##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2004 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from __________ to __________    Commission file number: 0-17517 SEA PINES ASSOCIATES, INC. 
  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 DividendRate/$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
 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 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 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, 2004 was
3,600,500. DOCUMENTS INCORPORATED BY REFERENCE




---



TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Repurchases            of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11.Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESEX-10(DD)EX-14EX-21EX-23(A)EX-23(B)EX-31(A)EX-31(B)EX-32(A)EX-32(B)EX-99.1    Table of Contents  
 PART I THIS REPORT 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. 
 Item 1. Business. (a) General Development of Business.Sea Pines Associates, Inc. was incorporated under South
Carolina law on May 4, 1987. As used in this report on Form 10-K, except where the context
otherwise indicates, Company means Sea Pines Associates, Inc. and its subsidiaries. The Company
was principally organized to acquire, own and operate certain resort assets located in Sea Pines, a
5,300-acre master planned resort community on Hilton Head Island, South Carolina. 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). SPC is a full-service resort, 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. SPREC provides real estate
brokerage services for buyers and sellers of real estate on Hilton Head Island and its neighboring
communities. Fifth Golf Course Club, Inc. owns certain acreage which could be used for outdoor
recreational 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. On July 27, 2004, the Company entered into an agreement and plan of merger (the Merger 2




---



##### Table of Contents



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. 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. (b) Financial Information Relating to Industry Segments.See Note 17 to the consolidated
financial statements contained elsewhere herein for business segment information. (c) Narrative Description of Business.The Companys operations are conducted primarily in
two reportable business segments. These segments are organized by the type of operations: (1)
resort operations, including home and villa 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 estate in the
Hilton Head Island, South Carolina area. 1. Resort Operations.Resort operations consist primarily of the 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 and beverage service operations and other recreational
facilities. For fiscal year 2004, resort operations accounted for $37,161,000 (57%) of the
Companys total revenues, with golf and tennis activity revenues representing $15,714,000 (24%),
home and villa rental management operations revenues representing $10,665,000 (16%), food and
beverage operations revenues representing $5,922,000 (9%) and Inn at Harbour Town operations
revenues representing $2,850,000 (4%). For fiscal year 2003, resort operations accounted for 3




---



##### Table of Contents



$33,586,000 (59%) of the Companys total revenues, with golf and tennis activities responsible
for revenues of $15,220,000 (27%), home and villa rental management operations responsible for
revenues of $10,629,000 (19%), food and beverage operations revenues representing $4,468,000 (8%)
and Inn at Harbour Town operations revenues representing $2,366,000 (4%). For fiscal year 2002,
resort operations accounted for $34,892,000 (64%) of the Companys total revenues, with golf and
tennis activities responsible for revenues of $15,284,000 (28%) and home and villa rental
management operations responsible for revenues of $11,606,000 (21%), food and beverage operations
revenues representing $4,444,000 (8%) and Inn at Harbour Town operations revenues representing
$2,667,000 (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. Fees charged to the general public for use of the Companys facilities are typically higher
than the fees charged to persons residing within Sea Pines. The Company is also a party to certain
use and access agreements with several developments and hotels located both inside and outside of
Sea Pines. These agreements generally provide the guests of those particular developments and
hotels with access to the Companys facilities at rates slightly lower than those available to the
general public. In addition, the Company will occasionally offer special discounts and package
rates as part of its ongoing promotional activities. Vacation use at Sea Pines is seasonal with the higher period being from March through November
and the lower period from December through February. Substantial fixed costs continue during the
non-peak period, leading to major seasonal fluctuations in operating income. The Company believes that its resort operations are relatively stable. Nevertheless, economic
conditions and other factors do adversely affect tourism on Hilton Head, and may have a negative
impact on the resort operations of the Company. Because of its location on the Atlantic coast,
Hilton Head is susceptible to adverse weather conditions and resulting damage 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 maintains property and casualty insurance in 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 Companys operations, depending on the
severity and duration of the interruption or price increase. The Company is generally subject to various local and regional land use and environmental
regulations, ordinances and restrictive covenants. The Company believes that it is currently in 4




---



##### Table of Contents



material compliance with all such applicable regulations and covenants and does not expect
that compliance in the future will have any material adverse effect on the operations or the
profitability of the Company. The Companys resort operations are subject to significant competition from various 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 with 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. One of the Companys golf courses hosts the annual MCI 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 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. The Companys golf and tennis operations consist primarily of operating and maintaining the
Companys facilities. The Company receives court fees, greens fees, cart rental fees and income
from merchandise sales. The Companys tennis facility and the three resort golf courses are open
to the general public. Maintenance and overhead expenses associated with the Companys golf and
tennis operations remain generally stable regardless of the volume of facility usage. The
Companys current and future financial results are substantially dependent upon the revenues
generated from the usage of its facilities, which revenues are a function of both the volume of
usage and the fee levels the Company is in a position to charge in its market area. The Companys resort operations employed 318 people as of December 31, 2004. 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. SPREC maintains 12 offices, five located within Sea Pines, five located outside of Sea Pines
on Hilton Head Island and two located off Hilton Head Island in the surrounding Beaufort County
area. For fiscal year 2004, real estate brokerage operations accounted for $24,662,000 (38%) of the
Companys total revenues, excluding cost reimbursements revenues. For fiscal year 2003, real
estate brokerage operations accounted for $19,710,000 (34%) of the Companys total revenues. For
fiscal 5




---



##### Table of Contents



year 2002, real estate brokerage operations accounted for $16,250,000 (30%) of the Companys
total revenues. While brokerage 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. SPREC employed 29 people, and had 114 non-employee sales agents, as of December 31, 2004. (d) Financial Information About Foreign and Domestic Operations and Export Sales.All of the
Companys operations are confined to Beaufort and Jasper Counties in South Carolina. See Item
1(a). 
 Item 2. Properties. (a) Golf Facilities.SPC owns three 18-hole resort golf courses known as the Harbour Town
Golf Links, the Ocean Course, and the Sea Marsh Course, all of which are located within Sea Pines.
Each of the Companys golf courses is substantially utilized during the peak occupancy period on
Hilton Head Island, which is March through November. 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. The Sea Marsh Golf Course contains approximately 92 acres, and the Ocean Course contains
approximately 97 acres. There is a driving range, that contains approximately 11.6 acres, located
adjacent to, and shared by, the Ocean and Sea Marsh golf courses. (b) Tennis Facility.SPC owns and operates a tennis complex in the Harbour Town area of Sea
Pines known as the Sea Pines Racquet Club. (c) The Inn at Harbour Town.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) Harbour Town 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. (e) Equestrian Facilities.SPC owns a tract of land known as Lawton Stables, which contains
approximately 21.8 acres. The stables are leased to a stable operator who provides boarding,
lessons and trail rides. 6




---



##### Table of Contents



(f) Plantation Club.SPC owns a tract of land with 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, food and beverage
facilities, a health and fitness center, a swimming pool and a bike rental store. (g) Other Recreational Facilities.In the vicinity of the Harbour Town Golf Links, SPC owns
and operates recreational areas containing a playground, a swimming pool and a snack bar. SPC also owns and operates a Beach Club in the vicinity of the Plantation Club, containing a
retail shop, an outdoor food and beverage facility and a real estate office. (h) Undeveloped Tracts/Development Rights.The Company owns a number of undeveloped tracts of
land within Sea Pines briefly described as follows:  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; and6.
    Outdoor Recreation Tract - approximately 9 acres. (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. The portion 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. (j) Welcome Center.SPC owns 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 executive and
administrative offices, the lodging front office facilities, and the main office facility for
SPREC. (k) Liberty Oak Cafe.SPC owns a 1.6-acre tract of land and improvements known as the Liberty
Oak Cafe. This is an outdoor food and beverage facility used for catered functions. 7




---



##### Table of Contents



(l) Leases.SPC currently leases approximately 31,000 square feet of 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) Other 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 that serves as the
Harbour Town Bakery. The Company also owns a small office building in the South Beach area within
Sea Pines that serves as a sales office for SPREC. Substantially all of the Companys properties are subject to liens as described in Note 7 to the
Companys consolidated financial statements. 
 Item 3. Legal Proceedings. 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. 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 and Sea 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 of ownership of the trademarks and an unspecified amount of compensatory and punitive
damages based on allegations of wrongful interference 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 lawsuit 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. The Company is subject to claims and 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. 
 Item 4. Submission of Matters to a Vote of Security Holders. None. 8




---



##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Repurchases
of Equity Securities. (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. In May 2000, the Company established a bulletin board on its web site that allows persons 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, 2004 ranged
from $.75 to $3.50 per share. Neither 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. Pursuant to the agreement and plan of merger with The Riverstone Group, LLC, holders of the
Companys common stock will be entitled to receive $8.50 per share in cash, without interest, for
each of their shares of common stock. (b) Holders.As of December 31, 2004, there were approximately 553 holders of record of
shares of common stock. (c) Dividends.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 Companys
judgment loan, as described in Note 7 to the Companys consolidated financial statements, required
the Company to cease the payment of dividends on its preferred stock. As of October 31, 2004, all 9




---



##### Table of Contents



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 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. 10




---



##### Table of Contents



Item 6. Selected Financial Data. The following selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and with
the consolidated financial statements and notes thereto, which are included elsewhere in this
annual report. Years Ended October 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands, except per share amounts)Consolidated Statements of Operations Data:Revenues
    
    $
    65,653
    
    
    $
    56,935
    
    
    $
    54,692
    
    
    $
    53,851
    
    
    $
    52,765Costs and expenses
    
    $
    62,510
    
    
    $
    55,548
    
    
    $
    51,790
    
    
    $
    51,561
    
    
    $
    51,677Income from operations
    
    $
    3,143
    
    
    $
    1,387
    
    
    $
    2,902
    
    
    $
    1,290
    
    
    $
    1,088Interest 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
    
    
    
    3,174Consolidated Balance Sheet Data:Current assets
    
    $
    6,566
    
    
    $
    6,614
    
    
    $
    5,894
    
    
    $
    4,259
    
    
    $
    5,017Real estate assets, net
    
    $
    43,671
    
    
    $
    45,861
    
    
    $
    47,416
    
    
    $
    49,516
    
    
    $
    50,310Total assets
    
    $
    50,628
    
    
    $
    52,814
    
    
    $
    54,511
    
    
    $
    55,172
    
    
    $
    56,994Current liabilities
    
    $
    9,938
    
    
    $
    8,510
    
    
    $
    7,223
    
    
    $
    7,495
    
    
    $
    8,802Long-term obligations, less current portion
    
    $
    37,650
    
    
    $
    41,451
    
    
    $
    37,948
    
    
    $
    38,498
    
    
    $
    36,236Shareholders equity (1)
    
    $
    3,040
    
    
    $
    2,853
    
    
    $
    9,340
    
    
    $
    9,179
    
    
    $
    11,956
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation. Merger Agreement On July 27, 2004, the Company entered into an agreement and plan of merger 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   (1)
    
    Litigation expenses totaling $6,324 were recorded
during fiscal year 2003, as discussed in Note 5 to the Companys
consolidated financial statements. 11




---



##### Table of Contents



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. 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. Results of Operations 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. Critical Accounting Policies In the preparation of its financial statements, the Company applies accounting principles
generally accepted in the United States. The application of generally accepted accounting
principles may require management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying results. These critical accounting policies
have been discussed with the Companys audit committee. 12




---



##### Table of Contents



Revenue Recognition 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 the sale. As a result, the
Companys revenue recognition process does not involve significant judgments or estimates. Investment in Real Estate Assets 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: Land improvements
    
    15 yearsBuildings
    
    39 yearsMachinery and equipment
    
    5  7 years
 In the event that management uses inappropriate useful lives or methods for depreciation, the
Companys net income would be misstated. Valuation of Real Estate Assets 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 of the
Company. 2004 Compared to 2003 Revenues 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%. 13




---



##### Table of Contents



The 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. 14




---



##### Table of Contents



Cost of revenues Cost of revenues were $44,763,000 in fiscal 2004, representing an increase of $5,580,000,
or 14.2%, over fiscal 2003. A majority of this increase, $4,066,000, was attributable to increased
commissions earned by real estate sales agents as a result of improved real estate sales activity. Expenses  
    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. Other income (expense)  
    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 $930,000 in fiscal
2004. If the swap agreements remain in effect until their expiration date in 2005, the
cumulative total of all related income and expense entries will equal zero.
    Interest income decreased by $183,000 during fiscal 2004 as compared to fiscal 2003.
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 held in September 2003.
    Interest expense increased by $241,000, or 10.6%, during fiscal 2004 as compared to
fiscal 2003. This increase is primarily the result of increased interest expense related
to the additional debt from the judgment loan and the higher rate of interest on the trust
preferred securities as described in Note 7 to the financial statements. 15




---



##### Table of Contents




    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. Income taxes The Company has not recorded any income tax provision for fiscal 2004 since the Company has
sufficient net operating losses and loss carryforwards. The net operating loss carryforwards are
fully reserved since the Company is uncertain whether there will be sufficient taxable income in
future periods to allow for utilization of the loss carryforwards. The Companys valuation
allowance on its deferred tax assets decreased by $590,000 during the year ended October 31, 2004
to $2,695,000. 2003 Compared to 2002 Revenues The Company reported revenues of $56,935,000 for fiscal 2003, a $2,243,000, or 4.1%, increase
over fiscal year 2002. Resort revenues, excluding cost reimbursements revenues, declined by
$1,306,000, or 3.7%, compared to 2002; while real estate brokerage revenues, excluding cost
reimbursements revenues, improved by $3,460,000, or 21.3%. The decline in resort revenues showed
the effects of a nationwide decrease in personal resort travel and corporate meetings during the
Companys first three quarters of fiscal year 2003. The primary factors contributing to the $2,243,000 increase in revenues were as follows:  
    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 16




---



##### Table of 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 average daily rate 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 Sea Pines Beach Club, a $53,000, or 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 Harbour 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. Cost of revenues 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. Expenses  
    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. 17




---



##### Table of Contents




    Depreciation and amortization expense decreased by $11,000, or 0.4%, and totaled
$2,578,000 in fiscal 2003. Other income (expense)  
    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. Income taxes 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. The Company 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. Financial Condition, Liquidity and Capital Resources The Companys financial results from its resort operations and real estate brokerage
activities 18




---



##### Table of Contents



experience fluctuations by season. The period from November through February has historically been
the Companys lower resort revenue and real estate sales season, and the period from March through
October has historically been the Companys 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)
decreased during fiscal 2004 by $1,476,000, resulting in a working capital deficit of $3,372,000 at
October 31, 2004. Accounts payable and accrued expenses increased by $989,000 during fiscal 2004 and totaled
$3,681,000 at October 31, 2004. This increase was primarily due to increased accrued brokerage
commission due to real estate agents and increased accrued preferred stock dividends. Under the Companys master 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. 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. 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. 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%. 19




---



##### Table of Contents



A summary of the Companys contractual obligations is presented below: Payments Due by PeriodContractual Obligations(in thousands)More thanTotal
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-term debt
    
    $
    35,150
    
    
    $
    1,325
    
    
    $
    5,370
    
    
    $
    28,455
    
    
    $
    Trust preferred
securities
    
    
    2,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,480Operating leases
    
    
    3,451
    
    
    
    998
    
    
    
    1,435
    
    
    
    558
    
    
    
    460Purchase obligations
    
    
    1,039
    
    
    
    714
    
    
    
    300
    
    
    
    25
    
    
    
    Total contractual
obligations
    
    $
    42,120
    
    
    $
    3,037
    
    
    $
    7,105
    
    
    $
    29,038
    
    
    $
    2,940
 Subsequent Events 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. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 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. 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 1.85% for a period ending November 1, 2005. The Company has reduced its interest rate risk exposure by 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. Based on variable rate
obligations outstanding at October 31, 2004, each 25 basis point increase or decrease in the level
of interest rates would increase or decrease the Companys annual interest expense and related cash
payments by approximately $28,000. 20




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data. The audited Consolidated Financial Statements of the Company which include supplementary data
are attached hereto beginning at page F-1. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. The Companys principal accountant, Ernst & Young LLP, resigned effective October 21, 2004.
On October 21, 2004, the Companys audit committee engaged Hancock Askew & Co., LLP as the
Companys principal accountant. This change was reported on a Form 8-K dated October 21, 2004. 
 Item 9A. Controls and Procedures. As of October 31, 2004, 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-15(e) and 15d-15-(e)).
Based 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. 
 Item 9B. Other Information. None 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. Directors: Name, Age and Address
    
    Biographical InformationJohn 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.
 21




---



##### Table of Contents



Name, Age and Address
    
    Biographical InformationBard 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
 22




---



##### Table of Contents



Name, Age and Address
    
    Biographical InformationVice 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,
 23




---



##### Table of Contents



Name, Age and Address
    
    Biographical Informationa 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.
 24




---



##### Table of Contents



Name, Age and Address
    
    Biographical InformationKathleen 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.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.
 Executive Officers: Name of Individual
    
    TitleNorman P. Harberger*
    
    ChairmanJoseph F. Vercellotti*
    
    Vice ChairmanMarc Puntereri*
    
    Vice ChairmanMichael E. Lawrence*
    
    Chief Executive OfficerSteven P. Birdwell
    
    Chief Financial OfficerThomas C. Morton*
    
    Treasurer
 *Biographical information concerning these individuals can be found above under Directors Name, Age and Address
    
    Biographical InformationSteven 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
 25




---



##### Table of Contents



Name, Age and Address
    
    Biographical InformationBoard of
Directors 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 Exchange Commission and (ii) independent as that term
is used in Item 7(d)(3)(iv) of Schedule 14A of the Proxy Rules. The Company has adopted a code of ethics that applies to the Chief Executive Officer and Chief
Financial Officer of the Company and the Chief Executive Officer, Chief Financial Officer and
Controller of the Companys subsidiaries. A copy of that code of ethics can be found as Exhibit 14
to this Annual Report on Form 10-K. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange act of 1934 requires that the directors, officers and
certain shareholders of the Company file reports of holdings and transactions in the Companys
common stock and preferred stock with the Securities and Exchange Commission. Based solely on the
Companys review of such reports furnished to the Company and written representations from certain
reporting persons, the Company believes that all Securities and Exchange Commission filing
requirements applicable to its directors and officers with respect to the Companys fiscal year
ended October 31, 2004 were complied with. 
 Item 11.Executive Compensation. Director Compensation The Company discontinued its practice of paying cash retainers and meeting fees to non-employee
directors as of March 2001, 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. In fiscal year 2004, each non-employee director received an unconditional grant of 1,000 shares of
common 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. 26




---



##### Table of Contents



Officer Compensation Except for Messrs. Lawrence and Birdwell, none of the officers of the Company receives any cash or
non-cash 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, 2003 and 2002. Summary Compensation Table Long-TermAnnual Compensation

    
    
    CompensationName and Principal
    
    
    
    

    


    
    
    Restricted
    
    
    All OtherPosition
    
    Year
    
    
    Salary (1)
    
    
    Bonus (2)
    
    
    Stock Award (3)
    
    
    Compensation (4)Michael E. Lawrence
    
    
    2004
    
    
    $
    209,404
    
    
    $
    0
    
    
    $
    0
    
    
    $
    6,364Chief Executive
    
    
    2003
    
    
    $
    198,500
    
    
    $
    0
    
    
    $
    30,550
    
    
    $
    6,154Officer
    
    
    2002
    
    
    $
    193,596
    
    
    $
    39,700
    
    
    $
    31,950
    
    
    $
    5,369Steven P. Birdwell
    
    
    2004
    
    
    $
    128,654
    
    
    $
    0
    
    
    $
    0
    
    
    $
    3,806Chief Financial
Officer
    
    
    2003
    
    
    $
    122,000
    
    
    $
    0
    
    
    $
    11,700
    
    
    $
    3,3252002
    
    
    $
    119,115
    
    
    $
    16,600
    
    
    $
    12,500
    
    
    $
    3,303
   (1)
    Salary includes amounts deferred at the election of the named officer pursuant to the
Companys 401(k) plan.  (2)
    Bonus includes amounts earned by the named officer in the year indicated, but paid in the
following fiscal year.  (3)
    The value of the conditional shares held by Mr. Lawrence and Mr. Birdwell as of October 31,
2004 was $257,550 and $98,600, respectively, based on the price of $8.50 per share that would
be paid if the merger agreement described in Item 1(a) is approved by the Companys
shareholders.  (4)
    All other compensation consists of amounts contributed by the Company to the 401(k) plan
account of the named officer. The remuneration 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. Sea Pines key managers are parties to change of control severance agreements that provide them 27




---



##### Table of Contents



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). Compensation Committee Interlocks and Insider Participation 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. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. The following table sets forth, as of December 31, 2004, certain information regarding the
beneficial ownership of Sea Pines common stock and preferred stock by:  
    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. 28




---



##### Table of Contents



There were approximately 553 record holders of Sea Pines common stock and 3,600,500 shares of Sea
Pines common stock outstanding on that date. Number of Shares (1)
    
    
    Percent of ClassName of Owner
    
    Common
    
    
    Preferred
    
    
    Common
    
    
    PreferredExecutive Officers and DirectorsJohn F. Bard (2)
    
    
    2,750
    
    
    
    500
    
    
    
    *
    
    
    
    *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 30346Paul B. Barringer, II (3)
    
    
    328,000
    
    
    
    
    
    
    
    9.11
    %
    
    
    14 South Calibogue Cay
Hilton Head Island, SC 29928
   *
    
    Represents less than 1% of the class  (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. 29




---



##### Table of Contents



(2)
    Includes 2,000 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.  (3)
    Based on information supplied to the Company by Mr. Barringer, 324,000 shares are owned by a
limited partnership, the general partner of which is a limited liability company controlled by
Mr. Barringer and his wife, and 4,000 shares are held directly by Mr. Barringer. Mr. Barringer
is both a director and a beneficial owner of 5% or more of the Companys outstanding common
stock.  (4)
    Does not include 11,600 deferred shares granted to Mr. Birdwell under the Sea Pines Deferred
Issuance Stock Plan.  (5)
    Includes 13,000 shares held directly by Mr. Dupps and 53,000 shares held jointly with his
spouse.  (6)
    Includes 22,000 shares held by Mr. Harberger directly and 8,000 shares held jointly with his
spouse.  (7)
    Includes 12,000 shares held by Mr. Lawrence directly and 2,000 shares held directly by his
spouse. Does not include 30,300 deferred shares granted to Mr. Lawrence under the Sea Pines
Deferred Issuance Stock Plan.  (8)
    Includes 12,000 shares held by Mr. Morton directly, 8,000 shares held jointly with his spouse
and 8,000 shares held directly by his spouse.  (9)
    Includes 3,000 shares held by Mr. Pardue directly, and 2,000 shares held directly by his
spouse.  (10)
    Includes 3,000 shares held directly by Mr. Parrott directly and 9,000 shares held jointly
with his spouse.  (11)
    Includes 4,000 common shares held directly by Mrs. Speer and 184,500 common shares and 5,500
Series A preferred shares held by Mrs. Speers spouse.  (12)
    Includes 4,000 shares held directly by Mr. Vercellotti and 6,000 shares held jointly with his
spouse.  (13)
    Based on information set forth in a Schedule 13D filed by The Riverstone Group and Mr.
Goodwin, both have sole voting and investment power with respect to all of such shares.  (14)
    Based on information supplied to Sea Pines by Mr. Speer. Does not include 4,000 shares held
directly by Mr. Speers spouse, who is a director of Sea Pines. 30




---



##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans Number of securities to be
    
    
    
    Weighted average exerciseissued upon exercise of
    
    
    
    price of outstanding
    
    
    
    Number of securitiesoutstanding options, warrants
    
    
    
    options, warrants and
    
    
    
    remaining availablePlan category
    
    
    and rights
    
    
    
    rights
    
    
    
    for future issuance(a
    )
    
    
    
    (b
    )
    
    
    
    (c
    )Equity compensation
plans approved by
security holders
    
    
    
    113,650
    
    
    
    $
    4.27
    
    
    
    
    66,350Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000
    (1)Total
    
    
    
    113,650
    
    
    
    $
    4.27
    
    
    
    
    111,350
   (1)
    
    These shares are available for future issuance under the Companys Director Stock
Compensation Plan. Information with respect to that plan can be found in Note 13 to the Companys
consolidated financial statements included herein. 
 Item 13. Certain Relationships and Related Transactions. Mr. Lawrences wife is a licensed real estate agent with Sea Pines Real Estate Company, Inc.,
a subsidiary of the Company. Total commissions paid to Mrs. Lawrence during fiscal year 2004 were
$142,412. 
 Item 14. Principal Accountant Fees and Services. The Companys former principal accountant, Ernst & Young LLP, resigned effective October 21,
2004. The Company engaged Hancock Askew & Co., LLP on October 21, 2004 as principal accountant to
perform the fiscal 2004 audit. The aggregate fees listed below for professional services in fiscal years 2004 and 2003 as
follows: Services Rendered
    
    Fiscal 2004
    
    
    Fiscal 2003Audit Fees
    
    $
    136,470
    
    
    $
    146,410Audit-Related Fees
    
    
    
    
    
    
    4,400Tax Fees
    
    
    36,464
    
    
    
    25,150All Other Fees
    
    
    
    
    
    
    Total
    
    $
    172,934
    
    
    $
    175,960
 All fiscal 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 & 31




---



##### Table of Contents



Co., LLP. The Hancock Askew & Co., LLP fees represent the agreed upon audit fee that was paid
subsequent to year end. The audit fees above represent fees for professional services rendered for the audits and
quarterly reviews of the consolidated financial statements of the Company. The audit-related fees above represent professional fees rendered for executive discussions
regarding internal control policies, procedures and reporting in anticipation of adopting Section
404 of the Sarbanes-Oxley Act. The tax fees 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 Audit Committees Charter provides that the committee will pre-approve all audit services
and, subject to the de minimus exception, all permissible non-audit services to be performed for
the Company by its independent auditors. From time to time, the Committee may delegate its
authority to pre-approve non-audit services to the Chairman of the Committee. Any such approvals
are to be reported to the full Committee at its next meeting. In 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. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules. (a)(1)-(2) Financial Statements and Schedules: The 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. All other schedules for which provision is made in the applicable regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index are filed (except Exhibits 32(a) and
32(b) which are furnished pursuant to Item 601 of Regulation S-K) as part of this report. 32




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 31, 2005
    
    By:
    
    /s/ Michael E. LawrenceMichael E. LawrenceChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, 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/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
 33




---



##### Table of Contents



Signature
    
    Title
    
    DateJohn 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
 34




---



##### Table of Contents



Index to Consolidated Financial Statements 1.
    
    Financial Statements of Sea Pines Associates, Inc.Report of Independent Registered Public Accountants
    
    F-2 through F-3Consolidated Balance Sheets
    
    F-4 through F-5Consolidated Statements of Operations
    
    F-6Consolidated Statements of Shareholders Equity
    
    F-7Consolidated Statements of Cash Flows
    
    F-8Notes to Consolidated Financial Statements
    
    F-9 through F-292.
    
    Financial Statement Schedule of Sea Pines Associates, Inc.Schedule II  Valuation and Qualifying Accounts
    
    F-30
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders
Sea Pines Associates, Inc. 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. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Sea Pines Associates, Inc. at October 31, 2004,
and the consolidated results of its 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. /s/ Hancock Askew & Co., LLP
 Savannah, Georgia
December 17, 2004 F-2




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders
Sea Pines Associates, Inc. We have audited the accompanying consolidated balance sheet of Sea Pines Associates, Inc. (the
Company) as of 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. 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. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Sea Pines Associates, Inc. at October 31, 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. /s/ Ernst & Young LLP
 Atlanta, Georgia
December 8, 2003
  except for the first paragraph of Note 14,
  as to which the date is
  July 27, 2004 F-3




---



##### Table of Contents



Sea Pines Associates, Inc. Consolidated Balance Sheets
(In thousands) October
312004
    
    

2003AssetsCurrent assets:Cash and cash equivalentsUnrestricted
    
    $
    557
    
    
    $
    471Restricted
    
    
    3,230
    
    
    
    3,5713,787
    
    
    
    4,042Accounts receivable, less allowance
for doubtful accounts of $19 and $35
at October 31, 2004 and 2003,
respectively
    
    
    1,546
    
    
    
    1,420Inventories
    
    
    860
    
    
    
    792Prepaid expenses
    
    
    373
    
    
    
    360Total current assets
    
    
    6,566
    
    
    
    6,614Deferred loan fees, net
    
    
    223
    
    
    
    279Other assets, net
    
    
    168
    
    
    
    60391
    
    
    
    339Real estate assets:Operating properties, net
    
    
    40,687
    
    
    
    42,675Properties held for future development
    
    
    2,984
    
    
    
    3,18643,671
    
    
    
    45,861Total assets
    
    $
    50,628
    
    
    $
    52,814
 F-4




---



##### Table of Contents



Sea Pines Associates, Inc. Consolidated Balance Sheets
(In thousands, except share amounts) October 312004
    
    
    2003Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    3,681
    
    
    $
    2,692Accrued interest payable
    
    
    725
    
    
    
    422Accrued property taxes
    
    
    700
    
    
    
    429Advance deposits
    
    
    3,135
    
    
    
    3,441Current portion of deferred revenue and other
long-term liabilities
    
    
    372
    
    
    
    296Current portion of long-term debt
    
    
    1,325
    
    
    
    1,230Total current liabilities
    
    
    9,938
    
    
    
    8,510Long-term debt, less current portion
    
    
    33,825
    
    
    
    36,567Interest rate swap agreement
    
    
    814
    
    
    
    1,744Deferred revenue and other long-term liabilities
    
    
    531
    
    
    
    660Payable to Sea Pines Associates Trust I
    
    
    2,480
    
    
    
    2,480Total liabilities
    
    
    47,588
    
    
    
    49,961Commitments
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
    
    
    
    1,294Series 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
    
    
    
    7,916Unearned stock compensation
    
    
    (270
    )
    
    
    (255
    )Accumulated deficit
    
    
    (6,047
    )
    
    
    (6,102
    )Total shareholders equity
    
    
    3,040
    
    
    
    2,853Total liabilities and shareholders equity
    
    $
    50,628
    
    
    $
    52,814
 See accompanying notes. F-5




---



##### Table of Contents



Sea Pines Associates, Inc. Consolidated Statements of Operations
(In thousands, except per share amounts) Year ended October 312004
    
    
    2003
    
    
    2002RevenuesResort
    
    $
    37,161
    
    
    $
    33,586
    
    
    $
    34,892Real estate
    
    
    24,662
    
    
    
    19,710
    
    
    
    16,250Cost reimbursements
    
    
    3,830
    
    
    
    3,639
    
    
    
    3,55065,653
    
    
    
    56,935
    
    
    
    54,692Cost and expenses:Cost of revenues
    
    
    44,763
    
    
    
    39,183
    
    
    
    36,036Costs subject to reimbursement
    
    
    3,830
    
    
    
    3,639
    
    
    
    3,550Sales and marketing expenses
    
    
    4,155
    
    
    
    3,271
    
    
    
    3,022General and administrative expenses
    
    
    6,967
    
    
    
    6,877
    
    
    
    6,593Depreciation and amortization
    
    
    2,795
    
    
    
    2,578
    
    
    
    2,58962,510
    
    
    
    55,548
    
    
    
    51,790Income from operations
    
    
    3,143
    
    
    
    1,387
    
    
    
    2,902Other income (expense):(Loss) gain on sale or disposal of assets, net
    
    
    (21
    )
    
    
    63
    
    
    
    Interest income
    
    
    19
    
    
    
    202
    
    
    
    111Interest 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
    )
    
    
    240Provision for income taxes
    
    
    
    
    
    
    (54
    )
    
    
    (43
    )Net income (loss)
    
    
    375
    
    
    
    (6,464
    )
    
    
    197Preferred stock dividend requirements
    
    
    (160
    )
    
    
    (160
    )
    
    
    (160
    )Net income (loss) attributable to common stock
    
    $
    215
    
    
    $
    (6,624
    )
    
    $
    37Net 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
 See accompanying notes. F-6




---



##### Table of Contents



Sea Pines Associates, Inc. Consolidated Statements of Shareholders Equity
(In thousands) (AccumulatedSeries A
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    Deficit)Preferred Stock
    
    
    Common Stock
    
    
    Stock
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Compensation
    
    
    Earnings
    
    
    TotalBalance at November
1, 2001
    
    
    221
    
    
    $
    1,294
    
    
    
    3,560
    
    
    $
    7,559
    
    
    $
    (159
    )
    
    $
    485
    
    
    $
    9,179Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    197Issuance of common
stock to directors
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    84
    
    
    
    (84
    )
    
    
    
    
    
    
    Issuance of grants
for deferred stock
plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    (116
    )
    
    
    
    
    
    
    Amortization of
stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    124Preferred stock
dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    (160
    )Balance at October
31, 2002
    
    
    221
    
    
    
    1,294
    
    
    
    3,574
    
    
    
    7,759
    
    
    
    (235
    )
    
    
    522
    
    
    
    9,340Net 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
    
    
    
    
    
    
    
    137Preferred stock
dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    (160
    )Balance at October
31, 2003
    
    
    221
    
    
    
    1,294
    
    
    
    3,588
    
    
    
    7,916
    
    
    
    (255
    )
    
    
    (6,102
    )
    
    
    2,853Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375
    
    
    
    375Issuance of common
stock to directors
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    31
    
    
    
    (31
    )
    
    
    
    
    
    
    Issuance of grants
for deferred stock
plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    (116
    )
    
    
    
    
    
    
    Amortization of
stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    132Preferred stock
dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320
    )
    
    
    (320
    )Balance at October
31, 2004
    
    
    221
    
    
    $
    1,294
    
    
    
    3,600
    
    
    $
    8,063
    
    
    ($
    270
    )
    
    ($
    6,047
    )
    
    $
    3,040
 See accompanying notes. F-7




---



##### Table of Contents



Sea Pines Associates, Inc. Consolidated Statements of Cash Flows
(In thousands) Year ended October 312004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet income (loss)
    
    $
    375
    
    
    $
    (6,464
    )
    
    $
    197Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation
    
    
    2,492
    
    
    
    2,536
    
    
    
    2,563Impairment loss
    
    
    239
    
    
    
    
    
    
    
    Amortization of deferred loan fees
    
    
    64
    
    
    
    42
    
    
    
    26Provision for bad debts
    
    
    
    
    
    
    (15
    )
    
    
    94Loss (gain) on sale of assets
    
    
    21
    
    
    
    (63
    )
    
    
    Amortization of stock compensation
    
    
    132
    
    
    
    137
    
    
    
    124Interest rate swap agreements
    
    
    (930
    )
    
    
    (533
    )
    
    
    381Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    200Changes in assets and liabilities:Restricted cash
    
    
    341
    
    
    
    (1,083
    )
    
    
    (1,306
    )Accounts and notes receivable
    
    
    (126
    )
    
    
    975
    
    
    
    (357
    )Inventories
    
    
    (68
    )
    
    
    67
    
    
    
    11Prepaid expenses and other assets
    
    
    (121
    )
    
    
    18
    
    
    
    (134
    )Accounts payable and accrued expenses
    
    
    1,243
    
    
    
    245
    
    
    
    (1
    )Advance deposits
    
    
    (306
    )
    
    
    1,031
    
    
    
    1,379Deferred revenue
    
    
    (53
    )
    
    
    (210
    )
    
    
    (122
    )Income taxes receivable
    
    
    
    
    
    
    217
    
    
    
    252Net cash provided by (used in) operating activities
    
    
    3,303
    
    
    
    (3,100
    )
    
    
    3,307Cash flows used in investing activitiesProceeds from sale of assets
    
    
    4
    
    
    
    118
    
    
    
    5Capital expenditures and property acquisitions
    
    
    (566
    )
    
    
    (1,036
    )
    
    
    (468
    )Net cash used in investing activities
    
    
    (562
    )
    
    
    (918
    )
    
    
    (463
    )Cash flows from financing activitiesPayment 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
    )
    
    
    214Unrestricted cash and cash equivalents at beginning of year
    
    
    471
    
    
    
    574
    
    
    
    360Unrestricted cash and cash equivalents at end of year
    
    $
    557
    
    
    $
    471
    
    
    $
    574
 See accompanying notes. F-8




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements October 31, 2004  1.
    Description of Business and Summary of Significant Accounting Policies Sea Pines Associates, Inc. (SPA or the Company) was incorporated in South Carolina on May 4,
1987. The Company was principally organized to acquire, own and operate certain resort assets in
Sea Pines Plantation on Hilton Head Island, South Carolina. The consolidated, wholly-owned 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), 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. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its consolidated,
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. (See
Note 7 for information on deconsolidation of the Trust.) Cash Equivalents The Company considers all short-term investments with maturities of 90 days or less at the time of
purchase to be cash equivalents. Revenue Recognition Revenues 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. F-9




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued)  1.
    Description of Business and Summary of Significant Accounting Policies
(continued) Cost of Revenues Cost of revenues 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. Concentration of Credit Risk The Company maintains substantially all of its cash with one financial institution. Account
balances greater than $100,000 are not federally insured and are subject to a loss if the financial
institution fails. Management believes such risk is minimal based on the current financial
condition of the financial institution. Restricted Cash 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. Accounts Receivable Receivables are recognized 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. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value. F-10




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued)  1.
    Description of Business and Summary of Significant Accounting Policies
(continued) Advertising Expense 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. Real Estate Assets Real estate assets are recorded 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. Other Assets Deferred loan fees are amortized on a straight-line basis over the lives of the corresponding debt,
which approximates the effective interest method. Impairment of Long-Lived Assets An impairment loss 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 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 incurred $239,000 in 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 Consolidated Statement of Operations.
The Company did not incur any impairment losses for the years ended October 31, 2003 or 2002. F-11




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued)  1.
    Description of Business and Summary of Significant Accounting Policies
(continued) Financial Instruments The carrying amounts reflected in the Consolidated Balance Sheets 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. Income Taxes The Company accounts 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. Interest Rate Swap Agreements 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. 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. F-12




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued)  1.
    Description of Business and Summary of Significant Accounting Policies
(continued) Interest Rate Swap Agreements (continued) The Company records the fair market value of the interest rate swaps on its consolidated balance
sheet. On an ongoing 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. Use of Estimates The 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. Actual results could differ from
those estimates. Reclassifications Certain amounts in the prior years financial statements have been reclassified to conform to the
current year presentation. F-13




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued)  2.
    Recent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation 46 (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.  3.
    Statements of Cash Flows Supplemental disclosure of cash flow information follows (in thousands of dollars): Year ended October 312004
    
    
    2003
    
    
    2002Cash paid during the year for:Interest
    
    $
    2,525
    
    
    $
    2,261
    
    
    $
    2,409
 F-14




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued)  4.
    Inventories Inventories consist of the following (in thousands of dollars): October 312004
    
    
    2003Merchandise
    
    $
    656
    
    
    $
    592Supplies, parts and accessories
    
    
    35
    
    
    
    35Food and beverages
    
    
    120
    
    
    
    121Other
    
    
    49
    
    
    
    44$
    860
    
    
    $
    792
  5.
    Litigation 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. F-15




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued) 6. Real Estate Assets Operating properties consist of the following (in thousands of dollars): October 312004
    
    
    2003Land and improvements
    
    $
    26,903
    
    
    $
    26,806Buildings
    
    
    23,683
    
    
    
    23,510Machinery and equipment
    
    
    9,068
    
    
    
    11,95559,654
    
    
    
    62,271Less 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




---



##### Table of Contents



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 312004
    
    
    2003Term 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
    
    
    
    17,100Judgment 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
    
    
    
    37,797Less current portion of long-term debt
    
    
    (1,325
    )
    
    
    (1,230
    )Total long-term debt
    
    $
    33,825
    
    
    $
    36,567
 F-17




---



##### Table of Contents



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 312005
    
    $
    1,3252006
    
    
    3,8302007
    
    
    1,5402008
    
    
    20,8432009
    
    
    7,612Total
    
    $
    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




---



##### Table of Contents



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 312004
    
    
    2003
    
    
    2002Current provision (benefit):Federal
    
    
    
    
    
    $
    54
    
    
    $
    (157
    )State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    (157
    )Deferred provision (benefit):Federal
    
    
    
    
    
    
    
    
    
    
    173State
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    200
    
    
    $
    54
    
    
    $
    43
 F-19




---



##### Table of Contents



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 312004
    
    
    2003
    
    
    2002Tax (benefit) expense at statutory
federal income tax rates
    
    $
    127
    
    
    $
    (2,180
    )
    
    $
    82State income tax (benefit) expense, net
of federal income tax (charge) benefit
    
    
    12
    
    
    
    (342
    )
    
    
    9Increase (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 312004
    
    
    2003
    
    
    2002Deferred revenue:License and fee income
    
    $
    303
    
    
    $
    334
    
    
    $
    432Country club membership sales
    
    
    
    
    
    
    20
    
    
    
    29Loss on interest rate swaps
    
    
    304
    
    
    
    650
    
    
    
    849Charitable contribution carryover
    
    
    37
    
    
    
    32
    
    
    
    10Net operating loss carryforwards
    
    
    3,184
    
    
    
    3,012
    
    
    
    88Accrued liabilities and other
    
    
    271
    
    
    
    234
    
    
    
    208Gross deferred income tax assets
    
    
    4,099
    
    
    
    4,282
    
    
    
    1,616Less: Valuation allowance
    
    
    (2,695
    )
    
    
    (3,285
    )
    
    
    (686
    )Deferred income tax assets
    
    
    1,404
    
    
    
    997
    
    
    
    930Depreciation
    
    
    (1,248
    )
    
    
    (879
    )
    
    
    (763
    )Other
    
    
    (156
    )
    
    
    (118
    )
    
    
    (167
    )Gross deferred income tax liabilities
    
    
    (1,404
    )
    
    
    (997
    )
    
    
    (930
    )Net deferred income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 F-20




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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 312005
    
    $
    9982006
    
    
    8322007
    
    
    6032008
    
    
    3502009
    
    
    208Thereafter
    
    
    460Total
    
    $
    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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Sea Pines Associates, Inc. Notes to Consolidated Financial Statements (continued) 14. Merger Agreement (continued) 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. 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




---



##### Table of Contents



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, 2004First
    
    
    Second
    
    
    Third
    
    
    FourthRevenues
    
    $
    9,257
    
    
    $
    17,169
    
    
    $
    21,288
    
    
    $
    17,939Gross profit
    
    $
    1,285
    
    
    $
    5,122
    
    
    $
    6,020
    
    
    $
    4,633Net (loss) income
    
    $
    (2350
    )
    
    $
    914
    
    
    $
    1,627
    
    
    $
    184Net (loss) income
per share of common
stock,
basis and diluted
    
    $
    (0.67
    )
    
    $
    0.24
    
    
    $
    0.44
    
    
    $
    0.05
 Year Ended October 31, 2003First
    
    
    Second
    
    
    Third
    
    
    FourthRevenues
    
    $
    7,789
    
    
    $
    14,484
    
    
    $
    18,726
    
    
    $
    15,936Gross profit
    
    $
    715
    
    
    $
    4,743
    
    
    $
    4,957
    
    
    $
    3,698Net (loss) income
    
    $
    (1,883
    )
    
    $
    (7,908
    ) (1)
    
    $
    1,257
    
    
    $
    2,070Net (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




---



##### Table of Contents



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




---



##### Table of Contents



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 312004
    
    
    2003
    
    
    2002RevenuesResort
    
    $
    40,004
    
    
    $
    36,268
    
    
    $
    37,615Real estate brokerage
    
    
    25,649
    
    
    
    20,667
    
    
    
    17,07765,653
    
    
    
    56,935
    
    
    
    54,692Cost of revenues:Resorts
    
    $
    26,132
    
    
    $
    24,618
    
    
    $
    24,460Real estate brokerage
    
    
    18,631
    
    
    
    14,565
    
    
    
    11,576$
    44,763
    
    
    $
    39,183
    
    
    $
    36,036Interest expense:Resort
    
    $
    2,512
    
    
    $
    2,271
    
    
    $
    2,392$
    2,512
    
    
    $
    2,271
    
    
    $
    2,392Depreciation and amortization expense:Resort
    
    $
    2,731
    
    
    $
    2,513
    
    
    $
    2,521Real estate brokerage
    
    
    64
    
    
    
    65
    
    
    
    68$
    2,795
    
    
    $
    2,578
    
    
    $
    2,589Segment income (loss) before income taxes:Resort
    
    $
    (1,938
    )
    
    $
    (8,065
    )
    
    $
    (1,080
    )Real estate brokerage
    
    
    2,313
    
    
    
    1,655
    
    
    
    1,320$
    375
    
    
    $
    (6,410
    )
    
    $
    240Identifiable assets:Resort
    
    $
    47,031
    
    
    $
    49,010
    
    
    $
    51,859Real estate brokerage
    
    
    3,597
    
    
    
    3,804
    
    
    
    2,652$
    50,628
    
    
    $
    52,814
    
    
    $
    54,511
 F-29




---



##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS Sea Pines Associates, Inc. October 31, 2004 COL. A
    
    COL. B
    
    
    COL. C
    
    
    COL. D.
    
    
    COL. EAdditionsBalance at
    
    
    Charged (Released) to
    
    
    Deductions 
    
    
    Balance at EndDescription
    
    Beginning of Period
    
    
    Costs and Expenses
    
    
    Describe
    
    
    of PeriodYear Ended October 31, 2004:Deducted from assets accounts:Allowance for doubtful accounts
    
    $
    35,000
    
    
    $
    
    
    
    $
    16,000
    (1)
    
    $
    19,000Valuation allowance for
deferred tax assets
    
    
    3,285,000
    
    
    
    
    
    
    
    590,000
    
    
    
    2,695,000Total
    
    $
    3,320,000
    
    
    $
    
    
    
    $
    606,000
    
    
    $
    2,714,000Year Ended October 31, 2003:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    115,000
    
    
    $
    (15,000
    )
    
    $
    65,000
    (1)
    
    $
    35,000Valuation allowance for
deferred tax assets
    
    
    686,000
    
    
    
    2,599,000
    (2)
    
    
    
    
    
    
    3,285,000Total
    
    $
    801,000
    
    
    $
    2,584,000
    
    
    $
    65,000
    
    
    $
    3,320,000Year Ended October 31, 2002:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    30,000
    
    
    $
    94,000
    (3)
    
    $
    9,000
    (1)
    
    $
    115,000Valuation allowance for
deferred tax assets
    
    
    730,000
    
    
    
    (44,000
    )
    
    
    
    
    
    
    686,000Total
    
    $
    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




---



##### Table of Contents



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)




---



##### Table of Contents



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, 200310(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)




---



##### Table of Contents



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)*




---



##### Table of Contents



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)




---



##### Table of Contents



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) above10(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)




---



##### Table of Contents



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