UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended April 30, 2004

For the Transition Period From __________to __________

Commission File Number 0-17517

SEA PINES ASSOCIATES, INC.

32 Greenwood Drive, Hilton Head Island, South Carolina 29928
(Address of principal executive offices) (Zip Code)

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

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.

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

The number of shares outstanding of the registrant’s common stock as of May 31, 2004 was 3,600,500.

INDEX TO FORM 10-Q
FOR SEA PINES ASSOCIATES, INC.

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PART I

THIS REPORT ON FORM 10-Q 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-Q, 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. Financial Statements

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Sea Pines Associates, Inc.

Note:

The condensed consolidated balance sheet at October 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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

Note:

The condensed consolidated balance sheet at October 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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Sea Pines Associates, Inc.

See accompanying notes.

6

Sea Pines Associates, Inc.

See accompanying notes.

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SEA PINES ASSOCIATES, INC.

APRIL 30, 2004
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain amounts for the year ended October 31, 2003 have been reclassified to conform with the quarter ended April 30, 2004 presentation. Operating results for the three-month and six-month periods ended April 30, 2004 are not necessarily indicative of the results that may be expected for the year ending October 31, 2004. 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 low resort revenue and real estate sales season, and the period from March through October has historically been the Company’s high season. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended October 31, 2003.

NOTE 2 — 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.

NOTE 3 — INVENTORIES

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

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NOTE 4 — REAL ESTATE ASSETS

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

Properties held for future development of $3,186,000 at April 30, 2004 and October 31, 2003, respectively, consist primarily of land and certain future development rights.

NOTE 5 — 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):

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

The Articles of Incorporation of the Company provide for dividends on the preferred stock of $0.722 per share per annum to be paid in arrears. The terms of the judgment loan described in the Company’s consolidated financial statements for the year ended October 31, 2003 required the Company to cease the payment of dividends on its preferred stock and interest on its trust preferred securities. As of April 30, 2004, the Company has accrued $80,000 of dividends on the preferred stock applicable to the year ending October 31, 2003. The Company may resume these dividend and interest payments with approval from its bank.

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 April 30, 2004, the Seasonal Line had an outstanding balance of $1,077,000. The seasonal line had no outstanding balance at October 31, 2003.

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.

Trust Preferred Securities

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. 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 eighteen months of interest accrued as of April 30, 2004. As a result of this suspension, the trust preferred securities are currently bearing interest at the penalty rate of 11.51%. The Company deconsolidated these trust preferred securities in first quarter 2004 (see Note 8).

NOTE 6 — INCOME TAXES

The Company has not recognized any income tax benefit for the six months ended April 30, 2004 related to its taxable loss since the Company is uncertain whether there will be sufficient taxable income in the year ending October 31, 2004 and future periods to allow for utilization of the loss.

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The Company’s income tax expense of $696,000 in the second quarter 2003 results from its reversal of the income tax benefit previously recognized during the first quarter 2003 based on the net loss to date at that time.

NOTE 7 — EARNINGS PER SHARE

Income (loss) per share of common stock is calculated by dividing net income or loss after preferred stock dividend requirements by the weighted average number of outstanding shares of common stock. Basic and diluted earnings per share are identical for all periods presented. Potentially dilutive securities consist of additional shares of common stock issuable when stock rights become exercisable. These contingently issuable shares have not been included in basic or diluted earnings per share as the stock rights are not yet exercisable.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

On January 23, 2004, Prudential-Bache/Fogelman Harbour Town Properties, L.P. (“Prudential-Bache/Fogelman”) filed a complaint in the United States District Court, District of South Carolina, Beaufort Division, naming the Company and Sea Pines Company, Inc. as defendants, and seeking a declaratory judgment that Prudential-Bache/Fogelman is the owner of certain trademarks, an injunction prohibiting the Company and Sea Pines Company, Inc. from making any claims of ownership of the trademarks and an unspecified amount of compensatory and punitive damages based on allegations of wrongful interference in Prudential-Bache/Fogelman’s prospective business relations. Service was accepted on May 21, 2004 and the Company and Sea Pines Company, Inc. intend to respond by denying the allegations and defending the actions vigorously. An adverse judgment in this matter could have a material adverse effect on the Company’s financial condition, results of operations and cash flow.

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

NOTE 9 — RECENT ACCOUNTING PRONOUNCEMENTS

In response to a Financial Accounting Standards Board (“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 have been reclassified to conform with this presentation in the 2004 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 Company’s financial position or result of operations.

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In January 2003, the FASB issued FASB Interpretation 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” In December 2003, the FASB issued a Revised Interpretation on FIN 46 (“Revised Interpretation”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company adopted the Revised Interpretation in first quarter 2004. The only effect was the deconsolidation of the Sea Pines Associates Trust I, which was offset by the Company’s recording of a liability for amounts due to the trust. The net impact of deconsolidation did not have any impact on the Company’s financial position or results of operations.

NOTE 10 — BUSINESS SEGMENT INFORMATION

The Company has two reportable business segments. The Company’s reportable segments are organized by the type of operations and include: (1) resort activities, including home and villa rental management operations, golf course and tennis center 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 Island, South Carolina area.

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All inter-company transactions between segments have been eliminated upon consolidation. Segment information as of and for the quarters and six months ended April 30, 2004 and 2003 are as follows (in thousands of dollars):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The Company’s operations are conducted primarily through two wholly owned subsidiaries. Sea Pines Company, Inc. operates all of the resort assets, including a 60-room inn, conference facilities, three resort golf courses, a tennis center, home and villa rental management operations, retail sales outlets, food service operations and other resort recreational facilities. Sea Pines Real Estate Company, Inc. is a real estate brokerage firm with 11 offices serving Hilton Head Island and its neighboring communities.

Critical Accounting Policies

In the preparation of its financial statements, the Company applies accounting principles generally accepted in the United States. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. The following 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:

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

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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. The Company has not incurred any impairment losses for the period ended April 30, 2004 and the year ended October 31, 2003.

Second Quarter 2004 Compared to Second Quarter 2003

Revenues

     The Company reported revenues of $17,169,000 for second quarter 2004, a $2,685,000, or 18.5%, increase over second quarter 2003. Resort revenues, excluding cost reimbursements, increased by $341,000, or 3.4%, compared to 2003; while real estate brokerage revenues, excluding cost reimbursements, improved by $2,360,000, or 64.0%.

     The primary factors contributing to the $2,685,000 increase in revenues were as follows:

•

Golf revenue in the second quarter 2004 decreased by $21,000, or 0.6%, as compared with the second quarter 2003. The number of resort golf rounds played at Harbour Town Golf Links during the second quarter 2004 decreased by 213 rounds, or 3.2%, from the second quarter 2003. The number of resort golf rounds played at the Ocean and Sea Marsh golf courses during the second quarter 2004 increased by 285 rounds, or 1.7%, from the second quarter 2003. This net increase in rounds played was offset by a 1.1% decrease in average resort rate paid per round in the second quarter 2004 over the second quarter 2003.

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	•		Rental management revenue decreased by $291,000, or 10.4%, during the second quarter 2004 as compared with the second quarter 2003. Total guest occupied nights during the second quarter 2004 decreased by 1,699 nights, or 12.1%, from the second quarter 2003. This decrease in guest occupied nights was partially offset by a $2.73, or 1.4%, increase in average daily rate in the second quarter 2004 over the second quarter 2003.
	•		Food and beverage operations generated revenues of $1,740,000 in the second quarter 2004. This represents an increase of $448,000, or 34.7%, over the second quarter 2003. This increase was primarily due to a $281,000, or 41.2%, increase in revenue from catering operations, a $79,000, or 48.2%, increase in revenue from the Heritage Grill, a $42,000 or 42.4%, increase in revenue from the Sea Pines Beach Club, a $31,000 or 31.0%, increase in revenue from the Habour Town Bakery and a $15,000 increase in revenue from other food and beverage operations.
	•		The Inn at Harbour Town generated revenues of $827,000 in the second quarter 2004. This represents an increase of $152,000, or 22.5%, over the second quarter 2003. Total occupied room nights were 3,823 as compared to 3,122 during the second quarter 2003. The average daily rate was $201.71 during the second quarter 2004, as compared to $210.86 during the second quarter 2003.
	•		Other recreation services revenue increased by $75,000, or 4.7%, during the second quarter 2004 as compared with the second quarter 2003. This increase is primarily the result of a $34,000, or 7.8%, increase in revenue from the Sea Pines Racquet Club and a $31,000, or 14.4%, increase in revenue from the Company’s fitness center and bike shop operations.
	•		Other revenue decreased by $22,000, or 9.6%, during the second quarter 2004 as compared with the second quarter 2003. This decrease is primarily due to a reduction in licensing fee revenue from the TidePointe retirement community.
	•		Real estate brokerage revenues increased by $2,360,000, or 64.0%, during the second quarter 2004 as compared with the second quarter 2003. Real estate brokerage revenues are very closely tied to real estate sales. The dramatic increase in sales is the result of favorable economic conditions, an expansion of marketing efforts to the mainland markets, the addition of several new agents, and the continuation of management’s focus on listings and individual agent marketing.
	•		Cost reimbursements increased by $16,000 during the second quarter 2004 as compared with the second quarter 2003.

Cost of revenues

     Cost of revenues was $11,447,000 in the second quarter 2004, representing an increase of $2,470,000, or 27.5%, over the second quarter 2003. Approximately $1,945,000 of this increase was attributable to increased commissions earned by real estate sales agents as a result of improved real estate sales activity. The remainder of this increase related to increased resort revenue activities.

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Expenses

	•		Sales and marketing expenses increased by $549,000, or 61.7%, and totaled $1,439,000 in the second quarter 2004. This increase was primarily due to a $311,000, or 71.5%, increase in resort marketing promotions and expenses, the recording of $178,000 in resort marketing barter expenses, a $38,000, or 26.0%, increase in conference sales expenses and a $22,000, or 7.1%, increase in real estate marketing expenses.
	•		General and administrative expenses decreased by $138,000, or 8.1%, totaling $1,569,000 for the second quarter 2004. This decrease is primarily the result of a $140,000 decrease in medical claims associated with the Company’s self-funded medical plan.
	•		Depreciation and amortization expense decreased by $3,000, or 0.5%, and totaled $643,000 in the second quarter 2004.

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 $315,000 in the second quarter 2004. If the swap agreements remain in effect until their expiration date in 2005, the cumulative total of all related income and expense entries will equal zero.
	•		Interest income decreased by $21,000 during the second quarter 2004 as compared to the second quarter 2003. The decrease is primarily the result of the payoff of the note receivable that the Company held in September 2003.
	•		Gain on the sale of assets totaled $2,000 for the second quarter 2004.
	•		Interest expense increased by $69,000, or 12.4%, during the second quarter 2004 as compared to the second quarter 2003. This increase is primarily the result of increased interest expense related to the additional debt from the judgment loan and the higher rate of interest on the trust preferred securities as described in Note 5 to the financial statements.
	•		Litigation expenses totaling $8,000,000 were recorded during second quarter 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 the second quarter 2004 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’s income tax expense of $696,000 in the second quarter 2003 results from its reversal of the income tax benefit

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previously recognized during the first quarter 2003 based on the net loss to date at that time.

First Six Months 2004 Compared to First Six Months 2003

Revenues

     The Company reported revenues of $26,426,000 for the first six months 2004, a $4,153,000, or 18.6%, increase over the first six months 2003. Resort revenues, excluding cost reimbursements, increased by $651,000, or 4.9%, compared to 2003; while real estate brokerage revenues, excluding cost reimbursements, improved by $3,346,000, or 45.3%.

     The primary factors contributing to the $4,153,000 increase in revenues were as follows:

	•		Golf revenue in the first six months 2004 increased by $66,000, or 1.3%, as compared to the first six months 2003. The number of resort golf rounds played at Harbour Town Golf Links during the first six months 2004 increased by 382 rounds, or 3.7%, from the first six months 2003. This increase in rounds played was partially offset by a $6.26, or 4.4%, decrease in the average resort rate paid per round in the first six months 2004 over the first six months 2003. The number of resort golf rounds played at the Ocean and Sea Marsh golf courses during the first six months 2004 increased by 614 rounds, or 2.4%, from the first six months 2003. The average resort rate paid per round increased by $.51, or 0.8%, in the first six months 2004 over the first six months 2003.
	•		Rental management revenue decreased by $259,000, or 7.8%, during the first six months 2004 as compared with the first six months 2003. Total guest occupied nights decreased by 1,481 nights, or 8.4%, during the first six months 2004 as compared with the first six months 2003. The average daily rate was $179.44 in the first six months 2004, as compared to $179.41 during the first six months 2003.

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	•		Food and beverage operations generated revenues of $2,349,000 in the first six months 2004. This represents an increase of $684,000, or 41.1%, over the first six months 2003. This increase was primarily due to a $459,000, or 55.4%, increase in revenue from catering operations, a $109,000, or 45.0%, increase in revenue from the Heritage Grill, a $56,000 or 38.4%, increase in revenue from the Harbour Town Bakery and a $42,000, or 42.0%, increase in revenue from the Sea Pines Beach Club and an $18,000 increase in revenue from other food and beverage operations.
	•		The Inn at Harbour Town generated revenues of $1,150,000 in the first six months 2004. This represents an increase of $166,000, or 16.9%, over the first six months 2003. Total guest occupied nights increased by 768 nights, or 15.3%, during the first six months 2004 as compared with the first six months 2003. The average daily rate was $183.42 during the first six months 2004, as compared to $183.36 during the first six months 2003.
	•		Other recreation services revenue increased by $98,000, or 5.0%, during the first six months 2004 as compared with the first six months 2003. This increase is primarily the result of a $48,000, or 13.5%, increase in revenue from the Company’s fitness center and bike shop operations and a $40,000, or 6.0%, increase in revenue from the Sea Pines Racquet Club.
	•		Other revenue decreased by $104,000, or 24.8%, during the first six months 2004 as compared with the first six months 2003. This decrease is primarily due to a reduction in licensing fee revenue from the TidePointe retirement community and decreased membership sales revenue related to the Sea Pines Country Club.
	•		Real estate brokerage revenues increased by $3,346,000, or 45.3%, during the first six months 2004 as compared with the first six months 2003. Real estate brokerage revenues are very closely tied to real estate sales. The dramatic increase in sales is the result of favorable economic conditions, an expansion of our marketing efforts to the mainland markets, the addition of several new agents, and the continuation of management’s focus on listings and individual agent marketing.
	•		Cost reimbursements increased by $156,000 during the first six months 2004 as compared with the first six months 2003. The increase was primarily the result of increased real estate marketing costs reimbursed by real estate agents.

Cost of revenues

     Cost of revenues was $18,667,000 in the first six months 2004, representing an increase of $3,170,000, or 20.5%, over the first six months 2003. Approximately $2,705,000 of this increase was attributable to increased commissions earned by real estate sales agents as a result of improved real estate sales activity. The remainder of this increase related to increased resort revenue activities.

Expenses

•

Sales and marketing expenses increased by $592,000, or 34.6%, and totaled $2,302,000 for the first six months 2004. This increase was primarily due to a $285,000, or 32.0%,

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			increase in resort marketing promotions and expenses, the recording of $178,000 in resort marketing barter expenses, a $66,000, or 24.2%, increase in conference sales expenses and a $63,000, or 11.6%, increase in real estate marketing expenses.
	•		General and administrative expenses increased by $37,000, or 1.2%, totaling $3,154,000 for the first six months 2004. Excluding the effect of a property tax refund of $304,000 received and recorded in the first quarter 2003, general and administrative expenses decreased by $267,000. This decrease is primarily the result of a $289,000 decrease in medical claims associated with the Company’s self-funded medical plan.
	•		Depreciation and amortization expense decreased by $5,000, or 0.4%, and totaled $1,289,000 for the first six months 2004.

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 $448,000 during the first six months 2004. If the swap agreements remain in effect until their expiration date in 2005, the cumulative total of all related income and expense entries will equal zero.
	•		Interest income decreased by $146,000 during the first six months 2004 as compared to the first six months 2003. This was primarily as a result of the Company receiving interest of $104,000 during first quarter 2003 on excess property taxes paid from fiscal 1998 through fiscal 2001 and the payoff of a note receivable that the Company held in September 2003.
	•		Gain on the sale of assets totaled $1,000 for the first six months 2004.
	•		Interest expense increased by $131,000, or 11.7%, during the first six months 2004 as compared to the first six months 2003. This increase is primarily the result of increased interest expense related to the additional debt from the judgment loan and the higher rate of interest on the trust preferred securities as described in Note 5 to the financial statements.
	•		Litigation expenses totaling $8,000,000 were recorded during second quarter 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 the first six months 2004 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.

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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 low resort revenue and real estate sales season, and the period from March through October has historically been the Company’s high season.

     Cash and cash equivalents increased by $2,826,000 since October 31, 2003 and totaled approximately $6,868,000 at April 30, 2004, of which $6,466,000 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 from October 31, 2003 by $1,051,000, resulting in a working capital deficit of $2,947,000 at April 30, 2004.

     Accounts receivable increased by $933,000 since October 31, 2003 and totaled approximately $2,353,000 at April 30, 2004. Group (corporate) business typically increases dramatically during April due to the MCI Heritage golf tournament, and the majority of this business is billed to the corporations in April and subsequently paid during the month of May.

     Under the Company’s master credit agreement, the Company maintains four loan facilities: a term loan, a revolving line of credit, a judgment loan and a seasonal line of credit. Available funds under these four loan facilities total $42,397,000, of which $38,874,000 was outstanding at April 30, 2004.

     The term loan had an outstanding principal amount of $14,797,000 as of April 30, 2004 and matures on November 1, 2008. The revolving line of credit had an outstanding balance of $18,200,000 as of April 30, 2004 and matures on November 1, 2007. The judgment loan had an outstanding balance of $4,800,000 on April 30, 2004 and matures on July 30, 2005. The maximum potential available borrowings under the seasonal line of credit total $4,500,000. It is used to meet cash requirements during the Company’s off-season winter months. As of April 30, 2004, the seasonal line of credit had an outstanding balance of $1,077,000. The seasonal line of credit expires on November 1, 2007.

     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%.

     The Articles of Incorporation of the Company provide for dividends on the preferred stock of $0.722 per share per annum to be paid in arrears. The terms of the judgment loan described in Note 5 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. As of April 30, 2004, the Company has accrued $80,000 of dividends on the preferred stock applicable to the year ended October 31, 2003. The Company may resume these dividend and interest payments with approval from its bank.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     During the quarter ended April 30, 2004, there were no material changes to the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003.

Item 4. Controls and Procedures

     As of April 30, 2004, the Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of April 30, 2004, the Company’s disclosure controls and procedures were effective. There has been no change in the Company’s internal control over financial reporting during the quarter ended April 30, 2004 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On January 23, 2004, Prudential-Bache/Fogelman Harbour Town Properties, L.P. (“Prudential-Bache/Fogelman”) filed a complaint in the United States District Court, District of South Carolina, Beaufort Division, naming the Company and Sea Pines Company, Inc. as defendants, and seeking a declaratory judgment that Prudential-Bache/Fogelman is the owner of certain trademarks, an injunction prohibiting the Company and Sea Pines Company, Inc. from making any claims of ownership of the trademarks and an unspecified amount of compensatory and punitive damages based on allegations of wrongful interference in Prudential-Bache/Fogelman’s prospective business relations. Service was accepted on May 21, 2004 and the Company and Sea Pines Company, Inc. intend to respond by denying the allegations and defending the actions vigorously. An adverse judgment in this matter could have a material adverse effect on the Company’s financial condition, results of operations and cash flow.

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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

     None

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters To A Vote of Security Holders

a)

The Annual Meeting of Shareholders of the Company was held on March 10, 2004.

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b)

The following Directors of the Company were elected during the Annual Meeting:

The following Directors’ terms of office as Directors of the Company continued after the Annual Meeting:

Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

	(a)		Exhibits:
			See attached Exhibit Index
	(b)		Reports on Form 8-K filed during the quarter ended April 30, 2004, 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 February 11, 2004, reporting under Items 7 and 9.
	(ii)		Sea Pines Associates, Inc., current report on Form 8-K dated March 10, 2004, reporting under Item 9.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

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