** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-Q**

** **

**QuarterlyReport pursuant to Section 13 or 15 (d) of theSecurities Exchange Act of 1934**

 

**For the quarterly period endedSeptember 30, 2003**

 

**Commission filenumber 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 whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  ý                   No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

Yes  o                   No  ý

 

**APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVEYEARS:**

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

 

Yes  ý                   No  o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

As of November 10, 2003,approximately 122,041,000 shares of Common Stock ($0.01 par value) wereoutstanding.

 

 

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**THE FINOVA GROUP INC.**

 

**TABLE OF CONTENTS**

 

** **
| **PART I    FINANCIAL INFORMATION** |
|---------------------------------------------------------|
|                                                    |
| Item 1.                                                 | Financial Statements |
|                                                    |   | Condensed  Consolidated Balance Sheets |
|                                                    |   | Condensed  Statements of Consolidated Operations |
|                                                    |   | Condensed  Statements of Consolidated Cash Flows |
|                                                    |   | Condensed  Statements of Consolidated Stockholders’ Equity |
|                                                    |   | Notes  to Interim Condensed Consolidated Financial Statements |
|                                                    |
| Item  2.                                                | Management’s  Discussion and Analysis of Financial Condition and Results of OperationsSpecial  Note Regarding Forward-Looking Statements |
|                                                    |   |   |
| Item  3.                                                | Quantitative  and Qualitative Disclosure About Market Risk |   |
|                                                    |   |   |
| Item 4.                                                 | Controls and Procedures |   |
|                                                    |   |   |
| **PART II    OTHER INFORMATION**    |
|                                                    |   |   |
| Item  1.                                                | Legal  Proceedings |   |
|                                                    |   |   |
| Item 6.                                                 | Exhibits and  Reports on Form 8-K |   |
|                                                    |   |   |
| Signatures                                              |   |   |
|                                                         |  |  |  |

 

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**PARTI****  FINANCIAL INFORMATION**

 

**Item1.****    Financial Statements**

**THE FINOVA GROUP INC.**

### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands)**

 
|                                                                                         |   | **September 30, 2003** |       | **December 31, 2002** |       |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------------------------|------------|
|                                                                                         |   | **(Unaudited)**             |       | **(Audited)**              |       |
|                                                                                         |   |                        |       |                       |       |
| **ASSETS**                                                                                   |   |                        | ** ** |                       | ** ** |
| Cash and cash equivalents                                                                    |   | $                           | 406,618    |                       | $          | 575,215 |   |
| **Financing Assets:**                                                                        |   |                        |       |                       |       |
| Loans and other financing contracts, net                                                     |   | 1,770,152                   |       | 2,655,724                  |       |
| Direct financing leases                                                                      |   | 200,791                     |       | 263,826                    |       |
| Leveraged leases                                                                             |   | 164,752                     |       | 182,410                    |       |
| Total financing assets                                                                       |   | 2,135,695                   |       | 3,101,960                  |       |
| Reserve for credit losses                                                                    |   | (305,806                    | )          | (540,268                   | )     |
| Net financing assets                                                                         |   | 1,829,889                   |       | 2,561,692                  |       |
| **Other Financial Assets:**                                                                  |   |                        |       |                       |       |
| Operating leases                                                                             |   | 93,532                      |       | 111,826                    |       |
| Assets held for sale                                                                         |   | 69,032                      |       | 393,125                    |       |
| Assets held for the production of income                                                     |   | 31,369                      |       | 67,867                     |       |
| Investments                                                                                  |   | 14,887                      |       | 21,641                     |       |
| Total other financial assets                                                                 |   | 208,820                     |       | 594,459                    |       |
| **Total Financial Assets**                                                                   |   | 2,038,709                   |       | 3,156,151                  |       |
| Other assets                                                                                 |   | 25,738                      |       | 27,642                     |       |
|                                                                                         |   | $                           | 2,471,065  |                       | $          | 3,759,008 |   |
|                                                                                         |   |                        |       |                       |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                               |   |                        |       |                       |       |
| **Liabilities:**                                                                             |   |                        |       |                       |       |
| Berkadia Loan                                                                                |   | $                           | 750,000    |                       | $          | 2,175,000 |   |
| Senior Notes - (principal amount due of  $2.97 billion)                                      |   | 2,329,501                   |       | 2,381,643                  |       |
| Total debt                                                                                   |   | 3,079,501                   |       | 4,556,643                  |       |
| Accounts payable and accrued expenses                                                        |   | 172,965                     |       | 156,338                    |       |
| Deferred income taxes, net                                                                   |   | 2,836                       |       | 16,776                     |       |
| **Total Liabilities**                                                                        |   | 3,255,302                   |       | 4,729,757                  |       |
|                                                                                         |   |                        |       |                       |       |
| **Stockholders’ Equity:**                                                               |   |                        |       |                       |       |
| Common stock, $0.01 par value, 400,000,000  shares authorized and  125,873,000 shares issued |   | 1,259                       |       | 1,259                      |       |
| Additional capital                                                                           |   | 75,779                      |       | 53,233                     |       |
| Accumulated deficit                                                                          |   | (860,679                    | )          | (1,020,828                 | )     |
| Accumulated other comprehensive loss                                                         |   | (60                         | )          | (3,877                     | )     |
| Common stock in treasury, 3,832,000 shares                                                   |   | (536                        | )          | (536                       | )     |
| **Total Stockholders’  Equity**                                                         |   | (784,237                    | )          | (970,749                   | )     |
|                                                                                         |   | $                           | 2,471,065  |                       | $          | 3,759,008 |   |

 

*See notes to interim condensed consolidatedfinancial statements.*

 

1

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**THE FINOVA GROUP INC.**

### **CONDENSEDSTATEMENTS OF CONSOLIDATED OPERATIONS**

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

**(Unaudited)**

 
|                                                           |   | **Three Months  Ended  Sept. 30,2003** |   | **Three Months  Ended  Sept. 30, 2002** |   | **Nine Months  Ended  Sept. 30, 2003** |   | **Nine Months  Ended  Sept. 30, 2002** |    |
|----------------------------------------------------------------|--------|----------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|----------------------------------------|---------|
| **Revenues:**                                                  |   |                                   |   |                                    |   |                                   |   |                                   |    |
| Interest income                                                |   | $                                      | 63,088 |                                    | $      | 49,758                                 |   | $                                      | 162,478 |   | $ | 193,181 |   |
| Rental income                                                  |   | 7,680                                  |   | 9,604                                   |   | 24,004                                 |   | 30,777                                 |    |
| Operating lease income                                         |   | 13,948                                 |   | 12,994                                  |   | 38,449                                 |   | 36,153                                 |    |
| Fees and other income                                          |   | 6,195                                  |   | 10,384                                  |   | 26,036                                 |   | 35,668                                 |    |
| **Total Revenues**                                             |   | 90,911                                 |   | 82,740                                  |   | 250,967                                |   | 295,779                                |    |
| Interest expense                                               |   | (77,478                                | )      | (96,858                                 | )      | (241,561                               | )      | (312,930                               | )  |
| Operating lease and other depreciation                         |   | (5,203                                 | )      | (8,347                                  | )      | (21,041                                | )      | (29,116                                | )       |
| **Interest  Margin**                                           |   | 8,230                                  |   | (22,465                                 | )      | (11,635                                | )      | (46,267                                | )  |
|                                                           |   |                                   |   |                                    |   |                                   |   |                                   |    |
| **Other Revenues and  (Expenses):**                            |   |                                   |   |                                    |   |                                   |   |                                   |    |
| Reversal of provision for credit losses                        |   | 30,195                                 |   | 69,467                                  |   | 153,768                                |   | 223,485                                |    |
| Net gain (loss) on financial assets                            |   | 24,537                                 |   | (33,159                                 | )      | 56,909                                 |   | (96,718                                | )  |
| Portfolio expenses                                             |   | (3,930                                 | )      | (12,211                                 | )      | (22,459                                | )      | (33,766                                | )  |
| General and administrative expenses                            |   | (12,344                                | )      | (24,299                                 | )      | (44,927                                | )      | (77,449                                | )  |
| Gain from extinguishment of debt,  net of fresh-start discount |   | 28,493                                 |   | 46,888                                  |   | 28,493                                 |   | 46,888                                 |    |
| **Total Other Revenues and  (Expenses)**                       |   | 66,951                                 |   | 46,686                                  |   | 171,784                                |   | 62,440                                 |    |
|                                                           |   |                                   |   |                                    |   |                                   |   |                                   |    |
| Income before income taxes                                     |   | 75,181                                 |   | 24,221                                  |   | 160,149                                |   | 16,173                                 |    |
| Income tax expense                                             |   |                                   |   | (41                                     | )      |                                   |   | (45                                    | )       |
| **Net Income**                                                 |   | $                                      | 75,181 |                                    | $      | 24,180                                 |   | $                                      | 160,149 |   | $ | 16,128 |   |
|                                                           |   |                                   |   |                                    |   |                                   |   |                                   |    |
| Basic/diluted earnings per share                               |   | $                                      | 0.61   |                                    | $      | 0.20                                   |   | $                                      | 1.31    |   | $ | 0.13 |   |
|                                                           |   |                                   |   |                                    |   |                                   |   |                                   |    |
| Weighted average shares outstanding                            |   | 122,041,000                            |   | 122,041,000                             |   | 122,041,000                            |   | 122,041,000                            |    |

 

*See notes to interim condensed consolidatedfinancial statements.*

 

2

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**THE FINOVA GROUP INC.**

### **CONDENSEDSTATEMENTS OF CONSOLIDATED CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**

 
|                                                                           |   | **Nine Months Ended September 30,** |    |
|--------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                           |   | **2003**                                 |    | **2002** |   |
| **Operating Activities:**                                                      |   |                                     |    |   |   |
| Net income                                                                     |   | $                                        | 160,149 |   | $ | 16,128 |   |
| Adjustments to reconcile net income to net  cash used by operating activities: |   |                                     |    |   |   |
| Reversal of provision for credit losses                                        |   | (153,768                                 | )       | (223,485 | ) |
| Net cash gain on disposal of financial  assets                                 |   | (79,941                                  | )       | (79,246 | ) |
| Net non-cash charge-offs of financial  assets                                  |   | 23,032                                   |    | 175,964 |   |
| Gain from extinguishment of debt, net of  fresh-start discount                 |   | (28,493                                  | )       | (46,888 | ) |
| Depreciation and amortization                                                  |   | 23,309                                   |    | 31,851 |   |
| Deferred income taxes, net                                                     |   | 6,647                                    |    | 4,250 |   |
| Other amortization                                                             |   | 2,932                                    |    | (3,588 | ) |
| Change in assets and liabilities:                                              |   |                                     |    |   |   |
| Decrease in other assets                                                       |   | 240                                      |    | 18,399 |   |
| Increase in accounts payable and accrued  expenses                             |   | 20,203                                   |    | 6,155 |   |
| **Net Cash Used by  Operating Activities**                                     |   | (25,690                                  | )       | (100,460 | ) |
|                                                                           |   |                                     |    |   |   |
| **Investing Activities:**                                                      |   |                                     |    |   |   |
| Proceeds from disposals of leases and  other owned assets                      |   | 117,880                                  |    | 64,118 |   |
| Proceeds from sales of investments                                             |   | 23,689                                   |    | 155,831 |   |
| Proceeds from sales of financial assets                                        |   | 311,368                                  |    | 572,820 |   |
| Collections from financial assets                                              |   | 1,147,894                                |    | 2,109,173 |   |
| Fundings under existing customer  commitments                                  |   | (322,116                                 | )       | (886,942 | ) |
| Recoveries of loans previously written off                                     |   | 53,253                                   |    | 38,857 |   |
| **Net Cash Provided by  Investing Activities**                                 |   | 1,331,968                                |    | 2,053,857 |   |
|                                                                           |   |                                     |    |   |   |
| **Financing Activities:**                                                      |   |                                     |    |   |   |
| Repayments of Berkadia Loan                                                    |   | (1,425,000                               | )       | (2,500,000 | ) |
| Repurchase of Senior Notes                                                     |   | (49,875                                  | )       | (29,551 | ) |
| Benefits realized from pre-confirmation  NOLs                                  |   |                                     |    | 36,029 |   |
| **Net Cash Used by  Financing Activities**                                     |   | (1,474,875                               | )       | (2,493,522 | ) |
|                                                                           |   |                                     |    |   |   |
| **Decrease in Cash and Cash  Equivalents**                                     |   | (168,597                                 | )       | (540,125 | ) |
|                                                                           |   |                                     |    |   |   |
| **Cash and Cash  Equivalents,  beginning of period**                      |   | 575,215                                  |    | 1,027,241 |   |
|                                                                           |   |                                     |    |   |   |
| **Cash and Cash  Equivalents,  end of period**                            |   | $                                        | 406,618 |   | $ | 487,116 |   |

 

*See notes to interim condensed consolidatedfinancial statements.*

 

3

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**THE FINOVA GROUP INC.**

### **CONDENSEDSTATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY**

**(Dollars in thousands)**

**(Unaudited)**

 
|                                                      |   | **Common  Stock** |   | **Additional  Capital** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Common  Stock in  Treasury** |   | **Total  Stockholders’  Equity** |   |
|-----------------------------------------------------------|--------|-------------------|--------|-------------------------|--------|--------------------------|--------|------------------------------------------------------|------------|--------------------------------|--------|---------------------------------------|--------|
| **Balance, January 1,  2002**                        |   | $                 | 1,259  |                    | $      | 16,928                   |   | $                                                    | (1,142,300 | )                              | $      | 4,080                                 |   | $ | (536 | ) | $ | (1,120,569 | ) |
| Comprehensive income:                                     |   |              |   |                    |   |                     |   |                                                 |       |                           |   |                                  |   |
| Net income                                                |   |              |   |                    |   | 121,472                  |   |                                                 |       |                           |   | 121,472                               |   |
| Net change in unrealized holding gains  (losses)          |   |              |   |                    |   |                     |   | (10,743                                              | )          |                           |   | (10,743                               | )      |
| Net change in foreign currency translation                |   |              |   |                    |   |                     |   | 2,786                                                |       |                           |   | 2,786                                 |   |
| Comprehensive income                                      |   |              |   |                    |   |                     |   |                                                 |       |                           |   | 113,515                               |   |
| Benefits realized from pre-confirmation  NOLs             |   |              |   | 36,029                  |   |                     |   |                                                 |       |                           |   | 36,029                                |   |
| Other                                                     |   |              |   | 276                     |   |                     |   |                                                 |       |                           |   | 276                                   |   |
| **Balance,  December 31, 2002**                      |   | 1,259             |   | 53,233                  |   | (1,020,828               | )      | (3,877                                               | )          | (536                           | )      | (970,749                              | )      |
| Comprehensive income:                                     |   |              |   |                    |   |                     |   |                                                 |       |                           |   |                                  |   |
| Net income                                                |   |              |   |                    |   | 160,149                  |   |                                                 |       |                           |   | 160,149                               |   |
| Net change in unrealized holding gains  (losses)          |   |              |   |                    |   |                     |   | 4,011                                                |       |                           |   | 4,011                                 |   |
| Net change in foreign currency translation                |   |              |   |                    |   |                     |   | (194                                                 | )          |                           |   | (194                                  | )      |
| Comprehensive income                                      |   |              |   |                    |   |                     |   |                                                 |       |                           |   | 163,966                               |   |
| Benefits realized from pre-confirmation  taxcontingencies |   |              |   | 22,546                  |   |                     |   |                                                 |       |                           |   | 22,546                                |   |
| **Balance,  September 30, 2003**                     |   | $                 | 1,259  |                    | $      | 75,779                   |   | $                                                    | (860,679   | )                              | $      | (60                                   | )      | $ | (536 | ) | $ | (784,237 | ) |

 

*See notes to interim condensed consolidatedfinancial statements.*

 

4

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**THE FINOVA GROUPINC.**

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2003**

**(Dollars in thousands in tables)**

**(Unaudited)**

 

**A.****    Nature of Operations and Basisof Presentation**

 

Theaccompanying financial statements and notes thereto should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002. Capitalized terms not defined herein are used as definedin the Form 10-K.

 

Thefollowing discussion relates to The FINOVA Group Inc. and its subsidiaries(collectively “FINOVA” or the “Company”), including its principal operatingsubsidiary, FINOVA Capital Corporation and its subsidiaries (“FINOVA Capital”).FINOVA, a Delaware corporation incorporated in 1991, is a financial servicesholding company. Through FINOVA Capital, the Company has provided a broad rangeof financing and capital markets products, primarily to mid-size businesses.FINOVA’s business is being operated under a Management Services Agreement withLeucadia National Corporation (“Leucadia”), which expires in 2011. Leucadia hasdesignated its employees to act as Chairman of the Board (Ian M. Cumming),President (Joseph S. Steinberg) and Chief Executive Officer (Thomas E. Mara).FINOVA Capital has been in operation since 1954.

 

Since emergence from chapter 11in August 2001, the Company’s business activities have been limited tomaximizing the value of its portfolio through the orderly collection of itsassets. These activities include collection efforts pursuant to underlyingcontractual terms and may include efforts to retain certain customerrelationships and restructure or terminate other relationships. The Company hasnot and does not expect to engage in any new lending activities, except tohonor existing customer commitments and in certain instances, to restructurefinancing relationships with existing customers to maximize value. Operationshave been restructured to more efficiently manage these collection efforts. TheCompany has sold portions of asset portfolios and will consider future sales ifbuyers can be found at acceptable prices; however, there can be no assurancethat the Company will be successful in efforts to sell additional assets. Anyfunds generated from these activities in excess of cash reserves permitted inthe Company’s debt agreements are used to reduce FINOVA’s obligations to itscreditors.

 

***Going Concern***

*** ***

FINOVAhas a substantial negative net worth and it is highly unlikely that the Companywill be able to repay its Senior Notes in their entirety at maturity inNovember 2009. While FINOVA continues to pay its obligations as theybecome due, the ability of the Company to continue as a going concern isdependent upon many factors, particularly the ability of its borrowers to repaytheir obligations to FINOVA and the Company’s ability to realize the value ofits portfolio. The accompanying condensed consolidated financial statements donot include any adjustments relating to the recoverability and classificationof assets or the amounts and classification of liabilities that might benecessary should the Company be unable to continue as a going concern. TheCompany’s independent public accountants qualified their report on the Company’s2002, 2001 and 2000 financial statements due to concerns regarding theCompany’s ability to continue as a going concern.

 

**B.****   ****SignificantAccounting Policies**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the Unites States requires FINOVA to use estimates andassumptions that affect reported amounts of assets and liabilities, revenuesand expenses and disclosure of contingent assets and liabilities. Thoseestimates are subject to known and unknown risks, uncertainties and otherfactors that could materially impact the amounts reported and disclosed in thefinancial statements. Significant estimates include anticipated amounts andtiming of future cash flows used in the calculation of fresh-start reportingadjustments, the reserve for credit losses and measurement of impairment. Otherestimates include selection of appropriate risk adjusted discount rates used innet present value calculations, determination of fair values of certainfinancial assets for which there is not an active market, residual assumptionsfor leasing transactions and determination of appropriate valuation allowancesagainst deferred tax assets. Actual results could differ from management’sestimates.

 

5

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For a listing of the Company’s significantaccounting policies, see Note B “Significant Accounting Policies” in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

***ConsolidationPolicy for Interim Reporting***

 

The interim condensed consolidated financialstatements present the financial position, results of operations and cash flowsof FINOVA and its subsidiaries, including FINOVA Capital and its subsidiaries.These financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States. All intercompany balanceshave been eliminated in consolidation.

 

The interim condensed consolidated financialinformation is unaudited. In the opinion of management, all adjustmentsconsisting of normal recurring items necessary to present fairly the financialposition as of September 30, 2003 and the results of operations and cashflows presented herein have been included in the condensed consolidatedfinancial statements. Interim results are not necessarily indicative of resultsof operations for the full year.

 

***New AccountingStandards***

 

In January 2003, The Financial AccountingStandards Board (the “FASB”) issued Interpretation No. 46, “Consolidation ofVariable Interest Entities” (“FIN 46”). FIN 46 addresses consolidation ofvariable interest entities, which are defined as entities whose equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. On October 9, 2003, FASB deferred the effective date of FIN 46for variable interests held by public companies in all entities that wereacquired prior to February 1, 2003. The deferral requires that publiccompanies adopt the provisions of FIN 46, with respect to entities that wereacquired prior to February 1, 2003, in periods ending afterDecember 15, 2003. The FASB is currently modifying and providing clarificationregarding the provisions of FIN 46.

 

FINOVA is not engaged in any new lending activitiesand has not acquired any variable interests in new entities sinceFebruary 1, 2003. As a result, the provisions of FIN 46 that are currentlyin effect, had no impact on the Company’s financial statements. The Companycontinues to evaluate the impact of FIN 46, which it expects could be materialif certain entities with which the Company has contractual lending arrangementsare considered variable interest entities and are required to be consolidated.As a lender, FINOVA does not have operating control over these entities (manyof which are financially troubled) and may not have the contractual right toobtain financial information that is of a quality necessary to ensurecompliance with various rules and regulations for a public company.

 

**C.****            Total Financial Assets**

 

Total financial assets represents the Company’s portfolio of investmentactivities, primarily consisting of secured financing to commercial and realestate enterprises principally under financing contracts (such as loans andother financing contracts, direct financing leases and leveraged leases). Inaddition to its financing contracts, the Company has other financial assets,including assets held for sale, owned assets (such as operating leases andassets held for the production of income) and investments (debt and equitysecurities and partnership interests). As of September 30, 2003 andDecember 31, 2002, the carrying amount of total financial assets (beforethe reserve for credit losses) was $2.3 billion and $3.7 billion, respectively.

 

To date, the asset liquidation process has resulted in significantreductions in size of many of the Company’s niche portfolios. As a result,these portfolios (commercial equipment, communications, corporate finance,franchise, healthcare, mezzanine and rediscount) have been combined in thetable below. The resort, transportation and specialty real estate portfoliosare reported separately.

 

6

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The following table details thecomposition and carrying amounts of FINOVA’s total financial assets:

 
|                       |   | **Revenue  Accruing  Assets** |      | **Revenue  Accruing  Impaired** |   | **Nonaccruing  Impaired  Loans** |   | **Nonaccruing  Leases  & Other** |    | **Owned  Assets &  Investments** |   | **Total  Financial  Assets** |      | **%**  |    |
|----------------------------|--------|-------------------------------|-----------|---------------------------------|--------|----------------------------------|--------|--------------------------------------|---------|--------------------------------------|--------|------------------------------|-----------|--------|---------|
| Resort                     |   | $                             | 732,721   |                            | $      | 5,257                            |   | $                                    | 92,814  |                                 | $      | 8,357                        |      | $      |    | $ | 839,149 |   | 35.8 |   |
| Transportation             |   |                          |      | 251,268                         |   | 95,332                           |   | 24,708                               |    | 123,551                              |   | 494,859                      |      | 21.1   |    |
| Specialty Real Estate      |   | 367,236                       |      | 2,752                           |   | 65,448                           |   |                                 |    |                                 |   | 435,436                      |      | 18.6   |    |
| All Other Portfolios       |   | 129,459                       |      | 62,419                          |   | 344,254                          |   | 22,702                               |    | 16,237                               |   | 575,071                      |      | 24.5   |    |
| **Total financial assets** |   | $                             | 1,229,416 |                            | $      | 321,696                          |   | $                                    | 597,848 |                                 | $      | 55,767                       |      | $      | 139,788 |   | $ | 2,344,515 |   | 100.0 |   |
| Reserve for credit losses  |   |                          |      |                            |   |                             |   |                                 |    |                                 |   | (305,806                     | )         |   |    |
| **Total (1)**              |   |                          |      |                            |   |                             |   |                                 |    |                                 |   | $                            | 2,038,709 |   |    |   |
|                            |        |                               |           |                                 |        |                                  |        |                                      |         |                                      |        |                              |           |        |         |  |  |  |  |  |  |

 

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| **Notes:** |
|------------|
| (1)        | Excludes $97.6 million of assets sold that the Company manages. |

 

Since FINOVA’s total financial assets are concentrated in certainspecialized industries, such as transportation and resort, the Company issubject to general economic risk and the additional risk of economic downturnswithin individual sectors of the economy. Additionally, the Company hascompleted multiple financial transactions with individual borrowers and theiraffiliates, resulting in a greater total exposure to those borrowers beyond thetypical transaction size and increased concentration risk of economic eventsaffecting the industries of those borrowers and their affiliates.

 

At September 30, 2003, the Company’s transportation portfolioconsisted of the following aircraft:

 
| **Aircraft Type**                                  |   | **Number of  Aircraft** |   | **Passenger** |   | **Cargo** |   | **Approximate  Average Age (years)** |   |
|----------------------------------------------------|--------|-------------------------|--------|---------------|--------|-----------|--------|--------------------------------------|--------|
| Airbus 300                                         |   | 7                       |   | 3             |   | 4         |   | 13                                   |   |
| Boeing 727                                         |   | 31                      |   | 6             |   | 25        |   | 26                                   |   |
| Boeing 737                                         |   | 27                      |   | 27            |   |      |   | 19                                   |   |
| Boeing 747                                         |   | 15                      |   | 8             |   | 7         |   | 22                                   |   |
| Boeing 757                                         |   | 8                       |   | 8             |   |      |   | 10                                   |   |
| Boeing 767                                         |   | 1                       |   | 1             |   |      |   | 17                                   |   |
| McDonnell Douglas DC 8 and DC 9                    |   | 32                      |   | 23            |   | 9         |   | 30                                   |   |
| McDonnell Douglas DC 10                            |   | 16                      |   | 5             |   | 11        |   | 25                                   |   |
| McDonnell Douglas MD series                        |   | 30                      |   | 30            |   |      |   | 18                                   |   |
| Regional jets, corporate aircraft and  turbo props |   | 41                      |   | 41            |   |      |   | 12                                   |   |
| Total                                              |   | 208                     |   | 152           |   | 56        |   | 20                                   |   |

 

At September 30, 2003, 70 aircraft with a carrying value of $273.2million were operated by U.S. domiciled carriers and 71 aircraft with acarrying value of $170.6 million were operated by foreign carriers.Additionally, 67 aircraft with a carrying value of $31.2 million wereoff-lease, classified as assets held for the production of income and parked atvarious storage facilities in the United States and Europe, including 10aircraft which are currently being dismantled to be sold in the parts market.Some of these off-lease aircraft are periodically placed in rental agreementswith payments based on aircraft usage, commonly known as power-by-the-houragreements. Often under these agreements, there are no minimum rents due, andfuture cash flows are difficult to project. FINOVA’s railroad portfolio (alldomestic) and other equipment had a carrying value of $19.9 million atSeptember 30, 2003.

 

7

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In addition to the concentrated exposures within the transportationportfolio, the Company has certain geographic concentrations within its resortportfolio. At September 30, 2003, the carrying amount of the resortportfolio by state was as follows:

 
|                       |   | **Carrying  Amount** |    | **%**  |   |
|----------------------------|--------|----------------------|---------|--------|--------|
| Florida                    |   | $                    | 216,008 |   | 25.7   | % |
| California                 |   | 150,522              |    | 17.9   | %      |
| Hawaii                     |   | 111,025              |    | 13.2   | %      |
| Nevada                     |   | 96,321               |    | 11.5   | %      |
| Arizona                    |   | 86,912               |    | 10.4   | %      |
| Other (each less than 10%) |   | 178,361              |    | 21.3   | %      |
| Total                      |   | $                    | 839,149 |   | 100.0  | % |

 

An analysis of nonaccruing assets included in totalfinancial assets is as follows:

 
|                                                                            |   | **September 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
| Contracts                                                                       |   | $                            | 638,944 |                        | $      | 1,345,191 |   |
| Repossessed assets (1)                                                          |   | 14,671                       |    | 48,041                      |   |
| Total nonaccruing assets                                                        |   | $                            | 653,615 |                        | $      | 1,393,232 |   |
| Nonaccruing assets as a percentage of  total financial assets (before reserves) |   | 27.9                         | %       | 37.7                        | %      |

 

----

| **Notes:** |                                                                                                    |
|------------|---------------------------------------------------------------------------------------------------------|
| (1)        | Excludes aircraft, which upon repossession are  classified as assets held for the production of income. |
|            |                                                                                                         |  |

 

Accounts classified as nonaccruing were $653.6million or 27.9% of total financial assets (before reserves) atSeptember 30, 2003 as compared to $1.4 billion or 37.7% atDecember 31, 2002. The decline in nonaccruing assets was primarilyattributed to collections and asset sales of $674.5 million and write-offs andnet valuation markdowns of $123.5 million, partially offset by the migration ofcertain previously accruing accounts to nonaccruing status. Also contributingto the decline was the return of certain assets to accruing status followingdemonstration of sustained performance and the classification of newlyrepossessed aircraft as assets held for the production of income, which areexcluded from nonaccruing assets.

 

At September 30, 2003, total financial assetsincluded $69.0 million of assets held for sale, down $324.1 million fromDecember 31, 2002. The decrease was due to $217.7 million of asset sales(primarily rediscount assets), $52.7 million of net assets no longer being heldfor sale and reclassified to loans, net runoff of $41.4 million and markdownsof $12.3 million.

 

**D.****            Reserve for CreditLosses**

 

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

 
|                                   |   | **Nine Months Ended  September 30,** |    |
|----------------------------------------|--------|-------------------------------------------|---------|
|                                   |   | **2003**                                  |    | **2002** |   |
| Balance, beginning of year             |   | $                                         | 540,268 |   | $ | 1,019,878 |   |
| Provision for credit losses (reversal) |   | (153,768                                  | )       | (223,485 | ) |
| Write-offs                             |   | (133,980                                  | )       | (155,645 | ) |
| Recoveries                             |   | 53,253                                    |    | 38,857 |   |
| Other                                  |   | 33                                        |    | 316 |   |
| Balance, end of period                 |   | $                                         | 305,806 |   | $ | 679,921 |   |

 

For the nine months endedSeptember 30, 2003, the Company recorded a $153.8 million reversal ofprovision for credit losses to reduce its reserve for credit losses. Thereserve reduction was primarily due to proceeds received from prepayments and

 

8

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asset sales in excess ofrecorded carrying amounts (net of reserves), collections and recoveries ofamounts previously written off. Partially offsetting this reserve reductionwere new impairment reserves established on specific accounts.

 

A summary of the reserve forcredit losses by impaired and other assets is as follows:

 
|                        |   | **September 30,  2003** |    | **December 31,  2002** |   |
|-----------------------------|--------|------------------------------|---------|-----------------------------|--------|
| Reserves on impaired assets |   | $                            | 257,354 |                        | $      | 438,172 |   |
| Other reserves              |   | 48,452                       |    | 102,096                     |   |
| Reserve for credit losses   |   | $                            | 305,806 |                        | $      | 540,268 |   |

 

At September 30, 2003, the total carryingamount of impaired loans and leases was $960.6 million, of which $321.7 millionwere revenue accruing. The Company has established impairment reserves of$257.4 million related to $603.5 million of impaired assets. AtDecember 31, 2002, the total carrying amount of impaired loans and leaseswas $1.8 billion, of which $471.1 million were revenue accruing. Impairmentreserves at December 31, 2002 totaled $438.2 million related to $1.2billion of impaired assets.

 

Reserves on impaired assets decreased due towrite-offs (primarily upon the repossession of aircraft), an improvement inpay-off and collection experience on certain assets previously reserved and theCompany’s application of cash received on nonaccruing assets, thus reducing theimpairment reserves required on those assets. Partially offsetting thesereductions were new impairment reserves established for assets reclassified toimpaired status during 2003 and additional reserves recorded on existingimpaired assets.

 

Other reserves related to estimated inherent losseson unimpaired assets decreased primarily as a result of collections, assetsales, changes in historical loss experience and the migration of certainaccounts to impaired assets.

 

**E.****             Debt**

 

A summary of the Company’stotal debt outstanding is as follows:

 
|                           |   | **September 30,  2003** |      | **December 31,  2002** |   |
|--------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
| Berkadia Loan                  |   | $                            | 750,000   |                        | $      | 2,175,000 |   |
| Senior Notes:                  |   |                         |      |                        |   |
| Principal                      |   | 2,967,949                    |      | 3,067,949                   |   |
| Fresh-start reporting discount |   | (638,448                     | )         | (686,306                    | )      |
| Total Senior Notes, net        |   | 2,329,501                    |      | 2,381,643                   |   |
| Total debt                     |   | $                            | 3,079,501 |                        | $      | 4,556,643 |   |

 

During the third quarter of 2003, prepayments of the Berkadia Loan totaled$450.0 million, and on November 7, 2003, the Company repaid an additional$225.0 million. Principal payments made to Berkadia since emergence from chapter11 have reduced the Berkadia Loan to $525.0 million as of the filing of thisreport.

 

At September 30, 2003, the Senior Notes are reflected in theCompany’s balance sheet net of a remaining $638.4 million unamortized discount,which was originally recorded with the adoption of fresh-start reporting uponemergence from chapter 11. The recorded book value of the remaining SeniorNotes is scheduled to increase to $2.97 billion over time through amortizationof the discount as interest expense. The Company is obligated to repay the full$2.97 billion principal amount of the Senior Notes.

 

The pace of debt repayments depends on numerous factors, including therate of collections from borrowers and asset sales.

 

In August 2002, in accordance with the Company’sdebt agreements, FINOVA’s Board of Directors, with Berkadia’s consent, approvedthe use of up to $300 million of cash to repurchase Senior Notes rather thanmake mandatory prepayments of the Berkadia Loan. During the third quarter of 2003, the Company repurchased$100.0 million (face amount) of Senior Notes at a price of 49.875% or $49.9million, plus accrued interest. The repurchase generated a net gain of $28.5million ($50.1 million repurchase

 

9

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discount, partially offset by $21.6 million of unamortized fresh-startdiscount). The repurchase reduced the face amount of the Senior Notes to $2.97billion. Since August 2002, the Company has used $105.3 million of cash torepurchase Senior Notes with a face amount of $285.0 million. There can be noassurance that the Company will repurchase any additional Senior Notes or thatadditional Senior Notes will become available at acceptable prices.

 

**F.****            ****Costs Associated with Exit orDisposal Activities**

 
|                       |   | **Termination  Benefits** |   | **Contract  Termination Costs** |   |
|----------------------------|--------|---------------------------|--------|---------------------------------|--------|
| Balance, beginning of year |   | $                         | 8,878  |                            | $      | 9,581 |   |
| Payments                   |   | (5,501                    | )      | (5,695                          | )      |
| Net additions              |   | 401                       |   | 1,757                           |   |
| Balance, end of period     |   | $                         | 3,778  |                            | $      | 5,643 |   |

 

As of September 30, 2003, FINOVA had a liability for terminationbenefits of $3.8 million for 49 individuals at various levels within theCompany. During the nine months ended September 30, 2003, the Company paidtermination benefits of $5.5 million and recorded a net charge of $0.4 millionfor employees notified during that period of their pending termination.

 

As of September 30, 2003, the remaining liability for contracttermination costs related to office leases totaled $5.6 million. The decreasesince December 31, 2002 was due to the payment of scheduled lease rentals(net of sublease income) and termination costs, partially offset by accrualsrelated to additional idle office space.

 

**G.****           ****Income Taxes**

 

For the nine months ended September 30, 2003, income tax expenserelated to pre-tax book income was entirely offset by a decrease in valuationallowances, which were previously established due to the Company’s concernregarding its ability to utilize deferred tax assets generated from losses inprior periods. The reasons the Company may not be able to utilize all thedeferred tax assets include uncertainty about the amount of future earnings, avariety of loss or other tax attribute carryover limitations in the variousjurisdictions in which the Company files tax returns and uncertainty regardingthe timing of the reversal of deferred tax liabilities. As ofSeptember 30, 2003, the Company had federal net operating losses of $1.0billion available for carryforward.

 

During 2003, the Company was able to favorably resolve $22.5 million ofpre-confirmation tax contingencies, which were recorded as a direct addition topaid-in capital in accordance with the provisions of the American Institute ofCertified Public Accountants’ Statement of Position 90-7, “Financial Reportingby Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). TheCompany’s net deferred income taxes were $2.8 million as of September 30,2003 versus $16.8 million at December 31, 2002.

 

On October 20, 2003, the Company received a federal tax refund of$32.5 million, which will be recorded in accordance with the provisions of SOP90-7 as a direct addition to paid-in-capital. This refund was the result of theCompany making certain elections and filings that have enabled it to carrybackNOLs to prior periods.

 

**H.****           ****Litigation and Claims**

 

***Legal Proceedings***

 

FINOVA is party either as plaintiff or defendant to various actions,proceedings and pending claims, including legal actions, some of which involveclaims for compensatory, punitive or other damages in significant amounts.Litigation often results from FINOVA’s attempts to enforce its lendingagreements against borrowers and other parties to those transactions.Litigation is subject to many uncertainties. It is possible that some of thelegal actions, proceedings or claims could be decided against FINOVA. Otherthan the matters described below, FINOVA believes that any resulting liabilityfrom its legal proceedings should not materially affect FINOVA’s financialposition, results of operations or cash flows. The following matters could havea material adverse impact on FINOVA’s financial position, results of operationsor cash flow.

 

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If any legal proceedings result in a significant adverse judgment againstthe Company, which is not anticipated, it is unlikely that FINOVA would be ableto satisfy that liability due to its financial condition. As previously noted,due to the Company’s financial condition, it does not expect that it cansatisfy all its secured debt obligations at maturity. Attempts to collect onthose judgments could lead to future reorganization proceedings of either avoluntary or involuntary nature.

 

***Litigation Related to Loans to TheThaxton Group Inc. and Related Companies***

 

On October 17, 2003, FINOVA Capital Corporation was served with acomplaint captioned *Earle B. Gregory, et al,v. FINOVA Capital Corporation, James T. Garrett, et al.,* filed inthe Court of Common Pleas of Lancaster County, South Carolina, case no.2003-CP-29-967. An amended complaint was served on November 5, 2003, prior tothe deadline for FINOVA to answer, plead, or otherwise respond to the originalcomplaint. The amended complaint is styled as a class action, brought on behalfof twenty-five individually named plaintiffs and three separately definedclasses. The named plaintiffs and the classes defined in the amended complaintare all citizens of South Carolina who purchased subordinated notes from TheThaxton Group Inc., a borrower with a senior secured indebtedness to FINOVA ofapproximately $110 million. 

 

The Thaxton Group Inc. and several related entities (collectively “theThaxton Entities”) were declared in default under their loan agreement withFINOVA after the Thaxton Entities advised FINOVA that they would have torestate earnings for the first two fiscal quarters of 2003, and had suspendedpayments on their subordinated notes. As a result of the default, FINOVAexercised its rights under the loan agreement, and accelerated theindebtedness. The Thaxton Entities then filed a petition for bankruptcy protectionunder chapter 11 of the federal bankruptcy code in the United States BankruptcyCourt for the District of Delaware on October 17, 2003, listing assets ofapproximately $206 million and debts of $242 million.

 

The amended South Carolina complaint by the subordinated noteholdersalleges claims of fraud, securities fraud, and various other civil conspiracyand business torts in the sale of the subordinated notes; the complaint seeksan unspecified amount of damages among other remedies. In addition to FINOVA,the complaint names as defendants several officers of the Thaxton Entities, andThaxton’s accountants and attorneys. Although the named plaintiffs and classesalleged in the amended complaint are limited to residents of South Carolina,there are approximately 6,800 holders of the subordinated notes issued inseveral states, with a total subordinated indebtedness of approximately $122million.

 

The Company believes the claims against FINOVA are without merit. FINOVAintends to vigorously defend against the claims, and to protect its seniorsecured position in the bankruptcy proceedings for the Thaxton entities.

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with the Company’s Annual Report onForm 10-K for the year ended December 31, 2002. Capitalized terms notdefined herein are used as defined in the Form 10-K.

 

The following discussion relates to The FINOVA Group Inc. and itssubsidiaries (collectively “FINOVA” or the “Company”), including its principaloperating subsidiary, FINOVA Capital Corporation and its subsidiaries (“FINOVACapital”). FINOVA, a Delaware corporation incorporated in 1991, is a financialservices holding company. Through FINOVA Capital, the Company has provided abroad range of financing and capital markets products, primarily to mid-sizebusinesses. FINOVA’s business is being operated under a Management ServicesAgreement with Leucadia National Corporation (“Leucadia”), which expires in2011. Leucadia has designated its employees to act as Chairman of the Board(Ian M. Cumming), President (Joseph S. Steinberg) and Chief Executive Officer(Thomas E. Mara). FINOVA Capital has been in operation since 1954.

 

***Current Business Activities***

 

Since emergence from chapter 11 in August 2001, the Company’sbusiness activities have been limited to maximizing the value of its portfoliothrough the orderly collection of its assets. These activities includecollection efforts pursuant to underlying contractual terms and may includeefforts to retain certain customer relationships and restructure or terminateother relationships. The Company has not and does not expect to engage in any newlending activities, except to honor existing customer commitments and incertain instances, to restructure financing relationships with existingcustomers to maximize value. Operations have been restructured to moreefficiently manage these collection efforts. The Company has sold portions ofasset portfolios and will consider future sales if buyers can be found atacceptable prices; however, there can be no assurance that the Company will besuccessful in efforts to sell additional assets. Any funds generated from theseactivities in excess of cash reserves permitted in the Company’s debtagreements are used to reduce FINOVA’s obligations to its creditors.

 

11

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**Applicationof Critical Accounting Policies and Use of Estimates**

 

The Company’s consolidated financial statements are prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires FINOVA to use estimates andassumptions that affect reported amounts of assets and liabilities, revenuesand expenses and disclosure of contingent assets and liabilities. Theseestimates are subject to known and unknown risks, uncertainties and otherfactors that could materially impact the amounts reported and disclosed in thefinancial statements. The Company believes the following to be among the mostcritical judgment areas in the application of its accounting policies.

 

***Carrying Amounts,Impairment and Use of Estimates***

 

Several of the Company’s accounting policies pertainto the ongoing determination of impairment reserves on financing assets and thecarrying amount valuation of other financial assets. Determination ofimpairment reserves and carrying amounts rely, to a great extent, on the estimationand timing of future cash flows. FINOVA’s cash flow estimates assume that itsasset portfolios are collected in an orderly fashion over time. These cashflows do not represent estimated recoverable amounts if FINOVA were toliquidate its asset portfolios over a short period of time. Management believesthat a short-term asset liquidation could have a material negative impact onthe Company’s ability to recover recorded amounts.

 

FINOVA’s process of determining impairment reservesand carrying amounts includes a periodic assessment of its portfolios on atransaction by transaction basis. Cash flow estimates are based on currentinformation and numerous assumptions concerning future general economicconditions, specific market segments, the financial condition of the Company’scustomers and FINOVA’s collateral. In addition, assumptions are sometimesnecessary concerning the customer’s ability to obtain full refinancing ofballoon obligations or residuals at maturity. As a result, the Company’s cash flowestimates assume FINOVA incurs refinancing discounts for certain transactions.

 

Changes in facts and assumptions have resulted in,and may in the future result in, significant positive or negative changes toestimated cash flows and therefore, impairment reserves and carrying amounts.

 

Impairment of financing assets is recorded throughthe Company’s reserve for credit losses, and accounting rules permit thereserve for credit losses to be increased or decreased as facts and assumptionschange. Impairment of other financial assets is marked down directly againstthe asset’s carrying amount. Accounting rules permit further markdown ifchanges in facts and assumptions result in additional impairment; however, mostof these assets (except certain investments and assets held for sale, which maybe marked up for subsequent events) may not be marked up if subsequent factsand assumptions result in a projected increase in value. Recoveries of previousmarkdowns are recorded through operations when realized.

 

The carrying amounts and reserve for credit lossesrecorded on FINOVA’s financial statements reflect the Company’s expectation ofcollecting less than the full contractual amounts owed by some of its customersand recovering less than its original investment in certain owned assets. TheCompany continues to pursue collection of full contractual amounts and originalinvestments, where appropriate, in an effort to maximize the value of its assetportfolios.

 

FINOVA has a significant number of aircraft that areoff lease and anticipates that additional aircraft will be returned as leasesexpire or operators are unable or unwilling to continue making payments. Inaccordance with the provisions of SFAS No. 144 “Accounting for the Impairmentor Disposal of Long-Lived Assets,” FINOVA has recorded impairment losses onowned aircraft by calculating the present value of estimated cash flows. Formany of these aircraft, scrap value was assumed, but for certain aircraft, theCompany elected (or anticipates electing upon return of the aircraft) to parkand maintain the aircraft under the assumption that they will be re-leased orsold in the future despite the lack of demand for those aircraft today. Whilethe current inactive market makes it difficult to quantify, the Company believesthat the recorded values determined under this methodology significantly exceedthe values that the Company would realize if it were to liquidate thoseaircraft today; however, there can be no assurance that these values will berealized.

 

The process of determining appropriate carryingamounts for these aircraft is particularly difficult and subjective, as itrequires the Company to estimate future demand, lease rates and scrap valuesfor assets for which there is currently little or no demand. The

 

12

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Company re-assesses its estimates and assumptionseach quarter. In particular, the Company assesses market activity and thelikelihood that certain aircraft types, which are forecast to go back on leasein the future, will in fact be re-leased.

 

The current state of the aircraft industry includessignificant excess capacity for both new and used aircraft and lack of demandfor certain classes and configurations of aircraft in the portfolio.Accordingly, the Company reduced the useful lives and anticipated scrap valuesof various aircraft and reduced its estimates regarding its ability to lease orsell certain returned aircraft.

 

**Reserve for Credit Losses.** The reserve for credit losses represents FINOVA’s estimate of lossesinherent in the portfolio and includes reserves on impaired assets and onassets that are not impaired. Impairment reserves are created if the carryingamount of an asset exceeds its estimated recovery, which is measured byestimating the present value of expected future cash flows (discounted atcontractual rates), market value, or the fair value of collateral. Thesemethodologies include the use of significant estimates and assumptionsregarding future customer performance (which are inherently dependent uponassumptions about general economic conditions and those affecting thecustomer’s business), amount and timing of future cash flows and collateralvalue. Reserves on assets that are not impaired are based upon assumptionsincluding general economic conditions, overall portfolio performance, includingloss experience, delinquencies and other inherent portfolio characteristics.Actual results have in the past and could in the future, differ from theseestimates, resulting in increases or reversal of reserves and there can be noassurance that existing reserves will approximate actual future losses. As ofSeptember 30, 2003 and December 31, 2002, the reserve for creditlosses totaled $305.8 million and $540.3 million, respectively.

 

**Owned Assets.** Assets held for theproduction of income and operating leases are carried at amortized cost withimpairment adjustments, if any, recorded as permanent markdowns throughoperations. An owned asset is considered impaired if anticipated undiscountedcash flows are less than the carrying amount of the asset. Once the asset hasbeen deemed impaired, accounting rules allow for several acceptable methods formeasuring the amount of impairment. FINOVA’s typical method of measuringimpairment is based on the comparison of the carrying amount of those assets tothe present value of estimated future cash flows, using risk adjusted discountrates. These estimates include assumptions regarding lessee performance, theamount and timing of future cash flows, selection of risk adjusted discountrates for net present value calculations and residual value assumptions forleases. If future portfolio assessments indicate additional impairment,additional markdowns may be necessary. If recoveries of previous markdowns arerealized, gains are recorded at that time. As of September 30, 2003 andDecember 31, 2002, owned assets totaled $124.9 million and $179.7 million,or 5.3% and 4.9% of total financial assets (before reserves), respectively.

 

**Assets Held for Sale.** Assets held for sale are comprised of assets previously classified asfinancing transactions and other financial assets that management does not havethe intent and/or the expected ability to hold to maturity. These assets arecarried at the lower of cost or market less anticipated selling expenses, withadjustment to estimated market value, if any, recorded as a loss on financialassets. Market value is often determined by the estimation of anticipatedfuture cash flows discounted at risk adjusted market rates to determine netpresent value. Valuation of assets held for sale includes estimates regardingmarket conditions and ultimate sales prices. Actual sales prices could differfrom estimates, impacting results from operations. As of September 30,2003 and December 31, 2002, assets held for sale totaled $69.0 million and$393.1 million, or 2.9% and 10.6% of total financial assets (before reserves),respectively.

 

**Nonaccruing Assets.** Accounts are generally classified as nonaccruingand recognition of income is suspended when a customer becomes 90 days past dueon the payment of principal or interest, or earlier, if in the opinion ofmanagement, full recovery of contractual income and principal becomes doubtful.The decision to classify accounts as nonaccruing on the basis of criteria otherthan delinquency, is based on certain assumptions and estimates includingcurrent and future general economic conditions, industry specific economicconditions, customer financial performance, the ability of customers to obtainfull refinancing of balloons or residuals at maturity and FINOVA’s ability orwillingness to provide such refinancing. In certain instances, accounts may bereturned to accruing status if sustained contractual performance isdemonstrated. Changes in borrower performance, assumptions or estimates couldresult in a material change in nonaccruing account classification and incomerecognition. As of September 30, 2003 and December 31, 2002, $653.6million and $1.4 billion, or 27.9% and 37.7% of total financial assets (beforereserves), were classified as nonaccruing, respectively.

 

**Fresh-Start Reporting.**Upon emergence from chapter 11, the Company adopted fresh-startreporting, which resulted in material adjustments to the carrying amounts ofthe Company’s assets and liabilities. The $863.7 million adjustment to assetswas based on the present value of estimated future cash flows discounted atappropriate risk adjusted interest rates selected at that time. Of this amount,$365.4 million was scheduled to amortize into income over the life of theunderlying transactions. If the underlying transactions are subsequentlyclassified as nonaccruing, amortization ceases. The Senior Notes were initiallyrecorded at $2.48 billion, reflecting their estimated fair value. The $771.3million discount to the Senior Notes is amortized as additional interestexpense over the term of the notes and the liability recorded on the Company’sbalance sheet increases in an amount equal to such amortization. In the eventthat any Senior Notes are repurchased and extinguished, the unamortizedfresh-start adjustment related to those notes is recorded as an offset to anygain recognized from extinguishment of the debt.

 

The adjustments relatingto the adoption of fresh-start reporting were based on estimates of anticipatedfuture cash flows, risk adjusted discount rates and the market value of theCompany’s debt securities shortly after emergence, but prior toSeptember 11,

 

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2001. Changes to estimatedcash flows could further impact the reserve for credit losses or causeadditional write downs of assets. Generally accepted accounting principles inthe U.S. do not permit additional fair value adjustments to the Senior Notesafter the initial fresh-start reporting date, including those that would haveresulted from the impact of September 11.

#### ** **

**New Accounting Standards.**In January 2003,The Financial Accounting Standards Board (the “FASB”) issued Interpretation No.46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addressesconsolidation of variable interest entities, which are defined as entitieswhose equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. On October 9, 2003, FASB deferred the effective date of FIN46 for variable interests held by public companies in all entities that wereacquired prior to February 1, 2003. The deferral requires that publiccompanies adopt the provisions of FIN 46, with respect to entities that wereacquired prior to February 1, 2003, in periods ending afterDecember 15, 2003. The FASB is currently modifying and providingclarification regarding the provisions of FIN 46.

 

FINOVA is not engaged in any new lending activitiesand has not acquired any variable interests in new entities sinceFebruary 1, 2003. As a result, the provisions of FIN 46 that are currentlyin effect, had no impact on the Company’s financial statements. The Companycontinues to evaluate the impact of FIN 46, which it expects could be materialif certain entities with which the Company has contractual lending arrangementsare considered variable interest entities and are required to be consolidated.As a lender, FINOVA does not have operating control over these entities (manyof which are financially troubled) and may not have the contractual right toobtain financial information that is of a quality necessary to ensurecompliance with various rules and regulations for a public company.

#### ** **

#### **Results of Operations**

 
|                                     |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                     |   | **2003**                                   |   | **2002**                                  |   | **Change** |   | **2003** |   | **2002** |   | **Change** |   |
|                                     |   | **(Dollars in thousands)**                 |   |
| Interest margin                          |   | $                                          | 8,230  |                                      | $      | (22,465 | ) | $ | 30,695 |   | $ | (11,635 | ) | $ | (46,267 | ) | $ | 34,632 |   |
| Reversal  of provision for credit losses |   | 30,195                                     |   | 69,467                                    |   | (39,272 | ) | 153,768 |   | 223,485 |   | (69,717 | ) |
| Net gain (loss) on financial assets      |   | 24,537                                     |   | (33,159                                   | )      | 57,696 |   | 56,909 |   | (96,718 | ) | 153,627 |   |
| Portfolio expenses                       |   | (3,930                                     | )      | (12,211                                   | )      | 8,281 |   | (22,459 | ) | (33,766 | ) | 11,307 |   |
| General and administrative expenses      |   | (12,344                                    | )      | (24,299                                   | )      | 11,955 |   | (44,927 | ) | (77,449 | ) | 32,522 |   |
| Gain from  extinguishment of debt, net   |   | 28,493                                     |   | 46,888                                    |   | (18,395 | ) | 28,493 |   | 46,888 |   | (18,395 | ) |
| Income tax expense                       |   |                                       |   | (41                                       | )      | 41 |   |   |   | (45 | ) | 45 |   |
| Net income                               |   | $                                          | 75,181 |                                      | $      | 24,180 |   | $ | 51,001 |   | $ | 160,149 |   | $ | 16,128 |   | $ | 144,021 |   |

 

***Nine Months Ended September 30,2003 and 2002***

 

**Net Income.**For the nine months ended September 30, 2003, the Company reportednet income of $160.1 million compared to $16.1 million for the nine monthsended September 30, 2002. The results for 2003 included a $153.8 millionreversal of provision for credit losses, a net gain on financial assets of $56.9million and a $28.5 million net gain from extinguishment of debt, partiallyoffset by a negative interest margin of $11.6 million, portfolio expenses of$22.5 million and general administrative expenses of $44.9 million.

 

In general, the net income in 2003 was attributable to better thananticipated realization and performance of FINOVA’s asset portfolios, with theexception of its transportation assets, and gains recognized fromextinguishment of debt. The Company cannot provide assurance that better thananticipated results will continue over the remaining term of its assetcollection and liquidation process.

 

The net income of $16.1 million for 2002 was the result of a $223.5million reversal of provision for credit losses and a $46.9 million net gainfrom extinguishment of debt, partially offset by a $46.3 million negativeinterest margin, a $96.7 million net loss on financial assets, portfolioexpenses of $33.8 million and general and administrative expenses of $77.5million.

 

**InterestMargin.**For the nine months ended September 30,2003, interest margin was negative $11.6 million as compared to a negative$46.3 million for the nine months ended September 30, 2002. The negativemargins were primarily due to a significantly lower level of earning assets($1.6 billion and $2.4 billion at September 30, 2003 and 2002,respectively) than outstanding debt ($3.1 billion and $4.8 billion atSeptember 30, 2003 and 2002, respectively) and the Company’s high

 

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aggregate cost of funds (8.1%and 6.5% for the nine months ended September 30, 2003 and 2002,respectively). The cost of debt will continue to increase as the lower costBerkadia Loan (LIBOR plus 2.25%) is repaid and the higher cost Senior Notes (7.5%stated rate and 10.83% aggregate fixed cost including fresh-start discountamortization) become a higher percentage of the outstanding debt.

 

Significantly offsetting thenegative interest margin for 2003 has been the recognition of suspended anddeferred income ($72.4 million) as a result of payoffs on certain assets inexcess of their carrying amounts and the return to earning status of certainassets following demonstration of sustained performance. Income recognition issuspended when an account is classified as a nonaccruing asset and allsubsequent interest payments received are applied against its carrying amountto mitigate the Company’s exposure. In certain instances, suspended income isrecognized, if after sustained performance is demonstrated, the account isreturned to accruing status or upon payoff, if proceeds realized are in excessof carrying amount.

 

**Provision for Credit Losses.** For the nine months ended September 30, 2003,the Company recorded a $153.8 million reversal of provision for credit lossesto reduce its reserve for credit losses. The reserve reduction was primarilydue to proceeds from prepayments and asset sales exceeding recorded carryingamounts (net of reserves), collections, recoveries of amounts previouslywritten off and the Company’s detailed assessment of estimated inherent lossesin its portfolio. In addition, the Company’s income recognition policy fornonaccruing accounts can result in periodic reserve reductions. In accordancewith SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,”impairment reserves are recorded if the carrying amount of a loan exceeds thenet present value of expected cash flows. For nonaccruing accounts, all cashreceived is applied against the carrying amount of the transaction. As a result,carrying amounts decline at a faster pace than net present value, thus reducingthe impairment reserve.

 

The $223.5 million reversal of provision for credit losses in 2002primarily related to portfolio runoff and asset sales in excess of recordedcarrying amounts (net of reserves), the Company’s detailed assessment ofestimated inherent losses in its portfolio, which indicated an improvement inestimated collections, reversal of reserves established after September 11on certain portfolios (primarily resort and specialty real estate) due to lessthan anticipated negative impact on these portfolios and recoveries of amountspreviously written off.

 

Since emergence from bankruptcy, the pace of collections and accountpayoffs has been faster than expected. In most portfolios, amounts collectedhave often exceeded anticipated cash flows, resulting in a partial reversal ofpreviously established reserves.

 

The measurement of credit impairment and asset valuation is dependent uponthe significant use of estimates and management discretion when predictingexpected cash flows. These estimates are subject to known and unknown risks,uncertainties and other factors that could materially impact the amountsreported and disclosed herein. See the “Special Note Regarding Forward-LookingStatements” and “Application of Critical Accounting Policies and Use ofEstimates” for a discussion of these and additional factors impacting the useof estimates.

 

**NetGain (Loss) on Financial Assets.** The Company realizeda net gain on financial assets of $56.9 million for the nine months endedSeptember 30, 2003 compared to a net loss of $96.7 million for the ninemonths ended September 30, 2002. The net gain during 2003 was primarilyattributable to sales of owned assets and financing contracts in excess ofcarrying amounts, the most significant of which included a $12.0 million gainfrom the sale of an equity investment in a resort timeshare company, an $11.4million gain from the sale of a real estate leveraged lease, a $5.8 million gainrealized from the sale of nine healthcare related loans and a $4.4 million gainrealized on the first quarter rediscount portfolio sale. The remainder of thegain activity is attributable to numerous individual asset sales (includingrepossessed assets, loans, residual positions and investments) spread acrossseveral portfolios. Partially offsetting the gains were $28.5 million of ownedasset impairment markdowns within the transportation portfolio. The impairmentlosses on the transportation portfolio resulted from the Company’s revisedestimate of future cash flows expected to be realized through the operation orsale of its predominately older vintage owned aircraft portfolio.

 

The $96.7 million net loss for the nine months ended September 30,2002 included $214.3 million of losses, partially offset by $117.6 million ofgains. Significant components of the net loss consisted of a $127.1 million netmarkdown of owned assets within the transportation portfolio, a $19.1 millionnet markdown of retained interests and owned assets within the commercialequipment portfolio and valuation adjustments in several other portfolios,partially offset by net gains of $41.0 million within the corporate financeportfolio.

 

The measurement of owned asset impairment is dependentupon the significant use of estimates and management discretion when predictingexpected future cash flows and asset values. An asset is considered impaired ifanticipated undiscounted cash flows are less than the carrying amount of theasset. Once the asset has been deemed impaired, the accounting rules provideseveral

 

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acceptable methods for measuring impairment.FINOVA’s typical practice is to compare the carrying amount of the asset to thepresent value of the estimated future cash flows, using an appropriate riskadjusted discount rate. The process of measuring impairment requires judgmentand estimation, and the actual results may differ from the estimates. See the“Special Note Regarding Forward-Looking Statements” for a discussion of manyfactors that could impact these estimates.

 

**Portfolio Expenses.**For the nine months ended September 30, 2003,portfolio expenses totaled $22.5 million compared to $33.8 million during thesame period of 2002. The decrease was primarily due to a decline in the levelof problem account and workout expenses for most portfolios and the timing ofcertain expenses anticipated during 2003. The transportation portfolio incurredthe majority of the portfolio costs ($13.3 million and $17.0 million during2003 and 2002, respectively). These costs are related to the large number ofoff lease and older vintage aircraft and include the cost of storing,maintaining and preparing certain of these aircraft for potential return toservice.

 

**General and Administrative Expenses.** General and administrative expenses decreased $32.5million to $44.9 million for the nine months ended September 30, 2003. Thedecrease was primarily due to $14.6 million of cost savings resulting from staffingand office occupancy reductions (233 employees at September 30, 2003compared to 347 at September 30, 2002). The remainder of the decrease wasthe result of an overall decline in general and administrative expenses causedby decreases in portfolio and staffing levels and prior year inclusion of $10.0million of accruals for settlement of bankruptcy claims. Partially offsettingthe decline were additional accruals recorded in 2003 related to idle officespace. The Company expects the dollar level of general and administrativeexpenses to continue to decrease as portfolio and staffing levels decrease;however, general and administrative expenses as a percentage of assets orrevenues will likely increase over time as a result of certain fixed costs and thehigh level of work intensive assets in the portfolio.

 

**Gain from Extinguishment of Debt, Net.** During the third quarter of 2003, the Companyrepurchased $100.0 million (face amount) of Senior Notes at a price of 49.875%or $49.9 million, plus accrued interest. The repurchase generated a net gain of$28.5 million ($50.1 million repurchase discount, partially offset by $21.6million of unamortized fresh-start discount).

 

During the third quarter of 2002, the Company repurchased $98.9 million(face amount) of Senior Notes at a price of 29.875% or $29.6 million, plusaccrued interest. The repurchase generated a net gain of $46.9 million ($69.4million repurchase discount, partially offset by $22.5 million of unamortizedfresh-start discount).

 

**Income Tax Expense.** For the nine months ended September 30, 2003,income tax expense related to pre-tax book income was entirely offset by adecrease in valuation allowances, which were previously established due to theCompany’s concern regarding its ability to utilize income tax benefitsgenerated from losses in prior periods. As of September 30, 2003, theCompany had federal net operating losses of $1.0 billion available forcarryforward.

 

***Three Months Ended September 30,2003 and 2002***

 

**Net Income.**For the three months ended September 30, 2003, the Company reportednet income of $75.2 million compared to $24.2 million for the three monthsended September 30, 2002. The results for 2003 included interest margin of$8.2 million, a $30.2 million reversal of provision for credit losses, a netgain on financial assets of $24.5 million and a $28.5 million net gain fromextinguishment of debt, partially offset by portfolio expenses of $3.9 millionand general administrative expenses of $12.3 million.

 

In general, the net income in 2003 was attributable to better thananticipated realization and performance of FINOVA’s asset portfolios and a gainrecognized from the extinguishment of debt. The Company cannot provideassurance that better than anticipated results will continue over the remainingterm of its asset collection and liquidation process.

 

The net income of $24.2 million for 2002 was the result of a $69.5 millionreversal of provision for credit losses and a $46.9 million net gain fromextinguishment of debt, partially offset by a net loss on financial assets of$33.2 million, a $22.5 million negative interest margin, portfolio expenses of$12.2 million and general and administrative expenses of $24.3 million.

 

**InterestMargin.**For the three months ended September 30,2003, interest margin was $8.2 million as compared to a negative $22.5 millionfor the three months ended September 30, 2002. The positive interestmargin during the third quarter of 2003 was primarily due to the recognition ofsuspended and deferred income ($36.9 million) as a result of payoffs on certainassets in excess of their carrying amounts and the return to earning status ofcertain assets following demonstration of sustained performance. Incomerecognition is suspended when an account is classified as a nonaccruing assetand all subsequent interest payments received are applied against its carryingamount to mitigate the Company’s exposure. In certain

 

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instances, suspended income isrecognized, if after sustained performance is demonstrated, the account isreturned to accruing status or upon payoff, if proceeds realized are in excessof carrying amount.

 

Partially offsetting thesepositive events was a significantly lower level of earning assets ($1.6 billionand $2.4 billion at September 30, 2003 and 2002, respectively) thanoutstanding debt ($3.1 billion and $4.8 billion at September 30, 2003 and2002, respectively) and the Company’s high aggregate cost of funds (8.5% and7.4% for the three months ended September 30, 2003 and 2002,respectively). The cost of debt will continue to increase as the lower costBerkadia Loan (LIBOR plus 2.25%) is repaid and the higher cost Senior Notes(7.5% stated rate and 10.83% aggregate fixed cost including fresh-start discountamortization) become a higher percentage of the outstanding debt.

 

**Provision for Credit Losses.** For the three months ended September 30, 2003,the Company recorded a $30.2 million reversal of provision for credit losses toreduce its reserve for credit losses. The reserve reduction was primarily dueto proceeds from prepayments and asset sales exceeding recorded carryingamounts (net of reserves), collections, recoveries of amounts previouslywritten off and the Company’s detailed assessment of estimated inherent lossesin its portfolio. In addition, the Company’s income recognition policy fornonaccruing accounts can result in periodic reserve reductions. In accordancewith SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” impairmentreserves are recorded if the carrying amount of a loan exceeds the net presentvalue of expected cash flows. For nonaccruing accounts, all cash received isapplied against the carrying amount of the transaction. As a result, carryingamounts decline at a faster pace than net present value, thus reducing theimpairment reserve.

 

The $69.5 million reversal of provision for credit losses in 2002primarily related to portfolio runoff and asset sales in excess of recordedcarrying amounts (net of reserves), the Company’s detailed assessment ofestimated inherent losses in its portfolio, which indicated an improvement inestimated collections and recoveries of amounts previously written off.

 

Since emergence from bankruptcy, the pace of collections and account payoffshas been faster than expected. In most portfolios, amounts collected have oftenexceeded anticipated cash flows, resulting in a partial reversal of previouslyestablished reserves.

 

The measurement of credit impairment and asset valuation is dependent uponthe significant use of estimates and management discretion when predictingexpected cash flows. These estimates are subject to known and unknown risks,uncertainties and other factors that could materially impact the amountsreported and disclosed herein. See the “Special Note Regarding Forward-LookingStatements” and “Application of Critical Accounting Policies and Use ofEstimates” for a discussion of these and additional factors impacting the useof estimates.

 

**NetGain (Loss) on Financial Assets.** The Company realizeda net gain on financial assets of $24.5 million for the three months endedSeptember 30, 2003 compared to a net loss of $33.2 million for the threemonths ended September 30, 2002. The net gain during the third quarter of 2003was primarily attributable to sales of owned assets and financing contracts inexcess of carrying amounts, the most significant of which included a $12.0million gain from the sale of an equity investment in a resort timesharecompany, a $3.5 million gain from the sale of a repossessed healthcarefacility, a $3.5 million gain from the liquidation of sub-prime auto paper anda $3.3 million gain from the sale of a residual position in an aircraftleveraged lease. Partially offsetting the gains were $4.0 million of ownedasset impairment markdowns within the transportation portfolio.

 

The $33.2 million net loss on financial assets for the three months endedSeptember 30, 2002 consisted of a $42.3 million net markdown of ownedassets within the transportation portfolio and valuation markdowns in severalother portfolios, partially offset by net gains of $14.9 million within thecorporate finance portfolio.

 

The measurement of owned asset impairment isdependent upon the significant use of estimates and management discretion whenpredicting expected future cash flows and asset values. An asset is consideredimpaired if anticipated undiscounted cash flows are less than the carryingamount of the asset. Once the asset has been deemed impaired, the accountingrules provide several acceptable methods for measuring impairment. FINOVA’stypical practice is to compare the carrying amount of the asset to the presentvalue of the estimated future cash flows, using an appropriate risk adjusteddiscount rate. The process of measuring impairment requires judgment andestimation, and the actual results may differ from the estimates. See the“Special Note Regarding Forward-Looking Statements” for a discussion of manyfactors that could impact these estimates.

 

**Portfolio Expenses.**For the three months ended September 30, 2003,portfolio expenses totaled $3.9 million compared to $12.2 million during thesame period of 2002. The decrease was primarily due to a decline in the levelof problem account and workout expenses for most portfolios and the timing ofcertain expenses anticipated during 2003.

 

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The most significant decrease occurred within FINOVA’s transportationportfolio, which declined to $1.2 million for the three months ended September 30,2003 compared to $6.2 million for the same period of 2002. The transportationdecrease is primarily attributed to the timing of certain anticipated expensesand a decline in the number of off-lease assets as a result of scrappingefforts.

 

**General and Administrative Expenses.** General and administrative expenses decreased $12.0million to $12.3 million for the three months ended September 30, 2003.The decrease was primarily due to $4.8 million of cost savings resulting fromstaffing and office occupancy reductions (233 employees at September 30,2003 compared to 347 at September 30, 2002). The remainder of the decreasewas the result of an overall decline in general and administrative expensescaused by decreases in portfolio and staffing levels and prior year inclusionof $4.2 million of accruals for settlement of bankruptcy claims. The Companyexpects the dollar level of general and administrative expenses to continue todecrease as portfolio and staffing levels decrease; however, general and administrativeexpenses as a percentage of assets or revenues will likely increase over timeas a result of certain fixed costs and the high level of work intensive assetsin the portfolio.

 

**Gain from Extinguishment of Debt, Net.** During the third quarter of 2003, the Companyrepurchased $100.0 million (face amount) of Senior Notes at a price of 49.875%or $49.9 million, plus accrued interest. The repurchase generated a net gain of$28.5 million ($50.1 million repurchase discount, partially offset by $21.6 millionof unamortized fresh-start discount).

 

During the third quarter of 2002, the Company repurchased $98.9 million(face amount) of Senior Notes at a price of 29.875% or $29.6 million, plusaccrued interest. The repurchase generated a net gain of $46.9 million ($69.4million repurchase discount, partially offset by $22.5 million of unamortizedfresh-start discount).

 

**Income Tax Expense.** For the three months ended September 30, 2003,income tax expense related to pre-tax book income was entirely offset by a decreasein valuation allowances, which were previously established due to the Company’sconcern regarding its ability to utilize income tax benefits generated fromlosses in prior periods. As of September 30, 2003, the Company had federalnet operating losses of $1.0 billion available for carryforward.

 

**Financial Condition, Liquidity and Capital Resources**

 

Becausevirtually all of the Company’s assets are pledged to secure the obligationsunder the Berkadia Loan and the Senior Notes, FINOVA’s ability to obtainadditional or alternate financing is severely restricted. Berkadia has noobligation to lend additional sums to or to further invest in the Company.Accordingly, FINOVA intends to rely on internally generated cash flows to meetits liquidity needs.

 

As a result of these restrictions, the estimation ofcash reserves is critical to the overall liquidity of the Company. Cash reserveestimations are subject to known and unknown risks, uncertainties and otherfactors that could materially impact the amounts determined. Failure toadequately estimate a cash reserve in one period could result in insufficientliquidity to meet obligations in that period, or in a subsequent period, ifactual cash requirements exceed the cash reserve estimates.

 

**The Company has a negative net worth of $784.2 million asof September 30, 2003 ($1.4 billion if the Senior Notes are considered attheir principal amount due). Based on the Company’s current financialcondition, it is highly unlikely that there will be funds available to fullyrepay the outstanding principal on the Senior Notes at maturity, and as aresult, there will not be a return to the Company’s stockholders. For thesereasons, the Company believes that investing in FINOVA’s debt and equitysecurities involves a high level of risk to the investor.**

 

At September 30, 2003, the Senior Notes arereflected in the Company’s balance sheet net of a remaining $638.4 millionunamortized discount, which was originally recorded with the adoption offresh-start reporting upon emergence from chapter 11. The recorded book valueof the remaining Senior Notes is scheduled to increase to $2.97 billion overtime through amortization of the discount as interest expense. The Company isobligated to repay the full $2.97 billion principal amount of the Senior Notes.

 

During the third quarter of 2003, repayments of the Berkadia Loan totaled$450.0 million, and on November 7, 2003, the Company repaid an additional$225.0 million. Principal payments made to Berkadia since emergence fromchapter 11 have reduced the Berkadia Loan to $525.0 million as of the filing ofthis report. The pace of debt repayments depends on numerous factors, includingthe rate of collections from borrowers and asset sales.

 

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In August 2002, in accordance with the Company’s debt agreements,FINOVA’s Board of Directors, with Berkadia’s consent, approved the use of up to$300 million of cash to repurchase Senior Notes rather than make mandatoryprepayments of the Berkadia Loan. In consideration for Berkadia’s consent,FINOVA and Berkadia agreed that they would share equally in the “Net InterestSavings” resulting from any repurchase. Net Interest Savings will be calculatedas the difference between (a) the reduction in interest expense on the SeniorNotes (resulting from the repurchase of such Senior Notes) and (b) the increasein interest expense on the Berkadia Loan (resulting from the use of cash torepurchase Senior Notes and to pay 50% of the Net Interest Savings to Berkadiarather than make mandatory prepayments on the Berkadia Loan). On each date thatinterest is paid on the outstanding Senior Notes (a “Note Interest PaymentDate”), 50% of the Net Interest Savings accrued since the last Note InterestPayment Date will be paid to Berkadia. The other 50% of the Net InterestSavings will be retained by FINOVA. Upon repayment in full of the BerkadiaLoan, Berkadia will not have the right to receive any Net Interest Savingsaccruing after that repayment. Because it is highly unlikely there will besufficient funds to repay the Senior Notes at maturity, the Company, if itelects to repurchase additional Senior Notes, intends to do so only atsubstantial discounts to par. The agreement between FINOVA and Berkadia wasapproved by the “Special Committee” of FINOVA’s Board of Directors, which iscomprised solely of directors unaffiliated with Berkadia, Berkshire orLeucadia.

 

During the third quarter of 2003, the Company repurchased $100.0 million(face amount) of Senior Notes at a price of 49.875% or $49.9 million, plusaccrued interest. The repurchase generated a net gain of $28.5 million ($50.1million repurchase discount, partially offset by $21.6 million of unamortizedfresh-start discount). The repurchase reduced the face amount of the SeniorNotes to $2.97 billion. Since August 2002, the Company has used $105.3million of cash to repurchase Senior Notes with a face amount of $285.0million. There can be no assurance that the Company will repurchase anyadditional Senior Notes or that additional Senior Notes will become availableat acceptable prices.

 

On October 20, 2003, the Company received a federal tax refund of$32.5 million, which will be recorded in accordance with the provisions of theAmerican Institute of Certified Public Accountants’ Statement of Position 90-7,“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”(“SOP 90-7”) as a direct addition to paid-in-capital. This refund was theresult of the Company making certain elections and filings that have enabled itto carryback NOLs to prior periods.

 

**Obligations and Commitments.**The following is a listing of FINOVA’s significantcontractual obligations and contingent commitments at September 30, 2003and December 31, 2002. A detailed repayment schedule has not beenprovided because the Company’s most significant obligations are contractual asto amount but contingent regarding the timing of repayment. The listing is notintended to be all encompassing and excludes normal recurring trade and other accountspayable obligations.

 
|                                                            |   | **September 30, 2003** |      | **December 31, 2002** |   |
|-----------------------------------------------------------------|--------|-----------------------------|-----------|----------------------------|--------|
| **Obligations and Commitments**                                 |   | **Contractual**             |      | **Contingent**             |   | **Contractual** |   | **Contingent** |   |
|                                                            |   | **(Dollars  in thousands)** |      |
| Berkadia Loan                                                   |   | $                           | 750,000   |                       | $      |   |   | $ | 2,175,000 |   | $ |   |   |
| Management Services Agreement                                   |   | 58,000                      |      |                       |   | 64,000 |   |   |   |
| Senior Notes                                                    |   | 2,967,979                   |      |                       |   | 3,067,949 |   |   |   |
| Contingent interest on Senior Notes                             |   |                        |      | 91,232                     |   |   |   | 94,313 |   |
| Unfunded customer commitments                                   |   |                        |      | 220,165                    |   |   |   | 568,267 |   |
| Nonrecourse debt associated with the  leveraged lease portfolio |   | 905,461                     |      |                       |   | 990,908 |   |   |   |
| Lease obligations                                               |   | 18,406                      |      |                       |   | 25,878 |   |   |   |
|                                                            |   | $                           | 4,699,846 |                       | $      | 311,397 |   | $ | 6,323,735 |   | $ | 662,580 |   |
|                                                                 |        |                             |           |                            |        |  |  |  |  |  |  |  |  |  |  |

 

Principal repayment of the Berkadia Loan is contingent on available cashin excess of cash reserves. Unpaid principal and accrued interest are due atmaturity on August 20, 2006. In addition to amounts included in the table,FINOVA is obligated to pay Berkadia 50% of the Net Interest Savings, resultingfrom the Senior Note repurchases. Based on interest rates in effect as of September 30,2003, 50% of the Net Interest Savings for repurchases to date is estimated tobe approximately $8.9 million per year. The Net Interest Savings will fluctuatewith changes in interest rates and would change if additional Senior Notes wererepurchased.

 

FINOVA’s business is being operated under a Management Services Agreementwith Leucadia, which expires in 2011. FINOVA pays Leucadia an annual managementfee of $8.0 million, paid quarterly in advance.

 

Principalrepayments of the Senior Notes, other than repurchases approved by Berkadia andthe Company’s Board of Directors, cannot commence until the Berkadia Loan ispaid in full and is contingent on the availability of excess cash.

 

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Contingentinterest cannot commence until the Senior Notes are paid in full. Basedon the Company’s current financial condition, it is highly unlikely that therewill be funds available to fully repay the outstanding principal on the SeniorNotes at maturity in November 2009 or to pay any contingent interest.

 

Unfunded customer commitments (primarily unused lines of credit) havedeclined from $568.3 million at December 31, 2002 to $220.2 million atSeptember 30, 2003, primarily due to the elimination of outstandingcommitments associated with asset sales during 2003 and the termination and/orexpiration of other outstanding committed lines of credit. Because of theprimarily revolving nature of its commitments, the Company is unable toestimate with accuracy what portion of the commitments will be funded.Historically, in the aggregate, actual fundings have been significantly belowthe commitment amounts.

 

The nonrecourse debt associatedwith leveraged leases represents principal amounts due to third party lendersunder lease arrangements. Nonrecourse debt declined to $905.5 million during2003, primarily due to scheduled principal payments of $62.1 million, therepayment of $15.5 million of nonrecourse debt following the sale of two officeproperties and the elimination of $14.5 million of nonrecourse debt as a resultof a senior debt holder proceeding against the underlying asset, partiallyoffset by $6.7 million of additional nonrecourse debt assumed in a foreclosureproceeding.

 

Lease obligations represent total contractual obligations (rent andoperating costs) due under operating leases (primarily leased office space), aswell as commitments made for tenant improvements and lease damages related tothe resolution of previously rejected lease space. Lease obligations declined to$18.4 million during 2003, primarily due to scheduled rent payments.

 

**Collection of the Portfolio.** As noted previously, the Company’s current businessactivities are limited to maximizing the value of its portfolio through theorderly collection of its receivables. These activities include continuedcollection of its portfolio pursuant to contractual terms and may includeefforts to retain certain customer relationships and restructure or terminateother relationships. The Company will consider the sale of certain portfoliosif buyers can be found at acceptable prices. Due to restrictions contained inFINOVA’s debt agreements as well as its general inability to access capital inthe public and private markets, the Company’s only viable source of cash flow isfrom the collection of its portfolio. The following table presents the activityin total financial assets, net of the reserve for credit losses for the ninemonths ended September 30, 2003:

 
| **(Dollars in thousands)**                             |   |       |      |
|--------------------------------------------------------|--------|------------|-----------|
| **Total financial assets at  December 31, 2002**  |   | $          | 3,156,151 |   |
|                                                   |   |       |      |
| **Cash activity:**                                     |   |       |      |
| Fundings under outstanding customer  commitments       |   | 322,116    |      |
| Collections  and proceeds from financial assets        |   | (1,574,143 | )         |
| Net cash flows                                         |   | (1,252,027 | )         |
|                                                   |   |       |      |
| **Non-cash activity:**                                 |   |       |      |
| Reversal of provision for credit losses                |   | 153,768    |      |
| Net  charge-offs of financial assets                   |   | (25,253    | )         |
| Other non-cash activity                                |   | 6,070      |      |
| Net non-cash activity                                  |   | 134,585    |      |
| **Total financial assets at  September 30, 2003** |   | $          | 2,038,709 |   |

 

Total financial assets, net of the reserve for credit losses, declined to$2.0 billion at September 30, 2003, down from $3.2 billion atDecember 31, 2002. During 2003, net cash flows from the portfolio totaled$1.3 billion, while non-cash activity resulted in a $134.6 million increase innet financial assets. Components of net cash flow included $1.2 billion fromcollections on financial assets (including recoveries), $373.0 million from thesale of assets (excluding cash gains), offset by $322.1 million of fundingsunder outstanding customer commitments. Collections on financial assetsincluded a significant level of prepayments (customer payments in advance ofscheduled due dates). Prepayments are not predictable and given the decline inthe size of FINOVA’s asset portfolio, prepayment levels as well as scheduledamortization are expected to decline over time. Non-cash activity included a$153.8 million reversal of reserves and other non-cash activity of $6.1million, partially offset by a $25.3 million reduction related to markdowns ofowned assets.

 

FINOVA’s reserve for credit losses decreased to$305.8 million at September 30, 2003 from $540.3 million atDecember 31, 2002. At September 30, 2003, the total carrying amountof impaired loans and leases was $960.6 million, of which $321.7 million were

 

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revenue accruing. The Company has establishedimpairment reserves of $257.4 million related to $603.5 million of impairedassets. At December 31, 2002, the total carrying amount of impaired loansand leases was $1.8 billion, of which $471.1 million were revenue accruing.Impairment reserves at December 31, 2002 totaled $438.2 million related to$1.2 billion of impaired assets.

 

Reserves on impaired assets decreased due towrite-offs (primarily upon the repossession of aircraft), an improvement inpay-off and collection experience on certain assets previously reserved and theCompany’s application of cash received on nonaccruing assets, thus reducing theimpairment reserves required on those assets. Partially offsetting thesereductions were new impairment reserves established for assets reclassified toimpaired status during 2003 and additional reserves recorded on existingimpaired assets.

 

Other reserves related to estimated inherent losseson unimpaired assets, decreased primarily as a result of collections, assetsales, changes in historical loss experience and the migration of certainaccounts to impaired assets.

 

Accounts classified as nonaccruing were $653.6million or 27.9% of total financial assets (before reserves) atSeptember 30, 2003 as compared to $1.4 billion or 37.7% atDecember 31, 2002. The decline in nonaccruing assets was primarilyattributed to collections and asset sales of $674.5 million and write-offs andnet valuation markdowns of $123.5 million, partially offset by the migration ofcertain previously accruing accounts to nonaccruing status. Also contributingto the decline was the return of certain assets to accruing status followingdemonstration of sustained performance and the classification of newlyrepossessed aircraft as assets held for the production of income, which areexcluded from nonaccruing assets.

 

Nonaccruing assets continue tobe affected by the Company’s concerns regarding its ability to fully collectprincipal and interest on certain transactions that have significant balloonpayments or residual values due at maturity. FINOVA is concerned that certainof its customers will not have the ability to obtain refinancing at maturityfor the full amount of these residual/balloon payments. FINOVA’s ability orwillingness to continue to extend credit to these borrowers may be affected byits restricted access to the capital markets and its assessment of the costsand benefits of doing so. In certain of these cases, FINOVA has classifiedtransactions as nonaccruing even though principal and interest payments arecurrent. If necessary, impairment reserves on these transactions areestablished in accordance with SFAS No. 114.

 

### **Special Note Regarding Forward-Looking Statements**

 

Certain statements in this report are “forward-looking,” in that they donot discuss historical fact, but instead note future expectations, projections,intentions or other items. Forward-looking statements are made pursuant to thesafe-harbor provisions of the Private Securities Litigation Reform Act of 1995.These forward-looking statements include assumptions, estimates and valuationsimplicit in the financial statements and related notes as well as mattersdiscussed in the sections of this report captioned “Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and“Item 3. Quantitative and Qualitative Disclosure About Market Risk.” They arealso made in documents incorporated in this report by reference, or in whichthis report may be incorporated.

 

Forward-looking statements are inherently subject to risks anduncertainties, many of which cannot be predicted or quantified. When used inthis report, the words “estimate,” “expects,” “anticipates,” “believes,”“plans,” “intends” and similar expressions are intended to identifyforward-looking statements that involve known and unknown risks anduncertainties. Risks, uncertainties and other factors may cause FINOVA’s actualresults or performance to differ materially from those contemplated by theforward-looking statements. Many of these factors are discussed in this reportand include, but are not limited to:

 

•      The extent to which FINOVA is successful inimplementing its business strategy, including the efforts to maximize the valueof its portfolio through orderly collection or sales of assets. Portfoliodecisions are based on estimates of asset value and future cash flows andactual results may differ from the estimated amounts. Failure to fullyimplement its business strategy might result in adverse effects, impair theCompany’s ability to repay outstanding secured debt and other obligations andhave a materially adverse impact on its financial position and results ofoperations. The focus on maximizing portfolio values and the absence of newbusiness generation will cause future financial results to differ materiallyfrom prior periods. Similarly, adoption of fresh-start reporting upon emergencefrom bankruptcy has resulted in revaluation of certain assets and liabilities andother adjustments to the financial statements, so that prior results are notindicative of future expectations.

 

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•      Several of the Company’s accountingpolicies pertain to the ongoing determination of portfolio impairment. Theseamounts rely, to a great extent, on the estimation and timing of future cashflows. Actual results may differ from the estimates.

 

•      The effect of economic conditions and theperformance of FINOVA’s borrowers. Economic conditions in general or inparticular market segments could impair the ability of FINOVA’s borrowers tooperate or expand their businesses, which might result in decreasedperformance, adversely affecting their ability to repay their obligations. Therate of borrower defaults or bankruptcies may increase. Changing economicconditions could adversely affect FINOVA’s ability to realize estimated cashflows. Conversely, economic conditions and borrower performance could improve,resulting in better results than anticipated in the Company’s cash flowestimates.

 

•      The cost of FINOVA’s capital has increasedsignificantly since the first quarter of 2000 and will continue to negativelyimpact results. Failure to comply with its credit obligations could result inadditional increases in interest charges. In addition, changes in interest rateindices may impact interest margin due to lack of matched funding of theCompany’s assets and liabilities.

 

•      Loss of employees. FINOVA must retain asufficient number of employees with relevant knowledge and skills to continueto monitor, collect and sell its portfolio. Failure to do so could result inadditional losses. Retention incentives intended to retain that employee basemay not be successful in the future.

 

•      Conditions affecting the Company’s aircraftportfolio, including changes in Federal Aviation Administration directives andconditions affecting the demand for used aircraft and the demand for aircraftspare parts. FINOVA’s aircraft are often of older vintage and contain configurationsof engines, avionics, fuel tanks and other components that may not be as highin demand as other available aircraft in that class. Future demand for thoseaircraft may decrease further as newer or more desirable aircraft andcomponents become available.

 

•      Changes in government regulations, taxrates and similar matters. For example, government regulations couldsignificantly increase the cost of doing business or could eliminate certaintax advantages of some FINOVA financing transactions. The Company has notrecorded a benefit in its financial statements for its existing tax attributesand estimated future tax deductions since it does not expect to generate thefuture taxable income needed to use those tax benefits. The Company may neverbe able to use those tax attributes.

 

•      Necessary technological changes, such asimplementation of information management systems, may be more difficult,expensive or time consuming to implement than anticipated.

 

•      Potential liabilities associated withdispositions of assets.

 

•      The accuracy of information relied upon byFINOVA, which includes information supplied by its borrowers or prepared bythird parties, such as appraisers. Inaccuracies in that information could leadto inaccuracies in the estimates.

 

•      As the portfolio declines, increasingconcentrations of financial assets in certain industries such as resort andtransportation could make the overall portfolio more subject to changes inperformance in those industries.

 

•      Other risks detailed in this and FINOVA’sother SEC reports or filings.

 

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

 

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**Item 3.****    Quantitative and QualitativeDisclosure About Market Risk**

 

There were no material changes from the informationprovided in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

**Item 4.****    Controls and Procedures**

 

(a)   Based on their evaluation as of the end of the period covered by this Form10-Q, the Company’s Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensurethat information required to be disclosed by the Company in reports that itfiles or submits under the Exchange Act are recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

(b)   There were no changes in the Company’s internal controls over financialreporting or in other factors which have materially affected or are reasonablylikely to materially affect these controls subsequent to the date of theirevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

The Company continues to reduce its workforce,consolidate its operations and outsource certain functions. Accordingly,responsibility for administration, management and review of many of theCompany’s assets has transitioned among FINOVA’s remaining personnel.Management has supervised these transitions and has implemented procedures thatit believes will provide effective controls and processes during and after thistransition. The Company is assessing the efficacy of these procedures and willcontinue to do so in subsequent periods.

 

**PART II********OTHER INFORMATION**

 

**Item 1.****    Legal Proceedings**

 

See Part I, Item 1, Note H“Litigation and Claims” for a discussion of pending legal proceedings.

 

**Item 6.****    Exhibits and Reports on Form8-K**

 

a)     Exhibits
| 31.1 |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|------|--------|---------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 |   | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 |   | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

b)    Reports on Form 8-KNone.

 

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**THE FINOVA GROUP INC.**

 

**Signatures**

 

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

 

 

**THE FINOVA GROUP INC.**

** **

**(Registrant)**

 

 
| Dated:  November 10,  2003 | By:    | /s/ Stuart A. Tashlik                                                          |
|-------------------------------------------|--------|--------------------------------------------------------------------------------|
|                                      |   |   Stuart  A. Tashlik, Senior Vice President, Chief Financial Officer |
|                                      |   |   Principal  Financial and Accounting Officer                        |

 

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**EXHIBIT INDEX**

** **
| **Exhibit  Number** |   | **Description**                                                                                                    |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                               |
| **31.1**            |   | **Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.** |
|                |   |                                                                                                               |
| 31.2                |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      |
|                |   |                                                                                                               |
| 32.1                |   | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      |
|                |   |                                                                                                               |
| 32.2                |   | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      |

 

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