normally obtain sales contracts on these inventory homes early in the construction process. An inventory home is also created when a sales contract is cancelled after construction has commenced, generally because the purchaser has not satisfied a contingency. At December 31, 2003, we had 248 inventory homes in various stages of construction, compared to 164 inventory homes at December 31, 2002. We also start the foundation of homes on a strategic and selective basis during the fall and early winter in order to moderate the effects of weather on the building process. These foundations are not included in the number of inventory homes we report.

Marketing Strategy—“The Best of Everything^®”

We market our customer-driven focus as “The Best of Everything.” As part of this philosophy, we build affordable homes with high-quality materials and construction practices, and we provide our home buyers with a high level of customer service.

Marketing and Sales. We have an extensive targeted marketing plan, which includes advertising by broadcast, newspapers, magazines, direct mail and billboards. Our advertising typically emphasizes the quality of our homes, the location of our communities, the brand name components used in our homes, the wide variety of our home styles and the longevity of the Company. We believe these factors differentiate our products and reinforce our “Dominion Homes-The Best of Everything^®” brand awareness program. According to a third party survey conducted during 2003, over 97% of Central Ohio respondents recognized the Dominion Homes^® brand.

We conduct our home sales from more than 50 furnished model homes located throughout Central Ohio and Louisville, Kentucky, and from two Dominion HomeStores^® in

Central Ohio. The two Dominion HomeStores^® primarily focus on sales through the realtor community and last year generated more than $111.5 million in sales. We encourage independent realtor participation in the home sales process because realtors often introduce our homes to customers who might not otherwise consider purchasing a new home.

We employ approximately 60 trained sales representatives. Our sales representatives are trained to fully explain the features and benefits of our homes, the available mortgage financing opportunities and the construction process. Our sales representatives are also trained to help the buyer determine which home design best suits his or her needs. We devote significant attention to the continued training of our sales representatives to assure high levels of professionalism and product knowledge. Our sales representatives are Company employees and are compensated on a commission-only basis. We believe that the use of an in-house sales staff allows for a more knowledgeable sales presentation and enables us to communicate a consistent message to our customers.

During 2003, we built a second central Ohio office building that includes our customer care and sales center. We are one of the first of the larger homebuilders in the country to combine, in a single location, all of the homebuilding operations that directly interact with customers. These operations include sales services, showroom and decorating services, mortgage services and title and closing services. We expect that, by combining these operations in one location, we will provide a more effective and satisfying home buying experience for our customers.

Occasionally, we use promotional and sales incentives, such as discounts on the purchase price of our homes, to market our products. We also offer discounts to previous purchasers of our homes, our vendors, our own employees and select companies through our “Best Benefit” program.

Quality Homes and Communities. Our more than 50 communities offer customers a wide-range of choices in neighborhood features, such as schools, bicycle and jogging trails, walking paths, park areas, playgrounds and swimming facilities. We believe that our homes have more standard features than any competitor selling at comparable prices in our markets. Every Dominion Home includes a front porch, maintenance-free exterior, two-car garage, cathedral ceiling, air conditioning, all major kitchen appliances and fully sodded yard. We use nationally recognized and industry leading brand name components in constructing our homes. These components include Andersen^® wood windows, the Kohler^® family of bathroom and kitchen fixtures, Trane^® natural gas furnaces, Armstrong^® flooring, General Electric^® appliances, Wilsonart^® decorative laminate and Aristokraft^® cabinets.

As part of our “Gold Medal” quality assurance program, every home we build undergoes eight separate inspections by our construction personnel. As part of this program, members of our senior management also inspect randomly selected homes on a monthly basis. We offer a comprehensive warranty program that features a two-year warranty covering the roof, windows, doors and all mechanical elements of our homes, including the heating, plumbing and electrical systems. We also offer a 30-year warranty covering all major structural components. The structural warranty on each home is automatically transferred to subsequent owners of the home. We also transfer to our customers all warranties provided by manufacturers and suppliers.

Customer Financing. Through our mortgage financing services subsidiary, Dominion Homes Financial Services, Ltd. (“DHFS”), we assist virtually all of our customers in obtaining mortgages to finance the purchase of their homes. We do not provide mortgage financing to our customers and, consequently, do not bear the interest rate and market risks associated with making mortgage loans. Our services include loan application counseling and processing. Since the inception of DHFS, we have used an agent to identify and negotiate the placement of mortgages with third party mortgage lenders. Effective in March of 2004, we expect that we will end our relationship with this agent and that DHFS will expand its services to identify and negotiate the placement of mortgages to third party mortgage lenders. Our expanded mortgage services are expected to offer our customers additional mortgage programs, a better home buying experience and increase our earnings from DHFS. DHFS will not, itself, provide mortgage financing to our customers. In 2003, DHFS provided mortgage financing services for approximately 2,700 of our customers, representing approximately 88% of our closings. The average mortgage amount was approximately $165,000. DHFS generated revenues of approximately 2.5% of the total loan volume.

We offer to our customers a number of attractive loan options that include interest rate buy downs and payment of the customer’s loan origination fees, rate commitment fees, discount points and some closing fees. We currently offer several “no money down” programs to purchasers of our Independence and Celebration Series homes. These “no money down” programs are provided through several non-profit corporations and are permitted by the U.S. Department of Housing and Urban Development. These “no money down” programs allow a home buyer to receive gift funds from the non-profit corporation to be used as a down payment. We are obligated to make a contribution to the non-profit corporation that is slightly larger than the amount of the gift to the home buyer. We aggressively market these “no money down” programs because they enable us to sell homes to entry-level home buyers who otherwise would not have the down payment necessary to qualify for mortgage financing. A significant percentage of our home buyers in 2003 participated in one of the “no money down” programs.

The majority of our homes are financed under Federal Housing Administration (“FHA”) or Department of Veteran Affairs (“VA”) mortgage programs. In comparison to conventional financing, FHA and VA financing generally allow customers to purchase homes with a higher percentage of their income directed toward housing expenses and with lower down payments. FHA and VA financing rules are also generally more flexible in the amount of points and closing costs that the seller may pay. During 2003, approximately 72% of our closings involved government insured financing. At January 1, 2004, the maximum dollar amount for FHA mortgages was $208,801 in the Columbus MSA, $180,405 in the Louisville MSA and $160,176 in the Lexington MSA.

We sell our homes using standard sales contracts. These contracts generally require the home buyer to make a $500 deposit when the contract is signed and to pay the balance of the cash down payment at the start of construction. Our “no money down” programs require an initial deposit of $250 when the contract is executed and a second $250 deposit when the home buyer’s loan is approved. Both of these deposits are returned to the home buyer upon the successful closing of the home.

Customer Communication. Our website provides an additional means to market our products and communicate with our customers. Through our website, a potential home buyer can

take virtual tours of models and search our home inventory by specifying size, location, amenities and price. Additionally, a home buyer can submit mortgage applications online to our mortgage financing services subsidiary. Our website allows our home buyers to communicate with their sales representatives and construction superintendents, and to monitor construction progress.

Most of our closings are performed by our affiliated title insurance agencies. Alliance Title Agency, Ltd. (“Alliance”) provides title insurance for most of our home closings in Central Ohio. Alliance is an Ohio limited liability company of which we own 49.9%, the maximum percentage allowed under Ohio law. Our wholly-owned subsidiary, Alliance Title Agency of Kentucky, LLC, a Kentucky limited liability company, began providing title insurance for our Louisville, Kentucky home closings in early 2002, and will provide title insurance for our Lexington, Kentucky home closings.

We believe that maintaining affiliated title insurance agencies facilitates quick and convenient closings. The title insurance agency personnel are trained to have a basic understanding of our home construction process and “The Best of Everything” marketing strategy. We also believe that having affiliated title insurance agencies and a mortgage financing services subsidiary enhances communication between these entities and the Company.

After a home closing, we survey our home buyers twice and invite them to complete a questionnaire that rates their home buying experience. This survey includes rating their sales representative, construction superintendent, decorating consultant and loan counselor. The questionnaires also provide other information regarding the home buyer’s building experience. We use the information obtained from these questionnaires to refine our product offerings.

Value Engineering. We have enhanced “The Best of Everything” marketing strategy through our innovative approach to home design and construction. We use streamlined architectural designs with more standard features and amenities than are normally found in new homes at comparable prices. This approach enables us to use standard-sized building materials and reduces construction deviations and change orders. On an ongoing basis, we work closely with our vendors to further refine and standardize our building material needs, enabling us to realize additional cost and supply efficiencies. This focus on the design and construction process allows us to deliver affordably priced homes with more consistent quality and shorter construction times.

Our design work is performed by our architectural department. Each home design is value engineered for greater efficiency in the building process and to lower the cost to the home buyer. On an ongoing basis, the architectural department uses its knowledge of our markets and feedback from our home buyers to create new designs and modify existing designs to keep pace with changing consumer tastes and preferences. The architectural department uses computers and computer graphics that provide flexibility in creating new designs, modifying existing designs and accurately estimating the materials required for any particular design.

Growth Opportunities

We believe that there are opportunities for continued growth in our Central Ohio and Kentucky markets. We continue to identify and economically acquire property to provide lots for

future homebuilding. Through the introduction of affordably priced product offerings, such as our Independence Series, we intend to continue to expand the potential customer base that can afford our homes. We believe that the entry-level and move-up buyer markets have the potential to provide a consistent, stable demand for our homes.

We also continually evaluate opportunities to expand into new markets. We consider expansion opportunities through either creating a start-up operation or acquiring an existing homebuilding company. In evaluating new markets, we consider many of the following factors:

Intellectual Property

We have obtained federal registrations for the service marks Dominion Homes^®, The Best of Everything^®, The Dominion HomeStore^® and Dominion Homes Financial Services ^®. We have obtained or applied for design patents on many of our homes. We also either have

obtained or applied for copyright registrations for both the architectural plans and the architectural works for virtually all of the homes that we build.

Employees

On December 31, 2003, we employed 628 individuals, which included 567 employees (including four part-time employees) in Central Ohio and 61 employees (including 1 part-time) in Louisville, Kentucky. We employed 194 individuals in construction, 22 in warranty, 166 in sales and marketing, 76 in the lumber and building materials distribution center, 23 in land development, 27 in mortgage services and 120 in management, professional services, administrative or clerical positions. Our employees are not represented by labor unions or covered by collective bargaining agreements. We believe our relationships with our employees and subcontractors are generally good.

Other Information

Information regarding seasonality, our practices regarding working capital items and backlog orders is contained in this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information regarding the availability of labor and raw materials, competition and governmental regulations affecting our business is contained in the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Risks – Material or labor shortages can adversely affect our business; The homebuilding industry is highly competitive; and, Our business is subject to substantial government regulation which could cause delays, increase costs, and restrict or prohibit homebuilding activity in certain regions.”

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 SEC’s Public Reference Room at 450 Fifth Street, NW, 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 at our Internet website, http://www.dominionhomes.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

We lease from BRC our two corporate offices in Central Ohio. The first building is approximately 40,000 gross square feet (37,557 net rentable square feet) and the lease commenced January 1, 1998. The lease has a term of twelve years, a triple net rental rate of $12.00 per square foot and provides for two options to renew for periods of five years each at

then-current market rates. The rental rate for the building was established by an MAI appraiser commissioned by a committee comprised solely of independent members of our Board of Directors, and confirmed in a review by a second MAI appraiser.

During 2002, we purchased land and contracted to build a second corporate office building. On October 31, 2003, we sold this building to BRC for its approximate cost of $4.5 million and leased it back. This second office building is approximately 35,000 gross square feet (33,260 net rentable square feet) and the lease commenced November 1, 2003. The lease has a term of fifteen years and a triple net rental rate per square foot of $12.58 for the first five years, $13.18 for the second five years and $13.83 for the last five years. The lease also provides for two options to renew for periods of five years each at then-current market rates. The terms of the sale and leaseback were negotiated based on bids from multiple third parties, reviewed by an MAI appraiser and approved by a committee comprised solely of independent members of our Board of Directors.

During 2003, we leased from BRC an aggregate of 15,750 square feet of commercial space in Central Ohio. We used this space for our decorating center, centralized sales office and mortgage financing services company. The weighted average lease rate was $11.20 a square foot. A committee comprised solely of independent members of our Board of Directors approved each of the leases after review of a report by an independent MAI appraiser. During November 2003, the staff and activities in this space moved into our new corporate office building.

During 2003, we leased from a non-affiliated third party 7,658 square feet of office space while completing our second corporate office building. The lease ended December 31, 2003. We also have short-term leases of warehouse space in Central Ohio with non-affiliated third parties of 1,200 square feet and 25,000 square feet for storing model furnishings and building material, respectively.

We lease approximately 6,400 square feet of commercial space in Louisville, Kentucky from a non-affiliated party for our Louisville, Kentucky offices and approximately 4,800 square feet of commercial office space from a non-affiliated third party for our Lexington, Kentucky offices.

We own a distribution center, which is located on approximately six acres in Columbus, Ohio. The facility includes nine buildings, constructed of steel, wood or concrete block and contains approximately 75,000 square feet of space.

From time to time, we participate in a program with a non-affiliated party to sell and lease back our model homes. At December 31, 2003, we leased eleven model homes under this program on a month to month basis. All of these leases were originated prior to 2003.

We are involved in various legal proceedings that arise in the ordinary course of business, some of which are covered by insurance. In the opinion of our management, there are no currently pending proceedings that will have a material adverse effect on our financial condition or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

PART II

Our common shares are traded on the NASDAQ National Market under the symbol “DHOM.” The following table sets forth, for the periods indicated, the high and low closing prices for our common shares, as reported by the NASDAQ National Market.

On March 12, 2004, the last sale price of our common shares, as reported by the NASDAQ National Market, was $36.38 per share, and there were approximately 220 holders of record of our common shares.

We have never paid any cash dividends on our common shares. From time to time, our Board of Directors evaluates the desirability of paying cash dividends. The future 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. The provisions of our existing bank credit facility limit the amount of cash dividends that we may pay during any calendar year to 50% of net income after taxes for such year.

The following table sets forth our selected consolidated financial and operating data as of the dates and for the periods indicated. This table should be read together with “Management’s

Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Form 10-K.

Overview

We are a leading builder of high-quality homes in Central Ohio (primarily the Columbus Metropolitan Statistical Area) and Louisville, Kentucky. In late 2003, we expanded our presence in Kentucky by entering the Lexington market. Our customer-driven focus targets entry-level and move-up home buyers. We offer a variety of homes that are differentiated by price, size, standard features and available options. Our homes range in price from approximately $100,000 to more than $350,000 and in size from approximately 1,000 to 3,500 square feet.

Our net income for 2003 increased 29.9% to a record $31.8 million, or $3.94 per diluted share, from $24.5 million, or $3.28 per diluted share, for 2002. The positive operating results are due in part to the continued development of our entry level or Independence Series, which we introduced in 2001. In 2003, closings from our Independence Series homes increased to over 30% of our total closings versus approximately 15% in 2002. Our market share in Central Ohio, based on new homes delivered, has increased to 32% in 2003 from 28% in 2002 and the majority of the increase was due to the expansion of the Independence Series.

Also during 2003, the percentage of closings generated by our Louisville, Kentucky division increased from approximately 10% in 2002 to approximately 15% in 2003. We continue to expand our investment in this market and expect to see continued growth.

The weighted average number of diluted shares outstanding during the twelve months ended December 31, 2003 increased 8% to 8,076,174 from 7,457,985 shares during the twelve months ended December 31, 2002 due to the full year impact of our secondary public offering completed in June 2002. On February 10, 2003, we announced that our Board of Directors had authorized the repurchase of up to 250,000 of our common shares. The repurchase plan ended on December 31, 2003. During the first quarter of 2003, we purchased 147,500 common shares at an aggregate purchase price of $1.8 million.

In 2004, we intend to continue our three-point growth strategy, which is to: (1) increase market share in Central Ohio, (2) begin sales in Lexington, Kentucky and expand our overall market share in Kentucky, and (3) review new markets for potential expansion.

Central Ohio is our strongest market providing over 75% of our closings. We expect to add additional communities during 2004 in order to expand this market.

We opened our Louisville, Kentucky operations in 1998 and, while 2003 closing information is not yet available, we believe that we have become the largest single family homebuilder in this market. In late 2003, we expanded into the Lexington, Kentucky market. We expect to begin selling homes in Lexington during the second quarter of 2004 and to have our first closings in the fourth quarter of 2004. As with our other markets, our goal is to become the dominant homebuilder in Lexington, Kentucky.

In evaluating potential new markets, we look for a market that has many of the following characteristics: (1) a potential for economies of scale, (2) a highly

fragmented homebuilder market, (3) a relatively stable and diverse economy, (4) demographics similar to our current markets, and (5) compatibility with our existing product offerings.

Effective December 3, 2003, we expanded and extended our unsecured credit facility. The facility was expanded from $175 million to $250 million and the maturity date was extended through May 2007. We intend to use this expanded credit facility to fund our growth.

The year 2004 will be a transition year for Dominion Homes. During 2003, the Company sold out of several of its communities faster than anticipated due to strong demand for our products combined with an attractive interest rate environment. During 2003, we also experienced delays in the development of replacement communities due to municipalities becoming more restrictive. As a result, the number of communities at December 31, 2003 in which we were actively selling homes was comparable to the number at December 31, 2002. Through expansion into Lexington, Kentucky and the development of new communities in Central Ohio and Louisville, Kentucky, we expect to increase our number of new communities by up to 35% by the end of 2004. Barring a significant change in market conditions, we anticipate a marginal increase in earnings in 2004 and a significant increase in year end backlog, which we expect will put the Company in a position for strong earnings growth in 2005.

Business Risks

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Annual Report on Form 10-K contains various “forward–looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “expect,” “hope” or similar words. These statements discuss future expectations, contain projections regarding future developments, operations or financial conditions, or state other forward-looking information. These forward-looking statements involve various important risks, uncertainties and other factors which could cause our actual results for 2004 and beyond to differ materially from those expressed in the forward-looking statements. Included among such important risks, uncertainties and other factors are the following:

We are particularly affected by changes in national and local economic, business and other conditions. Our financial position and results from operations are affected by changes and cycles in national and local economic, business and other conditions, most of which are beyond our control. These conditions include:

In addition, domestic terrorist attacks and the threat or the involvement of the United States in international armed conflict may also adversely affect general economic conditions, consumer confidence and the homebuilding markets.

Interest rate increases or changes in federal lending programs could adversely affect sales of our homes. Virtually all purchasers of our homes finance their purchase through third party lenders who offer conventional, FHA and VA mortgage financing. A material increase in mortgage interest rates or unfavorable changes to these lending programs would adversely affect the ability of prospective home buyers, particularly our targeted entry-level home buyers, to obtain mortgage financing. We also depend upon the availability and cost of mortgage financing for buyers of the current homes owned by potential purchasers of our homes. Prior to purchasing our homes, some of our home buyers must sell their current homes, and these sales depend on the availability and cost of mortgage financing. In addition, because the majority of our home buyers use FHA mortgage financing, a material reduction in the scope or funding of FHA mortgage programs could have a material adverse effect on our sales.

In particular, a substantial number of our home buyers use down payment assistance programs, which allow home buyers to receive gift funds from non-profit corporations to be used as a down payment. At one time, HUD proposed rules which would have prohibited the use of gift fund programs in conjunction with FHA-insured mortgage loans. HUD subsequently withdrew these proposed rules, but has continued to increase its regulation of gift fund programs. If HUD were to prohibit or make materially unfavorable changes to the use of gift fund programs, we would expect to offer, as we have in the past, a different type of down payment program. There can be no assurance, however, that any such replacement program would be as attractive to home buyers as the programs offered today and that our sales would not suffer.

Our business is subject to substantial government regulation which could cause delays, increase costs, and restrict or prohibit homebuilding activity in certain regions. We are subject to substantial local, state and Federal requirements concerning zoning, resource protection, building design and construction, and similar matters. These requirements include local regulations, which impose restrictive zoning and density requirements to limit the number of homes that can eventually be built within the boundaries of a particular location. Particularly in the case of local political subdivisions, anti-growth sentiments can lead to ballot measures that can interfere with or impede our ability to develop land or build homes. Candidates for local office who favor restrictions on growth and development are being elected with greater frequency in certain communities in which the Company conducts business. Restrictive measures can also affect construction activities, including construction materials, which must be used in home construction, as well as sales activities and other dealings with home buyers. We also must obtain licenses, permits and approvals from various governmental agencies for our development activities, the granting of which are beyond our control. Obtaining acceptable

zoning and overcoming objections of neighborhood groups and citizen activists is becoming more difficult, time consuming and expensive. There can be no assurance that these issues will not adversely affect the Company in the future.

We also are subject to a variety of local, state and Federal requirements concerning the protection of health and the environment. The particular environmental laws, which apply to any given project, vary greatly according to the project site and the present and former uses of the property. These environmental laws may result in delays and cause us to incur substantial compliance costs, including substantial expenditures for pollution and water quality control. These laws may prohibit or severely restrict development in certain environmentally sensitive regions. In an effort to avoid major environmental issues in our developments, we have a general practice of requiring environmental reports from qualified, independent professionals and resolution of identified environmental issues prior to purchasing land. However, there is no assurance that we will not incur material liabilities relating to the removal of toxic wastes or other environmental matters affecting land we have acquired.

Building moratoria may result in periodic delays or may preclude us from developing certain projects. These moratoria generally result from insufficient water supplies or sewer facilities, delays in utility hookups, inadequate road capacity, environmental concerns, school system overcrowding or financial difficulties, or anti-growth sentiment within a specific market area or community. Time-limited moratoria or restrictions on zoning changes, building permit issuance and extensions of utilities in certain areas have been adopted by several communities in which the Company develops land and builds homes, and similar restrictive measures have been considered by other communities in which the Company conducts business. These moratoria can occur before or after we start our operations and without notice or recourse.

Our success depends on the availability of undeveloped land that is suitable for our development. We currently are the developer in approximately 90% of the communities in which we are build homes. Therefore, our short and long-term financial success depends and will continue to depend on our ability to acquire land, adjust our strategy for purchasing land, address changing market conditions and develop communities successfully. We commit substantial financial and managerial resources to acquire land and develop the streets, utility services and other infrastructure before any revenue is generated from the community. We may acquire and develop land upon which we cannot, or choose not to, build or sell homes. The market value of undeveloped land and building lots fluctuates. We also build some homes before we obtain non-cancelable sale contracts for those homes. We may have to hold these unsold inventory homes for an indefinite time prior to a sale. In addition, because market prices fluctuate, we may have to sell inventory homes at a loss.

Adverse weather conditions may prevent or delay the construction of homes and reduce the number of home sales. Poor weather conditions can hinder our construction and development activities, and thereby increase the cost of constructing our homes and delay the closing of our homes and our recognition of revenue from such closings. In addition, in cases of prolonged severe weather, potential home buyers may delay or forgo the purchase of a home.

Delays in construction of our homes could cause mortgage commitments to expire. Delays in the construction of a home could cause the mortgage commitment to expire and could require

us, if mortgage interest rates have increased, to pay significant amounts to the mortgage lender to extend the original mortgage interest rates.

We are significantly leveraged and depend on the availability of financing. We incur significant up-front expenditures for land acquisition, development and construction costs. We have traditionally financed these costs with bank borrowings, internally-generated funds and joint venture arrangements. Although we have not in recent years experienced problems in obtaining financing, we cannot be sure that continued financing will be available to us in the future, or that any financing available to us will be on favorable terms. Our ability to make payments of principal or interest on, or to refinance our indebtedness, will depend on our future operating performance and successful execution of our business strategy.

We operate in a limited number of geographic areas. Our operations include Central Ohio and Louisville, Kentucky, and we have recently entered the Lexington, Kentucky market. Our lack of geographic diversity means that adverse general economic or weather conditions in one or more of these markets could have a material adverse impact on our operations.

Our expansion strategies may adversely effect our operations. We continually evaluate opportunities to expand into new markets, whether through acquisitions or start-up operations. Any expansion strategy involves many risks. New markets may prove to be less stable than our current markets and may result in delays, problems and expenses not typically encountered in our current markets. Regulations in various states may prohibit or impede us from using some of our community development strategies, such as those utilized with the Independence Series, that require condominium or other high density housing. We may fail to identify suitable acquisition candidates or complete acquisitions on acceptable terms. The magnitude, timing and nature of acquisitions will depend upon various factors, including the availability of suitable acquisition candidates, financial resources and skilled employees to manage the acquired companies, the negotiation of acceptable terms, and general economic and business conditions. The likelihood of our success in establishing start-up operations also depends on similar factors, including identification of suitable start-up markets, availability of financial resources and skilled employees and subcontractors, and general economic and business conditions. In addition, start-up operations may require significant lead-time before they generate sufficient revenues to be profitable. Expansion through acquisitions or start-up operations will require substantial attention from our management team. The diversion of management’s attention, as well as any other difficulties that may be encountered in the transition and integration process, could have a material adverse effect on our operations.

Our new product offerings may not be attractive to customers. We continue to introduce new home designs and new community concepts as part of our product offerings. There are significant risks that we may not accurately predict the tastes or preferences of potential home buyers. A failure to predict these tastes or preferences could have a material adverse effect on our sales.

The loss of certain key personnel could adversely effect our operations. We have several key executive officers, the loss or prolonged absence of whom could have an adverse effect on our operations. In particular, the loss of the services or prolonged absence of Douglas Borror, our Chairman and Chief Executive Officer, or Jon Donnell, our President and Chief Operating Officer, could have a material adverse effect on our operations. Our future success will depend

on our continued ability to attract and retain highly skilled and qualified personnel, of which there can be no assurance.

Our operating results vary on a quarterly basis. Our business is significantly affected by changes in economic cycles, and our revenues and earnings vary with the level of general economic activity in the markets where we build homes. We historically have experienced, and expect to continue to experience, variability in revenues and reported earnings on a quarterly basis. A significant percentage of our sales contracts are executed during the first and second quarters of the year. Closing on a home occurs approximately three to six months after the date of the sales contract but, with weather and other delays, may take longer. We do not recognize any revenue on the sale of a home until the closing occurs. As a result, we historically have experienced higher closings and revenues during the second half of the year.

We are subject to warranty claims arising in the ordinary course of business that could be costly. As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. We provide warranties on our homes for periods as long as thirty years. In the event that we experience greater warranty claims than we anticipate, we could incur significant expenses which could affect future earnings.

Litigation related to construction defects could adversely affect our business. Litigation related to construction defects has increased significantly in recent years. The homebuilding industry has experienced both an increase in the number of individual claims for construction defects as well as increased costs of insuring against such claims.

Our financial results are subject to inflation and other cost increases. We are not always able to reflect all cost increases in the prices of our homes because competitive pressures and other factors sometimes require us to maintain or discount those prices. While we attempt to maintain costs with subcontractors from the date a sales contract with a customer is accepted until the date construction is completed, we may incur unanticipated costs which cannot be passed on to the customer.

Material or labor shortages can adversely affect our business. During periods of increased construction activity, the homebuilding industry has faced shortages in the availability of skilled labor. Waiting for skilled labor to become available may result in construction delays. The use of less skilled labor to satisfy a skilled labor shortage may cause quality standards to suffer. Increases in the demand for skilled labor also can result in increases in the cost of skilled labor. The principal raw materials used in the homebuilding industry are lumber, brick and concrete as well as plumbing and electrical supplies. While these materials are generally available from a variety of sources, they are subject to periodic price fluctuations. In particular, the homebuilding industry has experienced occasional lumber shortages which produced significant price increases. Because we may not be able to pass on to our customers price increases in raw materials or labor, future price increases in these items could have a material adverse effect on our operating margins and earnings.

The homebuilding industry is highly competitive. We compete in each of our geographic markets with national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition and sales resources than we do. We compete not only for home

buyers, but also for desirable properties, financing, raw materials and skilled labor. We also compete with the resale market for existing homes, which some home buyers may prefer over new homes. Additionally, there are many other national and regional homebuilders, many of which have greater financial, marketing, land acquisition and sales resources than we do, that do not currently have a significant presence in our current markets. A concerted effort by these homebuilders to enter or expand their current operations in our markets could have a material adverse effect on our sales.

Covenants in our bank credit facility restrict our ability to engage in certain activities. Our bank credit facility imposes restrictions on our operations and activities. Some of the more significant restrictions limit:

Application of critical accounting policies requires management to make certain estimates and assumptions that may impact our future financial results. In preparing our financial statements, management is required to make certain estimates and assumptions that affect the annual and quarterly reported amounts of assets, liabilities, revenues and expenses, and disclosures about contingent assets and liabilities. Our actual results could be different from these estimates and assumptions. Some of our more critical accounting policies include:

Seasonality and Variability in Quarterly Results

We experience significant seasonality and quarter-to-quarter variability in our homebuilding activity. Typically, closings and related revenues increase in the second half of the year. We believe this seasonality reflects the tendency of home buyers to shop for a new home in the spring with the goal of closing in the fall or winter. Weather conditions can also accelerate or delay the scheduling of closings.

The following table sets forth certain data for each of our last eight quarters:

At December 31, 2003, the aggregate sales value of homes in backlog was $198.9 million compared to $194.2 million at December 31, 2002. At December 31, 2003, the average sales price of homes in backlog was $195,231 compared to $190,743 at December 31, 2002.

Results of Operations

The following table sets forth, for the periods indicated, certain items from our Consolidated Statements of Operations expressed as percentages of total revenues, as well as certain operating data:

We include a home in “sales contracts” when a home buyer signs our standard sales contract, which requires a deposit and generally has no contingencies other than for buyer financing or for the sale of an existing home, or both. We recognize revenue and cost of real estate sold at the time of closing. “Closings” or “deliveries” occur when we deliver the deed to the home buyer and we receive payment for the home. We include a home in “backlog” when a home buyer signs our standard sales contract, but the closing has not occurred as of the end of the period.

Homes included in “sales contracts” in the foregoing table are net of cancellations. Most cancellations occur when home buyers cannot qualify for financing. While most cancellations occur prior to the start of construction, some cancellations occur during the construction process. The cancellation rates for homes in backlog as of December 31, 2002, 2001, and 2000 were 17.4%, 11.6%, and 15.3%, respectively.

We annually incur a substantial amount of indirect construction costs, which are essentially fixed in nature. For purposes of quarterly financial reporting, we capitalize these costs to real estate inventories based on the ratio of estimated annual indirect costs to direct construction costs to be incurred. Thus, variations in construction activity cause fluctuations in interim and annual gross profits.

2003 Compared to 2002

Revenues. Our revenues for 2003 increased by 14.6% to $563.5 million from the delivery of 3,070 homes compared to revenues for 2002 of $491.7 million from the delivery of 2,591 homes. This $71.8 million increase in revenues was primarily due to the delivery of 479 more homes. As expected, the average price of homes delivered in 2003 decreased 2.9% or $5,300 to $179,800 from $185,100 in 2002. The lower average price of delivered homes in 2003 was the result of closing a larger percentage of our entry-level series of homes.

Included in revenues are other revenues, consisting principally of fees from the Company’s mortgage financing services subsidiary. During 2003, these other revenues increased 2.6% to $11.9 million from $11.6 million for 2002. We expect that the changes we are making in our mortgage financing services subsidiary will increase these other revenues in the future.

Gross Profit. Our gross profit for 2003 increased by 17.4% to $135.0 million from $115.0 million for 2002. The primary reason for the 2003 increase in gross profit was the larger number of homes delivered during 2003.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for 2003 increased by 14.7% to $74.0 million from $64.5 million for 2002. The primary reasons for the increase in selling, general and administrative expenses for 2003 were higher variable costs associated with delivering more homes. These higher variable costs included variable incentive compensation, sales commissions, advertising expenses and administrative expenses related to the mortgage financing services subsidiary.

Interest Expense. Our interest expense for 2003 decreased by 8.9% to $7.9 million from $8.7 million for 2002, as a result of a lower average borrowing rate. The average revolving line of credit borrowings outstanding were $112.5 million and $117.4 million for 2003 and 2002,

respectively. The weighted average rate of interest under the revolving line of credit was 5.9% for 2003 compared to 6.2% for 2002.

Provision for Income Taxes. Our income tax expense for 2003 increased to $21.2 million from $17.3 million for 2002. The Company’s annual effective tax rate decreased to 40.0% for 2003, from 41.4% for 2002 due to implementation of various tax planning strategies.

2002 Compared to 2001

Revenues. Our revenues for 2002 increased by 24.3% to $491.7 million from the delivery of 2,591 homes compared to revenues for 2001 of $395.7 million from the delivery of 2,054 homes. This $96.0 million increase in revenues was primarily due to the delivery of 537 more homes resulting from an overall improvement in build times in all series of homes. Included in the 2,054 homes delivered in 2001 were 15 homes, with a sales value of $2.2 million that we sold to unaffiliated third parties and leased back for use as model homes and sales offices. We did not sell and leaseback any homes in 2002. As expected, the average price of homes delivered in 2002 decreased 2.1% or $4,000 to $185,100 from $189,100 in 2001. The lower average price of delivered homes in 2002 was the result of closing a larger percentage of our new entry-level series of homes.

Included in revenues are other revenues, consisting principally of fees from the Company’s mortgage financing services subsidiary. During 2002, these other revenues increased by 61.1% to $11.6 million from $7.2 million for 2001.

Gross Profit. Our gross profit for 2002 increased by 27.3% to $115.0 million from $90.3 million for 2001. The primary reasons for the 2002 increase in gross profit were the larger number of homes delivered during 2002, the reduced cost associated with mortgage financing contributions due to falling interest rates and increased mortgage financing service fees.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for 2002 increased by 22.9% to $64.5 million from $52.5 million for 2001. The primary reasons for the increase in selling, general and administrative expenses for 2002 were the higher sales commissions associated with the sale of more homes, payment of higher compensation due to improved profits and general and administrative expenses of our mortgage financing services subsidiary.

Interest Expense. Our interest expense for 2002 decreased by 25.6% to $8.7 million from $11.7 million for 2001, as a result of the reduction of debt from our sale of common shares and a lower average borrowing rate. The average revolving line of credit borrowings outstanding were $117.4 million and $126.4 million for 2002 and 2001, respectively. The weighted average rate of interest under the revolving line of credit was 6.2% for 2002 compared to 7.7% for 2001.

Provision for Income Taxes. Our income tax expense for 2002 increased to $17.3 million from $11.0 million for 2001. The Company’s estimated annual effective tax rate decreased to 41.4% for 2002, from 42.1% for 2001.

Liquidity and Capital Resources

Historically, our capital needs have depended on sales volume, asset turnover, land acquisition and inventory levels. Our traditional sources of capital have been internally generated cash, bank borrowings and seller financing. At times, we also have sold our common shares in the public market. We have incurred indebtedness in the past and expect to incur indebtedness in the future to fund our operations and our investment in land. We expect the cash flow from our sales in backlog and funds from our Senior Unsecured Revolving Credit Facility to allow us to meet our short-term cash obligations. The primary reasons that we could require additional capital are an expansion in our existing markets, expansion into new markets, expansion of our mortgage subsidiary, or a purchase of a homebuilding company. We believe that our current borrowing capacity and anticipated cash flows from operations are sufficient to meet our liquidity needs for the foreseeable future.

Sources and Uses of Cash

For the Three Year Period Ended December 31, 2003

During 2003, we generated $46.7 million of cash flow from operations before expenditures on real estate inventories. Our real estate inventories increased by $55.4 million because homes under construction increased by $14.9 million and land and land development and other costs increased by $40.5 million. We invested significantly in land and land development in order to replace communities that had sold out earlier than anticipated, to expand our presence in Louisville, Kentucky and to enter the Lexington, Kentucky market. We used cash from operations together with borrowings under our bank credit facility to finance the increase in real estate inventories.

During 2002, we generated $29.0 million of cash flow from operations before expenditures on real estate inventories. We also raised approximately $27.4 million in cash from the sale of 1,503,900 common shares, and we used this cash to reduce debt under our bank credit facility. Our real estate inventories increased by $33.7 million because homes under construction increased by $10.7 million and land and land development and other costs increased by $23.0 million. We used cash from operations together with borrowings under our bank credit facility to finance the increase in real estate inventories.

During 2001, we generated $27.7 million of cash flow from operations before expenditures on real estate inventories. Our real estate inventories increased by $43.2 million because homes under construction grew by $25.1 million and land and land development and other costs increased by $18.1 million. We used cash from operations together with borrowings under our bank credit facility to finance the increase in real estate inventories.

Real Estate Inventories

Our real estate inventories at December 31, 2003 increased $63.9 million to $326.8 million compared to $262.9 million at December 31, 2002. Real estate inventories include land and land development costs, homes under construction and other building materials. As of December 31, 2003, land and land development costs increased to $205.5 million from $157.2 million as of December 31, 2002, homes under construction increased to $117.3 million from $102.5 million on December 31, 2002 and other building material inventories increased to $3.9

million from $3.2 million as of December 31, 2002. Our land and land development costs increased principally due to the increased number of sales communities.

We develop approximately 90% of the communities in which we build homes and generally do not purchase land for resale. We attempt to maintain a land inventory that is sufficient to meet our anticipated lot needs for the next three to six years. At December 31, 2003, we owned lots or land that we estimate could be developed into 9,726 lots, including 1,734 lots in Louisville, Kentucky.

At December 31, 2003, we controlled, through option agreements or contingent contracts, land that we estimate could be developed into 11,454 additional lots, including 1,674 lots in Louisville, Kentucky. We hold additional contingent agreements for land that may allow us to develop additional lots that are not included in these totals. However, based on our land review process, we have concluded that it is unlikely that all of the contingencies contained in these other agreements will be satisfied in the near future. Consequently, we did not consider these contingent agreements when estimating the total amount of land or number of lots that we potentially may control. The option agreements that we determined were more than likely to have the contingencies satisfied expire at various dates through 2009. During 2003, we exercised options to purchase lots or unimproved land that could be developed into 5,263 lots, including 1,452 lots in Louisville, Kentucky. We decide whether to exercise any particular option or otherwise acquire additional land based upon our assessment of a number of factors, including our existing land inventory at the time, the status of purchase contingencies and our evaluation of the future demand for our homes.

On December 31, 2003, we had 248 single family inventory homes, including 25 in Louisville, Kentucky, in various stages of construction, representing an aggregate investment of $18.0 million, compared to 164 single family inventory homes, including 17 in Louisville, Kentucky, in various stages of construction, representing an aggregate investment of $14.9 million on December 31, 2002. We do not include inventory homes in sales or backlog.

Contractual Obligations

Notes Payable Banks. On December 3, 2003, we entered into a Second Amended and Restated $250.0 million Senior Unsecured Revolving Credit Facility (the “Facility”). The Facility amends and restates the previous Amended and Restated Credit Agreement dated December 31, 2001. The Facility was amended to increase the amount of the Facility to $250.0 million from $175.0 million and to extend the maturity date to May 31, 2007 from May 31, 2005. Several of the loan restrictions were also changed to reflect our growth and to allow us additional flexibility in our operations. As of December 31, 2003, we were in compliance with the Facility covenants and had $91.4 million available under the Facility, after adjustment for borrowing base limitations. Borrowing availability under the Facility could increase, depending on our use of the proceeds of borrowings under the Facility.

The Facility provides for a variable rate of interest on our borrowings. The variable rate is the three month LIBOR rate plus a margin based on our interest coverage ratio that ranges from 1.75% to 2.5% and is determined quarterly. The margin was 1.75% during 2003. In order to reduce the risks caused by interest rate fluctuations, we have entered into interest rate swap

contracts that fix the interest rate on a portion of our borrowings under the Facility. The weighted average interest rates for borrowings under the Facility for the years ended December 31, 2003 and 2002 were 5.9% and 6.2%, respectively. These rates include the cost of our interest rate swaps. Interest rates for 2003 decreased compared to 2002 due to a lower average borrowing rate. Additional information regarding the interest rate swap contracts we have entered into is set forth under the heading “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A below. For a more detailed description of the Facility, including restrictions on our business activities, see Note 7 Note Payable, Banks to the Consolidated Financial Statements included herein.

Seller Financing. We purchased land for development that was partially financed with seller provided term debt that has an outstanding balance of $8.5 million at December 31, 2003.

Capital and Operating Leases. We believe the best use of our Facility is to finance direct investments in our homebuilding operations. Assets that support our homebuilding operations are generally financed through capital and operating lease obligations. These assets include office facilities, model homes, vehicles and equipment. We analyze each lease and determine whether the lease is a capital lease, in which case the asset and related obligation is included on our balance sheet, or an operating lease, in which case the asset and obligation is not included on our balance sheet. We do not retain a residual financial interest in leased assets. Our capital lease obligations were $2.4 million at December 31, 2003. We believe our operating leases are properly classified as off balance sheet transactions. Our minimum rental commitment under such non-cancelable operating leases was $14.8 million at December 31, 2003. For further information on our leases, see Note 9 Operating Lease Commitments and Note 12 Related Party Transactions to the Consolidated Financial Statements included herein.

During 2003, we vacated commercial space that we leased and moved into our new office building. The commercial space had a lease obligation of approximately $300,000 at December 31, 2003. We recognized an expense of $155,000 related to the remaining lease obligation, net of estimated sublease rental income. We also recognized an impairment loss of approximately $440,000 related to the abandonment of leasehold improvements in connection with the termination of these leases.

Land Purchase Commitments. On December 31, 2003, we had non-cancelable obligations to purchase residential lots and unimproved land at an aggregate cost of $1.5 million. We intend to purchase this land over the next year.

The following is a summary of our contractual obligations at December 31, 2003 (in thousands):

Off Balance Sheet Arrangements

Performance Bonds and Irrevocable Letters of Credit. We are liable for performance bonds of $42.4 million and irrevocable letters of credit of $5.2 million at December 31, 2003. These instruments were issued to municipalities and other individuals to ensure performance and completion of certain land development activities and as collateral for contingent land purchase commitments. We do not anticipate incurring any liability with respect to these instruments.

Variable Interest Entities. We selectively enter into joint ventures with other homebuilders to own and develop communities. Through the creation of joint venture partnerships and limited liability companies, these joint ventures engage in land development activities for the purpose of developed lot distribution to partners in the entity. These partners in the joint ventures acquire substantially all of the lots developed by the joint ventures and fund the development costs in proportion to their equity interests. We receive our percentage interest in the lots developed in the form of capital distributions. Our equity interest in these joint ventures varies from 33% to 50%. These joint ventures generally do not hold debt securities, except for seller requested financing arrangements upon purchasing the land for the joint ventures. In certain cases, we may be liable under debt commitments within the particular joint venture. As of December 31, 2003, we were party to one joint venture that finances its own development activities. We have guaranteed the obligations under the joint venture’s loan agreement up to $1.2 million, representing our one-half interest. At December 31, 2003, the joint venture had $298,000 in loans outstanding and the portion guaranteed by us was $149,000. We have determined that our land development joint ventures do not qualify as variable interest entities that would require consolidation in our financial statements. See Note 6 Land Development Joint Ventures to the Consolidated Financial Statements included herein.

In managing our land inventories, we enter into land option and contingent purchase contracts with third parties to acquire unimproved land and developed lots, which may qualify as variable interest entities. These contracts may be with individual land owners or entities that hold land for sale and generally require us to pay refundable or non-refundable deposits or letters of credit. We have determined that certain of these contracts are with variable interest entities. Our analysis of these entities indicates that we are not the primary beneficiary, as defined in FIN 46R, of the land option contracts or contingent purchase contracts, and, therefore, we do not intend to consolidate any of them in our financial statements. We do not have legal title to the land subject to these contracts and our maximum exposure to loss is limited to option deposits of approximately $3.7 million at December 31, 2003.

We continually evaluate our land option and contingent purchase contracts to purchase unimproved land and developed lots. Cancelable obligations consist of options under which we have the right, but not the obligation, to purchase land and contingent purchase contracts under which our obligation to purchase land is subject to the satisfaction of zoning, utility, environmental, title or other contingencies. On December 31, 2003, we had $112.6 million of cancelable contractual obligations for which we had determined it is reasonably likely that we will execute the land or lot purchase. Our good faith deposits on these contracts were $2.1 million at December 31, 2003. Assuming that the contingencies are actually satisfied and that no other significant obstacles to development arise, we expect to purchase most of the residential lots and unimproved land that are subject to these cancelable contractual obligations. We expect to fund our land acquisition and development obligations from internally generated cash and

from the borrowing capacity under our Facility. We are in the process of evaluating an additional $76.9 million of cancelable contractual obligations for which we have not yet determined whether it is reasonably likely that we will execute the land or lot purchase. On December 31, 2003, good faith deposits on these contracts were $1.6 million.

We own a 49.9% interest in an unconsolidated title insurance agency that provides closing services for our homes. Our maximum exposure to loss in this entity is limited to the amount invested, which is approximately $244,000 at December 31, 2003. We have determined that this entity is a variable interest entity requiring consolidation effective in the first quarter of 2004. We do not expect the consolidation to have a significant impact on our consolidated financial position or results of operations.

In 1997, we entered into an agreement with an unaffiliated third party to sell and lease back certain model homes. At December 31, 2003, we had eleven model homes subject to month-to-month leases under this agreement. We have determined that these leases are not with a variable interest entity and rental obligations are properly classified as operating leases in our schedule of contractual obligations.

During 2003, we built an office building that was sold to BRC on October 31, 2003 and leased back for a term of fifteen years. We have no residual financial interest in properties leased from BRC. We analyzed this transaction and other leasing arrangements with BRC and determined that BRC was not a variable interest entity requiring consolidation in our financial statements.

The following is a summary of our commercial commitments under off balance sheet arrangements at December 31, 2003 (in thousands):

Inflation and Other Cost Increases

We are not always able to reflect all of our cost increases in the prices of our homes because competitive pressures and other factors sometimes require us to maintain or discount those prices. While we attempt to maintain costs with subcontractors from the date a sales contract with a customer is accepted until the date construction is completed, we may incur unanticipated costs which cannot be passed on to the customer. For example, delays in construction of a home can cause the mortgage commitment to expire and can require us, if mortgage interest rates have increased, to pay significant amounts to the mortgage lender to extend the original mortgage interest rate. In addition, during periods of high construction

activities, we may incur additional costs to obtain subcontractors when certain trades are not readily available, which additional costs can result in lower gross profits. Periods of rapid price increases can result in lower gross profits.

Recently Issued Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities —an interpretation of ARB No. 51. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 explains how to identify a variable interest entity and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.

In December 2003, the FASB issued FASB Interpretation No. 46R (“FIN 46R”), which supercedes FIN 46. FIN 46R must be adopted no later than the end of the first interim or annual reporting period ending after March 15, 2004, for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.

We have evaluated our interests in land development joint ventures, land option contracts, sale and leaseback arrangements and Alliance Title Agency, Ltd. (“Alliance”) for possible variable interests acquired before February 1, 2003. Alliance provides title insurance for most of our home closings in Ohio and is an Ohio limited liability company of which we own 49.9%, the maximum allowable under Ohio law. Based on our evaluation, we anticipate that we will consolidate Alliance for the purposes of FIN 46R effective in the first quarter of 2004, but that we will not consolidate the land development joint ventures or entities with which we have land option contracts. Sale and leaseback arrangements are not with variable interest entities and therefore are appropriately accounted for as operating leases. We have determined that we are not the primary beneficiary, as defined in FIN 46R, of the land option contracts and therefore have not consolidated any of our option contracts entered into after January 31, 2003. Consolidation of Alliance is not expected to have a significant impact on our consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150 (“SFAS No. 150”), Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 generally requires that an issuer classify a financial instrument that is within its scope as a liability. SFAS No. 150 applies to three types of freestanding financial instruments, other than outstanding shares. One type is mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or assets; a second type of financial instrument subject to SFAS No. 150 includes put

options and forward purchase contracts that require or may require the issuer to buy back some of its shares in exchange for cash or other assets; the third type of financial instrument subject to SFAS No. 150 is obligations that can be settled with shares, the monetary value of which is fixed, ties solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. We do not currently have any financial instruments within the scope of SFAS No. 150.

On November 7, 2003, the FASB issued FASB Staff Position No. FAS 150-3 “FSP 150-3”, Effective Date for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FAS 150. FSP 150-3 defers the measurement provisions of FAS 150 for mandatorily redeemable noncontrolling interests created on or before November 5, 2003 for an indefinite period.

Critical Accounting Policies

The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, including the related Notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates including those related to real estate inventories, warranty obligations, and construction costs for homes closed. We base these estimates on historical trends and experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

developed within each community and are based on detailed budgets for the land development project and historical experience and trends. If actual costs or the total number of lots developed changes, significant variances may be encountered.

As of December 31, 2003, we were a party to nine interest rate swap contracts with an aggregate notional amount of $110 million, as reflected in the table below. We enter into swap contracts to minimize earnings fluctuations caused by interest rate volatility associated with our variable rate debt. The swap contracts allow us to have variable rate borrowings and to select the level of fixed rate debt for the Company as a whole. Under the swap contracts, we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate amounts calculated by reference to an agreed notional amount. Our intention is to maintain approximately 50% of our debt on a fixed interest rate basis. At any time, this percentage may be more or less depending on specific circumstances. At December 31, 2003, our level of fixed rate debt under the Facility, after considering the effect of the interest rate swaps, was 85%. In early 2004, $30 million of interest rate swaps matured and our outstanding borrowings increased, primarily due to the purchases of land for development. The combination of these two events caused our level of fixed rate debt to return to the 50% range. We do not enter into derivative financial instrument transactions for speculative purposes. The swap contracts are more fully described below:

The following table presents descriptions of the financial instruments and derivative instruments that we held at December 31, 2003. For the liabilities, the table presents principal calendar year cash flows that exist by maturity date and the related average interest rate. For the interest rate derivatives, the table presents the notional amounts and expected interest rates that exist by contractual dates. Interest on our variable rate liabilities is LIBOR plus a variable margin ranging from 1.75% to 2.50%. Cash flows for interest on $110 million of the variable rate liabilities subject to interest rate derivatives is the contractual average pay rate plus the variable margin (1.75% at December 31, 2003). The notional amount is used to calculate the contractual payments to be exchanged under the contract. The fair value of the variable rate liabilities at December 31, 2003 and 2002 was $129.2 million and $111.0 million, respectively. The fair value of the derivatives at December 31, 2003 was a liability of $1.9 million and at December 31, 2002 a liability of $4.2 million. We do not expect a loss to be realized because we expect to retain the swap contracts to maturity. All dollar amounts are in thousands.

The Independent Auditors’ Report of PricewaterhouseCoopers LLP and the Consolidated Financial Statements of the Company as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, follow.

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors

and Shareholders

of Dominion Homes, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Dominion Homes, Inc. and its subsidiaries (the “Company”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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.

/s/    PricewaterhouseCoopers LLP

Columbus, Ohio

January 24, 2004

Dominion Homes, Inc.

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

The accompanying notes are an integral part of the Consolidated Financial Statements.

Dominion Homes, Inc.

Consolidated Balance Sheets

(In thousands, except share information)

The accompanying notes are an integral part of the Consolidated Financial Statements.

Dominion Homes, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands)