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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Registration File No. 333-40708

Chesapeake Funding LLC
(Formerly known as Greyhound Funding LLC)
(Exact name of Registrant as specified in its charter)

(410) 771-1900
(Registrant's telephone number, including area code)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý        No o

Chesapeake Funding LLC

Index

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

Chesapeake Funding LLC
CONDENSED STATEMENTS OF INCOME
(in thousands)

See Notes to Condensed Financial Statements.

2

Chesapeake Funding LLC
CONDENSED BALANCE SHEETS
(In thousands)

See Notes to Condensed Financial Statements.

3

Chesapeake Funding LLC
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

See Notes to Condensed Financial Statements.

4

Chesapeake Funding LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies

Basis of Presentation

Chesapeake Funding LLC ("Chesapeake" or "the Company") is a special purpose limited liability company, which was organized on June 24, 1999 as Greyhound Funding LLC under the laws of the State of Delaware. On April 25, 2002 the Company's name was changed to Chesapeake Funding LLC. The sole common member of Chesapeake is Raven Funding LLC ("Raven"), which itself is a special purpose limited liability company established under the laws of the State of Delaware. The sole member of Raven is PHH Vehicle Management Services LLC ("PHH" or "Vehicle Management Services"), a limited liability company and, from its date of organization to March 1, 2001, a wholly-owned subsidiary of Avis Group Holdings, Inc. ("Avis").

On March 1, 2001, Avis was acquired by PHH Corporation. PHH became a wholly-owned subsidiary of PHH Corporation, which is a wholly-owned subsidiary of Cendant Corporation ("Cendant"). All assets and liabilities were recorded by the Company at fair value as of March 1, 2001. No significant adjustments were made by the Company.

Chesapeake was formed for the purpose of issuing indebtedness, issuing preferred membership interests, acquiring a special unit of beneficial interest in certain leases (the "Lease SUBI"), and acquiring a portion of a special unit of beneficial interest in certain fleet service receivables (the "Fleet Receivable SUBI") owned by D.L. Peterson Trust ("DLPT"). The Lease SUBI is a beneficial ownership interest in the leases, vehicles and paid-in-advance vehicles owned by DLPT ("SUBI Assets"). DLPT is a statutory business trust established by PHH in order to administer the titling of the vehicles in connection with the financing and transfer of vehicles subject to leases. Chesapeake owns a certificate representing the Lease SUBI (the "Lease SUBI Certificate") and a certificate representing an interest in the Fleet Receivable SUBI which entitles Chesapeake to receive up to $80 million a month of the collections received in respect of the fleet services receivables (the "Fleet Receivable SUBI Certificate"). PHH acts as servicer of the assets held by DLPT, including the assets allocated to the Lease SUBI and the Fleet Receivable SUBI. In its role as servicer, PHH will maintain all property and equipment and employees required to perform the servicing activities. The Fleet Receivable SUBI Certificate and the Lease SUBI Certificate were issued by DLPT to Raven, which were then contributed to Chesapeake by Raven.

In management's opinion, the accompanying unaudited Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. The Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K dated March 29, 2002.

2.    Restricted Cash

The Company is required by its debt agreements to set aside certain amounts of cash to provide additional credit enhancement on its medium-term and variable funding notes. Amounts required to be set aside by the Company are not readily available for disbursements and are based on an applicable percentage of the total commitment under the respective agreements.

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3.    Debt

For the nine months ended September 30, 2002, the Company made principal payments to the holders of its Series 1999-2 Class A-1 notes totaling approximately $467 million.

The Company issued $650 million of medium-term Series 2002-1 notes in June 2002 bearing interest at a rate that is reset monthly at LIBOR plus 20 basis points for $295 million of such notes and LIBOR plus 27 basis points for $355 million of such notes.

The proceeds from this issuance were used to repay $500 million of the Company's then outstanding variable funding notes balance.

For the nine months ended September 30, 2002, the Company borrowed approximately $401 million under its variable funding notes.

In connection with the issuance of such notes, the Company issued senior preferred membership interests ("PMI's"), which approximated $62.9 million as of September 30, 2002. The holders of the PMI's are entitled to receive dividends at a rate equal to monthly LIBOR plus 170 basis points. The dividend periods correspond to the same interest periods as the variable funding notes. Dividends on the PMI's must be declared and paid on each dividend payment date to the extent that on such date, the Company has funds legally available for the payment of such dividends based on the covenants specified in the Company's LLC agreement.

        *****

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

The following discussions should be read in conjunction with our Condensed Financial Statements and accompanying Notes thereto included elsewhere herein. Unless otherwise noted, all dollar amounts are in thousands.

We are a special purpose limited liability company organized on June 24, 1999 as Greyhound Funding LLC under the laws of the State of Delaware. On April 25, 2002, we changed our name to Chesapeake Funding LLC. Our sole common member is Raven Funding, which is also a special purpose limited liability company established under the laws of the State of Delaware. The sole member of Raven Funding is Vehicle Management Services, a limited liability company and an indirect wholly-owned subsidiary of Cendant Corporation. Our activities are limited to acquiring and holding an investment in the Lease SUBI (which is a special unit of beneficial interest in certain leases and vehicles owned by D. L. Peterson Trust) and a portion of the Fleet Receivable SUBI (which is a special unit of beneficial interest in certain fleet service receivables owned by D. L. Peterson Trust), issuing indebtedness and preferred membership interests to finance such investment and engaging in other activities that are related or incidental to the foregoing and necessary, convenient or advisable to accomplish the foregoing. We do not conduct operating activities.

Income from investment in related party special unit of beneficial interest in leases for the three and nine months ended September 30, 2002 decreased by $13.9 and $58.7 million, respectively. Such decreases are the result of declines in the floating rate indices on which interest billings under the leases allocated to the Lease SUBI are based. Interest expense for the three and nine months ended September 30, 2002 also decreased by $8.5 and $51.3 million, respectively, as a result of corresponding decreases in commercial paper rates and LIBOR. Accordingly, operating income decreased by $5.5 and $7.7 million, respectively, primarily as a result of the fact that the floating rate indices on which Lease SUBI lease billings are based decreased at a faster rate during 2002 than the commercial paper rates and LIBOR at which our floating rate debt expense accrues.

The principal source of our revenue is payments received on the Lease SUBI held by us. Set forth below is certain historical data with respect to delinquency experience, loss and recovery experience, residual value loss experience, conversions of floating rate leases to fixed rate leases, and fleet management billing experience, in each case for leases and fleet management receivables that are of the same type as those allocated to the Lease SUBI and the Fleet Receivable SUBI.

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Delinquency Experience

The following table sets forth delinquency data with respect to aggregate billings of lease payments for all of Vehicle Management Services' leases and fleet management receivables for the nine months ended September 30, 2002 and 2001. These leases and fleet management receivables are of the same type as the leases allocated to the Lease SUBI and the fleet management receivables allocated to the Fleet Receivable SUBI and do not include any other types of leases or fleet management receivables.

(1)

The period of delinquency is based on the number of days payments are contractually past due.

(2)

An average of the ratios, expressed as a percentage, for each monthly billing period within the applicable period of the aggregate billings for all leases and all fleet management receivables which were delinquent for the applicable number of days as of the last day of that monthly billing period to the sum of the aggregate billings for all leases and all fleet management receivables which were unpaid as of the last day of the preceding monthly billing period and the aggregate amount billed for all leases and fleet management receivables during that monthly period.

Total delinquencies for the nine months ended September 30, 2002 remained below 5% of total billings, which is consistent with the performance of the portfolio over the last several years. Delinquencies of 60 days or more increased to 2.99% of total billings compared to 2.91% in the nine months ended September 30, 2001 due to the continuing effects of Chapter 11 bankruptcy filings of several customers and a lower level of billings partially offset by a decline in non-bankruptcy delinquent receivables of 60 days or more from the comparable period in 2001. Delinquencies of 30-59 days decreased to 1.24% in the nine months ended September 30, 2002 from 1.41% in the nine months ended September 30, 2001.

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Loss and Recovery Experience

The following table sets forth loss and recovery data with respect to Vehicle Management Services' leases and fleet management receivables for the nine months ended September 30, 2002 and 2001. These leases and fleet management receivables are of the same type as the leases allocated to the Lease SUBI and the fleet management receivables allocated to the Fleet Receivable SUBI and do not include any other types of leases or fleet management receivables.

(1)

Based on the sum of all principal amounts outstanding under the leases, including, in the case of closed-end leases, the stated residual values of the related leased vehicles.

(2)

Gross losses includes losses on fleet management receivables.

(3)

Recoveries are net of legal fees.

Net losses as a percentage of ending dollar amount of leases decreased from .06% for the nine months ended September 30, 2001 to .02% for the nine months ended September 30, 2002 due to lower losses from bankruptcies in 2002. Net losses as a percentage of total billings decreased from .10% for the nine months ended September 30, 2001 to .05% for the nine months ended September 30, 2002 due to lower losses from bankruptcies in 2002. Gross losses with respect to bankrupt obligors generally are not recognized by Vehicle Management Services until it receives payment upon the confirmation of the plan of reorganization of the bankrupt obligor and receives any terminal rental adjustment payments that may be applied to satisfy outstanding obligations with respect to fleet management receivables. Losses are charged against previously established reserves. Reserve adequacy for the purposes of Vehicle Management Services' financial statements is determined at the time of a client's bankruptcy filing and any necessary charge is recorded to the statement of income at that time.

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Residual Value Loss Experience

The following table sets forth residual value performance data for Vehicle Management Services' closed-end leases for the nine months ended September 30, 2002 and 2001. These closed-end leases are of the same type as the closed-end leases allocated to the Lease SUBI and do not include any other types of closed-end leases.

(1)

The ratio of the number of vehicles sold during the period to the number of vehicles scheduled to terminate, on their date of origination, during the period, expressed as a percentage.

(2)

Includes fees received and expenses incurred to dispose of vehicles and certain amounts received after the sale and disposition of the vehicles.

(3)

Per vehicle dollar amounts are not in thousands.

(4)

The ratio of total gains/losses on vehicles sold during the period to the stated residual values of those vehicles, expressed as a percentage.

Total residual value losses decreased $5.2 million to $101 thousand and the total number of sold vehicles decreased 28.9%. The decrease in units sold is the result of a lower number of closed-end leases scheduled to terminate and an increase in clients retaining vehicles beyond their original lease term. The average loss per vehicle returned and sold in the nine months ended September 30, 2002 decreased 97.3% from the comparable period in 2001 to $32 per unit. The decrease in residual value losses during 2002 is the result of establishing lower residual values at lease inception which was initiated in the beginning of 2000.

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Conversions of Floating Rate Leases to Fixed Rate Leases

The following table sets forth data with respect to conversions of Vehicle Management Services' floating rate leases to fixed rate leases during the nine months ended September 30, 2002 and 2001.

(1)

Based on the sum of all principal amounts outstanding under the leases, including, in the case of closed-end leases, the stated residual values of the related leased vehicles.

Total conversions of floating rate leases to fixed rate leases were $4.9 million during the nine months ended September 30, 2002 compared with $31.2 million in the period ended September 30, 2001. Conversions of floating rate to fixed rate leases was lower for the nine months ended September 30, 2002 compared to the comparable period in 2001 due to continued low interest rates during the year.

Fleet Management Receivable Billing Experience

The following table sets forth data for Vehicle Management Services' aggregate billings of fleet management receivables for the nine months ended September 30, 2002 and 2001. These fleet management receivables are of the same type as the fleet management receivables allocated to the Fleet Receivable SUBI and do not include any other types of fleet management receivables.

Aggregate fleet management receivable billings decreased to $660.1 million during the nine months ended September 30, 2002 compared to $789.9 million during the nine months ended September 30, 2001. The primary factor for this decrease was a decrease in billings relating to vehicles purchased directly for customers.

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Characteristics of Leases Allocated to Lease SUBI

The following table contains certain statistical information relating to the leases allocated to the Lease SUBI as of September 19, 2002 (the last monthly reporting period cutoff date during the third quarter of 2002). All of the leases and vehicles owned by DLPT as of September 19, 2002 were allocated to the Lease SUBI. The following information does not include vehicles ordered at the request of lessees party to a master lease agreement allocated to the Lease SUBI, which have an aggregate cost of $80,171,655 as of that date, because they are not yet subject to a lease. For the purposes of preparing the following tables, we assumed the original term of each lease to be the period over which the related vehicle is scheduled to be depreciated.

Note: Dollar amounts are in whole amounts.

As of September 19, 2002, the aggregate lease balance of the leases allocated to the Lease SUBI with the lessee having the largest aggregate lease balances was $110,476,012. The aggregate lease balance of the leases allocated to the Lease SUBI with the lessees having the five largest aggregate lease balances was $462,816,026 and the aggregate lease balance of the leases allocated to the Lease SUBI with the lessees having the ten largest aggregate lease balances was $794,629,898.

Forward-Looking Statements

Forward-looking statements in our public filings or other public statements are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on

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various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements.

Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "project", "estimates", "plans", "may increase", "may fluctuate" and similar expressions or future or conditional verbs such as "will", "should", "would", "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

•

changes in general economic and business conditions and the impact thereof on the vehicle leasing business or the lessees of our vehicles;



•

the effects of changes in interest rates; and



•

changes in laws and regulations, including changes in accounting standards.

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

We use interest rate caps to manage and reduce the interest rate risk related specifically to our asset-backed debt. Interest rate risk is our only market exposure. We do not engage in trading, market-making, or other speculative activities in the derivatives markets. We assess our interest rate risk based on changes in the interest rates utilizing a sensitivity analysis, which measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in our asset-backed debt and interest rate caps. We used September 30, 2002 interest rates to perform a sensitivity analysis. We have determined, through such analyses, that the impact of a 10% change in interest rates on our earnings, fair values and cash flows would not be material.

Item 4. Controls and Procedures

(a)

Evaluation and Disclosure controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating our company required to be included in our reports filed or submitted under the Exchange Act.



(b)

Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.

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PART II—OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits

        See Exhibit Index

(b)  Reports on Form 8-K

On August 14, 2002, we filed a current report on Form 8-K to report under Item 5 the certification by our executives of our financial statements.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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I, George J. Kilroy, certify that:

1)

I have reviewed this quarterly report on Form 10-Q of Chesapeake Funding LLC;



2)

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4)

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date");

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;




5)

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):



a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal control; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and




6)

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Neil J. Cashen, certify that:

1)

I have reviewed this quarterly report on Form 10-Q of Chesapeake Funding LLC;



2)

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4)

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date");

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;




5)

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):



a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal control; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and




6)

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Exhibit Index

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QuickLinks

Item 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures

PART II—OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K