OXFORD FINANCE CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

OXFORD FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

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.

(2) Indicate by check mark whether the registrant is an accelerated filer. Yes o No x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $.01 par value, outstanding as of August 14, 2003 was 5,200,000.


		PAGE

PART I.	FINANCIAL INFORMATION		3

Item 1.	Financial Statements		3

	Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002		3
	Statements of Operations for the three and six months ended June 30, 2003 and 2002(unaudited)		4
	Statement of Stockholders’ Equity for the six months ended June 30, 2003 (unaudited)		5
	Statement of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)		6
	Schedule of Investments as of June 30, 2003 and December 31, 2002 (unaudited)		7
	Notes to Financial Statements (unaudited)		11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Overview		18
	Results of Operations		21
	Liquidity and Capital Resources		23

Item 3.	Quantitative and Qualitative Disclosure About Market Risk		25

Item 4.	Control Procedures		26

PART II.	OTHER INFORMATION		26
Item 1.	Legal Proceedings		27

Item 2	Changes in Securities and Use of Proceeds		27

Item 3	Defaults upon Senior Securities		27

Item 4	Submission of Matters to a Vote of Security Holders		27

Item 5	Other Information		27

Item 6	Exhibits and Reports on Form 8-K		27


							Prior to becoming
				As a Business			a Business
				Development			Development
				Company			Company
				June 30, 2003			December 31, 2002
				(Unaudited)
	ASSETS
	Cash and cash equivalents			$	2,717,499		$	11,831,439
	Investments:
		Loans at fair value (cost of $51,745,591 and $39,963,137)			51,745,591			39,963,137
		Less: unearned income			(1,156,966	)		(932,503	)
		Investment in equity securities at fair value (cost of $1,483,720 and $1,028,279, respectively)			1,435,760			999,948

			Total Investments		52,024,385			40,030,582
	Principal and interest receivable				1,108,681			663,911
	Interest receivable — cash and cash equivalents				—			15,336
	Intangible assets, net				212,760			224,580
	Prepaid & other assets				577,457			498,363

TOTAL ASSETS				$	56,640,782		$	53,264,211

	LIABILITIES & STOCKHOLDERS’ EQUITY LIABILITIES
	Notes payable			$	9,999,581		$	7,131,205
	Accounts payable				37,785			17,578
	Accrued expenses and other liabilities				596,441			171,747
	Customer deposits				168,308			124,253

Total Liabilities				$	10,802,115		$	7,444,783

STOCKHOLDERS’ EQUITY
	Preferred stock, 10,000,000 shares authorized, no shares issued or outstanding			$	—		$	—
	Common stock, $0.01 par value, 40,000,000 shares authorized and 5,200,000 shares issued and outstanding				52,000			52,000
	Capital in excess of par value				45,739,152			45,849,434
	Earnings (loss) in excess of distributions				95,475			(53,675	)
	Net unrealized depreciation on investments				(47,960	)		(28,331	)

Total stockholders’ equity					45,838,667			45,819,428

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	56,640,782		$	53,264,211


										(1)
				Prior to becoming						Prior to becoming
	As a Business			a Business			As a Business			a Business
	Development			Development			Development			Development
	Company			Company			Company			Company
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Interest and fee income
Interest and fee income — loans	$	1,369,527		$	410,398		$	3,194,266		$	442,856
Interest income — cash and cash equivalents		20,821			150,541			50,767			157,888

Total interest and fee income		1,390,348			560,939			3,245,033			600,744
Operating expenses
Salaries, payroll taxes and benefits		497,287			236,181			943,143			286,181
Interest and financing fees		137,348			—			271,986			26,301
General and administrative		275,846			153,108			528,754			358,790

Total operating expense		910,481			389,289			1,743,883			671,272

Net operating income (loss) before provision for loan losses		479,867			171,650			1,501,150			(70,528	)
Provision for loan losses		—			(25,000	)		—			(50,000	)

Net operating income (loss), before income taxes and net unrealized depreciation on investments		479,867			146,650			1,501,150			(120,528	)
Income tax (expense) / benefit		—			(58,660	)		—			48,212

Income before net unrealized depreciation on investments		479,867			87,990			1,501,150			(72,316	)
Net unrealized depreciation on investments		(5,163	)		—			(19,629	)		—

Net increase (decrease) in stockholders’ equity resulting from net income (loss)	$	474,704		$	87,990		$	1,481,521		$	(72,316	)

Per common share data:
Earnings per common share — basic and diluted	$	0.09		$	0.02		$	0.28		$	(0.02	)
Dividends paid per common share	$	0.19		$	—		$	0.26		$	—
Weighted average common shares outstanding - basic and diluted		5,200,000			5,200,000			5,200,000			4,200,000


					Capital in			Earnings			Net unrealized			Total
	Common Stock				Excess of Par			in excess of			depreciation			Stockholders'
	Shares		Amount		Value			distributions			on investments			Equity

Balance at December 31, 2002		5,200,000	$	52,000	$	45,849,434		$	(53,675	)	$	(28,331	)	$	45,819,428
Offering of Common Stock, net of costs		—		—		(110,282	)		—			—			(110,282	)
Net increase / (decrease) in stockholders’ equity resulting from net income									1,501,150			(19,629	)		1,481,521
Dividend declared and paid									(1,352,000	)					(1,352,000	)

Balance at June 30, 2003		5,200,000	$	52,000	$	45,739,152		$	95,475		$	(47,960	)	$	45,838,667


				Prior to becoming
	As a Business			a Business
	Development			Development
	Company			Company
	Six Months			Six Months
	Ended			Ended
	June 30, 2003			June 30, 2002 (1)
Cash Flows from Operating Activities:
Net increase (decrease) in stockholders’ equity resulting from net income (loss)	$	1,481,521		$	(72,316	)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Provision for loan losses		—			50,000
Depreciation expense		25,267			2,832
Amortization expense		11,820			—
Amortization of deferred fees		(304,203	)		(20,730	)
Changes in operating assets and liabilities:
Interest receivable		(88,819	)		(64,355	)
Prepaid and other assets		(60,596	)		(311,947	)
Accounts payable		20,207			41,366
Accrued and other liabilities		111,991			390,759

Net Cash Flows Provided by Operating Activities		1,197,188			15,609

Cash Flows from Investing Activities:
Capital expenditures		(28,429	)		(54,287	)
Purchase of intangible asset		—			(236,400	)
Net increase in loans and equity investments		(11,688,794	)		(20,000,754	)

Net Cash Flows Used in Investing Activities:		(11,717,223	)		(20,291,441	)

Cash Flows from Financing Activities Stock Issuance Costs		(110,282	)		46,126,242
Proceeds from borrowings, net		2,868,377			—
Dividends paid		(1,352,000	)		—

Net Cash Flows Provided by Financing Activities		1,406,095			46,126,242

Net (Decrease) Increase in Cash and Cash Equivalents		(9,113,940	)		25,850,410
Cash and Cash Equivalents — Beginning of Period		11,831,439			—

Cash and Cash Equivalents — End of Period	$	2,717,499		$	25,850,410

Supplemental Data:
Cash paid for interest:	$	245,542		$	26,357


		June 30, 2003
Portfolio Company	Investment	Cost		Fair Value
Alphavax Human Vaccines, Inc.	Senior Debt	$	435,727	$	435,727
	Warrants to Purchase
	Common Stock		1,932		1,932

Altus Biologics, Inc.	Senior Debt		2,233,088		2,233,088
	Warrants to Purchase
	Common Stock		50,546		48,538

Ambit Biosciences, inc	Senior Debt		504,071		504,071
	Warrants to Purchase
	Preferred Stock		13,723		13,660

Amnis	Senior Debt		177,940		177,940

Amphora Discovery, Inc.	Senior Debt		4,199,162		4,199,162
	Warrants to Purchase
	Common Stock		101,218		72,415

Ardent Pharmaceuticals, Inc.	Senior Debt		103,320		103,320
	Warrants to Purchase
	Common Stock		6,178		6,107

Athenix, Inc.	Senior Debt		292,807		292,807
	Warrants to Purchase
	Preferred Stock		20,018		19,618

Axya Medical, Inc.	Senior Debt		56,676		56,676

Beyond Genomics, Inc.	Senior Debt		2,459,763		2,459,763
	Warrants to Purchase
	Common Stock		92,450		89,577

BioTrove, Inc.	Senior Debt		1,081,100		1,081,100
	Warrants to Purchase
	Preferred Stock		21,868		21,689

Cellular Genomics, Inc.	Senior Debt		2,643,810		2,643,810
	Warrants to Purchase
	Preferred Stock		174,215		172,144

Ceptyr	Senior Debt		1,077,867		1,077,867
	Warrants to Purchase
	Preferred Stock		23,423		23,423

Chemcodes, Inc.	Senior Debt		734,759		734,759
	Warrants to Purchase
	Preferred Stock		31,492		31,072

Cogent Neuroscience, Inc. (1)	Senior Debt		302,865		302,865

CropSolution, Inc.	Senior Debt		979,374		979,374
	Warrants to Purchase
	Common Stock		49,049		48,552

Dynogen Pharmaceuticals, Inc.	Senior Debt		975,737		975,737
	Warrants to Purchase
	Preferred Stock		25,576		25,360

Egea Biosciences, Inc.	Senior Debt		818,040		818,040
	Warrants to Purchase
	Preferred Stock		20,377		19,394

Elixir Pharmaceuticals, Inc.	Senior Debt		2,053,317		2,053,317
	Warrants to Purchase
	Common Stock		54,194		53,812

Elusys Therapeutics, Inc.	Senior Debt		289,599		289,599
	Warrants to Purchase
	Preferred Stock		6,061		5,956


		June 30, 2003
Portfolio Company	Investment	Cost		Fair Value
Entelos, Inc.	Senior Debt		996,923		996,923

ICAgen, Inc.	Senior Debt		592,062		592,062

Impact Rx	Senior Debt		385,174		385,174

Infinity Pharmaceuticals	Senior Debt		4,643,354		4,643,354
	Warrants to Purchase
	Preferred Stock		84,516		84,246

LipoScience, Inc.	Senior Debt		2,138,768		2,138,768
	Warrants to Purchase
	Common Stock		87,755		86,562

Locus Discovery, Inc.	Senior Debt		3,115,240		3,115,240
	Warrants to Purchase
	Common Stock		172,931		170,773

Memory Pharmaceuticals, Inc.	Senior Debt		2,575,373		2,575,373
	Warrants to Purchase
	Common Stock		107,431		106,096

Microbia, Inc.	Senior Debt		2,557,486		2,557,486

Nobex, Inc.	Senior Debt		529,441		529,441
	Warrants to Purchase
	Preferred Stock		22,762		22,563

Norak BioSciences	Senior Debt		834,865		834,865
	Warrants to Purchase
	Preferred Stock		13,818		13,555

Odyssey Thera, Inc.	Senior Debt		202,185		202,185
	Warrants to Purchase
	Preferred Stock		5,918		5,769

Picoliter, inc	Senior Debt		906,049		906,049
	Warrants to Purchase
	Preferred Stock		26,615		25,894

Plexxikon, Inc.	Senior Debt		1,742,950		1,742,950
	Warrants to Purchase
	Preferred Stock		50,195		49,799

Protometrix, Inc.	Senior Debt		823,046		823,046
	Warrants to Purchase
	Preferred Stock		58,634		57,965

Quantum Dot	Senior Debt		148,253		148,253
	Warrants to Purchase
	Preferred Stock		3,013		3,013

Sagres Discovery, Inc.	Senior Debt		1,317,823		1,317,823
	Warrants to Purchase
	Preferred Stock		30,580		30,429

Stemco Biomedical	Senior Debt		143,937		143,937
	Warrants to Purchase
	Preferred Stock		3,354		3,354

Structural GenomiX, Inc.	Senior Debt		3,493,580		3,493,580
	Warrants to Purchase
	Preferred Stock		87,009		85,991

Transmolecular, Inc.	Senior Debt		112,662		112,662
	Warrants to Purchase
	Preferred Stock		6,004		6,004

TransTech Pharma, Inc.	Senior Debt		1,303,007		1,303,007
	Warrants to Purchase
	Common Stock		27,001		26,634

Triad Therapeutics, Inc.	Senior Debt		140,705		140,705
	Warrants to Purchase
	Common Stock		3,864		3,864

US Genomics, Inc	Senior Debt		466,720		466,720

Total Investments		$	52,072,345	$	52,024,385


		December 31, 2002
Portfolio Company	Investment	Cost		Fair Value
3-Dimensional Pharmaceuticals, Inc. (2)	Senior Debt	$	6,502,591	$	6,502,591

Alphavax, Human vaccines, Inc.	Senior Debt		410,901		410,901

Altus Biologics, Inc.	Senior Debt		1,600,376		1,600,376
	Warrants to Purchase
	Common Stock		39,165		39,165

Ambit Biosciences, inc	Senior Debt		405,094		405,094
	Warrants to Purchase
	Preferred Stock		10,915		10,915

Amphora Discovery, Inc.	Senior Debt		2,697,379		2,697,379
	Warrants to Purchase
	Common Stock		47,218		18,887

Ardent Pharmaceuticals, Inc.	Senior Debt		119,394		119,394
	Warrants to Purchase
	Common Stock		6,178		6,178

Athenix, Inc.	Senior Debt		345,931		345,931
	Warrants to Purchase
	Preferred Stock		20,018		20,018

Axya Medical, Inc.	Senior Debt		70,280		70,280

Beyond Genomics, Inc.	Senior Debt		1,659,648		1,659,648
	Warrants to Purchase
	Common Stock		64,485		64,485

Cellular Genomics, Inc.	Senior Debt		2,950,443		2,950,443
	Warrants to Purchase
	Preferred Stock		172,054		172,054

Chemcodes, Inc.	Senior Debt		614,936		614,936
	Warrants to Purchase
	Preferred Stock		25,460		25,460

Cogent Neuroscience, Inc. (1)	Senior Debt		533,144		533,144

CropSolution, Inc.	Senior Debt		1,073,339		1,073,339
	Warrants to Purchase
	Common Stock		47,608		47,608

Dynogen Pharmaceuticals, Inc.	Senior Debt		236,371		236,371
	Warrants to Purchase
	Preferred Stock		7,590		7,590

Elixir Pharmaceuticals, Inc.	Senior Debt		414,572		414,572
	Warrants to Purchase
	Common Stock		15,910		15,910

Entelos, Inc.	Senior Debt		729,140		729,140

ICAgen, Inc.	Senior Debt		476,509		476,509

Infinity Pharmaceuticals	Senior Debt		2,165,921		2,165,921
	Warrants to Purchase
	Preferred Stock		41,205		41,205


		December 31, 2002
Portfolio Company	Investment	Cost		Fair Value
LipoScience, Inc.	Senior Debt		2,454,335		2,454,335
	Warrants to Purchase
	Common Stock		87,755		87,755

Locus Discovery, Inc.	Senior Debt		3,473,822		3,473,822
	Warrants to Purchase
	Common Stock		166,244		166,244

Memory Pharmaceuticals, Inc.	Senior Debt		1,735,330		1,735,330
	Warrants to Purchase
	Common Stock		82,453		82,453

Microbia, Inc.	Senior Debt		1,467,927		1,467,927

Nobex, Inc.	Senior Debt		323,180		323,180
	Warrants to Purchase
	Preferred Stock		15,275		15,275

Plexxikon, Inc.	Senior Debt		1,691,146		1,691,146
	Warrants to Purchase
	Preferred Stock		44,091		44,091

Protometrix, Inc.	Senior Debt		752,483		752,483
	Warrants to Purchase
	Preferred Stock		49,618		49,618

Structural GenomiX, Inc.	Senior Debt		3,444,050		3,444,050
	Warrants to Purchase
	Preferred Stock		79,033		79,033

Transmolecular, Inc.	Senior Debt		129,061		129,061
	Warrants to Purchase
	Preferred Stock		6,004		6,004
US Genomics, Inc	Senior Debt		553,331		553,331

Total Investments		$	40,058,913	$	40,030,582

OXFORD FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2003

Interim financial statements of Oxford Finance Corporation (the “Company”, “Oxford”, “we” or “us”) are prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. These financial statements and the accompanying notes should be read in connection with the audited financial statements of Oxford Finance Corporation for the year ended December 31, 2002, which are included in its registration statement on Form 10, as amended, filed on March 21, 2003. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

The Company was incorporated under the General Corporation Laws of the State of Maryland on October 23, 2001. On December 31, 2002, the Company elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940. In addition, the Company intends to elect to be regulated for tax purposes as a Regulated Investment Company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for the calendar year 2003.

To qualify as a RIC for federal income tax purposes, the Company was required to distribute any “earnings and profits” (as determined for federal income tax purposes) from operations prior to the elective election to be taxed as a RIC. To meet this requirement, the Company paid dividends during 2002 of substantially all of the earning and profits for the year ended December 31, 2002.

As a RIC, the Company will be required to pay out as a dividend 90% of its ordinary income and short-term capital gains for each taxable year in order to maintain its status as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. The Company intends to pay out as a dividend substantially all those amounts. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based on the annual earnings estimated by the management of the Company. The Company has a policy of retaining long-term capital gains and not paying them out as dividends.

The Company’s investment objective is to achieve a high level of current income from interest payments from the loans made to portfolio companies and to achieve capital gains through an increase in the value of the warrants received from portfolio companies in connection with these loans. The Company provides loans primarily to emerging-growth life sciences companies. The Company generally secures loans with equipment and other assets.

The financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of the Company’s accounting policies that currently affect the Company’s financial condition and results of operations.

On December 31, 2002 the Company elected to be regulated as a BDC under the Investment Company Act of 1940. The results of operations for 2002 reflect the Company’s results prior to operating as a BDC and the cumulative effect of accounting change for the conversion to a BDC on December 31, 2002. Accounting principles used in the preparation of the financial statements as a BDC differ primarily related to the carrying value of investments and the accounting for income taxes.

Interest and Fee Income Recognition — Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Original issue discount is amortized into interest income using the effective interest method. It is

management’s practice to cease accruing interest on loans when payments are 90 days delinquent. However, management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest, and the loan is in the process of collection. Unearned fees are amortized over the term of the related loan using the effective interest method.

Cash and cash equivalents - Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less.

Valuation of Investments – Substantially all of the Company’s investments are carried at fair value as determined by the Company’s board of directors. Prior to the Company’s conversion to a BDC, the Company recorded an allowance for loan losses and only marketable debt and equity securities and certain derivative securities were required to be carried at market value. As a BDC, because all of the Company’s investments were acquired in privately negotiated transactions and do not have readily determinable market values, the investments are required to be carried at fair value. Fair value is determined in good faith by the Company’s board of directors pursuant to the Company’s valuation policy, with changes in value reported quarterly through the Company’s statement of operations under the caption “unrealized appreciation (depreciation) on investments.” Determination of fair value involves subjective judgments and the resultant values may not represent amounts at which investments could be bought or sold in an independent third party transaction, and the difference could be material.

Commercial loans — Net unearned income includes unearned fees of $1,157,000 and $933,000 at June 30, 2003 and December 31, 2002, respectively. Unearned fees are amortized over the term of the related loan using the effective interest method for amortizing term loans. In general, the Company’s loans are collateralized by equipment and other assets pledged by the Company’s customers. At June 30, 2003 and December 31, 2002, the Company’s loans were carried at fair value. In making such a determination, for loans which no public trading market exists, the board of directors values loans at original cost less principal repayment, unless economic, industry, or company fundamentals have deteriorated to the degree that the market value or repayment expectation indicates otherwise. The board considered the following factors: enterprise value, enterprise performance asset liquidation, collateral value, comparable loan purchases/sales, or other sources of repayment.

Investments in equity securities - In certain loan arrangements, warrants are received from the borrower as additional origination fees. The Company’s equity securities are carried at fair value. These equity securities are warrants in non-public companies and typically have an exercise price equal to the price of the stock as determined in the most recent equity round of financing. On a quarterly basis, the board establishes the fair value of warrants using Black-Scholes valuation techniques and taking an assessment and review of the borrower’s business performance under consideration. The board will consider subsequent rounds of financing that establish a third-party confirmation of value. In the absence of a new round of financing consideration is given to the portfolio company’s performance.

Debt issuance costs - Debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These amounts of $320,000 at June 30, 2003 and $233,000 at December 31, 2002 are included in other assets on the balance sheet and are amortized into the statement of operations as interest expense ratably over the contractual term of the borrowing on the effective interest method.

Stock-based compensation — The Company accounts for stock-based compensation arrangements in accordance with the intrinsic value method as defined by the Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which for the Company requires certain disclosures related to the Company stock-based compensation arrangements. Under APB No. 25 and related interpretations, if the exercise price of the employee stock options equals or exceeds the fair value of the underlying stock on the date of grant, and other criteria are met, the Company records no compensation expense for the award of employee stock options.

On February 28, 2003, the Company granted 674,000 stock options with a strike price of $8.81, to executive management. One third of these options vested immediately, with the remainder then vesting on a quarterly basis ratably over the next three years. These options expire in February, 2013. The following tables presents the effect on net increase (decrease) in stockholders’ equity resulting from net earnings / net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to the Company’s stock-based compensation.


	Three months ended June 30,

	2003			2002
Net increase in stockholders’ equity resulting from earnings / net income	$	474,704		$	87,990
Add: Stock-based compensation included in net increase in stockholders’ equity resulting from earnings / net income		—			—
Less: Stock-based compensation expense determined under the fair value based method for all awards		(90,990	)		—

Pro Forma net increase in stockholders’ equity resulting form earnings / net income	$	383,714		$	87,990

Earnings per share Basic and diluted — as reported	$	0.09		$	0.02
Basic and diluted — pro forma	$	0.07		$	0.02


	Six months ended June 30,

	2003			2002
Net increase (decrease) in stockholders’ equity resulting from earnings / net income (loss)	$	1,481,521		$	(72,316	)
Add: Stock-based compensation included in net increase (decrease) in stockholders’ equity resulting from earnings / net income (loss)		—			—
Less: Stock-based compensation expense determined under the fair value based method for all awards		(454,951	)		—

Pro Forma net increase (decrease) in stockholders’ equity resulting form earnings / net income (loss)	$	1,026,570		$	(72,316	)

Earnings (loss) per share Basic and diluted — as reported	$	0.28		$	(0.02	)
Basic and diluted — pro forma	$	0.20		$	(0.02	)

Property and equipment - Property and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets ranging from three to five years.

Intangible Assets - Intangible assets are recorded in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” issued in June 2001. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company is amortizing these intangible assets over their expected life which is ten years.

Income Taxes - Through December 31, 2002 the Company was taxed under subchapter C of the Internal Revenue Code. The Company intends to elect to be taxed as a RIC under Subchapter M of the Internal Revenue Code effective January 1, 2003. Pursuant to this election, if the Company qualifies to be a RIC, Oxford generally will not pay corporate-level income taxes on any income distributed to stockholders as dividends, allowing the Company to substantially reduce or eliminate corporate-level income tax liability.

As of June 30, 2003 and December 31, 2002, tax assets of $53,000 represent estimated refunds of prior year payments.

Use of estimates in the preparation of financial statements - 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

reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. As a BDC, because all of the Company’s investments were acquired in privately negotiated transactions and do not have readily determinable market values, the investments are required to be carried at fair value. Fair value is determined in good faith by the Company’s board of directors pursuant to the Company’s valuation policy, with changes in value reported quarterly through the Company’s statement of operations under the caption “unrealized appreciation (depreciation) on investments.” Determination of fair value involves subjective judgments and the resultant values may not represent amounts at which investments could be bought or sold in an independent third party transaction, and the difference could be material.

Certain prior period information has been reclassified to conform to current year presentation.

The composition of the Company’s portfolio of investments as of June 30, 2003 and December 31, 2002 at cost and fair values was as follows:

The Company provides loans primarily to emerging-growth life science companies. The Company’s loans are generally collateralized by a first priority security interest in essential-use assets, primarily laboratory equipment, and to a lesser extent, computers, furniture, software and manufacturing equipment that tends to retain secondary market value. The monthly amortization of the loans is intended to keep the loan balances in line with secondary market values based on management’s experience. Generally, the Company does not finance special purpose or customized equipment. The Company’s loans are amortizing term loans that generally mature between 30 and 48 months. Debt instruments are at fixed rates of interest which range from 600 to 1,000 basis points above coterminous Treasury Bills.

Set forth below is a table showing the composition of Oxford’s portfolio by industry section at cost and fair value at June 30, 2003 and December 31, 2002.


	Investments at Cost
	June 30, 2003					December 31, 2002
			Percent of					Percent of
Industry Sector:	Investment		Total			Investment		Total
Therapeutics	$	27,200,419		52	%	$	19,603,385		49	%
Enabling technology		20,481,322		39	%		15,606,906		39	%
Diagnostics		2,226,523		4	%		2,542,090		6	%
Agriculture Biotechnology		1,341,248		3	%		1,486,896		4	%
Other		822,833		2	%		819,636		2	%

Total	$	52,072,345		100	%	$	40,058,913		100	%


	Investments at Fair Value
	June 30, 2003					December 31, 2002
			Percent of					Percent of
Industry Sector:	Investment		Total			Investment		Total
Therapeutics	$	27,192,174		52	%	$	19,603,385		49	%
Enabling technology		20,443,698		39	%		15,578,575		39	%
Diagnostics		2,225,330		4	%		2,542,090		6	%
Agriculture Biotechnology		1,340,350		3	%		1,486,896		4	%
Other		822,833		2	%		819,636		2	%

Total	$	52,024,385		100	%	$	40,030,582		100	%

At June 30, 2003, approximately 77% of the Company’s investments are in portfolio companies located in the eastern United States.

Investments in portfolio companies increased from $40,030,582 to $52,024,385 during the first two quarters of 2003. Repayments during the first two quarters of 2003 include a prepayment in full of an investment in a portfolio company with a balance of $5,948,421 in 2003. This portfolio company was acquired during the first quarter of 2003, and the new parent company elected to repay the loan as well as a prepayment fee of $551,759 which is included in interest and fee income in the statement of operations. During the first two quarters of 2003, other portfolio companies made regularly scheduled principal repayments of $7,552,568.

Investments in equity securities represent the Company’s ownership of warrants received primarily as part of a loan arrangement. In certain loan arrangements, warrants are received from the borrower as additional origination fees to provide the Company with a potentially enhanced internal rate of return. At June 30, 2003, 80% of Oxford’s loans had associated warrants. When the Company receives a warrant to purchase stock in a borrower in connection with a loan, the warrant will typically have an exercise price, equal to the price of the stock as determined in the most recent equity round of financing, and entitles the Company to purchase a non-controlling percentage of the borrower’s stock. Any resulting discount on the loan from recordation of warrants is accreted into income over the term of the loan.

During 2002, the Company charged off $315,000 on a loan to a customer. This customer filed for Chapter 7 bankruptcy protection on December 3, 2002. This customer had an outstanding principal balance at December 31, 2002 of $848,144. The Company has applied its entire $315,000 allowance for loan losses towards this loan during 2002 and collected $230,279 during 2003, leaving a remaining outstanding balance of $302,865 at June 30, 2003. On the inception of the loan, in addition to the standard equipment collateral, the Company took a collateral interest or lien on all of the customer’s intellectual property. The Company currently believes that the value of this collateral is equal to the recorded fair value and that the Company will not incur any loss on its liquidation. However, there can be no assurance that the collateral value will be sufficient to repay the loan balance or that the loan balance will be repaid in full. The Company had no other delinquent loans at June 30, 2003.

On November 27, 2002, the Company entered into a Master Loan and Security Agreement with Farmers & Mechanics Bank (“F&M Bank”). Pursuant to the agreement, F&M Bank agreed to provide the Company $7,500,000 in term loans that must be drawn down by April 30, 2004. The Company has the option of selecting a fixed interest rate equal to F&M Bank’s like term cost of funds plus 320 basis points or a floating interest rate equal to the base rate plus 1 percent. The base rate is equal to the highest per annum rate published from time to time in the Wall Street Journal. The obligations to F&M Bank to

repay the loans are secured by certain eligible loans. The average interest rate on the Company’s borrowings was a fixed rate of 6.57% at June 30, 2003.

At June 30, 2003 the Company had outstanding $7,499,940 and pledged certain loans as collateral. The loans had terms coterminous with the Company’s pledged customer loans and ranged between 30 and 48 months with fixed interest rates ranging from 4.97% to 6.95%. Monthly principal and interest payments due on these term loans commenced on January 15, 2003 and end on November 15, 2006. The Company is subject to certain financial covenants including an interest rate coverage ratio and a maximum debt to net worth covenant.

On May 2, 2003, the Company entered into a Master Loan and Security Agreement with National City Bank. Pursuant to the agreement, National City Bank agreed to provide the Company $10,000,000 in revolving loans that are available to be drawn down by September 30, 2003 with a maximum term of 48 months. The Company has the option of selecting an interest rate equal to the 30-Day LIBOR plus 325 basis points or National City Bank’s base rate which is the prime rate plus 150 basis points. The obligations to National City Bank to repay the loans are secured by certain eligible loans.

At June 30, 2003 the Company had outstanding $2,500,000 in revolving loans and pledged certain loans as collateral. Monthly interest payments, at 4.27%, commenced in July, 2003. The Company is subject to a borrowing base and certain financial covenants including an interest rate coverage ratio and a maximum debt to net worth covenant.

The following table sets forth the computation of basic and diluted loss per share for the three months ended June 30:

The following table sets forth the computation of basic and diluted loss per share for the six months ended June 30:

The following is a schedule of financial highlights for the six months ended June 30, 2003:


	Six Months			Three Months
	Ended			Ended
	June 30, 2003			June 30, 2003
Per Share Data — basic and diluted:
Net asset Value at beginning of period	$	8.81		$	8.93
Net operating income		0.28			0.09
Increase in unrealized depreciation on investments		—			—

Net increase in stockholders’ equity resulting from earnings		0.28			0.09
Dividends paid		(0.26	)		(0.19	)
Business Development Company reporting costs*		(0.01	)		(0.01	)

Net decrease in stockholders’ equity resulting from distributions		(0.27	)		(0.20	)

Net asset value at end of period	$	8.82		$	8.82

Ratio/Supplemental Data:
Net Assets at end of period	$	45,838,667		$	45,838,667
Ratio of operating expenses to average net assets		3.8	%		2.0	%
Ratio of net operating income to average net assets		3.3	%		1.0	%

* Costs in connection with the Company’s conversion to a Business Development Company and filing of registration statement on Form 10, as amended on March 21, 2003.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ALL STATEMENTS CONTAINED HEREIN, OTHER THAN HISTORICAL FACTS, MAY CONSTITUTE “FORWARD-LOOKING STATEMENTS” THESE STATEMENTS MAY RELATE TO, AMONG OTHER THINGS, FUTURE EVENTS OR OUR FUTURE PERFORMANCE OR FINANCIAL CONDITION. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “MIGHT,” “BELIEVE,” “WILL,” “PROVIDED,” “ANTICIPATE,” “FUTURE,” “COULD,” “GROWTH,” “PLAN,” “INTEND,” “EXPECT,” “SHOULD,” “WOULD,” “IF,” “SEEK,” “POSSIBLE,” “POTENTIAL” OR THE NEGATIVE OF SUCH TERMS OR COMPARABLE TERMINOLOGY. THESE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, (1) ADVERSE CHANGES IN INTEREST RATES; (2) OUR FAILURE OR INABILITY TO ESTABLISH OR MAINTAIN REFERRAL ARRANGEMENTS WITH VENTURE CAPITAL FUNDS TO GENERATE LOAN OPPORTUNITIES; (3) THE LOSS OF ONE OR MORE OF OUR EXECUTIVE OFFICERS,; (4) OUR INABILITY TO MAINTAIN A CREDIT FACILITY ON TERMS REASONABLY ACCEPTABLE TO US, IF AT ALL; (5) OUR INABILITY TO SUCCESSFULLY SECURITIZE OUR LOAN PORTFOLIO ON TERMS REASONABLY ACCEPTABLE TO US, IF AT ALL; (6) THE DECISION OF OUR COMPETITORS TO AGGRESSIVELY SEEK TO MAKE SENIOR LOANS TO LIFE SCIENCES BUSINESSES ON TERMS MORE FAVORABLE THAN WE INTEND TO PROVIDE; AND (7) THOSE FACTORS LISTED UNDER THE CAPTION “RISK FACTORS” IN OUR FORM 10, AS FILED ON MARCH 21, 2003. WE CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE AFTER THE DATE OF THIS REPORT.

THE FOLLOWING ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS REPORT.

We were incorporated under the General Corporation Laws of the State of Maryland on October 23, 2001. On December 31, 2002, we elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940. In addition, we intend to elect to be regulated for tax purposes as a Regulated Investment Company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code’’) for the calendar year 2003.

We commenced operations on March 20, 2002 and made our first loans in portfolio companies at the end of the first quarter of 2002. Results for the first quarter of 2002 include only a partial period of activity and thus are not indicative of future results, nor comparable to the results for the quarter ended June 30, 2003.

Our investment objective is to achieve a high level of current income from interest payments and transaction fees from the loans we make to portfolio companies and to achieve capital gains through an increase in the value of the warrants we receive from our portfolio companies in connection with these loans.

We target private emerging-growth companies in the life science industry that meet our lending criteria, including substantial ownership by experienced private equity investors, adequate assets for loan collateral, strong cash position, experienced management teams with a meaningful ownership interest in the business, potential for growth and profitable operations, and potential opportunities for us to realize appreciation and gain liquidity in our equity position. We anticipate that this liquidity may be achieved through a merger or acquisition of the portfolio company or a public offering by the portfolio company.

On March 28, 2002 we completed a private offer and sale of 5,000,000 shares of common stock, $.01 par value per share. Proceeds to the Company, net of underwriting costs, were $46,500,000, and were used to fund loans, and for corporate and working capital purposes.

On December 31, 2002 we elected to be regulated as a BDC under the Investment Company Act of 1940. The results of operations for 2002 reflect our results prior to operating as a BDC and the cumulative effect of accounting change for the conversion to a BDC on December 31, 2002. Accounting principles used in the preparation of the financial statements as a BDC differ primarily related to the carrying value of investments and the accounting for income taxes.

We make loans primarily to emerging-growth life sciences companies to finance equipment acquisitions that are essential to their businesses. Our loans will range from $100,000 to $6,500,000 (averaging approximately $1,750,000), and mature in approximately three to four years. Generally, our loans accrue interest at a fixed rate of from 9% to 14% and are not rated by any debt rating agency. The average effective rate and term of our loans at June 30, 2003 is approximately 12.2% and 40 months. Our loans are generally collateralized by a first priority security interest in essential-use assets, primarily laboratory equipment, and to a lesser extent, computers, furniture, software and manufacturing equipment that tends to retain secondary market value The monthly amortization of the loans is intended to keep the loan balances in line with secondary market values based on management’s experience. Generally, we do not finance special purpose or customized equipment. The loans are fully amortized over the term, with payments of principal and interest being required on a monthly basis.

We seek to provide our stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we may receive when we make loans. When we receive a warrant to purchase stock in a borrower in connection with a loan, the warrant will typically have a nominal exercise price, equal to the price of the stock as determined in the most recent equity round of financing, and entitles us to purchase a non-controlling percentage of the borrower’s stock.

On December 31, 2002 we elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940. In addition, the Company intends to elect to be regulated for tax purposes as a Regulated Investment Company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for the year 2003. As a BDC, we are required to make available significant managerial assistance to our portfolio companies. The specific services we provide vary by portfolio company, but generally consist of reviewing existing credit facilities, reviewing business plans and providing general financial advice.

Prior to making a loan, we ordinarily enter into a non-binding proposal letter with the potential borrower. These proposals are generally subject to a number of conditions, including but not limited to the satisfactory completion of our due diligence investigations of the potential borrower’s business. Typically, upon execution of this non-binding proposal letter, the potential borrower pays us a non-refundable fee (usually no more than 1% of our proposed loan) for our services rendered through the commitment date. We recognize this fee, net of direct expenses, as revenue over the life of the associated loan.

Total investment activity as of and for the three months ended June 30, 2003 was:

Investments in portfolio companies increased from $40,030,582 to $52,024,385 during the first two quarters of 2003. Repayments during the first two quarters of 2003 include a prepayment in full of an investment in a portfolio company with a balance of $5,948,421 in 2003. This portfolio company was acquired during the first quarter of 2003, and the new parent company elected to repay the loan as well as a prepayment fee of $551,759 which is included in interest and fee income in the statement of operations. During the first quarter of 2003, other portfolio companies made regularly scheduled principal repayments of $7,552,612.

The majority of our investments are senior secured loans. Our investments in equity securities are warrants to acquire equity interests. The receipt of warrants allows us to participate in positive changes in the value of the portfolio company. The following table shows the cost and fair value of our portfolio by asset class as of June 30, 2003 and December 31, 2002:

Set forth below is a table showing the composition of Oxford’s portfolio by industry section at fair value and cost at June 30, 2003 and December 31, 2002.


	Investments at Fair Value
	June 30, 2003					December 31, 2002
			Percent of					Percent of
Industry Sector:	Investment		Total			Investment		Total
Therapeutics	$	27,192,174		52	%	$	19,603,385		49	%
Enabling technology		20,443,698		39	%		15,578,575		39	%
Diagnostics		2,225,330		4	%		2,542,090		6	%
Agriculture Biotechnology		1,340,350		3	%		1,486,896		4	%
Other		822,833		2	%		819,636		2	%

Total	$	52,024,385		100	%	$	40,030,582		100	%


	Investments at Cost
	June 30, 2003					December 31, 2002
			Percent of					Percent of
Industry Sector:	Investment		Total			Investment		Total
Therapeutics	$	27,200,419		52	%	$	19,603,385		49	%
Enabling technology		20,481,322		39	%		15,606,906		39	%
Diagnostics		2,226,523		4	%		2,542,090		6	%
Agriculture Biotechnology		1,341,248		3	%		1,486,896		4	%
Other		822,833		2	%		819,636		2	%

Total	$	52,072,345		100	%	$	40,058,913		100	%

In addition to various risk management and monitoring tools, we also use a rating system to characterize and monitor our expected level of returns on each loan and warrant in our portfolio. We use the following 1 to 5 rating scale. Below is a description of the conditions associated with each rating:


Rating		Summary Description

1		Capital gain expected
2		Full return of principal and interest expected with customer performing in accordance with plan
3		Full return of principal and interest expected but customer requires closer monitoring
4		Some loss of interest expected but still expecting an overall positive internal rate of return
5		Loss of interest and some loss of principal expected which would result in an overall negative internal rate of return

The following table shows the distribution of our loans and warrants on the 1 to 5 rating scale at fair value as of June 30, 2003 and December 31, 2002:

At June 30, 2003, we have made loans to 42 portfolio companies for a total of approximately $72.2 million. When a loan becomes 90 days or more past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. However, we may make exceptions to this policy if the investment is well secured and in the process of collection.

At June 30, 2003, there was one customer loan with a fair value of approximately $302,000, or approximately 0.6% of the investment portfolio on non-accrual status as compared to 1.3% of the investment portfolio at December 31, 2002. This customer filed for Chapter 7 bankruptcy protection on December 3, 2002. During 2002, the Company recorded a loss of $315,000 related to this loan. We currently believe that the value of the collateral approximates the remaining unpaid loan balance and that we will not incur any loss on its liquidation. However, there can be no assurance that the collateral value will be sufficient to repay the loan balance or that the loan balance will be paid in full. We had no other delinquent loans at June 30, 2003.

During 2002, venture capital financings for U.S. biotechnology companies increased by approximately 19% over 2001. There remained however, limited opportunities to conduct initial public offerings and other sources of capital such as secondary offerings, debt transactions or partnering arrangements While these recent events generate increased demand for our products, we believe that the decrease in the overall liquidity available in the life science industry has caused us to have a slower pace of investment during 2002. However, we believe that the life science industry will continue to grow, and as a result, there will be continuing demand for our lending products now and in the near future.

Different accounting principles are used in the preparation of financial statements of a business development company, or BDC, under the Investment Company Act of 1940 and, as a result, the financial results for the periods ending before December 31, 2002 are not comparable to the period commencing on January 1, 2003 and are not expected to be representative of our future financial results.

For the three months ended June 30, 2003 (“Second quarter of 2003”), total interest and fee income increased $829,409 over the three months ended June 30, 2002 (“Second quarter of 2002”).

Interest and fee income from loans to private and public companies increased to $1,369,524 during the second quarter of 2003 as compared to $410,398 during the second quarter of 2002. Interest income is affected by both the level of net new investments and by changes in interest rates. The average interest rate on loans to portfolio companies was 12.2% and 12.9% at June 30, 2003 and 2002 respectively.

Interest income from cash and cash equivalents has decreased from $150,541 in the second quarter of 2002 to $20,821 in the second quarter of 2003. The interest on invested cash and cash equivalents primarily reflects the interest we received on the investment of the proceeds of our placement of common shares at the end of the first quarter of 2002. As we have funded additional investments and utilized our cash, income from invested cash and cash equivalents has declined. The interest rate on invested cash was 1.13% and 1.8% at June 30, 2003 and 2002 respectively.

Operating expenses for the second quarter of 2003 were $910,481 as compared to $389,289 for the second quarter of 2002. This amount consisted primarily of salaries and benefits, interest and financing fees, and general and administrative expenses.

Salaries and benefits consisted of $497,287 for the second quarter of 2003 as compared to $236,181 for the second quarter of 2002. In the second quarter of 2003, the results included additional loan officers and certain administrative staff.

Interest and financing fees of $137,348 represented costs associated with the loan facility and borrowings outstanding during the second quarter of 2003. During the second quarter of 2002 the Company did not incur any interest or fees as it had no financings outstanding during the quarter.

General and administrative expenses were $275,846 during the second quarter of 2003 as compared to $153,108 during the second quarter of 2002. During the second quarter

of 2003, major components of general and administrative expenses consisted of approximately $61,000 of legal and professional fees, travel and marketing costs of approximately $44,000, corporate director’s fees of $18,000, rent of $26,000, depreciation and amortization expenses of $18,000 and other general and administrative expenses of approximately $109,000.

Through December 31, 2002 we were taxed under Subchapter C of the Internal Revenue Code. We intend to elect, effective as of January 1, 2003, to be a RIC under Subchapter M of the Internal Revenue Code and will not be subject to taxation of income to the extent such income is distributed to stockholders and we meet certain minimum dividend distribution and other requirements. Our effective tax rate for the three months ended June 30, 2002 was 40%. The effective rate includes both federal and state income tax components. As of June 30, 2003, tax assets of $53,000 represent estimated refunds of prior year payments.

We value our investment portfolio each quarter. The valuations are reviewed by the Company’s senior management and presented to the Board of Directors, which reviews and approves the portfolio valuations in accordance with our valuation policy. During the second quarter of 2003 the Company recorded an unrealized depreciation on investment of $5,163, related entirely to equity investments, based on the board’s valuation. During the second quarter of 2002, prior to operating as a BDC, we had recorded an allowance for loan losses of $25,000.

NET INCREASE (DECREASE) IN STOCKHOLDERS’ EQUITY RESULTING FROM EARNINGS / NET INCOME (LOSS)

As a result of the operating income, operating expenses and unrealized depreciation on investments described above, we had a net increase in stockholder’s equity resulting from earnings / net income of $474,704 for the second quarter of 2003 as compared to a net increase in stockholder’s equity resulting from earnings / net income of $87,990 for the second quarter of 2002.

The Company commenced operations on March 20, 2002 and made our first loans in portfolio companies at the end of the first quarter of 2002. Results for the first two quarters of 2002 include only a partial period of activity and thus were neither indicative of future results, nor comparable to the results for the quarter ended June 30, 2003. Different accounting principles are used in the preparation of financial statements of a business development company, or BDC, under the Investment Company Act of 1940 and, as a result, the financial results for the periods ending before December 31, 2002 are not comparable to the period commencing on January 1, 2003 and are not expected to be representative of our future financial results.

For the six months ended June 30, 2003, total interest and fee income increased $2,644,289 over the six months ended June 30, 2002.

Interest and fee income from loans to private and public companies increased to $3,245,033 during the first two quarters of 2003 as compared to $600,744 during the first two quarters of 2002. Repayments during the First two quarters of 2003 include a prepayment in full of an investment in a portfolio company with a balance of $5,948,421 in 2003. This portfolio company was acquired during the second quarter of 2003, and the new parent company elected to repay the loan as well as a prepayment fee of $551,759 which is included in interest and fee income in the statement of operations. This customer was acquired during the second quarter of 2003 and the new parent company elected to repay the loan as well the prepayment fee of $551,759. Interest income is affected by both the level of net new investments and by changes in interest rates. We did not close our first loans until the end of the first quarter of 2002, and realized minimal interest income during that period. The average interest rate on loans to portfolio companies was 12.2% and 12.9% at June 30, 2003 and 2002 respectively.

Interest income from cash and cash equivalents decreased from $157,888 in the first two quarters of 2002 to $50,767 in the first two quarters of 2003. The interest on invested cash and cash equivalents primarily reflects the interest we received on the investment of the proceeds of our placement of common shares at the end of the first

quarter of 2002. As we have funded additional investments and utilized our cash, income from invested cash and cash equivalents has declined. The interest rate on invested cash was 1.13% and 1.8% at June 30, 2003 and 2002 respectively.

Operating Expenses for the first two quarters of 2003 were $1,743,883 as compared to $671,272 for the first two quarters of 2002. This amount consisted primarily of salaries and benefits, interest and financing fees, and general and administrative expenses.

Salaries and benefits consisted of $943,143 for the first two quarters of 2003 as compared to $286,181 for the first two quarters of 2002. In the first two quarters of 2003, the results represented a full quarter of operations and include additional loan officers and certain administrative staff.

Interest and financing fees of $271,986 represented costs associated with the loan facility and borrowings during the first two quarters of 2003. During the first two quarters of 2002 the Company incurred $26,301 in interest and fees related to the financing utilized during the two quarters.

General and administrative expenses were $528,754 during the first two quarters of 2003 as compared to $358,790 during the first two quarters of 2002. During the first two quarters of 2003, major components of general and administrative expenses consisted of approximately $117,000 of legal and professional fees, travel and marketing costs of approximately $87,000, corporate director’s fees of $45,000, rent of $53,000, depreciation and amortization expenses of $37,000 and other general and administrative expenses of approximately $190,000.

We value our investment portfolio each quarter. The valuations are reviewed by the Company’s senior management and presented to the Board of Directors, which reviews and approves the portfolio valuations in accordance with our valuation policy. During the first two quarters of 2003 the Company recorded an unrealized depreciation on investment of $19,629, related entirely to equity investments, based on the board’s valuation. During the second quarter of 2002, prior to operating as a BDC, we had recorded an allowance for loan losses of $50,000.

NET INCREASE (DECREASE) IN STOCKHOLDERS’ EQUITY RESULTING FROM EARNINGS / NET INCOME (LOSS)

As a result of the operating income, operating expenses and unrealized depreciation on investments described above, we had a net increase in stockholder’s equity resulting from earnings / net income of $1,481,521 for the first two quarters of 2003 as compared to a net decrease in stockholder’s equity resulting from earnings / net loss of $72,316 for the first two quarters of 2002.

At June 30, 2003 and December 31, 2002, we had $2.7 million and $11.8 million, respectively, in cash and cash equivalents. We invest cash on hand in interest bearing deposit accounts. The decrease in cash from December 31, 2002 to June 30, 2003 is due to our continued investments in portfolio companies during the period, net of the borrowings under our debt facilities. Our objective is to maintain a low cash balance, while keeping sufficient cash on hand to cover current funding requirements and operations. We expect our cash on hand, cash generated from operations and available under credit facilities to

be adequate to meet our cash needs at our current level of operations, including the next twelve months.

At June 30, 2003, we had loans to 41 private companies, totaling approximately $52 million. We currently have a number of non-binding proposal letters outstanding that we intend to close in the next ninety days.

Cash provided by operating activities during the first two quarters of 2003 consisting primarily of the items described under “Results of Operations,” was $1,197,188 as compared to $15,609 during the first two quarters of 2002. Higher operating cash flows from earnings during the first two quarters of 2003 were somewhat offset by increased working capital requirements.

Net cash used in investing activities was $11,717,223 during the first two quarters of 2003 as compared to $20,291,441 during the comparable period on 2002, and primarily consisted of the amounts used to make loans to portfolio companies. Investments in portfolio companies increased from approximately $21,470,000 during the first two quarters of 2002 to approximately $25,514,000 during the first two quarters of 2003, but were offset by the prepayment of one of our portfolio investments with a balance of approximately $5,948,000 in 2003. This portfolio company was acquired during the first quarter of 2003, and the new parent company elected to repay the loan as well as a prepayment fee of approximately $552,000. During the first two quarters of 2003, customers also made scheduled principal repayments of approximately $7,553,000 compared to only $1,399,000 during the partial operating period in the second quarter of 2002.

Net cash provided by financing activities was $1,406,095 during the first two quarters of 2003 as compared to $46,126,242 during the first two quarters of 2002. During 2003, we had net borrowings $2,868,000 from our debt facilities and paid dividends of $1,352,000. During 2002, we completed its private placement of equity and received net proceeds of approximately $46,126,000.

During the first two quarters of 2003, cash and cash equivalents decreased from $11,831,439 to $2,717,499 and during the first two quarters of 2002, cash and cash equivalents increased from zero at beginning of the year to $25,850,410 at June 30, 2002. These changes were the results of our operating and financing activities, described above. To fund growth in our investment portfolio, we anticipate needing to raise additional capital from various sources, including the public and private equity markets and debt-related markets.

On November 27, 2002, we entered into a Master Loan and Security Agreement with Farmers & Mechanics Bank (“F&M Bank”). Pursuant to the agreement, F&M Bank agreed to provide us $7,500,000 in term loans that can be drawn down through April 30, 2004. The Company has the option of selecting a fixed interest rate equal to F&M Bank’s like term cost of funds plus 320 basis points or a floating interest rate equal to the base rate plus 1 percent. The base rate is equal to the highest per annum rate published from time to time in the Wall Street Journal. The obligations to F&M Bank to repay the loans are secured by certain eligible loans. The average interest rate on our borrowings was a fixed rate of 6.57% at June 30, 2003.

In connection with our election to be regulated as a BDC, we intend to elect to be treated as a RIC under Subchapter M of the Internal Revenue Code for the year 2003. As a RIC, we are required to distribute annually 90% or more of our investment company taxable income and 98% of our realized short-term capital gains to shareholders. As a BDC, our asset coverage must be at least 200% after each issuance of Senior Securities. As of June 30, 2003, the Company’s asset coverage was approximately 566%.

During 2003, we declared a $0.07 per share dividend on February 28, 2003 to our stockholders of record on March 15, 2003 which was paid on March 31, 2003 and a $0.19 per share dividend on May 30, 2003 to our stockholders of record on June 13, 2003 which was paid on June 30, 2003. The dividend which was declared on February 28, 2003 was based on our projected earnings of the Company for the first quarter of 2003.. The Company subsequently received a fee from the prepayment in full of an investment in a portfolio company with a balance of $5,948,421 in 2003. This portfolio company was acquired during the first quarter of 2003, and the new parent company elected to repay the loan as well as a prepayment fee of $551,759 which is included in interest and fee income in the

statement of operations. The dividend which was declared on May 30, 2003 was based on our projected earnings of the Company for the second quarter of 2003 as well as the one time distribution of the income from the prepayment fee.

We declared aggregate dividends of $0.05 per share during the twelve months ended December 31, 2002 to our stockholders representing the distribution of substantially all of our earnings and profits since inception through December 31, 2002.

We are required to distribute at least 90% of our investment company taxable income to avoid corporate level taxes on the amount distributed and at least 98% of our investment company taxable income to avoid an excise tax. We intend to make distributions on a quarterly basis to our stockholders of all of our income, except for certain net capital gains and adjustments for long-term incentive compensation expense.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC and due to provisions in our credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure shareholders that they will receive any distributions or distributions at a particular level.

Set forth below are descriptions of the portfolio companies that are in excess of 5% of our portfolio.

In June 2002, we provided a line of credit to and received warrants from Amphora Discovery, Inc. Amphora Discovery was formed to exploit opportunities in chemical genomics. By applying high precision screening across biological systems and surrogate therapeutic suitability assays, Amphora is able to efficiently deliver high quality drug candidates. As of June 30, 2003, the outstanding loan balance was $4,199,162.

In October 2002, we provided a line of credit to and received warrants from Infinity Pharmaceuticals, Inc. Infinity Pharmaceuticals, Inc., is a drug discovery company that is developing and integrating unique approaches and capabilities in synthetic chemistry, chemical genetics, informatics, and biological screening. The company is positioned to capitalize on the enormous opportunity resulting from the genomics revolution by providing pharmaceutically active and selective new drug candidates to a broad, expanded range of well-validated biological targets. As of June 30, 2003, the outstanding loan balance was $4,643,354.

In March 2002, we provided a line of credit to and received warrants from Locus Discovery, Inc. Locus Discovery Inc. has an algorithmic approach for identifying the biologically relevant active binding site of proteins, and then designing small molecule therapeutic compounds that can act as antagonists or agonists of protein activity. The basic technology applies to all major classes of proteins, including receptors, enzymes and structural proteins. Moreover, the algorithm can solve protein folding, the prediction of three-dimensional protein structure from only the primary amino acid sequence. As of June 30, 2003, the outstanding loan balance was $3,115,240.

In July 2002, we provided a line of credit to Structural GenomiX, Inc. Structural GenomiX is a drug discovery company utilizing genomics-driven, high-throughput structure-based platform to increase the efficiency and effectiveness of the drug discovery process. As of June 30, 2003, the outstanding loan balance was $3,493,580.

We are subject to financial market risks, including changes in interest rates. At June 30, 2003 100% of the loans in our portfolio were made at fixed rates. Substantially all of the remainder of our assets are invested in variable-rate money market instruments. A 1% change in the interest rate earned on money market instruments would result in a $25,000 annual change in interest income based on the balance invested at June 30, 2003. Our borrowings are at fixed rates. We also expect to borrow additional

funds to finance future lending activities. These future borrowings may be at fixed rates or variable rates.

We invest primarily in illiquid debt securities of private companies. Our investments generally have no established trading market. Since there is no ready market for the investments in our portfolio, as a BDC, our board of directors determines in good faith the fair value of these investments pursuant to our valuation policy. We value substantially all of our investments at fair value as determined in good faith by the board of directors in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make.

We expect to hedge against possible interest rate fluctuations in the future by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of loans.

(a) As of the end of the period covered by this quarterly report on Form 10-Q, the Company’s chief executive officer and chief financial officer conducted an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them of any material information relating to the Company that is required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934.

(b) There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2003, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company is not currently subject to any material legal proceeding, nor, to the Company’s knowledge, is any material legal proceeding threatened against the Company.

On June 3, 2003, we filed a current report on Form 8-K, pursuant to Item 12 reporting the issuance of a press release, announcing our financial results for the quarter ended March 31, 2003.

31.1*

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Act of 1934.

31.2*

Certification of Chief Financial Officer Pursuant Rule 13a-14(a) or 15d-14(a) under the Securities Act of 1934.

32.1+

Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2+

Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


Maryland		01-0615368
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

133 North Fairfax Street
Alexandria, VA		22314
(Address of principal executive office)		(Zip Code)


	Investments at Cost
	June 30, 2003				December 31, 2002
Senior Debt Investments in Equity Securities		$50,588,625 1,483,720	97.2 2.8	% %	$	39,030,634 1,028,279	97.4 2.6	% %

Total		$52,072,345	100.0	%	$	40,058,913	100.0	%


	Investments at Fair Value
	June 30, 2003				December 31, 2002
Senior Debt Investments in Equity Securities		$50,588,625 1,435,760	97.2 2.8	% %	$	39,030,634 999,948	97.5 2.5	% %

Total		$52,024,385	100.0	%	$	40,030,582	100.0	%


	2002

Net decrease in stockholder’s equity resulting from earnings / net income		($72,316	)
Denominator for basic weighted average shares		4,200,000
Dilutive potential shares		—
Denominator for diluted weighted average shares		4,200,000
Basic loss per common share	$	0.02
Diluted loss per common share	$	0.02


Beginning Portfolio: April 1, 2003	$	42,721,910
Originations/Net Draws		13,326,585
Repayments		<4,018,948>
Net Change in Unrealized Appreciation (Depreciation) on Loans and Warrants		<5,163>

Ending Portfolio June 30, 2003	$	52,024,385


x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


	2003

Net increase in stockholder’s equity resulting from earnings/net income	$	474,704
Denominator for basic weighted average shares		5,200,000
Dilutive potential shares		—
Denominator for diluted weighted average shares		5,200,000
Basic earnings per common share	$	0.09
Diluted earnings per common share	$	0.09


Beginning Portfolio: January 1, 2003	$	40,030,582
Originations/Net Draws		25,514,465
Repayments		(13,501,033	)
Unrealized Depreciation		(19,629	)

Ending Portfolio June 30, 2003	$	52,024,385