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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20594





FORM 10-Q





Quarterly Report pursuant to Section 13 or 15 (d) of the


Securities Exchange Act of 1934





For the quarterly period ended March 31, 2002





Commission file number 1-11011





THE FINOVA GROUP INC.


(Exact name of
registrant as specified in its charter)





Delaware (State or other jurisdiction of incorporation or organization)

86-0695381 (I.R.S. employer identification no.)4800 North Scottsdale Road Scottsdale, AZ (Address of principal executive offices)

85251-7623 (Zip code)





Registrants telephone number, including area code: 480-636-4800





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  Ö  No__





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:


Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by the court.





Yes  Ö  No__





APPLICABLE ONLY TO CORPORATE ISSUERS:


As of May 9, 2002, approximately 122,041,000 shares of
Common Stock ($0.01 par value) were outstanding.





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THE FINOVA GROUP INC.





TABLE OF CONTENTS








Page No.PART I    FINANCIAL INFORMATIONItem  1.  Financial Statements

1Condensed Consolidated Balance Sheets

1Condensed Statements of Consolidated Operations

2Condensed Statements of Consolidated Cash Flows

3Condensed Statements of Consolidated Shareowners Equity

4Notes to Interim Condensed Consolidated Financial Statements

5Item  2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

13Special Note Regarding Forward-Looking Statements

20Item  3.  Quantitive and Qualitive Disclosure About Market Risk

21PART II    OTHER INFORMATIONItem  1.  Legal Proceedings

21Item  6.  Exhibits and Reports on Form 8-K

21Signatures

22












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PART I  FINANCIAL INFORMATION





Item 1.  Financial Statements





THE FINOVA GROUP INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)


(Unaudited)


Reorganized CompanyMarch 31, 2002


December 31, 2001ASSETSCash and cash equivalents

$
676,548


$
1,027,241Financing Assets:Loans and other financing contracts, net


4,496,243



5,020,426Direct financing leases


375,047



354,958Leveraged leases


178,515



196,813Total financing assets


5,049,805



5,572,197Less reserve for credit losses


(960,072
)


(1,019,878
)Net financing assets


4,089,733



4,552,319Other Financial Assets:Assets held for sale


314,364



420,025Operating leases


188,717



190,925Assets held for the production of income


149,883



151,872Investments


52,780



116,745Total other financial assets


705,744



879,567Total Financial Assets


4,795,477



5,431,886Other assets


44,318



44,898$
5,516,343


$
6,504,025LIABILITIES AND SHAREOWNERS EQUITYLiabilities:Berkadia Loan

$
3,900,000


$
4,900,000Senior debt (principal amount due of $3.25 billion)


2,497,033



2,489,082Total debt


6,397,033



7,389,082Accounts payable and accrued expenses


240,971



223,155Deferred income taxes, net


15,991



12,357Total Liabilities


6,653,995



7,624,594Shareowners Equity:Common stock, $0.01 par value, 400,000,000 shares authorized and 125,873,000 shares issued


1,259



1,259Additional capital


16,928



16,928Accumulated deficit


(1,154,481
)


(1,142,300
)Accumulated other comprehensive (loss) income


(822
)


4,080Common stock in treasury, 3,832,000 shares


(536
)


(536
)Total Shareowners Equity


(1,137,652
)


(1,120,569
)$
5,516,343


$
6,504,025





See notes to interim condensed consolidated financial statements.







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THE FINOVA GROUP INC.


CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS


(Dollars in thousands, except per share data)


(Unaudited)





Reorganized Company


Predecessor CompanyThree Months Ended March 31,2002


2001Revenues:Interest income

$
80,837


$
182,681Rental income


10,136



20,336Operating lease income


12,202



23,407Fees and other income


14,342



32,952Net gain on financial assets


968



6,651Total Revenues


118,485



266,027Expenses:Interest expense


112,290



172,550Operating lease and other depreciation


10,065



20,831Provision for credit losses


(25,184
)


61,750Operating expenses


33,493



54,988Net reorganization expense






9,619Total Expenses


130,664



319,738Loss from continuing operations before income taxes and preferred dividends


(12,179
)


(53,711
)Income tax expense


(2
)


(2,343
)Loss from continuing operations before preferred dividends


(12,181
)


(56,054
)Preferred dividends, net of tax






946Loss from continuing operations


(12,181
)


(57,000
)Discontinued operations, net of tax expense of $685






(5,946
)Net loss on disposal of operations






(12,800
)Net Loss

$
(12,181
)

$
(75,746
)Basic/diluted loss per share:Loss from continuing operations

$
(0.10
)

$
(0.93
)Loss from discontinued operations






(0.31
)Loss per share

$
(0.10
)

$
(1.24
)Adjusted weighted average shares outstanding


122,041,000



61,065,000





See notes to interim condensed consolidated financial statements.




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THE FINOVA GROUP INC.


CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS


(Dollars in thousands)


(Unaudited)





Reorganized Company


Predecessor CompanyThree Months Ended March 31,2002


2001Net Cash (Used) Provided by Continuing Operating Activities

$
(8,937
)

$
35,306Investing Activities:Proceeds from disposals of leases and other owned assets


12,455



5,720Proceeds from sales of investments


130,310



26,019Proceeds from sales of financial assets


716Collections from financial assets


821,300



755,229Expenditures for financial assets


(319,669
)


(299,129
)Recoveries of loans previously written off


13,132



232Net Cash Provided by Investing Activities


658,244



488,071Financing Activities:Repayments of Berkadia Loan


(1,000,000
)Net Cash Used by Financing Activities


(1,000,000
)Net Cash Provided by Discontinued Operations






401,602(Decrease) Increase in Cash and Cash Equivalents


(350,693
)


924,979Cash and Cash Equivalents, beginning of period


1,027,241



699,228Cash and Cash Equivalents, end of period

$
676,548


$
1,624,207








See notes to interim condensed consolidated financial
statements.




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##### Table of Contents




THE FINOVA GROUP INC.


CONDENSED STATEMENTS OF CONSOLIDATED SHAREOWNERS EQUITY


(Dollars in thousands)


(Unaudited)





Common Stock

Additional Capital


Accumulated Deficit


Accumulated Other Comprehensive Income (Loss)


Common Stock in Treasury


Total Shareowners EquityBalance, January 1, 2001 (Predecessor)

$
648

$
1,107,575


$
(283,435
)

$
15,154


$
(167,008
)

$
672,934Comprehensive loss:Net loss before reorganization and Fresh- Start Reporting









(597,085
)










(597,085
)Net change in unrealized holding gains (losses)













(19,000
)






(19,000
)Net change in foreign currency translation













(540
)






(540
)Comprehensive loss





















(616,625
)Net change in unamortized amount of restricted stock and other





11,956















11,956Shares cancelled from employee benefit plans

















(11,263
)


(11,263
)Effect of reorganization and Fresh-Start Reporting


611


(1,102,631
)


880,520



4,386



177,735



(39,379
)Balance, August 31, 2001 (Reorganized)


1,259


16,900











(536
)


17,623Comprehensive loss:Net loss









(1,142,300
)










(1,142,300
)Net change in unrealized holding gains (losses)













6,999







6,999Net change in foreign currency translation













(2,919
)






(2,919
)Comprehensive loss





















(1,138,220
)Other





28















28Balance, December 31, 2001 (Reorganized)


1,259


16,928



(1,142,300
)


4,080



(536
)


(1,120,569
)Comprehensive loss:Net loss









(12,181
)










(12,181
)Net change in unrealized holding gains (losses)













(7,815
)






(7,815
)Net change in foreign currency translation













2,913







2,913Comprehensive loss





















(17,083
)Balance, March 31, 2002 (Reorganized)

$
1,259

$
16,928


$
(1,154,481
)

$
(822
)

$
(536
)

$
(1,137,652
)





See notes to interim condensed consolidated financial statements.




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THE FINOVA GROUP INC.


NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2002


(Dollars in
thousands in tables, except per share data)





A.    Nature of Operations and Reorganization





The accompanying financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2001.





The following discussion relates to The FINOVA Group Inc., a financial services holding company, and its
subsidiaries (collectively FINOVA or the Company), including FINOVA Capital Corporation and its subsidiaries (FINOVA Capital). FINOVA is a Delaware corporation, incorporated in 1991. Through its principal
operating subsidiary, FINOVA Capital, the Company has provided a broad range of financing and capital markets products, primarily to mid-size businesses. FINOVA Capital has been in operation since 1954.





On January 30, 2002, FINOVA and the New York Stock Exchange mutually agreed that the exchange would suspend trading FINOVAs common stock, which had been traded under the symbol
FNV, after the close of market on February 6, 2002. This action was due to FINOVAs common stock trading below $1.00 per share for more than 30 consecutive trading days. FINOVAs stock began trading over-the-counter on February
7, 2002, under the symbol FNVG.





Since its emergence from bankruptcy in August 2001, the Companys business activities have been limited to
maximizing the value of its portfolio through the orderly collection of its receivables. These activities include continued collection of its portfolio pursuant to contractual terms and may include efforts to retain certain customer relationships
and restructure or terminate other relationships. FINOVA is no longer engaged in any new lending activities, except to honor previously existing customer commitments. Any cash generated from these activities in excess of cash reserves permitted in
the Companys debt agreements is used to pay down FINOVAs obligations to its creditors. Operations have been restructured to more efficiently manage these collection efforts. The Company will consider the sale of certain portfolios if
buyers can be found at appropriate prices.





To facilitate the orderly collection of its remaining asset portfolios, FINOVA has combined its former operating
segments into one operating unit. As a result of this combination, elimination of new business activities and reductions in its asset portfolios, FINOVA has significantly reduced its work force. As of March 31, 2002, the Company had 441 employees
compared to 497 and 1,098 at December 31, 2001 and 2000, respectively.





On March 7, 2001, FINOVA, FINOVA Capital and seven of their subsidiaries (the
Debtors) filed for protection pursuant to Chapter 11, Title 11, of the United States Code in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) to enable them to restructure their debt. On
August 10, 2001, the Bankruptcy Court entered an order confirming FINOVAs Third Amended and Restated Joint Plan of Reorganization (the Plan), pursuant to which the Debtors restructured their debt, effective August 21, 2001 (the
Effective Date).





Pursuant to the Plan, Berkadia LLC (Berkadia), an entity jointly owned by Berkshire Hathaway Inc. (Berkshire)
and Leucadia National Corporation (Leucadia), loaned $5.6 billion to FINOVA Capital on a senior secured basis (the Berkadia Loan). The proceeds of the Berkadia Loan, together with cash on hand and the issuance by FINOVA of
approximately $3.25 billion aggregate principal amount of 7.5% Senior Secured Notes maturing in 2009 with Contingent Interest due 2016 (the New Senior Notes) were used to restructure the Companys debt. In addition, FINOVA issued
Berkadia 61,020,581 shares of common stock, representing 50% of FINOVA shares outstanding after giving effect to implementation of the Plan. Principal payments made to Berkadia since emergence have reduced the Berkadia Loan to $3.2 billion as of
April 15, 2002. FINOVA does not anticipate loan repayments to continue at this pace.





Upon emergence from bankruptcy, the Company adopted Fresh-Start Reporting,
which, together with changes in the Companys operations, have resulted in the consolidated financial statements for the periods subsequent to August 31, 2001 (the Reorganized Company) not being comparable to those of the Company
for periods prior to August 31, 2001 (the Predecessor Company). For financial reporting purposes, the effective date of the Plan is considered to be the close of business on August 31, 2001, although the Company emerged from its
reorganization proceedings on August 21, 2001. The results of operations from August 21, 2001 through August 31, 2001 were not significant.




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Going Concern





While FINOVA
continues to pay its obligations as they become due, the ability of the Company to continue as a going concern is dependent upon many factors, particularly the ability of its borrowers to repay their obligations to FINOVA and the Companys
ability to realize the value of its portfolio. Unless the Companys current financial condition significantly improves, it is highly unlikely the Company will be able to repay the New Senior Notes in their entirety at maturity in November 2009.
The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Companys independent public accountants qualified their report on the Companys 2000 and 2001 financial statements due to concerns about the Companys ability to continue as a going concern.





B.    Significant Accounting Policies





The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires FINOVA to use estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. Those estimates are subject to known and unknown risks, uncertainties and other factors that could materially impact the amounts reported and disclosed in the financial statements. Significant
estimates include anticipated amounts and timing of future cash flows used in the calculation of Fresh-Start Reporting adjustments and the reserve for credit losses, measurement of impairment, selection of appropriate discount rates used in net
present value calculations, determination of fair values of certain financial instruments for which there is not an active market, residual assumptions for leasing transactions, and the determination of appropriate valuation allowances against
deferred tax assets. Actual results could differ from those estimated.





Consolidation Policy for Interim Reporting





The interim condensed consolidated financial statements present the financial position, results of operations and cash flows of The FINOVA Group Inc. and its subsidiaries, including
FINOVA Capital and its subsidiaries. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany balances have been eliminated in
consolidation.





The interim condensed consolidated financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly
the financial position as of March 31, 2002 and the results of operations and cash flows presented herein have been included in the condensed consolidated financial statements. Interim results are not necessarily indicative of results of operations
for the full year.





Segment Reporting Policy





In connection
with the Companys reorganization and emergence from bankruptcy as a new reporting entity, formerly reported operating segments have been combined into one operating unit. FINOVA is no longer soliciting new business and its assets are not
managed by separate strategic business units. Many components of the segments have been sold, dissolved or combined with other business units and as a result, comparisons with prior periods are not meaningful. Managements plan is to maximize
the value of its assets through an orderly administration and collection of the portfolio. Accordingly, the performance of reportable business segments presented in the Predecessor Companys financial statements is no longer meaningful to the
operation of the Reorganized Company.





Critical Policies





The
following policies are considered by the Company to be among the most critical accounting policies and those that could most significantly impact the consolidated financial statements. The application of these policies rely upon management
discretion and the use of estimates.





Assets Held for the Production of Income.Assets held for the production of income include off-lease and returned
assets previously the subject of financing transactions that are currently being made available for new financing transactions. Assets held for the production of income are carried at amortized cost with adjustments for impairment, if any, recorded
in operations. Depreciation of these assets is charged to operations over their estimated remaining useful lives. The determination of impairment




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is often dependent upon the estimation of anticipated future cash flows discounted at appropriate market rates to determine net present value.





Assets Held for Sale.Assets held for sale are comprised of assets previously classified as financing transactions and other financial assets that management does not have the
intent and/or ability to hold to maturity. Assets held for sale are revalued at least quarterly at the lower of cost or market less anticipated selling expenses, with the adjustment, if any, recorded in current operations. The determination of
impairment is often dependent upon the estimation of anticipated future cash flows discounted at appropriate market rates to determine net present value.





Fresh-Start Reporting.In accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code, FINOVA implemented Fresh-Start Reporting upon emergence from chapter 11. This resulted in material adjustments to the historic carrying amounts of the Companys assets and liabilities to record them at their current fair values. The
resulting values were dependent upon the use of estimates and many other factors and valuation methods, including estimating the present value of future cash flows discounted at appropriate risk adjusted market rates, traded market prices and other
applicable ratios and valuation techniques believed by the Company to be indicative of fair value.





The fair value adjustments to revenue accruing loans and
financing leases will accrete into interest income utilizing the effective interest method over the life of the transactions. If transactions are classified as nonaccruing, the Companys policy is to suspend income accretion.





The fair value adjustment to the New Senior Notes will be amortized to interest expense over the life of the debt utilizing the effective interest method.





Impaired Loans. In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114), a loan becomes impaired when it
is probable that the Company will be unable to collect all amounts due, including principal and interest payments, in accordance with the original contractual terms. Impairment reserves are recorded when the current carrying amount of a loan exceeds
the greater of (a) its net present value, determined by discounting expected cash flows from the borrower at the original effective interest rate of the transaction or (b) net fair value of collateral. Accruing impaired loans are paying in
accordance with the current modified loan agreement or are believed to have adequate collateral protection. The process of measuring impairment requires judgment and estimation, and the eventual outcomes may differ from the estimated amounts.





Impairment of Owned Assets. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, an owned asset is
considered impaired if the undiscounted cash flows are less than the carrying amount of the asset. SFAS No. 144 provides several acceptable methods for measuring the amount of the impairment. FINOVAs typical practice is to compare the carrying
amount of the asset to the present value of the estimated future cash flows, using an appropriate discount rate. The process of measuring impairment requires judgment and estimation, and the eventual outcomes may differ from the estimated amounts.





Investments. The Companys investments include debt and equity securities and partnership interests. At acquisition, marketable debt and equity
securities are designated as either (a) held to maturity, which are carried at amortized cost adjusted for other than temporary impairment, if any, (b) trading, which are carried at estimated fair value, with unrealized gains and losses reflected in
results of operations or (c) available for sale, which are carried at estimated fair value using the specific identification method, with unrealized gains and losses reflected as a separate component of shareowners equity.





Partnerships are accounted for under either the cost or equity method depending on the Companys level of ownership in the investee. Under the equity method, the Company
recognizes its share of income or losses of the partnership in the period in which they are earned or incurred. Under the cost method, the Company recognizes income based on distributions received.





The carrying values of equity securities and partnership interests are periodically reviewed for impairment, which if identified, is recorded as a charge to operations. The impairment
analysis for investments utilizes various valuation techniques involving the use of estimates and management judgment and the eventual outcomes may differ from the estimates.





Net Assets of Discontinued Operations. Upon emergence from chapter 11, the Company reclassified its net assets of discontinued operations to assets held for sale. This decision reflects managements intention to
manage all assets of the Company as one operating unit. These assets were reclassified at their then current net realizable values.




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During the third quarter of 2000, FINOVAs Board of Directors approved a plan to discontinue and offer for sale its corporate
finance, distribution & channel and commercial services businesses. As a result, the Company reported these divisions as discontinued operations in accordance with Accounting Principles Board Opinion (APB) No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Accordingly, the revenues, costs and expenses, assets and liabilities
expected to be assumed by an acquiring entity, and cash flows of these discontinued operations were excluded from the respective captions in the consolidated balance sheet and statements of consolidated operations and cash flows presented. The net
assets of discontinued operations represented reasonable estimates of the net realizable values of those businesses. These estimates were based on market conditions, interest rates and other factors that could differ significantly from actual
results.





Nonaccruing Assets. Accounts are generally classified as nonaccruing when the earlier of the following events occur: (a) the borrower
becomes 90 days past due on the payment of principal or interest or (b) when, in the opinion of management, a full recovery of income and principal becomes doubtful. Due to a variety of factors, accounts may be classified as impaired even though the
borrower is current on principal and interest payments.





Receivable Sales. In accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, subsequently amended by SFAS No. 140, when the Company sells receivables, it may retain subordinated interests, which are retained interests in the transferred receivables. These receivable
transfers are accounted for as sales when legal and effective control of the transferred receivables is surrendered. Gain or loss on the sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the receivables sold and the retained interests based on their relative fair value at the date of transfer. Active markets with quoted prices for retained interests generally do not exist. Therefore, the Company estimates
fair value based on the present value of future estimated cash flows and key assumptions, i.e. net credit losses, prepayments and discount rates commensurate with the risks involved. In general, the servicing fees earned are approximately equal to
the cost of servicing; therefore, no material servicing assets or liabilities have been recognized in those transactions.





FINOVAs retained interests in
transferred receivables are generally treated as assets available for sale, which are carried at estimated fair value using the specific identification method with unrealized gains and losses being recorded as a component of accumulated other
comprehensive income within the equity section of the balance sheet; however, in accordance with the Emerging Issues Task Force (EITF) Issues No. 99-20 Reorganization of Interest Income and Impairment on Purchase and Retained
Beneficial Interests in Securitized Financial Assets, if a decline in value is considered other than temporary, the valuation adjustment is recorded through the statement of operations. These retained interests are carried on the balance sheet
within investments.





During the periods in which FINOVA had assets classified as discontinued operations, the transferred receivables that related to these
operations were recorded within discontinued operations.





Reserve for Credit Losses. The reserve for credit losses is established for estimated credit
impairment on individual assets and inherent credit losses in the Companys loan and financing lease portfolios. This reserve is not established for assets held for sale, assets held for the production of income or other owned assets, including
assets on operating leases and residuals, as these asset classes are subject to other accounting rules, which requires direct write down for impairment. The provision for credit losses is the charge or credit to operations resulting from an increase
or decrease to the reserve for credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral. Other factors considered include changes in geographic and product mix, size of the
portfolio and current economic conditions. Impairment reserves are created if the carrying amount of the assets exceed the estimated recovery, which is measured by estimating the present value of expected future cash flows, market value or the fair
value of collateral. This includes the use of significant estimates and assumptions regarding future customer performance, amount and timing of future cash flows and collateral coverage. Accounts are either written off or written down and charged to
the reserve when the actual loss is determinable, after giving consideration to the customers financial condition and the value of the underlying collateral, including any guarantees. Recoveries of amounts previously written off as
uncollectable increase the reserve for credit losses.





Residual Values. FINOVA has a significant investment in residual values in its leasing portfolio.
These residual values represent estimates of the value of leased assets at the end of contract terms and are initially recorded based upon appraisals or estimates. Residual values are periodically reviewed to determine that recorded amounts are
appropriate.




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Revenue Recognition. For loans and other financing contracts, earned income is recognized over the life of the contract,
using the effective interest method.





Leases that are financed by nonrecourse borrowings and meet certain other criteria are classified as leveraged leases. For
leveraged leases, aggregate rental receivables are reduced by the related nonrecourse debt service obligation including interest (net rental receivables). The difference between (a) the net rental receivables and (b) the cost of the
asset less estimated residual value at the end of the lease term is recorded as unearned income. Earned income is recognized over the life of the lease at a constant rate of return on the positive net investment, which includes the effects of
deferred income taxes.





For operating leases, earned income is recognized on a straight-line basis over the lease term and depreciation is taken on a straight-line
basis over the estimated useful lives of the leased assets.





Origination fees, net of direct origination costs, are deferred and amortized over the life of the
originated asset as an adjustment to yield. As a result of FINOVAs elimination of new business activities, no new origination fees are anticipated.





Original
issue discounts are established when equity interests are received in connection with a funded loan and are based on the fair value of the equity interest. The assigned value is amortized to income over the term of the loan as an adjustment to
yield.





Fees received in connection with loan commitments, extensions, waivers and restructurings are recognized as income over the term of the loan as an
adjustment to yield. Fees on commitments that expire unused are recognized at expiration.





Income recognition is generally suspended for leases, loans and other
financing contracts at the earlier of the date at which payments become 90 days past due, or when, in the opinion of management, a full recovery of income and principal becomes doubtful and the account is determined to be impaired. Income
recognition is resumed only when the lease, loan or other financing contract becomes contractually current and performance is demonstrated to be resumed.





|C. |  | Total Financial Assets
|-- |  | ----------------------




Total financial assets represents the
Companys portfolio of investment activities, primarily consisting of secured financing to commercial and real estate enterprises principally under financing contracts (such as loans and other financing contracts, direct financing leases and
leveraged leases). In addition to its financing contracts, the Company has to a lessor extent, other financial assets including assets held for sale, owned assets (such as operating leases and assets held for the production of income) and
investments (debt and equity securities and partnership interests). As of March 31, 2002 and December 31, 2001, the carrying amount of total financial assets was $5.8 billion and $6.5 billion (before reserve for credit losses), respectively.





The following table details the composition of the Companys total financial assets (before reserve for credit losses) at March 31, 2002:




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TOTAL FINANCIAL ASSETS


MARCH 31, 2002


(Dollars in thousands)





Revenue Accruing Assets

Revenue Accruing Impaired

Nonaccruing Impaired

Nonaccruing Leases & Other

Other (1)

Total Financial Assets


%Resort

$
1,030,024

$
147,609

$
140,992

$
1,800

$
3,500

$
1,323,925


23.0Transportation





411,904


248,184





314,254


974,342


16.9Franchise (2)


519,391


8,257


182,080


394


5,311


715,433


12.4Specialty Real Estate (3)


552,840


27,185


90,581


14,510


15,140


700,256


12.2Rediscount


282,609


27,097


300,861


27,641





638,208


11.1Healthcare


234,262


4,249


233,678


1,692


16,634


490,515


8.5Communications


77,936


4,893


234,202





390


317,421


5.5Commercial Equipment


217,702





49,239


20,586


18,468


305,995


5.3Corporate Finance


41,547





117,474


2,495





161,516


2.8Mezzanine


49,310


1,370


26,105





12,286


89,071


1.6Investment Alliance (4)


1,879





1,919





4,948


8,746


0.2Other (5)


20,897








3,827


5,397


30,121


0.5Total financial assets

$
3,028,397

$
632,564

$
1,625,315

$
72,945

$
396,328

$
5,755,549


100.0Reserve for credit losses

















(960,072
)Total (6)
















$
4,795,477





---

Notes:


|(1) |  | Other includes operating leases, of which $131.8 million are generating revenue, investments, assets held for the production of income and certain assets held for sale.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In April 2002, the Company completed the sale of approximately $485 million of its franchise portfolio for approximately $490 million. This sale included substantially all the performing
assets in FINOVAs franchise portfolio. The Company will continue the orderly liquidation of its remaining franchise assets, which substantially consists of non-performing assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In January 2002, the remaining assets of the public portfolio were combined with specialty real estate.
|--- |  | -------------------------------------------------------------------------------------------------------

|(4) |  | In a series of transactions during the first quarter of 2002, the Company sold substantially all of its investment alliance assets for $67.4 million, which resulted in a $6.7
million gain.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | During the first quarter of 2002, the Company liquidated substantially all assets ($58.4 million) related to a trust for nonqualified compensation plans.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Excludes $203.1 million of assets sold that the Company manages, including $106.9 million in commercial equipment and $96.2 million in franchise.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




D.    Reserve for Credit Losses





The following table presents the balances and changes to the reserve for credit losses:





Three Months Ended March 31,2002


2001Balance, beginning of period

$
1,019,878


$
578,750Provision for credit losses


(25,184
)


61,750Write-offs


(47,803
)


(22,661
)Recoveries


13,132



232Other


49



(66
)Balance, end of period

$
960,072


$
618,005





A summary of the reserve for credit losses by impaired and other is as follows:





March 31, 2002

December 31, 2001Reserves on impaired assets

$
637,628

$
636,661Other reserves


322,444


383,217Reserve for credit losses

$
960,072

$
1,019,878





At March 31, 2002, the total carrying amount of impaired loans was $2.3 billion, of which $632.6 million were
revenue accruing. The Company has established impairment reserves of $637.6 million related to $1.6 billion of impaired loans. At December 31, 2001, the total carrying amount of impaired loans was $2.3 billion, of which $576.7 million were revenue
accruing. The impairment reserve at December 31, 2001 totaled $636.7 million related to $1.7 billion of impaired loans.





The Companys reserve for credit
losses represents FINOVAs estimate of inherent losses in its portfolio. On a periodic basis, the Company performs detailed portfolio reviews to identify impaired assets, measure the amount of such impairment and estimate inherent losses on
assets that are not impaired. SFAS No. 114 defines impaired assets as those not expected to perform in accordance with contractual terms and specifies the measurement of impairment on the basis of net present value, determined by discounting
expected cash flows from the borrower at the original effective interest rate of the transaction or net fair value of collateral. Reserves on assets that are not impaired are based on assumptions regarding general and industry specific economic
conditions, overall portfolio performance and other inherent portfolio characteristics.





FINOVAs reserve for credit losses decreased to $960.1 million at
March 31, 2002 from $1.0 billion at December 31, 2001. The reserve pertaining to impaired assets was substantially unchanged primarily due to amounts written off during the quarter and a modest improvement in collection experience on certain assets
previously reserved, offset by new reserves established for other impaired assets. Reserves on unimpaired assets decreased as a result of significant portfolio runoff during the quarter. In April 2002, FINOVA sold $485 million of franchise assets at
a slight gain. This sale will result in a reduction to reserves on unimpaired assets during the second quarter.





The reserve for credit losses as a percent of
financing assets grew to 19.0% at March 31, 2002 compared to 18.3% at December 31, 2001. The reserve for credit losses as a percent of nonaccruing assets also grew to 56.5% at March 31, 2002 compared to 55.3% at December 31, 2001. Accounts
classified as nonaccruing declined to $1.7 billion or 29.5% of total financial assets (before reserves) at March 31, 2002 as compared to $1.8 billion or 28.6% at December 31, 2001. The portfolios with the largest decline in nonaccruing assets during
the first quarter of 2002 included resort ($150.1 million), transportation ($40.0 million), healthcare ($20.8 million) and corporate finance ($16.3 million), partially offset by increases within rediscount ($45.8 million) and communications ($25.3
million). The large decline within the resort portfolio was primarily attributable to the Company negotiating a slightly discounted prepayment of one nonaccruing account (approximately $100 million), while the decline in the transportation portfolio
was almost entirely due to the write-down of accounts in conjunction with foreclosure proceedings.




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##### Table of Contents




|E. |  | Debt
|-- |  | ----




The Companys total debt outstanding was as follows:





March 31, 2002


December 31, 2001Berkadia Loan

$3,900,000


$4,900,000Senior debt:Principal amount due at maturity

3,250,478


3,250,478Discount for Fresh-Start Reporting

(753,445
)

(761,396
)Total senior debt

2,497,033


2,489,082Total debt

$6,397,033


$7,389,082





Upon emergence from bankruptcy, all of FINOVAs outstanding indebtedness was restructured. Pursuant to the
Plan, Berkadia loaned $5.6 billion to FINOVA Capital on a senior secured basis, which was used together with cash on hand and the issuance of $3.25 billion aggregate principal amount of New Senior Notes to restructure the Companys
pre-emergence indebtedness (including TOPrS), and repay all accrued and unpaid pre-petition and post-petition interest.





The terms of the Credit Agreement dated
August 21, 2001 between Berkadia and FINOVA Capital (the Credit Agreement) and the Indenture governing the New Senior Notes (the Indenture) prohibit the Company from using available funds (after certain permitted uses) for
any purpose other than to satisfy its obligations to creditors. Under the terms of the Credit Agreement and the Indenture, the Company is permitted to establish a cash reserve in an amount not to exceed certain defined criteria. Any amount in excess
of the cash reserve is required to be paid to Berkadia to reduce the principal amount of the loan on a quarterly basis. As a result, the Company paid Berkadia $500 million on January 7, 2002 and $200 million on April 8, 2002. In addition to the
mandatory prepayments, the Company has made, with Berkadias consent, two voluntary prepayments of $500 million each on February 7, 2002 and April 15, 2002 (proceeds from the franchise sale), reducing the loan balance to $3.2 billion. Loan
repayments are unlikely to continue at this pace.





The Berkadia Loan matures on August 20, 2006 and bears interest, payable monthly at the Eurodollar Rate, as
defined in the Credit Agreement, plus 2.25%. Principal is payable from available cash. All outstanding principal and accrued and unpaid interest is payable at maturity. FINOVA and substantially all of its direct and indirect subsidiaries (except
those that are contractually prohibited from acting as a guarantor) have guaranteed FINOVA Capitals repayment of the Berkadia Loan.





The terms of the Credit
Agreement require the Company to maintain at all times, a ratio of Collateral Value (as defined in the Credit Agreement) to the Berkadia Loan balance of not less than 1.25 to 1. As of March 31, 2002, the Companys Collateral Value totaled $5.5
billion, resulting in a ratio of 1.42 to 1.





The New Senior Notes mature in November 2009 and bear interest, payable semi-annually to the extent that cash is
available for that purpose in accordance with the Indenture, at a fixed interest rate of 7.5% per annum. Principal payments are due prior to maturity only after the Berkadia Loan has been paid in full, and are payable out of available cash after
establishment of cash reserves as defined in the Indenture.





Based on the Companys current financial condition, it is highly unlikely that there will be
funds available to fully repay the outstanding principal on the New Senior Notes at maturity. The Company has a negative net worth of $1.1 billion as of March 31, 2002 ($1.9 billion when the New Senior Notes are considered at their principal amount
due), the financial condition of many of its customers has weakened, impairing their ability to meet obligations to the Company, much of the Companys portfolio of owned assets is not income producing and the Company is restricted from entering
into new business activities or issuing new securities to generate cash flow. For these reasons, the Company believes that investing in the Companys debt or equity securities involves a high level of risk to the investor.




12




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##### Table of Contents




F.    Loss Per Share





Basic loss per share excludes the effects of dilution and is computed by dividing loss from continuing operations by the weighted average amount of common stock outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur if options, convertible preferred stock or other contracts to issue stock were exercised or converted into common stock. These per share calculations are presented for the three months ended March 31, 2002 and 2001.





As a result of the Companys reorganization, all stock incentive plans, outstanding stock options, stock appreciation rights and restricted stock were
cancelled. As a result, basic and diluted loss per share are equal for all periods subsequent to the reorganization. For the period ended March 31, 2001, basic loss per share equaled diluted loss per share due to the Company not having any dilutive
contracts to issue stock.





Basic and diluted loss per share calculations are presented in the Condensed Statements of Consolidated Operations and are detailed
below:





Three Months Ended March 31,2002


2001Basic/Diluted Loss Per Share Computation:Loss from continuing operations

$
(12,181
)

$
(57,000
)Weighted average shares outstanding


122,041,000



61,204,000Contingently issued shares






(139,000
)Adjusted weighted average shares


122,041,000



61,065,000Basic/diluted loss from continuing operations per share

$
(0.10
)

$
(0.93
)





|G. |  | Litigation and Claims
|-- |  | ---------------------




Legal Proceedings





FINOVA is a party either as plaintiff or defendant to various actions, proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts. Litigation often results from FINOVAs attempts to enforce its lending agreements against borrowers and other parties to those transactions. Litigation is subject to
many uncertainties. It is possible that some of the legal actions, proceedings or claims could be decided against FINOVA. Other than the matters described below, FINOVA believes that any resulting liability for litigation matters should not
materially affect FINOVAs financial position, results of operations or cash flows. One or more of the following matters could have a material adverse impact on FINOVAs financial position, results of operations or cash flow.





If any litigation matters result in a significant adverse judgment against the Company, which is not anticipated, it is unlikely that FINOVA would be able to satisfy that
liability, unless it were first able to provide for the satisfaction of its secured debt obligations. As previously noted, due to the Companys financial condition, it does not expect that it can satisfy all its secured debt obligations at
maturity. Attempts to collect on those judgments could lead to future reorganization proceedings of either a voluntary or involuntary nature.





Bankruptcy





On March 7, 2001, FINOVA, FINOVA Capital and seven of their subsidiaries filed voluntary petitions for protection from creditors pursuant to Chapter 11,
Title 11, United States Code, in the Bankruptcy Court. The other subsidiaries were FINOVA (Canada) Capital Corporation, FINOVA Capital plc, FINOVA Loan Administration Inc., FINOVA Mezzanine Capital Inc., FINOVA Portfolio Services, Inc., FINOVA
Technology Finance Inc. and FINOVA Finance Trust.





The Debtors obtained orders from the Bankruptcy Court on the first day permitting them to continue their
operations in the ordinary course, including honoring their obligations to borrowers. The orders also permitted the Debtors to pay certain pre- and post-petition expenses and claims, such as to employees (other than executive officers, with
exceptions), taxing authorities and foreign trade vendors.





The Debtors submitted a Joint Plan of Reorganization to the Bankruptcy Court on June 10, 2001. In July,
the Debtors Third Amended and Restated Joint Plan of Reorganization was submitted for creditor approval, and eventually was approved at a confirmation hearing on August 10, 2001. The Bankruptcy Courts order confirming the Plan became
final and non-appealable on August 21, 2001, at which time it became effective upon consummation of the Berkadia Loan. See Note B Significant Accounting Policies for more information regarding the Reorganization Proceedings.





Certain post-confirmation proceedings continue in the Bankruptcy Court relating to proofs of claims filed by creditors or alleged creditors, as well as
administrative claims and claims for damages for rejected executory contracts. Many of these claims relate to pre-petition litigation claims, as noted above, and it is possible that some of the claims could be decided against FINOVA. Many of those
claims are for amounts substantially in excess of amounts, if any, that FINOVA believes it owes the creditor. FINOVA believes that any resulting liability for those claims should not materially affect FINOVAs financial position, although
adverse resolution of the claims could have a material adverse impact on the Companys financial condition.





Securities Litigation





Between March 29, 2000 and May 23, 2000, five shareowner lawsuits were filed against FINOVA and Samuel Eichenfield, FINOVAs former chairman, president and chief executive
officer. Two of the lawsuits also named FINOVA Capital as a defendant and one named three other executive officers. All of the lawsuits purport to be on behalf of the named plaintiffs (William K. Steiner, Uri Borenstein, Jerry Krim, Mark Kassis and
the Louisiana School Employees Retirement System) and others who purchased FINOVA common stock during the class period of July 15, 1999, through either March 26, 2000, or May 7, 2000. The suit brought by the Louisiana School Employees Retirement
System also purported to be on behalf of all those who purchased FINOVA Capitals 7.25% Notes which, prior to the reorganization, would have been due November 8, 2004, pursuant to the registration statement and prospectus supplement dated
November 1, 1999.





By order of the U.S. District Court for the District of Arizona dated August 30, 2000, these five lawsuits were consolidated and captioned In
re: FINOVA Group Inc. Securities Litigation. The court also selected the Louisiana School Employees Retirement System (LSERS) as the lead plaintiff in the consolidated cases. LSERS filed its Amended Consolidated Complaint on September
29, 2000, naming FINOVA, FINOVA Capital, Samuel Eichenfield, Matthew Breyne and Bruno Marszowski as defendants. The consolidated amended complaint generally alleged that the defendants made materially misleading statements regarding FINOVAs
loss reserves, and otherwise violated the federal securities laws in an effort to, among other reasons, bolster FINOVAs stock price. Among other things, the complaint sought unspecified damages for losses incurred by shareowners, plus interest
and other relief and rescission with regard to the notes purchased.





Since consolidation of the original five shareowner lawsuits, other related lawsuits have been
initiated against the Company and current and former officers and directors. Three shareowner lawsuits were filed in the United States District Court for the Middle District of Tennessee, in which the named plaintiffs (John Cartwright, Sirrom
Partners and Sirrom G-1, and Caldwell Travel) assert claims relating to the Companys acquisition in 1999 of Sirrom Capital Corporation, and the exchange of shares of Sirrom stock for shares of FINOVA stock. The Cartwright complaint purports to
be a class action lawsuit on behalf of all Sirrom shareowners that exchanged their Sirrom stock for FINOVA stock as a result of the acquisition. The defendants named are Sirrom Capital Corporation, FINOVA, Samuel Eichenfield, John W. Teets,
Constance Curran, G. Robert Durham, James L. Johnson, Kenneth Smith, Shoshana Tancer and Bruno Marszowski. The complaints allege that the defendants made materially misleading statements regarding FINOVAs loss reserves, and otherwise violated
the federal securities laws in an effort to reduce the total consideration provided to Sirrom shareowners at the time of the acquisition. The complaints seek unspecified damages for losses incurred by shareowners, plus interest and other relief.





Another lawsuit was filed on September 13, 2000, in the Circuit Court for Davidson County, Tennessee, by Ronald Benkler against several former officers of Sirrom
Capital Corporation. In various agreements entered into in connection with the Sirrom acquisition, FINOVA had agreed to indemnify the former officers of Sirrom named as defendants. The complaint alleges that the Sirrom officers breached various
duties to Sirrom in connection with the acquisition of Sirrom by the Company in 1999, and with the exchange of Sirrom stock for FINOVA stock as a result of the acquisition. The plaintiffs agreed to a stay of discovery in this case, pending the final
determination of the motion to dismiss the consolidated securities litigation.





On January 4, 2001, the United States District Court for the Middle District of
Tennessee granted a motion brought by FINOVA and the other defendants to transfer the Cartwright and Sirrom Partners cases to the United States District Court for the District of Arizona. The plaintiff in Caldwell Travel agreed to dismiss that case
without prejudice. Pursuant to a Stipulation and Order entered in March 2001, the Cartwright case was consolidated for all purposes with the previous five cases in the FINOVA Group Securities Litigation, and the Sirrom Partners case was consolidated
for all pre-trial purposes.





On May 4, 2001, the lead plaintiffs filed a Second Amended Consolidated Complaint for all of the consolidated and transferred actions
pending in the United States District Court in Arizona. Among other things, the Second Amended Consolidated Complaint expanded the original class period for the shareholder class to all those who had purchased FINOVA Common Stock, and certain debt
securities, between January 14, 1999 and November 13, 2000. It also asserted claims on behalf of a purported subclass of those who exchanged shares of Sirrom stock for FINOVA stock in connection with the 1999 Sirrom acquisition.





By agreement of the parties, the time for the defendants to answer or move to dismiss the Second Amended Consolidated Complaint was extended to August 24, 2001. After extensive
negotiations, the parties reached an agreement in principle to resolve all of the various claims in the Consolidated Securities Litigation, including the claims in the Tennessee actions that had been transferred and consolidated in January, and the
claims asserted in the Tennessee state court action brought by Ronald Benkler. The Bankruptcy Court gave preliminary approval to the agreement in principle on August 10, 2001. Between September 2001 and January 2002, the lead plaintiffs conducted
confirmatory discovery in connection with the settlement. The parties executed a settlement agreement on February 19, 2002, which is pending before the United States District Court in Arizona for preliminary approval. In addition to that approval,
the agreement remains subject to certain other conditions. In 2000 FINOVA accrued and in 2001 it funded into an escrow its anticipated share of the settlement.





Finally, two shareowners derivative lawsuits were filed against current and former officers and directors of FINOVA Group, one in the United States District Court for the District of Arizona, and one in the Court of Chancery for
Newcastle County, Delaware. Both complaints were filed on September 11, 2000, and both purported to be brought by the named plaintiffs (William Kass and Cindy Burkholter) derivatively on behalf of the Company against several current and former
officers and directors, alleging generally breaches of fiduciary and other duties as directors. These actions sought unspecified money damages and other relief. As with the consolidated securities litigation, the allegations centered generally on
claims that there were materially misleading statements regarding FINOVAs loss reserves. The Plan, which was confirmed on August 10, 2001, provided that the Company may enforce any claims or causes of action arising before or after the
petition that the Company has against any entity or person, that the Company may pursue or abandon such claims or causes of action as it deems appropriate, and that no creditor or shareowner may pursue or commence such litigation, whether direct or
derivative, in regard to such claims and causes of action. The shareowners derivative actions are thus superceded by the Plan. By stipulation of the parties, the Delaware Chancery Court therefore dismissed the Kass lawsuit in December 2001,
and the Arizona District Court dismissed the Burkholter lawsuit in January 2002.





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





Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with FINOVAs Form 10-K for the year ended December 31, 2001.





The following discussion relates to The FINOVA Group Inc., a financial services holding company, and its subsidiaries (collectively FINOVA or the Company),
including FINOVA Capital Corporation and its subsidiaries (FINOVA Capital). FINOVA is a Delaware corporation, incorporated in 1991. Through its principal operating subsidiary, FINOVA Capital, the Company has provided a broad range of
financing and capital markets products, primarily to mid-size businesses. FINOVA Capital has been in operation since 1954.





Historically, FINOVA relied upon
borrowed funds and internal cash flow to finance its operations. Profit has been typically recorded from the spread between the cost of borrowing and rates paid by its customers, less operating expenses. The Company also generates revenues through
loan servicing and related activities and the sale of assets.





Beginning in the first quarter of 2000, a series of events impeded FINOVAs access to capital
in the public and private markets. As the year progressed, the U.S. economy continued to weaken and FINOVAs portfolio experienced higher levels of delinquencies. The impact of these events resulted in increased levels of problem accounts,
higher cost of funds and inadequate access to capital. This deterioration in financial stability culminated in the Companys chapter 11 reorganization.





On
March 7, 2001, FINOVA, FINOVA Capital and seven of their subsidiaries (the Debtors) filed for protection pursuant to Chapter 11, Title 11, of the United States Code in the United States Bankruptcy Court for the District of Delaware (the
Bankruptcy Court) to enable them to restructure their debt. On August 10, 2001, the Bankruptcy Court entered an order confirming FINOVAs Third Amended and Restated Joint Plan of Reorganization (the Plan), pursuant to
which the Debtors restructured their debt, effective August 21, 2001 (the Effective Date).




13




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##### Table of Contents




Pursuant to the Plan, Berkadia LLC (Berkadia), an entity jointly owned by Berkshire Hathaway Inc.
(Berkshire) and Leucadia National Corporation (Leucadia), loaned $5.6 billion to FINOVA Capital on a senior secured basis (the Berkadia Loan). The proceeds of the Berkadia Loan, together with cash on hand and the
issuance by FINOVA of approximately $3.25 billion aggregate principal amount of 7.5% Senior Secured Notes maturing in 2009 with Contingent Interest due 2016 (the New Senior Notes) were used to restructure the Companys debt. In
addition, FINOVA issued Berkadia 61,020,581 shares of common stock, representing 50% of FINOVA shares outstanding after giving effect to implementation of the Plan.





Upon emergence from bankruptcy, the Company adopted Fresh-Start Reporting, which, together with changes in the Companys operations, have resulted in the consolidated financial statements for the periods subsequent to August 31, 2001
(the Reorganized Company) not being comparable to those of the Company for periods prior to August 31, 2001 (the Predecessor Company). For financial reporting purposes, the effective date of the Plan is considered to be the
close of business on August 31, 2001, although the Company emerged from its reorganization proceedings on August 21, 2001. The results of operations from August 21, 2001 through August 31, 2001 were not significant.





Recent Developments





On January 30, 2002, FINOVA and the New York Stock Exchange mutually
agreed that the exchange would suspend trading FINOVAs common stock, which had been traded under the symbol FNV, after the close of market on February 6, 2002. This action was due to FINOVAs common stock trading below $1.00
per share for more than 30 consecutive trading days. FINOVAs stock began trading over-the-counter on February 7, 2002, under the symbol FNVG.





In
a series of transactions during the first quarter of 2002, the Company sold substantially all of its investment alliance assets for $67.4 million, which resulted in a $6.7 million gain.





In April 2002, the Company completed the sale of approximately $485 million of its franchise portfolio for approximately $490 million. This sale includes substantially all the performing assets in FINOVAs
franchise portfolio. The Company will continue the orderly liquidation of its remaining franchise assets, which substantially consists of non-performing assets.





Pursuant to the terms of the Credit Agreement dated August 21, 2001 between FINOVA Capital and Berkadia (the Credit Agreement), FINOVA Capital is required to make mandatory quarterly prepayments of principal in an amount equal
to the excess cash flow as defined in the Credit Agreement. As a result, the Company paid Berkadia $500 million on January 7, 2002 and $200 million on April 8, 2002. In addition to the mandatory prepayments, the Company has made, with
Berkadias consent, two voluntary prepayments of $500 million each on February 7, 2002 and April 15, 2002 (proceeds from the franchise sale), reducing the loan balance to $3.2 billion. Loan repayments are unlikely to continue at this pace.





In March 2002, Congress enacted the Job Creation and Worker Assistance Act of 2002 (the Act). The Act includes provisions allowing corporations to
carryback certain tax net operating losses (NOLs) for longer periods and with fewer limitations. The impact of the Act to the Company depends on whether the Company decides to make certain elections available under Section 108 of the
Internal Revenue Code of 1986 related to the recognition of approximately $800 million of cancellation of debt (COD) income in 2001. If these elections are made, NOLs will be available to carryback and the Company will be entitled to
obtain refunds of approximately $65 million under the Act. However, if such elections are made, the Company will not utilize any of its U.S. NOL carryforwards and credits to offset the COD income as contemplated in the Companys Form 10-K for
December 31, 2001. The Company will determine whether to make these elections with the filing of the corporate tax return due September 15, 2002.





Current
Business Activities





Pursuant to the terms of the Credit Agreement and the Indenture governing the New Senior Notes (the Indenture), FINOVA is not
engaged in any new customer lending activities, nor does it expect to engage in any of these activities for the foreseeable future. The Companys current business activities are limited to maximizing the value of its existing portfolio. These
activities include the continued collection of its portfolio, and may include efforts to retain certain customer relationships, restructure or terminate other relationships or sell certain assets if buyers can be found at appropriate prices.
Operations have been restructured to more efficiently manage these collection efforts. The Company will also continue to focus on negotiating appropriate rates and fee structures with its customers, or foreclose on its collateral for borrowers who
do not comply with their agreements. In some




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##### Table of Contents

instances, the Company has taken and expects to continue to take ownership or a controlling equity interest in certain of its customers businesses. FINOVA may
operate these entities until the assets are liquidated, which may take a number of years in some cases. FINOVA continues to fund existing customer commitments. All funds generated from the Companys portfolio in excess of defined cash reserves
is to be used to satisfy its creditors in the manner and priorities set forth in the Credit Agreement and the Indenture.





To facilitate the orderly collection of
its remaining asset portfolios, FINOVA has combined its former operating segments into one operating unit. As a result of this combination, elimination of new business activities and reductions in its asset portfolios, FINOVA has significantly
reduced its work force. As of March 31, 2002, the Company had 441 employees compared to 497 and 1,098 at December 31, 2001 and 2000, respectively.





Critical
Accounting Policies





The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires FINOVA to use estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. These
estimates are subject to known and unknown risks, uncertainties and other factors that could materially impact the amounts reported and disclosed in the financial statements. The Company believes the following to be among the most critical judgment
areas in the application of its accounting policies.





Nonaccruing Assets. Accounts are generally classified as nonaccruing and recognition of
income is suspended when a borrower/lessee becomes 90 days past due on the payment of principal or interest, or earlier, if in the opinion of management, full recovery of contractual income and principal becomes doubtful. The decision to classify
accounts as nonaccruing on the basis of criteria other than delinquency, is based on certain assumptions and estimates including current and future general economic conditions, industry specific economic conditions, borrower/lessee financial
performance, the ability of borrowers/lessees to obtain full refinancing of balloons or residuals at maturity and FINOVAs ability or willingness to provide such refinancing. Changes in assumptions or estimates could result in a material change
in nonaccruing account classification and income recognition. As of March 31, 2002, $1.7 billion, or 29.5% of total financial assets (before reserves), was classified as nonaccruing.





Reserve for Credit Losses. The reserve for credit losses represents FINOVAs estimate of losses inherent in the portfolio and includes reserves on impaired assets and on assets that are not impaired.
Impairment reserves are created through the provision for credit losses if the carrying amount of such assets exceed the estimated recovery, which is measured by estimating the present value of expected future cash flows, market value, or the fair
value of collateral. These methodologies include the use of significant estimates and assumptions regarding future customer performance, amount and timing of future cash flows and collateral coverage. Reserves on assets that are not impaired are
based upon assumptions including general economic conditions, overall portfolio performance and other inherent portfolio characteristics. Actual results could differ from these estimates and there can be no assurance that existing reserves will
approximate actual future losses. As of March 31, 2002, the reserve for credit losses totaled $960.1 million.





Owned Assets. Assets held for
the production of income and operating leases are carried at amortized cost with impairment adjustments, if any, recorded as permanent markdowns through operations. An owned asset is considered impaired if anticipated undiscounted cash flows are
less than the carrying amount of the asset. Once the asset has been deemed impaired, the accounting rules allow for several acceptable methods for measuring the amount of the impairment. FINOVAs typical method of measuring impairment is based
on the comparison of the carrying amount of those assets to the present value of estimated future cash flows, using appropriate discount rates. These estimates include assumptions regarding lessee performance, the amount and timing of future cash
flows, selection of appropriate discount rates for net present value calculations and residual value assumptions for leases. If actual results differ from the estimates used to determine impairment, additional markdowns may be necessary, impacting
financial condition and results from operations. As of March 31, 2002, owned assets totaled $338.6 million, or 5.9% of total financial assets (before reserves).





Assets Held for Sale. Assets held for sale are comprised of assets previously classified as financing transactions and other financial assets that management does not have the intent and/or the ability to hold to maturity. These
assets are carried at the lower of cost or market less anticipated selling expenses, with adjustment to estimated market value, if any, recorded as a loss on financial assets. Market value is often determined by the estimation of anticipated future
cash flows discounted at market rates to determine net present value. Valuation of assets held for sale includes estimates regarding market conditions and ultimate sales




15




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##### Table of Contents

prices. Actual sales prices could differ from estimates, impacting results from operations. As of March 31, 2002, assets held for sale totaled $314.4 million, or 5.5% of
total financial assets (before reserves).





Fresh-Start Reporting. Upon emergence from the Reorganization Proceedings, the Company adopted the provisions of
Fresh-Start Reporting, which resulted in material adjustments to the historical carrying amounts of the Companys assets and liabilities. The $863.7 million adjustment to assets was based on the present value of estimated future cash flows
discounted at appropriate risk adjusted interest rates. Of this amount, $365.4 million was scheduled to amortize into income over the life of the underlying transactions. Amortization will cease to the extent that the underlying transactions are
classified as nonaccruing. The New Senior Notes were initially recorded at $2.48 billion, reflecting their estimated fair value. The $771.3 million discount will be amortized as additional interest expense over the term of the notes and the
liability recorded on the Reorganized Companys Consolidated Balance Sheet will increase in an amount equal to such amortization. Although the recorded balance will be net of the unamortized discount, the Companys repayment obligation is
the $3.25 billion principal amount. Based on the Companys current financial condition, it is highly unlikely that there will be funds available to fully repay the principal amount of the New Senior Notes at maturity.





The adjustments relating to the adoption of Fresh-Start Reporting were based on estimates of anticipated future cash flows, risk adjusted discount rates and the market value of the
Companys debt securities shortly after emergence. Changes to estimated asset valuation could impact the reserve for credit losses or cause additional write downs of assets. Generally accepted accounting principles do not permit additional fair
value adjustments to the New Senior Notes after the initial Fresh-Start Reporting date.





Results of Operations





The following is a discussion of the Companys results for the three months ended March 31, 2002 and 2001. As a result of the application of Fresh-Start Reporting guidelines and
changes in the Companys operations, the condensed consolidated financial statements for the three months ended March 31, 2002 are not comparable to those of the Company for the prior year.





Three Months Ended March 31, 2002 and 2001





Net Loss. The Company reported a net loss of $12.2 million for
the three months ended March 31, 2002 compared to a net loss of $75.7 million for the same period in 2001. The improved operating results were primarily attributable to $86.9 million of lower provision for credit losses, $21.5 million of lower
operating expenses, $2.3 million of lower income tax expense and prior year losses from discontinued operations, net reorganization expense and preferred dividends that were no longer incurred in the current year. Partially offsetting these positive
variances were lower interest margins of $76.5 million in the current quarter.





Interest Margins Earned. Interest margins earned (defined as total revenues
less interest expense and operating lease and other depreciation) were a negative $3.9 million for the three months ended March 31, 2002 compared to a positive $72.6 million for the three months ended March 31, 2001. The decline was primarily due to
lower revenues resulting from a significantly lower level of earning assets and higher borrowing costs relative to historic rates paid by the Company. Total financial assets (before reserves) declined to $5.8 billion at March 31, 2002 from $10.9
billion at March 31, 2001, while during the same period, nonaccruing assets increased to $1.7 billion from $1.6 billion. The reduction in assets was due to the continued collection or disposal of the existing portfolio, valuation adjustments, the
elimination of new business development activities and reduced funding requirements on existing customer commitments. This declining asset trend is expected to continue at a slower pace as the level of problem accounts increase as a percentage of
total remaining assets. Nonaccruing assets as a percent of total financial assets (before reserves) increased to 29.5% at March 31, 2002 from 14.7% at March 31, 2001. The proportionate increase in nonaccruing assets is primarily the result of the
weakened economy, the events of September 11 and slower collection of nonaccruing assets relative to performing assets. Also contributing to the decline in interest margins is the fact that the Company is no longer match funded, and due to the
significant level of nonaccruing assets, it has a lower level of accruing fixed-rate assets than its $3.25 billion of fixed-rate debt obligations. FINOVA expects these negative interest margins will continue and may worsen in the foreseeable future.





Provision for Credit Losses. During the first quarter of 2002, the Company recorded a negative $25.2 million provision for credit losses to reduce its
reserve for credit losses. The reduction in reserve was recorded following the Companys detailed assessment of estimated inherent losses in its portfolio, which indicated a slight improvement in estimated cash collections. The provision for
credit losses of $61.8 million in the first quarter of 2001 was the result of increased impairment reserves on nonaccruing assets.




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The measurement of credit impairment is dependent upon the significant use of estimates and management discretion when predicting
expected cash flows. These estimates are subject to known and unknown risks, uncertainties and other factors that could materially impact the amounts reported and disclosed herein. See the Special Note Regarding Forward-Looking
Statements for a discussion of the many factors impacting the use of estimates.





Net Gain on Financial Assets. The Company realized a net gain on
financial assets of $1.0 million for the three months ended March 31, 2002 compared to a net gain of $6.7 million in 2001. The $1.0 million net gain for the quarter included $29.1 million of gains offset by $28.1 million of additional losses.
The most significant item was a $6.7 million gain realized on the sale of investment alliance assets during the quarter.





Operating Expenses. Operating
expenses declined $21.5 million to $33.5 million for the three months ended March 31, 2002 from $55.0 million for the comparable period in 2001. The decrease was primarily due to the cost savings resulting from a reduction in employees (441 at
March 31, 2002 compared to 768 at March 31, 2001). Also contributing to the decrease was lower professional fees in the current year compared to the prior year, which included a significant level of fees (consisting of investment banking, legal and
accounting fees), principally related to the Reorganization Proceedings. The Company expects this operating expense trend to continue as the portfolio decreases in size.





Net Reorganization Expense. Net reorganization expense during the first quarter of 2001 included expenses and income directly associated with the bankruptcy process. No reorganization expense was incurred during the first quarter of
2002. For the three months ended March 31, 2001, net reorganization expense was $9.6 million and included the charge-off of $15.1 million of debt origination costs, professional service fees of $9.6 million and the full amortization of debt
discounts totaling $7.9 million. Partially offsetting these expenses were gains of $22.2 million from the termination of interest rate swaps and interest of $0.8 million earned on cash retained for interest and debt payments that were deferred
during the bankruptcy period.





Income Tax Expense. In the first quarter of 2002, the Company recorded $2 thousand of income tax expense due to taxable
income generated by foreign operations. Income tax benefits related to the pre-tax book loss were fully offset by an increase in the valuation allowance due to the uncertainty regarding the ability to utilize such benefits in the future. In the
first quarter of 2001, the Company provided for income taxes in spite of having losses before income taxes, due to taxable income being generated by foreign operations (primarily in the United Kingdom and Canada).





Discontinued Operations.Businesses that were previously classified as discontinued operations were reclassified to assets held for sale upon emergence from chapter 11. For the
three months ended March 31, 2001, losses from discontinued operations consisted of additional net realizable markdowns of $12.8 million and additional operating losses of $5.9 million.





Financial Condition, Liquidity and Capital Resources





On March 7, 2001, FINOVA, FINOVA Capital and seven of their
subsidiaries (the Debtors) filed for protection pursuant to Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware to enable them to restructure their debt. On August 10, 2001,
the Bankruptcy Court entered an order confirming the Plan, pursuant to which the Debtors restructured their debt, effective August 21, 2001.





Upon emergence from
bankruptcy, the $5.6 billion Berkadia Loan together with cash on hand and the issuance of $3.25 billion New Senior Notes financed the restructuring of the Companys pre-emergence indebtedness (including TOPrS) and repaid all allowed
accrued and unpaid pre-petition and post-petition interest claims. The New Senior Notes are reflected in the Companys Condensed Consolidated Balance Sheet net of an unamortized discount of $753.4 million, resulting from the adoption of
Fresh-Start Reporting. The book value of the New Senior Notes is scheduled to increase to the $3.25 billion principal amount over time through amortization of the discount as interest expense. The Company remains obligated to pay the full $3.25
billion principal amount of the New Senior Notes.





The terms of the Credit Agreement and the Indenture substantially prohibit the Company from using available
funds (after certain permitted uses) for any purpose other than to satisfy its obligations to creditors. Under the terms of the Credit Agreement, the Company is permitted to establish a cash reserve in an amount not to exceed certain defined
criteria. Any amount in excess of the cash reserve is required to be paid to Berkadia to reduce the principal amount of the loan on a quarterly basis. As a result, the Company paid Berkadia $500 million on January 7, 2002 and $200 million on April
8, 2002. In addition to the mandatory prepayments, the Company has made, with Berkadias consent, two voluntary prepayments of $500 million each on February 7,




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2002 and April 15, 2002 (proceeds from the franchise sale), reducing the loan balance to $3.2 billion. Loan repayments are unlikely to continue at this pace.





As a result of FINOVAs current financial condition and restrictions contained in the debt agreements that do not allow FINOVA to incur any meaningful amount of new debt, the
estimation of cash reserves is critical to the overall liquidity of the Company. Cash reserve estimations are subject to known and unknown risks, uncertainties and other factors that could materially impact the amounts determined. Failure to
adequately estimate a cash reserve in one period could result in insufficient liquidity to meet obligations in that or a subsequent period if actual cash requirements exceed the prior cash reserve estimates.





Based on the Companys current financial condition, it is highly unlikely that there will be funds available to fully repay the outstanding principal on the New Senior Notes at
maturity, the related 5% distribution to common shareowners, or to make any contingent interest payments, discussed in Obligations and Commitments below. The Company has a negative net worth of $1.1 billion as of March 31, 2002 ($1.9
billion when the New Senior Notes are considered at their principal amount due), the financial condition of many of its customers has weakened, impairing their ability to meet obligations to the Company, much of the Companys portfolio of owned
assets is not income producing and the Company is restricted from entering into new business activities or issuing new securities to generate cash flow. For these reasons, the Company believes that investing in the Companys debt and equity
securities involves a high level of risk to the investor.





Obligations and Commitments.The following is a listing of FINOVAs significant contractual
obligations and contingent commitments at March 31, 2002. A detailed schedule of the timing of repayment has not been provided because the Companys most significant obligations are contractual as to amount but contingent regarding the timing
of repayment. The listing is not intended to be all encompassing and excludes normal recurring trade and other accounts payable obligations.








Contractual and Contingent Obligations (Dollars in thousands)

Contractual Obligations

Contingent ObligationsBerkadia Loan

$
3,900,000

$New Senior Notes


3,250,478Contingent interest on New Senior Notes





100,000Unfunded customer commitments





917,852Nonrecourse debt associated with the leveraged lease portfolio


1,057,762Operating leases


20,071$
8,228,311

$
1,017,852





Principal repayment of the Berkadia Loan is contingent on available cash in excess of cash reserves. The Berkadia
Loan was further reduced to $3.2 billion in April 2002. All unpaid principal and accrued interest are due at maturity on August 20, 2006.





Principal repayment of
the New Senior Notes cannot commence until the Berkadia Loan is paid in full and is contingent on the availability of excess cash, as defined. Contingent interest cannot commence until the New Senior Notes are paid in full. As noted above, it is
highly unlikely that there will be funds available to fully repay the outstanding principal on the New Senior Notes at maturity in November 2009 or any contingent interest through its expiration in 2016.





Unfunded customer commitments have declined from $1.14 billion at December 31, 2001 to $917.9 million at March 31, 2002 primarily due to the termination of outstanding committed lines of
credit within the corporate finance and resort portfolios. Because of the primarily revolving nature of its commitments, the Company is unable to estimate with certainty what portion of the commitments will be funded. Historically, in the aggregate,
actual funding has been significantly below the commitment amounts.





Nonrecourse debt associated with the leveraged lease portfolio represents principal amounts
due to third party lenders under lease agreements. Nonrecourse debt declined to $1.06 billion at March 31, 2002 due to scheduled principal payments and the Companys decision to prepay $11.5 million of high cost debt associated with one leasing
transaction that had its prepayment penalties expire during the first quarter.





Contractual operating lease obligations represent the total future minimum rental
payments due under operating leases (primarily leased office space) as of March 31, 2002. During the Reorganization Proceedings, the Company rejected certain of its operating leases and is currently paying on a month-to-month basis while
implementing alternative arrangements. By the end of the second




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quarter of 2002, the Company anticipates it will finalize lease negotiations on its primary operating headquarters in Scottsdale, Arizona, which will increase the Companys contractual
operating lease obligations.





Collection of the Portfolio. The following table summarizes the rollforward activity for total financial assets, net of the
reserve for credit losses at March 31, 2002.





Total financial assets at December 31, 2001

$5,431,886Cash activity:Fundings under outstanding customer commitments

319,669Collections on financial assets

(951,544
)Net cash flows

(631,875
)Non-cash activity:Provision for credit losses (reversal)

25,184Charge-offs of financial assets

(25,401
)Other non-cash activity

(4,317
)Net non-cash activity

(4,534
)Total financial assets at March 31, 2002

$4,795,477





Total financial assets, net of the reserve for credit losses, declined to $4.8 billion at March 31, 2002, down
$636.4 million from $5.4 billion at December 31, 2001. During 2002, net cash flow from portfolio collections totaled $631.9 million, while non-cash activity resulted in a slight decrease in financial assets. Components of net cash flow included
$834.5 million from collections on financial assets, $117.1 million from the sale of assets (excluding cash gains), offset by $319.7 million from fundings under outstanding customer commitments. Collections on financial assets included $248.6
million of prepayments (customer payments in advance of scheduled due dates). Prepayments are not predictable and given the decline in the size of FINOVAs asset portfolio and the higher level of nonaccruing assets in the remaining portfolio,
prepayment levels as well as scheduled amortization are expected to decline over time. Non-cash activity included the reversal of $25.2 million of provision for credit losses, offset by a $25.4 million reduction related to markdowns of owned assets
and $4.3 million of other non-cash activity, primarily operating lease depreciation offset by Fresh-Start accretion. The decline in total financial assets is expected to continue; however, not at the same pace.





FINOVAs reserve for credit losses decreased to $960.1 million at March 31, 2002 from $1.0 billion at December 31, 2001. The reserve pertaining to impaired assets was substantially
unchanged primarily due to amounts written off during the quarter and a modest improvement in collection experience on certain assets previously reserved, offset by new reserves established for other impaired assets. Reserves on unimpaired assets
decreased as a result of significant portfolio runoff during the quarter. In April 2002, FINOVA sold $485 million of franchise assets at a slight gain. This sale will result in a reduction to reserves on unimpaired assets during the second quarter.





The reserve for credit losses as a percent of financing assets grew to 19.0% at March 31, 2002 compared to 18.3% at December 31, 2001. The reserve for credit
losses as a percent of nonaccruing assets also grew to 56.5% at March 31, 2002 compared to 55.3% at December 31, 2001. Accounts classified as nonaccruing declined to $1.7 billion or 29.5% of total financial assets (before reserves) at March 31, 2002
as compared to $1.8 billion or 28.6% at December 31, 2001. The portfolios with the largest decline in nonaccruing assets during the first quarter of 2002 included resort ($150.1 million), transportation ($40.0 million), healthcare ($20.8 million)
and corporate finance ($16.3 million), partially offset by increases within rediscount ($45.8 million) and communications ($25.3 million). The large decline within the resort portfolio was primarily attributable to the Company negotiating a slightly
discounted prepayment of one nonaccruing account (approximately $100 million), while the decline in the transportation portfolio was almost entirely due to the write-down of accounts in conjunction with foreclosure proceedings.





Earning impaired assets also increased during 2002 to $632.6 million at March 31, 2002 from $576.7 million at December 31, 2001. The majority of this increase was attributable
to the resort portfolio, which grew to $147.6 million at March 31, 2002 from $42.4 million at year end. Partially offsetting the resort increase was a decline in the transportation portfolio of $38.8 million, resulting




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primarily from migration of these accounts to operating leases or off-lease status. The increase in resort was primarily due to the migration of one large exposure to impaired status following
extension and modification of its payment terms.





The Company expects that over time, its impaired assets will comprise an increasing percentage of its total
portfolio, as the obligors under those contracts tend to be in poor financial condition, and will repay their obligations more slowly than performing obligors.





Special Note Regarding Forward-Looking Statements





Certain statements in this report are forward-looking, in that they do not
discuss historical fact, but instead note future expectations, projections, intentions or other items. These forward-looking statements include assumptions, estimates and valuations implicit in the financial statements and related notes as well as
matters in the sections of this report captioned Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 3. Quantitative and Qualitative Disclosure About Market Risk. They
are also made in documents incorporated in this report by reference, or in which this report may be incorporated.





Forward-looking statements are subject to known
and unknown risks, uncertainties and other factors that may cause FINOVAs actual results or performance to differ materially from those contemplated by the forward-looking statements. Many of these factors are discussed in this report and
include:





|· |  | On September 11, the terrorist attacks on the United States resulted in the interruption of many business activities and overall disruption of the U.S. and world economies. Many of
FINOVAs customers have been adversely affected by these events, especially in the airline industry. The Company estimated the economic impact these events have had on its financial condition and will have on future operations, and accordingly,
recorded charges to write down assets and add to reserves for credit losses. These charges are based on the Companys estimation of inherent losses and actual results may differ from the estimate.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | The extent to which FINOVA is successful in implementing its business strategy, including the efforts to maximize the value of its portfolio. Failure to fully implement its business
strategy might result in adverse effects, impair the Companys ability to repay outstanding secured debt and other obligations, and have a materially adverse impact on its financial position and results of operations. The current focus on
maximizing portfolio values and the absence of any new business generation will cause future financial results to differ materially from prior periods. Similarly, adoption of Fresh-Start Reporting upon emergence from bankruptcy has resulted in
revaluation of certain assets and liabilities and other adjustments to the financial statements, so that prior results are not indicative of future expectations.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | The effect of economic conditions and the performance of FINOVAs borrowers. Economic conditions in general or in particular market segments could impair the ability of
FINOVAs borrowers to operate or expand their businesses, which might result in decreased performance, adversely affecting their ability to repay their obligations. The rate of borrower defaults or bankruptcies may increase. Changing economic
conditions could adversely affect FINOVAs ability to generate cash flow from sales of assets and investments and realize estimated residual values. Certain changes in fair values of assets must be reflected in FINOVAs reported financial
results.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | The cost of FINOVAs capital. That cost has increased significantly since the first quarter of 2000 and will negatively impact results. Failure to comply with its credit obligations
could result in additional increases in interest charges. In addition, changes in interest rate indices may negatively impact interest margins due to lack of matched funding of the Companys assets and liabilities.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | Loss of employees. FINOVA must retain a sufficient number of employees with relevant knowledge and skills to continue to monitor and collect its portfolio. Failure to do so could result
in additional losses. The curtailment of new business could adversely affect employee retention absent significant incentives.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | Changes in Federal Aviation Administration directives. These changes could have a significant impact on aircraft values, especially FINOVAs portfolio of aircraft that are of an
older vintage.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|· |  | Changes in government regulations, tax rates and similar matters. For example, government regulations could significantly increase the cost of doing business or could eliminate certain
tax advantages of some FINOVA financing products. The Company has not recorded a benefit in its financial statements for its existing tax attributes and estimated future tax deductions since it does not expect to generate the future taxable income
needed to use those tax benefits. The Company may never be able to use those tax attributes.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | Necessary technological changes, such as implementation of information management systems, may be more difficult, expensive or time consuming to implement than anticipated.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | Potential liabilities associated with dispositions of assets.
|- |  | -------------------------------------------------------------




|· |  | Other risks detailed in this and FINOVAs other SEC reports or filings.
|- |  | -----------------------------------------------------------------------




FINOVA does not intend to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. FINOVA cannot predict the risk from reliance on forward-looking statements
in light of the many factors that could affect their accuracy.





Item 3. Quantitative and Qualitative Disclosure About Market Risk





FINOVA uses various sensitivity analysis models to measure the
exposure of net income or loss to increases or decreases in interest rates. These models measure the change in annual net income or loss if interest rates on floating-rate assets, liabilities and derivative instruments increase or decrease, assuming
no prepayments. Based on models used, a 100 basis point or 1% shift in interest rates would affect net income/(loss) by less than $10 million. An increase in rates would have a negative impact, while a decrease in rates would have a positive impact.





Certain limitations are inherent in the models used for interest rate risk measurements. Modeling changes require certain assumptions that may oversimplify the
manner in which actual yields and costs respond to changes in market interest rates. For example, the models assume a more static composition of FINOVAs interest sensitive assets, liabilities and derivative instruments than would actually
exist over the period being measured. The models also assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the maturity or repricing of specific assets and liabilities. Although the
sensitivity analysis models provide an indication of FINOVAs interest rate risk exposure at a particular point in time, the models are not intended to and do not provide a precise forecast of the effects of changes in market interest rates on
FINOVAs net income or loss and will likely differ from actual results.





PART II OTHER INFORMATION





Item 1. Legal Proceedings





See Part I, Item 1, Note G for a discussion of pending legal proceedings.





Item 6. Exhibits and Reports on Form 8-K





None.




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THE FINOVA GROUP INC.





Signatures





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





THE FINOVA GROUP INC.





(Registrant)





Dated:    May 10, 2002



By:

/s/ Stuart A. TashlikStuart A. Tashlik, Senior Vice President, Chief Financial Officer Principal Financial and Accounting Officer




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