SECURITIESTable ANDof EXCHANGE COMMISSION Contents

~~Washington,~~UNITED ~~D.C.~~STATES SECURITIES ~~20549~~AND EXCHANGE COMMISSION

~~FORM~~Washington, ~~10-K~~D.C. 20549

xFORM ~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~10-K

~~For~~þ ~~the~~ANNUAL ~~fiscal~~REPORT ~~year~~PURSUANT ~~ended~~TO ~~October 31,~~SECTION ~~2002~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

oFor ~~TRANSITION~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION~~October 31, ~~13 OR 15(D0 OF THE SECURITIES EXCHANGE ACT OF 1934~~2004

~~For~~o TRANSITION ~~the~~REPORT ~~Transition~~PURSUANT ~~period~~TO ~~from~~SECTION ~~__________~~13 toOR ~~__________~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission~~For ~~file~~the ~~number:~~Transition ~~0-17517~~period from __________ to __________

~~SEA~~Commission ~~PINES~~file ~~ASSOCIATES,~~number: ~~INC.~~0-17517

~~(Exact~~SEA ~~name~~PINES ofASSOCIATES, ~~registrant as specified in its charter)~~INC.

South Carolina		57-0845789
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(Exact name of registrant as specified in its charter)

South Carolina		57-0845789
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
32 Greenwood Drive Hilton Head Island, South Carolina		29928
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (843) 785-3333

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock (No Par) (Title of Class)

Series A Cumulative Preferred Stock ($0.722 Dividend Rate/$7.60 Liquidation Preference and Redemption Price) (Title of Class)

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]~~ 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 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. ~~[ ]~~þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes ~~[ ]~~ o No ~~[X]~~ þ

There is presently no established public trading market for shares of the registrant’s common stock, no par value, and there has been very limited trading in such shares since their original issuance in 1987. Accordingly, trading activity in the common stock of the registrant does not ~~currently~~ currently represent a reliable indicator of the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant and the registrant is unable to estimate such value.

The number of shares outstanding of the registrant’s common stock as of December 31, ~~2002~~2004 was 3,~~573~~600,~~400~~500.

DOCUMENTS INCORPORATED BY REFERENCE

~~Portions~~TABLE ofOF ~~the registrant’s Proxy Statement in connection with its 2003 Annual Meeting of Shareholders are incorporated by reference into Part III.~~ CONTENTS

PART I


PART I
	Item 1. Business
	Item 2. Properties
Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
	PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11.Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
EX-10(DD)
EX-14
EX-21
EX-23(A)
EX-23(B)
EX-31(A)
EX-31(B)
EX-32(A)
EX-32(B)
EX-99.1

THISTable REPORTof ON FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE COMPANY OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. THE INVESTMENT COMMUNITY IS CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE THOSE SET FORTH IN THIS REPORT, AND THOSE CONTAINED IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS REPORT ON FORM 10-K, WHICH FACTORS ARE HEREBY INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME. Contents

~~Item 1.~~PART ~~Business.~~I

~~(a) General~~THIS ~~Development~~REPORT ofON ~~Business.~~FORM ~~Sea~~10-K ~~Pines~~AND ~~Associates,~~OTHER ~~Inc.~~STATEMENTS ~~was~~ISSUED OR MADE FROM TIME TO TIME BY THE COMPANY OR ~~incorporated~~ITS ~~under~~REPRESENTATIVES ~~South~~CONTAIN ~~Carolina~~STATEMENTS ~~law~~WHICH onMAY ~~May 4~~CONSTITUTE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, ~~1987.~~AS AsAMENDED, ~~used~~AND inTHE ~~this~~SECURITIES ~~report on~~EXCHANGE ~~Form 10-K~~ACT OF 1934, ~~except~~AS AMENDED. ~~where~~THOSE ~~the~~STATEMENTS ~~context~~INCLUDE ~~otherwise~~STATEMENTS ~~indicates~~REGARDING THE INTENT, ~~the~~BELIEF ~~“Company”~~OR ~~means~~CURRENT EXPECTATIONS ~~Sea~~OF ~~Pines~~THE ~~Associates~~COMPANY AND MEMBERS OF ITS MANAGEMENT TEAM, ~~Inc.~~AS ~~and~~WELL ~~its~~AS ~~subsidiaries~~THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. ~~The~~THE ~~Company~~INVESTMENT ~~was~~COMMUNITY ~~principally~~IS CAUTIONED THAT ANY SUCH FORWARD-LOOKING ~~organized~~STATEMENTS toARE ~~acquire~~NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, ~~own~~AND ~~and~~THAT ACTUAL ~~operate~~RESULTS ~~certain~~MAY ~~resort~~DIFFER ~~assets~~MATERIALLY ~~located~~FROM inTHOSE ~~Sea~~CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. ~~Pines,~~IMPORTANT aFACTORS 5CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE THOSE SET FORTH IN THIS REPORT,~~300~~ AND THOSE CONTAINED IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-~~acre~~LOOKING ~~master~~STATEMENTS ~~planned~~INCLUDED ~~resort~~AS EXHIBIT ~~community~~99.1 onTO ~~Hilton~~THIS ~~Head~~REPORT ~~Island~~ON FORM 10-K, WHICH FACTORS ARE HEREBY INCORPORATED HEREIN BY ~~South~~REFERENCE. ~~Carolina~~THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.

~~Subsidiaries~~Item ~~of the Company include Sea Pines Company, Inc~~1. ~~(“SPC”), Sea Pines Real Estate Company, Inc~~Business. ~~(“SPREC”), Sea Pines Associates Trust I, and Fifth Golf Course Club, Inc., all of which are wholly-owned.~~

~~SPC is~~ (a) General ~~full-service~~Development ~~resort,~~of ~~which~~Business. ~~owns~~Sea ~~and~~Pines ~~operates The Inn at Harbour Town~~Associates, ~~three~~Inc. ~~golf~~was ~~courses,~~incorporated ~~tennis~~under ~~and various other recreational facilities,~~South ~~home~~Carolina ~~and~~law ~~villa~~on ~~rental management operations~~May 4, ~~conference~~1987. ~~facilities,~~As ~~and~~used ~~food and~~in ~~beverage~~this ~~services.~~report ~~SPREC~~on ~~provides~~Form ~~real~~10-K, ~~estate~~except ~~brokerage~~where ~~services~~the ~~for~~context ~~buyers~~otherwise ~~and~~indicates, ~~sellers~~“Company” ofmeans ~~real~~Sea ~~estate~~Pines onAssociates, ~~Hilton~~Inc. ~~Head Island~~ and its ~~neighboring communities~~subsidiaries. ~~Fifth~~The ~~Golf~~Company was ~~Course~~principally ~~Club,~~organized ~~Inc.~~to ~~owns~~acquire, ~~certain~~own ~~acreage~~and ~~which~~operate ~~could~~certain ~~be used~~resort ~~for~~assets ~~outdoor~~located ~~recreational~~in ~~purposes.~~ Sea Pines, ~~Associates Trust I holds~~a ~~certain~~5,300-acre ~~company~~master ~~debentures~~planned asresort ~~security~~community ~~for~~on ~~notes~~Hilton itHead ~~has~~Island, ~~issued~~South Carolina.

2 The consolidated, wholly-owned subsidiaries of the Company include Sea Pines Company, Inc. (“SPC”), Sea Pines Real Estate Company, Inc. (“SPREC”) and Fifth Golf Course Club, Inc. The Company owns all the common securities of Sea Pines Associates Trust I (the “Trust”).

~~(b) Financial~~SPC ~~Information~~is ~~Relating~~a tofull-service ~~Industry~~resort, ~~Segments~~which owns and operates The Inn at Harbour Town, three golf courses, tennis and various other recreational facilities, home and villa rental management operations, conference facilities, and food and beverage services. ~~See~~SPREC ~~Note~~provides 14real toestate ~~the~~brokerage ~~consolidated~~services ~~financial~~for ~~statements~~buyers ~~contained~~and ~~elsewhere~~sellers ~~herein~~of real estate on Hilton Head Island and its neighboring communities. Fifth Golf Course Club, Inc. owns certain acreage which could be used for ~~business~~outdoor ~~segment~~recreational ~~information~~purposes. The Trust holds a debenture issued by the Company. Interest on the debenture is used by the Trust to pay interest on the trust preferred securities issued by the Trust.

~~(c) Narrative~~On ~~Description of Business. The Company’s operations were conducted primarily in two reportable business segments for the year ended October~~July 3127, ~~2002.~~2004, ~~These segments are organized by~~ the ~~type~~Company ofentered ~~operations:~~into ~~(1) resort~~an ~~operations,~~agreement ~~including home~~ and ~~villa~~plan rental management operations, a 60-room inn, golf course operations, conference facilities, food and beverage operations, and various other recreational activities; and (2) real estate brokerage for buyers and sellers of ~~real~~merger ~~estate in~~ (the ~~Hilton Head Island,~~“Merger ~~South Carolina area.~~

~~1. Resort Operations. Resort operations consist primarily of the~~2 operation of three resort golf courses, a racquet club facility, home and villa rental management operations, a 60-room inn, conference facilities, retail outlets, food service operations, and other recreational facilities. For fiscal year 2002, resort operations accounted for approximately $34,892,000 (68%) of the Company’s total revenues, with golf and tennis activity revenues representing $15,284,000 (30%) and home and villa rental management operations revenues representing $11,606,000 (23%). For fiscal year 2001, resort operations accounted for approximately $33,734,000 (67%) of the Company’s total revenues, with golf and tennis activities responsible for revenues of approximately $14,540,000 (29%) and home and villa rental management operations responsible for revenues of approximately $11,822,000 (23%). For fiscal year 2000, resort operations accounted for approximately $29,670,000 (61%) of the Company’s total revenues, with golf and tennis activities responsible for revenues of approximately $12,710,000 (26%) and home and villa rental management operations responsible for revenues of approximately $12,436,000 (25%).

DuringTable each of the fiscal years 2002, 2001 and 2000, approximately 70% of golf and tennis revenues and 100% of inn revenues and home and villa rentals were derived from vacation and conference use at Sea Pines. The remaining golf and tennis revenues, approximately 30%, were generated from Hilton Head Island residents. As a result, the Company believes its future success is dependent upon Hilton Head (in general) and Sea Pines (in particular) continuing to be considered as prime destination resort areas, with appropriate lodging and conference facilities. Contents

~~During~~Agreement”) ~~fiscal~~with ~~years~~The ~~2002~~Riverstone Group, ~~2001~~LLC ~~and~~whereby ~~2000,~~the ~~residents~~Company ~~and~~would ~~vacationers utilizing~~become ~~accommodations~~a atwholly ~~Sea~~owned subsidiary ~~Pines~~of ~~accounted~~The ~~for~~Riverstone ~~approximately~~Group, ~~85%~~LLC. ofUnder the ~~use~~ proposed merger, holders of the Company’s common ~~golf~~stock ~~and~~other ~~tennis~~than ~~facilities~~the Company, ~~with~~The ~~the~~Riverstone ~~remainder~~Group, LLC, or any of their subsidiaries or ~~attributable~~holders toperfecting ~~use~~their bydissenters ~~persons~~rights ~~residing~~under ~~outside~~South ~~Sea~~Carolina ~~Pines.~~law ~~Fees~~will ~~charged~~be entitled to ~~the~~receive ~~general~~$8.50 ~~public~~per share in cash, without interest, for ~~use~~each of ~~the~~their ~~Company’s~~shares ~~facilities~~of ~~are~~common ~~typically~~stock. ~~higher~~In ~~than~~addition, the ~~fees~~Merger ~~charged~~Agreement toprovides ~~persons~~that ~~residing~~if ~~within~~the ~~Sea~~proposed ~~Pines.~~merger occurs, then within 10 days thereafter The Riverstone Group, LLC will provide the Company iswith ~~also~~sufficient ~~a party~~cash to ~~certain~~redeem ~~use~~all of its outstanding Series A preferred stock and ~~access~~pay ~~agreements~~off ~~with~~its ~~several~~debenture ~~developments~~to the Trust, and ~~hotels~~following the ~~located~~receipt ~~both~~of ~~inside~~such ~~and~~cash, ~~outside~~the Company will redeem all of ~~Sea~~its ~~Pines.~~outstanding ~~These~~Series A ~~agreements~~preferred ~~generally~~stock and ~~provide~~pay off the ~~guests~~debenture to the Trust, which will result in the redemption of ~~those~~all ~~particular~~of ~~developments~~the ~~and~~outstanding trust ~~hotels~~preferred ~~with~~securities ~~access~~issued by the Trust. The Merger Agreement is subject to closing conditions customary for transactions of this type, including obtaining the approval of holders of at least 80% of the Company’s ~~facilities~~outstanding atcommon ~~rates~~stock. ~~slightly~~In ~~lower~~order ~~than~~to ~~those~~avoid ~~available~~having tothe Merger Agreement trigger the distribution of Series B preferred stock purchase rights under the Company’s ~~general~~Second ~~public.~~Amended Inand ~~addition~~Restated Rights Agreement (“Rights Agreement”), the Company ~~will~~amended ~~occasionally~~the ~~offer special~~Rights ~~discounts~~Agreement ~~and~~on ~~package~~July 27, ~~rates~~2004 so that no person would become an “Acquiring Person” (as ~~part~~defined in the plan) as the result of ~~its~~the ~~ongoing~~execution ~~promotional~~or ~~activities~~delivery of, or the consummation of the merger contemplated by, the Merger Agreement.

~~Vacation~~A ~~use~~preliminary isproxy ~~seasonal~~statement with respect to the ~~highest~~proposed ~~period~~merger ~~being~~has ~~from~~been ~~March~~filed ~~through~~with the ~~November~~Securities and Exchange Commission. It is anticipated that the ~~lowest~~shareholders ~~period~~will vote on the merger during the second fiscal quarter 2005. Effective as of December 13, 2004, the Merger Agreement was amended to extend from December 31, ~~through~~2004 ~~February.~~to ~~Substantial~~March 31, 2005 the date after which any ~~fixed~~party ~~costs~~may ~~continue~~terminate ~~during~~the merger agreement if the ~~non-peak~~merger ~~period,~~has ~~leading~~not then occurred and to ~~major~~make ~~seasonal~~a ~~fluctuations~~corresponding inextension ~~operating~~of ~~income~~the latest date to which the Company is obligated to postpone the shareholders’ meeting to approve the merger.

3 (b) Financial Information Relating to Industry Segments. See Note 17 to the consolidated financial statements contained elsewhere herein for business segment information.

~~The~~(c) Narrative ~~Company~~Description ~~believes~~of ~~that~~Business. ~~its~~The ~~resort~~Company’s operations are ~~relatively~~conducted ~~stable. Nevertheless,~~primarily ~~economic conditions and other factors do adversely affect tourism~~in ontwo ~~Hilton~~reportable ~~Head,~~business ~~and~~segments. ~~may~~These ~~have~~segments aare ~~negative~~organized ~~impact~~by on the ~~resort~~type ~~operations~~ of ~~the~~operations: (1) ~~Company.~~resort ~~Because of its location on the Atlantic coast~~operations, ~~Hilton~~including ~~Head~~home ~~is susceptible to adverse weather conditions~~ and ~~resulting~~villa ~~damage~~rental ~~from~~management ~~hurricanes~~operations, as ~~well as the potential for damage from~~ a ~~major~~60-room ~~oil~~inn, ~~or hazardous waste spill.~~golf ~~Although~~course ~~Hilton~~operations, ~~Head’s~~conference ~~location~~facilities, ~~away~~food ~~from~~and ~~major~~beverage ~~oil drilling~~ operations, and ~~industrial~~ ~~sites~~various ~~greatly reduces the risk of the latter occurrence, there can~~other berecreational noactivities; ~~assurance that such damage will never occur. The Company maintains property~~ and ~~casualty~~(2) real ~~insurance~~estate inbrokerage ~~amounts that it believes to be adequate including coverage~~ for ~~business~~buyers ~~interruption.~~and ~~Furthermore,~~sellers ~~access to the Company’s facilities is dependent upon adequate means~~ of ~~transportation~~real atestate ~~a reasonable cost. In the future, fuel shortages, increases~~ in ~~fuel costs and~~the ~~other~~Hilton ~~events~~Head ~~which might inhibit or restrict airplane or automobile travel could have a negative impact on the Company’s operations~~Island, ~~depending~~South onCarolina ~~the severity and duration of the interruption or price increase~~area.

~~The~~ 1. Resort ~~Company~~Operations. isResort ~~generally~~operations ~~subject~~consist toprimarily ~~various~~of ~~local~~the ~~and~~operation ~~regional~~of ~~land~~three ~~use~~resort golf courses, a racquet club facility, home and ~~environmental~~villa ~~regulations~~rental management operations, ~~ordinances~~a 60-room inn, conference facilities, retail outlets, food and ~~restrictive~~beverage ~~covenants~~service operations and other recreational facilities. ~~The~~For fiscal year 2004, resort operations accounted for $37,161,000 (57%) of the Company’s ~~believes~~total ~~that~~revenues, itwith isgolf ~~currently~~and intennis ~~compliance~~activity ~~with~~revenues ~~all~~representing ~~such~~$15,714,000 ~~applicable~~(24%), ~~regulations~~home and ~~covenants~~villa ~~and~~rental ~~does~~management ~~not~~operations ~~expect~~revenues ~~that~~representing ~~compliance~~$10,665,000 in(16%), ~~the~~food ~~future~~and ~~will~~beverage ~~have~~operations ~~any~~revenues ~~material~~representing ~~effect~~$5,922,000 on(9%) ~~the~~and Inn at Harbour Town operations revenues orrepresenting ~~the~~$2,850,000 ~~profitability~~(4%). ofFor ~~the~~fiscal year 2003, resort operations accounted for ~~Company.~~

~~Resort operations are subject to significant competition from various~~3 competing facilities on Hilton Head, as well as other destination resorts in South Carolina, Georgia and Florida. Specifically, the Company believes its golf courses are directly competitive with approximately 20 golf courses located on Hilton Head outside of Sea Pines. However, in as much as golf course play is in large part dictated by the number of guests utilizing accommodations within Sea Pines, the overall success of the Company’s operations will continue to be dependent on Sea Pines maintaining its reputation as a premier golf and tennis resort. The Company believes that its rates are competitive compared to other facilities of comparable quality and reputation in the southeastern region and expects that its facilities will continue to compete favorably due to location, quality, design and the established reputation of Sea Pines.

OneTable of the Company’s golf courses hosts the annual Heritage Golf Tournament, a nationally televised professional golf tournament. Although the facility usage fee for this tournament does not constitute a major source of income, the event has a significant favorable impact on the Company’s lodging, food and beverage and retail business. Moreover, the tournament’s extensive media coverage provides substantial marketing benefits resulting in an enhanced national reputation of Sea Pines and the Company’s facilities. Loss of the tournament would negatively affect the Company in all these respects. Contents

~~The~~$33,586,000 (59%) of the Company’s total revenues, with golf and tennis ~~operations~~activities ~~consist~~responsible for ~~primarily~~revenues of ~~marketing and~~$15,220,000 ~~maintaining~~(27%), ~~the~~home ~~Company’s~~and ~~facilities.~~villa ~~The~~rental ~~Company~~management ~~receives~~operations ~~court~~responsible ~~fees,~~for ~~greens~~revenues ~~fees~~of $10,629,000 ~~cart rental fees~~(19%), food and ~~income~~beverage ~~from~~operations ~~merchandise~~revenues ~~sales.~~representing ~~The~~$4,468,000 (8%) ~~Company’s~~and ~~tennis~~Inn ~~facility~~at ~~and~~Harbour ~~the~~Town ~~three~~operations ~~resort~~revenues ~~golf~~representing ~~courses~~$2,366,000 ~~are~~(4%). ~~open~~For tofiscal ~~the~~year 2002, ~~general~~resort ~~public.~~operations ~~Maintenance~~accounted ~~and~~for ~~overhead~~$34,892,000 ~~expenses~~(64%) ~~associated~~of ~~with~~ the Company’s total revenues, with golf and tennis ~~operations~~activities ~~remain~~responsible ~~generally~~for ~~stable~~revenues ~~regardless~~ of ~~the~~$15,284,000 (28%) and home and villa rental ~~volume~~management ofoperations ~~facility~~responsible ~~usage.~~for ~~The~~revenues ~~Company’s~~of ~~current~~$11,606,000 ~~and~~(21%), ~~future~~food ~~financial~~and ~~results~~beverage operations ~~are~~revenues ~~substantially~~representing ~~dependent~~$4,444,000 ~~upon~~(8%) ~~the~~and ~~revenues~~Inn ~~generated~~at ~~from~~Harbour ~~the~~Town operations revenues representing $2,667,000 (4%).

4 The Company believes that during each of the fiscal years 2004, 2003 and 2002, the majority of golf and tennis revenues and substantially all of inn revenues and home and villa rentals were derived from vacation and conference use at Sea Pines, with most of the remaining golf and tennis revenues being generated from Hilton Head Island residents. As a result, the Company believes its future success is dependent upon Hilton Head (in general) and Sea Pines (in particular) continuing to be considered as prime destination resort areas, with appropriate lodging and conference facilities.

~~usage~~ Fees charged to the general public for use of ~~its~~the Company’s facilities, ~~which~~are ~~revenues~~typically ~~are~~higher than the fees charged to persons residing within Sea Pines. The Company is also a ~~function~~party ofto certain use and access agreements with several developments and hotels located both ~~the~~inside ~~volume~~and outside of Sea Pines. These agreements generally provide the guests of ~~usage~~those particular developments and hotels ~~the~~with ~~fee~~access ~~levels~~to the Company’s isfacilities inat arates ~~position~~slightly lower than those available to ~~charge~~the general inpublic. ~~its~~In addition, the Company will occasionally offer special discounts and package ~~market~~rates ~~area~~as part of its ongoing promotional activities.

~~The~~Vacation ~~Company’s~~use ~~resort~~at ~~operations~~Sea ~~employed~~Pines ~~approximately~~is ~~329~~seasonal ~~people~~with asthe ofhigher period being from March through November and the lower period from December 31 through February. Substantial fixed costs continue during the non-peak period, ~~2002~~leading to major seasonal fluctuations in operating income.

2. The ~~Real~~Company ~~Estate~~believes ~~Brokerage~~that its resort operations are relatively stable. ~~SPREC~~Nevertheless, iseconomic conditions ~~engaged~~and ~~primarily~~other infactors do adversely affect tourism on Hilton Head, and may have a negative impact on the ~~brokerage~~resort operations of ~~residential~~ ~~real~~the ~~estate~~Company. Because of its location on the Atlantic coast, Hilton Head ~~Island~~is susceptible to adverse weather conditions and ~~its~~resulting ~~neighboring~~damage ~~communities~~from hurricanes and other natural occurrences, as well as the potential for damage from a major oil or hazardous waste spill. Although Hilton Head’s location away from major oil drilling operations and industrial sites reduces the risk of the latter occurrence, there can be no assurance that such damage will never occur. The Company ~~competes~~maintains ~~with~~property ~~other~~and ~~real~~casualty ~~estate~~insurance ~~brokerage~~in ~~firms~~amounts that it believes to be adequate including coverage for business interruption. Furthermore, access to the Company’s facilities is dependent upon adequate means of transportation at a reasonable cost. In the future, fuel shortages, increases in fuel costs and other events which might inhibit or restrict airplane or automobile travel could have a negative impact on the ~~Hilton~~Company’s ~~Head~~operations, depending on the ~~Island~~severity ~~area~~and duration of the interruption or price increase.

~~SPREC~~The ~~maintains~~Company 15is ~~offices,~~generally ~~five~~subject ~~located~~to ~~within~~various ~~Sea~~local ~~Pines,~~and ~~six~~regional ~~located outside~~land ofuse ~~Sea~~and ~~Pines~~environmental regulations, onordinances ~~Hilton Head Island~~ and ~~four~~restrictive ~~located~~covenants. ~~off~~The ~~Hilton~~Company ~~Head Island~~believes inthat ~~the~~it ~~surrounding~~is ~~Beaufort~~currently ~~County area.~~in

~~For fiscal year 2002, real estate brokerage operations accounted for~~4 approximately $16,250,000 (32%) of the Company’s total revenues. For fiscal year 2001, real estate brokerage operations accounted for approximately $16,610,000 (33%) of the Company’s total revenues. For fiscal year 2000, real estate brokerage operations accounted for approximately $19,169,000 (39%) of the Company’s total revenues.

WhileTable brokerageof activities are not tied directly to vacation and conference activities, any general decrease in visitors to Hilton Head Island can result in slower residential real estate sales. Furthermore, the sluggish national economy and decline in air travel are anticipated to suppress real estate brokerage revenues to some degree for an indeterminate period. Contents

~~SPREC~~material ~~employed~~compliance 34with ~~people,~~all such applicable regulations and ~~had~~covenants ~~approximately~~and ~~116~~does ~~non-employee~~not ~~sales~~expect ~~agents,~~that ascompliance in the future will have any material adverse effect on the operations or the profitability of ~~December 31,~~the ~~2002~~Company.

~~(d) Financial~~The ~~Information~~Company’s ~~About~~resort ~~Foreign~~operations ~~and~~are ~~Domestic~~subject ~~Operations~~to significant competition from various facilities on Hilton Head, as well as other destination resorts in South Carolina, Georgia and ~~Export~~Florida. ~~Sales~~Specifically, the Company believes its golf courses are directly competitive with approximately 20 golf courses located on Hilton Head outside of Sea Pines. ~~All~~However, in as much as golf course play is in large part dictated by the number of guests utilizing accommodations within Sea Pines, the overall success of the Company’s operations ~~are~~will ~~confined~~continue to ~~Beaufort~~be dependent on Sea Pines maintaining its reputation as a premier golf and ~~Jasper~~tennis resort. The Company believes that its rates are ~~Counties~~competitive with other facilities of comparable quality and reputation in ~~South~~the ~~Carolina.~~southeastern ~~See~~region and ~~Item 1(a)~~expects that its facilities will continue to compete favorably due to location, quality, design and the established reputation of Sea Pines.

~~Item 2~~ One of the Company’s golf courses hosts the annual MCI Heritage Golf Tournament, a nationally televised professional golf tournament. ~~Properties~~Although the facility usage fee for this tournament does not constitute a major source of income, the event has a significant favorable impact on the Company’s lodging, food and beverage and retail businesses. Moreover, the tournament’s extensive media coverage provides substantial marketing benefits resulting in an enhanced national reputation of Sea Pines and the Company’s facilities. Loss of the tournament would negatively affect the Company in all these respects.

~~(a) Golf~~The ~~Facilities.~~Company’s ~~SPC~~golf ~~owns~~and ~~three~~tennis ~~18-hole~~operations ~~resort~~consist ~~golf~~primarily ~~courses~~of ~~known~~operating as and maintaining the Company’s ~~Harbour~~facilities. ~~Town~~The ~~Golf~~Company ~~Links,~~receives ~~the~~court ~~Ocean~~fees, ~~Course~~greens fees, cart rental fees and ~~the~~income from ~~Sea~~merchandise ~~Marsh~~sales. ~~Course,~~The ~~all~~Company’s ~~of which~~tennis facility and the three resort golf courses are ~~located~~open to ~~within~~the ~~Sea~~general ~~Pines~~public. ~~Each~~Maintenance ofand overhead expenses associated with the Company’s golf ~~courses~~and tennis isoperations remain generally stable regardless of the volume of facility usage. The Company’s current and future financial results are substantially ~~utilized~~dependent ~~during~~upon the ~~peak~~revenues generated ~~occupancy~~from ~~period~~the onusage ~~Hilton~~of ~~Head~~its ~~Island~~facilities, which revenues are a function of both the volume of usage and the fee levels the Company is ~~March~~in ~~through~~a ~~November~~position to charge in its market area.

The ~~Harbour~~Company’s ~~Town~~resort ~~Golf~~operations ~~Links~~employed ~~property~~318 ~~consists~~people ofas ~~approximately 136 acres, including a driving range. Harbour Town is the site~~ of ~~the Heritage Golf Tournament~~December 31, ~~an annual tournament on the PGA Tour~~2004. ~~Adjacent to the Harbour Town~~ ~~Golf Links is the Harbour Town Clubhouse, which contains a pro shop, a~~ ~~restaurant, and other small meeting and dining facilities.~~

5 2. Real Estate Brokerage. SPREC is engaged primarily in the brokerage of residential real estate on Hilton Head Island and its neighboring communities. The Company competes with other real estate brokerage firms in the Hilton Head Island area.

~~The~~SPREC ~~Sea~~maintains ~~Marsh~~12 ~~Golf~~offices, ~~Course~~five ~~contains~~located ~~approximately~~within 92Sea ~~acres~~Pines, ~~and~~five ~~the~~located ~~Ocean Course~~outside ~~contains~~of ~~approximately~~Sea 97Pines on ~~acres.~~Hilton ~~There~~Head isIsland aand ~~driving~~two ~~range, that contains approximately 11.6 acres,~~ located ~~adjacent~~off ~~to,~~Hilton ~~and~~Head ~~shared~~Island ~~by,~~in the ~~Ocean~~ ~~and~~surrounding ~~Sea~~Beaufort ~~Marsh golf courses~~County area.

For fiscal year 2004, real estate brokerage operations accounted for $24,662,000 (b38%) ~~Tennis~~ ~~Facility.~~of ~~SPC~~the Company’s ~~owns~~total ~~and~~revenues, ~~operates~~excluding acost ~~tennis~~reimbursements ~~complex~~revenues. inFor ~~the~~fiscal year 2003, real ~~Harbour~~estate ~~Town~~brokerage ~~area~~operations ofaccounted ~~Sea~~for ~~Pines~~$19,710,000 ~~known~~(34%) asof the ~~Sea~~Company’s ~~Pines~~total ~~Racquet Club~~revenues. For fiscal

~~(c) The Inn at Harbour Town. In November 2000, the Company completed~~5 construction of a small inn in the Harbour Town area. The Inn at Harbour Town is a 47,000 square-foot facility featuring 60 inn rooms and is adjacent to and provides views of the Harbour Town Golf Links.

(d) HarbourTable Townof Conference Center. The Company operates the Harbour Town Conference Center located adjacent to the Harbour Town Golf Links Clubhouse. The Harbour Town Conference Center is a 16,000 square-foot facility and is available for both group conferences and social functions. Contents

~~(e) Equestrian~~year ~~Facilities.~~2002, ~~SPC~~real ~~owns~~estate abrokerage ~~tract~~operations ofaccounted ~~land~~for ~~known as Lawton Stables~~$16,250,000 ~~which~~(30%) ~~contains~~of ~~approximately~~the ~~21.8 acres. The stables are leased to a~~Company’s ~~stable~~total ~~operator who provides boarding, lessons, and trail rides~~revenues.

~~(f) Plantation~~While ~~Club.~~brokerage ~~SPC~~activities ~~owns~~are anot ~~tract~~tied ofdirectly ~~land~~to ~~with~~vacation ~~improvements thereon known as the Plantation Club site containing approximately 9.4 acres. It includes the golf pro shop associated with the Ocean~~ and ~~Sea Marsh golf courses as well as~~ conference ~~facilities~~activities, ~~food~~any general ~~and~~decrease ~~beverage~~in ~~facilities,~~visitors ato ~~health~~Hilton ~~and fitness~~Head ~~center,~~Island acan ~~swimming~~result ~~pool,~~in ~~and~~slower aresidential ~~bike~~real ~~rental store~~estate sales.

~~(g) Other~~SPREC ~~Recreational~~employed ~~Facilities.~~29 ~~In the vicinity of the Harbour Town Golf Links~~people, ~~SPC owns~~ and ~~operates~~had ~~recreational~~114 ~~areas~~non-employee ~~containing~~sales ~~a playground~~agents, ~~a swimming~~as ~~pool~~of December 31, ~~and a snack bar~~2004.

~~SPC~~(d) Financial ~~also~~Information ~~owns~~About Foreign and ~~operates~~Domestic aOperations ~~Beach~~and ~~Club~~Export inSales. ~~the~~All ~~vicinity~~ of the ~~Plantation~~ ~~Club,~~Company’s ~~containing~~operations aare ~~retail~~confined ~~shop,~~to anBeaufort ~~outdoor food~~ and ~~beverage~~Jasper ~~facility,~~Counties ~~and~~in ~~a real~~South ~~estate~~Carolina. ~~office~~See Item 1(a).

~~(h) Undeveloped~~Item ~~Tracts/Development Rights~~2. ~~SPC owns a number of undeveloped tracts of land within Sea Pines briefly described as follows:~~ Properties.

1 (a) Golf Facilities. ~~Sea~~SPC ~~Pines~~owns ~~Academy~~three ~~Tract~~18-hole —resort ~~approximately~~golf 3courses ~~acres;~~known 2.as ~~Sea~~the ~~Pines~~Harbour ~~Center~~Town Golf ~~Residual~~Links, —the ~~approximately~~Ocean ~~1.4~~Course, ~~acres;~~and 3.the ~~Harbour~~Sea ~~Town~~Marsh ~~Main~~Course, ~~Parking~~all ~~Tract~~of —which ~~approximately~~are ~~3.2~~located ~~acres;~~within 4Sea Pines. Each ~~Artists~~of ~~Area~~the ~~Tract~~Company’s —golf ~~approximately~~courses ~~1.5~~is ~~acres;~~substantially 5.utilized ~~Cordillo~~during ~~Parkway~~the ~~Tract~~peak —occupancy ~~approximately~~period 6on Hilton ~~acres;~~Head ~~and~~Island, which is March through November.

6 The Harbour Town Golf Links property consists of approximately 136 acres, including a driving range. Harbour Town is the site of the MCI Heritage Golf Tournament, an annual tournament on the PGA Tour. Adjacent to the Harbour Town Golf Links is the Harbour Town Clubhouse, which contains a pro shop, a restaurant and other small meeting and dining facilities.

6 The Sea Marsh Golf Course contains approximately 92 acres, and the Ocean Course contains approximately 97 acres. ~~Outdoor~~There ~~Recreation~~is ~~Tract~~a —driving range, that contains approximately 911.6 acres, located adjacent to, and shared by, the Ocean and Sea Marsh golf courses.

(ib) ~~Forest~~ Tennis ~~Preserve~~Facility. SPC owns aand ~~495-acre~~operates ~~tract~~a oftennis ~~land~~complex ~~known~~in as the ~~Sea Pines~~Harbour ~~Forest~~Town ~~Preserve.~~area ~~Various recreational activities are permitted to be conducted on 181~~ of ~~these acres. A golf course is one possible use, but~~Sea ~~construction~~Pines ofknown aas ~~golf course would require~~ the ~~approval of 75% of~~ Sea Pines ~~property~~ ~~owners~~Racquet ~~voting on such issue~~Club.

(c) The ~~portion~~Inn ofat ~~the~~Harbour ~~Forest~~Town. ~~Preserve~~The ~~not~~Inn ~~reserved~~at ~~for~~Harbour ~~outdoor~~Town ~~recreation~~ is ~~designated~~ as a ~~wild life preserve. In August 1993~~47,000 ~~the~~square-foot ~~Company made a~~facility ~~commitment~~featuring to60 ~~donate~~inn ~~approximately~~rooms ~~404~~and ~~acres~~is ofadjacent ~~the wildlife preserve~~ to ~~a not-for-profit~~and ~~organization~~provides onviews ~~Hilton Head Island, South Carolina. As~~ of ~~October 31,~~ ~~2002, approximately 90 of~~ the ~~404~~Harbour ~~acres~~Town ~~had~~Golf ~~been donated and title transferred~~Links. ~~The remaining 314 acres are leased to the same not-for-profit~~ ~~organization for a minimal amount.~~

(jd) ~~Welcome~~ Harbour Town Conference Center. ~~SPC~~The ~~owns~~Company aoperates ~~6-acre~~the ~~tract~~Harbour ofTown ~~land,~~Conference ~~which~~Center located isadjacent ~~the~~to ~~site of~~ the ~~Sea~~Harbour ~~Pines~~Town ~~Welcome~~Golf ~~Center~~Links Clubhouse. ~~This~~The Harbour Town Conference Center is a 23 16,000~~-square~~ square-foot facility, ~~which contains the Company’s executive~~ and ~~administrative~~is ~~offices,~~available ~~the~~for ~~lodging~~both ~~front office~~group ~~facilities,~~conferences and ~~the~~social ~~main office facility for SPREC~~functions.

(ke) ~~Liberty~~ Equestrian ~~Oak Cafe~~Facilities. SPC owns a ~~1.6-acre~~ tract of land ~~and improvements~~ known as ~~the~~Lawton ~~Liberty~~Stables, ~~Oak~~which ~~Cafe~~contains approximately 21.8 ~~This~~acres. isThe anstables ~~outdoor~~are ~~food~~leased ~~and~~to ~~beverage~~a ~~facility~~stable operator who provides boarding, ~~used~~lessons ~~for~~and ~~catered~~trail ~~functions~~rides.

~~(l) Leases. SPC currently leases approximately 31,000 square feet of~~6 ~~space used for the golf maintenance facilities, and SPREC leases approximately 19,749 square feet of office space in eight locations throughout the Hilton Head Island area.~~

(m) OtherTable Real Estate. SPC owns a small office building in the Harbour Town area known as the Saddlebag Building, which is leased to a third party, and three small commercial buildings in Harbour Town, one of which currently serves as a sales office for SPREC and one serves as the Harbour Town Bakery. Contents

~~Substantially~~(f) Plantation ~~all~~Club. SPC owns a tract of land with improvements thereon known as the Plantation ~~Company’s~~Club ~~properties~~site ~~are~~containing ~~subject~~approximately to9.4 ~~liens~~acres. asIt includes the golf pro shop associated ~~described~~with inthe ~~Item 7~~Ocean and Sea Marsh golf courses as well as conference facilities, ~~Management’s~~food ~~Discussion~~and beverage facilities, a health and ~~Analysis~~fitness ofcenter, ~~Financial Conditions~~a swimming pool and ~~Results~~a ofbike ~~Operations~~rental store.

~~Item~~ (g) 3Other Recreational Facilities. ~~Legal~~In ~~Proceedings~~the vicinity of the Harbour Town Golf Links, SPC owns and operates recreational areas containing a playground, a swimming pool and a snack bar.

~~The~~SPC ~~Company~~also isowns ~~subject~~and tooperates ~~claims~~a ~~and~~Beach ~~suits~~Club in the ~~ordinary~~vicinity ~~course~~ of ~~business.~~ Inthe ~~management’s~~Plantation ~~opinion~~Club, nocontaining ~~currently~~a retail ~~pending~~shop, ~~claims~~an ~~and~~outdoor ~~suits against~~food ~~the~~and ~~Company~~beverage ~~will~~facility ~~have~~and a ~~material~~real ~~adverse~~estate ~~effect on the Company~~office.

~~Item~~ (h) 4.Undeveloped ~~Submission~~Tracts/Development ofRights. ~~Matters~~The toCompany owns a ~~Vote~~number of ~~Security~~undeveloped ~~Holders.~~tracts of land within Sea Pines briefly described as follows:

~~None~~1. Sea Pines Academy Tract - approximately 3 acres; 2. Sea Pines Center Residual - approximately 1.4 acres; 3. Harbour Town Main Parking Tract - approximately 3.2 acres; 4. Artist Area Tract - approximately 1.5 acres; 5. Cordillo Parkway Tract - approximately 6 acres; and 6. Outdoor Recreation Tract - approximately 9 acres.

7 (i) Forest Preserve. The Company owns a 495-acre tract of land known as the Sea Pines Forest Preserve. Various recreational activities are permitted to be conducted on 181 of these acres. A golf course is one possible use, but construction of a golf course would require the approval of 75% of Sea Pines property owners voting on the issue.

~~PART~~ The IIportion of the Forest Preserve not reserved for outdoor recreation is designated as a wild life preserve. In August 1993, the Company made a commitment to donate approximately 404 acres of the wildlife preserve to a not-for-profit organization on Hilton Head Island, South Carolina. As of October 31, 2004, approximately 90 of the 404 acres had been donated and title transferred. The remaining 314 acres are leased to the same not-for-profit organization for a minimal amount.

~~Item~~ (j) 5Welcome Center. ~~Market~~SPC ~~for~~owns ~~Registrant~~a 6-acre tract of land, which is the site of the Sea Pines Welcome Center. This is a 23,000-square foot facility, which contains the Company’s ~~Common~~executive ~~Equity~~and administrative offices, the lodging front office facilities, and ~~Related~~the ~~Stockholder~~main ~~Matters~~office facility for SPREC.

(ak) Market Information. There is no established public trading market for the Company’s common stock. The Company’s capital stock was originally issued in 1987 in units consisting of 750 shares of common stock and 500 shares of Series ALiberty ~~preferred~~Oak ~~stock~~Cafe. ~~From~~SPC ~~1987~~owns ~~through February 2000, virtually all transactions in the Company’s common stock and preferred stock were completed in units as originally issued. Transactions in such units traded sporadically on~~ a ~~bid and ask basis through the over the counter market at Robinson~~1.6-~~Humphrey Company~~acre intract ~~Atlanta, Georgia. In February 2000, the Company completed an exchange offer in which holders~~ of ~~preferred~~land ~~stock~~and ~~could~~improvements ~~exchange~~known preferred stock for common stock or trust preferred securities. Since the exchange offer closed in February 2000, there has been very limited trading of the Company’s common stock. Through its transfer agent, the Company is aware of only 20 transfers of shares of common stock occurring during the fiscal year ended October 31, 2002. The Company has no official data as to the ~~prices at which~~Liberty ~~any~~Oak ~~of these transfers took place~~Cafe. ~~Consequently,~~This ~~the Company~~ is ~~unable~~an ~~to provide~~outdoor ~~high~~food and ~~low~~beverage ~~closing~~facility ~~sales~~used ~~prices~~ for ~~shares~~catered ~~of its common stock for the fiscal years ended October 31, 2002 and October 31, 2001~~functions.

~~In May 2000, the Company established a bulletin board on its web site that~~7 allows persons the ability to post their interest in buying or selling the Company’s securities. This bulletin board allows offers to be posted in all three of the Company’s outstanding securities: common stock, Series A preferred stock, and trust preferred securities. The bulletin board can be accessed on the Company’s web site on the World Wide Web at www.seapines.com. Offering prices on the bulletin board to purchase the Company’s common stock during the fiscal year ended October 31, 2002 ranged from $2.50 to $6.00 per share. Recent posted offers have ranged from $2.50 to $4.50 per share.

NeitherTable the Company nor any of its affiliates will (a) receive any compensation for creating or maintaining the bulletin board or for its use, (b) be involved in any purchase or sale negotiations arising from the bulletin board, (c) give advice regarding the merits or shortcomings of any particular trade, (d) use the bulletin board, directly or indirectly, to offer to buy or sell securities except in compliance with all securities laws, or (e) receive, transfer, or hold any funds or securities as an incident of operating the bulletin board. Contents

(bl) ~~Holders~~ Leases. AsSPC ofcurrently ~~December~~ leases approximately 31,000 ~~2002~~square feet of space used for the golf maintenance facilities, ~~there~~and ~~were~~SPREC leases approximately ~~550 holders~~19,749 ofsquare ~~record~~feet of ~~shares~~office ofspace ~~common~~in ~~stock~~eight locations throughout the Hilton Head Island area.

(cm) ~~Dividends~~ Other Real Estate. ~~The~~SPC ~~Articles~~owns ofa ~~Incorporation~~small ofoffice building in the ~~Company~~Harbour ~~provide~~Town ~~for dividends~~area onknown as the Saddlebag ~~preferred~~Building, ~~stock~~which ofis ~~$0.722~~leased ~~per~~to ~~share~~a ~~per~~third ~~annum~~party, toand bethree ~~paid~~small commercial buildings in ~~arrears.~~Harbour AsTown, one of ~~October 31,~~which ~~2002,~~currently serves as a sales office for SPREC and one that serves as the Harbour Town Bakery. The Company ~~has~~also ~~paid~~owns ~~all~~a ~~accrued~~small ~~dividends~~office on building in the ~~preferred~~South ~~stock~~Beach ~~applicable~~area towithin Sea ~~all~~Pines ~~years~~that ~~ended~~serves onas ora ~~before~~sales ~~October 31, 2001~~office for SPREC.

AtSubstantially ~~its~~all ~~December 16, 2002, Board~~ of ~~Directors meeting,~~ the Company’s ~~declared a~~properties ~~cash~~are ~~dividend~~subject ofto ~~$0.722~~liens ~~per~~as ~~share~~described ~~for~~in ~~fiscal~~Note ~~year~~7 ~~2002~~to ~~payable~~the Company’s toconsolidated ~~holders~~financial ofstatements. ~~Series A Cumulative~~

8 Item 3. Legal Proceedings.

~~Preferred~~ On ~~Stock~~November 4, 2004, Sea Crest Development Company, Robert C. ~~This~~Graves, ~~dividend~~et isal. ~~payable~~filed a civil action in ~~equal~~the ~~quarterly~~Beaufort ~~installments~~ County Court of ~~approximately~~Common ~~$0.18~~Pleas, ~~per~~naming ~~share~~Sea onPines ~~January 15~~Company, ~~2003,~~Inc.; ~~April 15,~~Sea ~~2003,~~Pines ~~July 15,~~Real ~~2003~~Estate Company, Inc. and ~~October 15,~~Michael ~~2003,~~E. toLawrence ~~shareholders~~as defendants. The plaintiffs are seeking an unspecified amount of ~~record~~actual and punitive damages and attorney fees based on ~~January 1,~~the ~~2003,~~allegations ~~April~~of 1breach of contract, ~~2003~~breach of good faith and fair dealings, ~~July 1~~negligent misrepresentation, ~~2003~~fraud and breach ~~October 1,~~of ~~2003~~lease agreement in connection with the development and sale of the Sea Crest condominium project owned by the plaintiffs and marketed and sold by the Sea Pines Real Estate Company. An adverse judgment in this matter could have a material adverse effect on the Company’s financial condition, ~~respectively~~results of operations and cash flow.

~~The~~On January 23, 2004, Prudential-Bache/Fogelman Harbour Town Properties, L.P. (“Prudential-Bache/Fogelman”) filed a complaint in the United States District Court, District of South Carolina, Beaufort Division, naming the Company ~~has~~and ~~not~~Sea ~~paid~~Pines Company, Inc. as defendants, and seeking a declaratory judgment that Prudential-Bache/Fogelman is the owner of certain trademarks, an injunction prohibiting the Company and Sea Pines Company, Inc. from making any claims ~~dividends~~of onownership ~~its~~of ~~common~~the ~~stock~~trademarks and ~~has~~an nounspecified amount of compensatory and punitive ~~present~~damages ~~intention~~based on allegations of ~~paying~~wrongful ~~such~~interference ~~dividends~~in Prudential-Bache/Fogelman’s prospective business relations. An Order of Dismissal was entered in this matter on July 22, 2004. The parties settled the ~~foreseeable~~lawsuit ~~future~~in the Company’s first fiscal quarter 2005. The settlement did not have a material impact on the Company’s financial position or results of operations. The Company continues to have full authority to control the use of the trademarks, which can only be used by others under terms of licenses granted by Sea Pines.

~~(d) Securities~~The ~~Authorized~~Company ~~for~~is ~~Issuance~~subject ~~Under~~to ~~Equity~~claims ~~Compensation~~and ~~Plans~~suits in the ordinary course of business. In management’s opinion, except as noted above, no currently pending claims and suits against the Company will have a material adverse effect on the Company.

Number of

securities to be

issued upon

Weighted average

exercise of

exercise price of

Number of

outstanding

securities

options, warrants

remaining available

Plan category

and rights

for future issuance

(a)

(b)

(c)

Equity compensation plans approved by security holders

55,400

4.86

124,600

Equity compensation plans not approved by security holders

—

22,000

(1)

Total

55,400

4.86

146,600

Item 4. Submission of Matters to a Vote of Security Holders.

~~(1) These shares are available for future issuance under the Company’s Director Stock Compensation Plan~~ None. ~~Information with respect to that plan can be found in Note 11 to the Company’s consolidated financial statements included herein.~~

Item 6.Table Selectedof Financial Data. Contents

~~The~~PART ~~following selected consolidated financial data should be read in~~II ~~conjunction with “Management’s Discussion and Analysis of Financial Conditions~~ ~~and Results of Operations” and with the consolidated financial statements and~~ ~~notes thereto, which are included elsewhere in this annual report.~~

	Years Ended October 31,
	2002			2001			2000			1999			1998
	(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
Revenues	$	51,142		$	50,344		$	48,839		$	46,414		$	38,506
Cost of operations	$	48,240		$	49,054		$	47,751		$	42,563		$	34,345
Income from operations	$	2,902		$	1,290		$	1,088		$	3,851		$	4,161
Interest expense	$	(2,392	)	$	(2,771	)	$	(1,426	)	$	(1,099	)	$	(1,345	)
Other (expense) income	$	(270	)	$	(1,623	)	$	(149	)	$	523		$	333
Net income (loss)	$	197		$	(2,674	)	$	(389	)	$	2,063		$	2,050
Net income (loss) attributable to common stock	$	37		$	(2,834	)	$	(730	)	$	1,176		$	1,163
Per share of common stock
Net income (loss)	$	0.01		$	(0.80	)	$	(0.23	)	$	0.64		$	0.63
Weighted average shares outstanding		3,568			3,554			3,174			1,843			1,843
Consolidated Balance Sheet Data:
Current assets	$	5,894		$	4,259		$	5,017		$	5,926		$	4,852
Real estate assets, net	$	47,416		$	49,516		$	50,310		$	34,963		$	30,838
Total assets	$	54,511		$	55,172		$	56,994		$	42,690		$	37,925
Current liabilities	$	7,223		$	7,495		$	8,802		$	6,392		$	5,518
Long-term obligations, less current portion	$	37,948		$	38,498		$	36,236		$	20,404		$	17,689
Shareholders’ equity	$	9,340		$	9,179		$	11,956		$	15,894		$	14,718

10 (a) Market Information. There is no established public trading market for the Company’s common stock. The Company’s capital stock was originally issued in 1987 in units consisting of 750 shares of common stock and 500 shares of Series A preferred stock. From 1987 through February 2000, virtually all transactions in the Company’s common stock and preferred stock were completed in units as originally issued. Transactions in such units traded sporadically on a bid and ask basis through the over-the-counter market. In February 2000, the Company completed an exchange offer in which holders of preferred stock could exchange preferred stock for common stock or trust preferred securities. Since the exchange offer closed in February 2000, there has been very limited trading of the Company’s common stock. Through its transfer agent, the Company is aware of only 17 transfers of shares of common stock occurring during the fiscal year ended October 31, 2004. The Company has no official data as to the prices at which any of these transfers took place. Consequently, the Company is unable to provide high and low closing sales prices for shares of its common stock for the fiscal years ended October 31, 2004 and October 31, 2003.

~~Item~~ In May 7.2000, ~~Management~~the Company established a bulletin board on its web site that allows persons to post their interest in buying or selling the Company’s ~~Discussion~~securities. ~~and~~This ~~Analysis~~bulletin board allows offers to be posted in all three of ~~Financial~~the ~~Conditions~~Company’s outstanding securities: common stock, Series A preferred stock, and ~~Results~~trust ofpreferred ~~Operation~~securities. The bulletin board can be accessed on the Company’s web site on the World Wide Web at www.seapines.com. Offering prices on the bulletin board to purchase the Company’s common stock during the fiscal year ended October 31, 2004 ranged from $.75 to $3.50 per share.

~~Results~~ Neither the Company nor any of ~~Operations~~its affiliates will (a) receive any compensation for creating or maintaining the bulletin board or for its use, (b) be involved in any purchase or sale negotiations arising from the bulletin board, (c) give advice regarding the merits or shortcomings of any particular trade, (d) use the bulletin board, directly or indirectly, to offer to buy or sell securities except in compliance with all securities laws, or (e) receive, transfer, or hold any funds or securities as an incident of operating the bulletin board.

~~The~~Pursuant ~~Company’s~~to ~~operations~~the ~~are~~agreement ~~conducted~~and ~~primarily~~plan ~~through~~of ~~two~~merger ~~wholly~~with ~~owned subsidiaries.~~The ~~Sea~~Riverstone ~~Pines~~Group, ~~Company~~LLC, ~~Inc.~~holders ~~operates all~~ of the ~~resort assets,~~ ~~including~~Company’s acommon ~~60-room~~stock ~~inn,~~will ~~conference~~be ~~facilities,~~entitled ~~three~~to ~~resort~~receive ~~golf~~$8.50 ~~courses,~~per ~~a tennis~~share ~~center,~~in ~~home and villa rental management operations~~cash, ~~retail~~without ~~sales outlets~~interest, ~~food service operations, and other resort recreational facilities.~~for ~~Sea~~each ~~Pines~~of ~~Real~~their ~~Estate~~shares ~~Company,~~of ~~Inc.~~common ~~is an independent real estate brokerage firm with 15 offices serving Hilton Head Island and its neighboring communities~~stock.

~~Critical~~ (b) Holders. ~~Accounting~~As ~~Policies~~of December 31, 2004, there were approximately 553 holders of record of shares of common stock.

In (c) Dividends. ~~preparation~~The Articles of ~~its~~Incorporation ~~financial~~of ~~statements,~~ the Company ~~applies~~provide ~~accounting~~for dividends on the ~~principles~~preferred ~~generally~~stock ~~accepted~~of in$0.722 ~~the~~per ~~United~~share ~~States~~per annum to be paid in arrears. The ~~application~~terms of the Company’s ~~generally~~judgment ~~accepted~~loan, ~~accounting~~as ~~principles~~described ~~may~~in ~~require~~Note ~~management~~7 to ~~make estimates~~the ~~and~~Company’s ~~assumptions~~consolidated ~~that~~financial ~~affect~~statements, required the ~~amounts~~Company ~~reported~~to incease the ~~financial statements~~payment ~~and~~of ~~accompanying~~dividends ~~results~~on its preferred stock. As of October 31, 2004, all

~~As discussed in Note 1 to the Company’s consolidated financial statements,~~9 revenue from resort operations is recognized as goods are sold and services are provided and revenue from real estate brokerage is recognized when the title passes to the buyer. As a result, the Company’s revenue recognition process does not involve significant judgments or estimates.

AsTable discussed in Note 1 to the Company’s consolidated financial statements, an impairment loss is recognized whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. In order to evaluate for potential impairment the Company compares estimates of future cash flows expected from the use of the asset to the carrying amount of the asset. Management believes that the Company’s estimates of future cash flows are based on reasonable and supportable assumptions and represent the Company’s best estimates of the cash flows expected to result from the use of the corresponding assets. As disclosed in the consolidated financial statements, the Company has not incurred any impairment losses for the years ended October 31, 2002, 2001 or 2000. Contents

~~2002~~preferred ~~Compared~~stock dividends applicable to ~~2001~~the fiscal years ended October 31, 2004 and 2003 have been accrued, but not paid. Preferred stock dividends applicable to the fiscal year ended October 31, 2002 and all prior years have been declared and paid.

~~Revenues~~ The Company has not paid any dividends on its common stock and has no present intention of paying such dividends in the foreseeable future. The Company’s Articles of Incorporation prohibit the payment of dividends on the common stock until the accrued dividends on the preferred stock have been paid.

~~The Company reported revenues of $51,142,000 for fiscal year 2002, a~~10 ~~$798,000, or 1.6%, increase over fiscal year 2001.~~

11 Table of Contents

~~The~~Item ~~primary~~6. ~~factors~~Selected ~~contributing~~Financial ~~to the $798,000 increase in revenues were as follows:~~ Data.

• The ~~Golf~~following ~~revenue~~selected inconsolidated ~~fiscal~~financial ~~year~~data ~~2002~~should ~~increased~~be byread ~~$377,000,~~in orconjunction 3.2%, as compared to 2001. This increase was due to the Harbour Town Golf Links being open for all twelve months of 2002 as compared to only being open for ten months of 2001. The golf course was closed for eight months beginning with “Management’s ~~the~~Discussion ~~third~~and ~~quarter~~Analysis of ~~2000~~Financial ~~through~~Condition ~~part of the first quarter of 2001 to complete a major restoration project. • Food~~ and ~~beverage~~Results ~~operations generated revenues~~ of ~~$4,444,000~~Operations” ~~in fiscal year 2002. This represents an increase of $355,000, or 8.7%, over 2001. This increase was due to increased revenue in the catering operations, Harbour Town Bakery~~ and the Sea Pines Beach Club. • The Inn at Harbour Town generated revenues of $2,667,000 in fiscal year 2002. This represents an increase of $294,000, or 12.4%, over 2001. Total occupied room nights were 13,516 as compared to 12,599 during 2001. The average daily rate was $187.97 during 2002, an increase of $7.87, or 4.4%, from the same period in 2001. • Revenues from the Company’s rental management operation in 2002 decreased by $217,000, or 1.8%, compared with ~~2001. This decrease is primarily~~ the ~~result~~consolidated offinancial ~~current~~statements ~~economic conditions~~ and ~~the~~notes ~~decline in air travel. Guest occupied unit nights decreased 4.4% in fiscal year 2002~~thereto, ~~totaling~~which ~~53,510~~are ~~for~~included ~~the~~elsewhere ~~year. The average daily rate of $208.67~~ in ~~fiscal~~this annual ~~year 2002 was a 3~~report.1% increase over the average daily rate in 2001 of $202.43. • Gross commission revenue in fiscal year 2002 from the real estate brokerage operation decreased by $360,000, or 2.2%, as compared to 2001. This decrease was primarily the result of the economic downturn during the first six months of fiscal 2002, which adversely affected the second-home sales market.

Cost of revenues


	Years Ended October 31,
	2004			2003			2002			2001			2000

	(In thousands, except per share amounts)
Consolidated Statements of Operations Data:

Revenues	$	65,653		$	56,935		$	54,692		$	53,851		$	52,765
Costs and expenses	$	62,510		$	55,548		$	51,790		$	51,561		$	51,677
Income from operations	$	3,143		$	1,387		$	2,902		$	1,290		$	1,088
Interest expense	$	(2,512	)	$	(2,271	)	$	(2,392	)	$	(2,771	)	$	(1,426	)
Other (expense) income (1)	$	(256	)	$	(5,526	)	$	(270	)	$	(1,623	)	$	(149	)
Net income (loss) (1)	$	375		$	(6,464	)	$	197		$	(2,674	)	$	(389	)
Net income (loss) attributable to common stock	$	215		$	(6,624	)	$	37		$	(2,834	)	$	(730	)
Per share of common stock Net income (loss)	$	0.06		$	(1.85	)	$	0.01		$	(0.80	)	$	(0.23	)
Weighted average shares outstanding		3,595			3,580			3,568			3,554			3,174

Consolidated Balance Sheet Data:

Current assets	$	6,566		$	6,614		$	5,894		$	4,259		$	5,017
Real estate assets, net	$	43,671		$	45,861		$	47,416		$	49,516		$	50,310
Total assets	$	50,628		$	52,814		$	54,511		$	55,172		$	56,994
Current liabilities	$	9,938		$	8,510		$	7,223		$	7,495		$	8,802
Long-term obligations, less current portion	$	37,650		$	41,451		$	37,948		$	38,498		$	36,236
Shareholders’ equity (1)	$	3,040		$	2,853		$	9,340		$	9,179		$	11,956

~~Cost~~Item ~~of revenues were $36,263,000 in fiscal year 2002, representing a 1~~7.~~0% decrease~~ ~~from~~Management’s ~~fiscal~~Discussion ~~year~~and ~~2001.~~Analysis ~~This~~of ~~decrease~~Financial isCondition ~~primarily~~and ~~due~~Results toof ~~a decrease in commission expense from real estate brokerage operations~~Operation.

~~Expenses~~Merger Agreement

~~Sales~~On July 27, 2004, the Company entered into an agreement and ~~marketing~~plan ~~expenses~~of ~~were~~merger $3with The Riverstone Group,~~022,000~~ inLLC ~~fiscal~~whereby ~~year~~the ~~2002, representing~~Company awould ~~4.4%~~become ~~decrease~~a ~~from~~wholly ~~fiscal~~owned ~~year~~subsidiary ~~2001.~~of ~~This~~The ~~decrease~~Riverstone isGroup, ~~primarily~~LLC. Under the ~~result~~proposed merger, holders of ~~reduced~~the ~~real~~Company’s ~~estate~~common ~~marketing~~stock ~~costs.~~other

~~General~~(1) ~~and~~Litigation ~~administrative~~ expenses ~~decreased by $397,000, or 5.9%,~~ totaling $6,~~366,000~~324 ~~for~~were ~~the~~recorded ~~year.~~during ~~This~~fiscal ~~decrease~~year ~~was~~2003, ~~primarily~~as ~~the~~discussed ~~result~~in ~~of lower~~Note ~~medical~~5 ~~claims~~to ~~paid by~~ the Company’s ~~self-funded~~consolidated ~~medical~~financial ~~plan and a reduction in property tax expense~~statements. ~~These decreases were partially offset by increases in insurance costs.~~

1211

DepreciationTable and amortization expense increased by $85,000, or 3.4%, and totaled $2,589,000 in fiscal year 2002. This increase was the result of a full year’s depreciation on the Inn at Harbour Town and the Harbour Town Golf Links restoration project. Both of these projects were completed during fiscal year 2001, and depreciation expense applied only to the period the facilities were in operation. Contents

~~Other~~than ~~income~~the Company, The Riverstone Group, LLC, or any of their subsidiaries or holders perfecting their dissenters rights under South Carolina law will be entitled to receive $8.50 per share in cash, without interest, for each of their shares of common stock. In addition, the Merger Agreement provides that if the proposed merger occurs, then within 10 days thereafter The Riverstone Group, LLC will provide the Company with sufficient cash to redeem all of its outstanding Series A preferred stock and pay off its debenture to the Trust, and following the receipt of such cash, the Company will redeem all of its outstanding Series A preferred stock and pay off the debenture to the Trust, which will result in the redemption of all of the outstanding trust preferred securities issued by the Trust. The merger agreement is subject to closing conditions customary for transactions of this type, including obtaining the approval of holders of at least 80% of the Company’s outstanding common stock. In order to avoid having the merger agreement trigger the distribution of Series B preferred stock purchase rights under the Company’s Second Amended and Restated Rights Agreement (~~expense~~“Rights Agreement”), the Company amended the Rights Agreement on July 27, 2004 so that no person would become an “Acquiring Person” (as defined in the plan) as the result of the execution or delivery of, or the consummation of the merger contemplated by, the merger agreement.

	•		The Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective November 1, 2000. This accounting standard requires the Company to report changes in the value of its interest rate swap agreements in its operations. The value of these agreements is greatest when interest rates are high enough to bring the rate protection into play. Falling interest rates during fiscal year 2002 made the rate protection less relevant, causing the fair value of the agreements to decline by $381,000. This charge is a non-cash expense in 2002. If interest rates rise in the future, there will be a gain reported. If the swap agreements remain in effect until their expiration date in 2005, the cumulative total of all related income and expense entries will equal zero.
	•		Interest expense decreased by $379,000, or 13.7%, during fiscal year 2002 as compared 2001. This decrease is attributable to lower interest rates during fiscal year 2002 and lower outstanding debt balances.

A preliminary proxy statement with respect to the proposed merger has been filed with the Securities and Exchange Commission. It is anticipated that the shareholders will vote on the merger during the second fiscal quarter 2005. Effective as of December 13, 2004, the Merger Agreement was amended to extend from December 31, 2004 to March 31, 2005 the date after which any party may terminate the merger agreement if the merger has not then occurred and to make a corresponding extension of the latest date to which the Company is obligated to postpone the shareholders’ meeting to approve the merger.

~~2001~~Results ~~Compared~~of ~~to 2000~~Operations

~~Revenues~~ The Company’s operations are conducted primarily through two wholly owned subsidiaries. Sea Pines Company, Inc. operates all of the resort assets, including a 60-room inn, conference facilities, three resort golf courses, a tennis center, home and villa rental management operations, retail sales outlets, food and beverage service operations and other resort recreational facilities. Sea Pines Real Estate Company, Inc. is an independent real estate brokerage firm with 12 offices serving Hilton Head Island and its neighboring communities.

~~The~~Critical ~~Company~~Accounting ~~reported revenues of $50,344,000 for fiscal year 2001, a~~Policies ~~$1,505,000, or 3.1%, increase over fiscal year 2000.~~

In the preparation of its financial statements, the Company applies accounting principles generally accepted in the United States. The ~~primary~~application ~~factors~~of ~~contributing~~generally accepted accounting principles may require management to ~~the~~make ~~$1,505,000~~estimates ~~increase~~and assumptions that affect the amounts reported in ~~revenues~~the financial statements and accompanying results. These critical accounting policies ~~were~~have asbeen ~~follows:~~discussed with the Company’s audit committee.

	•		Golf revenue in fiscal year 2001 increased by $1,839,000, or 18.6%, as compared to 2000. The increase was due to the reopening of the Harbour Town Golf Links in December 2000. The golf course was closed for eight months beginning with the third quarter of fiscal 2000 to complete a major restoration project.
	•		Food and beverage operations generated revenues of $4,089,000 in fiscal year 2001. These revenues represent an increase of $513,000, or 14.5%, over 2000. This increase was due to an increased focus on the catering business and increased revenue at the Heritage Grill and in the golf food and beverage operation due to the Harbour Town Golf Links reopening as mentioned above.

13 Table of Contents

•Revenue Revenues from the Company’s rental management operation in 2001 decreased by $614,000, or 4.9%, compared with 2000. This decrease is primarily the result of the current economic downturn and the decline in air travel following the events of September 11, 2001. Guest occupied unit nights decreased 12.8% in fiscal year 2001, totaling 55,968 for the year. The average daily rate of $202.43 in fiscal year 2001 was an 8.2% increase over the average daily rate in 2000 of $187.05. • The Inn at Harbour Town opened in November 2000, and revenues totaled $2,372,000 during the first year of operation. • Gross commission revenue in fiscal year 2001 from the real estate brokerage operation decreased by $2,559,000, or 13.3%, as compared to 2000. The soft national economy has significantly adversely affected the second-home sales market.Recognition

~~Cost~~ Revenue from resort operations is recognized as goods are sold and services are provided and revenue from real estate brokerage is recognized upon closing of ~~revenues~~the sale. As a result, the Company’s revenue recognition process does not involve significant judgments or estimates.

~~Cost~~Investment ~~of revenues were $36,626,000~~ in ~~fiscal~~Real ~~year~~Estate ~~2001, representing a 1.9%~~Assets ~~decrease from fiscal year 2000. This decline is the net result of the~~ ~~$1,769,000 decrease in commissions paid to the Company’s real estate agents,~~ ~~offset by a $1,046,000 increase in payments to owners on the Company’s rental~~ ~~management program and increased cost of sales from food and beverage operations.~~

~~Expenses~~ The Company’s management is required to make subjective assessments as to the useful lives of its depreciable assets. The Company considers the period of future benefit of the asset to determine the appropriate useful life. These assessments have a direct impact on net income. The estimated useful lives of the Company’s assets by class are as follows:

Sales and marketing expenses were $3,161,000 in fiscal 2001, representing a 6.0% increase from fiscal year 2000. This cost increase is due to increased marketing efforts to promote The Inn at Harbour Town and special promotions to maintain guest volume in the face of the current economic slowdown.


Land improvements		15 years
Buildings		39 years
Machinery and equipment		5 – 7 years

~~General~~In ~~and administrative expenses increased by $939,000, or 16.1%, totaling $6,763,000 for~~ the ~~year.~~event ~~This~~that ~~increase~~management ~~primarily~~uses ~~results~~inappropriate ~~from~~useful ~~higher medical~~lives ~~claims~~or ~~paid~~methods byfor ~~the~~depreciation, the Company’s ~~self-funded~~net ~~medical~~income ~~plan.~~would ~~Medical~~be ~~claims increased by $564,000 in fiscal 2001, or 48%, as compared to fiscal 2000~~misstated.

~~Depreciation~~Valuation ~~and~~of ~~amortization~~Real ~~expense~~Estate ~~increased by $907,000, or 56.8%, and~~Assets ~~totaled $2,504,000 in fiscal year 2001. This increase results from~~ ~~depreciation of the Company’s new Harbour Town assets.~~

~~Other~~ Management continually monitors events and changes in circumstances that could indicate that the carrying amounts of the real estate assets, both operating properties and properties held for future development, may not be recoverable. When there are indicators that the carrying amount of a real estate asset may not be recoverable, management assesses the recoverability of the asset by determining whether the carrying value of the real estate asset will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate asset to fair value and the Company recognizes an impairment loss. A projection of expected future cash flows requires management to make certain estimates. If management uses inappropriate assumptions in the future cash flow analysis, resulting in an incorrect assessment of the property’s future cash flows and fair value, it could result in the overstatement of the carrying value of real estate assets and net income ~~(expense)~~of the Company.

~~The~~2004 ~~increase~~Compared into ~~operating income in 2001 was more than offset by increases~~2003 ~~in non-operating charges. Other expenses increased from $1,575,000 in 2000 to~~ ~~$4,394,000 in 2001. Two items account for most of this increase:~~

14Revenues

	•		The Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective November 1, 2000. This new accounting standard requires the Company to report changes in the value of its interest rate swap agreements in the Consolidated Statement of Operations. The value of these agreements is greatest when interest rates are high enough to bring the rate protection into play. Falling interest rates during fiscal year 2001 made the rate protection less relevant, causing the fair value of the agreements to decline by $1,896,000. This charge is a non-cash expense in 2001. If interest rates rise in the future, there will be a gain reported. If the swap agreements remain in effect until their expiration date in 2005, the cumulative total of all related income and expense entries will equal zero.
	•		Interest expense on the Company’s debt increased by $1,345,000, or 94.3%, in fiscal year 2001 as compared to fiscal year 2000. This increase is attributable to the increase in outstanding debt from the construction of the new Harbour Town assets and interest on the junior subordinated debentures which were issued by the Company in February 2000.

The Company reported revenues of $65,653,000 for fiscal 2004, an $8,718,000, or 15.3%, increase over fiscal 2003. Resort revenues, excluding cost reimbursements revenues, increased by $3,575,000, or 10.6%, compared to fiscal 2003, while real estate brokerage revenues, excluding cost reimbursements revenues, improved by $4,952,000, or 25.1%.

~~Gain on the sale of assets totaled $172,000 for the fiscal year 2001.~~13 ~~These gains were the result of the sale of a Company-owned condominium and certain other assets.~~

ExchangeTable offer costs in fiscal year 2001 decreased as a result of the completion of the exchange offer in February 2000. Legal fees and professional fees in the amount of $294,000 were incurred in connection with the exchange offer. Of that amount, $202,000 was expensed in fiscal year 2000 and the remaining amount was capitalized and is being amortized over 30 years. Contents

~~Income~~The ~~taxes~~ primary factors contributing to the $8,718,000 increase in revenues were as follows: • Real estate brokerage revenues increased by $4,952,000, or 25.1%, during fiscal 2004 as compared with fiscal 2003. Real estate brokerage revenues are very closely tied to real estate sales. The increase in sales is the result of favorable economic conditions, an expansion of our marketing efforts to the mainland markets, the addition of several new agents and the continuation of management’s focus on listings and individual agent marketing. • Golf revenue in fiscal 2004 increased by $224,000, or 1.9%, as compared to fiscal 2003. The number of resort golf rounds played at Harbour Town Golf Links during fiscal 2004 increased by 2,366 rounds, or 9.8%, from fiscal 2003. This increase in rounds played was partially offset by an $8.49, or 5.8%, decrease in average resort rate paid per round in fiscal 2004 over fiscal 2003. The number of resort golf rounds played at the Ocean and Sea Marsh golf courses during fiscal 2004 increased by 3,299 rounds, or 5.5%, from fiscal 2003. This increase was partially offset by a $3.29, or 5.4%, decrease in average resort rate paid per round in fiscal 2004 over fiscal 2003. • Rental management revenue increased by $36,000, or 0.3%, during fiscal 2004 as compared with fiscal 2003. Total guest occupied nights during fiscal 2004 were 47,121, as compared to 48,081 during fiscal 2003. The average daily rate was $217.02 in fiscal 2004, as compared to $212.08 during fiscal 2003. • Food and beverage operations generated revenues of $5,922,000 in fiscal 2004. This represents an increase of $1,454,000, or 32.5%, over fiscal 2003. This increase was due to a $926,000, or 55.7%, increase in revenue from the catering department, a $228,000, or 42.7%, increase in revenue from the Harbour Town Grill, a $130,000, or 12.4%, increase in revenue from the Sea Pines Beach Club, a $107,000, or 25.1%, increase in revenue from the Harbour Town Bakery and a $63,000 increase in revenue from other food and beverage operations. • The Inn at Harbour Town generated revenues of $2,850,000 in fiscal 2004. This represents an increase of $484,000, or 20.5%, from fiscal 2003. Total guest occupied room nights were 14,518 during fiscal 2004 as compared to 12,043 during fiscal 2003. The average daily rate was $181.46 during fiscal 2004, a decrease of $1.47 from the same period in fiscal 2003. • Other resort services revenue increased by $270,000, or 7.5%, during fiscal 2004 as compared with fiscal 2003. This increase is primarily the result of increased revenue from tennis operations related to the Smith/Stearns Tennis Academy and increased rental income from the Company’s bike shop operations. • Cost reimbursements increased by $191,000, and totaled $3,830,000, in fiscal 2004. The increase was primarily due to a $125,000 increase in housekeeping expenses reimbursed by villa owners on the Company’s rental program and a $67,000 increase in other lodging related billings reimbursed by resort guests.

~~The significant increase in the valuation allowance in the year ended~~14 ~~October 31, 2001 is due to the Company’s review of its estimate of realization, of deferred tax assets, primarily related to the loss on the interest rate swaps.~~

LiquidityTable andof Capital Resources Contents

~~Cash~~Cost ~~and cash equivalents increased by $1,520,000 during fiscal 2002 and totaled approximately $3,062,000 at October 31, 2002,~~ of ~~which $2,488,000 was~~revenues ~~restricted. Working capital increased at October 31, 2002 by $1,907,000~~ ~~resulting in a working capital deficit of $1,329,000.~~

~~Under~~Cost aof ~~master~~revenues ~~credit~~were ~~agreement with its corporate lender~~$44,763,000 ~~the~~in ~~Company maintains~~fiscal ~~three loan facilities: a term loan~~2004, arepresenting ~~revolving~~an ~~line~~increase of ~~credit and a~~$5,580,000, ~~seasonal~~or ~~line of credit~~14.2%, ~~Available~~over ~~funds~~fiscal ~~under~~2003. ~~these~~A ~~three~~majority ~~loan~~of ~~facilities total~~this ~~$38~~increase,~~740,000,~~ ~~of which~~ $334,~~540~~066,000, was ~~outstanding~~attributable atto ~~October 31, 2002.~~increased ~~The~~commissions ~~Company~~earned ~~reduced~~by ~~the~~real ~~outstanding~~estate ~~balance~~sales ~~under~~agents ~~these~~as ~~three~~a ~~loan~~result ~~facilities by~~of ~~$2,459,000~~improved ~~during~~real ~~fiscal~~estate ~~year~~sales ~~2002~~activity.

~~The term loan had an outstanding principal balance of $15,940,000 as of~~Expenses ~~October 31, 2002 and matures on November 1, 2008.~~

15 • Sales and marketing expenses increased by $884,000, or 27.0%, and totaled $4,155,000 in fiscal 2004. This increase was primarily due to a $353,000, or 21.9%, increase in resort marketing promotions and expenses, the recording of $257,000 in resort marketing barter expenses, a $153,000, or 14.3%, increase in real estate marketing expenses and a $121,000, or 20.5%, increase in conference sales expenses. • General and administrative expenses increased by $90,000, or 1.3%, totaling $6,967,000 for the year. Excluding the effect of a property tax refund of $304,000 received and recorded in the first quarter 2003, general and administrative expenses decreased by $214,000. This decrease was primarily due to a $413,000 decrease in medical claims associated with the Company’s self-funded medical plan and a $131,000 decrease in legal fees. These decreases were offset by a $344,000 increase in property taxes due to a countywide reassessment. • Depreciation and amortization expense increased by $217,000, or 8.4%, and totaled $2,795,000 in fiscal 2004. This increase was primarily related to the Company recording $239,000 in impairment losses in fiscal 2004 related to assets associated with discontinued development projects.

~~The~~Other ~~revolving~~income ~~line of credit was pre-approved by the bank for use in the~~(expense) ~~construction of the Harbour Town construction projects. The available balance~~ ~~under the revolving line of credit totals $18,300,000, of which $17,600,000 was~~ ~~outstanding as of October 31, 2002.~~

• The ~~available~~Company ~~balance~~reports ~~under~~changes in the ~~seasonal~~value ~~line~~ of ~~credit~~its ~~totals~~interest rate swap agreements in its operations. The Company recorded interest rate swap agreement income of $4930,~~500,~~000 in fiscal 2004. If the swap agreements remain in effect until their expiration date in 2005, the cumulative total of all related income and isexpense ~~used~~entries will equal zero. • Interest income decreased by $183,000 during fiscal 2004 as compared to ~~meet~~fiscal ~~cash~~2003. ~~requirements~~This was primarily as a result of the Company receiving interest of $104,000 during first quarter 2003 on excess property taxes paid from fiscal 1998 through fiscal 2001 and the payoff of a note receivable that the Company’s ~~off-season~~held ~~winter months~~in September 2003. As• ofInterest ~~October 31~~expense increased by $241,000, ~~2002~~or 10.6%, during fiscal 2004 as compared to fiscal 2003. This increase is primarily the ~~seasonal~~result ~~line~~of increased interest expense related to the additional debt from the judgment loan and the higher rate of ~~credit~~interest ~~had~~on nothe ~~outstanding balance~~trust preferred securities as described in Note 7 to the financial statements.

~~In November 2002, the Company completed a modification to its master~~15 credit agreement with its principal corporate lender. The modification extended the revolving line of credit note maturity date and the seasonal line of credit maturity date from November 1, 2003 to November 1, 2007 and revised certain loan covenant requirements.

TheTable Company has two interest rates swap agreements which effectively fix the interest rate on $24,000,000 of the principal amount outstanding under the loan facilities described above. The amount of $18,000,000 has been fixed at 5.24% per annum plus a credit margin ranging from 1.40% to 1.65%, and the amount of $6,000,000 has been fixed at 6.58% plus a credit margin ranging from 1.40% to 1.65%. Contents

Recent Developments

	•	Merger related expenses totaling $1,184,000 were recorded during fiscal 2004. This total included consulting, investment banking and legal expenses related to the merger agreement with The Riverstone Group, LLC.

	•	Litigation expenses totaling $6,324,000 were recorded during fiscal 2003. On April 30, 2003, a jury verdict of $7,800,000 was rendered against Sea Pines Company, Inc. in Grey Point Associates, et al. v. Sea Pines Company, Inc. The lawsuit involved alleged breach of contract related to the development of the TidePointe retirement community. On October 6, 2003, Sea Pines Company, Inc. agreed pursuant to the terms of a settlement agreement and release to pay $5,900,000 to settle the lawsuit. The Company incurred $424,000 in legal fees and related expenses in connection with the lawsuit.

~~The~~Income ~~Heritage Classic Foundation (the “Foundation”), parent organization of~~taxes ~~The Heritage golf tournament, dismissed WorldCom as the tournament’s title~~ ~~sponsor in July 2002, shortly before WorldCom declared bankruptcy.~~

The Company has anot ~~contract~~recorded ~~with~~any ~~the~~income ~~Foundation~~tax ~~(which~~provision ~~runs~~for ~~through~~fiscal ~~2006) that~~2004 ~~parallels~~since the ~~Foundation’s contract with the PGA Tour. The~~ Company has ~~provides~~sufficient ~~the~~net ~~tournament~~operating ~~site~~losses and ~~certain~~loss ~~services~~carryforwards. ~~necessary~~The tonet ~~the~~operating ~~hosting~~loss ofcarryforwards are ~~the~~fully ~~tournament.~~reserved Insince ~~exchange,~~ the Company ~~receives~~is auncertain ~~site~~whether ~~fee~~there ~~and~~will abe ~~course~~sufficient taxable income in ~~preparation~~future ~~fee~~periods to ~~compensate~~allow for ~~the~~utilization ~~loss~~ of ~~revenue~~the ~~resulting~~loss ~~from~~carryforwards. ~~the~~The ~~course~~Company’s valuation ~~closure~~allowance ~~and~~on ~~the~~its ~~additional~~deferred ~~expenses~~tax ~~incurred~~assets indecreased ~~preparing~~by ~~the~~$590,000 ~~course~~during ~~for~~ the ~~tournament.~~ ~~Other~~year ~~financial~~ended ~~benefits include increased pro shop apparel sales~~October 31, 2004 ~~and~~to ~~increased lodging and catering revenue~~$2,695,000.

~~The~~2003 ~~Foundation’s~~Compared ~~board and staff are now working~~ to ~~find new funding~~2002 ~~sources to sponsor the tournament. The Company is cooperating with the board~~ ~~and staff of the Foundation in their efforts to assure the tournament’s~~ ~~continued success.~~

~~Item 7a. Quantitative and Qualitative Disclosures About Market Risk~~Revenues

OnThe ~~September 30,~~Company ~~1998,~~reported ~~the~~revenues ~~Company~~of ~~entered~~$56,935,000 ~~into~~for anfiscal ~~interest~~2003, ~~rate~~a ~~swap agreement~~$2,243,000, ~~which~~or ~~effectively~~4.1%, ~~fixed~~increase over ~~the~~fiscal ~~interest~~year ~~rate~~2002. onResort ~~$18 million~~revenues, ~~of principal~~excluding ~~amount~~cost ~~outstanding~~reimbursements ~~under~~revenues, ~~the~~declined ~~three~~by $1,306,000, ~~loan~~or ~~facilities~~3.7%, ~~the~~compared ~~Company maintains~~to ~~with~~2002; ~~its~~while ~~corporate~~real ~~lender~~estate atbrokerage ~~5.24%~~revenues, ~~plus~~excluding acost reimbursements ~~credit~~revenues, ~~margin~~improved ~~ranging~~by ~~from 1.40%~~$3,460,000, toor 121.653%,. ~~based~~The ondecline in resort revenues showed the ~~calculation~~effects of ~~certain~~a ~~financial~~nationwide ~~ratios,~~decrease ~~for~~in ~~a period~~personal ~~ending~~resort ~~November 10,~~travel ~~2005.~~and ~~The~~corporate ~~lender~~meetings ~~has~~during the Company’s ~~option~~first ofthree ~~calling~~quarters ~~the~~of ~~swap agreement~~fiscal onyear ~~November 10,~~ 2003.

16 The primary factors contributing to the $2,243,000 increase in revenues were as follows:

The Company entered into a second interest rate swap agreement on May 4, 2000, which effectively fixed the interest rate on an additional $6 million of principal amount at 6.58% plus a credit margin ranging from 1.40% to 1.65% for a period ending November 1, 2005.

	•	Real estate brokerage revenues increased by $3,460,000, or 21.3%, during fiscal 2003 as compared with fiscal 2002. This increase was primarily the result of a 24.3% increase in sales volume in fiscal 2002. This improvement is attributable to low mortgage interest rates and a favorable second home real estate market.

	•	Golf revenue in fiscal 2003 decreased by $514,000, or 4.2%, as compared to fiscal 2002. The number of resort golf rounds played at Harbour Town Golf Links during fiscal 2003 decreased by 1,123 rounds, or 4.4%, from fiscal 2002. This decrease in rounds played was partially offset by a $2.68, or 1.9%, increase in average resort rate paid per round in fiscal 2003 over fiscal 2002. The number of resort golf rounds played at the Ocean and Sea Marsh golf courses during fiscal 2003 decreased by 8,195 rounds, or 12.1%, from fiscal 2002. This

~~The Company has significantly reduced its interest rate risk exposure by~~16 ~~entering into these two swap agreements. A change in the LIBOR rate would affect the rate at which the Company could borrow funds in excess of the $24 million fixed by the above swap agreements.~~

Item 8.Table Financialof Statements and Supplementary Data. Contents

decrease was partially offset by a $2.47, or 4.2%, increase in average resort rate paid per round in fiscal 2003 over fiscal 2002. • Rental management revenue decreased by $977,000, or 8.4%, during fiscal 2003 as compared with fiscal 2002. Total guest occupied nights during fiscal 2003 were 48,081 as compared to 52,470 during fiscal 2002. The ~~audited~~average ~~Consolidated~~daily ~~Financial~~rate ~~Statements~~was $212.08 in fiscal 2003, as compared to $212.81 during fiscal 2002. • Food and beverage operations generated revenues of $4,468,000 in fiscal 2003, a decrease of $24,000, or 0.5%, over fiscal 2002. This decrease was primarily due to a $348,000, or 17.3%, decline in revenue from catering operations and a $54,000, or 10.0%, decline in revenue from golf food and beverage operations. These decreases were partially offset by a $342,000, or 48.3%, increase in revenue from the ~~Company~~Sea ~~which~~Pines ~~include supplementary~~Beach ~~data~~Club, ~~are~~a ~~attached~~$53,000, ~~hereto~~or ~~beginning~~14.2%, increase in revenue from the Harbour Town Bakery and a $42,000, or 8.5%, increase in revenue from the Heritage Grill. • The Inn at ~~page~~Harbour ~~F-1~~Town generated revenues of $2,366,000 in fiscal 2003, a decrease of $301,000, or 11. 3%, from fiscal 2002. Total occupied room nights were 12,043 as compared to 13,516 during 2002. The average daily rate was $182.93 during fiscal 2003, a decrease of $5.04, or 2.7%, from the same period in fiscal 2002. • Other recreation services revenue increased by $450,000, or 14.2%, during fiscal 2003 as compared with fiscal 2002. This increase was primarily the result of increased revenue from tennis operations related to the Smith/Stearns Tennis Academy and increased rental income from the Company’s bike shop operations.

~~Item 9.~~Cost ~~Changes~~of ~~in and Disagreements with Accountants on Accounting and Financial Disclosure.~~revenues

~~None~~ Cost of revenues were $39,183,000 in fiscal 2003, representing an increase of $3,147,000, or 9.2%, over fiscal 2002. A majority of this increase, $2,989,000, was attributable to increased commissions earned by real estate sales agents as a result of improved real estate sales activity.

~~PART III~~Expenses

Item 10. Directors and Executive Officers of the Registrant.

	•	Sales and marketing expenses increased by $249,000, or 8.2%, and totaled $3,271,000 in fiscal 2003. This increase was the result of increased real estate marketing and resort marketing promotions during fiscal 2003.

	•	General and administrative expenses increased by $284,000, or 4.3%, totaling $6,877,000 for the year. This increase was the result of a $219,000 increase in medical claims paid by the Company’s self-funded medical plan, a $187,000 increase in consulting and legal expenses related to the Company’s board of directors’ strategic planning, a $164,000 increase in property tax expenses, a $101,000 increase in insurance expenses and a $52,000 increase in bank service fees. These increases were partially offset by the $304,000 property tax refund discussed above and a $109,000 decrease in bad debt expense.

~~Item 11. Executive Compensation.~~17

Item 12.Table Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Contents

~~Item 13.~~• ~~Certain~~Depreciation ~~Relationships~~and amortization expense decreased by $11,000, or 0.4%, and ~~Related~~totaled ~~Transactions~~$2,578,000 in fiscal 2003.

~~Information~~Other ~~called~~income ~~for by Part III~~ (~~Items 10, 11, 12 and 13~~expense) ~~has been~~ ~~omitted as the Company intends to file with the Securities and Exchange~~ ~~Commission not later than 120 days after the close of its fiscal year ended~~ ~~October 31, 2001 a definitive Proxy Statement pursuant to Regulation 14A. Such~~ information is set forth in such Proxy Statement, (i) with respect to Item 10, under the caption “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Executive Officers,” (ii) with respect to Item 11, under the caption “Executive Compensation” and “Compensation of Directors”, (iii) with respect to Item 12, under the caption “Ownership of Voting Securities in Excess of Five Percent by Beneficial Owners” and “Stock Ownership of Management and Directors” and (iv) with respect to Item 13, under the caption “Certain Transactions” and is hereby incorporated by reference.

17 • The Company reports changes in the value of its interest rate swap agreements in its operations. The Company recorded interest rate swap agreement income of $533,000 in fiscal 2003. During fiscal 2002, falling interest rates caused the fair value of the agreements to decline and the Company recorded interest rate swap agreement expense of $381,000. If the swap agreements remain in effect until their expiration date in 2005, the cumulative total of all related income and expense entries will equal zero. • Interest income increased by $91,000 during fiscal 2003 as compared to fiscal 2002. This was primarily as a result of the Company receiving interest of $104,000 during the first quarter 2003 on a refund of excess property taxes paid during fiscal 1998 through fiscal 2001. • Gain on the sale of assets totaled $63,000 for fiscal 2003. These gains were the result of the sale of two density units and certain other assets. • Interest expense decreased by $121,000, or 5.1%, during fiscal 2003 as compared to fiscal 2002. This decrease was attributable to lower interest rates during fiscal 2003. • Litigation expenses totaling $6,324,000 were recorded during fiscal 2003. On April 30, 2003, a jury verdict of $7,800,000 was rendered against Sea Pines Company, Inc. in Grey Point Associates, et al. v. Sea Pines Company, Inc. The lawsuit involved alleged breach of contract related to the development of the TidePointe retirement community. On October 6, 2003, Sea Pines Company, Inc. agreed pursuant to the terms of a settlement agreement and release to pay $5,900,000 to settle the lawsuit. The Company incurred $424,000 in legal fees and related expenses in connection with the lawsuit.

~~PART~~Income IVtaxes

~~Item 14~~ The Company has not recognized any income tax benefit for fiscal 2003 related to its taxable loss since the Company is uncertain whether there will be sufficient taxable income in future periods to allow for utilization of the loss. ~~Controls~~The ~~and~~Company ~~Procedures~~had current tax expense of approximately $54,000 for fiscal 2003. This expense related to a reduction of the current income tax receivable upon finalization of the timing differences for the 2002 income tax returns. Because the Company’s deferred assets are fully reserved, this reduction results in a net current tax charge for the 2003 fiscal year. The Company’s valuation allowance on its deferred tax assets increased by $2,599,000 during the year ended October 31, 2003 to $3,285,000.

~~Within 90 days of the filing of this report, the Company’s Chief Executive Officer and Chief~~ Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14). Based on that evaluationCondition, ~~the~~Liquidity ~~Company’s Chief Executive Officer~~ and ~~Chief~~Capital ~~Financial~~Resources ~~Officer concluded that the Company’s disclosure controls and procedures are~~ ~~effective to make known to them in a timely fashion material information~~ ~~related to the Company required to be filed in this report. There have been no~~ ~~significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.~~

~~Item 15.~~ The ~~Exhibits,~~Company’s ~~Financial~~financial ~~Statement~~results ~~Schedules,~~from its resort operations and ~~Reports~~real onestate ~~Form 8-K.~~brokerage activities

~~(a)(1)-(2) Financial Statements and Schedules:~~18

TheTable financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements at page F-1 herein are filed as part of this report. Contents

~~All~~experience ~~other~~fluctuations ~~schedules~~by ~~for~~season. ~~which~~The ~~provision~~period isfrom ~~made~~November inthrough ~~the~~February ~~applicable regulations~~has ofhistorically been the ~~Securities~~Company’s lower resort revenue and ~~Exchange~~real ~~Commission~~estate ~~are~~sales ~~not~~season, ~~required~~and ~~under~~ the ~~related~~period ~~instructions~~from orMarch ~~are~~through October ~~inapplicable,~~has ~~and~~historically ~~therefore~~been ~~have~~the ~~been~~Company’s ~~omitted~~higher season.

(Cash and cash equivalents decreased by $255,000 during fiscal 2004 and totaled $3,787,000 at October 31, 2004, of which $3,230,000 was restricted. Restricted cash includes cash held in escrow pending real estate closings, advance deposits for home and villa rentals, and rental receipts to be paid to home and villa owners. Working capital (current assets less current liabilities) ~~Exhibits:~~ decreased during fiscal 2004 by $1,476,000, resulting in a working capital deficit of $3,372,000 at October 31, 2004.

~~The~~Accounts ~~exhibits~~payable ~~listed~~and onaccrued ~~the~~expenses ~~accompanying~~increased ~~Exhibit Index~~by $989,000 during fiscal 2004 and totaled $3,681,000 at ~~pages~~October 31, ~~E-1~~2004. This increase was primarily due to ~~E-4~~increased accrued brokerage ~~are~~commission ~~filed~~due asto ~~part~~real ofestate ~~this~~agents ~~report~~and increased accrued preferred stock dividends.

~~(b)~~ Under ~~Reports~~the onCompany’s ~~Form~~master ~~8-K~~credit agreement, the Company maintains four loan facilities: a term loan, a revolving line of credit, judgment loan and a seasonal line of credit. Available funds under these four loan facilities total $38,767,000, of which $35,150,000 was outstanding at October 31, 2004.

~~None~~The term loan had an outstanding principal amount of $13,567,000 as of October 31, 2004 and matures on November 1, 2008. The revolving line of credit had an outstanding balance of $18,300,000 as of October 31, 2004 and matures on November 1, 2007. The judgment loan had an outstanding balance of $2,400,000 on October 31, 2004 and matures on November 15, 2005. The available balance under the seasonal line of credit totals $4,500,000. It is used to meet cash requirements during the Company’s off-season winter months. As of October 31, 2004, the seasonal line of credit had an outstanding balance of $883,000. The seasonal line of credit expires on November 1, 2007.

18 Long-term debt decreased by $2,647,000 during fiscal 2004. Repayments of $3,500,000 were made on the judgment loan and repayments of $1,230,000 were made on the term loan. Borrowings on the revolving line of credit were $1,200,000 and borrowings on the seasonal line of credit were $883,000.

~~SIGNATURES~~ The Company has two interest rate swap agreements which effectively fix the interest rate on a $24 million notional principal amount outstanding under the loan facilities described above. An amount of $18 million has been fixed at 5.24% per annum plus a credit margin ranging from 1.40% to 1.85%, and an amount of $6 million has been fixed at 6.58% plus a credit margin ranging from 1.40% to 1.85%.

~~Pursuant to the requirements of Section 13 or 15(d) of the Securities~~19 ~~Exchange Act of 1934, the registrant, Sea Pines Associates, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~

		SEA PINES ASSOCIATES, INC.
Dated: January 17, 2003		By: /s/ Michael E. Lawrence
		Michael E. Lawrence Chief Executive Officer

~~Pursuant~~A tosummary ~~the requirements~~ of the ~~Securities~~Company’s ~~Exchange~~contractual ~~Act~~obligations ofis ~~1934,~~presented ~~this report has been signed~~ below ~~by the following persons on behalf of the~~: ~~registrant, Sea Pines Associates, Inc., and in the capacities and on the dates~~ ~~indicated.~~

Signature	Title		Date
	Payments Due by Period
/s/ Norman P. Harberger Norman P. Harberger	Chairman and Director		January 17, 2003
	Contractual Obligations
/s/ Michael E. Lawrence Michael E. Lawrence	Chief Executive Officer and Director (principal executive officer)		January 17, 2003
	(in thousands)
/s/ Steven P. Birdwell Steven P. Birdwell	Chief Financial Officer (principal financial officer and principal accounting officer)		January 17, 2003
										More than
/s/ Thomas C. Morton Thomas C. Morton	Treasurer and Director		January 17, 2003
	Total			Less than 1 year		1-3 years		3-5 years		5 years
/s/ Joseph F. Vercellotti Joseph F. Vercellotti	Vice Chairman and Director		January 17, 2003
Long-term debt	$	35,150		$	1,325	$	5,370	$	28,455	$	—
/s/ Peter Parrott Peter Parrott	Secretary and Director		January 17, 2003
Trust preferred securities		2,480			—		—		—		2,480
Operating leases		3,451			998		1,435		558		460
Purchase obligations		1,039			714		300		25		—
Total contractual obligations	$	42,120		$	3,037	$	7,105	$	29,038	$	2,940

19Subsequent Events

Signature	Title	Date
/s/ Paul B. Barringer, II Paul B. Barringer, II	Director	January 17, 2003
/s/ Ralph L. Dupps, Jr. Ralph L. Dupps, Jr.	Director	January 17, 2003
/s/ P.R. Easterlin, Jr. P. R. Easterlin, Jr.	Director	January 17, 2003
/s/ John G. McGarty John G. McGarty	Director	January 17, 2003
/s/ John A. Norlander John A. Norlander	Director	January 17, 2003
/s/ David E. Pardue David E. Pardue	Director	January 17, 2003
/s/ Marc Puntereri Marc Puntereri	Director	January 17, 2003
/s/ Robert W. Siler, Jr. Robert W. Siler, Jr.	Director	January 17, 2003
/s/ Kathleen B. Speer Kathleen B. Speer	Director	January 17, 2003
/s/ Arthur P. Sundry Arthur P. Sundry	Director	January 17, 2003

In December 2004, the bank waived the loan covenant in the Company’s master credit agreement related to the net worth ratio for the year ending October 31, 2005. The waiver was required because the Company did not expect to be in compliance with this covenant for the year ending October 31, 2005.

20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

~~CERTIFICATIONS~~ On September 30, 1998, the Company entered into an interest rate swap agreement, which effectively fixed the interest rate on $18 million of principal amount outstanding under the four loan facilities the Company maintains under its master credit agreement with its principal corporate lender at 5.24% plus a credit margin ranging from 1.40% to 1.85%, based on the calculation of certain financial ratios, for a period ending November 10, 2005.

I The Company entered into a second interest rate swap agreement on May 4, ~~Michael~~2000, Ewhich effectively fixed the interest rate on an additional $6 million of principal amount at 6.58% ~~Lawrence,~~plus ~~certify~~a credit ~~that:~~margin ranging from 1.40% to 1.85% for a period ending November 1, 2005.

1. The ICompany ~~have~~has ~~reviewed~~reduced ~~this~~its ~~annual~~interest ~~report~~rate onrisk ~~Form~~exposure ~~10-K~~by ofentering ~~Sea~~into ~~Pines~~these ~~Associates,~~two ~~Inc~~swap agreements.; 2.A ~~Based~~change onin ~~my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make~~ the ~~statements~~LIBOR ~~made,~~rate inwould ~~light~~affect of the ~~circumstances~~rate ~~under~~at which ~~such~~the ~~statements~~Company ~~were~~could ~~made,~~borrow funds ~~not~~in ~~misleading~~excess ~~with~~of ~~respect to~~ the ~~period~~$24 million ~~covered~~fixed by ~~this~~the ~~annual~~above ~~report;~~swap 3agreements. Based on myvariable ~~knowledge,~~rate obligations ~~the~~outstanding ~~financial~~at ~~statements~~October 31, ~~and~~2004, ~~other~~each ~~financial~~25 ~~information~~basis ~~included~~point inincrease ~~this~~or ~~annual~~decrease ~~report, fairly present~~ in ~~all material respects~~ the ~~financial condition, results~~ level of ~~operations~~interest ~~and~~rates ~~cash~~would ~~flows~~increase ofor ~~the~~decrease ~~registrant as of, and for,~~ the ~~periods presented in this annual report; 4. The registrant~~Company’s ~~other~~annual ~~certifying~~interest ~~officers~~expense and Irelated ~~are~~cash payments ~~responsible~~by ~~for~~approximately ~~establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:~~$28,000.

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;20

5.Table The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):Contents

a)Item ~~all~~8. ~~significant~~Financial ~~deficiencies~~Statements ~~in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize~~ and ~~report~~Supplementary ~~financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and~~Data.

21 The audited Consolidated Financial Statements of the Company which include supplementary data are attached hereto beginning at page F-1.

b)Item ~~any~~9. ~~fraud,~~Changes ~~whether~~in orand ~~not~~Disagreements ~~material,~~with ~~that~~Accountants ~~involves~~on ~~management~~Accounting orand ~~other~~Financial ~~employees who have a significant role in the registrant’s internal controls; and~~Disclosure.

6. The ~~registrant~~Company’s ~~other~~principal ~~certifying~~accountant, ~~officers~~Ernst ~~and~~& IYoung ~~have~~LLP, ~~indicated~~resigned ineffective ~~this~~October 21, ~~annual~~2004. On ~~report~~October 21, ~~whether~~2004, ~~there~~the ~~were~~Company’s ~~significant~~audit ~~changes~~committee inengaged ~~internal~~Hancock ~~controls~~Askew or& inCo., ~~other~~LLP ~~factors~~as ~~that~~the Company’s ~~could~~principal ~~significantly~~accountant. ~~affect~~This ~~internal~~change ~~controls~~was ~~subsequent~~reported toon ~~the~~a ~~date~~Form of8-K ~~our~~dated ~~most recent evaluation~~October 21, ~~including any corrective actions with regard to significant deficiencies and material weaknesses~~2004.

~~Date:~~Item ~~January 17,~~9A. ~~2003~~ Controls and Procedures.

/ As of October 31, 2004, the Company’s/ ~~Michael~~Chief E.Executive ~~Lawrence~~Officer ~~Michael~~and EChief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15-(e)). Based ~~Lawrence~~on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of October 31, 2004 the Company’s disclosure controls and procedures were effective. There has been no change in the Company’s internal control over financial reporting during the quarter ended October 31, 2004 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

I,Item ~~Steven P~~9B. ~~Birdwell,~~Other ~~certify that:~~ Information.

1. I have reviewed this annual report on Form 10-K of Sea Pines Associates, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:None

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

PART III

22 Item 10. Directors and Executive Officers of the Registrant.

~~c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~Directors:

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


Name, Age and Address		Biographical Information
John F. Bard (63) 13 West Beach Lagoon Road Hilton Head Island, SC 29928		Mr. Bard has served as a director since 2003. He was Executive Vice President and Chief Financial Officer of The Wm. Wrigley Jr. Company from 1990 until his retirement in 2000. He began his business career with The Procter & Gamble Company in financial management and subsequently was Chief Financial Officer of The Clorox Company and later President of Tambrands Inc. prior to joining Wrigley. Mr.

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and21

6.Table The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Contents

Date: January 17, 2003


Name, Age and Address		Biographical Information
		Bard presently serves on the boards of The Wm. Wrigley Jr. Company and Weight Watchers International, Inc.

Paul B. Barringer, II (74) 14 South Calibogue Cay Hilton Head Island, SC 29928		Mr. Barringer has served as a director since 1997. He has been Chairman and CEO of Coastal Lumber Company headquartered in Weldon, North Carolina, since 1959. He currently serves on the boards of several educational institutions and is an active board member of various civic and industry associations.

Todd Clist (62) 39 River Club Drive Hilton Head Island, SC 29926		Mr. Clist retired in December 2000 after a 32-year career with Marriott Corporation. He retired as President of North American Lodging Operations, Marriott International, Inc. He was responsible for operations and market management for all franchised and managed lodging brands in the United States and Canada, over 1,800 properties including Marriott Hotels, Resorts and Suites, Renaissance Hotels and Resorts, Courtyards, Residence Inns, Fairfield Inn and Suites and TownPlace Suites.

Ralph L. Dupps, Jr. (59) 12 Plantation Drive Hilton Head Island, SC 29928		Mr. Dupps has served as a director since 1995. He has been President of Dupps and Company and a partner in NWI, a real estate development company, since 1981. He was the Chairman of the Board of Directors of Atlantic Savings Bank, a subsidiary of Wachovia Bank, N.A. from 1994 until 2003. Currently, he is a director of Ward Edwards, Inc., a member of the Wachovia Bank of South Carolina Advisory Board, a member of the Hilton Head Museum Board of Directors and a CSA Board member.

Norman P. Harberger (75) 22 Oyster Landing Road Hilton Head Island, SC 29928		Mr. Harberger has served as a director since 1993 and as Chairman of the Company since 1999. He was Vice Chairman of the Company from 1996 to 1999. He was President and Owner of Harberger & Associates, management consultants from 1986 to 2002. He was previously an executive of Rohm and Haas Company, retiring as that firm’s Administrative

~~/s/ Steven P. Birdwell Steven P. Birdwell Chief Financial Officer~~22

23 Table of Contents

EXHIBIT INDEX


Name, Age and Address		Biographical Information
		Vice President in 1986. He is a trustee of the Heritage Classic Foundation and the Technical College of the Lowcountry Foundation. He serves as Chairman of the Greater Island Committee and as a director of Seacoast Synergy, Inc.

Michael E. Lawrence (60) 46 Baynard Park Road Hilton Head Island, SC 29928		Mr. Lawrence has served as a director since 1994 and as Chief Executive Officer of the Company since 1995. He has served as President of Sea Pines Company, Inc. since November 1994 and was its Vice President and Chief Financial Officer from February 1991 to November 1994 and its Controller from February 1990 to February 1991. Formerly, he was a partner in the Management Consulting Division of Ernst & Young LLP.

Thomas C. Morton (63) 20 Harleston Green Hilton Head Island, SC 29928		Mr. Morton has served as a director since 1991 and as Treasurer of the Company since 1991. He is a certified public accountant who has owned and operated tax and accounting practices in Michigan and South Carolina since 1974. Prior to that he spent 10 years in the audit and tax departments of the international accounting firm of Deloitte & Touche.

John A. Norlander (74) 72 N. Calibogue Cay Road Hilton Head Island, SC 29928		Mr. Norlander has served as a director since 2000. He has been a Sea Pines property owner since his retirement in 1997. He was an executive with Hilton Hotels for 20 years working in sales and marketing and as general manager of three major convention hotels. He then joined Radisson Hotels as EVP/COO and was subsequently promoted to President and CEO of Radisson. Mr. Norlander’s last position was President/CEO of Carlson Hospitality Worldwide which included, in addition to Radisson and Radisson Seven Seas, the TGI Friday’s restaurant chain and Country Inns by Carlson.

Peter Parrott (59) 23 N. Calibogue Cay Road Hilton Head Island, SC 29928		Mr. Parrott has served as a director since 2000 and as Secretary of the Company since 2001. He has been President of University Housing Group,

~~Pursuant to Item 601 of Regulation S-K~~23

Exhibit No.
3(a)		Articles of Incorporation of Registrant, as Amended (Incorporated by reference to Exhibit 3(a) to Form 10-K filed January 29, 2001)
3(b)		Amended Bylaws of Registrant as revised September 30, 2002
4(a)		First Amended and Restated Rights Agreement between Sea Pines Associates, Inc. and EquiServe Trust Company, N.A. dated as of August 23, 1993 and Amended and Restated as of July 20, 1999 (Incorporated by reference to Form 8A12G/A filed August 8, 1999)
4(b)		First Amendment to First Amended and Restated Rights Agreement between Sea Pines Associates, Inc. and EquiServe Trust Company, N.A. dated as of December 13, 1999 (Incorporated by reference to Exhibit 4(b) to Form 10-K filed January 29, 2001)
4(c)		Amended and Restated Trust Agreement dated February 1, 2000 by Sea Pines Associates, Inc. (Incorporated by Reference to Form 10-Q filed June 14, 2000)
4(d)		Junior Subordinated Indenture dated February 1, 2000 between Sea Pines Associates, Inc. and First Union National Bank (Incorporated by reference to Form 10-Q filed June 14, 2000)
4(e)		Guarantee Agreement dated February 1, 2000 between Sea Pines Associates, Inc. and First Union National Bank (Incorporated by reference to Form 10-Q filed June 14, 2000)

E-1


Name, Age and Address		Biographical Information
		a developer of private, market rate housing for college students since 1997. Previously, he was a founder and Director of Gables Residential Trust, a publicly traded real estate investment trust. Prior to Gables, Mr. Parrott was a partner and a member of the management board of Trammell Crow Residential Company, a large privately owned real estate company. Currently he serves as Chairman of the Board of Directors of Volunteers in Medicine on Hilton Head Island.

David E. Pardue (57) 17 South Beach Lagoon Road Hilton Head Island, SC 29928		Mr. Pardue has served as a director since 2002. His business career has involved three areas: real estate sale/leaseback transactions, golf course development and management, and venture capital transactions. He has been Chairman of Primus Capital LLC, a real estate sale/leaseback investment company, since 1997. Mr. Pardue has also been the general partner and primary investor in Dacourt Golf, Inc. since 1987, and Chairman of The Dacourt Group, Inc., a venture capital investment company since 1983. He served on the Board of Trustees of The University of North Carolina at Chapel Hill from 1995 until 2003, the Board of Trustees of Elon University from 1985 until 1999, and has been a director of The THA Foundation since 1979.

Marc Puntereri (53) 26 Plantation Drive Hilton Head Island, SC 29928		Mr. Puntereri has served as a director since 2001. He has been a Managing Member of The Cypress Group, LLC, an owner, operator and developer of senior living communities, since 1990. Previously, he served as president of First Southern Properties, Inc., and as a consultant to the Sea Pines Company, Inc. His community service has included board and/or committee involvement for Hilton Head Hospital, Hilton Head Health Services, Inc., Hilton Head Medical Associates, Inc., Community Services Associates, Inc. (CSA), Sea Pines Montessori School, Hilton Head Preparatory School, United Way, Chamber Business/Education Partnership and the Deep Well Project.

Exhibit No.
10(a)		Adjustable Rate Promissory Note between Sea Pines Company, Inc. and Carolina Center Building Corp. dated October 31, 1996 (Incorporated by reference to Exhibit 10(t) to Form 10-K filed January 29, 1997)
10(b)		Mortgage Assignment and Security Agreement between Sea Pines Company, Inc. and Carolina Center Building Corp. dated October 31, 1996 (Incorporated by reference to Exhibit 10(u) to Form 10-K filed January 29, 1997)
10(c)		Amended and Restated Master Credit Agreement dated as of October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A.
10(d)		Second Amended and Restated Term Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated October 31, 2002 with respect to the Credit Agreement in 10(c) above
10(e)		Second Amended and Restated Revolving Line of Credit Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated October 31, 2002 with respect to the Credit Agreement in 10(c) above
10(f)		Second Amended and Restated Seasonal Line of Credit Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated October 31, 2002 with respect to the Credit Agreement in 10(c) above
10(g)		Second Mortgage Modification and Restatement Agreement dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above

E-2 Table of Contents

Exhibit No.
Name, Age and Address		Biographical Information
10(h)		Second Mortgage Modification and Restatement Agreement dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above
Kathleen B. Speer (44) 26 Sandhill Crane Hilton Head Island, SC 29928		Mrs. Speer has served as a director since 2001. She has been a Sea Pines property owner since 1995. She retired as a partner of Hewitt Associates, L.L.C., a human resource management consulting firm after 11 years with the firm. Mrs. Speer has served on the Board of the Association of Sea Pines Plantation Property Owners (ASPPPO), the Arts Center of Coastal Carolina, and presently serves on the CSA Board of Directors.
10(i)		Second Mortgage Modification and Restatement Agreement dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above
Joseph F. Vercellotti (75) 18 Old Military Road Hilton Head Island, SC 29928		Mr. Vercellotti has served as a director since 1995 and as Vice Chairman of the Company since 2001. He retired in 1987, after a 35 year general management, strategic planning and marketing career with General Electric Company, to pursue interests in management consulting, primarily with high-tech, start up firms.
10(j)		Second Master Amendment to Collateral Assignments dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above
10(k)		Swap Transaction confirmation between Sea Pines Company, Inc. and Wachovia Bank, N.A. dated September 30, 1998 (Incorporated by reference to Exhibit 10(s) to Form 10-K filed January 29, 1999)
10(l)		Swap Transaction confirmation between Sea Pines Company, Inc. and Wachovia Bank, N.A. dated May 4, 2000.
10(m)		License and Use Agreement dated June 30, 1998 between Sea Pines Company, Inc. and CC-Hilton Head, Inc. (Incorporated by reference to Exhibit 10(t) to Form 10-K filed January 29, 1999)
10(n)		Sea Pines Associates, Inc. Director Stock Compensation Plan (Incorporated by reference to Exhibit 4.1 to Form S-8 filed June 18, 2001)*
10(o)		First Amendment to Sea Pines Associates, Inc. Director Stock Compensation Plan (Incorporated by reference to Exhibit 4.2 to Form S-8 filed June 18, 2001)*
10(p)		Sea Pines Associates, Inc. Deferred Issuance Stock Plan (Incorporated by reference to Exhibit 4.3 to Form S-8 filed June 18, 2001)*

~~E-3~~Executive Officers:

Exhibit No.
21		Subsidiaries of the Registrant
23		Consent of Ernst & Young
99.1		Safe Harbor Disclosure
99.2(a)		Certification of Chief Executive Officer
99.2(b)		Certification of Chief Financial Officer
* Management Contract or Compensatory Plan or Arrangement


Name of Individual		Title
Norman P. Harberger*		Chairman
Joseph F. Vercellotti*		Vice Chairman
Marc Puntereri*		Vice Chairman
Michael E. Lawrence*		Chief Executive Officer
Steven P. Birdwell		Chief Financial Officer
Thomas C. Morton*		Treasurer

~~E-4~~*Biographical information concerning these individuals can be found above under “Directors”

Index to Consolidated Financial Statements


Name, Age and Address		Biographical Information
Steven P. Birdwell (45) 12 Governors Lane Hilton Head Island, SC 29928		Mr. Birdwell became the Chief Financial Officer of the Company in 2002. He has served as Chief Financial Officer of Sea Pines Company, Inc. since May 1999, and also served in that capacity from November 1994 to September 1998. He was Controller of Sea Pines Company from June 1992 to November 1994. He was the Senior Vice President and Chief Financial Officer of Sholodge, Inc. from September 1998 to May 1999. He currently serves as Chairman of the

1.	Financial Statements of Sea Pines Associates, Inc.
	Report of Independent Auditors	F-2
	Consolidated Balance Sheets	F-3 through F-4
	Consolidated Statements of Operations	F-5
	Consolidated Statements of Shareholders’ Equity	F-6
	Consolidated Statements of Cash Flows	F-7 through F-8
	Notes to Consolidated Financial Statements	F-9 through F-25
2.	Financial Statement Schedule of Sea Pines Associates, Inc.
	Report of Independent Auditors	F-26
	Schedule II — Valuation and Qualifying Accounts	F-27

F-1 Table of Contents

~~Report~~Name, Age and Address Biographical Information Board of ~~Independent~~Directors ~~Auditors~~ of the Resort Hotel Association, a director of Resort Hotel Insurance Company and a member of the Wachovia Bank Advisory Board.

The Company’s Audit Committee is composed of Directors Bard, Barringer, Parrott and Puntereri. The Board of Directors has determined that Mr. Bard is an (i) “audit committee financial expert” as defined by the rules of the Securities and ~~Shareholders~~Exchange Commission and (ii) independent as that term ~~Sea~~is ~~Pines~~used ~~Associates,~~in ~~Inc~~Item 7(d)(3)(iv) of Schedule 14A of the Proxy Rules.

We The ~~have~~Company ~~audited~~has ~~the~~adopted ~~accompanying~~a ~~consolidated~~code ~~balance sheets~~ of ~~Sea~~ethics ~~Pines Associates,~~that ~~Inc.~~applies ~~(the~~to ~~“Company”) as of October 31, 2002 and 2001, and~~ the ~~related~~ ~~consolidated~~Chief ~~statements~~Executive ofOfficer ~~operations, shareholders’ equity,~~ and ~~cash~~Chief ~~flows~~Financial ~~for~~Officer ~~each~~ of the ~~three~~Company ~~years~~and in the ~~period~~Chief ~~ended~~Executive ~~October 31~~Officer, ~~2002.~~Chief ~~These financial~~Financial ~~statements~~Officer ~~are~~and Controller ~~the responsibility~~ of the Company’s ~~management~~subsidiaries. ~~Our responsibility~~A iscopy toof ~~express~~that ancode ~~opinion~~of onethics ~~these~~can ~~financial~~be ~~statements~~found ~~based~~as onExhibit 14 ~~our~~to ~~audits~~this Annual Report on Form 10-K.

We conducted our audits in accordance with auditing standards generally accepted in the 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 includes examining, on Section 16(a) ~~test~~Beneficial ~~basis,~~Ownership ~~evidence~~Reporting ~~supporting the amounts and disclosures in the financial~~Compliance ~~statements. An audit also includes assessing the accounting principles used~~ ~~and significant estimates made by management, as well as evaluating the overall~~ ~~financial statement presentation. We believe that our audits provide a~~ ~~reasonable basis for our opinion.~~

In Section 16(a) ~~our~~of ~~opinion,~~ the ~~financial~~Securities ~~statements~~Exchange ~~referred~~act toof ~~above~~1934 ~~present~~requires ~~fairly~~that the directors, inofficers and ~~all~~certain ~~material~~shareholders ~~respects,~~of the ~~consolidated~~Company ~~financial~~file ~~position~~reports of ~~Sea~~holdings ~~Pines Associates,~~and ~~Inc.~~transactions atin ~~October 31,~~the ~~2002~~Company’s common ~~and~~stock ~~2001,~~ and ~~the~~preferred ~~consolidated~~stock ~~results~~with ~~of its~~the ~~operations~~Securities and ~~its~~Exchange ~~cash~~Commission. ~~flows~~Based ~~for~~solely ~~each~~on the Company’s review of ~~the~~such ~~three~~reports ~~years~~furnished into the ~~period~~Company and written representations from certain ~~ended~~reporting ~~October 31~~persons, ~~2002~~the inCompany ~~conformity~~believes ~~with~~that ~~accounting~~all ~~principles~~Securities ~~generally~~and Exchange Commission filing ~~accepted~~requirements inapplicable to its directors and officers with respect to the ~~United~~Company’s ~~States~~fiscal year ended October 31, 2004 were complied with.

~~/s/Ernst~~Item &11.Executive ~~Young LLP Atlanta, Georgia December 6, 2002~~Compensation.

~~F-2~~Director Compensation

~~Sea~~The ~~Pines~~Company ~~Associates~~discontinued its practice of paying cash retainers and meeting fees to non-employee directors as of March 2001, ~~Inc~~replacing those payments with annual stock grants. The stock grants are made pursuant to the Company’s Director Stock Compensation Plan (the “Plan”). The Plan allotted 50,000 shares of common stock to be issued at the discretion of the Board of Directors to compensate directors who are not salaried employees of the Company or any of its subsidiaries. An additional 50,000 shares of common stock was allotted by the Board of Directors in February 2004. Pursuant to the Plan, the Board of Directors may grant any eligible director an unconditional award of shares of common stock or an award of the conditional right to receive shares of common stock in the future, as compensation for services rendered in as members of the Board of Directors.

~~Consolidated~~In ~~Balance~~fiscal ~~Sheets~~year 2004, each non-employee director received an unconditional grant of 1,000 shares of ~~(In~~common ~~thousands)~~stock, in recognition of service on the Board of Directors from March 2004 to March 2005. Directors also are entitled to discounts at various facilities owned by the Company for golf fees, restaurant purchases and retail purchases and are provided complimentary tickets to events sponsored by the Company.

			October 31
			2002		2001
Assets
Current assets:
	Cash and cash equivalents
		Unrestricted	$	574	$	360
		Restricted		2,488		1,182
				3,062		1,542
	Accounts receivable, less allowance for doubtful accounts of $115 and $30 at October 31, 2002 and 2001, respectively			1,290		946
	Current portion of notes receivable			88		82
	Income tax refund receivable			217		469
	Deferred income taxes			—		106
	Inventories			859		870
	Prepaid expenses			378		244
Total current assets				5,894		4,259
Notes receivable, less current portion				1,002		1,089
Deferred income taxes				—		94
Deferred loan fees, net				139		154
Other assets, net				60		60
				1,201		1,397
Real estate assets:
	Operating properties, net			44,197		46,297
	Properties held for future development			3,219		3,219
				47,416		49,516
Total assets			$	54,511	$	55,172

F-3 Table of Contents

~~Sea~~Officer ~~Pines Associates, Inc.~~Compensation

~~Consolidated~~ Except ~~Balance~~for ~~Sheets~~Messrs. Lawrence and Birdwell, none of the officers of the Company receives any cash or ~~(In~~non-cash ~~thousands~~compensation for services rendered in such capacity. The Company’s operations are conducted exclusively through its wholly-owned subsidiaries. The following table summarizes the compensation earned by Mr. Lawrence and Mr. Birdwell for services performed during fiscal years 2004, ~~except~~2003 ~~share~~and ~~amounts)~~2002.

		October 31
		2002			2001
Liabilities and shareholders’ equity
Current liabilities:
	Accounts payable and accrued expenses	$	2,786		$	2,617
	Accrued property taxes		512			682
	Advance deposits		2,410			1,031
	Line of credit		—			2,000
	Current portion of deferred revenue and other long-term liabilities		373			367
	Current portion of long-term debt		1,142			798
	Total current liabilities		7,223			7,495
Long-term debt, less current portion			32,398			33,201
Interest rate swap agreement			2,277			1,896
Deferred revenue and other long-term liabilities			793			921
Trust preferred securities			2,480			2,480
Total liabilities			45,171			45,993
Commitments and contingencies
Shareholders’ equity:
	Series A cumulative preferred stock, no par value, 2,000,000 shares authorized; 220,900 shares issued and outstanding at October 31, 2002 and 2001, respectively (liquidation preference of $1,679 at October 31, 2002 and 2001, respectively)		1,294			1,294
	Series B junior cumulative preferred stock, no par value; 20,000 shares authorized, none issued or outstanding		—			—
	Common stock, 23,000,000 shares authorized, no par value; 3,573,400 shares and 3,559,400 shares issued and outstanding at October 31, 2002 and 2001, respectively		7,759			7,559
	Unearned stock compensation		(235	)		(159	)
	Retained earnings		522			485
Total shareholders’ equity			9,340			9,179
Total liabilities and shareholders’ equity		$	54,511		$	55,172

Summary Compensation Table

See accompanying notes.


							Long-Term
			Annual Compensation				Compensation
Name and Principal							Restricted		All Other
Position	Year		Salary (1)		Bonus (2)		Stock Award (3)		Compensation (4)
Michael E. Lawrence		2004	$	209,404	$	0	$	0	$	6,364
Chief Executive		2003	$	198,500	$	0	$	30,550	$	6,154
Officer		2002	$	193,596	$	39,700	$	31,950	$	5,369

Steven P. Birdwell		2004	$	128,654	$	0	$	0	$	3,806
Chief Financial Officer		2003	$	122,000	$	0	$	11,700	$	3,325
		2002	$	119,115	$	16,600	$	12,500	$	3,303

~~F-4~~ (1) Salary includes amounts deferred at the election of the named officer pursuant to the Company’s 401(k) plan.

~~Sea~~(2) ~~Pines~~Bonus ~~Associates~~includes amounts earned by the named officer in the year indicated, ~~Inc~~but paid in the following fiscal year.

~~Consolidated~~(3) ~~Statements~~The value of ~~Operations (In~~the ~~thousands~~conditional shares held by Mr. Lawrence and Mr. Birdwell as of October 31, ~~except~~2004 was $257,550 and $98,600, respectively, based on the price of $8.50 per share ~~amounts~~that would be paid if the merger agreement described in Item 1(a) is approved by the Company’s shareholders.

		Year ended October 31
		2002			2001			2000
Revenues		$	51,142		$	50,344		$	48,839
Cost and expenses:
	Cost of revenues		36,263			36,626			37,349
	Sales and marketing expenses		3,022			3,161			2,981
	General and administrative expenses		6,366			6,763			5,824
	Depreciation and amortization		2,589			2,504			1,597
			48,240			49,054			47,751
Income from operations			2,902			1,290			1,088
Other income (expense):
	Gain (loss) on sale or disposal of assets, net		—			172			(66	)
	Interest income		111			101			119
	Interest rate swap agreements		(381	)		(1,896	)		—
	Interest expense, net of amounts capitalized		(2,392	)		(2,771	)		(1,426	)
	Exchange offer costs		—			—			(202	)
			(2,662	)		(4,394	)		(1,575	)
Income (loss) before income taxes			240			(3,104	)		(487	)
Provision for (benefit from) income taxes			43			(430	)		(98	)
Net income (loss)			197			(2,674	)		(389	)
Preferred stock dividend requirements			160			160			341
Net income (loss) attributable to common stock		$	37		$	(2,834	)	$	(730	)
Net income (loss) per share of common stock; basic and diluted		$	0.01		$	(0.80	)	$	(0.23	)
Weighted average shares outstanding			3,568			3,554			3,174

(4)	All other compensation consists of amounts contributed by the Company to the 401(k) plan account of the named officer.

~~See~~The ~~accompanying~~remuneration ~~notes~~described in the previous table does not include the cost to Sea Pines Company, Inc. of certain employee benefits furnished to Messrs. Lawrence and Birdwell. The amount of such employee benefits accrued in each of fiscal years 2003, 2002 and 2001 did not exceed 10% of the total of each officer’s respective annual salary and bonus reported above for such year.

~~F-5~~Sea Pines’ key managers are parties to change of control severance agreements that provide them

~~Sea Pines Associates, Inc.~~27

ConsolidatedTable Statements of Shareholders’ Equity (In thousands) Contents

		Series A										Unearned
		Preferred Stock						Common Stock				Stock			Retained
		Shares			Amount			Shares		Amount		Compensation			Earnings			Total
Balance at October 31, 1999			1,228		$	7,218			1,843	$	2,166	$	—		$	6,510		$	15,894
	Net loss		—			—			—		—		—			(389	)		(389	)
	Trust preferred exchange		(1,007	)		(5,924	)		1,703		5,177		—			(1,733	)		(2,480	)
	Preferred stock dividend		—			—			—		—		—			(1,069	)		(1,069	)
Balance at October 31, 2000			221			1,294			3,546		7,343		—			3,319			11,956
	Net loss		—			—			—		—		—			(2,674	)		(2,674	)
	Issuance of common stock to directors		—			—			14		63		(63	)		—			—
	Deferred stock plan		—			—			—		153		(153	)		—			—
	Amortization of stock compensation		—			—			—		—		57			—			57
	Preferred stock dividend		—			—			—		—		—			(160	)		(160	)
Balance at October 31, 2001			221			1,294			3,560		7,559		(159	)		485			9,179
	Net income		—			—			—		—		—			197			197
	Issuance of common stock to directors		—			—			14		84		(84	)		—			—
	Deferred stock plan		—			—			—		116		(116	)		—			—
	Amortization of stock compensation		—			—			—		—		124			—			124
	Preferred stock dividend		—			—			—		—		—			(160	)		(160	)
Balance at October 31, 2002			221		$	1,294			3,574	$	7,759	$	(235	)	$	522		$	9,340

with significant economic protection if they are fired without “cause” or quit with “good reason,” in each case as defined in the severance agreements, within 12 months after the effective date of a “change of control” as defined in the severance agreements. The proposed merger, if it occurs, would constitute a “change of control” under the severance agreements. The total amount payable to Sea Pines’ executive officers if their severance payments were triggered is $481,226 ($309,923 to Mr. Lawrence and $171,303 to Mr. Birdwell).

~~See~~Compensation ~~accompanying~~Committee ~~notes.~~Interlocks and Insider Participation

~~F-6~~Directors Harberger, Norlander, Puntereri, Speer and Vercellotti were members of the Personnel and Compensation Committee during fiscal year 2004. Mr. Harberger is the Chairman of the Board of the Company, and Mr. Vercellotti and Mr. Puntereri are the Vice Chairmen of the Company. None of these individuals is an employee of the Company.

~~Sea~~Item ~~Pines~~12. ~~Associates,~~Security ~~Inc~~Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

~~Consolidated~~The ~~Statements~~following table sets forth, as of ~~Cash~~December 31, ~~Flows~~2004, certain information regarding the ~~(In~~beneficial ~~thousands)~~ownership of Sea Pines’ common stock and preferred stock by:

		Year ended October 31
		2002			2001			2000
Cash flows from operating activities
Net income (loss)		$	197		$	(2,674	)	$	(389	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation and amortization		2,589			2,504			1,597
	Allowance for doubtful accounts		85			12			(23	)
	Loss (gain) on sale of assets		—			(172	)		66
	Amortization of stock compensation		124			57			—
	Interest rate swap agreement		381			1,896			—
	Deferred income taxes		200			135			(252	)
Changes in assets and liabilities:
	Restricted cash		(1,306	)		1,469			(271	)
	Accounts and notes receivable		(348	)		190			953
	Inventories		11			(177	)		44
	Prepaid expenses		(134	)		(8	)		(96	)
	Other assets		—			—			(92	)
	Accounts payable and accrued expenses		(1	)		(1,495	)		1,495
	Advance deposits		1,379			(1,531	)		407
	Deferred revenue		(122	)		156			(310	)
	Income taxes payable (receivable)		252			(623	)		500
Net cash provided by (used in) operating activities			3,307			(261	)		3,629
Cash flows from investing activities
	Proceeds from sale of assets		5			335			90
	Capital expenditures and property acquisitions		(468	)		(1,784	)		(17,082	)
Net cash used in investing activities			(463	)		(1,449	)		(16,992	)
Cash flows from financing activities
	Payment of deferred loan fees		(11	)		(77	)		(40	)
	Additional borrowing on revolving loan		600			2,300			14,250
	(Repayment) additional borrowing on line of credit		(2,000	)		2,000			—
	Principal repayments of debt		(1,059	)		(2,034	)		(400	)
	Preferred stock dividends paid		(160	)		(341	)		(887	)
Net cash (used in) provided by financing activities			(2,630	)		1,848			12,923

	•	each of Sea Pines’ directors and executive officers;

	•	all of Sea Pines’ directors and executive officers as a group; and

	•	each person known by Sea Pines to be the beneficial owner of 5% or more of Sea Pines’ outstanding common stock.

~~F-7~~28

SeaTable Pinesof Associates, Inc. Contents

~~Consolidated~~There ~~Statements~~were approximately 553 record holders of ~~Cash~~Sea ~~Flows~~Pines’ ~~(continued)~~common stock and 3,600,500 shares of Sea ~~(In~~Pines’ ~~thousands)~~common stock outstanding on that date.

	Year ended October 31
	Number of Shares (1)				Percent of Class
	2002		2001		2000
Name of Owner	Common		Preferred		Common			Preferred
Net increase (decrease) in unrestricted cash and cash equivalents		214		138		(440	)
Executive Officers and Directors
Unrestricted cash and cash equivalents at beginning of year		360		222		662
John F. Bard (2)		2,750		500		*			*
Unrestricted cash and cash equivalents at end of year	$	574	$	360	$	222
Paul B. Barringer, II (3)		328,000		—		9.11	%		—
Steven P. Birdwell (4)		8,000		—		*			—
Todd Clist		1,000		—		*			—
Ralph L. Dupps, Jr. (5)		66,000		—		1.83	%		—
Norman P. Harberger (6)		30,000		—		*			—
Michael E. Lawrence (7)		14,000		—		*			—
Thomas C. Morton (8)		28,000		—		*			—
John A. Norlander		6,750		—		*			—
David E. Pardue (9)		5,000		—		*			—
Peter Parrott (10)		12,000		—		*			—
Marc Puntereri		6,000		—		*			—
Kathleen B. Speer (11)		188,500		5,500		5.24	%		2.49	%
Joseph F. Vercellotti (12)		10,000		—		*			—
All Directors and Executive Officers as a group (14 persons)		706,000		6,000		19.61	%		2.72	%
Beneficial Owners of More Than 5%
The Riverstone Group, LLC and William H. Goodwin, Jr. (13) 901 East Cary St., Suite 1500 Richmond, VA 23219		958,000		—		26.61	%		—
Richard N. Speer, Jr. (14)		184,500		5,500		5.12	%		2.49	%
One Ravinia Drive, Suite 625 Atlanta, GA 30346
Paul B. Barringer, II (3)		328,000		—		9.11	%		—
14 South Calibogue Cay Hilton Head Island, SC 29928

~~See~~* ~~accompanying~~Represents ~~notes.~~ less than 1% of the class

~~F-8~~ (1) Shares of common stock reflected in the table as owned by Messrs. Birdwell, Clist, Norlander, and Puntereri are owned by each of them directly. Unless otherwise indicated, shares reflected in the table as owned by each of the other shareholders are owned jointly with such shareholder’s spouse.

~~Sea Pines Associates, Inc.~~29

NotesTable toof Consolidated Financial Statements Contents

~~October 31~~(2) Includes 2,000 ~~2002~~ common shares held directly by Mr. Bard and 750 common shares and 500 Series A preferred shares held directly by his spouse. Does not include 2,000 deferred shares granted to Mr. Bard under the Sea Pines’ Director Stock Compensation Plan.

1(3) Based on information supplied to the Company by Mr. ~~Description~~Barringer, 324,000 shares are owned by a limited partnership, the general partner of ~~Business~~which is a limited liability company controlled by Mr. Barringer and ~~Summary~~his wife, and 4,000 shares are held directly by Mr. Barringer. Mr. Barringer is both a director and a beneficial owner of ~~Significant~~5% ~~Accounting~~or ~~Policies~~ more of the Company’s outstanding common stock.

~~Sea Pines Associates, Inc.~~ (~~“SPA” or the “Company”~~4) ~~was~~Does ~~incorporated~~not ininclude ~~South Carolina on May 4~~11,600 ~~1987.~~deferred ~~The~~shares ~~Company~~granted ~~was principally organized~~ to ~~acquire,~~Mr. ~~own and~~Birdwell ~~operate~~under ~~certain~~the ~~resort assets in~~ Sea Pines’ ~~Plantation~~Deferred onIssuance ~~Hilton~~Stock ~~Head Island, South Carolina~~Plan.

~~The wholly-owned subsidiaries of the Company are Sea Pines Company, Inc.~~ (~~“SPC”~~5), ~~Sea~~Includes ~~Pines Real Estate Company (“SPREC”)~~13,000 ~~Fifth~~shares ~~Golf~~held ~~Course~~directly ~~Club,~~by ~~Inc~~Mr.~~, and~~ ~~Sea~~Dupps ~~Pines Associates Trust I. SPC is a full-service resort, which provides guests with the use of three golf courses, tennis facilities, inn~~ and ~~conference~~ ~~facilities~~53,000 ~~various~~shares ~~other~~held ~~recreational~~jointly ~~facilities,~~with ~~home~~his ~~and villa rental management operations, and food-and-beverage services~~spouse. SPREC provides real estate brokerage services for buyers and sellers of real estate in the Hilton Head Island, South Carolina area (see Note 17 for business segment information). Fifth Golf Course Club, Inc. owns certain acreage which could be used for outdoor recreational activities. Sea Pines Associates Trust I holds certain company debentures as security for notes it has issued.

~~Principles~~(6) ofIncludes ~~Consolidation~~ 22,000 shares held by Mr. Harberger directly and 8,000 shares held jointly with his spouse.

~~The~~(7) ~~consolidated~~Includes ~~financial~~12,000 ~~statements~~shares ~~include~~held ~~the~~by ~~accounts~~Mr. ofLawrence ~~the~~directly ~~Company~~ and ~~its~~ ~~wholly-owned~~2,000 ~~subsidiaries~~shares held directly by his spouse. ~~All~~Does ~~intercompany~~not ~~accounts~~include ~~and~~30,300 ~~transactions~~deferred ~~have been~~shares ~~eliminated~~granted to Mr. Lawrence under the Sea Pines’ Deferred Issuance Stock Plan.

~~Statements~~(8) ofIncludes ~~Cash~~12,000 ~~Flows~~ shares held by Mr. Morton directly, 8,000 shares held jointly with his spouse and 8,000 shares held directly by his spouse.

~~For~~(9) ~~purposes~~Includes ~~of the statements of cash flows~~3,000 ~~the~~shares ~~Company~~held ~~considers~~by ~~all short-term~~Mr. ~~investments~~Pardue ~~with~~directly, ~~maturities~~and of2,000 ~~90 days~~shares orheld ~~less~~directly atby ~~the~~his ~~time of purchase to be cash equivalents~~spouse.

~~Revenue~~(10) ~~Recognition~~ Includes 3,000 shares held directly by Mr. Parrott directly and 9,000 shares held jointly with his spouse.

~~Revenues~~(11) ~~and~~Includes ~~expenses~~4,000 ~~from~~common ~~resort~~shares ~~operations~~held ~~are~~directly ~~recognized~~by asMrs. ~~goods~~Speer ~~are sold~~ and ~~services~~184,500 ~~are~~common ~~provided.~~shares ~~Real estate brokerage revenues are recognized upon closing of the sale. Advance deposits are required for certain resort reservations~~ and ~~real~~5,500 ~~estate~~Series ~~transactions~~A ~~and~~preferred ~~are~~shares ~~not~~held ~~recognized~~by ~~as revenue until earned~~Mrs. ~~The Company~~Speer’s ~~accounts receivable are unsecured~~spouse.

~~F-9~~ (12) Includes 4,000 shares held directly by Mr. Vercellotti and 6,000 shares held jointly with his spouse.

~~Sea~~(13) ~~Pines~~Based ~~Associates~~on information set forth in a Schedule 13D filed by The Riverstone Group and Mr. Goodwin, ~~Inc~~both have sole voting and investment power with respect to all of such shares.

~~Notes~~(14) Based on information supplied to ~~Consolidated~~Sea ~~Financial~~Pines ~~Statements~~by ~~(continued)~~ Mr. Speer. Does not include 4,000 shares held directly by Mr. Speer’s spouse, who is a director of Sea Pines.

~~1. Description of Business and Summary of Significant Accounting Policies (continued)~~30

CostTable of Revenues Contents

~~Cost~~Securities ofAuthorized ~~revenues~~for ~~includes~~Issuance ~~payments~~Under toEquity ~~home~~Compensation ~~and villa owners, real estate sales~~Plans ~~commissions, cost of inventories sold, credit-card commissions and costs~~ ~~incurred to operate and maintain operating properties.~~

Concentration of Credit Risk



	Number of securities to be			Weighted average exercise
	issued upon exercise of			price of outstanding			Number of securities
	outstanding options, warrants			options, warrants and			remaining available
Plan category	and rights			rights			for future issuance
		(a	)		(b	)		(c	)
Equity compensation plans approved by security holders		113,650		$	4.27			66,350
Equity compensation plans not approved by security holders		—			—			45,000	⁽¹⁾
Total		113,650		$	4.27			111,350

~~The~~(1) ~~Company~~These ~~maintains~~shares ~~substantially~~are ~~all~~available offor ~~its~~future ~~cash~~issuance ~~with~~under ~~one~~the ~~financial institution.~~Company’s ~~Account~~Director ~~balances~~Stock ~~greater~~Compensation ~~than~~Plan. ~~$100,000~~Information ~~are~~with ~~not~~respect ~~federally insured and are subject~~ to athat ~~loss~~plan ifcan ~~the~~be ~~financial~~found ~~institution~~in ~~fails.~~Note ~~Management believes~~13 ~~such~~to ~~risk is minimal based on~~ the ~~current~~Company’s consolidated financial ~~condition~~statements ofincluded ~~the financial institution~~herein.

~~Restricted~~ Mr. Lawrence’s ~~cash~~wife ~~includes~~is ~~cash~~a ~~held~~licensed ~~in escrow pending~~ real estate ~~closings, advance~~agent ~~deposits~~with ~~for~~Sea ~~home~~Pines ~~and~~Real ~~villa~~Estate ~~rentals~~Company, ~~and~~Inc., a ~~rental~~subsidiary ~~receipts~~of tothe beCompany. Total commissions paid to ~~home~~ ~~and~~Mrs. Lawrence ~~villa~~during ~~owners~~fiscal year 2004 were $142,412.

~~Inventories~~ Item 14. Principal Accountant Fees and Services.

~~Inventories~~ The ~~are~~Company’s ~~valued~~former atprincipal ~~the~~accountant, ~~lower~~Ernst of& ~~cost~~Young ~~(first-in~~LLP, ~~first-out~~resigned ~~method)~~effective orOctober 21, 2004. ~~net~~The Company engaged Hancock Askew & Co., LLP on October 21, 2004 as principal accountant to ~~realizable~~perform ~~value~~the fiscal 2004 audit.

~~Advertising~~ The ~~Expense~~aggregate fees listed below for professional services in fiscal years 2004 and 2003 as follows:

The cost of advertising is expensed as incurred and is classified as selling and marketing expenses in the Consolidated Statements of Operations.


Services Rendered	Fiscal 2004		Fiscal 2003

Audit Fees	$	136,470	$	146,410
Audit-Related Fees		—		4,400
Tax Fees		36,464		25,150
All Other Fees		—		—


Total	$	172,934	$	175,960

~~Real~~ All ~~Estate~~fiscal ~~Assets~~2003 fees were billed by Ernst & Young LLP. During fiscal 2004, $97,934 of the fees were billed by Ernst & Young LLP and $75,000 of the fees were billed by Hancock Askew &

~~Real estate assets are recorded at cost less any impairment losses, if~~31 applicable. The costs of new development, additions and improvements which substantially extend the useful lives of assets are capitalized. Capitalized costs include costs of construction, property taxes, interest and miscellaneous expenses incurred during the construction period. Capitalized construction period interest totaled approximately $0, $61,000 and $694,000 in 2002, 2001 and 2000, respectively. Repairs and maintenance costs are expensed as incurred.

F-10 Table of Contents

~~Sea~~Co., ~~Pines~~LLP. ~~Associates~~The Hancock Askew & Co., ~~Inc~~LLP fees represent the agreed upon audit fee that was paid subsequent to year end.

~~Notes~~ The toaudit ~~Consolidated~~fees ~~Financial~~above ~~Statements~~represent ~~(continued)~~fees for professional services rendered for the audits and quarterly reviews of the consolidated financial statements of the Company.

1. The ~~Description~~audit-related offees ~~Business~~above represent professional fees rendered for executive discussions regarding internal control policies, procedures and ~~Summary~~reporting in anticipation of ~~Significant~~adopting ~~Accounting~~Section 404 ~~Policies~~of ~~(continued)~~the Sarbanes-Oxley Act.

~~Real~~ The ~~Estate~~tax ~~Assets~~fees ~~(continued)~~above represent professional fees for compliance services in connection with the Company’s federal and state tax filings and advisory services related to the Company’s merger agreement.

The ~~Company~~Audit Committee’s Charter provides ~~depreciation~~that ~~for~~the ~~financial~~committee ~~reporting~~will ~~purposes~~pre-approve ~~when~~all ~~the~~audit services ~~asset~~and, issubject ~~placed~~to inthe ~~operation~~de ~~using~~minimus ~~straight~~exception, all permissible non-~~line~~audit ~~method~~services ~~over~~to be performed for the ~~estimated~~Company by its independent auditors. From time to time, the Committee may delegate its ~~useful~~authority ~~lives~~to pre-approve non-audit services to the Chairman of the ~~assets,~~Committee. ~~which~~Any ~~range~~such ~~from~~approvals are ~~five~~to be reported to ~~39 years~~the full Committee at its next meeting.

~~Other~~ In ~~Assets~~fiscal years 2003 and 2004, all of the audit fees, audit-related fees and tax fees were approved either by the Audit Committee or its designee.

~~Deferred~~PART ~~loan fees are amortized over the lives of the corresponding debt.~~IV

~~Impairment~~Item of15. ~~Long-Lived~~Exhibits ~~Assets~~ and Financial Statement Schedules.

An(a)(1)-(2) ~~impairment~~Financial ~~loss~~Statements ~~is recognized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance~~ and ~~future estimated results in its~~Schedules: ~~evaluation of potential impairment and then compares the carrying amount of the~~ ~~asset to the estimated future cash flows expected to result from the use of the~~ ~~asset. If the carrying amount of the asset exceeds the estimated expected~~ future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The Company has not incurred any impairment losses for the years ended October 31, 2002, 2001 or 2000.

The financial statements and schedules listed in the accompanying Index to Consolidated Financial ~~Instruments~~Statements at page F-1 herein are filed as part of this report.

~~The~~ All ~~carrying~~other ~~amounts~~schedules offor ~~cash~~which ~~and~~provision ~~cash~~is ~~equivalents,~~made ~~trade~~in ~~receivables,~~the ~~notes receivable,~~applicable ~~other~~regulations ~~current assets, accounts payable, line~~ of ~~credit with bank,~~the ~~long-term~~Securities ~~debt~~ and ~~accruals~~Exchange ~~meeting~~Commission ~~the~~are ~~definition~~not ofrequired ~~financial~~under ~~instruments approximate~~the ~~their~~related ~~fair~~instructions ~~values~~or asare inapplicable, ofand ~~October 31,~~therefore ~~2002~~have ~~and~~been ~~2001~~omitted.

~~Income Taxes~~ (3) Exhibits:

The ~~Company~~exhibits ~~accounts~~listed ~~for~~on ~~income taxes using~~ the ~~liability~~accompanying ~~method,~~Exhibit Index ~~which requires~~are ~~recognition~~filed of(except ~~deferred~~Exhibits ~~tax~~32(a) ~~liabilities~~ and ~~assets based on temporary~~ ~~differences~~32(b) ~~between~~which ~~the~~are ~~financial~~furnished ~~statement~~pursuant ~~and~~to ~~tax~~Item 601 ~~basis~~ of ~~assets~~Regulation S-K) ~~and liabilities~~as ~~using~~part ~~current statutory tax rates. A valuation allowance is established against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all~~ of ~~the~~this ~~deferred tax assets will not be realized~~report.

~~F-11~~32

SeaTable Pinesof Associates, Inc. Contents

~~Notes to Consolidated Financial Statements (continued)~~SIGNATURES

1. Pursuant ~~Description~~to the requirements of ~~Business~~Section 13 ~~and~~or ~~Summary~~15(d) of ~~Significant~~the ~~Accounting~~Securities ~~Policies~~Exchange ~~(continued)~~Act of 1934, the registrant, Sea Pines Associates, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Interest Rate Swap Agreements


	SEA PINES ASSOCIATES, INC.

Dated: January 31, 2005	By:	/s/ Michael E. Lawrence

		Michael E. Lawrence
		Chief Executive Officer

On Pursuant ~~November 1,~~to ~~2000,~~ the ~~Company~~requirements ~~adopted~~of ~~SFAS~~the ~~133,~~Securities ~~“Accounting~~Exchange ~~for~~Act ~~Derivative Instruments~~of ~~and Hedging Activities~~1934,” asthis ~~amended.~~report ~~SFAS~~has ~~133 requires the Company~~been tosigned ~~recognize~~below ~~all~~by ~~derivative instruments on~~ the ~~balance~~following ~~sheet~~persons aton ~~fair~~behalf ~~value. The adoption~~ of ~~SFAS 133 affects~~ the ~~accounting~~registrant, ~~for~~Sea ~~the~~Pines ~~Company’s~~Associates, ~~interest rate swap agreements~~Inc., ~~The Company accounts for interest expense under its swap~~and ~~agreements~~in ~~by recording differences between~~ the ~~interest~~capacities ~~rates~~and on the ~~underlying~~ ~~debt~~dates ~~and the swap rates, applied to the notional amount of the swaps~~indicated.

The Company’s results of operations can be significantly affected by changes in interest rates as the outstanding debt has variable interest rates based on a LIBOR index. To manage the risks associated with changes in interest rates, the Company entered into two interest rate swap agreements, which have maturities on November 1, 2005 and November 10, 2005, to fix the interest rate the Company is charged on a notional amount of $24 million of the outstanding debt.


Signature	Title	Date

/s/ Norman P. Harberger Norman P. Harberger	Chairman and Director	January 31, 2005

/s/ Michael E. Lawrence Michael E. Lawrence	Chief Executive Officer and Director (principal executive officer)	January 31, 2005

/s/ Steven P. Birdwell Steven P. Birdwell	Chief Financial Officer (principal financial officer and principal accounting officer)	January 31, 2005

/s/ Thomas C. Morton Thomas C. Morton	Treasurer and Director	January 31, 2005

/s/ Joseph F. Vercellotti Joseph F. Vercellotti	Vice Chairman and Director	January 31, 2005

/s/ Peter Parrott Peter Parrott	Secretary and Director	January 31, 2005

~~Upon adoption of SFAS 133, the Company recorded the fair market value of the~~33 interest rate swaps on its consolidated balance sheet. On an ongoing basis, the Company will adjust the balance sheet to reflect the current fair market value of the interest rate swap agreements. The interest rate swap agreements do not qualify for hedge accounting as defined by SFAS 133, and accordingly, the change in the fair value of the derivative is immediately recognized in the consolidated statement of operations. The Company recorded $381,000 and $1,896,000 of expense in the consolidated statement of operations for the change in fair value of the interest rate swap agreement for the year ended October 31, 2002 and 2001, respectively.

RecentTable Accountingof Pronouncements Contents

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet been incurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the


Signature	Title	Date
John F. Bard	Director	January 31, 2005

/s/ Paul B. Barringer, II Paul B. Barringer, II	Director	January 31, 2005

/s/ Todd Clist Todd Clist	Director	January 31, 2005

/s/ Ralph L. Dupps, Jr. Ralph L. Dupps, Jr.	Director	January 31, 2005

/s/ John A. Norlander John A. Norlander	Director	January 31, 2005

/s/ David E. Pardue David E. Pardue	Director	January 31, 2005

/s/ Marc Puntereri Marc Puntereri	Director	January 31, 2005

/s/ Kathleen B. Speer Kathleen B. Speer	Director	January 31, 2005

~~F-12~~34

SeaTable Pinesof Associates, Inc. Contents

~~Notes~~Index to Consolidated Financial Statements ~~(continued)~~

1. Description of Business and Summary of Significant Accounting Policies (continued)


1.	Financial Statements of Sea Pines Associates, Inc.

	Report of Independent Registered Public Accountants	F-2 through F-3

	Consolidated Balance Sheets	F-4 through F-5

	Consolidated Statements of Operations	F-6

	Consolidated Statements of Shareholders’ Equity	F-7

	Consolidated Statements of Cash Flows	F-8

	Notes to Consolidated Financial Statements	F-9 through F-29

2.	Financial Statement Schedule of Sea Pines Associates, Inc.

	Schedule II – Valuation and Qualifying Accounts	F-30

~~Recent Accounting Pronouncements (continued)~~F-1

restTable of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company will adopt the standard on November 1, 2002 and expects no material impact on its consolidated financial statements. Contents

~~Use~~Report of ~~Estimates~~Independent Registered Public Accounting Firm

~~The~~Board ~~preparation~~ of ~~financial~~Directors ~~statements in conformity with accounting principles generally accepted in the United States requires management to make estimates~~ and ~~assumptions that affect the amounts reported in the financial~~Shareholders ~~statements~~Sea ~~and~~Pines ~~accompanying~~Associates, ~~notes~~Inc. ~~Actual results could differ from those~~ ~~estimates.~~

~~Reclassifications~~We have audited the accompanying consolidated balance sheet of Sea Pines Associates, Inc. (the “Company”) as of October 31, 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended October 31, 2004. Our audit also included the financial statement schedule referred to in Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

~~Certain~~We ~~amounts~~conducted our audit in accordance with the ~~prior~~standards ~~years~~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 ~~have~~are ~~been~~free ~~reclassified~~of material misstatement. An toaudit ~~conform~~includes toexamining, ~~current~~on ~~year~~a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

2In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sea Pines Associates, Inc. ~~Statements~~at October 31, 2004, and the consolidated results of ~~Cash~~its ~~Flows~~operations and its cash flows for the year ended October 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein for the year ended October 31, 2004.

~~Supplemental~~/s/ ~~disclosure~~Hancock ofAskew ~~cash~~& ~~flow~~Co., ~~information follows (in thousands of dollars):~~ LLP

		Year ended October 31
		2002		2001		2000
Cash paid during the year for:
	Interest, net of amounts capitalized	$	2,409	$	2,803	$	1,305
	Income taxes		—		—		—

Savannah, Georgia
December 17, 2004

F-132

SeaTable Pinesof Associates, Inc. Contents

~~Notes~~Report toof ~~Consolidated~~Independent ~~Financial~~Registered ~~Statements~~Public ~~(continued)~~Accounting Firm

3.Board ~~Inventories~~of Directors and Shareholders Sea Pines Associates, Inc.

~~Inventories~~We ~~consist~~have ofaudited the ~~following~~accompanying consolidated balance sheet of Sea Pines Associates, Inc. (inthe “Company”) ~~thousands~~as of ~~dollars~~October 31, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended October 31, 2003. Our audits also included the financial statement schedule referred to in Item 15(a):. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

	October 31
	2002		2001
Merchandise	$	667	$	678
Supplies, parts and accessories		35		35
Food and beverages		115		111
Other		42		46
	$	859	$	870

We conducted our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

4In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sea Pines Associates, Inc. ~~Real~~at ~~Estate~~October 31, ~~Assets~~2003, and the consolidated results of its operations and its cash flows for each of the two years in the period ended October 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

~~Operating~~/s/ ~~properties~~Ernst ~~consist~~& ofYoung ~~the following (in thousands of dollars):~~ LLP

	October 31
	2002			2001
Land and improvements	$	26,487		$	26,455
Buildings		23,265			23,164
Machinery and equipment		11,642			11,385
		61,394			61,004
Less accumulated depreciation		(17,197	)		(14,707	)
	$	44,197		$	46,297

Atlanta, Georgia
December 8, 2003
  except for the first paragraph of Note 14,
  as to which the date is
  July 27, 2004

~~Properties held for future development of $~~F-3~~,219,000 at October 31, 2002 and~~ ~~2001, respectively, consist primarily of land and certain future development rights.~~

F-14 Table of Contents

Sea Pines Associates, Inc.

~~Notes to~~ Consolidated ~~Financial~~Balance ~~Statements~~ Sheets (~~continued~~In thousands)

5. Long-Term Debt and Line of Credit Agreement


	October 31
	2004		2003

Assets
Current assets:
Cash and cash equivalents
Unrestricted	$	557	$	471
Restricted		3,230		3,571

		3,787		4,042

Accounts receivable, less allowance for doubtful accounts of $19 and $35 at October 31, 2004 and 2003, respectively		1,546		1,420
Inventories		860		792
Prepaid expenses		373		360

Total current assets		6,566		6,614

Deferred loan fees, net		223		279
Other assets, net		168		60

		391		339

Real estate assets:
Operating properties, net		40,687		42,675
Properties held for future development		2,984		3,186

		43,671		45,861

Total assets	$	50,628	$	52,814

~~Long~~F-~~term debt consists of the following (in thousands of dollars):~~4

	October 31
	2002			2001
Term note payable to bank, bearing interest at various London Interbank Offered Rates (LIBOR) (1.82% at October 31, 2002), plus 1.40% to 1.65% collateralized by substantially all assets of the Company. Principal is payable monthly from May through October each year in amounts ranging from $133,050 in 2002 to $220,979 in 2008, with a balloon payment due on maturity. Interest is payable monthly. The note matures November 1, 2008	$	15,940		$	16,999
$18.3 million revolving line of credit to bank, bearing interest at various London Interbank Offered Rates (LIBOR) (1.82% at October 31, 2002), plus 1.40% to 1.65%, collateralized by substantially all assets of the Company. Interest is payable monthly. The line matures November 1, 2007		17,600			17,000
		33,540			33,999
Less current portion of long-term debt		(1,142	)		(798	)
Total long-term debt	$	32,398		$	33,201

~~F-15~~Sea Pines Associates, Inc.

~~Sea~~Consolidated ~~Pines~~Balance ~~Associates~~Sheets (In thousands, ~~Inc.~~except share amounts)

Notes to Consolidated Financial Statements (continued)


	October 31
	2004			2003

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	3,681		$	2,692
Accrued interest payable		725			422
Accrued property taxes		700			429
Advance deposits		3,135			3,441
Current portion of deferred revenue and other long-term liabilities		372			296
Current portion of long-term debt		1,325			1,230

Total current liabilities		9,938			8,510

Long-term debt, less current portion		33,825			36,567
Interest rate swap agreement		814			1,744
Deferred revenue and other long-term liabilities		531			660
Payable to Sea Pines Associates Trust I		2,480			2,480
Total liabilities		47,588			49,961

Commitments and contingencies (note 10, 11)
Shareholders’ equity:
Series A cumulative preferred stock, no par value, 2,000,000 shares authorized; 220,900 shares issued and outstanding at October 31, 2004 and 2003, respectively (liquidation preference of $1,679 at October 31, 2004 and 2003, respectively)		1,294			1,294
Series B junior cumulative preferred stock, no par value; 20,000 shares authorized, none issued or outstanding		—			—
Common stock, 23,000,000 shares authorized, no par value; 3,600,500 shares and 3,587,400 shares issued and outstanding at October 31, 2004 and 2003, respectively		8,063			7,916
Unearned stock compensation		(270	)		(255	)
Accumulated deficit		(6,047	)		(6,102	)

Total shareholders’ equity		3,040			2,853

Total liabilities and shareholders’ equity	$	50,628		$	52,814

5.See ~~Long-Term~~accompanying ~~Debt and Line of Credit Agreement (continued)~~notes.

~~Scheduled maturities of long~~F-~~term debt as of October 31, 2002 are as follows~~5 ~~(in thousands of dollars):~~

Year ending October 31
	2003	$	1,142
	2004		1,230
	2005		1,325
	2006		1,430
	2007		1,540
	Thereafter		26,873
Total		$	33,540

~~The~~Sea ~~loan~~Pines ~~agreement~~Associates, ~~contains provisions and covenants which impose certain restrictions on the use of the Company’s assets~~Inc. ~~The significant restrictions~~ ~~include limitations as to new indebtedness, the sale or disposal of certain~~ ~~assets, capital contributions and investments, and new lines of business.~~

~~The~~Consolidated ~~Company~~Statements ~~maintains a $4,500,000 seasonal line~~ of ~~credit~~ Operations (~~the~~In ~~“Seasonal Line”) with the same bank. Interest is payable monthly at LIBOR plus 1.5% and the Seasonal Line expires November 1~~thousands, ~~2007.~~except ~~Borrowings~~per ~~under~~share ~~the Seasonal Line~~amounts) ~~are also collateralized by substantially all of the assets of the Company. As~~ ~~of October 31, 2002, the seasonal line had no outstanding balance.~~

The Company has two interest rate swap agreements. The first interest rate swap agreement effectively fixes the interest rate on an $18,000,000 notional principal amount at 5.24% plus a credit margin ranging from 1.40% to 1.65% until the maturity date of the agreement, November 10, 2005. The lender has the option of calling the swap agreement on November 10, 2003. The second interest rate swap agreement effectively fixes the interest rate on a $6,000,000 notional principal amount at 6.58% plus a credit margin ranging from 1.40% to 1.65% until the maturity date of the agreement, November 1, 2005.


	Year ended October 31
	2004			2003			2002
Revenues
Resort	$	37,161		$	33,586		$	34,892
Real estate		24,662			19,710			16,250
Cost reimbursements		3,830			3,639			3,550

		65,653			56,935			54,692


Cost and expenses:
Cost of revenues		44,763			39,183			36,036
Costs subject to reimbursement		3,830			3,639			3,550
Sales and marketing expenses		4,155			3,271			3,022
General and administrative expenses		6,967			6,877			6,593
Depreciation and amortization		2,795			2,578			2,589

		62,510			55,548			51,790


Income from operations		3,143			1,387			2,902

Other income (expense):
(Loss) gain on sale or disposal of assets, net		(21	)		63			—
Interest income		19			202			111
Interest rate swap agreements		930			533			(381	)
Interest expense		(2,512	)		(2,271	)		(2,392	)
Merger related expenses		(1,184	)		—			—
Litigation expenses		—			(6,324	)		—

		(2,768	)		(7,797	)		(2,662	)


Income (loss) before income taxes		375			(6,410	)		240

Provision for income taxes		—			(54	)		(43	)


Net income (loss)		375			(6,464	)		197

Preferred stock dividend requirements		(160	)		(160	)		(160	)

Net income (loss) attributable to common stock	$	215		$	(6,624	)	$	37


Net income (loss) per share of common stock, basic and diluted	$	0.06		$	(1.85	)	$	(0.01	)

Weighted average shares outstanding		3,595			3,580			3,568

~~Subsequent~~See ~~Event~~accompanying notes.

~~In November 2002, the Company completed a modification to its master credit~~F-6 agreement with its principal corporate lender. The modification extended both the revolving line of credit note maturity date and the seasonal line of credit maturity date from November 1, 2003 to November 1, 2007 and revised certain loan covenant requirements.

F-16 Table of Contents

Sea Pines Associates, Inc.

~~Notes to~~ Consolidated ~~Financial~~ Statements of Shareholders’ Equity (~~continued~~In thousands)

6. Income Taxes


												(Accumulated
	Series A								Unearned			Deficit)
	Preferred Stock				Common Stock				Stock			Retained
	Shares		Amount		Shares		Amount		Compensation			Earnings			Total

Balance at November 1, 2001		221	$	1,294		3,560	$	7,559	$	(159	)	$	485		$	9,179

Net income		—		—		—		—		—			197			197
Issuance of common stock to directors		—		—		14		84		(84	)		—			—
Issuance of grants for deferred stock plan		—		—		—		116		(116	)		—			—
Amortization of stock compensation		—		—		—		—		124			—			124
Preferred stock dividend		—		—		—		—		—			(160	)		(160	)

Balance at October 31, 2002		221		1,294		3,574		7,759		(235	)		522			9,340

Net loss		—		—		—		—		—			(6,464	)		(6,464	)
Issuance of common stock to directors		—		—		14		56		(56	)		—			—
Issuance of grants for deferred stock plan		—		—		—		101		(101	)		—			—
Amortization of stock compensation		—		—		—		—		137			—			137
Preferred stock dividend		—		—		—		—		—			(160	)		(160	)

Balance at October 31, 2003		221		1,294		3,588		7,916		(255	)		(6,102	)		2,853

Net income		—		—		—		—		—			375			375
Issuance of common stock to directors		—		—		12		31		(31	)		—			—
Issuance of grants for deferred stock plan		—		—		—		116		(116	)		—			—
Amortization of stock compensation		—		—		—		—		132			—			132
Preferred stock dividend		—		—		—		—		—			(320	)		(320	)

Balance at October 31, 2004		221	$	1,294		3,600	$	8,063	($	270	)	($	6,047	)	$	3,040

~~The~~See ~~provision~~accompanying ~~(benefit) for income taxes consists of the following (in~~notes. ~~thousands of dollars):~~

		Year ended October 31
		2002			2001			2000
Current provision (benefit):
	Federal	$	(157	)	$	(548	)	$	133
	State		—			(17	)		21
			(157	)		(565	)		154
Deferred provision (benefit):
	Federal		173			172			(218	)
	State		27			(37	)		(34	)
			200			135			(252	)
		$	43		$	(430	)	$	(98	)

F-7

TheTable reconciliation between actual income tax expense (benefit) and the amount calculated by applying the federal statutory rates to income (loss) before income taxes follows (in thousands of dollars): Contents

	Year ended October 31
	2002			2001			2000
Tax expense (benefit) at statutory federal income tax rates	$	82		$	(1,051	)	$	(165	)
State income tax expense (benefit), net of federal income tax benefit (charge)		9			(58	)		(16	)
(Decrease) increase in valuation allowance		(44	)		707			—
Offering costs		—			—			77
Other		(4	)		(28	)		6
	$	43		$	(430	)	$	(98	)

Sea Pines Associates, Inc.

~~F-17~~Consolidated Statements of Cash Flows (In thousands)

Sea Pines Associates, Inc.


	Year ended October 31
	2004			2003			2002

Cash flows from operating activities
Net income (loss)	$	375		$	(6,464	)	$	197
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		2,492			2,536			2,563
Impairment loss		239			—			—
Amortization of deferred loan fees		64			42			26
Provision for bad debts		—			(15	)		94
Loss (gain) on sale of assets		21			(63	)		—
Amortization of stock compensation		132			137			124
Interest rate swap agreements		(930	)		(533	)		381
Deferred income taxes		—			—			200
Changes in assets and liabilities:
Restricted cash		341			(1,083	)		(1,306	)
Accounts and notes receivable		(126	)		975			(357	)
Inventories		(68	)		67			11
Prepaid expenses and other assets		(121	)		18			(134	)
Accounts payable and accrued expenses		1,243			245			(1	)
Advance deposits		(306	)		1,031			1,379
Deferred revenue		(53	)		(210	)		(122	)
Income taxes receivable		—			217			252

Net cash provided by (used in) operating activities		3,303			(3,100	)		3,307

Cash flows used in investing activities
Proceeds from sale of assets		4			118			5
Capital expenditures and property acquisitions		(566	)		(1,036	)		(468	)

Net cash used in investing activities		(562	)		(918	)		(463	)

Cash flows from financing activities
Payment of deferred loan fees		(8	)		(182	)		(11	)
Borrowings (repayments) on revolving line of credit, net		1,200			(500	)		600
(Repayment) borrowings on judgment loan		(3,500	)		5,900			—
Borrowings (repayments) on seasonal line of credit, net		883			—			(2,000	)
Principal repayments of term note		(1,230	)		(1,143	)		(1,059	)
Preferred stock dividends paid		—			(160	)		(160	)

Net cash (used in) provided by financing activities		(2,655	)		3,915			(2,630	)

Net increase (decrease) in unrestricted cash and cash equivalents		86			(103	)		214
Unrestricted cash and cash equivalents at beginning of year		471			574			360

Unrestricted cash and cash equivalents at end of year	$	557		$	471		$	574

~~Notes~~See toaccompanying ~~Consolidated Financial Statements (continued)~~notes.

~~6. Income Taxes (continued)~~F-8

TheTable tax effects of the types of temporary differences and carryovers, which give rise to deferred income tax assets (liabilities), are as follows (in thousands of dollars): Contents

			October 31
			2002			2001			2000
Deferred revenue:
	License and fee income		$	432		$	480		$	416
	Country club membership sales			29			7			34
Loss on interest rate swaps				849			707			—
Charitable contribution carryover				10			7			4
State net operating loss				88			65			—
Severance payments				—			44			—
Accrued liabilities				208			138			142
Other assets				—			12			7
		Gross deferred income tax assets		1,616			1,460			603
Less: Valuation allowance				(686	)		(730	)		(23	)
		Deferred income tax assets		930			730			580
Depreciation				(763	)		(442	)		(164	)
Other liabilities				(167	)		(88	)		(81	)
		Gross deferred income tax liabilities		(930	)		(530	)		(245	)
Net deferred income tax assets			$	—		$	200		$	335

Sea Pines Associates, Inc.

~~The~~Notes ~~significant increase in the valuation allowance in the year ended October 31, 2001 is due~~ to ~~the~~Consolidated ~~Company’s~~Financial ~~review of its estimate of realization of~~Statements ~~deferred tax assets, primarily related to the loss on the interest rate swaps.~~

7.October 31, ~~Shareholders’ Equity~~2004

~~Preferred~~1. ~~Stock~~ Description of Business and Summary of Significant Accounting Policies

OfSea ~~the~~Pines 5Associates,~~000,000~~ ~~authorized~~Inc. ~~shares~~(“SPA” ofor ~~preferred~~the ~~stock,~~“Company”) ~~2,000,000~~was ~~shares~~incorporated ~~are designated~~in asSouth ~~Series A~~Carolina ~~cumulative~~on ~~preferred stock and 20~~May 4,~~000 shares are~~ ~~designated as Series B junior cumulative preferred stock~~1987. The ~~Board~~Company ~~of Directors~~was ~~has~~principally ~~the~~organized ~~authority~~ to ~~approve the issuance amount~~acquire, ~~rights~~own and ~~powers of~~operate ancertain ~~additional~~resort ~~2,980,000~~assets ~~shares of non-Series A preferred stock except that~~in ~~such~~Sea ~~rights~~Pines ~~and~~Plantation ~~powers~~on ~~shall~~Hilton ~~not~~Head beIsland, ~~superior~~South ~~to those of the Series A cumulative preferred shares~~Carolina.

FThe consolidated, wholly-18owned subsidiaries of the Company are Sea Pines Company, Inc. (“SPC”), Sea Pines Real Estate Company (“SPREC”), and Fifth Golf Course Club, Inc. SPC is a full-service resort, which provides guests with the use of three golf courses, tennis facilities, inn and conference facilities, various other recreational facilities, home and villa rental management operations, and food and beverage services. SPREC provides real estate brokerage services for buyers and sellers of real estate in the Hilton Head Island, South Carolina area (see Note 17 for business segment information). Fifth Golf Course Club, Inc. owns certain acreage which could be used for outdoor recreational activities.

The Company owns all the common securities of Sea Pines Associates Trust I (the “Trust”), ~~Inc~~which holds a debenture issued by the Company. Interest on the debenture is used by the Trust to pay interest on the trust preferred securities issued by the Trust.

~~Notes~~Principles toof ~~Consolidated Financial Statements (continued)~~Consolidation

7The consolidated financial statements include the accounts of the Company and its consolidated, wholly-owned subsidiaries. ~~Shareholders’~~All ~~Equity~~intercompany accounts and transactions have been eliminated. (~~continued~~See Note 7 for information on deconsolidation of the Trust.)

~~Preferred~~Cash ~~Stock (continued)~~Equivalents

The ~~Series A~~Company ~~cumulative~~considers ~~preferred~~all ~~shares~~short-term ~~provide~~investments ~~for~~with amaturities ~~cumulative dividend~~ of ~~$0.722~~ per share per annum, payable in arrears as declared by the Board of Directors. These shares have a liquidation value of $7.60 per share plus accumulated but unpaid dividends. If four or more years of dividends are in arrears, the Series90 Adays ~~cumulative preferred shareholders will be entitled to elect a majority of the Board of Directors of the Company. All~~ or ~~any~~less ~~part of such shares may be redeemed~~ at the ~~option~~time of ~~the Company at liquidation value.~~ Aspurchase ~~of October 31, 2002, all preferred stock dividends applicable~~ to ~~fiscal~~be ~~year ended~~cash ~~October 31, 2001 and all prior years have been declared and paid~~equivalents.

~~The~~Revenue ~~Series B junior cumulative preferred shares are subject to the prior and~~Recognition ~~superior rights of the holders of the Series A and all other classes of~~ ~~preferred shares. These Series B shares provide for a cumulative dividend of~~ the greater of $0.25 per share or an amount as adjusted for the anti-dilution number (initially 1,000). Each share of the Series B also entitles the holder to the number of votes equal to the anti-dilution number. Generally, the Series B and common shareholders will vote together as one class on all matters submitted to a vote. The Series B shares have a liquidation value of $100 per share, plus dividends thereon. The Series B shares are not redeemable. No shares of the Series B junior cumulative preferred stock have been issued (see Stock Purchase Rights Plan).

~~Common~~Revenues ~~Stock~~and expenses from resort operations are recognized as goods are sold and services are provided. Reimbursements received from third parties for services that the Company procures and manages are reflected as revenues as such reimbursements are earned. Real estate brokerage revenues are recognized upon closing of the sale. Advance deposits are required for certain resort reservations and real estate transactions and are not recognized as revenue until earned.

~~Of the 23,000,000 authorized shares of common stock, 2,000,000 shares are~~F-9 designated as special common stock and 1,000,000 are designated as nonvoting common stock. All other shares are voting. The 3,573,400 shares of common stock outstanding as of October 31, 2002 are all voting common stock.

EachTable share of common stock (regardless of class) shall participate on an equal and pro rata basis in all dividends and other distributions, including liquidation, subject to the rights of the preferred shareholders. Contents

~~Holders~~Sea ofPines ~~shares~~Associates, ~~of voting common stock are entitled to one vote per share~~Inc. ~~Holders of special common shares (if issued) will have such voting rights as~~ ~~specified by the Board of Directors, except that such rights will not be~~ ~~superior to the voting common stock.~~

~~F-19~~Notes to Consolidated Financial Statements (continued)

~~Sea~~1. ~~Pines~~Description ~~Associates,~~of ~~Inc.~~ Business and Summary of Significant Accounting Policies (continued)

~~Notes~~Cost toof ~~Consolidated Financial Statements (continued)~~Revenues

7.Cost ~~Shareholders’~~of ~~Equity~~revenues ~~(continued)~~includes payments to home and villa owners, real estate sales commissions, cost of inventories sold, credit-card commissions and costs incurred to operate and maintain operating properties.

~~Preferred~~Concentration ~~Stock~~of ~~Exchange~~Credit ~~Offer~~Risk

InThe ~~February 2000, the~~ Company ~~completed~~maintains ~~its~~substantially ~~Exchange~~all ~~Offer~~of ~~pursuant to~~ its ~~December~~ ~~1999~~cash ~~Exchange~~with ~~Offer~~one ~~Prospectus~~financial institution. ~~The Exchange Offer allowed holders of~~Account ~~the~~balances ~~Company’s~~greater ~~Series A~~than ~~Preferred~~$100,000 ~~Stock~~are tonot ~~exchange~~federally ~~each~~insured ~~preferred~~and ~~share~~are ~~for either~~subject 2to ~~1/2 shares of the Company’s common stock or an equivalent number of new 9.5% Company-obligated redeemable preferred securities of~~ a ~~subsidiary trust~~loss ~~holding~~if ~~solely~~ the ~~Junior Subordinated Debentures (“Trust Preferred~~financial ~~Securities”)~~institution ~~issued by Sea Pines Associates, Inc~~fails. ~~Holders~~Management ofbelieves ~~approximately~~such ~~56% of~~risk ~~the~~is ~~preferred~~minimal ~~stock~~based ~~exchanged~~on ~~their shares for Common Stock. Holders of approximately 26% of~~ the ~~preferred~~current ~~stock exchanged their shares for the new~~financial ~~Trust~~condition ~~Preferred Security. Holders~~ of ~~approximately 18% of~~ the ~~Series A Preferred~~financial ~~Stock did not exchange their shares~~institution.

InRestricted ~~conjunction with the Exchange Offer, the Company declared a cash payment of~~Cash ~~$0.722 per share to be paid only to holders of record of Series A Preferred~~ ~~Stock who exchanged shares of Series A Preferred Stock in the Exchange Offer.~~ ~~This cash payment was paid in four approximately equal quarterly installments commencing in April 2000. In addition, a deemed dividend of $1,733,000 was recorded as a reduction to retained earnings.~~

~~The~~Restricted ~~Company~~cash ~~incurred~~includes ~~approximately~~cash ~~$294,000~~held in ~~professional~~escrow ~~fees~~pending ~~and~~real ~~other costs~~estate ~~relating to this transaction. Costs of $202~~closings,~~000~~ ~~were~~advance ~~expensed~~deposits ~~in 2000~~for ~~relating~~home toand ~~the~~villa ~~Exchange Offer. The remaining costs of $92~~rentals,~~000~~ ~~were capitalized as deferred financing costs~~ and ~~are~~rental ~~being~~receipts ~~amortized~~to ~~over~~be ~~the 30-year~~paid ~~life~~to ofhome ~~the~~and ~~Trust~~villa ~~Preferred Securities~~owners.

~~The~~Accounts ~~Trust Preferred Securities bear interest at 9.5% per annum with payments~~Receivable ~~due quarterly, nine months in arrears, commencing January 31, 2001. The Trust~~ ~~Preferred Securities mature on January 31, 2030. The Company has the right to~~ redeem the Trust Preferred Securities on or after January 31, 2003 as specified in the indenture agreement. The Trust Preferred Securities are subordinate in right of payment to all senior debt of the Company.

~~Stock~~Receivables ~~Purchase~~are ~~Rights~~recognized ~~Plan~~and carried at original amount earned less a provision for any uncollectible amounts, which approximates fair value. The Company’s accounts receivable are unsecured. Receivables are generally due within 30 days. An allowance for doubtful accounts is made when collection of the full amount is no longer probable based upon review of customer credit. Amounts are written off when it is determined that collection will not occur. The Company serves a diverse customer base and therefore has limited exposure from credit loss to any particular customer or industry segment.

~~On August 23, 1993, the Company’s Board of Directors approved a Stock Purchase~~Inventories ~~Rights Plan (“Plan”) and declared a dividend distribution of one right~~ ~~(“Right”) for each share of the Company’s outstanding common stock. Each Right~~ ~~entitles a shareholder to purchase one one-thousandth of a share of Series B junior cumulative preferred stock at a price of $0.50 per Right, subject to adjustment.~~

FInventories are valued at the lower of cost (first-20in, first-out method) or net realizable value.

~~Sea Pines Associates, Inc.~~F-10

NotesTable toof Consolidated Financial Statements (continued) Contents

7.Sea ~~Shareholders’~~Pines ~~Equity~~Associates, ~~(continued)~~Inc.

~~Stock~~Notes ~~Purchase~~to ~~Rights~~Consolidated ~~Plan~~Financial Statements (continued)

The Rights become exercisable after any person or group of affiliated or associated persons (an “Acquirer”) acquires 20% percent or more of the Company’s outstanding common stock or commences a tender offer that would result in the Acquirer owning 20% or more of the Company’s outstanding common stock or an Acquirer has been designated an Adverse Person, as such term is defined in the Plan1. ~~The~~Description ~~Plan was amended in connection with the Exchange Offer allowing the acquisition~~ of ~~20%~~Business orand ~~more~~Summary of ~~the~~Significant ~~Company’s~~Accounting ~~outstanding common~~Policies stock as a result of the shares acquired in the Exchange Offer. In the event the Rights become exercisable, a Right will entitle the holder to receive shares of the Company’s common stock having a value equal to twice the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination or sale of 50% or more of its assets or earning power, a Right will entitle the holder to receive shares of the surviving company’s common stock having a market value equal to twice the exercise price of the Right. The Board of Directors has the flexibility to lower the 20% threshold to not less than 10% under certain circumstances. (continued)

InAdvertising ~~general, the Rights may be redeemed by the Company at $0.01 per Right at~~Expense ~~anytime before certain events occur. One Right is attached to and trades with~~ ~~each share of common stock. The Rights will not trade separately unless they~~ ~~become exercisable. All Rights expire on August 23, 2003.~~

~~F-21~~The cost of advertising is expensed as incurred and is classified as selling and marketing expenses in the Consolidated Statements of Operations. Advertising expenses were $2,308,000, $1,858,000 and $1,620,000 for the years ended October 31, 2004, 2003 and 2002, respectively.

~~Sea~~Real ~~Pines~~Estate ~~Associates, Inc.~~Assets

~~Notes~~Real toestate ~~Consolidated~~assets ~~Financial~~are ~~Statements~~recorded ~~(continued)~~at cost less any impairment losses, if applicable. The costs of new development, additions and improvements which substantially extend the useful lives of assets are capitalized. Capitalized costs include costs of construction, property taxes, interest and miscellaneous expenses incurred during the construction period. No interest expense was capitalized in 2004, 2003 or 2002. Repairs and maintenance costs are expensed as incurred. The Company provides depreciation for financial reporting purposes when the asset is placed in operation using the straight-line method over the estimated useful lives of the assets, which range from five to 39 years.

8.Other ~~Commitments~~Assets

~~Rent~~Deferred ~~expense~~loan ~~aggregated~~fees ~~approximately~~are ~~$1,174,000,~~amortized ~~$1,203,000~~on ~~and~~a ~~$982,000~~straight-line ~~for the~~basis ~~years~~over ~~ended~~the ~~October 31,~~lives ~~2002,~~of ~~2001~~the ~~and~~corresponding ~~2000~~debt, ~~respectively. Operating~~ ~~leases~~which ~~relate~~approximates ~~primarily~~the toeffective ~~office~~interest ~~space and equipment~~method. ~~Minimum annual rental~~ ~~commitments remaining at October 31, 2002, under non-cancelable operating~~ ~~leases with original terms of at least one year are as follows (in thousands of~~ ~~dollars):~~

Year ending October 31
	2003	$	928
	2004		470
	2005		294
	2006		123
	2007		82
	Thereafter		566
Total		$	2,463

Impairment of Long-Lived Assets

InAn ~~1993,~~impairment loss is recognized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company ~~made~~considers ahistorical ~~commitment~~performance and tofuture ~~donate~~estimated ~~approximately~~results ~~404~~in ~~acres~~its evaluation of apotential impairment and then compares the ~~wildlife~~carrying ~~preserve~~amount ~~owned~~of bythe asset to the ~~Company~~estimated future cash flows expected to aresult ~~not-for-profit~~from ~~organization~~the onuse of ~~Hilton~~the ~~Head~~asset. ~~Island,~~If ~~South~~the ~~Carolina.~~carrying Asamount of ~~October 31~~the asset exceeds the estimated expected future cash flows, the ~~2002~~Company ~~approximately~~measures 90the amount of the ~~404~~impairment ~~acres~~by ~~have~~comparing ~~been~~the ~~donated~~carrying ~~and~~amount ~~title~~of ~~transferred~~the asset to its fair value. The ~~remaining~~Company ~~314~~incurred ~~acres have~~$239,000 ~~been~~in ~~leased~~impairment losses for the year ended October 31, 2004 related to assets associated with discontinued development projects. These losses are recorded in depreciation and amortization expenses on the ~~same~~Consolidated Statement of Operations. The Company did not~~-for-profit~~ ~~organization~~incur any impairment losses for athe ~~nominal~~years ~~amount~~ended October 31, 2003 or 2002.

~~9. Contingencies~~F-11

TheTable Company is subject to claims and suits in the ordinary course of business. In management’s opinion, such currently pending claims and suits against the Company will not, in the aggregate, have a material adverse effect on the Company. Contents

~~10.~~Sea ~~Employee~~Pines ~~Savings~~Associates, ~~Plan~~Inc.

~~Effective~~Notes ~~January 1,~~to ~~1989,~~Consolidated ~~the~~Financial ~~Company~~Statements ~~adopted a 401~~(kcontinued) ~~defined contribution~~ ~~plan for all eligible employees with a minimum of one year of service and who~~ ~~meet certain age requirements, as defined. The Company matches 50% of the~~ ~~first 6% of the participants’ compensation. The Company’s contributions to the~~ ~~plan were approximately $132,000, $156,000 and $148,000 for the years ended October 31, 2002, 2001 and 2000, respectively.~~

~~F-22~~ 1. Description of Business and Summary of Significant Accounting Policies (continued)

~~Sea~~Financial ~~Pines Associates, Inc.~~Instruments

~~Notes~~The tocarrying amounts reflected in the Consolidated ~~Financial~~Balance ~~Statements~~Sheets ~~(continued)~~for cash and cash equivalents, trade receivables, other current assets, accruals and accounts payable approximate their respective fair value based on the short term nature of these instruments. The carrying amounts reflected in the Consolidated Balance Sheets for line of credit with bank and long-term debt approximate their respective fair market values since the interest rates on these instruments reset periodically to current market rates.

~~11.~~Income ~~Stock Compensation Plan and Deferred Issuance Plan~~Taxes

~~Director~~The ~~Stock~~Company ~~Compensation~~accounts ~~Plan~~for income taxes using the liability method, which requires recognition of deferred tax liabilities and assets based on temporary differences between the financial statement and tax basis of assets and liabilities using current statutory tax rates. A valuation allowance is established against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

~~Effective~~Interest ~~October 30,~~Rate ~~2000,~~Swap ~~the Company established a director stock~~Agreements ~~compensation plan. The purpose of the plan is to enable the Company to use~~ ~~common stock rather than cash to compensate non-employee directors for service~~ to the Company and thereby foster increased stock ownership by the directors. The plan has reserved 50,000 shares for issuance pursuant to future grants. In March 2002, 14,000 shares were issued, at a fair market value of $6.00 per share. The Company recorded $84,000 as deferred compensation at the time the stock was issued and that amount is being amortized over the directors’ 12-month terms. In March 2001, 14,000 shares were issued, at a fair market value of $4.50 per share. The Company recorded $63,000 as deferred compensation at the time the stock was issued and that amount was amortized over the directors’ 12-month terms.

~~Deferred~~The ~~Issuance~~Company’s ~~Stock~~results ~~Plan~~of operations can be significantly affected by changes in interest rates as the outstanding debt has variable interest rates based on a LIBOR index. To manage the risks associated with changes in interest rates, the Company entered into two interest rate swap agreements, which have maturities on November 1, 2005 and November 10, 2005, to fix the interest rate the Company is charged on a notional amount of $24 million of the outstanding debt. The Company accounts for interest expense under its swap agreements by recording differences between the interest rates on the underlying debt and the swap rates, applied to the notional amount of the swaps.

~~Effective October 30, 2000, the Company established a deferred issuance stock plan. The purpose of the plan is to optimize the profitability and growth of the Company through long~~F-term incentives, which link the personal interest of participants to those of the Company’s stockholders. The Company has 180,000 shares of common stock authorized for issuance to eligible employees under the plan. Deferred stock awards will be granted to key employees. Generally common stock of the Company will be issued to the participant on the fifth anniversary of the date the award is granted. On January 2, 2002, the Company awarded 24,300 deferred shares, at a fair market value of $5.00 per share. On June 1, 2001, the Company awarded 32,300 deferred shares, at a fair market value of $4.75 per share. For the years ended October 31, 2002 and 2001, the Company recorded $47,974 and $12~~,785, respectively, of stock compensation~~ ~~expense amortization.~~

12.Table Propertyof Tax Accrual Contents

~~The~~Sea ~~Company~~Pines is involved in an administrative law proceeding involving the valuation of the three golf courses owned by the Company for property tax purposes. The Company had accrued its property tax expense based on the valuation originally assessed for these properties. During the third quarter 2002Associates, ~~the court issued a final order and decision, which will ultimately lower the property taxes owed for the years 1998 through 2002~~Inc. ~~Based on this ruling~~ ~~and the Company’s estimate of its property tax liability, the Company lowered~~ ~~its property tax accrual in the third quarter 2002 by $322,000. This amount is~~ ~~included as a reduction to general and administrative expenses.~~

~~F-23~~Notes to Consolidated Financial Statements (continued)

~~Sea~~1. ~~Pines~~Description ~~Associates,~~of ~~Inc.~~ Business and Summary of Significant Accounting Policies (continued)

~~Notes~~Interest toRate ~~Consolidated~~Swap ~~Financial~~Agreements ~~Statements~~ (continued)

12The Company records the fair market value of the interest rate swaps on its consolidated balance sheet. ~~Property~~On ~~Tax~~an ~~Accrual~~ongoing ~~(continued)~~basis, the Company adjusts the balance sheet to reflect the current fair market value of the interest rate swap agreements. The interest rate swap agreements do not qualify for hedge accounting as defined by SFAS 133, and, accordingly, the change in the fair market value of the derivative is immediately recognized in the consolidated statement of operations. The Company recorded income of $930,000, income of $533,000 and expense of $381,000 in the consolidated statements of operations for the change in fair value of the interest rate swap agreement for the years ended October 31, 2004, 2003 and 2002, respectively.

~~Based~~Use ~~on the court ruling, the Company is entitled to receive a refund~~ of ~~property~~ ~~taxes paid of an additional $304,000 plus accrued interest. This~~Estimates ~~amount will be reflected in earnings when this refund has been received.~~

13The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. ~~Quarterly~~Actual ~~Results~~results ofcould ~~Operations~~differ ~~(Unaudited)~~from those estimates.

~~The following is a summary of the quarterly results of operations for the years~~Reclassifications ~~ended October 31, 2002 and 2001:~~

	2002 Quarters
	First			Second		Third		Fourth
Revenues	$	6,537		$	14,085	$	18,038	$	12,482
Cost of revenues	$	5,526		$	8,796	$	12,593	$	9,348
Net income (loss)	$	(1,063	)	$	1,078	$	695	$	(513	)
Earnings per common share Net income (loss), basic and diluted	$	(0.31	)	$	0.29	$	0.18	$	(0.15	)

Certain amounts in the prior years financial statements have been reclassified to conform to the current year presentation.

	2001 Quarters
	First			Second		Third		Fourth
Revenues	$	7,790		$	14,259	$	16,813	$	11,482
Cost of revenues	$	6,926		$	9,285	$	11,776	$	8,639
Net income (loss)	$	(2,250	)	$	662	$	432	$	(1,518	)
Earnings per common share Net income (loss), basic and diluted	$	(0.65	)	$	0.18	$	0.11	$	(0.44	)

F-13

14.Table Businessof Segment Information Contents

~~The~~Sea ~~Company~~Pines ~~has~~Associates, ~~two reportable business segments~~Inc. ~~The Company’s reportable~~ ~~segments are organized by the type of operations and for the years ended~~ ~~October 31, 2002, 2001 and 2000 were: (1) resort activities, including home~~ ~~and villa management operations, golf course operations, food and beverage~~ ~~operations, inn and conference facility operations, and various other recreational activities; and (2) real estate brokerage for buyers and sellers of real estate in the Hilton Head, South~~

~~F-24~~Notes to Consolidated Financial Statements (continued)

~~Sea~~2. ~~Pines~~Recent ~~Associates,~~Accounting ~~Inc.~~ Pronouncements

~~Notes~~In toJanuary 2003, ~~Consolidated~~the ~~Financial~~FASB ~~Statements~~issued FASB Interpretation 46 (~~continued~~“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” In December 2003, the FASB issued a Revised Interpretation on FIN 46 (“Revised Interpretation”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity 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. The Company adopted the Revised Interpretation on November 1, 2003. The only effect was the deconsolidation of the Trust, which was offset by the Company’s recording of a liability for amounts due to the Trust. The net impact of deconsolidation did not have any impact on the Company’s financial position or results of operations.

143. ~~Business~~Statements ~~Segment~~of ~~Information~~Cash ~~(continued)~~ Flows

~~Carolina,~~Supplemental ~~area.~~disclosure ~~The~~of ~~Company evaluates performance and allocates resources based on earnings before interest, depreciation and other non-~~cash ~~items.~~flow ~~The accounting~~information ~~policies~~follows ~~of the reportable segments are the same as those described~~ (in ~~the~~thousands ~~summary~~ of ~~significant accounting policies (Note 1~~dollars)~~. All intercompany~~: ~~transactions between segments have been eliminated upon consolidation.~~

Segment information as of and for the years ended October 31, 2002, 2001 and 2000 are as follows (in thousands of dollars):


	Year ended October 31
	2004		2003		2002

Cash paid during the year for:
Interest	$	2,525	$	2,261	$	2,409

		Year ended October 31
		2002			2001			2000
Revenues:
	Resort	$	34,892		$	33,734		$	29,670
	Real estate brokerage		16,250			16,610			19,169
			51,142			50,344			48,839
Cost of revenues:
	Resort		24,687			24,402			23,356
	Real estate brokerage		11,576			12,224			13,993
			36,263			36,626			37,349
Interest expense:
	Resort		2,392			2,771			1,426
			2,392			2,771			1,426
Depreciation and amortization expense:
	Resort		2,521			2,438			1,539
	Real estate brokerage		68			69			58
			2,589			2,507			1,597
Segment income (loss) before income taxes:
	Resort		(1,080	)		(3,723	)		(1,931	)
	Real estate brokerage		1,320			619			1,444
			240			(3,104	)		(487	)
Identifiable assets:
	Resort		51,859			54,016			53,905
	Real estate brokerage		2,652			1,156			3,089
		$	54,511		$	55,172		$	56,994

F-14

F-25 Table of Contents

~~REPORT~~Sea OFPines ~~INDEPENDENT~~Associates, ~~AUDITORS~~Inc.

~~Board~~Notes ofto ~~Directors~~Consolidated ~~and~~Financial ~~Shareholders Sea~~Statements ~~Pines Associates, Inc.~~(continued)

~~We have audited the consolidated financial statements of Sea Pines Associates, Inc~~4. as of October 31, 2002 and 2001, and for each of the three years in the period ended October 31, 2002, and have issued our report thereon dated December 6, 2002 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule in item 15 of this Annual Report on Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. Inventories

InInventories ~~our~~consist ~~opinion,~~of the ~~financial~~following ~~statement schedule referred to above, when considered~~ (in ~~relation~~thousands toof ~~the basic financial statements taken as a whole,~~dollars): ~~presents fairly in all material respects the information set forth therein.~~

/s/ Ernst & Young LLP


	October 31
	2004		2003

Merchandise	$	656	$	592
Supplies, parts and accessories		35		35
Food and beverages		120		121
Other		49		44

	$	860	$	792

~~Atlanta,~~5. ~~Georgia December 6, 2002~~ Litigation

~~F-26~~On April 30, 2003, a jury verdict of approximately $7.8 million was rendered against a wholly owned subsidiary of the Company in Grey Point Associates, et al. v. Sea Pines Company, Inc. The lawsuit involved alleged breach of contract by Sea Pines Company, Inc. related to the development of the TidePointe retirement community. On October 6, 2003, Sea Pines Company, Inc. agreed, pursuant to the terms of a settlement agreement and release, to pay $5.9 million to settle the lawsuit. For the year ended October 31, 2003, the Company incurred $6,324,000 in litigation expenses. The expenses included $5,900,000 in settlement costs and $424,000 in legal fees and related expenses.

~~SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS~~F-15

SeaTable Pinesof Associates, Inc. Contents

~~October 31~~Sea Pines Associates, ~~2002~~Inc.

COL. A				COL. B		COL. C			COL. D.			COL. E
						Additions
				Balance at		Charged (Released) to			Deductions—			Balance at End
Description				Beginning of Period		Costs and Expenses			Describe			of Period
Year Ended October 31, 2002:
	Deducted from assets accounts:
		Allowance for doubtful accounts		$	30,000	$	94,000	(3)	$	9,000	(1)	$	115,000
		Valuation allowance for deferred tax assets			730,000		(44,000	)		—			686,000
			Total	$	760,000	$	50,000		$	9,000		$	801,000
Year Ended October 31, 2001:
	Deducted from asset accounts:
		Allowance for doubtful accounts		$	18,000	$	22,000		$	10,000	(1)	$	30,000
		Valuation allowance for deferred tax assets			23,000		707,000	(2)		—			730,000
			Total	$	41,000	$	729,000		$	10,000		$	760,000
Year Ended October 31, 2000:
	Deducted from asset accounts:
		Allowance for doubtful accounts		$	41,000	$	5,000		$	28,000	(1)	$	18,000
		Valuation allowance for deferred tax assets			23,000		—			—			23,000
			Total	$	64,000	$	5,000		$	28,000		$	41,000

Notes to Consolidated Financial Statements (continued)

(1)		Uncollectible accounts written off, net of recoveries.
(2)		The significant increase in the year ended October 31, 2001 is due to the Company’s review of its estimate of realization of deferred tax assets, primarily related to the loss on interest rate swaps.
(3)		The significant increase in the year ended October 31, 2002 is due to the Company’s reserve for one significant customer that declared bankruptcy in the year.

6. Real Estate Assets

~~F-27~~Operating properties consist of the following (in thousands of dollars):


	October 31
	2004			2003

Land and improvements	$	26,903		$	26,806
Buildings		23,683			23,510
Machinery and equipment		9,068			11,955

		59,654			62,271
Less accumulated depreciation		(18,967	)		(19,596	)

	$	40,687		$	42,675

Properties held for future development of $2,984,000 at October 31, 2004 and 2003, respectively, consist primarily of land and certain future development rights.

F-16

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

7.	Long-Term Debt

Long Term Debt and Line of Credit Agreements

Long-term debt consists of loans obtained under a master credit agreement with one bank and include the following (in thousands of dollars):


	October 31
	2004			2003

Term note payable to bank, bearing interest at the London Interbank Offered Rates (LIBOR) (1.84% at October 31, 2004), plus 1.40% to 1.85% collateralized by substantially all assets of the Company. Principal is payable monthly from May through October each year in amounts ranging from $220,833 in 2005 to $276,667 in 2008, with a balloon payment due on maturity. Interest is payable monthly. The note matures November 1, 2008.	$	13,567		$	14,797

$18.3 million revolving line of credit with bank, bearing interest at LIBOR (1.84% at October 31, 2004), plus 1.40% to 1.85%, collateralized by substantially all assets of the Company. Interest is payable monthly. The line matures November 1, 2007.		18,300			17,100

Judgment loan payable to bank, bearing interest at LIBOR (1.84% at October 31, 2004), plus 2.35% collateralized by substantially all assets of the Company. Interest is payable monthly. The loan facility matures on November 15, 2005.		2,400			5,900

$4.5 million seasonal line of credit with bank, bearing interest at LIBOR (1.84% at October 31, 2004), plus 1.50%, collateralized by substantially all assets of the Company. Interest is payable monthly. The line matures on November 1, 2007.		883			—

		35,150			37,797
Less current portion of long-term debt		(1,325	)		(1,230	)

Total long-term debt	$	33,825		$	36,567

F-17

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

7.	Long-Term Debt (continued)

Long Term Debt and Line of Credit Agreements (continued)

Scheduled maturities of long-term debt as of October 31, 2004 are as follows (in thousands of dollars):


Year ending October 31
2005	$	1,325
2006		3,830
2007		1,540
2008		20,843
2009		7,612

Total	$	35,150

The master credit agreement relating to the debt described above contains provisions and covenants which impose certain restrictions on the use of the Company’s assets, including limitations as to new indebtedness, the sale or disposal of certain assets, capital contributions and investments, and new lines of business.

The articles of Incorporation of the Company provide for dividends on the preferred stock of $0.722 per share per annum to be paid in arrears. The terms of the judgment loan referred to above required the Company to cease the payment of dividends on its preferred stock and interest on its preferred securities. As of October 31, 2004, the Company has accrued $320,000 of dividends on the preferred stock and accrued $553,000 of interest on the preferred securities. The Company may resume dividend and interest payments with approval from its bank.

Interest Rate Swaps

The Company has two interest rate swap agreements. The first interest rate swap agreement effectively fixes the interest rate on an $18,000,000 notional principal amount at 5.24% plus a credit margin ranging from 1.40% to 1.85% until the maturity date of the agreement, November 10, 2005. The second interest rate swap agreement effectively fixes the interest rate on a $6,000,000 notional principal amount at 6.58% plus a credit margin ranging from 1.40% to 1.85% until the maturity date of the agreement, November 1, 2005.

F-18

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

7.	Long-Term Debt (continued)

Trust Preferred Securities

Sea Pines Associates Trust I (the “Trust”) holds a debenture issued by the Company. Interest on the debenture is used by the Trust to pay interest on the trust preferred securities issued by the Trust. The trust preferred securities bear interest at 9.5% per annum with payments due quarterly, nine months in arrears, commencing January 31, 2001. The trust preferred securities mature on January 31, 2030. The Company has the right to require the Trust to redeem the trust preferred securities as specified in the indenture agreement. The interest payments on the trust preferred securities are subordinate in right of payment to all senior debt of the Company. Interest payments on the trust preferred securities have been suspended as a result of restrictions imposed by the judgment loan, and, therefore, the Company has twenty-four months of interest accrued as of October 31, 2004. As a result of this suspension, the trust preferred securities are currently bearing interest at the penalty rate of 11.51%. The Company deconsolidated the Trust on November 1, 2003. (See Note 1)

8.	Income Taxes

The Company has not recognized any income tax provision for fiscal 2004 since the Company has sufficient net operating losses, which are currently fully reserved, that would offset projected taxable income. The provision (benefit) for income taxes consists of the following (in thousands of dollars):


	Year ended October 31
	2004		2003		2002

Current provision (benefit):
Federal		—	$	54	$	(157	)
State		—		—		—

		—		54		(157	)

Deferred provision (benefit):
Federal		—		—		173
State		—		—		27

		—		—		200

		—	$	54	$	43

F-19

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

8. Income Taxes (continued)

The reconciliation between actual income tax expense (benefit) and the amount calculated by applying the federal statutory rates to income (loss) before income taxes follows (in thousands of dollars):


	Year ended October 31
	2004			2003			2002

Tax (benefit) expense at statutory federal income tax rates	$	127		$	(2,180	)	$	82
State income tax (benefit) expense, net of federal income tax (charge) benefit		12			(342	)		9
Increase (decrease) in valuation allowance		(590	)		2,599			(44	)
Non-deductible expenses and adjustments		405			—			—
Other		46			(23	)		(4	)

	$	—		$	54		$	43

The tax effects of the types of temporary differences and carryovers, which give rise to deferred income tax assets (liabilities), are as follows (in thousands of dollars):


				October 31
	2004			2003			2002

Deferred revenue:
License and fee income	$	303		$	334		$	432
Country club membership sales		—			20			29
Loss on interest rate swaps		304			650			849
Charitable contribution carryover		37			32			10
Net operating loss carryforwards		3,184			3,012			88
Accrued liabilities and other		271			234			208

Gross deferred income tax assets		4,099			4,282			1,616
Less: Valuation allowance		(2,695	)		(3,285	)		(686	)

Deferred income tax assets		1,404			997			930

Depreciation		(1,248	)		(879	)		(763	)
Other		(156	)		(118	)		(167	)

Gross deferred income tax liabilities		(1,404	)		(997	)		(930	)

Net deferred income taxes	$	—		$	—		$	—

F-20

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

8.	Income Taxes (continued)

The valuation allowance is due to the Company’s review of its estimate of realization of deferred tax assets, primarily related to the net operating loss carryforwards. The Company’s federal net operating loss carryforward of $8,046,000 and state net operating loss carryforward of $8,870,000 expire beginning in 2023.

9.	Shareholders’ Equity

Preferred Stock

Of the 5,000,000 authorized shares of preferred stock, 2,000,000 shares are designated as Series A cumulative preferred stock and 20,000 shares are designated as Series B junior cumulative preferred stock. The Board of Directors has the authority to approve the issuance amount, rights and powers of an additional 2,980,000 shares of preferred stock except that such rights and powers shall not be superior to those of the Series A cumulative preferred shares.

The Series A cumulative preferred shares provide for a cumulative dividend of $0.722 per share per annum, payable in arrears as declared by the Board of Directors. These shares have a liquidation value of $7.60 per share plus accumulated but unpaid dividends. If four or more years of dividends are in arrears, the Series A cumulative preferred shareholders will be entitled to elect a majority of the Board of Directors of the Company. All or any part of such shares may be redeemed at the option of the Company at liquidation value. As of October 31, 2004, all preferred stock dividends applicable to the fiscal years ended October 31, 2004 and 2003 have been accrued, but not paid. Preferred stock dividends applicable to the fiscal year ended October 31, 2002 and all prior years have been declared and paid.

The Series B junior cumulative preferred shares are subject to the prior and superior rights of the holders of the Series A and all other classes of preferred shares. These Series B shares provide for a cumulative dividend of the greater of $0.25 per share or an amount as adjusted for the anti-dilution number (initially 1,000). Each share of the Series B also entitles the holder to the number of votes equal to the anti-dilution number. Generally, the Series B and common shareholders will vote together as one class on all matters submitted to a vote. The Series B shares have a liquidation value of $100 per share, plus dividends thereon. The Series B shares are not redeemable. No shares of the Series B junior cumulative preferred stock have been issued (see Stock Purchase Rights Plan).

F-21

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

9.	Shareholders’ Equity (continued)

Common Stock

Of the 23,000,000 authorized shares of common stock, 2,000,000 shares are designated as special common stock and 1,000,000 are designated as nonvoting common stock. All other shares are voting. All of the 3,600,500 shares of common stock outstanding as of October 31, 2004 are voting common stock.

Each share of common stock (regardless of class) participates on an equal and pro rata basis in all dividends and other distributions, including liquidation, subject to the rights of the preferred shareholders. Holders of shares of voting common stock are entitled to one vote per share. Holders of special common shares (if issued) will have such voting rights as specified by the Board of Directors, except that such rights will not be superior to the voting common stock

Stock Purchase Rights Plan

On August 5, 2003, the Company entered into a Second Amended and Restated Rights Agreement, with Wachovia Bank, N.A. as rights agent, which amends and restates in its entirety the Rights Agreement dated as of August 23, 1993, which was scheduled to expire in accordance with its terms on August 23, 2003 (as amended and restated, the “Rights Agreement”). Among other things, the Second Amended and Restated Rights Agreement deleted the requirement in the original Rights Agreement that “continuing directors” approve any redemption of the rights following a proxy or consent solicitation in certain situations and extended the Rights Agreement for an additional ten-year term expiring August 5, 2013.

Each share of the Company’s outstanding common stock carries with it the right (“Right”) to purchase one one-thousandth of a share of the Company’s Series B junior cumulative preferred stock at a price of $50 per one one-thousandth of a share, subject to adjustment. In general, the Rights may be redeemed by the Company at $0.01 per Right at anytime before they become exercisable. Until they become exercisable, the Rights are not separately transferable from the Company’s common stock.

Generally, the Rights become exercisable when a person or group of affiliated or associated persons becomes an “Acquiring Person” or an “Adverse Person” or a tender offer that would result in such person or group becoming an Acquiring Person is announced or commenced. A person or group of affiliated or associated persons becomes an Acquiring Person when such person or group becomes the beneficial owner of 20% or more of the Company’s outstanding common stock.

F-22

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

9.	Shareholders’ Equity (continued)

However, a person or group that became the owner of 20% or more of the Company’s outstanding common stock as a result of the Company’s Exchange Offer that closed in 2000 does not trigger the exercisability of the Rights unless such person or group becomes the owner of an additional share of the Company’s common stock. A person or group of affiliated or associated persons becomes an Adverse Person when such person or group exceeds an ownership limitation (which must be at least 10% of the Company’s outstanding common stock) specified by the Board for such person or group.

In the event the Rights become exercisable, a Right will entitle the holder (except those beneficially owned by the Acquiring Person or Adverse Person) to receive shares of the Company’s common stock having a value equal to at least twice the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination or there is a sale of 50% or more of its assets or earning power, a Right will entitle the holder (except those beneficially owned by an Acquiring Person or Adverse Person) to receive shares of the surviving company’s common stock having a market value equal to twice the exercise price of the Right.

10.

Commitments

Rent expense aggregated $1,016,000, $1,023,000 and $1,174,000 for the years ended October 31, 2004, 2003 and 2002, respectively. Operating leases relate primarily to office space and equipment. Minimum annual rental commitments remaining at October 31, 2004, under non-cancelable operating leases with original terms of at least one year are as follows (in thousands of dollars):


Year ending October 31
2005	$	998
2006		832
2007		603
2008		350
2009		208
Thereafter		460

Total	$	3,451

In 1993, the Company made a commitment to donate approximately 404 acres of a wildlife preserve owned by the Company to a not-for-profit organization on Hilton Head Island, South Carolina. As of October 31, 2004 approximately 90 of the 404 acres had been donated and title transferred. The remaining 314 acres have been leased to the same not-for-profit organization for a nominal amount.

F-23

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

11.

Contingencies

The Company is subject to claims and suits in the ordinary course of business. In management’s opinion, such currently pending claims and suits against the Company will not, in the aggregate, have a material adverse effect on the Company.

12.

Employee Savings Plan

The Company maintains a 401(k) defined contribution plan for all eligible employees with a minimum of one year of service and who meet certain age requirements, as defined. The Company matches 50% of the first 6% of the participants’ compensation. The Company’s contributions to the plan were $162,000, $140,000 and $132,000 for the years ended October 31, 2004, 2003 and 2002, respectively.

13.

Stock Compensation Plan and Deferred Issuance Stock Plan

Director Stock Compensation Plan

Effective October 30, 2000, the Company established a director stock compensation plan. The purpose of the plan is to enable the Company to use common stock rather than cash to compensate non-employee directors for service to the Company and thereby foster increased stock ownership by the directors. The Company reserved 50,000 shares of common stock for issuance pursuant to grants under the plan. In February 2004, the Company authorized an additional 50,000 shares of common stock for issuance under the plan. In April 2004, 12,000 shares were issued, at an estimated fair market value of $2.25 per share. The Company recorded $27,000 as deferred compensation at the time the stock was issued and that amount is being amortized over the directors’ 12-month terms. In April 2003, 14,000 shares were issued, at an estimated fair market value of $4.00 per share. The Company recorded $56,000 as deferred compensation at the time the stock was issued and that amount was amortized over the directors’ 12-month terms. In March 2002, 14,000 shares were issued, at an estimated fair market value of $6.00 per share. The Company recorded $84,000 as deferred compensation at the time the stock was issued and that was amortized over the directors’ 12-month terms. For the years ended October 31, 2004, 2003 and 2002, the Company recorded $41,000, $65,000 and $76,000, respectively of director stock compensation expense.

Deferred Issuance Stock Plan

Effective October 30, 2000, the Company established a deferred issuance stock plan. The purpose of the plan is to optimize the profitability and growth of the Company through long-term incentives,

F-24

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

13.

Stock Compensation Plan and Deferred Issuance Plan (continued)

which link the personal interest of participants to those of the Company’s stockholders. The Company reserved 180,000 shares of common stock for issuance to key employees pursuant to grants under the plan. Generally common stock of the Company will be issued to the participant on the fifth anniversary of the date the award is granted. On March 1, 2004, the Company awarded 35,700 deferred shares, at an estimated fair market value of $3.25 per share.

On February 7, 2003, the Company awarded 25,450 deferred shares, at an estimated fair market value of $4.50 per share. On January 2, 2002, the Company awarded 24,300 deferred shares, at an estimated fair market value of $5.00 per share. For the years ended October 31, 2004, 2003 and 2002, the Company recorded $90,000, $72,000 and $48,000, respectively, of stock compensation expense amortization. For the years ended October 31, 2004, 2003 and 2002, employees forfeited 0, 2,900 and 1,200, respectively, of deferred shares.

14.

Merger Agreement

On July 27, 2004, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with The Riverstone Group, LLC whereby the Company would become a wholly owned subsidiary of The Riverstone Group, LLC. Under the proposed merger, holders of the Company’s common stock other than the Company, The Riverstone Group, LLC, or any of their subsidiaries or holders perfecting their dissenters rights under South Carolina law will be entitled to receive $8.50 per share in cash, without interest, for each of their shares of common stock. In addition, the Merger Agreement provides that if the proposed merger occurs, then within 10 days thereafter The Riverstone Group, LLC will provide the Company with sufficient cash to redeem all of its outstanding Series A preferred stock and pay off its debenture to the Trust, and following the receipt of such cash, the Company will redeem all of its outstanding Series A preferred stock and pay off the debenture to the Trust, which will result in the redemption of all of the outstanding trust preferred securities issued by the Trust. The Merger Agreement is subject to closing conditions customary for transactions of this type, including obtaining the approval of holders of at least 80% of the Company’s outstanding common stock. In order to avoid having the Merger Agreement trigger the distribution of Series B preferred stock purchase rights under the Company’s Second Amended and Restated Rights Agreement (“Rights Agreement”), the Company amended the Rights Agreement on July 27, 2004 so that no person would become an “Acquiring Person” (as defined in the plan) as the result of the execution or delivery of, or the consummation of the merger contemplated by, the Merger Agreement.

F-25

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

14. Merger Agreement (continued)

15. Subsequent Events

On December 15, 2004, the bank waived the loan covenant related to the net worth ratio for the year ending October 31, 2005. The waiver was required because the Company did not expect to be in compliance with this covenant for the year ending October 31, 2005.

On November 4, 2004, Sea Crest Development Company, Robert C. Graves, et al. filed a civil action in the Beaufort County Court of Common Pleas, naming Sea Pines Company, Inc.; Sea Pines Real Estate Company, Inc. and Michael E. Lawrence as defendants. The plaintiffs are seeking an unspecified amount of actual and punitive damages and attorney fees based on the allegations of breach of contract, breach of good faith and fair dealings, negligent misrepresentation, fraud and breach of lease agreement in connection with the development and sale of the Sea Crest condominium project owned by the plaintiffs and marketed and sold by the Sea Pines Real Estate Company. An adverse judgment in this matter could have a material adverse effect on the Company’s financial condition, results of operations and cash flow.

F-26

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

16. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended October 31, 2004 and 2003 (in thousands of dollars):


	Year Ended October 31, 2004
	First			Second		Third		Fourth
Revenues	$	9,257		$	17,169	$	21,288	$	17,939
Gross profit	$	1,285		$	5,122	$	6,020	$	4,633
Net (loss) income	$	(2350	)	$	914	$	1,627	$	184

Net (loss) income per share of common stock, basis and diluted	$	(0.67	)	$	0.24	$	0.44	$	0.05


	Year Ended October 31, 2003
	First			Second			Third		Fourth
Revenues	$	7,789		$	14,484		$	18,726	$	15,936
Gross profit	$	715		$	4,743		$	4,957	$	3,698
Net (loss) income	$	(1,883	)	$	(7,908	) (1)	$	1,257	$	2,070

Net (loss) income per share of common stock, basic and diluted	$	(0.54	)	$	(2.22	)(1)	$	0.34	$	0.57

(1) Litigation expenses totaling $8,000,000 were recorded during second quarter 2003. This amount was eventually reduced to a total of $6,324,000 for fiscal 2003, when the Company agreed pursuant to the terms of a settlement agreement and release in the Grey Point Associates, et al. vs. Sea Pines Company, Inc. lawsuit – referred to in Note 5.

F-27

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

17.

Business Segment Information

The Company has two reportable business segments. The Company’s reportable segments are organized by the type of operations and for the years ended October 31, 2004, 2003 and 2002 were: (1) resort activities, including home and villa rental management operations, golf course operations, food and beverage operations, inn and conference facility operations, and various other recreational activities; and (2) real estate brokerage for buyers and sellers of real estate in the Hilton Head, South Carolina, area. The Company evaluates performance and allocates resources based on earnings before interest, depreciation and other non-cash items. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (Note 1). All intercompany transactions between segments have been eliminated upon consolidation.

F-28

Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)

17. Business Segment Information (continued)

Segment information as of and for the years ended October 31, 2004, 2003 and 2002 are as follows (in thousands of dollars):


	Year ended October 31
	2004			2003			2002

Revenues
Resort	$	40,004		$	36,268		$	37,615
Real estate brokerage		25,649			20,667			17,077

		65,653			56,935			54,692


Cost of revenues:
Resorts	$	26,132		$	24,618		$	24,460
Real estate brokerage		18,631			14,565			11,576

	$	44,763		$	39,183		$	36,036


Interest expense:
Resort	$	2,512		$	2,271		$	2,392

	$	2,512		$	2,271		$	2,392


Depreciation and amortization expense:
Resort	$	2,731		$	2,513		$	2,521
Real estate brokerage		64			65			68

	$	2,795		$	2,578		$	2,589


Segment income (loss) before income taxes:
Resort	$	(1,938	)	$	(8,065	)	$	(1,080	)
Real estate brokerage		2,313			1,655			1,320

	$	375		$	(6,410	)	$	240


Identifiable assets:
Resort	$	47,031		$	49,010		$	51,859
Real estate brokerage		3,597			3,804			2,652

	$	50,628		$	52,814		$	54,511

F-29

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

Sea Pines Associates, Inc.

October 31, 2004



COL. A	COL. B			COL. C			COL. D.			COL. E

			Additions
	Balance at			Charged (Released) to			Deductions —			Balance at End
Description	Beginning of Period			Costs and Expenses			Describe			of Period

Year Ended October 31, 2004:
Deducted from assets accounts:
Allowance for doubtful accounts	$	35,000		$	—		$	16,000	(1)	$	19,000
Valuation allowance for deferred tax assets		3,285,000			—			590,000			2,695,000

Total	$	3,320,000		$	—		$	606,000		$	2,714,000

Year Ended October 31, 2003:
Deducted from asset accounts:
Allowance for doubtful accounts	$	115,000		$	(15,000	)	$	65,000	(1)	$	35,000
Valuation allowance for deferred tax assets		686,000			2,599,000	(2)		—			3,285,000

Total	$	801,000		$	2,584,000		$	65,000		$	3,320,000

Year Ended October 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts	$	30,000		$	94,000	(3)	$	9,000	(1)	$	115,000
Valuation allowance for deferred tax assets		730,000			(44,000	)		—			686,000

Total	$	760,000		$	50,000		$	9,000		$	801,000

(1)		Uncollectible accounts written off, net of recoveries.

(2)		The significant increase in the year ended October 31, 2003 is due to the Company’s review of its estimate of realization of deferred tax assets, primarily related to the net operating loss carryforwards and the interest rate swaps.

(3)		The significant increase in the year ended October 31, 2002 is due to the Company’s reserve for one significant customer that declared bankruptcy in the year.

F-30

EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K


Exhibit No.
3(a)		Articles of Incorporation of Registrant, as amended (Incorporated by reference to Exhibit 3(a) to Form 10-K filed by the registrant on January 29, 2001)

3(b)		Amended Bylaws of Registrant as revised September 30, 2002 (Incorporated by reference to Exhibit 3(b) to Form 10-K filed by the registrant on January 17, 2003)

4(a)1		Second Amended and Restated Rights Agreement between Sea Pines Associates, Inc. and Wachovia Bank, N.A. dated as of August 5, 2003 (Incorporated by reference to Exhibit 1.1 of Form 8-A 12G/A filed by the registrant on August 5, 2003)

4(a)2		First Amendment to Second Amended and Restated Rights Agreement between Sea Pines Associates, Inc. and Wachovia Bank, N.A. dated as of July 27, 2004 (Incorporated by reference to Exhibit (dd) to Form 10-Q filed by the registrant on September 13, 2004)

4(b)		Amended and Restated Trust Agreement dated February 1, 2000 by Sea Pines Associates, Inc. (Incorporated by reference to Exhibit 4(f) to Form 10-Q filed by the registrant on June 14, 2000)

4(c)		Junior Subordinated Indenture dated February 1, 2000 between Sea Pines Associates, Inc. and First Union National Bank (Incorporated by reference to Exhibit 4(d) to Form 10-Q filed by the registrant on June 14, 2000)

4(d)		Guarantee Agreement dated February 1, 2000 between Sea Pines Associates, Inc. and First Union National Bank (Incorporated by reference to Exhibit 4(e) to Form 10-Q filed by the registrant on June 14, 2000)


Exhibit No.
10(a)		Settlement Agreement and Release between Sea Pines Company, Inc. and Thomas M. DiVenere, Irwin (Pete) Pomranz and Grey Point Associates, Inc. dated October 6, 2003 (Incorporated by reference to Exhibit 1 to Form 8-K filed by the registrant on December 11, 2003)

10(b)		Waiver with respect to the Credit Agreement in 10(c) below dated December 17, 2003

10(c)		Amended and Restated Master Credit Agreement dated as of October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. (Incorporated by reference to Exhibit 10(c) to Form 10-K filed by the registrant on January 17, 2003)

10(d)		Second Amended and Restated Term Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated October 31, 2002 with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(d) to Form 10-K by the registrant on filed January 17, 2003)

10(e)		Second Amended and Restated Revolving Line of Credit Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated October 31, 2002 with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(e) to Form 10-K filed by the registrant on January 17, 2003)

10(f)		Second Amended and Restated Seasonal Line of Credit Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated October 31, 2002 with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(f) to Form 10-K filed by the registrant on January 17, 2003)

10(g)		Second Mortgage Modification and Restatement Agreement dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(g) to Form 10-K filed by the registrant on January 17, 2003)


Exhibit No.
10(h)		Second Mortgage Modification and Restatement Agreement dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(h) to Form 10-K filed by the registrant on January 17, 2003)

10(i)		Second Mortgage Modification and Restatement Agreement dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(i) to Form 10-K filed by the registrant on January 17, 2003)

10(j)		Second Master Amendment to Collateral Assignments dated October 31, 2002 between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(j) to Form 10-K filed by the registrant on January 17, 2003)

10(k)		Swap Transaction confirmation between Sea Pines Company, Inc. and Wachovia Bank, N.A. dated September 30, 1998 (Incorporated by reference to Exhibit 10(s) to Form 10-K filed by the registrant on January 29, 1999)

10(l)		Swap Transaction confirmation between Sea Pines Company, Inc. and Wachovia Bank, N.A. dated May 4, 2000 (Incorporated by reference to Exhibit 10(l) to Form 10-K filed by the registrant on January 17, 2003)

10(m)		License and Use Agreement dated June 30, 1998 between Sea Pines Company, Inc. and CC-Hilton Head, Inc. (Incorporated by reference to Exhibit 10(t) to Form 10-K filed by the registrant on January 29, 1999)

10(n)		Sea Pines Associates, Inc. Director Stock Compensation Plan (Incorporated by reference to Exhibit 4.1 to Form S-8 filed by the registrant on June 18, 2001)*

10(o)		First Amendment to Sea Pines Associates, Inc. Director Stock Compensation Plan (Incorporated by reference to Exhibit 4.2 to Form S-8 filed by the registrant on June 18, 2001)*


Exhibit No.
10(p)		Sea Pines Associates, Inc. Deferred Issuance Stock Plan (Incorporated by reference to Exhibit 4.3 to Form S-8 filed by the registrant on June 18, 2001)*

10(q)		Waiver with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(q) to Form 10-Q filed by the registrant on July 16, 2003)

10(r)		First Modification and Waiver Agreement to the Amended and Restated Master Credit Agreement between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated July 31, 2003 with Respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(r) to Form 10-Q filed by the registrant on September 12, 2003)

10(s)		First Modification to the Second Mortgage Modification and Re-Statement Agreement between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated July 31, 2003 with respect to the agreement in 10(g) above (Incorporated by reference to Exhibit 10(s) to Form 10-Q filed by the registrant on September 12, 2003)

10(t)		First Modification to the Second Mortgage Modification and Re-Statement Agreement between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated July 31, 2003 with respect to the agreement in 10(h) above (Incorporated by reference to Exhibit 10(t) to Form 10-Q filed by the registrant on September 12, 2003)

10(u)		First Modification to the Second Mortgage Modification and Re-Statement Agreement between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated July 31, 2003 with respect to the agreement in 10(i) above (Incorporated by reference to Exhibit 10(u) to Form 10-Q filed by the registrant on September 12, 2003)

10(v)		Judgment Note between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated July 31, 2003 with respect to the First Modification and Waiver Agreement in 10(r) above (Incorporated by reference to Exhibit 10(v) to Form 10-Q filed by the registrant on September 12, 2003)


Exhibit No.
10(w)		Change of Control Agreement for Michael E. Lawrence dated February 17, 2004* (Incorporated by reference to Exhibit 10(w) to Form 10-Q filed by the registrant on June 8, 2004)

10(x)		Change of Control Agreement for Steven P. Birdwell dated March 9, 2004* (Incorporated by reference to Exhibit 10(w) to Form 10-Q filed by the registrant on June 8, 2004)

10(y)		Form of Change of Control Agreement (This form is used by the Company for various key employees.)* (Incorporated by reference to Exhibit 10(w) to Form 10-Q filed by the registrant on June 8, 2004)

10(z)		Agreement and Plan of Merger by and among The Riverstone Group, LLC, RG Subsidiary Corporation and Sea Pines Associates, Inc. dated July 27, 2004 (Incorporated by reference to Form 8-K filed by the registrant on July 30, 2004)

10(aa)		Second Modification to the Amended and Restated Master Credit Agreement between Sea Pines Associates, Inc. and Sea Pines Company, Inc. and Wachovia Bank, N.A. dated July 22, 2004 with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(aa) to Form 10-Q filed by the registrant on September 13, 2004)

10(bb)		Consent with respect to the Credit Agreement in 10(c) above (Incorporated by reference to Exhibit 10(bb) to Form 10-Q filed by the registrant on September 13, 2004)

10(cc)		Resolution of the Sea Pines Associates, Inc. Board of Directors dated February 23, 2004 with respect to the Director Stock Plan in Exhibit 10(n) above (Incorporated by reference to Exhibit 10(cc) to Form 10-Q filed by the registrant on September 13, 2004)*

10(dd)		Waiver with respect to the Credit Agreement in 10(c) above

10(ee)		Amendment No. 1 to Agreement and Plan of Merger by and among The Riverstone Group, LLC, RG Subsidiary Corporation and Sea Pines Associates, Inc. dated as of December 13, 2004 (Incorporated by reference to Annex A of the preliminary proxy statement filed by the registrant on January 13, 2005)


Exhibit No.
14		Sea Pines Associates, Inc. Code of Ethics for Senior Financial Officers
		(filed herewith)

21		Subsidiaries of the Registrant (filed herewith)

23(a)		Consent of Hancock Askew & Co., LLP, Independent Registered Public Accounting Firm
		(filed herewith)

23(b)		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith)

31(a)		Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer (filed herewith)

31(b)		Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer (filed herewith)

32(a)		Section 1350 Certification of Chief Executive Officer (filed herewith)

32(b)		Section 1350 Certification of Chief Financial Officer (filed herewith)

99.1		Safe Harbor Disclosure (filed herewith)

*		Management Contract or Compensatory Plan or Arrangement

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