UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File No.: 001-13457

ORTHODONTIC CENTERS OF AMERICA, INC.

3850 N. Causeway Boulevard, Suite 800
Metairie, Louisiana 70002
(504) 834-4392

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ     NOo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YESþ     NOo

At May 12, 2004 there were approximately 50,097,000 outstanding shares of the Registrant’s Common Stock, $.01 par value per share.

ORTHODONTIC CENTERS OF AMERICA, INC.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Report may not be based on historical facts and are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward looking terminology, such as “anticipate,” “estimate,” “believe,” “expect,” “foresee,” “may,” “would,” “could” or “will.” These forward-looking statements include, without limitation, statements regarding patient revenue, critical accounting policies, net operating loss carryforwards and income tax liability, effects of changes in accounting, amounts payable to affiliated practices under incentive programs, liquidity, capital resources, cash needs, buy-outs of Service Agreements, transitions of affiliated practices, pending litigation, advancement of funds to affiliated practices, recoverability of assets related to certain practices, updates to internal controls, repayment of outstanding indebtedness, capital expenditures for development of de novo centers, investment activities, stock repurchases, deferred tax assets, future growth and operating results. We caution you not to place undue reliance on these forward-looking statements, in that they involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include potential adverse changes in the Company’s financial results and condition, disruption of the Company’s relationships with its affiliated practices or loss of a significant number of the Company’s affiliated practices, failure or delay in integrating OrthAlliance’s affiliated practices, adverse outcomes of litigation pending against the Company and OrthAlliance, competition, inability to effectively manage an increasing number of affiliated practices, changes in the general economy of the United States and the specific markets in which the Company operates, difficulties in staffing and managing foreign offices, foreign currency exchange fluctuations and other risks relating to international expansion and the Company’s foreign operations, changes in the Company’s operating or expansion strategy, inability of the Company to attract and retain qualified management, personnel and affiliated practitioners, inability of the Company to effectively market its services and those of its affiliated practices, changes in regulations affecting the Company’s business, and other factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, other filings with the Securities and Exchange Commission or in other public announcements by the Company. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)

See accompanying notes to condensed consolidated financial statements.

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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(in thousands, except per share data)

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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)

     See accompanying notes to condensed consolidated financial statements.

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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004

1. DESCRIPTION OF BUSINESS

     Orthodontic Centers of America, Inc. and its wholly- and majority-owned subsidiaries (“OCA”) provide business services to orthodontic and pediatric dental practices in 46 states and four foreign markets. References to the “Company” are to OCA and the entities required to be consolidated pursuant to FIN 46R (as defined below), unless the context otherwise requires.

     OCA provides purchasing, financial, marketing and administrative services under service, consulting and management service agreements (“Service Agreements”). OCA provides services to orthodontic and pediatric dental practices operated by orthodontists and pediatric dentists and/or their wholly-owned professional entities (“Affiliated Practices”). OCA does not hold any ownership interest in the Affiliated Practices and does not employ the orthodontists or other practitioners in the Affiliated Practices. The patients who are parties to patient contracts with Affiliated Practices are the patients of the Affiliated Practices, not OCA. OCA does not practice orthodontics or other forms of dentistry, and is prohibited from doing so by the laws of each jurisdiction in which it operates.

     OCA generally affiliates with an existing orthodontic or pediatric dental practice by entering into a Service Agreement and acquiring substantially all of the non-professional assets of the practice or professional corporation. OCA obtains the exclusive right to provide business operations, financial, marketing and administrative services to the Affiliated Practice during the term of the Service Agreement. The Service Agreements generally provide that the professional corporation or entity is responsible for providing orthodontic or pediatric dental services and for employing all orthodontists or pediatric dentists. The terms of the Service Agreements range from 20 to 40 years, with most ranging from 20 to 25 years. In many cases, the Affiliated Practice has the option to terminate the Service Agreement after a certain number of years (typically seven) as prescribed in the Service Agreement. If the Affiliated Practice terminates its affiliation with OCA, it generally is required to pay OCA for the tangible and intangible assets associated with the practice at their current book value or sell the Affiliated Practice’s interests in the practice to another licensed orthodontist or pediatric dentist.

     The following table provides information about the Affiliated Practices:

     The total number of Affiliated Practices at March 31, 2004 and 2003 excludes 61 and 50 practices, respectively, that are parties to Service Agreements but were engaged in litigation with OCA or its subsidiary, OrthAlliance, Inc., and had ceased paying service fees as of such respective dates. The total number of Affiliated Practices at March 31, 2004 and 2003 includes 40 and 29 other practices, respectively, that were parties to Service Agreements and were not engaged in litigation with OCA or OrthAlliance but had ceased paying service fees as of such respective dates. The Company had generally

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ceased to record patient revenue and fee revenue with respect to each of these practices as of the respective dates (“Non-Performing Practices”). Therefore, at March 31, 2004, there were a total of 101 Non-Performing Practices for which the Company had generally ceased to record patient revenue, and at March 31, 2003, there were a total of 79 Non-Performing Practices for which the Company had generally ceased to record fee revenue. See Note 5 for further discussion.

2. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet was derived from the audited financial statements, but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for financial statements. In the opinion of management, all normal and recurring adjustments, except for the adjustments resulting from the adoption of FIN 46 as defined below, considered necessary for a fair presentation have been included. While all available information has been considered, actual amounts could differ from those estimates. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in OCA’s Annual Report on Form 10-K for the year ended December 31, 2003.

Reclassifications

     Certain reclassifications have been made to prior periods in order to conform to the current period presentation. This primarily relates to reclassification of “Assets associated with non-performing practices.” See Note 5.

Adoption of New Accounting Standard

     Effective January 1, 2004, OCA was required to, and did, adopt the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN 46R”). FIN 46R was issued by the FASB on December 24, 2003 and replaced Interpretation No. 46 (“FIN 46”), which was issued in January 2003. FIN 46R requires the consolidation of variable interest entities (“VIE”), as defined in FIN 46R, when an enterprise absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the VIE.

     OCA has evaluated its contractual and economic relationships with its Affiliated Practices in light of FIN 46R, and has concluded that the Affiliated Practices are VIEs for purposes of FIN 46R. OCA has also concluded that it is the primary beneficiary of the Affiliated Practices for purposes of FIN 46R, in that OCA absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of contractual or other financial interests in the Affiliated Practices. Accordingly, effective January 1, 2004, OCA is consolidating the assets, liabilities, equity and financial results of the Affiliated Practices (other than the Non-Performing Practices) in the Company’s consolidated financial statements. The Company was not required to consolidate the Affiliated Practices for financial reporting purposes prior to January 1, 2004, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 97-2.

     The Company’s adoption of FIN 46R and consolidation of the Affiliated Practices for financial reporting purposes does not change the legal and contractual relationships between OCA and the Affiliated Practices. OCA does not hold any ownership interest in the Affiliated Practices and does not employ the orthodontists or other practitioners in the Affiliated Practices. The patients who are parties to patient contracts with Affiliated Practices are the patients of the Affiliated Practices, not OCA. OCA does not practice orthodontics or other forms of dentistry, and is prohibited from doing so by the laws of each jurisdiction in which the Company operates.

     In connection with the Company’s consolidation of the Affiliated Practices for financial reporting purposes effective January 1, 2004, the Company now presents patient revenues and patient receivables

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associated with the activities of its Affiliated Practices in its consolidated financial statements. Services fees and service fees receivable are eliminated upon consolidation of the Affiliated Practices. In addition, due to consolidation under FIN 46R, the Company will be presenting in its consolidated statements of income (loss) the amounts retained by practitioners under its Service Agreements. The consolidation rules of FIN 46R and Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” will result in a change in our accounting for excess distributions to affiliated practices that are consolidated under FIN 46R, as well as identifiable intangible assets and goodwill. Due to the consolidation of Affiliated Practices and resulting presentation of patient revenue in the Company’s consolidated statements of income (loss), the Company’s accounting policy for revenue recognition will now be reflective of the Affiliated Practices’ services performed to their patients rather than the services the Company performs on behalf of and for the Affiliated Practices. The Company’s new accounting policies effective January 1, 2004 are summarized following the analysis of the impact of FIN 46R below.

     The table below provides the impact to the Company’s condensed consolidated balance sheet at January 1, 2004, including elimination of intercompany transactions, as a result of the Company’s adoption of FIN 46R (in thousands):

     The following discusses the more significant adjustments on certain line items of the Company’s condensed balance sheet as a result of adopting FIN 46R:

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     (a) Patient Receivables and Service Fee Receivables. Effective January 1, 2004, the Company records patient receivables in its consolidated balance sheets. Patient receivables represent amounts patients owe Affiliated Practices, as calculated under the Company’s revenue recognition policy, as discussed below. They reflect amounts yet to be received after being recognized as patient revenue. These amounts are expected to be collected within twelve months. Because the Company now consolidates Affiliated Practices, the Company no longer records service fees receivable in its consolidated balance sheets, including the current and financed practice-related expense portion of service fees receivable.

      (b) Advances to Affiliated Practices and Amounts Payable to Affiliated Practices. Effective January 1, 2004, the Company does not record in its consolidated balance sheets cash advances to Affiliated Practices against future distributions. Because the Company now consolidates Affiliated Practices, at January 1, 2004, the Company made the following adjustments with respect to advances to Affiliated Practices: (A) eliminated advances to Affiliated Practices that related to cash advances to Affiliated Practices against future distributions, (B) reclassified advances related to amounts due under Service Agreements with Non-Performing Practices to assets associated with Non-Performing Practices (which are reflected in “Other assets” in the table above), and (C) eliminated advances to Affiliated Practices related to amounts due under Service Agreements. The Company will continue to record receivables and payables related to short-term differences between amounts distributed as monthly or biweekly draws to practitioners and the amounts that the practitioners are entitled to retain under their Service Agreements, until those amounts are trued up.

     (c) Goodwill and Identifiable Intangibles. Pursuant to the consolidation provisions of FIN 46R, effective January 1, 2004, the Company accounts for affiliations with practices as business combinations and therefore was required to reclassify identifiable intangible assets related to Service Agreements as goodwill. Prior to the Company’s adoption of FIN 46R, it recorded these amounts as identifiable intangible assets and amortized these assets. Also, as of January 1, 2004, the Company reclassified identifiable intangible assets related to Non-Performing Practices into “Assets associated with Non-Performing Practices,” because the Company does not consolidate these practices. (See Note 5.) The Company continues to amortize these assets. Goodwill is not amortized but is tested for impairment under provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” As a result of the Company’s adoption of FIN 46R, the Company determined that an interim impairment test was required under SFAS No. 142. Accordingly and with the assistance of an outside consultant, the Company determined that no impairment was warranted as of the test date. However, the Company’s fair value assessment is sensitive to a decrease in the market price of OCA common stock. As a result, if the market price per share of OCA common stock were to decrease materially, it could result in an impairment of all or a portion of the carrying value of goodwill. See Note 4 “Identifiable Intangible Assets and Goodwill.”

     (d) Deferred Revenue and Service Fee Prepayments. Effective January 1, 2004, the Company records deferred revenue in its consolidated balance sheets. Deferred revenue represents amounts received prior to the recognition of the related patient revenue. The Company no longer records related service fee prepayments in its consolidated balance sheets.

     (e) Cumulative effect of change in accounting principle. As a result of adopting FIN 46R, the Company recorded a cumulative effect charge of $74.7 million, net of income tax benefit of $41.4 million, which was affected by items discussed above. The pre-tax charge was primarily due to the change in the Company’s revenue recognition policy, a reclassification of certain advances to Affiliated Practices as amounts retained by practitioners as described above and reversal of previously-recorded amortization of identifiable intangible assets for the period following adoption of SFAS No. 142.

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Summary of Significant Accounting Policies

     For a summary of our significant accounting policies, see OCA’s Annual Report on Form 10-K for the year ended December 31, 2003. New accounting policies resulting from the adoption of FIN 46R are outlined below.

Principles of Consolidation

     The accompanying condensed consolidated financial statements include the accounts of Orthodontic Centers of America, Inc. and its wholly- and majority-owned subsidiaries and entities required to be consolidated pursuant to FIN 46R. Patient revenue is presented in the accompanying condensed consolidated statements of income (loss) because the Company consolidates the assets, liabilities, equity and financial results of the Affiliated Practices (other than Non-Performing Practices) for financial reporting purposes. All significant intercompany accounts and transactions, including service fees, have been eliminated in consolidation.

Revenue Recognition

     The Company generally recognizes patient revenues related to services provided to patients on a straight-line basis over the term of treatment (which typically averages about 25 months). Revenues related to teeth retention appliances, commonly known as retainers, are recognized in the final month of treatment when braces are removed and retainers are provided to the patients, in accordance with EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”

Amounts Retained by Practitioners

     Amounts retained by practitioners represents amounts retained in accordance with contractual terms of the Service Agreements. Amounts retained by practitioners includes cash advances provided to practitioners to fund certain practice-related matters or to provide practices with unsecured financing which will be repaid from future distributions and which are reflected as an expense in the period such amounts are advanced. Amounts retained by practitioners are reduced by repayments in the period in which repaid. On a monthly or biweekly basis, the Company generally distributes cash draws to practitioners that are intended to approximate calculated amounts retained by the practitioners under their Service Agreements. At the end of each quarter, the Company calculates amounts the practitioners are entitled to retain in accordance with the Service Agreements. The Company then records a receivable or payable, as applicable, for any overpayment or underpayment. To the extent amounts are payable to the Company, the Company generally reduces the next monthly or biweekly draw to the practitioners.

Patient Receivables

     Effective January 1, 2004, patient receivables represent amounts owed from patients of our affiliated practices, as calculated under the Company’s revenue recognition policy. The Company provides an allowance for uncollectible amounts based upon a percentage estimate of patient receivables that may not be collected by our affiliated practices. The allowance percentage is determined based on the Company’s historical experience in collecting patient receivables on behalf of the Affiliated Practices and write-off experience.

Deferred Revenue

     Deferred revenue represents down payments, prepayments and other cash received under patient contracts prior to the related services being provided by Affiliated Practices. The Company defers recognition of such amounts until they are recognized under the Company’s revenue recognition policy.

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Goodwill and Identifiable Intangibles

     Pursuant to the consolidation provisions of FIN 46R, effective January 1, 2004, the Company accounts for affiliations with Affiliated Practices as business combinations and has reclassified identifiable intangible assets as goodwill. Prior to the adoption of FIN 46R, the Company amortized the identifiable intangible assets over the lesser of the expected life of the Service Agreement or 25 years. See Note 4 for a discussion of the Company’s goodwill and results of its interim impairment tests performed in connection with the Company’s adoption of FIN 46R.

Segment Reporting

     Operating segments are components of a business enterprise that its chief operating decision maker (“CODM”) applies his decisions to allocate the resources to its different segments and to make assessments on their performances. The Company’s CODM, as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is OCA’s Chief Executive Officer. The CODM assesses the performance of the Company based on revenues and overall profitability. By this definition, the Company operates only in one operating segment: the providing of purchasing, financial, marketing, administrative and other business services under Service Agreements to Affiliated Practices operated by orthodontists and pediatric dentists and/or their wholly-owned professional entities.

3. PROPERTY, EQUIPMENT AND IMPROVEMENTS

     Property, equipment and improvements consisted of the following as of the dates indicated: