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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2003

o     TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from __________ to __________



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Commission file number: 0-17517

SEA PINES ASSOCIATES, INC.

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(Exact name of registrant as specified in its charter)


South Carolina
    
    57-0845789(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)32 Greenwood DriveHilton 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    x            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.    o

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

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, 2003 was 3,587,400.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement in connection with its 2004
Annual Meeting of Shareholders are incorporated by reference into Part III.





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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.

Subsidiaries of the Company include Sea Pines Company, Inc. (SPC), Sea
Pines Real Estate Company, Inc. (SPREC), Sea Pines Associates Trust I, and
Fifth Golf Course Club, Inc., all of which are wholly-owned.

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. Sea Pines Associates Trust I (the
Trust) holds certain Company debentures. Interest on the debentures is used
by the Trust to pay interest on the trust preferred securities issued by the
Trust.

2



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(b)     Financial Information Relating to Industry Segments.See Note 16 to
the consolidated financial statements contained elsewhere herein for business
segment information.

(c)     Narrative Description of Business.The Companys operations were
conducted primarily in two reportable business segments for the year ended
October 31, 2003. 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, excluding cost reimbursements
revenues, 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 service operations and other
recreational facilities. For fiscal year 2003, resort operations accounted for
approximately $33,586,000 (59%) of the Companys total revenues, with golf and
tennis activity revenues representing $15,220,000 (27%) and home and villa
rental management operations revenues representing $10,629,000 (19%). For
fiscal year 2002, resort operations accounted for approximately $34,892,000
(64%) of the Companys total revenues, with golf and tennis activities
responsible for revenues of approximately $15,284,000 (28%) and home and villa
rental management operations responsible for revenues of approximately
$11,606,000 (21%). For fiscal year 2001, resort operations accounted for
approximately $33,734,000 (63%) of the Companys total revenues, with golf and
tennis activities responsible for revenues of approximately $14,540,000 (27%)
and home and villa rental management operations responsible for revenues of
approximately $11,822,000 (22%).

We believe that during each of the fiscal years 2003, 2002 and 2001, the
majority of golf and tennis revenues and 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.

During fiscal years 2003, 2002 and 2001, residents and vacationers
utilizing accommodations at Sea Pines accounted for the majority of the use of
the Companys golf and tennis facilities, with the remainder attributable to
use by persons residing outside Sea Pines. 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.

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

One of the Companys golf courses hosts the annual Heritage Golf
Tournament, a nationally televised professional golf tournament. Although the
facility usage fee for this tournament does not constitute a major source of
income, the event has a significant favorable impact on the Companys lodging,
food and beverage and retail 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.

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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 approximately 345 people as of
December 31, 2003.

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 2003, real estate brokerage operations accounted for
approximately $19,710,000 (34%) of the Companys total revenues, excluding cost
reimbursements revenues. For fiscal year 2002, real estate brokerage
operations accounted for approximately $16,250,000 (30%) of the Companys total
revenues. For fiscal year 2001, real estate brokerage operations accounted for
approximately $16,610,000 (31%) 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 28 people, and had approximately 115 non-employee sales
agents, as of December 31, 2003.

(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 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.

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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.

(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.SPC 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;
and
| | -- |  | ---------------------------------------------------



| | 6. |  | Outdoor Recreation Tract  approximately 9 acres.
| | -- |  | -------------------------------------------------

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(i)     Forest Preserve.SPC 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, 2003, 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.

(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.

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 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 related to the development of the TidePointe
retirement community.

On October 6, 2003, the Company 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.

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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.

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 27 transfers of shares of common stock occurring during the
fiscal year ended October 31, 2003. 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, 2003 and October 31, 2002.

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, 2003 ranged from $2.00 to $5.00 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.

(b)     Holders.As of December 31, 2003, there were approximately 548
holders of record of shares of common stock.

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(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. As of October 31, 2003, the Company has paid all accrued dividends on
the preferred stock applicable to all years ended on or before October 31,
2002. The terms of the judgment loan described in Managements Discussion and
Analysis of Financial Condition and Results of Operations and Note 7 to the
Companys consolidated financial statements required the Company to cease the
payment of dividends on its preferred stock and interest on its trust
preferred securities. The Company may resume these dividend and interest
payment with approval from its bank.

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.

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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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands, except per share amounts)Consolidated Statements of Operations Data:Revenues
    
    $
    56,935
    
    
    $
    54,692
    
    
    $
    53,851
    
    
    $
    52,765
    
    
    $
    49,547Costs and expenses
    
    $
    55,548
    
    
    $
    51,790
    
    
    $
    52,561
    
    
    $
    51,677
    
    
    $
    45,696Income from operations
    
    $
    1,387
    
    
    $
    2,902
    
    
    $
    1,290
    
    
    $
    1,088
    
    
    $
    3,851Interest expense
    
    $
    (2,271
    )
    
    $
    (2,392
    )
    
    $
    (2,771
    )
    
    $
    (1,426
    )
    
    $
    (1,099
    )Other (expense) income (1)
    
    $
    (5,526
    )
    
    $
    (270
    )
    
    $
    (1,623
    )
    
    $
    (149
    )
    
    $
    523Net (loss) income (1)
    
    $
    (6,464
    )
    
    $
    197
    
    
    $
    (2,674
    )
    
    $
    (389
    )
    
    $
    2,063Net (loss) income attributable to
common stock
    
    $
    (6,624
    )
    
    $
    37
    
    
    $
    (2,834
    )
    
    $
    (730
    )
    
    $
    1,176Per share of common stockNet (loss) income
    
    $
    (1.85
    )
    
    $
    0.01
    
    
    $
    (0.80
    )
    
    $
    (0.23
    )
    
    $
    0.64Weighted average shares outstanding
    
    
    3,580
    
    
    
    3,568
    
    
    
    3,554
    
    
    
    3,174
    
    
    
    1,843Consolidated Balance Sheet Data:Current assets
    
    $
    6,614
    
    
    $
    5,894
    
    
    $
    4,259
    
    
    $
    5,017
    
    
    $
    5,926Real estate assets, net
    
    $
    45,861
    
    
    $
    47,416
    
    
    $
    49,516
    
    
    $
    50,310
    
    
    $
    34,963Total assets
    
    $
    52,814
    
    
    $
    54,511
    
    
    $
    55,172
    
    
    $
    56,994
    
    
    $
    42,690Current liabilities
    
    $
    8,510
    
    
    $
    7,223
    
    
    $
    7,495
    
    
    $
    8,802
    
    
    $
    6,392Long-term obligations, less current portion
    
    $
    41,451
    
    
    $
    37,948
    
    
    $
    38,498
    
    
    $
    36,236
    
    
    $
    20,404Shareholders equity (1)
    
    $
    2,853
    
    
    $
    9,340
    
    
    $
    9,179
    
    
    $
    11,956
    
    
    $
    15,894


Item 7.   Managements Discussion and Analysis of Financial Condition and Results of Operation.

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,



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|(1) |  | Litigation expenses totaling $6,324 were recorded during fiscal year 2003,
as discussed in Note 5 to the Company#s consolidated financial statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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retail sales outlets, food service operations and other resort
recreational facilities. Sea Pines Real Estate Company, Inc. is an independent
real estate brokerage firm with 15 offices serving Hilton Head Island and its
neighboring communities.

Critical Accounting Policies

In 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.

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.

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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 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. This represents 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. This represents 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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##### 





| |  |  | Other recreation services revenue increased by $450,000, or 14.2%,
during fiscal 2003 as compared with fiscal 2002. 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 of revenues

Cost of revenues were $39,596,000 in fiscal 2003, representing an increase
of $3,333,000, 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 is the result of
increased real estate marketing and resort marketing promotions during
fiscal 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses increased by $98,000, or 1.5%,
totaling $6,464,000 for the year. This increase is the result of a
$219,000 increase in medical claims paid by the Companys self-funded
medical plan, $101,000 increase in insurance expenses and a $52,000
increase in bank service fees. These increases were partially offset
by a $164,000 increase in property tax expenses, the $304,000 property
tax refund discussed in Note 14 and a $109,000 decrease in bad debt
expense.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 $90,000 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 fiscal 2003 on
a refund of excess property taxes paid during fiscal 1998 through
fiscal 2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



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##### 





| |  |  | 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 is 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 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 related to the
development of the TidePointe retirement community. On October 6,
2003, the Company agreed pursuant to the terms of a settlement
agreement and release to pay $5.9 million 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 has 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.

2002 Compared to 2001

Revenues

The Company reported revenues of $54,692,000 for fiscal 2002, an $841,000,
or 1.6%, increase over fiscal 2001.

The primary factors contributing to the $841,000 increase in revenues were
as follows:



| |  |  | Golf revenue in fiscal 2002 increased by $377,000, or 3.2%, as
compared to fiscal 2001. This increase was due to the Harbour Town
Golf Links being open for all twelve months of fiscal 2002 as compared
to only being open for ten months of fiscal 2001. The golf course was
closed for eight months beginning with the third quarter of fiscal 2000
through part of the first quarter of fiscal 2001 to complete a major
restoration project.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Food and beverage operations generated revenues of $4,444,000 in
fiscal 2002. This represents an increase of $355,000, or 8.7%, over
fiscal 2001. This increase was due to increased revenue in the
catering operations, Harbour Town Bakery and the Sea Pines Beach Club.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



---



##### 





| |  |  | The Inn at Harbour Town generated revenues of $2,667,000 in fiscal
2002. This represents an increase of $294,000, or 12.4%, over fiscal
2001. Total occupied room nights were
13,516 as compared to 12,599 during fiscal 2001. The average daily rate
was $187.97 during fiscal 2002, an increase of $7.87, or 4.4%, from
fiscal 2001.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from the Companys rental management operation in fiscal
2002 decreased by $217,000, or 1.8%, compared with fiscal 2001. This
decrease is primarily the result of current economic conditions and the
decline in air travel. Guest occupied unit nights decreased 6.3% in
fiscal 2002, totaling 52,470 for the year. The average daily rate of
$212.81 in fiscal 2002 was a 5.1% increase over the average daily rate
in fiscal 2001 of $202.43.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross commission revenue in fiscal 2002 from the real estate
brokerage operation decreased by $360,000, or 2.2%, as compared to
fiscal 2001. This decrease was primarily the result of the economic
downturn during the first six months of fiscal 2002, which adversely
affected the second-home sales market.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of revenues

Cost of revenues were $36,263,000 in fiscal year 2002, representing a 1.0%
decrease from fiscal 2001. This decrease is primarily due to a decrease in
commission expense from real estate brokerage operations.

Expenses



| |  |  | Sales and marketing expenses were $3,022,000 in fiscal 2002,
representing a 4.4% decrease from fiscal 2001. This decrease is
primarily the result of reduced real estate marketing costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses decreased by $397,000, or 5.9%,
totaling $6,366,000 for the year. This decrease was primarily the
result of lower medical claims paid by the Companys self-funded
medical plan and a reduction in property tax expense. These decreases
were partially offset by increases in insurance costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Other income (expense)



| |  |  | The Company reports changes in the value of its interest rate swap
agreements in its operations. The value of these agreements is
greatest when interest rates are high enough to bring the rate
protection into play. Falling interest rates during fiscal year 2002
made the rate protection less relevant, causing the fair value of the
agreements to decline by $381,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



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##### 





| |  |  | This charge is a non-cash expense
in 2002. If interest rates rise in the future, there will be a gain
reported. If the swap agreements remain in effect until their
expiration date in 2005, the cumulative total of all related income and
expense entries will equal zero.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense decreased by $379,000, or 13.7%, during fiscal
2002 as compared with fiscal 2001. This decrease is attributable to
lower interest rates during fiscal 2002 and lower outstanding debt
balances.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Condition, Liquidity and Capital Resources

The Companys financial results from its resort operations and real estate
brokerage activities 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 increased by $980,000 during fiscal 2003 and
totaled approximately $4,042,000 at October 31, 2003, of which $3,571,000 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 2003 by $567,000, resulting in a working
capital deficit of $1,896,000 at October 31, 2003.

In July 2003, the Company completed a modification to its master credit
agreement with its principal corporate lender. The modification included
revisions to certain loan covenants and representations and waived certain loan
covenants for the year ending October 31, 2003.

The modification also provided for a Judgment Loan Facility (the Judgment
Loan) in an amount up to $8,000,000. This loan facility may only be used to
pay for expenses related to the litigation described in Note 5 of the financial
statements. Interest on the facility is payable monthly at various London
Interbank Offered Rates (LIBOR) plus 2.35%, and it is collateralized by
substantially all assets of the Company. The terms of the Judgment Loan
require the Company to cease the payment of dividends on the Series A
cumulative preferred stock and interest on its junior subordinated debentures.

Under the Companys master credit agreement, the Company maintains four
loan facilities: a term loan, a revolving line of credit, the Judgment Loan
and a seasonal line of credit. Available funds under these four loan
facilities total $43,497,000, of which $37,797,000 was outstanding at October
31, 2003.

The term loan had an outstanding principal amount of $14,797,000 as of
October 31, 2003 and matures on November 1, 2008. The revolving line of credit
had an outstanding balance of $17,100,000 as of October 31, 2003 and matures on
November 1, 2007. The Judgment Loan had an outstanding balance of $5,900,000
on October 31, 2003 and matures on July 30, 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,
2003, the seasonal line of credit had no outstanding balance. The seasonal
line of credit expires on November 1, 2007.

16



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##### 



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%.

A summary of our contractual obligations is presented below:

Payments Due by PeriodContractual Obligations(in thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsLong-term debt
    
    $
    37,797
    
    
    $
    1,230
    
    
    $
    8,655
    
    
    $
    20,300
    
    
    $
    7,612Trust preferred
securities
    
    
    2,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,480Operating leases
    
    
    3,334
    
    
    
    992
    
    
    
    1,289
    
    
    
    544
    
    
    
    509Purchase obligations
    
    
    925
    
    
    
    300
    
    
    
    625
    
    
    
    
    
    
    
    Total contractual
obligations
    
    $
    44,536
    
    
    $
    2,522
    
    
    $
    10,569
    
    
    $
    20,844
    
    
    $
    10,601


Subsequent Events

In December 2003, 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, 2004. The waiver was required because the Company did not expect
to be in compliance with this covenant for the year ending October 31, 2004.

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, 2003, 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 $34,000.

17



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##### 



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.

None

Item 9a. Controls and Procedures

As of October 31, 2003, 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, 2003 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, 2003 that has
materially affected or is reasonably likely to materially affect the Companys
internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The Company has adopted a code of ethics that applies to the Chief
Executive Officer, Chief Financial Officer and Controller of the Company and
its subsidiaries. A copy of that code of ethics can be found as Exhibit 14 to
this Annual Report on Form 10-K.

Item 11. Executive Compensation.

18



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##### 



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

Securities Authorized for Issuance Under Equity Compensation Plans

Number ofsecurities to beissued upon
    
    Weighted averageexercise of
    
    exercise price of
    
    Number ofoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    remaining availablePlan category
    
    and rights
    
    and rights
    
    for future issuance(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    77,950
    
    
    $
    4.74
    
    
    
    102,050Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    8,000
    (1)Total
    
    
    77,950
    
    
    $
    4.74
    
    
    
    110,050




---

|(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.

Item 14. Principal Accountant Fees and Services.

Certain information called for by Part III (Items 10, 11, 12, 13 and 14)
and not included above has been omitted as the Company intends to file with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year ended October 31, 2003 a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement, (i)
with respect to Item 10, under the caption Election of Directors, Meetings
and Committees of the Board of Directors, Section 16(a) Beneficial Ownership
Reporting Compliance and Executive Officers, (ii) with respect to Item 11,
under the caption Executive Compensation and Compensation of Directors,
(iii) with respect to Item 12, under the caption Ownership of Voting
Securities in Excess of Five Percent by Beneficial Owners and Stock Ownership
of Management and Directors, (iv) with respect to Item 13, under the caption
Certain Transactions, and (v) with respect to Item 14, under the caption
Independent Auditors and is hereby incorporated by reference.

19



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##### 



PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(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 at pages E-1 to E-5
are filed (except Exhibits 32.1 and 32.2 which are furnished pursuant to Item
601 of Regulation S-K) as part of this report.



|(b) |  | Reports on Form 8-K filed during the quarter ending October 31, 2003, the
items reported, any financial statements filed, and the dates of any such
reports are listed below.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | Sea Pines Associates, Inc., current report on Form 8-K dated August
5, 2003, reporting under Item 5 that the Company had entered into a
Second Amended and Restated Rights Agreement, dated as of August 5,
2003, with Wachovia Bank, N.A. as rights agents.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20



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##### 



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, INCDated: January 28, 2004
    
    By:
    
    /s/ Michael E. LawrenceMichael E. Lawrence
Chief 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. HarbergerNorman P. Harberger
    
    Chairman and Director
    
    January 28, 2004/s/ Michael E. LawrenceMichael E. Lawrence
    
    Chief Executive Officer
and Director (principal
executive officer)
    
    January 28, 2004/s/ Steven P. BirdwellSteven P. Birdwell
    
    Chief Financial Officer
(principal financial
officer and principal
accounting officer)
    
    January 28, 2004/s/ Thomas C. MortonThomas C. Morton
    
    Treasurer and
Director
    
    January 28, 2004/s/ Joseph F. VercellottiJoseph F. Vercellotti
    
    Vice Chairman and
Director
    
    January 28, 2004Peter Parrott
    
    Secretary and
Director
    
    January 28, 2004


21



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##### 



/s/ John F. BardJohn F. Bard
    
    Director
    
    January 28, 2004/s/ Paul B. Barringer, IIPaul B. Barringer, II
    
    Director
    
    January 28, 2004Ralph L. Dupps, Jr.
    
    Director
    
    January 28, 2004P. R. Easterlin, Jr.
    
    Director
    
    January 28, 2004/s/ John G. McGartyJohn G. McGarty
    
    Director
    
    January 28, 2004/s/ John A. NorlanderJohn A. Norlander
    
    Director
    
    January 28, 2004/s/ David E. PardueDavid E. Pardue
    
    Director
    
    January 28, 2004/s/ Marc PuntereriMarc Puntereri
    
    Director
    
    January 28, 2004/s/ Robert W. Siler, Jr.Robert W. Siler, Jr.
    
    Director
    
    January 28, 2004/s/ Kathleen B. SpeerKathleen B. Speer
    
    Director
    
    January 28, 2004/s/ Arthur P. SundryArthur P. Sundry
    
    Director
    
    January 28, 2004


22



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##### 



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 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 January 17, 2003)4(a)
    
    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 August 5, 2003)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 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
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 June 14, 2000)


E-1



---



##### 



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
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 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 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 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 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
January 17, 2003)


E-2



---



##### 



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 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 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 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 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 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 January 29, 1999)10(n)
    
    Sea Pines Associates, Inc. Director Stock Compensation
Plan (Incorporated by reference to Exhibit 4.1 to
Form S-8 filed June 18, 2001)*10(o)
    
    First Amendment to Sea Pines Associates, Inc. Director
Stock Compensation Plan (Incorporated by reference
to Exhibit 4.2 to Form S-8 filed June 18, 2001)*


E-3



---



##### 



Exhibit No.10(p)
    
    Sea Pines Associates, Inc. Deferred Issuance Stock Plan
(Incorporated by reference to Exhibit 4.3 to Form S-8
filed June 18, 2001)*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 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 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 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 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 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 September 12, 2003)


E-4



---



##### 



14
    
    Sea Pines Associates, Inc. Code of Ethics for Senior Financial Officers21
    
    Subsidiaries of the Registrant23
    
    Consent of Ernst & Young31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32(a)
    
    Section 1350 Certification of Chief Executive Officer32(b)
    
    Section 1350 Certification of Chief Financial Officer99.1
    
    Safe Harbor Disclosure*
    
    Management Contract or Compensatory Plan or Arrangement


E-5



---



##### 



Index to Consolidated Financial Statements

1.
    
    Financial Statements of Sea Pines Associates, Inc.Report of Independent Auditors
    
    F-2Consolidated Balance Sheets
    
    F-3 through F-4Consolidated Statements of Operations
    
    F-5Consolidated Statements of Shareholders' Equity
    
    F-6Consolidated Statements of Cash Flows
    
    F-7Notes to Consolidated Financial Statements
    
    F-8 through F-282.
    
    Financial Statement Schedule of Sea Pines Associates, Inc.Schedule II - Valuation and Qualifying Accounts
    
    F-29






---



##### 



Report of Independent Auditors

Board of Directors and Shareholders
Sea Pines Associates, Inc.

We have audited the accompanying consolidated balance sheets of Sea Pines
Associates, Inc. (the Company) as of October 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended October 31, 2003. Our
audits also included the financial statement schedule listed in the index at
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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
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 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 31, 2003, 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.



| | /s/Ernst & Young LLP
| | --------------------

Atlanta, Georgia
December 8, 2003,
     except for the subsequent events paragraph in Note 7,
     as to which the date is
     December 17, 2003

F-2



---



##### 



Sea Pines Associates, Inc.

Consolidated Balance Sheets
(In thousands)

October 312003
    
    2002AssetsCurrent assets:Cash and cash equivalentsUnrestricted
    
    $
    471
    
    
    $
    574Restricted
    
    
    3,571
    
    
    
    2,4884,042
    
    
    
    3,062Accounts receivable, less allowance for doubtful
accounts of $35 and $115 at October 31, 2003 and
2002, respectively
    
    
    1,420
    
    
    
    1,290Current portion of notes receivable
    
    
    
    
    
    
    88Income tax refund receivable
    
    
    
    
    
    
    217Inventories
    
    
    792
    
    
    
    859Prepaid expenses
    
    
    360
    
    
    
    378Total current assets
    
    
    6,614
    
    
    
    5,894Notes receivable, less current portion
    
    
    
    
    
    
    1,002Deferred loan fees, net
    
    
    279
    
    
    
    139Other assets, net
    
    
    60
    
    
    
    60339
    
    
    
    1,201Real estate assets:Operating properties, net
    
    
    42,675
    
    
    
    44,197Properties held for future development
    
    
    3,186
    
    
    
    3,21945,861
    
    
    
    47,416Total assets
    
    $
    52,814
    
    
    $
    54,511


F-3



---



##### 



Sea Pines Associates, Inc.

Consolidated Balance Sheets
(In thousands, except share amounts)

October 312003
    
    2002Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    3,114
    
    
    $
    2,786Accrued property taxes
    
    
    429
    
    
    
    512Advance deposits
    
    
    3,441
    
    
    
    2,410Current portion of deferred revenue and other long-term
liabilities
    
    
    296
    
    
    
    373Current portion of long-term debt
    
    
    1,230
    
    
    
    1,142Total current liabilities
    
    
    8,510
    
    
    
    7,223Long-term debt, less current portion
    
    
    36,567
    
    
    
    32,398Interest rate swap agreement
    
    
    1,744
    
    
    
    2,277Deferred revenue and other long-term liabilities
    
    
    660
    
    
    
    793Trust preferred securities
    
    
    2,480
    
    
    
    2,480Total liabilities
    
    
    49,961
    
    
    
    45,171Commitments and contingenciesShareholders equity:Series A cumulative preferred stock, no par value,
2,000,000 shares authorized; 220,900 shares issued and
outstanding at October 31, 2003 and 2002, respectively
(liquidation preference of $1,679 at October 31, 2003
and 2002, 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; 3,587,400 shares and 3,573,400 shares issued and
outstanding at October 31, 2003 and 2002, respectively
    
    
    7,916
    
    
    
    7,759Unearned stock compensation
    
    
    (255
    )
    
    
    (235
    )(Accumulated deficit) retained earnings
    
    
    (6,102
    )
    
    
    522Total shareholders equity
    
    
    2,853
    
    
    
    9,340Total liabilities and shareholders equity
    
    $
    52,814
    
    
    $
    54,511


See accompanying notes.

F-4



---



##### 



Sea Pines Associates, Inc.

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

Year ended October 312003
    
    2002
    
    2001RevenuesResort
    
    $
    33,586
    
    
    $
    34,892
    
    
    $
    33,734Real estate
    
    
    19,710
    
    
    
    16,250
    
    
    
    16,610Cost reimbursements
    
    
    3,639
    
    
    
    3,550
    
    
    
    3,50756,935
    
    
    
    54,692
    
    
    
    53,851Cost and expenses:Cost of revenues
    
    
    39,596
    
    
    
    36,263
    
    
    
    36,626Costs subject to reimbursement
    
    
    3,639
    
    
    
    3,550
    
    
    
    3,507Sales and marketing expenses
    
    
    3,271
    
    
    
    3,022
    
    
    
    3,161General and administrative expenses
    
    
    6,464
    
    
    
    6,366
    
    
    
    6,763Depreciation and amortization
    
    
    2,578
    
    
    
    2,589
    
    
    
    2,50455,548
    
    
    
    51,790
    
    
    
    52,561Income from operations
    
    
    1,387
    
    
    
    2,902
    
    
    
    1,290Other income (expense):Gain on sale or disposal of assets, net
    
    
    63
    
    
    
    
    
    
    
    172Interest income
    
    
    202
    
    
    
    111
    
    
    
    101Interest rate swap agreements
    
    
    533
    
    
    
    (381
    )
    
    
    (1,896
    )Interest expense, net of amounts capitalized
    
    
    (2,271
    )
    
    
    (2,392
    )
    
    
    (2,771
    )Litigation expenses
    
    
    (6,324
    )
    
    
    
    
    
    
    (7,797
    )
    
    
    (2,662
    )
    
    
    (4,394
    )(Loss) income before income taxes
    
    
    (6,410
    )
    
    
    240
    
    
    
    (3,104
    )(Provision for) benefit from income taxes
    
    
    (54
    )
    
    
    (43
    )
    
    
    430Net (loss) income
    
    
    (6,464
    )
    
    
    197
    
    
    
    (2,674
    )Preferred stock dividend requirements
    
    
    (160
    )
    
    
    (160
    )
    
    
    (160
    )Net (loss) income attributable to common stock
    
    $
    (6,624
    )
    
    $
    37
    
    
    $
    (2,834
    )Net (loss) income per share of common stock;
basic and diluted
    
    $
    (1.85
    )
    
    $
    0.01
    
    
    $
    (0.80
    )Weighted average shares outstanding
    
    
    3,580
    
    
    
    3,568
    
    
    
    3,554


See accompanying notes.

F-5



---



##### 



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 October
31, 2000
    
    
    221
    
    
    $
    1,294
    
    
    
    3,546
    
    
    $
    7,343
    
    
    $
    
    
    
    $
    3,319
    
    
    $
    11,956Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,674
    )
    
    
    (2,674
    )Issuance of common
stock to directors
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    63
    
    
    
    (63
    )
    
    
    
    
    
    
    Issuance of grants
for deferred stock
plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    (153
    )
    
    
    
    
    
    
    Amortization of
stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    57Preferred stock
dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    (160
    )Balance at October
31, 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
    )
    
    $
    2,853


See accompanying notes.

F-6



---



##### 



Sea Pines Associates, Inc.
Consolidated Statements of Cash Flows
(In thousands)

Year ended October 312003
    
    2002
    
    2001Cash flows from operating activitiesNet (loss) income
    
    $
    (6,464
    )
    
    $
    197
    
    
    $
    (2,674
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Depreciation
    
    
    2,536
    
    
    
    2,563
    
    
    
    2,413Amortization of deferred loan fees
    
    
    42
    
    
    
    26
    
    
    
    91Allowance for doubtful accounts
    
    
    (80
    )
    
    
    85
    
    
    
    12Gain on sale of assets
    
    
    (63
    )
    
    
    
    
    
    
    (172
    )Amortization of stock compensation
    
    
    137
    
    
    
    124
    
    
    
    57Interest rate swap agreements
    
    
    (533
    )
    
    
    381
    
    
    
    1,896Deferred income taxes
    
    
    
    
    
    
    200
    
    
    
    135Changes in assets and liabilities:Restricted cash
    
    
    (1,083
    )
    
    
    (1,306
    )
    
    
    1,469Accounts and notes receivable
    
    
    1,040
    
    
    
    (348
    )
    
    
    190Inventories
    
    
    67
    
    
    
    11
    
    
    
    (177
    )Prepaid expenses
    
    
    18
    
    
    
    (134
    )
    
    
    (8
    )Accounts payable and accrued expenses
    
    
    245
    
    
    
    (1
    )
    
    
    (1,495
    )Advance deposits
    
    
    1,031
    
    
    
    1,379
    
    
    
    (1,531
    )Deferred revenue
    
    
    (210
    )
    
    
    (122
    )
    
    
    156Income taxes receivable/payable
    
    
    217
    
    
    
    252
    
    
    
    (623
    )Net cash (used in) provided by operating activities
    
    
    (3,100
    )
    
    
    3,307
    
    
    
    (261
    )Cash flows from investing activitiesProceeds from sale of assets
    
    
    118
    
    
    
    5
    
    
    
    335Capital expenditures and property acquisitions
    
    
    (1,036
    )
    
    
    (468
    )
    
    
    (1,784
    )Net cash used in investing activities
    
    
    (918
    )
    
    
    (463
    )
    
    
    (1,449
    )Cash flows from financing activitiesPayment of deferred loan fees
    
    
    (182
    )
    
    
    (11
    )
    
    
    (77
    )(Repayments) borrowings on revolving line of credit
    
    
    (500
    )
    
    
    600
    
    
    
    2,300Borrowings on judgment loan
    
    
    5,900
    
    
    
    
    
    
    
    (Repayments) borrowings on seasonal line of credit
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000Principal repayments of term note
    
    
    (1,143
    )
    
    
    (1,059
    )
    
    
    (2,034
    )Preferred stock dividends paid
    
    
    (160
    )
    
    
    (160
    )
    
    
    (341
    )Net cash provided by (used in) financing activities
    
    
    3,915
    
    
    
    (2,630
    )
    
    
    1,848Net (decrease) increase in unrestricted cash and cash
equivalents
    
    
    (103
    )
    
    
    214
    
    
    
    138Unrestricted cash and cash equivalents at beginning of year
    
    
    574
    
    
    
    360
    
    
    
    222Unrestricted cash and cash equivalents at end of year
    
    $
    471
    
    
    $
    574
    
    
    $
    360


See accompanying notes.

F-7



---



##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements

October 31, 2003



|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 wholly-owned subsidiaries of the Company are Sea Pines Company, Inc.
(SPC), Sea Pines Real Estate Company (SPREC), Fifth Golf Course Club, Inc.,
and Sea Pines Associates Trust I. SPC is a full-service resort, which provides
guests with the use of three golf courses, tennis facilities, inn and
conference facilities, 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 16 for business segment
information). Fifth Golf Course Club, Inc. owns certain acreage which could be
used for outdoor recreational activities. Sea Pines Associates Trust I (the
Trust) holds certain company debentures. Interest on the debentures 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 wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated.

Statements of Cash Flows

For purposes of the statements of cash flows, 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. The Companys accounts receivable are unsecured.

F-8



---



##### 



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. An
allowance for doubtful accounts is made when collection of the full amount is
no longer probable.

Inventories

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

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 approximately $1,858,000, $1,620,000, and $1,652,000
for the years ended October 31, 2003, 2002, and 2001, respectively.

F-9



---



##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



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

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. Capitalized construction
period interest totaled approximately $61,000 in 2001. No interest expense was
capitalized in 2003 and 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 has
not incurred any impairment losses for the years ended October 31, 2003, 2002
or 2001.

Financial Instruments

The carrying amounts of cash and cash equivalents, trade receivables, notes
receivable, other current assets, accounts payable, line of credit with bank,
long-term debt and accruals meeting the definition of financial instruments
approximate their fair market values as of October 31, 2003 and 2002.

F-10



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



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

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.

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 $533,000, expense of
$381,000 and expense of $1,896,000 in the consolidated statements of operations
for the change in fair value of the interest rate swap agreement for the years
ended October 31, 2003, 2002 and 2001, 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.

F-11



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



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

Reclassifications

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



|2. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------

In response to a FASB staff announcement in November 2001, and in accordance
with the Emerging Issues Task Force (EITF) Issue No. 01-14, Income Statement
Characterization of Reimbursements received for Out-Of-Pocket Expenses
Incurred, which was issued in January 2002, the Company began recording the
reimbursements of costs incurred on behalf of other parties (e.g. villa owners,
real estate agents) received as cost reimbursements revenues and the costs
incurred on behalf of other parties as costs subject to reimbursements in the
year ended October 31, 2003. These costs relate primarily to situations where
the Company has discretionary responsibility to procure and manage the
resources in performing its services under certain contracts. Comparative
financial statements for the prior periods were reclassified to conform with
the presentation in the 2003 financial statements. Since the reimbursements
are made based upon the costs incurred with no added margin, the adoption of
this guidance has no effect on the operating income, cash flows or financial
position of the Company.

In November 2002, the FASB issued FASB Interpretation 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 currently requires that
a liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, as of December 31, 2002, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a roll-forward of the
entitys product warranty liabilities. The adoption of FIN 45 did not have any
impact on the Companys financial position, results of operations or
disclosures.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure provisions of SFAS 123, Accounting for Stock Based
Compensation, to currently require disclosure of the effects of an entitys
accounting policy with

F-12



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|2. |  | Recent Accounting Pronouncements (continued)
|-- |  | --------------------------------------------

respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS 148 does
not amend SFAS 123 to require companies to account for their employee
stock-based awards using the fair value method. Adoption of SFAS 148 did not
have any impact on the Companys financial position, results of operations or
disclosures.

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. FIN 46 is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of the Revised
Interpretation must be applied for the Companys first interim period ending
after March 15, 2004. There has been no impact on the Companys financial
position, results of operations or disclosures for fiscal 2003 under FIN 46.
The Company is currently evaluating the impact of the Revised Interpretation
that will be adopted in the first quarter of the year ending October 31, 2004.
Adoption will require that the Company deconsolidate the Trust and record a
liability for amounts due to the Trust. The net impact of deconsolidation will
not have a significant impact on the Companys financial position or results of
operations.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying derivative to conform it to language used in FIN 45, and amends
certain other existing pronouncements. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. In addition, provisions of SFAS 149 should be
applied prospectively. The Company does not expect the application of SFAS 149
to have a significant impact on its financial position, results of operations
or disclosures.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how an issuer

F-13



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|2. |  | Recent Accounting Pronouncements (continued)
|-- |  | --------------------------------------------

classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. Certain components of SFAS 150 were deferred by the FASB in October
2003 for an indefinite period. The Company does not expect the application of
SFAS 150 to have a significant impact on its financial position, results of
operations or disclosures.



|3. |  | Statements of Cash Flows
|-- |  | ------------------------

Supplemental disclosure of cash flow information follows (in thousands of
dollars):

Year ended October 312003
    
    2002
    
    2001Cash paid during the year for:Interest, net of amounts capitalized
    
    $
    2,261
    
    
    $
    2,409
    
    
    $
    2,803




|4. |  | Inventories
|-- |  | -----------

Inventories consist of the following (in thousands of dollars):

October 312003
    
    2002Merchandise
    
    $
    592
    
    
    $
    667Supplies, parts and accessories
    
    
    35
    
    
    
    35Food and beverages
    
    
    121
    
    
    
    115Other
    
    
    44
    
    
    
    42$
    792
    
    
    $
    859


F-14



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|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 related to the development of the TidePointe retirement community.

On October 6, 2003, the Company 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.



|6. |  | Real Estate Assets
|-- |  | ------------------

Operating properties consist of the following (in thousands of dollars):

October 312003
    
    2002Land and improvements
    
    $
    26,806
    
    
    $
    26,487Buildings
    
    
    23,510
    
    
    
    23,265Machinery and equipment
    
    
    11,955
    
    
    
    11,64262,271
    
    
    
    61,394Less accumulated depreciation
    
    
    (19,596
    )
    
    
    (17,197
    )$
    42,675
    
    
    $
    44,197


Properties held for future development of $3,186,000 and $3,219,000 at October
31, 2003 and 2002, respectively, consist primarily of land and certain future
development rights.

F-15



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##### 



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 312003
    
    2002Term note payable to bank, bearing interest at the London
Interbank Offered Rates (LIBOR) (1.12% at October 31,
2003), 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
$205,000 in 2004 to $276,667 in 2008, with a balloon
payment due on maturity. Interest is payable monthly. The
note matures November 1, 2008
    
    $
    14,797
    
    
    $
    15,940$18.3 million revolving line of credit with bank, bearing
interest at LIBOR (1.12% at October 31, 2003), plus 1.40%
to 1.85%, collateralized by substantially all assets of the
Company. Interest is payable monthly. The line matures
November 1, 2007
    
    
    17,100
    
    
    
    17,600Judgment loan note payable to bank, bearing interest at
LIBOR (1.12% at October 31, 2003), plus 2.35%
collateralized by substantially all assets of the Company
Interest is payable monthly. The loan facility matures on
July 30, 2005
    
    
    5,900
    
    
    
    37,797
    
    
    
    33,540Less current portion of long-term debt
    
    
    (1,230
    )
    
    
    (1,142
    )Total long-term debt
    
    $
    36,567
    
    
    $
    32,398


F-16



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##### 



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, 2003 are as follows
(in thousands of dollars):

Year ending October 31
2004
    
    $
    1,2302005
    
    
    7,2252006
    
    
    1,4302007
    
    
    1,5402008
    
    
    18,760Thereafter
    
    
    7,612Total
    
    $
    37,797


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 master credit agreement also contains representations and warranties which
are required to be maintained and covenants with which the Company is required
to comply. As a result of the litigation described in Note 5, the Company was,
as of April 30, 2003, in breach of certain of such representations and
warranties and in violation of certain of such covenants. In June 2003, the
bank signed a waiver in which the bank waived retroactively to the filing of
the complaint in the litigation all events of default arising under the credit
agreement as a result of the litigation, including the rendering of the verdict
and any judgment entered thereon.

In July 2003, the Company completed a modification to its master credit
agreement. The modification included revisions to certain loan covenants and
representations and waivers of certain loan covenants for the year ended
October 31, 2003.

The July modification also provided for a Judgment Loan Facility (the Judgment
Loan) in an amount up to $8,000,000 to pay for expenses related to the
litigation described in Note 5. The terms of the Judgment Loan required the
Company to cease the payment of dividends on its Series A cumulative preferred
stock and interest on its trust preferred securities. The facility matures on
July 30, 2005. As of October 31, 2003, the Judgment Loan had an outstanding
balance of $5,900,000.

F-17



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|7. |  | Long-Term Debt (continued)
|-- |  | --------------------------

Long Term Debt and Line of Credit Agreements (continued)

On September 8, 2003, $8,000,000 was drawn on the loan facility. As a result
of the settlement (see Note 5), $2,100,000 of the loan was repaid in October
2003.

In addition to the term loan, the revolving line of credit and the Judgment
Loan, the master credit agreement includes a $4,500,000 seasonal line of credit
(the Seasonal Line). Interest is payable monthly at LIBOR plus 1.50%. The
Seasonal Line expires on November 1, 2007. Borrowings under the Seasonal Line
are also collateralized by substantially all of the assets of the Company. As
of October 31, 2003 and 2002, the Seasonal Line had no outstanding balance.

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 (see
Note 1).

Trust Preferred Securities

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
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 twelve months of
interest accrued as of October 31, 2003.

Subsequent Events

In December 2003, the bank waived the loan covenant related to the net worth
ratio for the year ending October 31, 2004. The waiver was required because
the Company did not expect to be in compliance with this covenant for the year
ending October 31, 2004.

F-18



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|8. |  | 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 has current tax expense of approximately $54,000 for fiscal
2003. The provision (benefit) for income taxes consists of the following (in
thousands of dollars):

Year ended October 312003
    
    2002
    
    2001Current provision (benefit):Federal
    
    $
    54
    
    
    $
    (157
    )
    
    $
    (548
    )State
    
    
    
    
    
    
    
    
    
    
    (17
    )54
    
    
    
    (157
    )
    
    
    (565
    )Deferred provision (benefit):Federal
    
    
    
    
    
    
    173
    
    
    
    172State
    
    
    
    
    
    
    27
    
    
    
    (37
    )
    
    
    
    200
    
    
    
    135$
    54
    
    
    $
    43
    
    
    $
    (430
    )


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 312003
    
    2002
    
    2001Tax (benefit) expense at statutory federal income
tax rates
    
    $
    (2,180
    )
    
    $
    82
    
    
    $
    (1,051
    )State income tax (benefit) expense, net of federal
income tax (charge) benefit
    
    
    (342
    )
    
    
    9
    
    
    
    (58
    )Increase (decrease) in valuation allowance
    
    
    2,599
    
    
    
    (44
    )
    
    
    707Other
    
    
    (23
    )
    
    
    (4
    )
    
    
    (28
    )$
    54
    
    
    $
    43
    
    
    $
    (430
    )


F-19



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|8. |  | Income Taxes (continued)
|-- |  | ------------------------

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 312003
    
    2002
    
    2001Deferred revenue:License and fee income
    
    $
    334
    
    
    $
    432
    
    
    $
    480Country club membership sales
    
    
    20
    
    
    
    29
    
    
    
    7Loss on interest rate swaps
    
    
    650
    
    
    
    849
    
    
    
    707Charitable contribution carryover
    
    
    32
    
    
    
    10
    
    
    
    7Net operating loss carryforwards
    
    
    3,012
    
    
    
    88
    
    
    
    65Severance payments
    
    
    
    
    
    
    
    
    
    
    44Accrued liabilities
    
    
    227
    
    
    
    208
    
    
    
    138Other
    
    
    7
    
    
    
    
    
    
    
    12Gross deferred income tax assets
    
    
    4,282
    
    
    
    1,616
    
    
    
    1,460Less: Valuation allowance
    
    
    (3,285
    )
    
    
    (686
    )
    
    
    (730
    )Deferred income tax assets
    
    
    997
    
    
    
    930
    
    
    
    730Depreciation
    
    
    (879
    )
    
    
    (763
    )
    
    
    (442
    )Other
    
    
    (118
    )
    
    
    (167
    )
    
    
    (88
    )Gross deferred income tax liabilities
    
    
    (997
    )
    
    
    (930
    )
    
    
    (530
    )Net deferred income tax assets
    
    $
    
    
    
    $
    
    
    
    $
    200


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 and the loss on the interest rate swaps. The Companys federal
net operating loss carryforward of $7,514,000 expires 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 non-Series A preferred stock except that
such rights and powers shall not be superior to those of the Series A
cumulative preferred shares.

F-20



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|9. |  | Shareholders Equity (continued)
|-- |  | --------------------------------

Preferred Stock (continued)

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, 2003, all 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).

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 3,587,400 shares of
common stock outstanding as of October 31, 2003 are voting common stock.

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

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.

F-21



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|9. |  | Shareholders Equity (continued)
|-- |  | --------------------------------

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
extends 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. 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 sale of 50% or more of
its assets or earning power, a Right will entitle the holder (except those
beneficially owned by an Acquiring

F-22



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|9. |  | Shareholders Equity (continued)
|-- |  | --------------------------------

Stock Purchase Rights Plan (continued)

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 approximately $1,023,000, $1,174,000 and $1,203,000 for
the years ended October 31, 2003, 2002 and 2001, respectively. Operating
leases relate primarily to office space and equipment. Minimum annual rental
commitments remaining at October 31, 2003, under non-cancelable operating
leases with original terms of at least one year are as follows (in thousands of
dollars):

Year ending October 31
2004
    
    $
    9922005
    
    
    8952006
    
    
    3942007
    
    
    3192008
    
    
    225Thereafter
    
    
    509Total
    
    $
    3,334


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, 2003 approximately 90 of
the 404 acres have 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



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##### 



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
approximately $140,000, $132,000 and $156,000 for the years ended October 31,
2003, 2002 and 2001, 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 April 2003, 14,000 shares were issued, at a 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 is being
amortized over the directors 12-month terms. In March 2002, 14,000 shares
were issued, at a fair market value of $6.00 per share. The Company recorded
$84,000 as deferred compensation at the time the stock was issued and that
amount was amortized over the directors 12-month terms. In March 2001, 14,000
shares were issued, at a fair market value of $4.50 per share. The Company
recorded $63,000 as deferred compensation at the time the stock was issued and
that amount was amortized over the directors 12-month terms. For the years
ended October 31, 2003, 2002 and 2001, the Company recorded $65,333, $76,125
and $43,875 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, which link the personal interest of
participants to those of the Companys stockholders. The

F-24



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|13. |  | Stock Compensation Plan and Deferred Issuance Plan (continued)
|--- |  | --------------------------------------------------------------

Deferred Issuance Stock Plan (continued)

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 February 7, 2003, the Company awarded 25,450 deferred shares, at a
fair market value of $4.50 per share. On January 2, 2002, the Company awarded
24,300 deferred shares, at a fair market value of $5.00 per share. On June 1,
2001, the Company awarded 32,300 deferred shares, at a fair market value of
$4.75 per share. For the years ended October 31, 2003, 2002 and 2001, the
Company recorded $71,531, $47,974 and $12,785, respectively, of stock
compensation expense amortization. In fiscal 2003, 2,900 deferred shares were
forfeited by employees. In fiscal 2002, 1,200 deferred shares were forfeited
by employees.



|14. |  | Property Tax Refund
|--- |  | -------------------

The Company was involved in an administrative law proceeding involving the
valuation of its three golf courses for property tax purposes. The Company
previously accrued its property tax expense based on the valuation originally
assessed for these properties. During the third quarter 2002, the court issued
a final order and decision, ultimately lowering the property taxes owed for the
fiscal years 1998 through 2002. Based on this ruling and the Companys
estimate of its property tax liability, the Company lowered its property tax
accrual in the third quarter 2002 by $322,000. This amount was included as a
reduction to general and administrative expenses. In February 2003, the Company
received a refund of property taxes paid of $304,000 plus accrued interest of
$104,000. The property tax refund of $304,000 is reflected within general and
administrative expenses, and the interest income of $104,000 is reflected in
interest income, in the consolidated statement of operations for the year ended
October 31, 2003.

F-25



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|15. |  | Quarterly Results of Operations (Unaudited)
|--- |  | -------------------------------------------

The following is a summary of the quarterly results of operations for the years
ended October 31, 2003 and 2002 (in thousands of dollars):

Year Ended October 31, 2003First
    
    Second
    
    Third
    
    FourthRevenues
    
    $
    7,789
    
    
    $
    14,484
    
    
    $
    18,726
    
    
    $
    15,936Gross profit
    
    $
    639
    
    
    $
    4,637
    
    
    $
    4,886
    
    
    $
    3,538Net (loss) income
    
    $
    (1,883
    )
    
    $
    (7,908
    )
    
    $
    1,257
    
    
    $
    2,070Net (loss) income per
share of common
stock; basic and
diluted
    
    $
    (0.54
    )
    
    $
    (2.22
    )
    
    $
    0.34
    
    
    $
    0.57


Year Ended October 31, 2002First
    
    Second
    
    Third
    
    FourthRevenues
    
    $
    7,154
    
    
    $
    14,921
    
    
    $
    19,267
    
    
    $
    13,350Gross profit
    
    $
    1,011
    
    
    $
    5,289
    
    
    $
    5,444
    
    
    $
    3,135Net (loss) income
    
    $
    (1,063
    )
    
    $
    1,078
    
    
    $
    695
    
    
    $
    (513
    )Net (loss) income per
share of common
stock; basic
and diluted
    
    $
    (0.31
    )
    
    $
    0.29
    
    
    $
    0.18
    
    
    $
    (0.15
    )


F-26



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|15. |  | Quarterly Results of Operations (Unaudited) (continued)
|--- |  | -------------------------------------------------------

As discussed in Note 2, the Company adopted EITF Issue No. 01-14 for the year
ended October 31, 2003. Comparative financial statements for the prior years
have been reclassified to conform with the presentation in the 2003 financial
statements. These reclassifications have no impact on net income (loss),
earnings per share or cash flows of the Company. Additionally, the Company
reclassified litigation expenses associated with the litigation discussed in
Note 5 as other expense within continuing operations for all periods presented.
Financial information in previously filed Forms 10-Q has been reclassified as
follows (in thousands of dollars):

Year ended October 31, 2003First
    
    Second
    
    ThirdRevenues as reported
    
    $
    7,159
    
    
    $
    13,614
    
    
    $
    17,545Adjustment for cost reimbursements
    
    
    630
    
    
    
    870
    
    
    
    1,181Revenues as reclassified
    
    $
    7,789
    
    
    $
    14,484
    
    
    $
    18,726Costs and expenses as reported
    
    $
    9,398
    
    
    $
    20,220
    
    
    $
    16,173Adjustment for costs subject to reimbursements
    
    
    630
    
    
    
    870
    
    
    
    1,181Reclassification of litigation expenses
    
    
    
    
    
    
    (8,000
    )
    
    
    (450
    )Costs and expenses as reclassified
    
    $
    10,028
    
    
    $
    13,090
    
    
    $
    16,904


Year ended October 31, 2002First
    
    Second
    
    Third
    
    FourthRevenues as reported
    
    $
    6,537
    
    
    $
    14,085
    
    
    $
    18,038
    
    
    $
    12,482Adjustment for cost reimbursements
    
    
    617
    
    
    
    836
    
    
    
    1,229
    
    
    
    868Revenues as reclassified
    
    $
    7,154
    
    
    $
    14,921
    
    
    $
    19,267
    
    
    $
    13,350Costs and expenses as reported
    
    $
    8,476
    
    
    $
    11,858
    
    
    $
    15,429
    
    
    $
    12,477Adjustment for costs subject to reimbursements
    
    
    617
    
    
    
    836
    
    
    
    1,229
    
    
    $
    868Costs and expenses as reclassified
    
    $
    9,093
    
    
    $
    12,694
    
    
    $
    16,658
    
    
    
    13,345


F-27



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##### 



Sea Pines Associates, Inc.

Notes to Consolidated Financial Statements (continued)



|16. |  | 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, 2003, 2002 and 2001 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.

Segment information as of and for the years ended October 31, 2003, 2002 and
2001 are as follows (in thousands of dollars):

Year ended October 312003
    
    2002
    
    2001Revenues:Resort
    
    $
    36,268
    
    
    $
    37,615
    
    
    $
    36,567Real estate brokerage
    
    
    20,667
    
    
    
    17,077
    
    
    
    17,284$
    56,935
    
    
    $
    54,692
    
    
    $
    53,851Cost of revenues:Resort
    
    $
    25,031
    
    
    $
    24,687
    
    
    $
    24,402Real estate brokerage
    
    
    14,565
    
    
    
    11,576
    
    
    
    12,224$
    39,596
    
    
    $
    36,263
    
    
    $
    36,626Interest expense:Resort
    
    $
    2,271
    
    
    $
    2,392
    
    
    $
    2,771$
    2,271
    
    
    $
    2,392
    
    
    $
    2,771Depreciation and amortization expense:Resort
    
    $
    2,513
    
    
    $
    2,521
    
    
    $
    2,435Real estate brokerage
    
    
    65
    
    
    
    68
    
    
    
    69$
    2,578
    
    
    $
    2,589
    
    
    $
    2,504Segment income (loss) before income taxes:Resort
    
    $
    (8,065
    )
    
    $
    (1,080
    )
    
    $
    (3,723
    )Real estate brokerage
    
    
    1,655
    
    
    
    1,320
    
    
    
    619$
    (6,410
    )
    
    $
    240
    
    
    $
    (3,104
    )Identifiable assets:Resort
    
    $
    49,010
    
    
    $
    51,859
    
    
    $
    54,016Real estate brokerage
    
    
    3,804
    
    
    
    2,652
    
    
    
    1,156$
    52,814
    
    
    $
    54,511
    
    
    $
    55,172


F-28



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##### 



SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

Sea Pines Associates, Inc.

October 31, 2003

COL. A
    
    COL. B
    
    COL. C
    
    COL. D.
    
    COL. EAdditionsChargedBalance at
    
    (Released) to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Deductions -
    
    at EndDescription
    
    of Period
    
    Expenses
    
    Describe
    
    of PeriodYear Ended October 31, 2003:Deducted from assets 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
    
    
    $
    24,000
    
    
    $
    104,000
    
    
    $
    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
    
    
    $
    801,000Year Ended October 31, 2001:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    18,000
    
    
    $
    22,000
    
    
    $
    10,000
    (1)
    
    $
    30,000Valuation allowance for
deferred tax assets
    
    
    23,000
    
    
    
    707,000
    (2)
    
    
    
    
    
    
    730,000Total
    
    $
    41,000
    
    
    $
    729,000
    
    
    $
    10,000
    
    
    $
    760,000




---

|(1) |  | Uncollectible accounts written off, net of recoveries.                                                                                                                                                                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The significant increases in the years ended October 31, 2003 and 2001
are 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-29