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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

For the transition period from              to             

Commission File Number: 1-13263

Castle Dental Centers, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (713) 490-8400

N/A

(Former name, former address and former fiscal year, if changed since last year)

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  ¨

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

The number of shares of Common Stock issued and outstanding, par value, $0.001 per share, as of May 7, 2004 was 8,265,323.

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CASTLE DENTAL CENTERS, INC.

Index

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

CASTLE DENTAL CENTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

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CASTLE DENTAL CENTERS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(in thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

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CASTLE DENTAL CENTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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CASTLE DENTAL CENTERS, INC.

NOTES TO CONDENSED CONDSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

Corporate Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and all wholly owned and beneficially-owned subsidiaries and the accounts of affiliated dental practices in which the Company has a long-term controlling financial interest. Because of corporate practice of medicine laws in the states in which the Company operates, the Company does not own dental practices but instead enters into exclusive long-term management services agreements (“Management Services Agreements”) with professional corporations that operate the dental practices. In addition, the Company has the contractual right to designate, upon the occurrence of certain events, the licensed dentist who is the majority shareholder of the capital stock of the professional corporation at a nominal cost (“nominee arrangements”). At March 31, 2004, all of the affiliated dental practices were owned by dentists with whom the Company had a nominee arrangement. The Management Services Agreements have initial terms of twenty-five years. The management fee charged by the Company to an affiliated dental practice is intended to reflect and is based on the fair value of the management services rendered by the Company to the affiliated dental practice. Subject to applicable law, the management fee earned by the Company, except from professional corporations located in California, is generally comprised of three components: (i) the costs incurred by it on behalf of the affiliated dental practice; (ii) a base management fee ranging from 12.5% to 20.0% of net patient revenues; and, (iii) a performance fee equal to the net patient revenues of the affiliated dental practice less (a) the expenses of the affiliated dental practice and (b) the sum of (i) and (ii), as described in the agreements. In California, the Company is paid a monthly management fee comprised of two components: (i) the costs incurred by it on behalf of the affiliated dental practice and (ii) a management fee in an amount of 30.0% of net patient revenues; plus a bonus equal to 30.0% of net patient revenues in excess of average monthly net patient revenues over the prior two-year period. The amount of the management fee is reviewed by the Company and the affiliated dental practice at least annually in order to determine whether such fee should be adjusted to continue to reflect the fair value of the management services rendered by the Company.

Through the Management Services Agreements and the nominee arrangements, the Company has a significant long-term controlling financial interest in the affiliated dental practices and, therefore, according to Emerging Issues Task Force Issue No. 97-2, “Application Statement of Financial Accounting Standard (“SFAS”) No. 94, Consolidation of All Majority-Owned Subsidiaries, and Accounting Principles Board Opinion (“APB”) No. 16, Business Combinations, to Physician Practice Management Entities and Certain Other Entities with Contractual Management Agreements,” consolidates the results of the affiliated practices with those of the Company. Net patient revenues are presented in the accompanying statement of operations because the Company must present consolidated financial statements. All significant intercompany accounts and transactions, including management fees, have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements as of March 31, 2004, and for the three months ended March 31, 2003 and 2004 include the accounts of the Company and its management company subsidiaries and the affiliated dental practices. Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. The unaudited condensed consolidated financial statements have been prepared consistent with the accounting policies reflected in the Company’s annual financial statements included in the Company’s Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission and should be read in conjunction therewith. In management’s opinion, the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such financial statements. Interim results are not necessarily indicative of results for a full year.

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CASTLE DENTAL CENTERS, INC.

NOTES TO CONDENSED CONDSOLIDATED FINANCIAL STATEMENTS – (Continued)

Accounting for Stock-Based Compensation

The Company accounts for its stock-based compensation plans in accordance with APB No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). In accordance with the provisions of APB No. 25, stock-based employee compensation cost is not reflected in net income for options granted at an exercise price equal to or in excess of the market value of the underlying common stock on the date of grant. The Company recognizes compensation cost on options granted at an exercise price less than the market value of the underlying common stock on the date of grant. In August 2003, the Company issued approximately 3.9 million stock options with an exercise price of $0.05 per share while the market value of the underlying common stock on the date of grant was $0.15 per share. The Company recorded approximately $0.4 million in deferred compensation, which is expensed over the vesting period of five years. The Company expensed approximately $20,000 in compensation expense during the first quarter of 2004. All stock options granted by the Company prior to August 2003 were issued with an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates, in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 148 “Accounting for Stock-Based Compensation – an Amendment of FASB Statement No. 123”, the effect on net income and income per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation:

Recent Accounting Pronouncements

As discussed above, the Company currently accounts for stock-based compensation as prescribed by APB 25, and does not record compensation expense related to grants issued with exercise prices equal to the market price of the underlying common stock on the date of the grant. On March 31, 2004, the FASB issued an Exposure Draft, “Share-Based Payment,” which, if enacted in its current form, would eliminate the Company’s ability to account for stock-based compensation using APB 25 and instead would require the Company to account for stock option awards using a fair-value based method resulting in compensation expense for all stock option awards. The proposed statement would be effective for stock options granted or modified in fiscal years beginning after December 15, 2004. Additionally, for stock options granted or modified after December 15, 1994 that have not vested as of the effective date of the proposed statement, compensation cost will be measured and recorded based on the same estimates of fair value calculated as of the date of grant as currently disclosed within the table required by SFAS 148 presented above. The Company is currently evaluating any potential impact this proposed statement will have on its results of operations in future periods. If enacted in its proposed form, the proposed statement may have an impact similar to that presented in the calculation above.

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CASTLE DENTAL CENTERS, INC.

NOTES TO CONDENSED CONDSOLIDATED FINANCIAL STATEMENTS – (Continued)

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses the consolidation of variable interest entities (VIEs) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. The Company does not have interests in structures that are commonly referred to as special-purpose entities, and therefore, the adoption of FIN 46R as of March 31, 2004 did not have a material affect on its financial position, results of operations or cash flows.

Reclassifiactions

Certain reclassifications have been made to the consolidated financial statements as of December 31, 2003, to conform to the current year presentation. There is no effect on previously reported earnings.

2. Long-term Debt:

The Company maintains a credit agreement (“Credit Agreement”) with GE Capital Corporation (“GEC