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

Form 10-Q

Commission File No. 333-40708

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

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

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

Chesapeake Funding LLC

Table of Contents

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 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. Forward-looking statements include information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "projects", "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 current interest rates; and



•

changes in laws and regulations or the applications thereof, including changes in accounting standards or other laws that impact our business.

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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Chesapeake Funding LLC
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
(Unless otherwise noted, all amounts are in millions)

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 ("VMS"), 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. VMS became a wholly-owned subsidiary of PHH Corporation, which is a wholly-owned subsidiary of Cendant Corporation. 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 and holding a certificate (the "Lease SUBI Certificate") representing a special unit of beneficial interest in certain leases (the "Lease SUBI"), and acquiring and holding a certificate (the "Fleet Receivable SUBI Certificate") representing a portion of a special unit of beneficial interest in certain fleet management receivables (the "Fleet Receivable SUBI") owned by D.L. Peterson Trust ("DLPT"). DLPT is a Delaware statutory trust established by VMS in order to administer the titling and to act as lessor of the vehicles in connection with the financing and transfer of vehicles subject to leases. The Lease SUBI is a beneficial ownership interest in the leases, vehicles and paid-in-advance vehicles owned by DLPT (the "SUBI Assets"). The Fleet Receivable SUBI is a beneficial interest in the fleet management receivables owned by DLPT which entitles Chesapeake to receive up to $120 million a month of the collections received in respect of the fleet management receivables.

Chesapeake does not have a direct ownership interest in the leases and vehicles allocated to the Lease SUBI and the fleet management receivables allocated to the Fleet Receivable SUBI. In order to protect against the risk that certain liens of third-party creditors of DLPT or others in the assets allocated to the Lease SUBI and the Fleet Receivable SUBI could take priority over Chesapeake's interests and those of the indenture trustee for its notes in these assets, DLPT has issued a guaranty in favor of the indenture trustee for the benefit of the noteholders and the holders of Chesapeake's preferred membership interests. The guaranty guarantees the payment of the full amount payable to or for the benefit of the noteholders of each series of notes, and the payment of dividends on, and the redemption price of, each series of preferred membership interests issued by Chesapeake. The guaranty is secured by a first priority security interest in all of the vehicles and other assets allocated to the Lease SUBI and the Fleet Receivable SUBI held by DLPT from time to time.

VMS 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, VMS will maintain all property, 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, and were then contributed to Chesapeake by Raven.

In presenting the financial statements, management makes 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. DLPT has historically recorded depreciation expense on a portion of its leased vehicle portfolio in accordance with industry practices whereby the carrying value of the vehicles would reflect the terms of the underlying lease transaction. Beginning in second quarter 2004, DLPT plans to use a different method of recording depreciation expense. Under the new method, the depreciation expense that is recorded by DLPT in the earlier part of the lease term will be greater than what would have been recorded during such period under DLPT's existing method. The Company recognizes revenue (income from investment in related party special unit of beneficial interest in leases) as DLPT recognizes income on its lease portfolio. Although the differences between applying the two depreciation methods is currently under review by DLPT, the Company does not believe that the difference in methods would have been material to its results of operations or financial position for any prior period. In management's opinion, the Condensed 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.

The Condensed Financial Statements should be read in conjunction with the Company's 2003 Annual Report on Form 10-K filed on March 10, 2004.

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2.     Debt

During the three months ended March 31, 2004, the Company made principal payments of $102.4 million and $89.1 million to the holders of its series 2001-1 Class A-1 medium-term notes and series 2002-1 Class A-1 medium-term notes, respectively.

During the three months ended March 31, 2004, the Company made drawdowns increasing the outstanding principal amount of its series 1999-3 variable funding notes by an aggregate of $130 million. As of March 31, 2004, the Company's series 1999-3 variable funding notes had a weighted average interest rate of approximately 1.56%. The series 1999-3 variable funding notes are renewable annually for an indefinite period if the Company and the multi-seller commercial paper conduits agree to do so. The principal amount of the series 1999-3 variable funding notes will begin to amortize when the notes are not renewed.

3.     Related Party Transactions

The Company has entered into an Administration Agreement with VMS which has agreed to perform various administrative duties under the indenture and related agreements pursuant to which the Company's outstanding indebtedness has been issued, including the preparation and delivery of reports, notices, documents and other information that the Company is required to deliver or make available under the indenture. VMS, as administrator, is entitled to receive a monthly fee for its services in an amount equal to 0.01% per annum of the Company's assets. VMS also acts as a servicer of the leases, vehicles and fleet management receivables owned by DLPT and allocated to the Company's SUBIs pursuant to a Servicing Agreement. VMS is entitled to receive a servicing fee for its services under the Servicing Agreement equal to 0.215% per annum of the principal balance of the leases allocated to the Lease SUBI.

The administration and servicing fees the Company paid to VMS for the three months ended March 31, 2004 and 2003 totaled $1.7 million and are included in service fees to related party on the Company's Statements of Income.

*****

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

The following discussion should be read in conjunction with our unaudited Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2004. Unless otherwise noted, all dollar amounts are in thousands.

We are a limited purpose entity formed in 1999. 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 DLPT) and a portion of the Fleet Receivable SUBI (which is a special unit of beneficial interest in certain fleet management receivables owned by DLPT), 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 months ended March 31, 2004 decreased by $5.3 million compared to the corresponding period in 2003. Such decrease resulted primarily from 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 months ended March 31, 2004 decreased by $.2 million as a result of decreases in commercial paper rates and LIBOR (the rates at which our floating rate debt accrues interest). Interest expense on mandatorily redeemable preferred membership interest increased $5.3 million as a result of the adoption of Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"). Before adoption of this standard, dividends on preferred membership interests were recorded as equity distributions. Operating income for the three months ended March 31, 2004 decreased by $10.3 million compared to the corresponding period in 2003, primarily as a result of (i) the treatment of preferred membership dividends as interest expense under SFAS No. 150 and (ii) the fact that the floating rate indices on which interest billings under the leases allocated to the Lease SUBI are based declined more than the rates at which our floating rate debt accrues interest.

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 receivable 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.

In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions that we are required to make pertain to matters that are inherently uncertain as they relate to future events. We do not believe the estimates and assumptions that we are required to make are particularly subjective or complex and as such we do not believe that any change in these estimates or assumptions would have a material impact on our results of operations or financial condition.

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Delinquency Experience

The following table sets forth delinquency data with respect to aggregate billings of lease payments for all of VMS' leases and fleet management receivables for the three months ended March 31, 2004 and 2003. 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)

Represents 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 that 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 fleet management receivables that 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 billing period.

Total delinquencies for the three months ended March 31, 2004 remained below 5% of total billings, which is consistent with the performance of the portfolio over the last several years. Delinquencies of 30-59 days increased slightly, but remained well within the range of historical levels. Management is not aware of any factors, which would negatively impact delinquencies for the remainder of 2004 beyond historical levels.

8

Loss and Recovery Experience

The following table sets forth loss and recovery data with respect to VMS' leases and fleet management receivables for the three months ended March 31, 2004 and 2003. 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 total billings decreased during the three months ended March 31, 2004 compared to the corresponding period in 2003 due to higher recoveries from previous losses.

Gross losses with respect to bankrupt obligors generally are not recognized by VMS 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 accounts receivable reserves. Reserve adequacy for the purposes of VMS' financial statements is determined at the time of a client's bankruptcy filing and any necessary charge is recorded to the income statement at that time. The principal amount outstanding under all leases where the related vehicles are repossessed was immaterial for the three months ended March 31, 2004 and 2003.

9

Residual Value Loss Experience

The following table sets forth residual value loss performance data for VMS' closed-end leases for the three months ended March 31, 2004 and 2003. 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 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. Total loss does not include any effect from fair value adjustments resulting from purchase accounting.

(3)

Per vehicle dollar amounts are not in thousands.

(4)

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

Total residual value losses decreased $138 during the three months ended March 31, 2004 compared to the corresponding period in 2003. For the same period, the total number of vehicles sold decreased by 35% compared to the corresponding period in 2003. The average loss per vehicle sold decreased $127 per unit compared to the corresponding period in 2003 as a result of higher values realized on vehicles sold in the marketplace.

Conversions of Floating Rate Leases to Fixed Rate Leases

The following table sets forth data with respect to conversions of VMS' floating rate leases to fixed rate leases during the three months ended March 31, 2004 and 2003.

(1)

Based on the sum of all principal amounts outstanding under the leases.

(2)

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.

Conversion of floating rate leases to fixed rate leases are at the discretion of the client. Management believes that the low amount of conversions in the three months ended March 31, 2004 is due to the clients' perception that floating rates will not increase materially from current levels in the near term.

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Fleet Management Receivable Billing Experience

The following tables set forth data for VMS' aggregate billings of fleet management receivables. 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 increased in the three months ended March 31, 2004 compared to the corresponding period in 2003 primarily due to an increase in billings for fuel and maintenance and for customer-owned vehicles, which are purchased directly for the customer's account.

The information set forth in the following table with respect to billings for fleet management receivables for the years ended December 31, 2003 through December 31, 1999, has been revised to eliminate certain customer charges and credits that do not meet the criteria to be included in the billing statistics related to fleet management receivables. The information is presented on a basis consistent with the information presented in the above table for the three months ended March 31, 2004 and 2003.

Aggregate fleet management receivable billings increased to $915 million for 2003 compared to $876 million for 2002. The primary factor for this increase was an increase in fuel and maintenance billings partially offset by a decrease in billings for company-owned vehicles, which are purchased directly for customers.

11

Characteristics of Leases Allocated to Lease SUBI

The following tables contain certain statistical information relating to the leases allocated to the Lease SUBI as of March 18, 2004 (the last Lease SUBI monthly reporting period cutoff date during the first quarter of 2004). The following information does not include vehicles ordered at the request of lessees party to a master lease agreement allocated to the Lease SUBI, having an aggregate cost of $130.7 million as of that date because such vehicles were 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

*

The CP Rate Index Floating Rate Leases are floating rate leases allocated to the Lease SUBI, the floating rate of which is typically based on either the rate on commercial paper set forth in Statistical Release H.15 (519), "Selected Interest Rates" published by the Board of Governors of the Federal Reserve System or the interest rates at which PHH Corporation issues its own commercial paper.

As of March 18, 2004, the aggregate lease balance of the leases allocated to the Lease SUBI with the lessee having the largest aggregate lease balances was $143.9 million, the aggregate lease balance of the leases allocated to the Lease SUBI with the lessees having the five largest aggregate lease balances was $527.8 million and the aggregate lease balance of the leases allocated to the Lease SUBI with the lessees having the ten largest aggregate lease balances was $819.4 million.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As previously discussed in our 2003 Annual Report on Form 10-K, 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 March 31, 2004 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)    Disclosure Controls and Procedures.    Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

(b)    Internal Control Over Financial Reporting.    There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

See Exhibit Index.

(b)

Reports on Form 8-K

None.

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SIGNATURES

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

Date: May 14, 2004

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Exhibit Index

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PART I—FINANCIAL INFORMATION
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 Risk
Item 4. Controls and Procedures
PART II—OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K