U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON
DC 20549






FORM
10-Q






(Mark
One)


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




For
the quarterly period ended March 28, 2009





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




For
the transition period from _______ to _______.




Commission
File No. 0-28452





VELOCITY
EXPRESS CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
                
                87-0355929(State
      or other jurisdictionof
      incorporation)
                
                (IRS
      EmployerIdentification
      No.)




One
Morningside Drive North, Bldg. B, Suite 300,


Westport,
Connecticut 06880


(Address
of Principal Executive Offices including Zip Code)




(203)
349-4160


(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 Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    YES  x    NO   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).YES   ̈    NO   ̈




The
Registrant is not yet subject to this requirement.




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, or “smaller
reporting company in Rule 12b-2 of the Exchange Act (check one):





Largeacceleratedfiler
                       ̈
                      
                      Acceleratedfiler
                       ̈Non-acceleratedfiler
                       ̈
                      
                      SmallerreportingCompany
                      x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of
1934    YES   ̈    NO  x




As of May
11, 2009, there were 3,988,819 shares of common stock of the registrant issued
and outstanding.













VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES




INDEX
TO FORM 10-Q




March
28, 2009





PagePART I.
            
            FINANCIALINFORMATION
            
            3ITEM
      1.
            
            FinancialStatements
      (Unaudited)Consolidated
      BalanceSheetsasofMarch28,2009andJune28,2008
            
            3Consolidated
      StatementsofOperationsfortheThreeandNineMonthsEndedMarch28,2009andMarch29,2008
            
            4Condensed
      Consolidated StatementofShareholders’DeficitandComprehensiveLossfortheNineMonthsEndedMarch28,2009
            
            5Consolidated
      StatementsofCashFlowsfortheNineMonthsEndedMarch28,2009andMarch29,2008
            
            6NotestoCondensedConsolidatedFinancialStatements
            
            7ITEM
      2.
            
            Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations
            
            19ITEM
      3.
            
            QuantitativeandQualitativeDisclosuresAboutMarketRisk
            
            28ITEM
      4T.
            
            ControlsandProcedures
            
            28PART II.
            
            OTHERINFORMATION
            
            29ITEM
      1.
            
            LegalProceedings
            
            29ITEM
      1A.
            
            RiskFactors
            
            30ITEM
      2.
            
            UnregisteredSalesofEquitySecuritiesandUseofProceeds
            
            41ITEM
      3.
            
            DefaultsUponSeniorSecurities
            
            41ITEM
      4.
            
            SubmissionofMatterstoaVoteofSecurityHolders
            
            41ITEM
      5.
            
            OtherInformation
            
            41ITEM
      6.
            
            Exhibits
            
            41SIGNATURES
            
            41








2




PART
I.




ITEM 1. FINANCIAL STATEMENTS.






VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Unaudited)


(Amounts
in thousands, except par value)





March28,
                              
                              
                              June28,2009
                              
                              
                              2008ASSETSCurrent
      assets:Cash
                              
                              $
                              1,837
                              
                              
                              $
                              4,240Trade
      accounts receivable, net of allowance of $807 and $1,724 at
      March 28, 2009 and June 28, 2008 respectively
                              
                              
                              18,902
                              
                              
                              
                              25,126Accounts
      receivable - other
                              
                              
                              1,119
                              
                              
                              
                              815Prepaid
      insurance
                              
                              
                              4,747
                              
                              
                              
                              1,635Other
      prepaid expenses and current assets
                              
                              
                              1,071
                              
                              
                              
                              720Total
      current assets
                              
                              
                              27,676
                              
                              
                              
                              32,536Property
      and equipment, net
                              
                              
                              6,028
                              
                              
                              
                              6,981Goodwill
                              
                              
                              35,138
                              
                              
                              
                              35,138Intangible
      assets, net
                              
                              
                              19,733
                              
                              
                              
                              21,333Deferred
      financing costs, net
                              
                              
                              2,773
                              
                              
                              
                              2,164Other
      assets
                              
                              
                              4,014
                              
                              
                              
                              3,797Total
      assets
                              
                              $
                              95,362
                              
                              
                              $
                              101,949LIABILITIES
      AND SHAREHOLDERS' DEFICITCurrent
      liabilities:Trade
      accounts payable
                              
                              $
                              26,752
                              
                              
                              $
                              26,533Accrued
      wages and benefits
                              
                              
                              3,576
                              
                              
                              
                              4,078Accrued
      legal and claims
                              
                              
                              1,350
                              
                              
                              
                              4,102Accrued
      insurance and claims
                              
                              
                              2,652
                              
                              
                              
                              3,075Accrued
      interest
                              
                              
                              4,107
                              
                              
                              
                              5,708Related
      party liabilities
                              
                              
                              40
                              
                              
                              
                              52Other
      accrued liabilities
                              
                              
                              1,155
                              
                              
                              
                              1,705Revolving
      line of credit
                              
                              
                              10,020
                              
                              
                              
                              7,942Current
      portion of long-term debt
                              
                              
                              910
                              
                              
                              
                              1,152Total
      current liabilities
                              
                              
                              50,562
                              
                              
                              
                              54,347Long-term
      debt, less current portion
                              
                              
                              74,391
                              
                              
                              
                              46,498Accrued
      insurance and claims
                              
                              
                              405
                              
                              
                              
                              538Other
      long-term liabilities
                              
                              
                              4,012
                              
                              
                              
                              4,992Total
      liabilities
                              
                              
                              129,370
                              
                              
                              
                              106,375Commitments
      and contingenciesShareholders'
      deficit:Preferred
      stock, $0.004 par value, 299,515shares authorized
      12,311
      and 11,763 shares issued and outstanding atMarch
      28, 2009 and June 28, 2008, respectively
                              
                              
                              72,148
                              
                              
                              
                              68,750Common
      stock, $0.004 par value, 700,000 shares authorized 3,984
      and 2,893 shares issued and outstanding atMarch
      28, 2009 and June 28, 2008, respectively
                              
                              
                              16
                              
                              
                              
                              11Stock
      subscription receivable
                              
                              
                              (170
                              )
                              
                              
                              (170
                              )Additional
      paid-in-capital
                              
                              
                              397,180
                              
                              
                              
                              393,318Accumulated
      deficit
                              
                              
                              (502,886
                              )
                              
                              
                              (466,081
                              )Accumulated
      other comprehensive loss
                              
                              
                              (296
                              )
                              
                              
                              (254
                              )Total
      shareholders' deficit
                              
                              
                              (34,008
                              )
                              
                              
                              (4,426
                              )Total
      liabilities and shareholders' deficit
                              
                              $
                              95,362
                              
                              
                              $
                              101,949





See notes
to condensed consolidated financial statements


3





VELOCITY
EXPRESS CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(Amounts
in thousands, except per share data)





Three
      Months Ended
                        
                        
                        Nine
      Months EndedMarch
      28,
                        
                        
                        March
      29,
                        
                        
                        March
      28,
                        
                        
                        March
      29,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Revenue
                        
                        $
                        60,825
                        
                        
                        $
                        82,159
                        
                        
                        $
                        199,147
                        
                        
                        $
                        261,567Cost
      of service revenues
                        
                        
                        42,916
                        
                        
                        
                        61,263
                        
                        
                        
                        143,059
                        
                        
                        
                        196,923Depreciation
                        
                        
                        422
                        
                        
                        
                        351
                        
                        
                        
                        1,377
                        
                        
                        
                        95243,338
                        
                        
                        
                        61,614
                        
                        
                        
                        144,436
                        
                        
                        
                        197,875Gross
      profit
                        
                        
                        17,487
                        
                        
                        
                        20,545
                        
                        
                        
                        54,711
                        
                        
                        
                        63,692Operating
      expenses:Occupancy
                        
                        
                        4,431
                        
                        
                        
                        4,975
                        
                        
                        
                        12,628
                        
                        
                        
                        14,036Selling,
      general and administrative
                        
                        
                        13,420
                        
                        
                        
                        17,578
                        
                        
                        
                        41,155
                        
                        
                        
                        54,14017,851
                        
                        
                        
                        22,553
                        
                        
                        
                        53,783
                        
                        
                        
                        68,176Integration
      costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        501Restructuring
      charges
                        
                        
                        -
                        
                        
                        
                        176
                        
                        
                        
                        51
                        
                        
                        
                        680Asset
      impairments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        15
                        
                        
                        
                        -Depreciation
      and amortization
                        
                        
                        741
                        
                        
                        
                        1,482
                        
                        
                        
                        2,316
                        
                        
                        
                        4,450Total
      operating expenses
                        
                        
                        18,592
                        
                        
                        
                        24,211
                        
                        
                        
                        56,165
                        
                        
                        
                        73,807Loss
      from operations
                        
                        
                        (1,105
                        )
                        
                        
                        (3,666
                        )
                        
                        
                        (1,454
                        )
                        
                        
                        (10,115
                        )Other
      income (expense):Interest
      expense, net
                        
                        
                        (10,007
                        )
                        
                        
                        (5,018
                        )
                        
                        
                        (28,545
                        )
                        
                        
                        (14,831
                        )Other
      (including extinguishment loss of $0.3 million in 2009)
                        
                        
                        (307
                        )
                        
                        
                        3
                        
                        
                        
                        (314
                        )
                        
                        
                        4Loss
      before income taxes
                        
                        
                        (11,419
                        )
                        
                        
                        (8,681
                        )
                        
                        
                        (30,363
                        )
                        
                        
                        (24,942
                        )Income
      tax (benefit)
                        
                        
                        3
                        
                        
                        
                        105
                        
                        
                        
                        (5
                        )
                        
                        
                        276Net
      loss
                        
                        $
                        (11,422
                        )
                        
                        $
                        (8,786
                        )
                        
                        $
                        (30,358
                        )
                        
                        $
                        (25,218
                        )Net
      loss applicable to common shareholders
                        
                        $
                        (13,688
                        )
                        
                        $
                        (10,613
                        )
                        
                        $
                        (36,805
                        )
                        
                        $
                        (32,494
                        )Basic
      and diluted net loss per share
                        
                        $
                        (3.73
                        )
                        
                        $
                        (3.78
                        )
                        
                        $
                        (10.71
                        )
                        
                        $
                        (11.77
                        )Weighted
      average common stock shares
      outstanding used in thebasic
      and diluted net loss per share calculation
                        
                        
                        3,668
                        
                        
                        
                        2,807
                        
                        
                        
                        3,437
                        
                        
                        
                        2,761





See notes
to condensed consolidated financial statements





4





VELOCITY
EXPRESS CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE
LOSS


(Unaudited)


(Amounts
in thousands)





Series
      M
                                                      
                                                      
                                                      Series
      N
                                                      
                                                      
                                                      Series
      O
                                                      
                                                      
                                                      Series
      P
                                                      
                                                      
                                                      Series
      QPreferred
      Stock
                                                      
                                                      
                                                      Preferred
      Stock
                                                      
                                                      
                                                      Preferred
      Stock
                                                      
                                                      
                                                      Preferred
      Stock
                                                      
                                                      
                                                      Preferred
      StockShares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      AmountBalance
      at June 28, 2008
                                                      
                                                      
                                                      4,063
                                                      
                                                      
                                                      $
                                                      14,335
                                                      
                                                      
                                                      
                                                      764
                                                      
                                                      
                                                      $
                                                      2,694
                                                      
                                                      
                                                      
                                                      90
                                                      
                                                      
                                                      $
                                                      355
                                                      
                                                      
                                                      
                                                      1,995
                                                      
                                                      
                                                      $
                                                      4,983
                                                      
                                                      
                                                      
                                                      4,851
                                                      
                                                      
                                                      $
                                                      46,383Issuance
      of Common Stock
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Offering
      costs
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Conversion
      of preferred stock to Common Stock
                                                      
                                                      
                                                      (4
                                                      )
                                                      
                                                      
                                                      (14
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Issuance
      of preferred stock for dividends paid-in-kind
                                                      
                                                      
                                                      185
                                                      
                                                      
                                                      
                                                      683
                                                      
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      149
                                                      
                                                      
                                                      
                                                      6
                                                      
                                                      
                                                      
                                                      22
                                                      
                                                      
                                                      
                                                      98
                                                      
                                                      
                                                      
                                                      326
                                                      
                                                      
                                                      
                                                      223
                                                      
                                                      
                                                      
                                                      2,232Preferred
      Stock PIK dividends earned
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Beneficial
      conversion of preferred stock
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Net
      loss
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Foreign
      currency translation
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Comprehensive
      loss
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Balance
      at March 28, 2009
                                                      
                                                      
                                                      4,244
                                                      
                                                      
                                                      $
                                                      15,004
                                                      
                                                      
                                                      
                                                      804
                                                      
                                                      
                                                      $
                                                      2,843
                                                      
                                                      
                                                      
                                                      96
                                                      
                                                      
                                                      $
                                                      377
                                                      
                                                      
                                                      
                                                      2,093
                                                      
                                                      
                                                      $
                                                      5,309
                                                      
                                                      
                                                      
                                                      5,075
                                                      
                                                      
                                                      $
                                                      48,615









VELOCITY
EXPRESS CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
(CONTINUED)
 (Unaudited)
 (Amounts
in thousands)





Total
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            AccumulatedPreferred
      Stock
                            
                            
                            Common
      Stock
                            
                            
                            Stock
                            
                            
                            Additional
                            
                            
                            
                            
                            
                            OtherSubscription
                            
                            
                            Paid-in
                            
                            
                            Accumulated
                            
                            
                            ComprehensiveShares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Receivable
                            
                            
                            Capital
                            
                            
                            Deficit
                            
                            
                            Loss
                            
                            
                            TotalBalance
      at June 28, 2008
                            
                            
                            11,763
                            
                            
                            $
                            68,750
                            
                            
                            
                            2,893
                            
                            
                            $
                            11
                            
                            
                            $
                            (170
                            )
                            
                            $
                            393,318
                            
                            
                            $
                            (466,081
                            )
                            
                            $
                            (254
                            )
                            
                            $
                            (4,426
                            )Issuance
      of Common Stock
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,091
                            
                            
                            
                            5
                            
                            
                            
                            -
                            
                            
                            
                            835
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            840Offering
      costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (22
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (22
                            )Conversion
      of preferred stock to Common Stock
                            
                            
                            (4
                            )
                            
                            
                            (14
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            14
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Issuance
      of preferred stock for dividends paid-in-kind
                            
                            
                            553
                            
                            
                            
                            3,412
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (3,412
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Preferred
      Stock PIK dividends earned
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,178
                            
                            
                            
                            (3,178
                            )
                            
                            
                            -
                            
                            
                            
                            -Beneficial
      conversion of preferred stock
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,269
                            
                            
                            
                            (3,269
                            )
                            
                            
                            -
                            
                            
                            
                            -Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (30,358
                            )
                            
                            
                            -
                            
                            
                            
                            (30,358
                            )Foreign
      currency translation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (42
                            )
                            
                            
                            (42
                            )Comprehensive
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (30,400
                            )Balance
      at March 28, 2009
                            
                            
                            12,311
                            
                            
                            $
                            72,148
                            
                            
                            
                            3,984
                            
                            
                            $
                            16
                            
                            
                            $
                            (170
                            )
                            
                            $
                            397,180
                            
                            
                            $
                            (502,886
                            )
                            
                            $
                            (296
                            )
                            
                            $
                            (34,008
                            )













5





VELOCITY
EXPRESS CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Amounts
in thousands)





Nine
      Months EndedMarch
      28,
                
                
                March
      29,2009
                
                
                2008OPERATING
      ACTIVITIESNet
      loss
                
                $
                (30,358
                )
                
                $
                (25,218
                )Adjustments
      to reconcile net loss to netcash
      flows used in operating activities:Depreciation
      and amortization of intangibles
                
                
                3,693
                
                
                
                5,403Accretion
      of interest and amortization of debt issue costs
                
                
                16,319
                
                
                
                7,468Stock
      option and warrant expense
                
                
                -
                
                
                
                151(Reversal
      of) provision for doubtful accounts
                
                
                (245
                )
                
                
                256Asset
      impairments
                
                
                15
                
                
                
                -Loss
      on debt extinguishment
                
                
                314
                
                
                
                -Gain
      on the sale of assets
                
                
                -
                
                
                
                (131
                )Change
      in operating assets and liabilities:Trade
      accounts receivable
                
                
                6,409
                
                
                
                5,904Other
      current assets
                
                
                (3,774
                )
                
                
                2,607Other
      assets
                
                
                (217
                )
                
                
                155Accounts
      payable
                
                
                (202
                )
                
                
                (2,551
                )Accrued
      liabilities
                
                
                6,721
                
                
                
                (5,978
                )Cashusedinoperatingactivities
                
                
                (1,325
                )
                
                
                (11,934
                )INVESTING
      ACTIVITIESProceeds
      from sale of assets
                
                
                -
                
                
                
                237Purchases
      of property and equipment
                
                
                (776
                )
                
                
                (1,330
                )Cashusedininvestingactivities
                
                
                (776
                )
                
                
                (1,093
                )FINANCING
      ACTIVITIES(Repayments
      of) proceeds from prior revolving credit facility, net
                
                
                (7,942
                )
                
                
                1,634Proceeds
      from replacement revolving credit facility, net
                
                
                8,499
                
                
                
                -Payments
      of notes payable and long-term debt
                
                
                (859
                )
                
                
                (725
                )Proceeds
      from issuance of common stock, net
                
                
                -
                
                
                
                3,599Cash
      (used in) provided by financing activities
                
                
                (302
                )
                
                
                4,508Net
      change in cash
                
                
                (2,403
                )
                
                
                (8,519
                )Cash,
      beginning of period
                
                
                4,240
                
                
                
                14,418Cash,
      end of period
                
                $
                1,837
                
                
                $
                5,899





See notes
to condensed consolidated financial statements


6


VELOCITY
EXPRESS CORPORATION AND SUBSIDIARIES





Notes
to Condensed Consolidated Financial Statements













1.
            
            DESCRIPTION OF
      BUSINESS





Velocity
Express Corporation and its subsidiaries (collectively, the “Company”) are
engaged in the business of providing time definite ground package delivery
services to individual consumers and businesses. The Company operates primarily
in the United States with limited operations in Canada. The Company currently
operates in a single business segment.





2.
            
            SIGNIFICANT ACCOUNTING
      POLICIES




Basis
of Presentation




The
condensed consolidated financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, all adjustments consisting
only of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of March 28, 2009 and the results of its operations
and its cash flows for the three and nine months ended March 28, 2009 and March
29, 2008, have been included. The results of operations for the three and nine
months ended March 28, 2009 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 27, 2009. Certain information in
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.




These
condensed consolidated financial statements should be read in conjunction with
the financial statements for the year ended June 28, 2008, and the footnotes
thereto, included in the Company’s Annual Report on Form 10-K, as amended, filed
with the Securities and Exchange Commission for such fiscal year.





Principles
of Consolidation





The
condensed consolidated financial statements include the accounts of Velocity
Express Corporation and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.


7


Concentrations
of Credit Risk





The
Company places its cash with federally insured financial institutions. At times,
such cash balances may be in excess of the federally insured limit.
Concentrations of credit risk with respect to its accounts receivable is limited
due to the wide variety of customers to which the Company’s services are sold
and the dispersion of those services across many industries and geographic
areas. The Company has two customers that accounted for 22.7% and 10.4% of its
revenues for the nine months ended March 28, 2009 and one customer that
accounted for 15.9% of its revenues for the nine months ended March 29, 2008,
respectively. No other customers have revenues in excess of 10%. The Company
performs credit evaluation procedures on its customers and generally does not
require collateral on its accounts receivable. An allowance for doubtful
accounts is reviewed periodically based on the Company’s historical collection
experience, current trends, credit policy and a percentage of accounts
receivable by aging category. At March 28, 2009 the Company had two customers
that accounted for 14.2% and 11.4% of the Company’s total trade accounts
receivable, and at June 28, 2008, no single customer had an account receivable
balance greater than 10% of the Company’s total trade accounts
receivable.





Comprehensive
Loss





Comprehensive
loss was $30.4 million and $25.5 million for the nine months ended March 28,
2009 and March 29, 2008, respectively. The difference between net loss and
comprehensive loss in each respective period relates to foreign currency
translation adjustments. All assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date. The resulting translation adjustments are recorded as foreign currency
translation adjustments, a component ofAccumulated other comprehensive
losswithin theShareholders’ deficit section of theConsolidated Balance Sheets.
Income and expense items are translated at average exchange rates for the
period.





Loss
Per Share





Basic
loss per share is computed by dividing net loss applicable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or other obligations to issue common stock such as options,
warrants or convertible preferred stock, were exercised or converted into common
stock that then shared in the earnings of the Company.   For each
period presented, diluted loss per share is equal to basic loss per share
because the effect of including such securities or obligations would have been
antidilutive.





The
following table presents a reconciliation of the numerators and denominators of
basic and diluted loss per share:





Three
      Months Ended
                
                
                Nine
      Months EndedMarch
      28,
                
                
                March
      29,
                
                
                March
      28,
                
                
                March
      29,2009
                
                
                2008
                
                
                2009
                
                
                2008(Amounts
      in thousands, except per share data)
                
                
                (Amounts
      in thousands, except per share data)eNumerator:Net
      loss
                
                $
                (11,422
                )
                
                $
                (8,786
                )
                
                $
                (30,358
                )
                
                $
                (25,218
                )Beneficial
      conversion feature for Series N Preferred
                
                
                (56
                )
                
                
                (45
                )
                
                
                (163
                )
                
                
                (243
                )Beneficial
      conversion feature for Series O Preferred
                
                
                (9
                )
                
                
                (35
                )
                
                
                (15
                )
                
                
                (131
                )Beneficial
      conversion feature for Series P Preferred
                
                
                (81
                )
                
                
                (68
                )
                
                
                (239
                )
                
                
                (328
                )Beneficial
      conversion feature for Series Q Preferred
                
                
                (958
                )
                
                
                (561
                )
                
                
                (2,852
                )
                
                
                (3,041
                )Series
      M Preferred dividends paid-in-kind
                
                
                (232
                )
                
                
                (217
                )
                
                
                (684
                )
                
                
                (746
                )Series
      N Preferred dividends paid-in-kind
                
                
                (51
                )
                
                
                (47
                )
                
                
                (149
                )
                
                
                (156
                )Series
      O Preferred dividends paid-in-kind
                
                
                (8
                )
                
                
                (33
                )
                
                
                (12
                )
                
                
                (109
                )Series
      P Preferred dividends paid-in-kind
                
                
                (110
                )
                
                
                (105
                )
                
                
                (326
                )
                
                
                (378
                )Series
      Q Preferred dividends paid-in-kind
                
                
                (761
                )
                
                
                (716
                )
                
                
                (2,007
                )
                
                
                (2,144
                )Net
      loss applicable to common shareholders
                
                $
                (13,688
                )
                
                $
                (10,613
                )
                
                $
                (36,805
                )
                
                $
                (32,494
                )Denominator
      for basic and diluted loss per share:Weighted
      average common stock shares outstanding
                
                
                3,668
                
                
                
                2,807
                
                
                
                3,437
                
                
                
                2,761Basic
      and Diluted Loss Per Share
                
                $
                (3.73
                )
                
                $
                (3.78
                )
                
                $
                (10.71
                )
                
                $
                (11.77
                )







8





The
following table presents securities that could be converted into common shares
and potentially dilute basic earnings per share in the future. As of March 28,
2009 and March 29, 2008, the potentially dilutive securities were not included
in the computation of diluted loss per share because to do so would have been
antidilutive:





March
      28,
                
                
                March
      29,2009
                
                
                2008(Amounts
      in thousands)Stock
      options
                
                
                28
                
                
                
                28Common
      stock warrants
                
                
                1,905
                
                
                
                1,929Convertible
      preferred stock:Series
      M Convertible Preferred
                
                
                671
                
                
                
                495Series
      N Convertible Preferred
                
                
                127
                
                
                
                93Series
      O Convertible Preferred
                
                
                16
                
                
                
                71Series
      P Convertible Preferred
                
                
                499
                
                
                
                369Series
      Q Convertible Preferred
                
                
                4,022
                
                
                
                2,9907,268
                
                
                
                5,975





New
Accounting Pronouncements





In
September 2006, the FASB issued SFAS No.157, Fair Value Measurements(“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. We
adopted the provisions of SFAS 157 as of June 29, 2008. The adoption of SFAS 157
did not have a material impact on our financial condition.





In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”).  SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value at specific election dates. SFAS 159’s objective is to
improve financial reporting by reducing both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 requires companies to provide
additional information that will help users of financial statements to more
easily understand the effect of the Company’s choice to use fair value on its
earnings. SFAS 159 also requires companies to display the fair value of those
assets and liabilities for which the company has chosen to use fair value on the
face of the balance sheet. The new standard does not eliminate disclosure
requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in SFAS 157,and SFAS 107, Disclosures about Fair Value of
Financial Instruments.  The Company has not elected to measure
any assets or liabilities at fair value that are not already measured at fair
value under existing standards.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”). SFAS 141(R) requires most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at “full fair value.” The statement applies to all business
combinations, including combinations among mutual enterprises. SFAS 141(R)
requires all business combinations to be accounted for by applying the
acquisition method and is effective for periods beginning on or after December
15, 2008, with early adoption prohibited.





In June
2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock (EITF
07-5).  EITF 07-5 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions.   EITF 07-5 is
effective for fiscal years beginning after December 15, 2008.  The
consensus must be applied to outstanding instruments as of the beginning of the
fiscal year in which the consensus
is adopted and should be treated as a cumulative-effect adjustment to the
opening balance of retained earnings. Early adoption is not permitted. The
Company is in the process of evaluating the impacts, if any, of adopting this
EITF.


9





3.
            
            RESTRUCTURING
      LIABILITIES





A summary
of the restructuring liabilities and the activity for the nine-month period
ended March 28, 2009 is as follows (amounts in thousands):





Restructuring
                
                
                
                
                
                
                
                
                Adjustments
                
                
                RestructuringLiabilities
                
                
                Restructuring
                
                
                
                
                
                and
      Changes
                
                
                LiabilitiesJune
      28, 2008
                
                
                Costs
                
                
                Payments
                
                
                in
      Estimates
                
                
                March
      28, 2009Employee
      termination benefits
                
                $
                7
                
                
                $
                -
                
                
                $
                (3
                )
                
                $
                -
                
                
                $
                4Lease
      termination costs
                
                
                514
                
                
                
                -
                
                
                
                (265
                )
                
                
                51
                
                
                
                300$
                521
                
                
                $
                -
                
                
                $
                (268
                )
                
                $
                51
                
                
                $
                304





4.
            
            DEBT





Revolving
Credit Facility





On March
13, 2009, the Company and some of its domestic subsidiaries entered into a
senior secured revolving credit agreement (the ”Agreement”) with a syndicate of
lenders led by Burdale Capital Finance, Inc. (“Burdale”).  Burdale is
the administrative agent under the revolving credit agreement, proceeds from
which were used to satisfy outstanding borrowings under the Wells revolving
credit agreement described below.  The revolving credit agreement, as
amended, matures on the earlier of (a) March 13, 2012, (b) March 31, 2010, so
long as the maturity date of the Senior Secured Notes has not been extended past
June 30, 2010 in a manner acceptable to Burdale, (c) 90 days prior to the
maturity date of the Modified Senior Notes if the maturity date of the Modified
Senior Notes has been extended to a date later than June 30, 2010 in a manner
acceptable to Burdale, (d) the acceleration of all obligations pursuant to the
terms of this Agreement or (e) the date on which this Agreement shall be
terminated in accordance with the provisions hereof or by operation of law. Each
of the Company’s subsidiaries (other than CD&L, the Company’s inactive
subsidiaries, the Company’s  franchising subsidiary, and foreign
subsidiaries) is a borrower under the revolving credit agreement, as amended,
and the Company and all of its domestic subsidiaries have guaranteed the
borrowers’ obligations under the revolving credit agreement, as amended. The
borrowers’ obligations are joint and several. Borrowings under the revolving
credit agreement, as amended, are secured by substantially all of the assets of
each borrower and each guarantor. The revolving credit agreement, as amended,
provides for up to $12.0 million of aggregate financing, $7.5 million of which
may be in the form of letters of credit.





Borrowings
under the Agreement bear interest at a rate equal to a base rate plus an
applicable margin of 4.00%. The base rate equals the highest of (a) the “prime rate” announced
from time to time by JPMorgan Chase Bank (or any successor to the foregoing or,
if such rate ceases to be so published, as quoted from such other generally
available and recognizable source as Burdale may select) as its “prime rate”,
subject to each increase or decrease in such prime rate, effective as of the day
any such change occurs, (b) the Federal Funds Effective Rate (as defined in the
Agreement) from time to time plus one-half of one (0.50) percentage point, (c)
LIBOR (under certain conditions) on such day plus one (1) percentage point and
(d) 4.25%. The Company’s borrowing rate at March 28, 2009 was
8.25%.  The Company had one letter of credit issued for $14,250 and
$1.5 million of unused availability under the Agreement at March 28,
2009.





The
revolving credit agreement, as amended, contains a number of customary covenants
that, among other things, restrict the borrowers’ and guarantors’ ability to
incur additional debt, create liens on assets, sell assets, pay dividends,
engage in mergers and acquisitions, change the business conducted by the
borrowers or guarantors, make capital expenditures and engage in transactions
with affiliates. The revolving
credit agreement, as amended, also includes specified financial covenants
requiring the borrowers to achieve a minimum Adjusted EBITDA (as defined in the
amended revolving credit agreement), measured at the end of each fiscal
month,  and to certify compliance on a monthly
basis.


10





For 13 of
the 41 days in the period from March 16, 2009 to May 6, 2009, borrowings under
the Burdale revolving credit facility were permitted to exceed the maximum
borrowings as calculated under the revolving credit agreement due to
discretionary decreases in availability blocks by Burdale.  On May 12,
2009, the Company entered into the first amendment to the revolving credit
facility to, among other things, temporarily reduce the availability blocks and
revise the minimum Adjusted EBITDA targets.





Repayment
of Wells Revolving Credit Facility





Prior to
March 13, 2009, the Company maintained a revolving credit facility with Wells
Fargo Foothill, Inc. (”Wells”) that allowed for borrowings up to $25 million.
Interest was payable monthly at a rate equal to, at the borrowers’ option,
either a base rate plus an applicable margin of 3.5%, or a LIBOR rate plus an
applicable margin of 6.0%. On March 13, 2009, the Wells revolving credit
facility was repaid with the proceeds from the Burdale revolving credit facility
(discussed above). In connection with the debt financing, the Company expensed
the remaining unamortized finance costs of $0.3 million as a loss from the
extinguishment of debt.





Prior to
closing, the Company paid $2.5 million in cash to collateralize its
participation in the captive insurance company that provides certain of its
insurance coverage reducing the letter of credit previously in place to secure
these obligations to zero.




Long
Term Debt





Long-term
debt consists of the following:





March
      28,
                        
                        
                        June
      28,2009
                        
                        
                        2008(Amounts
      in thousands)Modified
      Senior Notes, net of discount of $25,270 and $40,482,
      respectively
                        
                        $
                        73,671
                        
                        
                        $
                        45,543Capital
      leases
                        
                        
                        1,494
                        
                        
                        
                        1,969Other
                        
                        
                        136
                        
                        
                        
                        13875,301
                        
                        
                        
                        47,650Current
      maturities
                        
                        
                        (910
                        )
                        
                        
                        (1,152
                        )Total
      long term debt
                        
                        $
                        74,391
                        
                        
                        $
                        46,498





Modified
Senior Notes





The
Company is accreting the difference between the carrying amount of the Modified
Senior Notes ($73.7 million and $45.5 million at March 28, 2009 and June 28,
2008, respectively) and their face value ($98.9 million and $86.0 million at
March 28, 2009 and June 28, 2008, respectively) over the remaining term using
the effective interest method. Total accretion in the three and nine month
periods ended March 28, 2009 was $5.1 million and $15.2 million, respectively.
Total accretion in the three and nine month periods ended March 29, 2008 was
$2.0 million and $5.9 million, respectively.





The
Modified Senior Notes bear interest at an annual rate of 18% at March 28,
2009.  They may be redeemed at the Company’s option after June 30,
2009, upon payment of the then applicable redemption price. The Company may also
redeem up to 35% of the aggregate principal amount of the Modified Senior Notes
with proceeds derived from the sale of Velocity Express capital stock. The
Company may also redeem Modified Senior Notes with proceeds derived from the
exercise of warrants subject to specified limits.
In each instance, the optional redemption price is 106% of face value if the
redemption occurs between June 30, 2007 and June 29, 2009; and 100% if the
redemption occurs thereafter.


11





A second
supplemental indenture, dated December 22, 2006, prohibits the payment of
mandatory redemption of Original Senior Notes if there are outstanding
obligations under the revolving credit facility, as amended.





On July
25, 2007, the Company entered into a third supplemental indenture modifying the
indenture governing the Original Senior Notes. An allonge to the existing Senior
Notes raised the interest rate payable on the Notes from 12.0% to
13.0%.





On May
19, 2008, the holders of our Original Senior Notes due 2010 (the “Note Holders”)
consented to a fourth supplemental indenture modifying the indenture governing
the Original Senior Notes. The supplemental indenture (1) allowed for interest
payments due in June 2008 ($5.7 million) and December 2008 ($8.2 million) to be
paid-in-kind, instead of cash, (2) allows for one half of the interest payments
(9%) due in 2009 to be paid-in-kind, instead of cash, (3) at the option of
holder, up to 50% of PIK interest to be paid in registered common shares at
volume weighted average price (“VWAP”) not less than the current market of $0.88
on the date the agreement was reached, (4) required issuance of an additional
$7.8 million face value of the Senior Notes for a total of $86.0 million face
value then outstanding at May 19, 2008, (5) increased the interest rate to 18%,
(6) reduced the exercise price of the warrants originally issued with the
Original Senior Notes in July 2006 by $16.21, from $17.56 to $1.35 per share,
(7) required the issuance of additional warrants equal to 15% of the common
stock of the Company to holders at $0.88 per share (which was the greater of
105% VWAP or $0.88) with a forced conversion feature at 150% of the initial
conversion price, (8) replaced existing financial covenants with a $3.0 million
minimum cash covenant, and $26.0 million minimum cash plus accounts receivable
covenant, and a minimum quarterly trailing twelve months Adjusted EBITDA
covenant, (9) waived the Note Holders’ right of first refusal to replace the
Wells Fargo Foothill revolving credit facility, (10) defines the terms under
which replacement financing for the Company’s revolving credit facility is
permitted, (11) committed any and all proceeds from certain litigation to
prepayment of the Modified Senior Notes subject to the rights of the revolving
credit facility provider, (12) permits the sale or licensing of the Company’s
technology for use outside of North America, with certain proceeds or revenue
from such sale or licensing committed to prepayment of the Modified Senior Notes
subject to the rights of the revolving credit facility provider, (13) permits
the sale of certain non-core business units with certain proceeds from such
sales committed to prepayment of the Modified Senior Notes subject to the rights
of the revolving credit facility provider, (14) reduced certain executive pay,
and (15) provides for two-thirds (2/3rds) majority of the Note Holders of the
then outstanding balance of Modified Senior Notes to consent to modifications or
amendments to the Indenture governing the Modified Senior Notes .





The
Company did not meet its minimum quarterly trailing twelve months Adjusted
EBITDA covenant for the period ended December 27, 2008, its minimum cash and
cash equivalents requirement for the months ended October 25, 2008, November 22,
2008, and January 24, 2009, and its minimum cash, cash equivalents and qualified
accounts receivable requirement for the months ended October 25, 2008, November
22, 2008, December 27, 2008, January 24, 2009, and February 21, 2009, contained
in the indenture and its supplements.





The fifth
supplemental indenture, among other things, (1) waived the covenant violations
noted above, (2) replaced certain existing financial covenants with a lower
quarterly trailing twelve months Adjusted EBITDA covenant, a $20.0 million
minimum cash plus accounts receivable covenant, and increased the limit on
purchase money obligations and capital lease obligations to $2.75 million in the
aggregate, (3) permitted the Company to enter into a $12.0 million revolving
credit facility with Burdale, and (4) provides that the Company shall hire an
investment banker to conduct a sale of all or substantially all of the Modified
Senior Notes and/or the Company and/or the assets of the Company.  The
Note Holders were paid $0.5 million and will receive 50% of the first $2.0
million of net proceeds from certain litigations as consideration for their
consent.





The
Company did not meet its minimum cash and cash equivalents requirement contained
in the Indenture and its supplements for the months ended February 21, 2009 and
March 28, 2009.


12





On June
30, 2008, the Company issued $5.3 million face value of Modified Senior Notes
and 377,154 shares of common stock as settlement of interest accrued on the
Modified Senior Notes in accordance with the fourth supplemental
indenture.  On December 30, 2008, the Company issued $7.7 million face
value of Modified Senior Notes and certain Note Holders elected to receive
another $0.4 million of PIK interest in the form of approximately 612,232 shares
of common stock as settlement of interest accrued on the Modified Senior Notes
in accordance with the fourth supplemental indenture.





5.
            
            AUTOMOBILE
      AND WORKERS COMPENSATION
LIABILITIES





During
the third quarter of fiscal year 2005 and concluding in December 2006, we
changed our insurance program to policies with minimal or no deductibles from
earlier periods when our policies had various higher deductible levels; and thus
were partially self-insured for automobile and workers’ compensation claims
incurred during that period. The Company is also partially self-insured through
high deductible policies for cargo claims. Provisions for losses expected under
these programs are recorded based upon the Company’s estimates of the aggregate
liability for claims incurred and applicable deductible levels. These estimates
include the Company’s actual experience based on information received from the
Company’s insurance carriers and historical assumptions of development of unpaid
liabilities over time.





The
Company has established accruals for automobile and workers’ compensation
liabilities, and for cargo claims, which it believes are adequate. The Company
reviews these matters, internally and with outside brokers, on a regular basis
to evaluate the likelihood of losses, settlements and litigation related
expenses. The Company has funded settlements and expenses through cash flow and
believes that it will be able to do so going forward. There have not been any
losses that have differed materially from the accrued estimated
amounts.





In
January 2007, the Company began insuring its workers’ compensation risks through
insurance policies with substantial deductibles and retains risk as a result of
its deductibles related to such insurance policies. The Company’s deductible for
workers’ compensation is $500,000 per loss with an annual aggregate stop loss of
approximately $1,600,000. The Company accrues the estimated amounts of uninsured
claims and deductibles related to such insurance retentions for claims that have
occurred in the normal course of business. These accruals are established by
management based upon the recommendations of third party administrators who
perform a specific review of open claims, which include fully developed
estimates of both reported claims and incurred but not reported claims, as of
the balance sheet date. Actual claim settlements may differ materially from
these estimated accrued amounts. As of March 28, 2009 and June 28, 2008, the
Company has accrued approximately $1.5 million for case reserves plus
development reserves and estimated losses incurred, but not
reported.





6.
            
            SHAREHOLDERS’
      EQUITY





Common
stock





During
the three and nine-month periods ended March 28, 2009, the Company issued to the
Note Holders as settlement in part of accrued interest on the Modified Senior
Notes 612,232 and 989,386 shares of common stock with a fair value of
approximately $0.5 million and $0.7 million, respectively.




Warrant
Conversions





During
the first quarter of fiscal 2009, the Company redeemed approximately $0.1
million in face value of Modified Senior Notes as settlement of the exercise
price from the exercise of 101,864 warrants in exchange for 101,864 shares of
common stock. The warrants exercised by the holders of the Modified Senior Notes
had exercise prices of $0.88 and $1.35 per warrant. The shares issued were
recorded at their fair value of approximately $0.1 million resulting in a loss
on debt extinguishment of approximately $7,000 which is recorded in other
expense.





13




A summary
of the status of the Company’s common stock warrants outstanding as of March 28,
2009 and activity during the nine-month period then ended is presented
below:





WeightedWeighted
                
                Average
                AggregateNumber
      of
                
                
                Average
                
                Remaining
                Intrinsic
      ValueWarrants
                
                
                Exercise Price
                
                Contractual Life
                (in thousands)Warrants
      Outanding Begininng of Period
                
                
                2,006,728
                
                
                $
                3.89Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (101,864
                )
                
                
                0.97Forfeit/Expired
                
                
                (76
                )
                
                
                470.92Warrants
      outstanding and exercisable, March 28, 2009
                
                
                1,904,788
                
                
                $
                3.95
                
                1.55
      years
                $4





Preferred
Stock Conversions





During
the three and nine-month periods ended March 28, 2009 the Company issued zero
and 481 shares of common
stock as a result of shareholder conversions of Series M Convertible Preferred
Stock and Series O Convertible Preferred Stock within original terms of each
respective agreement.





7.
            
            COMMITMENTS
      AND CONTINGENCIES





Litigation,
Claims and Assessments





The
Company is subject to legal proceedings and claims that arise in the ordinary
course of its business. The Company determined the amount of its legal accrual
with respect to these matters in accordance with generally accepted accounting
principles based on management’s estimate of the probable liability. In the
opinion of management, none of these legal proceedings or claims is expected to
have a material adverse effect upon the Company’s financial position or results
of operations. However, the impact on cash flows might be material in the
periods such claims are settled and paid.





Office
Depot, Inc., previously one of the Company’s largest customers, terminated its
agreements with the Company in late October 2006. The Company believes that
Office Depot did so in violation of the agreements, which provided for
termination only upon: (a) 60 days prior notice if the termination is without
cause; and (b) if the termination is with cause, then upon 30 days notice, with
the opportunity to cure. Office Depot’s termination was for alleged cause and
provided no opportunity to cure as the termination was effective virtually
immediately.




Consequently,
on Friday, May 4, 2007, the Company filed suit against Office Depot in Superior
Court of Kent County, Delaware. That suit seeks three separate forms of relief.
The first claim is for almost $600,000 for unpaid invoices. The second claim is
for approximately $3.1 million resulting from Office Depot’s failure to pay the
minimums required of it pursuant to the agreements. The third claim is for
damages resulting from the improper termination, including loss of contributions
to the Company’s profit resulting from the alleged improper termination. The
damages for the last claim assume that the improperly cancelled agreements would
have remained in effect at least another year. Office Depot filed its answer on
July 18, 2007. Discovery is ongoing. There is no assurance the Company will be
successful in pursuing this lawsuit, that Office Depot will not file a claim
against us, or that the legal costs in doing so will not outweigh any amounts
received from Office Depot.





14




In
January 2007, two Notices of Assessment seeking payroll taxes were issued by the
California Employment Development Department (the “EDD”) against Velocity
Express, Inc. The first Notice of Assessment covers the period July 1, 2003 to
December 31, 2004. The second Notice of Assessment covers the period of January
1, 2005 to June 30, 2006. In February 2007, the Company filed a Petition for
Reassessment disputing both assessments in their entirety and requesting that
this matter be referred to an administrative law judge for resolution. TheCompanyiscurrentlyintheprocessofresearchingandproducingdocumentsforuseinconnectionwithitsPetitionforReassessment.





In
connection with the CD&L acquisition, the Company assumed the defense of a
class action suit filed in December, 2003 in the Superior Court of the State of
California for the County of Los Angeles, seeking to certify a class of
California based independent contractors from December 1999 to the
present.  The complaint seeks unspecified damages for various
employment related claims, including, but not limited to overtime, minimum wage
claims, and claims for unreimbursed business expenses. CD&L filed an Answer
to their Complaint on or about January 2, 2004 denying all
allegations.  Plaintiff’s motion for Class Certification was granted
in part and denied in part on January 28, 2007.  During the three and
nine-months ended March 28, 2009, the Company recorded benefits of approximately
$0.5 million and $1.5 million resulting from changes in the estimated settlement
liability related to this matter. Discovery on this matter is ongoing and a
trial date has been adjourned to December of 2009.





Nine
purported class action law suits were filed against the Company between December
2007 and July 2008.  These suits, which were filed by a very small
group of independent contractor drivers in six different states, seek
unspecified damages for various unsubstantiated employment related
claims.  In response to the proliferation of these cases, our outside
counsel filed a motion to have the cases consolidated pursuant to federal
multi-district litigation rules.  On October 8, 2008, the U.S.
Judicial Panel on Multidistrict Litigation granted our motion and ordered that
the cases be consolidated for pretrial proceedings.  The Panel ordered
that the cases be consolidated in the Eastern District of
Wisconsin.  At this point, the cases have all been transferred to the
Eastern District of Wisconsin, for further proceedings in that
court.  A non-binding mediation of these cases took place on April 14,
2009 and settlement discussions are ongoing. Unrelated discovery and motion
practice is presently stayed.  Velocity intends to vigorously defend
these suits and has filed answers rejecting all employment based allegations of
the various complaints.





NASDAQ
Compliance




The
Company received notice on June 19, 2008 from the NASDAQ that it was not in
compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid
requirement for the continued listing of our common stock on the NASDAQ. We
initially had a period of 180 days to attain compliance by maintaining a bid
price of $1.00 for ten consecutive trading days.  If we were unable to
demonstrate bid price compliance by the end of the compliance period, but are
found to meet all other initial listing requirements for the NASDAQ, we may
receive an additional 180-day compliance period. If we do not meet compliance
requirements within the second 180-day period, NASDAQ will notify us that our
common stock will be de-listed. Upon receiving this notice, we will file a
current report on Form 8-K with the SEC disclosing that and related
details.




The
Company received another notice on September 5, 2008 from the NASDAQ that we
were not in compliance with the Marketplace Rule 4310(c)(7) regarding the
minimum market value of publicly held shares requirement for the continued
listing of our common stock on the NASDAQ. If we were unable to demonstrate
minimum market value compliance by the end of the compliance period, NASDAQ will
notify us that our common stock will be de-listed.  Upon receiving
this notice, we will file a current report on Form 8-K with the SEC disclosing
that and related details.


15






On
October 16, 2008, the NASDAQ implemented a temporary suspension of bid price and
market value of publicly held shares requirements through Friday, January 16,
2009.  On October 22, 2008, NASDAQ sent the Company two letters to
inform management that it will remain at the same stage of the compliance period
with regard to minimum bid price or minimum market value of publicly held
shares, and upon reinstatement of the rules, it will retain the number of days
remaining in its compliance period of 62 days and 50 days, respectively,
extending the compliance period to March 23, 2009 and March 10, 2009,
respectively.




On
December 19, 2008, the NASDAQ announced that it extended its suspension of the
rules requiring a minimum $1.00 bid price and minimum market value of publicly
held shares until Monday, April 20, 2009.




The
Company received a third notice on October 16, 2008 that the Company is no
longer in compliance with Marketplace Rule 4310(c)(3) requiring the Company to
maintain a minimum of $2.5 million in stockholders’ equity. As provided in the
NASDAQ rules, the Company submitted a response to the NASDAQ staff on October
31, 2008, outlining a specific plan and timeline to achieve and sustain
compliance based on the prospective global alliance transactions. Based on the
staff review of the materials submitted, the Staff determined to grant the
Company an extension.  On December 9, 2008, the NASDAQ sent the
Company a letter granting an extension of time to regain compliance with of the
minimum stockholders’ equity requirement until January 29, 2009.




On
February 4, 2009, the Company received a fourth notice from the NASDAQ
containing a staff determination that the Company failed to comply with the $2.5
million stockholders’ equity requirement for continued listing by January 29,
2009 and notifying the Company that trading in the Company’s common stock would
be suspended unless an appeal of their determination was filed.  The
Company filed an appeal on February 11, 2009 requesting a formal hearing on the
matter.




On April
20, 2009, the Company received a fifth notice from the NASDAQ informing the
Company that the NASDAQ Hearings Panel in satisfied that the Company is
actively, diligently and in good faith taking responsible steps to regain
compliance and has decided to grant the request of the Company to remain listed
on the NASDAQ Stock Market through August 3, 2009.




Although
we may regain compliance with the NASDAQ listing requirements, the negative
publicity surrounding the receipt of these notices will likely have a material
adverse effect on the price of our common stock, our ability to raise capital,
whether debt or equity, in the future unless and until this situation is
resolved, and will likely cause a negative perception of, and confidence in, us
by our investors, customers, vendors, creditors and employees. Although we
believe we have done all that we can to maintain our NASDAQ listing, holders of
our preferred stock and certain warrants may claim that we did not use our best
efforts to maintain our NASDAQ listing. We cannot assure you that we will be
successful in regaining compliance with NASDAQ’s listing
requirements.





In the
event of delisting, trading, if any, would be conducted in the over-the-counter
market in the so-called “pink sheets” or on the OTC Bulletin Board. In addition,
our securities could become subject to the SEC’s “penny stock rules.” These
rules would impose additional requirements on broker-dealers who effect trades
in our securities, other than trades with their established customers and
accredited investors. Consequently, the delisting of our securities and the
applicability of the penny stock rules may adversely affect the ability of
broker-dealers to sell our securities, which may adversely affect your ability
to resell our securities. If any of these events take place, you may not be able
to sell as many securities as you desire, you may experience delays in the
execution of your transactions and our securities may trade at a lower market
price than they otherwise would.





8.
            
            RELATED
      PARTY TRANSACTIONS





GCC
Eagles, LLC Contractor Services Agreement





On
November 11, 2008, Velocity contracted with GCC Eagles, LLC (“GCC”) for
consulting and advisory services in connection with the Global Alliance pursuant
to a monthly contractor services agreement whereby Velocity agreed to pay GCC a
non-refundable $25,000 upon execution of the agreement and a monthly fee of
$12,500, plus other incentive compensation upon achievement of certain
actions.  Garrett Stonehouse, managing member and sole owner of GCC
Eagles, LLC, is a partner of MCG Global, LLC.






16




9.
            
            LIQUIDITY





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company reported significant recurring
losses from operations over the past several years including in 2008 a loss of
approximately $56.1 million, which includes a goodwill impairment charge of
$46.7 million and a $13.9 million non-cash gain on the extinguishment of debt,
and for the nine months ended March 28, 2009 a loss of approximately $30.4
million. The Company also used cash in operating activities over the past
several years, including $11.3 million in fiscal 2008 and $1.3 million for the
nine months ended March 28, 2009.  As of March 28, 2009 the Company
has negative working capital deficiency of approximately $22.7 million and a
deficiency in assets of $34.0 million. Further, the Company did not meet the
minimum Adjusted EBITDA levels required by its prior revolving credit agreement
at various times during fiscal 2008 and 2009.  The Company also did
not meet its minimum quarterly trailing twelve months Adjusted EBITDA covenant
for the period ended December 27, 2008, its minimum cash and cash equivalents
requirement and its minimum cash, cash equivalents and qualified accounts
receivable requirements contained in its Indenture and related supplements at
various times during fiscal 2009.  Additionally, the Company’s current
forecast projects that it will be unable to meet its June 2009 minimum Adjusted
EBITDA covenants or make its June interest payment to the Note Holders, both of
which could result in an event of default subject to the stay period as provided
in the intercreditor agreement as described below.  These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern.
 
 The
Company did not meet its minimum quarterly trailing twelve months Adjusted
EBITDA covenant for the period ended December 27, 2008, its minimum cash and
cash equivalents requirement for the months ended October 25, 2008, November 22,
2008, and January 24, 2009, and its minimum cash, cash equivalents and qualified
accounts receivable requirement contained in the Indenture and its supplements
for the months ended October 25, 2008, November 22, 2008, December 27, 2008,
January 24, 2009 and February 21, 2009.
 
 The fifth
supplemental indenture executed on March 13, 2009, among other things, (1)
waived the covenant violations noted above, (2) replaced certain existing
financial covenants with a lower quarterly trailing twelve months Adjusted
EBITDA covenant, a $20.0 million minimum cash plus accounts receivable covenant,
and increased the limit on purchase money obligations and capital lease
obligations to $2.75 million in the aggregate, (3) permitted the Company to
enter into a $12.0 million revolving credit facility with Burdale, and (4)
provides that the Company shall hire an investment banker to conduct a sale of
all or substantially all of the Modified Senior Notes and/or the Company and/or
the assets of the Company.  The Note Holders were paid $0.5 million
and will receive 50% of the first $2.0 million of net proceeds from certain
litigations as consideration for their consent.
 
 The
Company did not meet its minimum cash and cash equivalents requirement for the
months ended February 21, 2009 and March 28, 2009, contained in the Indenture
and its supplements.  We believe the Note Holder will waive the
covenant requirements. Unless waived by the Note Holders, then following
appropriate notice, such non-compliance constitute could constitute an event of
default thirty (30) days after receipt of such notice, which also would trigger
a cross-default under the Burdale revolving credit facility. Under the
intercreditor agreement between the Trustee and Burdale, after receipt by
Burdale of a written declaration of the Trustee on behalf of the Note Holders of
such event of default, the Note Holders would be stayed an additional 150 days
before being able to enforce their liens on a material portion of the
collateral, subject to Burdale’s rights.
 
 The
Company is also required to make the June and December 2009 interest payments to
the Note Holders including cash payments of $4.5 million and $4.7 million,
respectively.   If necessary, in order to facilitate the sales
process mandated under the fifth supplemental indenture, the Company plans to
solicit consents from the Bond Holders to defer or to waive the payment of
interest that is due in cash.  We believe we will receive such
waivers. However, no assurance can be given that the Note Holders will be
receptive to any such request.  In the event the Company is unable to
obtain the necessary waivers from the Note Holders and fails to pay the Note
Holders the June 30, 2009 interest payment by July 30, 2009, the Trustee, on
behalf of the Note Holders, or certain Note Holders may elect to declare the
principal and interest outstanding under the Modified Senior Notes immediately
due and payable and to notify Burdale of the same.  Such event of
default would trigger a cross-default under the Burdale revolving credit
facility. Under the intercreditor agreement between the Trustee and Burdale,
after receipt by Burdale of a written declaration of the Trustee on behalf of
the Note Holders of such event of default, the Note Holders would be stayed 150
days before being able to enforce their liens on a material portion of the
collateral, subject to Burdale’s rights.
 
 For 13 of
the 41 days in the period from March 16, 2009 to May 6, 2009, borrowings under
the Burdale revolving credit facility were permitted to exceed the maximum
borrowings as calculated under the revolving credit agreement due to
discretionary decreases in availability blocks by Burdale.  On May 12,
2009, the Company entered into the first amendment to the revolving credit
facility to, among other things, temporarily reduce the availability blocks and
revise the minimum Adjusted EBITDA targets.
 
 Under the
Company’s current operating plan, it expects positive cash flow over the next
year. Key components of the operating plan include the following:
  17
  •
              
              improving
      gross margins by continued use our integrated route information database
      to: (1) identify and correct driver pay where our average driver
      settlement has exceeded competitive market norms for the work performed
      and (2) identify and implement opportunities to re-design local route
      structures to optimize the number of drivers retained to perform the
      contracted deliveries;
  •
              
              lower
      operating and SG&A expenses primarily by reducing headcount and
      occupancy expenses, and to a lesser degree, changing or eliminating
      services and the related costs associated with telecommunications, vehicle
      expenses, and miscellaneous other
activities;
 
 •
              
              increasing
      profitable revenue growth from recently announced, existing and potential
      customers in targeted markets including new revenue derived from our
      expansion in the retail replenishment business;
  and
 
 •
              
              continuing
      to manage working capital.
 
 In order
to facilitate the sales process mandated under the fifth supplemental indenture,
the Company will need to obtain the necessary consents of its Note Holders and
Burdale to waive its non-compliance with debt covenants and defer or eliminate
the requirement to make the upcoming June 2009 and December 2009 interest
payments in cash to the Note Holders in order for it to have sufficient cash
flow to meet its expected cash needs and satisfy the covenants contained in the
agreements governing its debt (including any minimum Adjusted EBITDA or other
covenants under its amended revolving credit facility with Burdale) in the next
twelve month period.  No assurance can be given that the Note Holders
will be receptive to any such request for waivers.  As of March 28,
2009, the Company had $1.8 million in cash with $1.5 million of unused
availability remaining under its revolving credit facility. Although no
assurances can be given, based on the current operating plan (including the
related assumptions), recent results from operations, and qualitative feedback
from field management since March 28, 2009, the Company believes that if it
obtains relief from its interest obligations, it will be in compliance with its
covenants, including those summarized above, and will continue to meet its
obligations in the ordinary course of business as they become due through March
27, 2010.
 
 As with
any operating plan, there are risks associated with the Company’s ability to
execute it, including the slowing economic environment in which it operates.
Therefore, there can be no assurance that the Company will be able to satisfy
the revised minimum Adjusted EBITDA requirement or other applicable covenants to
its lenders, or achieve the operating improvements described above as
contemplated by the current operating plan. If the Company is unable to execute
this plan in general, it will need to find additional sources of cash not
contemplated by the current operating plan and/or raise additional capital to
sustain continuing operations as currently contemplated. Further, the Company
will take additional actions if necessary to reduce expenses.  In that
case, the Company would need to amend, or seek one or more waivers of, the
minimum Adjusted EBITDA covenant under the credit agreement, as amended, and the
minimum cash and cash equivalents requirement under the fifth supplemental
indenture. If the Company cannot maintain compliance with its covenant
requirements and cannot obtain appropriate waivers and modifications, the
lenders and bondholders may call the debt. If the debt is called, the Company
would need to obtain new financing; there can be no assurance that the Company
will be able to do so. If the Company is unable to achieve its operating plan
and maintain compliance with its loan covenants and its debt is called, the
Company will not be able to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty. For a discussion of these risks and related matters discussed
above, see “Risk Factors.”
 18





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




Certain
statements in this report, and other written or oral statements made by or on
behalf of the Company, may constitute “forward-looking statements” within the
meaning of the federal securities laws. Statements regarding future events and
developments and the Company’s future performance that are not historical facts,
as well as management’s expectations, beliefs, plans, objectives, assumptions
and projections about future events or future performance, are forward looking
statements within the meaning of these laws. Forward-looking statements include
statements that are preceded by, followed by, or include words such as
“believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” or
similar expressions. Forward-looking statements are only predictions and are not
guarantees of performance. These statements are based on beliefs and assumptions
of the Company’s management, which in turn are based on currently available
information. These assumptions could prove inaccurate. Forward-looking
statements are also affected by known and unknown risks that may cause the
actual results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Many of these risks are
beyond the ability of the Company to control or predict. Such factors include,
but are not limited to, the following: we may never achieve or sustain
profitability; we may be unable to fund our future capital needs, and we may
need funds sooner than anticipated; our large customers could reduce or
discontinue using our services; we may be unable to successfully compete in our
markets; we could be exposed to litigation stemming from the accidents or other
activities of our drivers; we could be required to pay withholding taxes and
extend employee benefits to our independent contractors; we have a substantial
amount of debt and preferred stock outstanding, and our ability to operate and
financial flexibility are limited by the agreements governing our debt and
preferred stock; we may be required to redeem our debt at a time when we do not
have the proceeds to do so; and the other risks identified in the section
entitled “Risk Factors” in this Report, as well as in the other documents that
the Company files from time to time with the Securities and Exchange
Commission.





Management
believes that the forward-looking statements contained in this report are
reasonable; however, undue reliance should not be placed on any forward-looking
statements contained herein, which are based on current expectations. Further,
forward-looking statements speak only as of the date they are made, and
management undertakes no obligation to publicly update any of them in light of
new information or future events.





We
present below Management’s Discussion and Analysis of Financial Condition and
Results of Operations of Velocity Express Corporation and its subsidiaries on a
consolidated basis. The following discussion should be read in conjunction with
our historical financial statements and related notes contained elsewhere in
this report.





Overview





The
Company is engaged in the business of providing time definite ground package
delivery services. It operates primarily in the United States with limited
operations in Canada. The Company operates in a single business
segment.





The
Company has one of the largest nationwide logistics solutions in the United
States.  Its customers are comprised of multi-location, blue chip
customers primarily in the healthcare, retail, rapid replenishment sectors and
recently in the postal consolidation area.





The
Company’s service offerings are divided into Small Package Delivery, Pallet
Delivery, Dedicated Delivery, Express Delivery and Business to Postal DDU
Delivery (B2DDU).  All of these services are provided on the
customer’s schedule including very tight time definite delivery
windows.





19


The
Company’s customers represent a variety of industries and utilize our services
across multiple service offerings. Revenue categories and percentages of total
revenue for the nine-month periods ended March 28, 2009 and March 29, 2008 were
as follows:




Nine
      Months EndedMarch
      28, 2009
                  
                  March
      29, 2008Retail
                  
                  39.4%
                  
                  35.6%Healthcare
                  
                  30.9%
                  
                  30.9%Rapid
      Replenishment
                  
                  16.8%
                  
                  20.7%Financial
      Services
                  
                  12.1%
                  
                  12.8%Postal
      Consolidation
                  
                  0.8%
                  
                  0.0%




With the
enactment of the Federal law known as Check 21, on October 28, 2004, financial
services revenue has continued to decline as financial institutions migrate to
electronically scanned and processed checks, without the need to move the
physical documents to the clearing institution. We expect to off-set this
relative decline in revenue in the financial services industry with new revenue
from our expansion in the retail replenishment business and most recently the
postal consolidation sector.  In addition, we believe we will benefit
from the growth in the healthcare industry within the United States, and be able
to effectively leverage our broad coverage footprint and track-and-trace
scanning capabilities to capitalize on this national growth
industry.




For the
nine months ended March 28, 2009, the Company had a net loss of $30.4 million,
and used cash from operations of $1.3 million.





Critical
Accounting Policies and Estimates




The
Company’s discussion and analysis of financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company’s management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company’s management evaluates its estimates, including those related to bad
debts, goodwill, insurance reserves, income taxes, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. For a discussion of the Company’s critical accounting
policies, see the Company’s Annual Report on Form 10-K, as amended, for the year
ended June 28, 2008.




Historical
Results of Operations




Three
Months Ended March 28, 2009 Compared to Three Months Ended March 29,
2008





Revenue
for the quarter ended March 28, 2009 decreased $21.3 million or 26.0% to $60.8
million from $82.2 million for the quarter ended March 29, 2008. The decrease in
revenue was the result of volume declines with continuing customers related to
the slowing U.S. economy ($12.2 million), lower fuel surcharge reimbursement
($3.6 million), our planned exit from uneconomic customer contracts acquired
with the CD&L merger ($4.9 million), other customer service stops ($4.9
million) and the continued migration of banking customers to the Check 21
scanning technology ($2.3 million). These negative changes were partly offset by
new revenue from customer start-ups of $3.4 million and $3.3 million of volume
growth by other continuing customers that are less affected by the slowing U.S.
economy.





Cost of
services for the quarter ended March 28, 2009 was $42.9 million, a decrease of
$18.3 million or 29.9% from $61.3 million for the quarter ended March 29, 2008.
The decrease in volume accounted for a decrease of $13.3 million in driver pay
and purchased transportation and $0.2 million in vehicle
expense.


20


Correcting
a number of specific routes where our average driver settlement exceeded
competitive market norms for the work performed accounted for $2.3 million.Direct labor declined by
$1.0 million, but increased as a percentage of revenue from 7.4% of revenue to
8.3% of revenue as the revenue mix shifted to more deliveries requiring sorting
in our warehouses.  Insurance expense declined $0.3 million primarily
related to the decrease in claims experience and estimated development reserves
related to reserves for auto liability; and cargo claims declined $0.6 million,
partially due to improved reimbursements from responsible drivers, and insurance
recoveries.  The cost of uniforms declined by $0.2 million and there
was another $0.3 million improvement in miscellaneous other
costs.  Offsetting these improvements was increased depreciation of
$0.1 million on the V-Trac 5.0 scanners acquired and deployed to the field, and
the related capitalized software development.  As a result, gross
margin increased from 25.0% in the prior year quarter ended March 29, 2008 to
28.7% for the quarter ended March 28, 2009.





Occupancy
expense for the quarter ended March 28, 2009 was $4.4 million, a decrease of
$0.5 million from the quarter ended March 29, 2008 reflecting reduced rent
expense ($0.3 million) and utility costs ($0.1 million), as well as lower repair
and maintenance costs ($0.1 million).





Selling,
general and administrative expenses for the quarter ended March 28, 2009 were
$13.4 million or 22.0% of revenue, a decrease of $4.2 million or 23.7% as
compared with $17.6 million or 21.4% of revenue for the quarter ended March 29,
2008.  The decrease in SG&A for the quarter resulted primarily
from a reduction in compensation, benefits, and travel expenses resulting from
the two restructuring actions implemented during 2008 in response to the
previously announced loss of the Company’s largest financial services customer
and the continuous recessionary volume declines cited earlier ($3.3 million), a
benefit of $0.6 million resulting from a change in an estimated settlement
liability in 2008, a favorable settlement of approximately $0.5 million, a
decline in equipment and software of approximately $0.3 million, a $0.2 million
reversal in reserve for bad debts, a decline in communication costs of
approximately $0.1 million and a decrease in supplies of $0.1
million.  Offsetting these improvements was an increase in legal fees
of $1.1 million primarily related to representation in the Office Depot suit,
the NICA, Inc. suit, and class action legal defense.





There
were no restructuring charges for the quarter ended March 28, 2009 as compared
to $0.2 million for the quarter ended March 29, 2008.  The
restructuring charges for the quarter ended March 29, 2008 were comprised of
estimated severance costs associated with a workforce reduction
plan.





Depreciation
and amortization for the quarter ended March 28, 2009 was $0.7 million or 1.2%
of revenue, a decrease of $0.7 million or 50.0% as compared with $1.5 million or
1.8% of revenue for the quarter ended March 29, 2008, of which $0.5 million
pertains to a decrease in depreciation as equipment becoming fully depreciated
exceeded depreciation on newly acquired fixed assets, and $0.2 million pertains
to a decrease in amortization expense, as the non-compete intangible assets
became fully amortized.





Net
interest expense for the quarter ended March 28, 2009 increased $5.0 million to
$10.0 million from $5.0 million for the quarter ended March 29, 2008 resulting
from an increase of 6.0% in the interest rate on the Modified Senior Notes, an
additional $7.8 million face value of Modified Senior Notes issued as
consideration for the modification to the indenture governing the Original
Senior Notes in May 2008 earning 18% interest, an additional $13.0 million face
value of Modified Senior Notes issued as settlement in-kind of interest accrued
on the Senior Notes also earning 18% interest, and an increase of 225 basis
points in the interest rate on the revolving credit agreement with Burdale when
compared to the interest rate on the revolving credit agreement with Wells for
the same period last year.





Other
expense for the quarter ended March 28, 2009 was $0.3 million and was comprised
of deferred fees that were written off in conjunction with the repayment and
extinguishment of the prior revolving credit facility.





As a
result of the above, the Company had a net loss of $11.4 million for the quarter
ended March 28, 2009 compared to a net loss of $8.8 million in the quarter ended
March 29, 2008.




Net loss
applicable to common stockholders was $13.7 million for the quarter ended March
28, 2009 compared with $10.6 million for the quarter ended March 29,
2008.  For both quarters, the difference between net loss applicable
to common stockholders and net loss relates to dividends paid-in-kind on Series
M, Series N, Series O, Series P and Series Q Convertible Preferred Stock, and
the beneficial conversion associated with dividends paid-in-kind on Series N,
Series O, Series P and Series Q Convertible Preferred Stock.





21




Nine
Months Ended March 28, 2009 Compared to Nine Months Ended March 29,
2008





Revenue
for the nine months ended March 28, 2009 decreased $62.4 million or 23.9% to
$199.1 million from $261.6 million for the nine months ended March 29, 2008. The
decrease in revenue was the result of volume declines with continuing customers
related to the slowing U.S. economy ($25.0 million), lower fuel surcharge
reimbursement ($4.2 miilion), our planned exit from uneconomic customer
contracts acquired with the CD&L merger ($24.4 million), other customer
service stops ($21.4 million), the continued migration of banking customers to
the Check 21 scanning technology ($7.2 million), and the loss of a significant
bank customer in the second quarter of 2008 ($4.0 million).  These
negative changes were partly offset by new revenue from customer start-ups of
$18.0 million and $5.8 million of volume growth by other continuing customers
that are less affected by the slowing U.S. economy.





Cost of
services for the nine months ended March 28, 2009 was $143.1 million, a decrease
of $53.9 million or 27.3% from $196.9 million for the nine months ended March
29, 2008. The decrease in volume accounted for a decrease of $39.5 million in
driver pay and purchased transportation and $0.5 million in vehicle expense.
Correcting a number of specific routes where our average driver settlement
exceeded competitive market norms for the work performed accounted for $6.1
million.Direct labor
decreased by $2.4 million but increased as a percentage of revenue from 7.0% of
revenue to 8.0% of revenue as the revenue mix shifted to more deliveries
requiring sorting in our warehouses.  Insurance expense declined $1.2
million primarily related to the decrease in claims experience and estimated
development reserves related to reserves for workers’ compensation and auto
liability; decreased umbrella insurance premiums, and cargo claims declined $0.9
million, partially due to improved reimbursements from responsible drivers and
insurance recoveries.  Communication and scanner expenses also
declined by $0.5 million partially due to improved reimbursements from
independent contractor drivers related to the rollout of V-Trac 5.0 scanners
($0.4 million).  Workforce acquisition costs also declined by $0.7
million primarily due to lower advertising ($0.3 million) and lower costs for
uniforms ($0.3 million).  Offsetting these improvements was increased
depreciation of $0.4 million on the V-Trac 5.0 scanners acquired and deployed to
the field, and the related capitalized software development.  As a
result, gross margin increased from 24.4% in the prior year nine-month period to
27.5% for the nine-month period ended March 28, 2009.





Occupancy
expense for the nine months ended March 28, 2009 was $12.6 million, a decrease
of $1.4 million from the nine months ended March 29, 2008 reflecting a $0.4
million recovery from New York City related to the condemnation of one of our
leased facilities, closures of redundant facilities offset with increased costs
for larger new facilities, occupied to accommodate anticipated volume growth
($0.5 million), utility costs ($0.2 million), as well as lower repair and
maintenance costs ($0.1 million).





Selling,
general and administrative expenses for the nine months ended March 28, 2009
were $41.2 million or 20.7% of revenue, a decrease of $13.0 million or 24.0% as
compared with $54.1 million or 20.7% of revenue for the nine months ended March
29, 2008.  The decrease in SG&A resulted primarily from a
reduction in compensation, benefits, and travel expenses resulting from the two
restructuring actions implemented during 2008 in response to the previously
announced loss of the Company’s largest financial services customer and the
continuous recessionary volume declines cited earlier ($9.8 million), a benefit
of $1.6 million resulting from a change in an estimated settlement liability in
2008, two favorable settlements of approximately $0.9 million, a decline in
communication costs of approximately $0.5 million, a decline in equipment and
software of approximately $1.2 million, a decrease in consulting and other
outside services ($0.6 million), a swing of $0.5 million in the reserve for bad
debts,  and a decrease in supplies of $0.4 million. Offsetting these
improvements was an increase in legal fees of $2.2 million primarily related to
representation in the Office Depot suit, the NICA suit, and class action legal
defense.





Integration
costs for the nine months ended March 29, 2008 were $0.5 million as the Company
completed the integration of CD&L in the first quarter of fiscal
2008.





Restructuring
charges for the nine months ended March 28, 2009 were $0.1 million, a decrease
of $0.6 million as compared to $0.7 million for the nine months ended March 29,
2008.  The decrease is comprised of revising the Company’s estimates
of previously recorded lease termination costs associated with prior period
restructurings to a lesser degree in the current nine-month period as compared
to the comparable nine-month period in the prior year plus approximately $0.2
million in severance costs included in the nine-month period ended March 29,
2008, in response to the previously announced loss of the Company’s largest
financial services customer.  There were no individually significant
restructuring actions during the nine months ended March 28, 2009, although the
Company continuously adjusts its operating costs downward in conjunction with
the lower revenue.





22




Depreciation
and amortization for the nine months ended March 28, 2009 was $2.3 million or
1.2% of revenue, a decrease of $2.1 million or 48.0% as compared with $4.5
million or 1.7% of revenue for the nine months ended March 29, 2008, of which
$1.5 million pertains to a decrease in depreciation as equipment becoming fully
depreciated exceeded depreciation on newly acquired fixed assets, and $0.6
million pertains to a decrease in amortization expense, as the non-compete
intangible assets became fully amortized.





Net
interest expense for the nine months ended March 28, 2009 increased $14.1
million to $28.9 million from $14.8 million for the nine months ended March 29,
2008 resulting from an increase of 6% in the interest rate on the Modified
Senior Notes due 2010, an additional $7.8 million face value of Modified Senior
Notes issued as consideration for the modification to the indenture governing
the Original Senior Notes in May 2008 earning 18% interest, and an additional
$13.0 million face value of Modified Senior Notes issued as settlement in-kind
of interest accrued on the Senior Notes also earning 18% interest, and an
increase of 225 basis points in the interest rate on the revolving credit
agreement with Burdale when compared to the interest rate on the revolving
credit agreement with Wells for the same period last year.





Other
expense for the nine months ended March 28, 2009 was $0.3 million and was
comprised of deferred fees that were written off in conjunction with the
repayment and extinguishment of the prior revolving credit
facility.





As a
result of the above, the Company had a net loss of $30.4 million for the nine
months ended March 28, 2009 compared to a net loss of $25.2 million in the nine
months ended March 29, 2008.




Net loss
applicable to common stockholders was $36.8 million for the nine months ended
March 28, 2009 compared with $32.5 million for the nine months ended March 29,
2008.  For the March 28, 2009 nine-month period, the difference
between net loss applicable to common stockholders and net loss relates to
dividends paid-in-kind on Series M, Series N, Series O, Series P and Series Q
Convertible Preferred Stock, and the beneficial conversion associated with
dividends paid-in-kind on Series N, Series O, Series P and Series Q Convertible
Preferred Stock.  In the nine months ended March 29, 2008, the
difference between net loss applicable to common stockholders and net loss
related to the beneficial conversion associated with the anti-dilution
provisions of Series N, Series O, Series P, and Series Q Convertible Preferred
Stock resulting from the modification of warrants, dividends paid-in-kind on
Series M, Series N, Series O, Series P and Series Q Convertible Preferred Stock,
and the beneficial conversion associated with dividends paid-in-kind on Series
N, Series O, Series P and Series Q Convertible Preferred Stock.





Liquidity
and Capital Resources




Overview




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company reported significant recurring
losses from operations over the past several years including in 2008 a loss of
approximately $56.1 million, which includes a goodwill impairment charge of
$46.7 million and a $13.9 million non-cash gain on the extinguishment of debt,
and for the nine months ended March 28, 2009 a loss of approximately $30.4
million. The Company also used cash in operating activities over the past
several years, including $11.3 million in fiscal 2008 and $1.3 million for the
nine months ended March 28, 2009.  As of March 28, 2009 the Company
has negative working capital deficiency of approximately $22.7 million and a
deficiency in assets of $34.0 million. Further, the Company did not meet the
minimum Adjusted EBITDA levels required by its prior revolving credit agreement
at various times during fiscal 2008 and 2009.  The Company also did
not meet its minimum quarterly trailing twelve months Adjusted EBITDA covenant
for the period ended December 27, 2008, its minimum cash and cash equivalents
requirement and its minimum cash, cash equivalents and qualified accounts
receivable requirements contained in its Indenture and related supplements at
various times during fiscal 2009.  Additionally, the Company’s current
forecast projects that it will be unable to meet its June 2009 minimum
Adjusted EBITDA covenants or make its June interest payment to the Note Holders,
both of which could result in an event of default subject to the stay period as
provided in the intercreditor agreement as described below.  These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern.




23


The
Company did not meet its minimum quarterly trailing twelve months Adjusted
EBITDA covenant for the period ended December 27, 2008, its minimum cash and
cash equivalents requirement for the months ended October 25, 2008, November 22,
2008, and January 24, 2009, and its minimum cash, cash equivalents and qualified
accounts receivable requirement contained in the Indenture and its supplements
for the months ended October 25, 2008, November 22, 2008, December 27, 2008,
January 24, 2009 and February 21, 2009.
 
 The fifth
supplemental indenture executed on March 13, 2009, among other things, (1)
waived the covenant violations noted above, (2) replaced certain existing
financial covenants with a lower quarterly trailing twelve months Adjusted
EBITDA covenant, a $20.0 million minimum cash plus accounts receivable covenant,
and increased the limit on purchase money obligations and capital lease
obligations to $2.75 million in the aggregate, (3) permitted the Company to
enter into a $12.0 million revolving credit facility with Burdale, and (4)
provides that the Company shall hire an investment banker to conduct a sale of
all or substantially all of the Modified Senior Notes and/or the Company and/or
the assets of the Company.  The Note Holders were paid $0.5 million
and will receive 50% of the first $2.0 million of net proceeds from certain
litigations as consideration for their consent.
 
 The
Company did not meet its minimum cash and cash equivalents requirement for the
months ended February 21, 2009 and March 28, 2009, contained in the Indenture
and its supplements.  Unless waived by the Note Holders, then
following appropriate notice, such non-compliance constitute could constitute an
event of default thirty (30) days after receipt of such notice, which also would
trigger a cross-default under the Burdale revolving credit facility. Under the
intercreditor agreement between the Trustee and Burdale, after receipt by
Burdale of a written declaration of the Trustee on behalf of the Note Holders of
such event of default, the Note Holders would be stayed an additional 150 days
before being able to enforce their liens on a material portion of the
collateral, subject to Burdale’s rights.
 
 The
Company is also required to make the June and December 2009 interest payments to
the Note Holders including payments of $4.5 million and $4.7 million in
cash.   If necessary, in order to facilitate the sales process
mandated under the fifth supplemental indenture, the Company plans to solicit
consents from the Bond Holders to defer or to waive the payment of interest that
is due in cash. No assurance can be given that the Note Holders will be
receptive to any such request.  In the event the Company is unable to
obtain the necessary waivers from the Note Holders and fails to pay the Note
Holders the June 30, 2009 interest payment by July 30, 2009, the Trustee, on
behalf of the Note Holders, or certain Note Holders may elect to declare the
principal and interest outstanding under the Modified Senior Notes immediately
due and payable and to notify Burdale of the same.  Such event of
default would trigger a cross-default under the Burdale revolving credit
facility. Under the intercreditor agreement between the Trustee and Burdale,
after receipt by Burdale of a written declaration of the Trustee on behalf of
the Note Holders of such event of default, the Note Holders would be stayed 150
days before being able to enforce their liens on a material portion of the
collateral, subject to Burdale’s rights.
 
 For 13 of
the 41 days in the period from March 16, 2009 to May 6, 2009, borrowings under
the Burdale revolving credit facility were permitted to exceed the maximum
borrowings as calculated under the revolving credit agreement due to
discretionary decreases in availability blocks by Burdale.  On May 12,
2009, the Company entered into the first amendment to the revolving credit
facility to, among other things, temporarily reduce the availability blocks and
revise the minimum Adjusted EBITDA targets.
 
 Under the
Company’s current operating plan, it expects positive cash flow over the next
year. Key components of the operating plan include the following:
  •
              
              improving
      gross margins by continued use our integrated route information database
      to: (1) identify and correct driver pay where our average driver
      settlement has exceeded competitive market norms for the work performed
      and (2) identify and implement opportunities to re-design local route
      structures to optimize the number of drivers retained to perform the
      contracted deliveries;
  •
              
              lower
      operating and SG&A expenses primarily by reducing headcount and
      occupancy expenses, and to a lesser degree, changing or eliminating
      services and the related costs associated with telecommunications, vehicle
      expenses, and miscellaneous other
activities;
 
 •
              
              increasing
      profitable revenue growth from recently announced, existing and potential
      customers in targeted markets including new revenue derived from our
      expansion in the retail replenishment business;
  and
 
 •
              
              continuing
      to manage working capital.
 
  24
  
 In order
to facilitate the sales process mandated under the fifth supplemental indenture,
the Company will need to obtain the necessary consents of its Note Holders and
Burdale to waive its non-compliance with debt covenants and defer or eliminate
the requirement to make the upcoming June 2009 and December 2009 interest
payments in cash to the Note Holders in order for it to have sufficient cash
flow to meet its expected cash needs and satisfy the covenants contained in the
agreements governing its debt (including any minimum Adjusted EBITDA or other
covenants under its amended revolving credit facility with Burdale) in the next
twelve month period.  No assurance can be given that the Note Holders
will be receptive to any such request for waivers.  As of March 28,
2009, the Company had $1.8 million in cash with $1.5 million of unused
availability remaining under its revolving credit facility. Although no
assurances can be given, based on the current operating plan (including the
related assumptions), recent results from operations, and qualitative feedback
from field management since March 28, 2009, the Company believes that if it
obtains relief from its interest obligations, it will be in compliance with its
covenants, including those summarized above, and will continue to meet its
obligations in the ordinary course of business as they become due through March
27, 2010.
 
 As with
any operating plan, there are risks associated with the Company’s ability to
execute it, including the slowing economic environment in which it operates.
Therefore, there can be no assurance that the Company will be able to satisfy
the revised minimum Adjusted EBITDA requirement or other applicable covenants to
its lenders, or achieve the operating improvements described above as
contemplated by the current operating plan. If the Company is unable to execute
this plan in general, it will need to find additional sources of cash not
contemplated by the current operating plan and/or raise additional capital to
sustain continuing operations as currently contemplated. Further, the Company
will take additional actions if necessary to reduce expenses.  In that
case, the Company would need to amend, or seek one or more waivers of, the
minimum Adjusted EBITDA covenant under the credit agreement, as amended, and the
minimum cash and cash equivalents requirement under the fifth supplemental
indenture. If the Company can not maintain compliance with its covenant
requirements and can not obtain appropriate waivers and modifications, the
lenders and bondholders may call the debt. If the debt is called, the Company
would need to obtain new financing; there can be no assurance that the Company
will be able to do so. If the Company is unable to achieve its operating plan
and maintain compliance with its loan covenants and its debt is called, the
Company will not be able to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty. For a discussion of these risks and related matters discussed
above, see “Risk Factors.”




Operating
Activities, Investing Activities & Financing Activities




During
the nine months ended March 28, 2009, the net decrease in cash was $2.4 million
compared to a net decrease of $8.5 million during the nine months ended March
29, 2008. As reported in our consolidated statements of cash flows, the decrease
in cash during the nine-month periods ended March 28, 2009 and March 29, 2008 is
summarized as follows (in thousands):





Nine
      months EndedMarch
      28,
                  2009
                
                
                March
      29,
                  2008Net
      cash used in operating activities
                
                $
                (1,325
                )
                
                $
                (11,934
                )Net
      cash used in investing activities
                
                
                (776
                )
                
                
                (1,093
                )Net
      cash (used in) provided by financing activities
                
                
                (302
                )
                
                
                4,508Total
      decrease in cash
                
                $
                (2,403
                )
                
                $
                (8,519
                )




Cash used
in operations was $1.3 million for the nine months ended March 28, 2009. This
use of cash was comprised of a net loss of $30.4 million offset by non-cash
expenses of $20.1 million and working capital changes of $8.9 million. The
increase in cash from working capital changes includes a decrease in accounts
receivable of $6.4 million, and an increase in accrued expenses of $6.7 million
partly offset by $2.5 million of cash paid to collateralize the Company’s
participation in the captive insurance company that provides
certain of its insurance coverage reducing the letter of credit previously in
place to secure these obligations to zero, an increase of $1.5 million in other
prepaid insurance and other current assets, and a decrease in accounts payable
of $0.2 million.


25






Cash used
in investing activities was $0.7 million for the nine months ended March 28,
2009 and consisted of capital expenditures.




Cash
used in financing activities for the nine months ended March 28, 2009 was $0.3
million.  Proceeds of $8.5 million from the Burdale replacement
revolving credit facility, net of financing fees, were used to fund the
repayment of $7.9 million outstanding under the previous Wells revolving credit
facility, and $0.9 million was used to pay capital leases.





Revolving
Credit Facility





On March
13, 2009, the Company and some of its domestic subsidiaries entered into a
senior secured revolving credit agreement (the ”Agreement”) with a syndicate of
lenders led by Burdale Capital Finance, Inc. (“Burdale”).  Burdale is
the administrative agent under the revolving credit agreement, proceeds from
which were used to satisfy outstanding borrowings under the Wells revolving
credit agreement described below.  The revolving credit agreement, as
amended, matures on the earlier of (a) March 13, 2012, (b) March 31, 2010, so
long as the maturity date of the Senior Secured Notes has not been extended past
June 30, 2010 in a manner acceptable to Burdale, (c) 90 days prior to the
maturity date of the Modified Senior Notes if the maturity date of the Modified
Senior Notes has been extended to a date later than June 30, 2010 in a manner
acceptable to Burdale, (d) the acceleration of all obligations pursuant to the
terms of this Agreement or (e) the date on which this Agreement shall be
terminated in accordance with the provisions hereof or by operation of law. Each
of the Company’s subsidiaries (other than CD&L, the Company’s inactive
subsidiaries, the Company’s  franchising subsidiary, and foreign
subsidiaries) is a borrower under the revolving credit agreement, as amended,
and the Company and all of its domestic subsidiaries have guaranteed the
borrowers’ obligations under the revolving credit agreement, as amended. The
borrowers’ obligations are joint and several. Borrowings under the revolving
credit agreement, as amended, are secured by substantially all of the assets of
each borrower and each guarantor. The revolving credit agreement, as amended,
provides for up to $12.0 million of aggregate financing, $7.5 million of which
may be in the form of letters of credit.





Borrowings
under the Agreement bear interest at a rate equal to a base rate plus an
applicable margin of 4.00%. The base rate equals the highest of (a) the “prime rate” announced
from time to time by JPMorgan Chase Bank (or any successor to the foregoing or,
if such rate ceases to be so published, as quoted from such other generally
available and recognizable source as Burdale may select) as its “prime rate”,
subject to each increase or decrease in such prime rate, effective as of the day
any such change occurs, (b) the Federal Funds Effective Rate (as defined in the
Agreement) from time to time plus one-half of one (0.50) percentage point, (c)
LIBOR (under certain conditions) on such day plus one (1) percentage point and
(d) 4.25%. The Company’s borrowing rate at March 28, 2009 was
8.25%.  The Company had one letter of credit issued for $14,250 and$1.5 million of unused availability under the Agreement at March 28,
2009.





The
revolving credit agreement, as amended, contains a number of customary covenants
that, among other things, restrict the borrowers’ and guarantors’ ability to
incur additional debt, create liens on assets, sell assets, pay dividends,
engage in mergers and acquisitions, change the business conducted by the
borrowers or guarantors, make capital expenditures and engage in transactions
with affiliates. The revolving credit agreement, as amended, also includes
specified financial covenants requiring the borrowers to achieve a minimum
Adjusted EBITDA (as defined in the amended revolving credit agreement), measured
at the end of each fiscal month,  and to certify compliance on a
monthly basis.





For 13 of
the 41 days in the period from March 16, 2009 to May 6, 2009, borrowings under
the Burdale revolving credit facility were permitted to exceed the maximum
borrowings as calculated under the revolving credit agreement due to
discretionary decreases in availability blocks by Burdale.  On May 12,
2009, the Company entered into the first amendment to the revolving credit
facility to, among other things, temporarily reduce the availability
blocks.





26


Modified
Senior Notes





The
Modified Senior Notes bear interest at an annual rate of 18% at March 28, 2009.
They may be redeemed at the Company’s option after June 30, 2009, upon payment
of the then applicable redemption price. The Company may also redeem up to 35%
of the aggregate principal amount of the Modified Senior Notes with proceeds
derived from the sale of Velocity capital stock. The Company may also redeem
Modified Senior Notes with proceeds derived from the exercise of warrants
subject to specified limits. In each instance, the optional redemption price is
106% of face value if the redemption occurs between June 30, 2007 and June 29,
2009; and 100% if the redemption occurs thereafter.





A second
supplemental indenture, dated December 22, 2006, prohibits the payment of
mandatory redemption of Original Senior Notes if there are outstanding
obligations under the revolving credit facility, as amended.





On July
25, 2007, the Company entered into a third supplemental indenture modifying the
indenture governing the Original Senior Notes. An allonge to the existing Senior
Notes raised the interest rate payable on the Notes from 12.0% to
13.0%.





On May
19, 2008, the holders of our Original Senior Notes due 2010 (the “Note Holders”)
consented to a fourth supplemental indenture modifying the indenture governing
the Original Senior Notes. The supplemental indenture (1) allows for interest
payments due in June 2008 ($5.7 million) and December 2008 ($8.2 million) to be
paid-in-kind, instead of cash, (2) allows for one half of the interest payments
(9%) due in 2009 to be paid-in-kind, instead of cash, (3) at the option of
holder, up to 50% of PIK interest to be paid in registered common shares at
volume weighted average price (“VWAP”) not less than the current market of $0.88
on the date the agreement was reached, (4) required issuance of an additional
$7.8 million face value of the Senior Notes for a total of $86.0 million face
value then outstanding at May 19, 2008, (5) increased the interest rate to 18%,
(6) reduced the exercise price of the warrants originally issued with the
Original Senior Notes in July 2006 by $16.21, from $17.56 to $1.35 per share,
(7) required the issuance of additional warrants equal to 15% of the common
stock of the Company to holders at $0.88 per share (which was the greater of
105% VWAP or $0.88) with a forced conversion feature at 150% of the initial
conversion price, (8) replaced existing financial covenants with a $3.0 million
minimum cash covenant, and $26.0 million minimum cash plus accounts receivable
covenant, and a minimum quarterly trailing twelve months EBITDA covenant, (9)
waived the Note Holders’ right of first refusal to replace the Wells Fargo
Foothill revolving credit facility, (10) defines the terms under which
replacement financing for the Company’s revolving credit facility is permitted,
(11) committed any and all proceeds from certain litigation to prepayment of the
Modified Senior Notes subject to the rights of the revolving credit facility
provider, (12) permits the sale or licensing of the Company’s technology for use
outside of North America, with certain proceeds or revenue from such sale or
licensing committed to prepayment of the Modified Senior Notes subject to the
rights of the revolving credit facility provider, (13) permits the sale of
certain non-core business units with certain proceeds from such sales committed
to prepayment of the Modified Senior Notes subject to the rights of the
revolving credit facility provider, (14) reduced certain executive pay, and (15)
provides for two-thirds (2/3rds) majority of the Note Holders of the then
outstanding balance of Modified Senior Notes to consent to modifications or
amendments to the Indenture governing the Modified Senior Notes.





The
Company did not meet its minimum quarterly trailing twelve months EBITDA
covenant for the period ended December 27, 2008, its minimum cash and cash
equivalents requirement for the months ended October 25, 2008, November 22,
2008, and January 24, 2009, and its minimum cash, cash equivalents and qualified
accounts receivable requirement for the months ended October 25, 2008, November
22, 2008, December 27, 2008, January 24, 2009, and February 21, 2009, contained
in the indenture and its supplements.





The fifth
supplemental indenture, among other things, (1) waived the covenant violations
noted above, (2) replaced certain existing financial covenants with a lower
quarterly trailing twelve months Adjusted EBITDA covenant, a $20.0 million
minimum cash plus accounts receivable covenant, and increased the limit on
purchase money obligations and capital  27


lease
obligations to $2.75 million in the aggregate, (3) permitted the Company to
enter into a $12.0 million revolving credit facility with Burdale, and (4)
provides that the Company shall hire an investment banker to conduct a sale of
all or substatially all of the Modified Senior Notes and/or the Company and/or
the assets of the Company.  The Note Holders were paid $0.5 million
and will receive 50% of the first $2.0 million of net proceeds from certain
litigations as consideration for their consent.





The
Company did not meet its minimum cash and cash equivalents requirement contained
in the Indenture and its supplements for the months ended February 21, 2009 and
March 28, 2009.





On June
30, 2008, the Company issued $5.3 million face value of Modified Senior Notes
and 377,154 shares of common stock as settlement of interest accrued on the
Modified Senior Notes in accordance with the fourth supplemental
indenture.  On December 30, 2008, the Company issued $7.7 million face
value of Modified Senior Notes  and certain Note Holders have elected
to receive another $0.4 million of PIK interest in the form of approximately
612,232 shares of common stock as settlement of interest accrued on the Modified
Senior Notes in accordance with the fourth supplemental indenture.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not
applicable for smaller reporting companies.





ITEM 4T. CONTROLS AND PROCEDURES





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. 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 of March 28, 2009. Based upon that
evaluation and subject to the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective as of March 28, 2009 because of the material weakness described
below.





In
connection with the preparation of our consolidated financial statements for the
year ended June 28, 2008, due to resource constraints, a material weakness is
evident to management regarding our inability to simultaneously close the books
on a timely basis each month and generate all the necessary disclosure for
inclusion in our filings with the Securities and Exchange Commission. A material
weakness is a deficiency or combination of deficiencies in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim financial statements will not be
prevented or detected on a timely basis. This material weakness was still
present at March 28, 2009.





We have
not yet had resources to fill positions to augment and upgrade our financial
staff to address issues of timeliness in financial reporting even during periods
when we are preparing filings for the Securities and Exchange Commission. We
have also managed the priorities of the staff to ensure that all financial
reporting requirements are assigned the appropriate level of resources and
timelines.Although
we believe that this corrective step will enable management to conclude that the
internal controls over our financial reporting are effective when all of the
additional financial staff positions are filled and the staff is trained, we
cannot assure you these steps will be sufficient. We may be required to expend
additional resources to identify, assess and correct any additional weaknesses
in internal control.


28


ChangesinInternalControlsoverFinancialReporting





TherehasbeennochangeininternalcontrolsoverfinancialreportingduringthequarterendedMarch28,2009thathasmateriallyaffected,orisreasonablylikelytoaffect,ourinternalcontrolsoverfinancialreporting.





DisclosureControlsandProcedures




Underthesupervisionandwiththeparticipationofourmanagement,includingourprincipalexecutiveofficerandprincipalfinancialofficer,weconductedanevaluationofourdisclosurecontrolsandprocedures,assuchtermisdefinedunderRule13a-15(e)promulgatedundertheSecuritiesExchangeActof1934,asamended(the“ExchangeAct”)asofMarch28,2009.Basedonthatevaluation,ourprincipalexecutiveofficerandprincipalfinancialofficerconcludedthat,asofMarch28,2009,ourdisclosurecontrolsandproceduresarenoteffective,becauseofthematerialweaknessdescribedabove,
 toensurethatinformationrequiredtobedisclosedinthereportsthatwefileorsubmitundertheSecuritiesExchangeActof1934arerecorded,processed,summarizedandreported,
 withinthetimeperiodsspecifiedintheSecuritiesandExchangeCommission’srulesandforms.
  Inherent
Limitations on Effectiveness of Controls




Our
management, including our chief executive officer and chief financial officer,
do not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all error and all fraud.
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.





PART
II




ITEM 1. LEGAL PROCEEDINGS.







We are a
party to litigation and have claims asserted against us in the normal course of
our business. Most of these claims are routine litigation that involve workers’
compensation claims, claims arising out of vehicle accidents and other claims
arising out of the performance of same-day transportation services. We and our
subsidiaries are also named as defendants in various employment-related lawsuits
arising in the ordinary course of our business. We vigorously defend against all
of the foregoing claims.





From time
to time, our independent contractor drivers are involved in accidents. We
attempt to manage this risk by requiring our independent contractor drivers to
maintain commercial motor vehicle liability insurance of at least $300,000 with
a minimal deductible and by carrying additional liability insurance in our name
totaling an additional $7.0 million. In addition, we perform extensive screening
of all prospective drivers to ensure that they have acceptable driving records
and pass a criminal background and drug tests, among other criteria. We believe
our driver screening programs have established an important competitive
advantage for us.


29





We also
carry workers’ compensation insurance coverage for our employees and have
arranged for the availability of occupational accident insurance for all of our
independent contractor drivers of at least the minimum amounts required by
applicable state laws. We also have insurance policies covering cargo, property
and fiduciary trust liability, which coverage includes all of our drivers and
messengers.





We review
our litigation matters on a regular basis to evaluate the demands and likelihood
of settlements and litigation related expenses. We have established reserves for
litigation, which we believe are adequate.





InJanuary2007,twoNoticesofAssessmentseekingpayrolltaxeswereissuedbytheCaliforniaEmploymentDevelopmentDepartment(“EDD”)againstVelocityExpress,Inc.ThefirstNoticeofAssessmentcoverstheperiodJuly1,2003toDecember31,2004.ThesecondNoticeofAssessmentcoverstheperiodofJanuary1,2005toJune30,2006.InFebruary2007,theCompanyfiledaPetitionforReassessmentdisputingbothassessmentsintheirentiretyandrequestingthatthismatterbereferredtoanadministrativelawjudgeforresolution.TheCompanyiscurrentlyintheprocessofresearchingandproducingdocumentsforuseinconnectionwithitsPetitionforReassessment.





In
connection with the CD&L acquisition, the Company assumed the defense of a
class action suit filed in December 2003 in the Los Angeles Superior Court,
seeking to certify a class of California based independent contractors from
December 1999 to the present.  The complaint seeks unspecified damages
for various employment related claims, including, but not limited to overtime,
minimum wage claims, and claims for unreimbursed business expenses. CD&L
filed an Answer to the Complaint on or about January 2, 2004 denying all
allegations.  Plaintiff’s motion for Class Certification was granted
in part and denied in part on January 28, 2007.  Discovery on this
matter is ongoing and a trial date has been adjourned to December of
2009.





Nine
purported class action law suits were filed against the Company between December
2007 and July 2008.  These suits, which were filed by a very small
group of independent contractor drivers in six different states, seek
unspecified damages for various unsubstantiated employment related claims. In
response to the proliferation of these cases, our outside counsel filed a motion
to have the cases consolidated pursuant to federal multi-district litigation
rules.  On October 8, 2008, the U.S. Judicial Panel on Multidistrict
Litigation granted our motion and ordered that the cases be consolidated for
pretrial proceedings.  The Panel ordered that the cases be
consolidated in the Eastern District of Wisconsin.  At this point, the
cases have all been transferred to the Eastern District of Wisconsin, for
further proceedings in that court.  A non-binding mediation of these
cases took place on April 14, 2009 and settlement discussions are ongoing.
Unrelated discovery and motion practice is stayed.  Velocity intends
to vigorously defend these suits and has filed answers rejecting all employment
based allegations of the various complaints.





ITEM
1A. RISK FACTORS





The
following are certain risk factors that could affect our business, financial
condition, operating results and cash flows. These risk factors should be
considered in connection with evaluating the forward-looking statements
contained in this report because these risk factors could cause our actual
results to differ materially from those expressed in any forward-looking
statement. The risks we have highlighted below are not the only ones we face. If
any of these events actually occur, our business, financial condition, results
of operations or cash flows could be negatively affected and the market price of
our common stock could decline. We caution you to keep in mind these risk
factors and to refrain from attributing undue certainty to any forward-looking
statements, which speak only as of the date of this report.





The sale process required under the
Company's Indenture may adversely affect its customer and other relationships as
well as its operations and financial condition.





On March
13, 2009, the Company and Wilmington Trust Company, as trustee for the holders
of the Company's Senior Secured Notes (the "Senior Notes") issued under an
Indenture dated July 3, 2006, as amended, entered into a Fifth Supplemental
Indenture modifying the indenture governing the Senior Notes. The Fifth
Supplemental Indenture was required in order to permit the Company to enter into
the $12 million Loan and Security Agreement with Burdale Capital Finance, Inc.





The
holders of the Company's Senior Notes required as part of that Supplemental
Indenture that the Company initiate a process to attempt to sell the Company or
all or substantially all of its assets or the Senior Notes (a "Transaction"). To
satisfy its obligations under that covenant, the Company appointed a special
board committee of independent directors (the "Committee"), consisting of
Richard A. Kassar and John J. Perkins, to oversee the sale process. The
Committee in March 2009 engaged the firm of Scura, Rise & Partners
Securities, LLC ("Scura") to act as exclusive financial advisor to the Committee
to assist it in attempting to effectuate a Transaction. The Committee has also
engaged independent legal counsel to assist it in its work.





To
attempt to preserve the going concern value of the Company and assure customers
and suppliers of the Company's continuity, a group led by MGC Global, LLC and
existing management of the Company (the "Management Buyout Group"), including
Vincent A. Wasik, chief executive officer, and Edward W. Stone, chief financial
officer, has made a proposal to purchase substantially all of the assets of the
Company, subject to certain liabilities including its senior secured revolving
credit facility with Burdale Capital Finance. The offer by its terms will remain
open until [July 10], 2009 to permit Scura to conduct a full sale process and
seek superior offers. The offer of the Management Buyout Group is subject to due
diligence, definitive documentation, and other standard conditions.





There can
be no assurances that any agreement on financial and other terms satisfactory to
the Committee will result from the sales process or the Committee's evaluation
of the proposal by the Management Buyout Group, nor whether there will be any
other offers made or accepted by the Committee, nor that any extraordinary
Transaction will be completed. . Further, the Company's ability to complete a
transaction, if the Board of Directors determines to pursue one, will depend
upon numerous factors, some which are outside of the Company's control,
including factors affecting the availability of financing for transactions or
the financial markets in general. Even if the Company is successful in
identifying and completing sale transaction, we cannot provide any assurance
about the financial impact or timing of the implementation of such transaction
nor that any individual or group of shareholders or stakeholders will determine
that such transaction is in his, her or its best interests.





In
addition, during any sales process, the Company's management resources may be
diverted, and there is a risk that customers, employees, suppliers and business
partners will react negatively to perceived uncertainties as to the Company's
future direction and strategy and to the eventual outcome of this process. To
date the Company has lost a few important employees for reasons it suspects
relate to the sales process. Any of the foregoing could materially and adversely
affect the Company's operating results and financial condition.





Risks
Related to Our Business





We
have received an opinion from our independent registered public accounting firm
expressing doubt regarding our ability to continue as a going
concern


30


Our
independent registered public accounting firm noted in their report accompanying
our financial statements as of and for the fiscal year ended June 28, 2008 that
we have reported a significant net loss and use of cash from operating
activities, and had a working capital deficiency of $21.8 million, and stated
that those conditions raise substantial doubt about our ability to continue as a
going concern.  Additionally, for the period April 20, 2009 to May___,
2009, borrowings under the Burdale revolving credit facility were permitted to
exceed the maximum borrowings as calculated under the loan and security
agreement due to discretionary decreases in availability blocks by
Burdale.  Management has developed a plan to continue operations which
includes further reductions in expenses to continue the positive Adjusted EBITDA
performance we have experienced since March 2008, and revenue growth from new
customers in the retail industry.  Although we believe we have
successfully reduced expenses in the past and have received verbal commitments
from prospective new retail customers, we cannot assure you that our plans to
address these matters will be successful.  This doubt about our
ability to continue as a going concern could adversely affect our ability to
obtain additional financing at favorable terms, if at all, as such an opinion
may cause investors to have reservations about our long-term prospects, and may
adversely affect our relationships with customers. If we cannot successfully
continue as a going concern, our stockholders may lose their entire investment
in us.




Given
our history of losses, we cannot predict whether we will be able to achieve or
sustain profitability or positive cash flow. If we cannot achieve or sustain
profitability or positive cash flow, the market price of our common stock could
decline significantly.




Our net
losses applicable to common stockholders for the nine-month periods ended March
28, 2009 and March 29, 2008, were $36.8 million and $32.5 million, respectively.
The respective periods’ net losses were $30.4 million and $25.2 million. The
increased amount of net losses applicable to common stockholders for such
periods was caused by beneficial conversion charges of $3.3 million and $3.7
million, and preferred stock dividends paid-in-kind of $3.2 million and $3.5
million for each of the respective periods. Our net losses applicable to common
stockholders for the fiscal years ended June 28, 2008 and June 30, 2007, were
$76.6 million and $66.0 million, respectively. The respective periods’ net
losses were $64.6 million and $39.5 million. The increased amount of net losses
applicable to common stockholders for such periods was caused by beneficial
conversion charges of $7.1 million and $21.2 million, and preferred stock
dividends paid-in-kind of $4.9 million and $5.2 million for each of the
respective periods. To achieve profitability, we will be required to pursue new
revenue opportunities, effectively offset the impact of competitive pressures on
pricing and freight volumes, and fully implement our technology initiatives and
other cost-saving measures. We cannot assure you that we will ever achieve or
sustain profitability or positive cash flow. If we cannot achieve or sustain
profitability or positive cash flow, the market price of our common stock could
decline significantly.




We
may be unable to fund our future capital needs, and we may need additional funds
sooner than anticipated.




We have
depended, and if we are unable to execute against our business plans, are likely
to continue to depend, on our ability to obtain additional financing to fund our
future liquidity and capital needs, including making the June 2009 and December
2009 cash interest payments of $4.5 million and $4.7 million on the Modified
Senior Notes, respectively. We may not be able to continue to obtain additional
capital when needed, and given the on-going turmoil in the global credit markets
and other reasons, additional capital may not be available on satisfactory
terms. Achieving our financial goals involves maximizing the effectiveness of
the variable cost model, the implementation of customer-driven technology
solutions and continued leverage of the consolidated back office selling,
general and administrative platform. To date, we have primarily relied upon debt
and equity investments to fund these activities. We may be required to engage in
additional financing activities to raise capital required for our operations. If
we issue additional equity securities or convertible debt to raise capital, the
issuance may be dilutive to the holders of our common stock. In addition, any
additional issuance may require us to grant rights or preferences that adversely
affect our business, including financial or operating covenants.




Because
we expect to need to refinance our existing debt, we face the risks of either
not being able to do so or doing so at higher interest expense.




Our
senior notes mature in 2010. We may not be able to refinance our senior notes or
renew or refinance any new credit facility we may enter into, or any renewal or
refinancing may occur on less


31




favorable
terms. If we are unable to refinance or renew our senior notes or any new credit
facility, our failure to repay all amounts due on the maturity date would cause
a default under the indenture or the applicable credit agreement. In addition,
our interest expense may increase significantly if we refinance our senior
notes, which bear interest at 18% per year, or any new credit facility, on terms
that are less favorable to us than the existing terms of our senior notes or any
new credit facility.




Early
termination or non-renewal of contracts could negatively affect our operating
results.




Our
contracts with our commercial customers typically have a term of one to three
years, but are often terminable earlier at will upon 30 or 60 days’ notice. We
often have significant start-up costs when we begin servicing a new customer in
a new location. Termination or non-renewal of contracts could have a material
adverse effect on our business, financial condition, operating results and cash
flows.




We
are highly dependent upon sales to a few customers. The loss of any of these
customers, or any material reduction in the amount of our services they
purchase, could materially and adversely affect our business, financial
condition, results of operations and cash flows.




For the
nine-month period ended March 28, 2009 we had two customers that accounted for
approximately 22.7% and 10.4% of our revenue and our top ten customers in
aggregate account for approximately 58.4% of our revenue. The loss of one of our
largest customers or some of the top ten customers or a material reduction in
their purchases of our services, especially given the current downturn in
economic conditions worldwide, could materially and adversely affect our
business, financial condition, results of operations and cash
flows.




The
industry in which we operate is highly competitive, and competitive pressures
from existing and new companies could materially and adversely affect our
business, financial condition, results of operations and cash
flows.




We face
intense competition, particularly for basic delivery services. The industry is
characterized by high fragmentation, low barriers to entry, competition based on
price and competition to retain qualified drivers, among other things.
Nationally, we compete with other large companies having same-day transportation
operations in multiple markets, many of which have substantial resources and
experience in the same-day transportation business. Price competition could
erode our margins and prevent us from increasing our prices to our customers
commensurate with cost increases. We cannot assure you that we will be able to
effectively compete with existing or future competitors.




As
a time definite logistics company, our ability to service our clients
effectively often depends upon factors beyond our control.




Our
revenues and earnings are especially sensitive to events beyond our control that
can affect our industry, including:





•
            
            U.S.
      business activity;





•
            
            economic
      factors affecting our significant
customers;





•
            
            mergers
      and consolidations of existing
customers;





•
            
            ability
      to purchase insurance coverage at reasonable
  prices;





•
            
            extreme
      weather conditions; and





•
            
            the
      levels of unemployment.




The
operation of our business is dependent on the price and availability of fuel.
Continued periods of high fuel costs may materially adversely affect our
operating results.




Our
operating results may be significantly impacted by changes in the availability
or price of fuel for our transportation vehicles. Fuel prices increased
substantially after 2006. Although we are currently able to obtain adequate
supplies of fuel, it is impossible to predict the price of fuel. Political
disruptions or wars


32




involving
oil-producing countries, changes in government policy, changes in fuel
production capacity, extreme weather conditions, environmental concerns and
other unpredictable events may result in fuel supply shortages and additional
fuel price increases in the future. We have historically had difficulty in
recovering increased fuel costs from our customers and there can be no assurance
that we will be able to fully recover increased fuel costs by passing these
costs on to our customers in the future. In the event that we are unable to do
so, our operating results will be adversely affected.




If
we lose any of our executive officers, or are unable to recruit, motivate and
retain qualified personnel, our ability to manage our business could be
materially and adversely affected.




Our
success depends on the skills, experience and performance of certain key members
of our management. The loss of the services of any of these key employees could
have a material adverse effect on our business, financial condition, results of
operations and cash flows. Our future success and plans for growth also depend
on our ability to attract and retain skilled personnel in all areas of our
business. There is strong competition for skilled management personnel in the
time definite logistics businesses and many of our competitors have greater
resources than we have to hire qualified personnel. Accordingly, if we are not
successful in attracting or retaining qualified personnel in the future, our
ability to manage our business could be materially and adversely
affected.




Because
we are exposed to litigation stemming from the accidents or other activities of
our drivers and messengers, if we were to experience a material increase in the
frequency or severity of accidents, liability claims, workers’ compensation
claims, unfavorable resolutions of claims or insurance costs, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.




We
utilize the services of approximately 3,240 drivers and messengers. From time to
time, these persons are involved in accidents or other activities that may give
rise to liability claims against us. We cannot assure you that claims against us
will not exceed the applicable amount of our liability insurance coverage, that
our insurer will be solvent at the time of settlement of an insured claim, that
the liability insurance coverage held by our independent contractors will be
sufficient or that we will be able to obtain insurance at acceptable levels and
costs in the future. If we were to experience a material increase in the
frequency or severity of accidents, liability claims, workers’ compensation
claims, unfavorable resolutions of claims or insurance costs, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.




If
the IRS, any state, or any group of drivers were to successfully assert that our
independent contractors are in fact our employees, we would be required to pay
withholding taxes and extend employee benefits to these persons, and could be
required to pay penalties or be subject to other liabilities as a result of
incorrectly classifying employees.




Substantially
all of our drivers are independent contractors and not our employees. From time
to time, federal and state taxing authorities have sought to assert that
independent contractor drivers in the same-day transportation and transportation
industries are employees. We do not pay or withhold federal employment taxes
with respect to drivers who are independent contractors. Although we believe
that the independent contractors we utilize are not employees under existing
interpretations of federal and state laws, we cannot guarantee that federal and
state authorities will not challenge this position or that other laws or
regulations, including tax laws and laws relating to employment and workers’
compensation, will not change. If the IRS, any state, or any group of drivers
were to successfully assert that our independent contractors are in fact our
employees, we would be required to pay withholding taxes and extend employee
benefits to these persons, and could be required to pay penalties or be subject
to other liabilities as a result of incorrectly classifying employees. If
drivers are deemed to be employees rather than independent contractors, we could
be required to increase their compensation. Any of the foregoing possibilities
could increase our operating costs and have a material adverse effect on our
business, financial condition, operating results and cash flows.




If
we are unable to recruit, motivate and retain qualified delivery personnel, our
business, financial condition, results of operations and cash flows could be
materially and adversely affected.


33





We depend
upon our ability to attract and retain, as employees or through independent
contractor or other arrangements, qualified delivery personnel who possess the
skills and experience necessary to meet the needs of our operations. We compete
in markets in which unemployment is generally relatively low and the competition
for independent contractors and other employees is intense. In addition, the
independent contractors we utilize are responsible for all vehicle expense
including maintenance, insurance, fuel and all other operating costs. We make
every reasonable effort to include fuel cost adjustments in customer billings
that are paid to independent contractors to offset the impact of fuel price
increases. However, if future fuel cost adjustments are insufficient to offset
independent contractors’ costs, we may be unable to attract a sufficient number
of independent contractors.
 
 We must
continually evaluate and upgrade our pool of available independent contractors
to keep pace with demands for delivery services. We cannot assure you that
qualified delivery personnel will continue to be available in sufficient numbers
and on terms acceptable to us. The inability to attract and retain qualified
delivery personnel could materially and adversely affect our business, financial
condition, results of operations and cash flows.
 
 Our
failure to maintain required certificates, permits or licenses, or to comply
with applicable laws, ordinances or regulations could result in substantial
fines or possible revocation of our authority to conduct certain of our
operations.
 
 Although
certain aspects of the transportation industry have been significantly
deregulated, our delivery operations are still subject to various federal, state
and local laws, ordinances and regulations that in many instances require
certificates, permits and licenses. Our failure to maintain required
certificates, permits or licenses, or to comply with applicable laws, ordinances
or regulations could result in substantial fines or possible revocation of our
authority to conduct certain of our operations.
 
 Our
reputation will be harmed, and we could lose customers, if the information and
telecommunication technologies on which we rely fail to adequately
perform.
 
 Our
business depends upon a number of different information and telecommunication
technologies as well as our ability to develop and implement new technologies
enabling us to manage and process a high volume of transactions accurately and
timely. Any impairment of our ability to process transactions in this way could
result in the loss of customers and negatively affect our reputation. In
addition, if new information and telecommunication technologies develop, we may
need to invest in them to remain competitive, which could reduce our
profitability and cash flow.
 
 If
our goodwill or other intangible assets were to become impaired, our results of
operations could be materially and adversely affected.
 
 The value
of our goodwill and other intangible assets is significant relative to our total
assets and stockholders deficit. We review goodwill and other intangible assets
for impairment during the fourth quarter of our fiscal year and at interim dates
when events and circumstances warrant. During the fourth quarter of fiscal 2008,
the Company recorded a $46.7 million goodwill impairment charge. Changes in
business conditions or interest rates could materially impact our estimates of
future operations and result in additional impairments. As such, we cannot
assure you that there will not be additional material impairments of our
goodwill and other intangible assets. If our goodwill or other intangible assets
were to become further impaired, our results of operations could be materially
and adversely affected.
 
 We
face trademark infringement and related risks.
 
 There can
be no assurance that any of our trademarks and service marks, collectively, the
“marks”, if registered, will afford us protection against competitors with
similar marks that may have a use date prior to that of our marks. In addition,
no assurance can be given that others will not infringe upon our marks, or that
our marks will not infringe upon marks and proprietary rights of others.
Furthermore, there can be no assurance that challenges will not be instituted
against the validity or enforceability of any mark claimed by us, and if
instituted, that such challenges will not be successful.
 
  34
  We
may face higher litigation and settlement costs than anticipated.
 
 We have
made estimates of our exposure in connection with the lawsuits and claims that
have been made. As a result of litigation or settlement of cases, the actual
amount of exposure in a given case could differ materially from that projected.
In addition, in some instances, our liability for claims may increase or
decrease depending upon the ultimate development of those claims. In estimating
our exposure to claims, we are relying upon our assessment of insurance
coverages and the availability of insurance. In some instances insurers could
contest their obligation to indemnify us for certain claims, based upon
insurance policy exclusions or limitations. In addition, from time to time, in
connection with routine litigation incidental to our business, plaintiffs may
bring claims against us that may include undetermined amounts of punitive
damages. Such punitive damages are not normally covered by
insurance.
 
 RISKS
RELATED TO OUR CAPITAL STRUCTURE
 
 We
have a substantial amount of debt outstanding and may incur additional
indebtedness in the future that could negatively affect our ability to achieve
or sustain profitability and compete successfully in our markets.
 
 We have a
significant amount of debt outstanding. At March 28, 2009, we had $110.4 million
in aggregate principal amount of debt outstanding consisting of $98.9 in
Modified Senior Notes, $10.0 million of revolving credit borrowings, and $1.5
million in capital leases; and $34.0 million of stockholders deficit.
Additionally, for the period April 20, 2009 to May___, 2009, borrowings under
the Burdale revolving credit facility were permitted to exceed the maximum
borrowings as calculated under the loan and security agreement due to
discretionary decreases in availability blocks by Burdale. The degree to which
we are leveraged could have important consequences for you,
including:
 
 •
              
              requiring
      us to dedicate a substantial portion of our cash flow from operations to
      make interest payments on our debt, approximately $9.1 million in 2009 and
      approximately $9.7 million in 2010, thereby reducing funds available for
      operations, future business opportunities and other
    purposes;
 
 •
              
              limiting
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate;
 
 •
              
              making
      it more difficult for us to satisfy our debt and other
      obligations;
 
 •
              
              limiting
      our ability to borrow additional funds, or to sell assets to raise funds,
      if needed, for working capital, capital expenditures, acquisitions or
      other purposes;
 
 •
              
              increasing
      our vulnerability to general adverse economic and industry conditions,
      including changes in interest rates;
and
 
 •
              
              placing
      us at a competitive disadvantage compared to our competitors that have
      less debt.
 
 As of
March 28, 2009, we were restricted from incurring additional debt under the
terms of our indenture other than our credit facility, subject to the terms of
the indenture and its supplements, the intercreditor agreement, and our credit
agreement, as amended.
 
 If we
cannot generate sufficient cash from our operations to meet our debt service and
repayment obligations, we may need to reduce or delay capital expenditures, the
development of our business generally and any acquisitions. If for any reason we
are unable to meet our debt service and repayment obligations, we would be in
default under the terms of the agreements governing our debt, which would allow
the debt holders to declare all borrowings outstanding to be due and
payable.
 
 Our
senior notes, revolving credit facility, and preferred stock contain restrictive
covenants that limit our operating and financial flexibility.
 
 The
indenture and related supplements pursuant to which we issued our senior notes
and the terms of our revolving credit facility, as amended, impose significant
operating and financial restrictions on us.
 
  35
  These
restrictions limit or restrict among other things, our ability and the ability
of certain of our subsidiaries to:
 
 •
              
              incur
      additional debt and issue preferred
stock;
 
 •
              
              make
      restricted payments, including paying dividends on, redeeming,
      repurchasing or retiring our capital stock and making investments and
      prepaying or redeeming debt and making other specified
      investments;
 
 •
              
              create
      liens;
 
 •
              
              sell
      or otherwise dispose of certain assets, including capital stock of
      subsidiaries;
 
 •
              
              enter
      into agreements that would restrict our subsidiaries’ ability to pay
      dividends, make loans or transfer assets to
us;
 
 •
              
              engage
      in transactions with affiliates;
 
 •
              
              engage
      in sale and leaseback transactions;
 
 •
              
              make
      capital expenditures;
 
 •
              
              engage
      in business other than our current
businesses;
 
 •
              
              consolidate,
      merge, recapitalize or enter into other transactions that would affect a
      fundamental change on us; and
 
 •
              
              under
      certain circumstances, enter into a senior credit facility (or refinance
      any such facility) without first giving the holders of the senior notes a
      right of first refusal to provide such
  financing.
 
 The
indenture and related supplements and revolving credit facility agreement, as
amended, also contain certain financial covenants under which we must maintain
cash and cash equivalents at specified levels and cash, cash equivalents and
qualified accounts receivable at specified levels as well as specified financial
ratios, including ratios regarding interest coverage, total leverage, senior
secured leverage and fixed charge coverage, and minimum trailing twelve months
Adjusted EBITDA.  Our ability to comply with these ratios may be
affected by events beyond our control.
 
 The
Company did not meet its minimum quarterly trailing twelve months Adjusted
EBITDA covenant for the period ended December 27, 2008, its minimum cash and
cash equivalents requirement for the months ended October 25, 2008, November 22,
2008, and January 24, 2009, and its minimum cash, cash equivalents and qualified
accounts receivable requirement for the months ended October 25, 2008, November
22, 2008, December 27, 2008, and January 24, 2009, contained in the indenture
and its supplements. In the fifth supplemental indenture dated March 13, 2009
modifying the indenture governing the Modified Senior Notes, the Note Holders
granted the Company waivers for these covenant violations .  The
Company did not meet its minimum cash and cash equivalents requirement for the
months ended February 21, 2009 and March 28, 2009, and its minimum cash, cash
equivalents and qualified accounts receivable requirement for the month ended
February 21, 2009, contained in the Indenture and its supplements.
 
 A breach
of any of these covenants could result in an event of default, or possibly a
cross-default or cross-acceleration of other debt that may be outstanding in the
future. In that event, the holders of our then outstanding debt could allow the
holders of that debt to declare all borrowings outstanding to be due and
payable. In the event of a default under the indenture and related supplements
or the revolving credit facility, as amended, the holders of the secured debt
then outstanding could foreclose on the collateral pledged to secure our
obligations under that debt, assets and capital stock pledged to them. The
modified senior notes and borrowings under the credit agreement, as amended, are
secured by a perfected lien, subject to permitted liens, on collateral
consisting of substantially all of our tangible and intangible
assets.
 
  36
  The
certificates of designation of several series of our outstanding preferred stock
impose similar restrictions on us, including on the following:
 
 •
              
              authorizing
      or issuing additional series of preferred stock that ranks senior to, or
      on a par with, the outstanding preferred
stock;
 
 •
              
              entering
      into mergers or similar transactions if our existing stockholders
      immediately before the transaction do not own 50% or more of the voting
      power of our capital stock after the
  transaction;
 
 •
              
              selling
      all or substantially all of our
assets;
 
 •
              
              materially
      changing our lines of business;
 
 •
              
              selling,
      leasing or licensing our intellectual property or technology other than
      pursuant to non-exclusive licenses granted to customers in connection with
      ordinary course sales of our
products;
 
 •
              
              raising
      capital by specified equity lines of credit or similar arrangements or
      issue any floating or variable priced equity instrument or specified other
      equity financings; and
 
 •
              
              until
      the date on which the original investors in our Series M Convertible
      Preferred Stock beneficially own less than 10% of our outstanding common
      stock, we are prohibited from issuing any preferred stock or convertible
      debt unless such preferred stock or convertible debt has a fixed
      conversion ratio. Similarly, we may not issue any of our common stock
      other than for a fixed price. Our inability to finance our operations in
      such ways may have an adverse effect on our business, financial condition,
      operating results and cash flows.
 
 Our
revolving credit facility, as amended, contains monthly minimum Adjusted EBITDA
requirements that may be difficult to attain.
 
 The
revolving credit facility agreement, as amended, contains specified levels of
minimum Adjusted EBITDA requirements. Our ability to comply with these levels
may be affected by events beyond our control.
 
 The
Company and its subsidiaries failed to achieve the minimum Adjusted EBITDA
levels contained in its previous revolving credit agreement with Wells for the
periods ended July 28, 2007, August 25, 2007, December 29, 2007, February 23,
2008, March 29, 2008, April 26, 2008, October 25, 2008, November 22, 2008 and
December 27, 2008. Wells, in its capacity as agent and lender under the previous
credit agreement, granted the Company waivers for these covenant
violations.  The Wells revolving credit agreement was paid in full on
March 13, 2009 with the proceeds from the Burdale revolving credit
facility.
 
 Given the
on-going turmoil in the global credit markets among other factors, we cannot
assure you we will be able to obtain or maintain additional waivers in the
future if we are unable to maintain compliance with our debt
covenants.
 
 If
we do not maintain our NASDAQ listing, you may have difficulty trading our
securities.
 
 We will
need to maintain certain financial and corporate governance qualifications to
keep our securities listed on the NASDAQ Capital Market (“NASDAQ”). At various
times in the past, we have received notices from NASDAQ that we would be
de-listed due to a failure to maintain a minimum bid price of $1.00, failure to
maintain a minimum market value of publicly held shares of $1,000,000 and
failure to maintain a minimum of $2,500,000 in stockholders’ equity. In each
instance, we have taken the actions required by NASDAQ to maintain continued
listing, but we cannot assure you that we will at all times meet the criteria
for continued listing.
 
 We
received a notice on June 19, 2008 from the NASDAQ that we were not in
compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid
requirement for the continued listing of our common stock on the NASDAQ. We
initially had a period of 180 days to attain compliance by
maintaining
 
  37
  a bid
price of $1.00 for ten consecutive trading days. If we are unable to demonstrate
bid price compliance by the end of the compliance period, but are found to meet
all other initial listing requirements for the NASDAQ, we may receive an
additional 180-day compliance period. If we do not meet compliance requirements
within the second 180-day period, NASDAQ will notify us that our common stock
will be de-listed. Upon receiving this notice, we will file a current report on
Form 8-K with the SEC disclosing that and related details.
 
 We also
received a notice on September 5, 2008 from the NASDAQ that we were not in
compliance with the Marketplace Rule 4310(c)(7) regarding the minimum market
value of publicly held shares requirement for the continued listing of our
common stock on the NASDAQ. If we were unable to demonstrate minimum market
value compliance by the end of the compliance period, NASDAQ will notify us that
our common stock will be de-listed.  Upon receiving this notice, we
will file a current report on Form 8-K with the SEC disclosing that and related
details.
 
 On
October 16, 2008, the NASDAQ implemented a temporary suspension of bid price and
market value of publicly held shares requirements through Friday, January 16,
2009.  On October 22, 2008, NASDAQ sent the Company two letters to
inform management that it will remain at the same stage of the compliance period
with regard to minimum bid price or minimum market value of publicly held
shares, and upon reinstatement of the rules, it will retain the number of days
remaining in its compliance period of 62 days and 50 days, respectively,
extending the compliance period to March 23, 2009 and March 10, 2009,
respectively.
 
 On
December 19, 2008, the NASDAQ announced that it extended its suspension of the
rules requiring a minimum $1.00 bid price and minimum market value of publicly
held shares until Monday, April 20, 2009.
 
 The
Company received a third notice on October 16, 2008 that the Company was no
longer in compliance with Marketplace Rule 4310(c)(3) requiring the Company to
maintain a minimum of $2.5 million in stockholders’ equity. As provided in the
NASDAQ rules, the Company submitted a response to the NASDAQ staff on October
31, 2008, outlining a specific plan and timeline to achieve and sustain
compliance based on the prospective global alliance transactions. Based on the
staff review of the materials submitted, the Staff determined to grant the
Company an extension.  On December 9, 2008, the NASDAQ sent the
Company a letter granting an extension of time to regain compliance with of the
minimum stockholders’ equity requirement until January 29, 2009.
 
 On
February 4, 2009, the Company received a fourth notice from the NASDAQ
containing a staff determination that the Company failed to comply with the $2.5
million stockholders’ equity requirement for continued listing by January 29,
2009 and notifying the Company that trading in the Company’s common stock would
be suspended unless an appeal of their determination was filed.  The
Company filed an appeal on February 11, 2009 requesting a formal hearing on the
matter.
 
 On April
20, 2009, the Company received a fifth notice from the NASDAQ informing the
Company that the NASDAQ Hearings Panel in satisfied that the Company is
actively, diligently and in good faith taking responsible steps to regain
compliance and has decided to grant the request of the Company to remain listed
on the NASDAQ Stock Market through August 3, 2009.
 
 Although
we may regain compliance with the NASDAQ listing requirements, the negative
publicity surrounding the receipt of these notices will likely have a material
adverse effect on the price of our common stock, our ability to raise capital,
whether debt or equity, in the future unless and until this situation is
resolved and will likely cause a negative perception of, and confidence in, us
by our investors, customers, vendors, creditors and employees. Further failing
to maintain our NASDAQ listing will result in our breaching covenants made to
holders of our preferred stock and certain warrants. We cannot assure you that
we will be successful in regaining compliance with NASDAQ listing
requirements.
 
 In the
event of delisting, trading, if any, would be conducted in the over-the-counter
market in the so-called “pink sheets” or on the OTC Bulletin Board. In addition,
our securities could become subject to the SEC’s “penny stock rules.” These
rules would impose additional requirements on broker-dealers who effect trades
in our securities, other than trades with their established customers and
accredited investors.
 
  38
  Consequently,
the delisting of our securities and the applicability of the penny stock rules
may adversely affect the ability of broker- dealers to sell our securities,
which may adversely affect your ability to resell our securities. If any of
these events take place, you may not be able to sell as many securities as you
desire, you may experience delays in the execution of your transactions and our
securities may trade at a lower market price than they otherwise
would.
 
 Because
we are a holding company with no operations, we will not be able to pay interest
on our debt or pay dividends unless our subsidiaries transfer funds to
us.
 
 As a
holding company, we have no direct operations and our principal assets are the
equity interests we hold in our subsidiaries. Our subsidiaries are legally
distinct from us and have no obligation to transfer funds to us. As a result, we
are dependent on the results of operations of our subsidiaries and, based on
their existing and future debt agreements, the state corporation law of the
subsidiaries and any state regulatory requirements, their ability to transfer
funds to us to meet our obligations, to pay interest and principal on our debt
and to pay any dividends in the future.
 
 Our
stock price is subject to fluctuation and volatility.
 
 The price
of our common stock in the secondary market may be influenced by many factors,
including the depth and liquidity of the market for our common stock, investor
perception of us, variations in our operating results, general trends in the
transportation/logistics industry, government regulation and general economic
and market conditions, among other things. The stock market has, on occasion,
experienced extreme price and volume fluctuations that have often particularly
affected market prices for smaller companies and that have often been unrelated
or disproportionate to the operating performance of the affected companies. The
price of our common stock could be affected by such fluctuations.
 
 Future
issuances, or the perception of future issuances, of a substantial amount of our
common stock may depress the price of the shares of our common
stock.
 
 Future
issuances, or the perception or the availability for sale in the public market,
of substantial amounts of our common stock could adversely affect the prevailing
market price of our common stock and could impair our ability to raise capital
through future sales of equity securities. Certain of our stockholders have
registration rights with respect to their common stock and preferred stock, and
the holders of our warrants and preferred stock may be forced to exercise and
convert these securities into our common stock if specified conditions are
met.
 
 We may
issue shares of our common stock, or other securities, from time to time as
consideration for future acquisitions and investments. In the event any such
acquisition or investment is significant, the number of shares of our common
stock, or the number or aggregate principal amount, as the case may be, of other
securities that we may issue may in turn be significant. We may also grant
registration rights covering those shares or other securities in connection with
any such acquisitions and investments.
 
 The
issuance of additional equity securities in a future financing could trigger the
anti-dilution provisions of our outstanding preferred stock and
warrants.
 
 In
conjunction with the Fourth Supplemental Indenture modifying the indenture
governing our Senior Notes on May 19, 2008, we reduced the exercise price on the
warrants held by the holders of our Original Senior Notes by $16.21, from $17.56
to $1.35 and issued  new warrants to purchase approximately 0.4
million shares of the Company’s common stock, triggering anti-dilution
provisions in our Series M, Series N, Series O, Series P, and the Series Q
Convertible Preferred Stock that adjusted the applicable conversion prices of
such preferred stock downward, and caused charges to the net loss applicable to
common shareholders from beneficial conversion features embedded in the various
preferred stock securities.
 
 If we
issue additional equity securities at a per share price lower than the current
market price (in the case of our outstanding warrants) or the conversion price
(in the case of our outstanding warrants and preferred stock), then the exercise
price of such warrants and the conversion price of such preferred stock would
automatically adjust downward. Such adjustments would have a dilutive effect on
our existing common stockholders and a negative effect on our stock
price.
 
  39
  We
do not intend to pay cash dividends on our common stock in the foreseeable
future.
 
 We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Any payment of cash dividends will depend on our financial condition, capital
requirements, earnings and other factors deemed relevant by our board of
directors. Further, the terms of our credit facilities limit our ability to pay
dividends.
 
 Our
organizational documents and applicable law could limit or delay another party’s
ability to acquire us and, therefore, could deprive our investors of the
opportunity to obtain a takeover premium for their shares.
 
 A number
of provisions in our certificate of incorporation and bylaws make it difficult
for another company to acquire us. These provisions include, among others, the
following:
 
 •
              
              requiring
      the affirmative vote of holders of not less than 62.5% of our Series M
      Convertible Preferred Stock and Series N Convertible Preferred Stock, each
      voting separately as a class, to approve certain mergers, consolidations
      or sales of all or substantially all of our
  assets;
 
 •
              
              requiring
      stockholders to provide us with advance notice if they wish to nominate
      any persons for election to our board of directors or if they intend to
      propose any matters for consideration at an annual stockholders meeting;
      and
 
 •
              
              authorizing
      the issuance of so-called “blank check” preferred stock without common
      stockholder approval upon such terms as the board of directors may
      determine.
 
 In
addition, TH Lee Putnam Ventures, L.P. beneficially owned, as of May 1, 2009 ,
approximately 24.2% (excludes other TH Lee funds) of our outstanding common
stock on a fully diluted basis, which means it can influence matters requiring
stockholder approval, including important corporate matters such as a change in
control of our company.
 
 We are
also subject to laws that may have a similar effect. For example, section 203 of
the Delaware General Corporation Law prohibits us from engaging in a business
combination with an interested stockholder for a period of three years from the
date the person became an interested stockholder unless certain conditions are
met. As a result of the foregoing, it will be difficult for another company to
acquire us and, therefore, could limit the price that possible investors might
be willing to pay in the future for shares of our common stock. These provisions
may also have the effect of making it more difficult for third parties to cause
the replacement of our current management team without the concurrence of our
board of directors.
 
 We
may be exposed to risks relating to our internal controls and may need to incur
significant costs to comply with applicable requirements.
 
 Under
Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public
companies to include a report of management on internal control over financial
reporting in their annual reports. In accordance with recently issued guidelines
from the SEC, we evaluated our internal controls over financial reporting in
order for our management to ascertain that such internal controls are adequate
and effective. There is a risk that going forward, we will not comply with all
of the requirements imposed by the Act. Accordingly, we cannot assure you that
we will not receive an adverse report on our assessment of our internal controls
over financial reporting and/or the operating effectiveness of our internal
controls over financial reporting from our independent registered public
accounting firm in 2010. If we identify significant deficiencies or material
weaknesses in our internal controls over financial reporting that we cannot
remediate in a timely manner or we receive an adverse report from our
independent registered public accounting firm with respect to our internal
controls over financial reporting, investors and others may lose confidence in
the reliability of our financial statements and our ability to obtain equity or
debt financing could be adversely affected.
 
 In
addition, if our independent registered public accounting firm is unable to rely
on our internal controls over financial reporting in connection with their audit
of our financial statements, and in the further event that they are unable to
devise alternative procedures in order to satisfy themselves as to the material
accuracy of our financial statements and related disclosures, it is possible
that we could receive a
 
  40
  qualified
or adverse audit opinion on those financial statements. In that event, the
market for our common stock could be adversely affected. Investors and others
may lose confidence in the reliability of our financial statements and our
ability to obtain equity or debt financing could be adversely
affected.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
 
 None
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
 
 Not
Applicable.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
 
 None
 
 ITEM 5. OTHER INFORMATION.
 
 Not
Applicable.
 
 ITEM 6. EXHIBITS.
 
 See the
Exhibit Index following the signature page of this Report.
 
  41
  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, in the Town of Westport, State of Connecticut on May 12,
2009.
 
 VELOCITY
      EXPRESS CORPORATION.By:
              /s/
      Vincent A. WasikVINCENT
      A. WASIKChief
      Executive OfficerBy:
              /s/
      Edward W. StoneEDWARD
      W. STONEChief
      Financial Officer
 
  42
  EXHIBIT
INDEX
 
 Exhibit
                    Number
                
                Description2.1
                
                Merger
      Agreement, dated September 8, 1999, by and among CEX Holdings, Inc.,
      Corporate Express Delivery Systems, Inc., United Shipping &
      Technology, Inc. and United Shipping & Technology Acquisition Corp.
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed October 8, 1999).2.2
                
                Amendment
      No. 1 to Merger Agreement, dated September 22, 1999, by and among CEX
      Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping
      & Technology, Inc. and United Shipping & Technology Acquisition
      Corp. (incorporated by reference from the Company’s Current Report on Form
      8-K, filed October 8, 1999).2.3
                
                Amendment
      No. 2 to Merger Agreement, Settlement and General Release Agreement, dated
      August 2, 2001, by and among Corporate Express, Inc., successor by merger
      to CEX Holdings, Inc., Velocity Express, Inc. f/k/a Corporate Express
      Delivery Systems, Inc., and United Shipping & Technology, Inc.
      (incorporated by reference from the Company’s Quarterly Report on Form
      10-Q, filed November 13, 2001).2.4
                
                Agreement
      and Plan of Merger, dated July 3, 2006, by and among Velocity Express
      Corporation, CD&L Acquisition Corp., a wholly-owned subsidiary of
      Velocity Express Corporation, and CD&L, Inc., (incorporated by
      reference from the Company’s Current Report on Form 8-K, filed July 10,
      2006).3.1
                
                Amended
      and Restated Certificate of Incorporation of Velocity Express Corporation
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed February 16, 2005).3.2
                
                Certificate
      of Amendment of Certificate of Incorporation of Velocity Express
      Corporation dated October 20, 2006 (incorporated by reference from the
      Company’s Current Report on Form 8-K filed on July 10,
    2006).3.3
                
                Amended
      and Restated Certificate of Incorporation of Velocity Express Corporation
      (incorporated by reference from the Company’s Quarterly Report on Form
      10-Q, filed November 21, 2006).3.4
                
                Certificate
      of Designations, Preferences and Rights of Series N Convertible Preferred
      Stock (incorporated by reference from the Company’s Current Report on Form
      8-K, filed May 4, 2005).3.5
                
                Certificate
      of Designations, Preferences and Rights of Series O Convertible Preferred
      Stock (incorporated by reference from the Company’s Current Report on Form
      8-K, filed July 26, 2005).3.6
                
                Certificate
      of Designations, Preferences and Rights of Series P Convertible Preferred
      Stock (incorporated by reference from the Company’s Current Report on Form
      8-K, filed October 20, 2005).3.7
                
                Certificate
      of Designations, Preferences and Rights of Series Q Convertible Preferred
      Stock (incorporated by reference from the Company’s Current Report on Form
      8-K, filed on July 6, 2006).3.8
                
                Amended
      Certificate of Designation of Series Q Convertible Preferred Stock
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed on July 6, 2006).3.9
                
                Certificate
      of Amendment to Amended and Restated Certificate of Incorporation
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed September 14, 2006).3.10
                
                Bylaws
      of Velocity Express Corporation (incorporated by reference from the
      Company’s Current Report on Form 8-K, filed January 9,
    2002).3.11
                
                Certificate
      of Amendment to Amended and Restated Certificate of Incorporation
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed December 6, 2007).4.1
                
                Specimen
      form of common stock certificate (incorporated by reference from the
      Company’s Annual Report on Form 10-K, filed September 27,
      2002).4.2
                
                Indenture,
      dated July 3, 2006, between Velocity Express Corporation and Wells Fargo
      Bank, N.A., as trustee, with respect to the Company’s 12% Senior Secured
      Notes due 2010 (incorporated by reference from the Company’s Current
      Report on Form 8-K, filed July 10,
2006).
 
  43
  
 Exhibit
                  Number
              
              Description4.3
              
              Supplemental
      Indenture, dated as of August 17, 2006, among the Company, Wells Fargo
      Bank, N.A., as trustee, and the Subsidiary Guarantors named thereto
      (incorporated by reference from the Company’s Quarterly Report on Form
      10-Q, filed February 13, 2007).4.4
              
              Second
      Supplemental Indenture dated as of December 22, 2006 among the Company,
      Wells Fargo Bank, N.A., as Trustee and the subsidiaries named thereto
      (incorporated by reference from our Current Report on From 8-K filed on
      December 27, 2006).4.5
              
              Third
      Supplemental Indenture, dated July 25, 2007 (incorporated by reference
      from the Company’s Current Report on Form 8-K filed on July 25,
      2007).4.6
              
              Security
      Agreement, dated July 3, 2006, by Velocity Express Corporation and the
      Subsidiary Guarantors named therein, to and in favor of Wells Fargo Bank,
      N.A., as trustee (incorporated by reference from the Company’s Current
      Report on Form 8-K, filed July 10, 2006).4.7
              
              Form
      of Warrant issued together with the 12% Senior Secured Notes due 2010
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed July 10, 2006).4.8
              
              Form
      of Warrant issued in connection with services (incorporated by reference
      from the Company’s Current Report on Form 8-K, filed July 10,
      2006).4.9
              
              Form
      of Common Stock Warrant between Velocity Express Corporation and
      management, dated February 12, 2004 (incorporated by reference from the
      Company’s Quarterly Report on Form 10-Q, filed May 11,
    2004).4.10
              
              Registration
      Rights Agreement, dated July 3, 2006, between Velocity Express Corporation
      and the Investors named therein with respect to the Series Q Convertible
      Preferred Stock (incorporated by reference from the Company’s Current
      Report on Form 8-K, filed July 10, 2006).4.11
              
              Registration
      Rights Agreement, dated December 21, 2004, between Velocity Express
      Corporation and the Investors named therein with respect to the Series M
      Convertible Preferred Stock (incorporated by reference from the Company’s
      Current Report on Form 8-K, filed December 27, 2004).4.12
              
              Registration
      Rights Agreement, dated April 28, 2005, between Velocity Express
      Corporation and the Investors named therein with respect to the Series N
      Convertible Preferred Stock (incorporated by reference from the Company’s
      Current Report on Form 8-K, filed May 4, 2005).4.13
              
              Registration
      Rights Agreement, dated July 18, 2005, between Velocity Express
      Corporation and the Investors named therein with respect to the Series O
      Convertible Preferred Stock (incorporated by reference from the Company’s
      Current Report on Form 8-K, filed July 26, 2005).4.14
              
              Registration
      Rights Agreement, dated October 14, 2005, between Velocity Express
      Corporation and the Investors named therein with respect to the Series P
      Convertible Preferred Stock (incorporated by reference from the Company’s
      Current Report on Form 8-K, filed October 20, 2005).4.15
              
              Amendment
      No. 1 to the Registration Rights Agreement, dated October 19, 2006,
      between Velocity Express Corporation and the Investors named therein with
      respect to the Series Q Convertible Preferred Stock (incorporated by
      reference from the Company’s Quarterly Report on Form 10-Q, filed February
      13, 2007).4.16
              
              Amendment
      No. 1 to the Registration Rights Agreement, dated October 19, 2006,
      between Velocity Express Corporation and the Investors named therein with
      respect to the Series M Convertible Preferred Stock (incorporated by
      reference from the Company’s Quarterly Report on Form 10-Q, filed February
      13, 2007).4.17
              
              Amendment
      No. 1 to the Registration Rights Agreement, dated October 19, 2006,
      between Velocity Express Corporation and the Investors named therein with
      respect to the Series N Convertible Preferred Stock (incorporated by
      reference from the Company’s Quarterly Report on Form 10-Q, filed February
      13, 2007).
 
  44
  
 Exhibit

                Number
              
              Description4.18
              
              Amendment
      No. 1 to the Registration Rights Agreement, dated October 19, 2006,
      between Velocity Express Corporation and the Investors named therein with
      respect to the Series O Convertible Preferred Stock (incorporated by
      reference from the Company’s Quarterly Report on Form 10-Q, filed February
      13, 2007).4.19
              
              Amendment
      No. 1 to the Registration Rights Agreement, dated October 19, 2006,
      between Velocity Express Corporation and the Investors named therein with
      respect to the Series P Convertible Preferred Stock (incorporated by
      reference from the Company’s Quarterly Report on Form 10-Q, filed February
      13, 2007).4.20
              
              Stock
      Purchase Warrant to purchase up to 193,552 shares of common stock issued
      to TH Lee Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P.,
      THLi Coinvestment Partners, LLC and Blue Star I, LLC, dated December 21,
      2004 (incorporated by reference from the Company’s Annual Report on Form
      10-K, filed December 23, 2004).4.21
              
              Warrant
      to purchase up to 4,000 shares of common stock issued to BLG Ventures,
      LLC, dated August 23, 2001 (incorporated by reference from the Company’s
      Quarterly Report on Form 10-Q, filed November 13,
2001).10.1
              
              1995
      Stock Option Plan (incorporated by reference from the Company’s Quarterly
      Report on Form 10-QSB, filed February 15, 2000).10.2
              
              1996
      Director Stock Option Plan, as amended (incorporated by reference from the
      Company’s Quarterly Report on Form 10-QSB, filed February 15,
      2000).10.3
              
              2000
      Stock Option Plan (incorporated by reference from the Company’s Definitive
      Schedule 14A, filed May 8, 2000).10.4
              
              2004
      Stock Incentive Plan (incorporated by reference from the Company’s
      Definitive Schedule 14A, filed January 31, 2005).10.5
              
              Form
      of non-qualified stock option issued to employees as of June 2000
      (incorporated by reference from the Company’s Annual Report on Form
      10-KSB, filed September 29, 2000).10.6
              
              Form
      of Incentive Stock Option Agreement, dated October 29, 2001, between
      United Shipping & Technology, Inc., and management (incorporated by
      reference from the Company’s Quarterly Report on Form 10-Q, filed May 3,
      2002).10.7
              
              Employment
      Agreement, dated November 28, 2001, between Velocity Express, Inc. and
      Andrew B. Kronick (incorporated by reference from the Company’s Annual
      Report on Form 10-K, filed December 23, 2004).10.8
              
              Employment
      Agreement, dated March 6, 2006, between Velocity Express Corporation and
      Edward W. Stone, Jr. (incorporated by reference from the Company’s Current
      Report on Form 8-K, filed March 7, 2006).10.9
              
              Contractor
      Services Agreement, between Velocity Express Corporation and MCG Global,
      LLC (incorporated by reference from the Company’s Annual Report on Form
      10-K, filed December 23, 2004).10.10
              
              Agency
      Agreement, dated May 25, 2004, between Velocity Express, Inc. and Peritas,
      LLC (incorporated by reference from the Company’s Annual Report on Form
      10-K, filed December 23, 2004).10.11
              
              Reimbursement
      Agreement, dated June 29, 2006, between Velocity Express Corporation and
      TH Lee Putnam Ventures (incorporated by reference from the Company’s
      Current Report on Form 8-K, filed July 6, 2006).10.12
              
              Purchase
      Agreement for 12% Senior Secured Notes and Warrants, dated July 3, 2006,
      between Velocity Express Corporation, the guarantors and purchasers named
      therein (incorporated by reference from the Company’s Current Report on
      Form 8-K/A, filed September 19,
2006).
 
  45
  
 Exhibit
                  Number
              
              Description10.13
              
              Unit
      Purchase Agreement, dated July 3, 2006, by and among Velocity Express
      Corporation, the guarantors named therein and Exeter Capital Partners IV,
      L.P. (incorporated by reference from the Company’s Current Report on Form
      8-K, filed July 10, 2006).10.14
              
              Stock
      Purchase Agreement, dated as of July 3, 2006, for Series Q Preferred
      Stock, between Velocity Express Corporation and the Purchasers named
      therein (incorporated by reference from the Company’s Current Report on
      Form 8-K/A, filed September 19, 2006)].10.15
              
              Stock
      Purchase Agreement to purchase up to 500,000 additional shares of Series Q
      Convertible Preferred Stock, dated August 17, 2006, between Velocity
      Express Corporation and the purchasers named therein (incorporated by
      reference from the Company’s Current Report on Form 8-K, filed August 23,
      2006).10.16
              
              Series
      A Preferred Stock and Warrant Purchase Agreement, dated as of July 3,
      2006, by and between Velocity Express Corporation and BNP Paribas
      (incorporated by reference from the Company’s Current Report on Form 8-K
      filed on July 10, 2006).10.17
              
              Series
      A Preferred Stock, Common Stock and Warrant Purchase Agreement (Note and
      Warrant Consideration), dated as of July 3, 2006, by and between Velocity
      Express Corporation and Exeter Capital Partners IV, L.P. (incorporated by
      reference from the Company’s Current Report on Form 8-K filed on July 10,
      2006)10.18
              
              Series
      A Preferred Stock, Common Stock and Warrant Purchase Agreement (Share
      Consideration), dated as of July 3, 2006, by and between Velocity Express
      Corporation and Exeter Capital Partners IV, L.P. (incorporated by
      reference from the Company’s Current Report on Form 8-K filed on July 10,
      2006)10.19
              
              Series
      A Convertible Subordinated Debenture Purchase Agreement, dated as of July
      3, 2006, by and between Velocity Express Corporation and each of the other
      parties thereto (incorporated by reference from the Company’s Current
      Report on Form 8-K filed on July 10, 2006).10.20
              
              Settlement
      Agreement and Mutual Release, dated December 2005, by and among Velocity
      Express, Inc., formerly known as Corporate Express Delivery Systems,
      Velocity Express Corporation, Banc of America Commercial Finance
      Corporation, Banc of America Leasing & Capital, LLC, John Hancock Life
      Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short,
      III, Sidewinder Holdings, Ltd. and Sidewinder, N.A., Ltd. (incorporated by
      reference from the Company’s Current Report on Form 8-K, filed December
      13, 2005).10.21
              
              Security
      Agreement, dated December 22, 2006, among the Company, Wells Fargo
      Foothill, Inc. and the Subsidiary Guarantors named thereto (incorporated
      by reference from our Current Report on Form 8-K filed on December 27,
      2006).10.22
              
              Intercompany
      Subordination Agreement dated, as of December 22, 2006, among the Company,
      the Subsidiary Guarantors named thereto and Wells Fargo Foothill, Inc.
      (incorporated by reference from our Current Report on Form 8-K filed on
      January 5, 2007).10.23
              
              Contribution
      Agreement, dated as of December 22, 2006, among the Company and the
      Subsidiary Guarantors named thereto (incorporated by reference from our
      Current Report on Form 8-K/A filed on January 5, 2007).10.24
              
              Intercreditor
      Agreement, dated as of December 22, 2006, among the Company, the
      Subsidiary Guarantors named thereto, Wells Fargo Bank, N.A., as trustee,
      and Wells Fargo Foothill, Inc. (incorporated by reference from our Current
      Report on Form 8-K/A filed on January 5, 2007).10.25
              
              Credit
      Agreement, dated as of December 22, 2006, among the Company, the
      Subsidiary Guarantors named thereto, Wells Fargo Foothill, Inc., as
      arranger and administrative agent, and the several banks and other
      financial institutions or entities from time to time parties to the Credit
      Agreement (incorporated by reference from our Current Report on From 8-K
      filed on December 27, 2006).
 
  46
  
 Exhibit
                  Number
              
              Description10.26
              
              Waiver
      to Credit Agreement, dated as of May 14, 2007, by and among Velocity
      Express Corporation, the lenders party thereto and Wells Fargo Foothill,
      Inc., as arranger and administrative agent (incorporated by reference from
      the Company’s Quarterly Report on Form 10-Q, filed May 15,
      2007).10.27
              
              Amendment
      No. 6, dated May 25, 2007, to Credit Agreement dated as of December 22,
      2006, among Velocity Express Corporation, the subsidiaries thereof party
      thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent,
      and the several lenders from time to time party thereto (incorporated by
      reference from the Company’s Annual Report on Form 10-K, filed on October
      15, 2007).10.28
              
              Amendment
      No. 7, dated July 13, 2007, to Credit Agreement dated as of December 22,
      2006, among Velocity Express Corporation, the subsidiaries thereof party
      thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent,
      and the several lenders from time to time party thereto (incorporated by
      reference from the Company’s Current Report on Form 8-K filed on July 31,
      2007).10.29
              
              Amendment
      No. 8, dated October 15, 2007, to Credit Agreement dated as of December
      22, 2006, among Velocity Express Corporation, the subsidiaries thereof
      party thereto, Wells Fargo Foothill, Inc., as arranger and administrative
      agent, and the several lenders from time to time party thereto
      (incorporated by reference from the Company’s Annual Report on Form 10-K,
      filed October 15, 2007).10.30
              
              Amendment
      No. 9, dated February 12, 2008, to Credit Agreement dated as of December
      22, 2006, among Velocity Express Corporation, the subsidiaries thereof
      party thereto, Wells Fargo Foothill, Inc., as arrange and administrative
      agent, and the several lenders from time to time party thereto
      (incorporated by reference from the Company’s Quarterly Report on Form
      10-Q, filed on May 20, 2008).10.31
              
              Waiver
      and Tenth Amendment, dated April 30, 2008, to Credit Agreement dated as of
      December 22, 2006, among Velocity Express Corporation, the subsidiaries
      thereof party thereto, Wells Fargo Foothills, Inc., as arranger and
      administrative agent, and the several lenders from time to time party
      thereto (incorporated by reference from the Company’s Quarterly Report on
      Form 10-Q, filed on May 20, 2008).10.32
              
              Waiver
      and Eleventh Amendment dated May 19, 2008, to Credit Agreement dated as of
      December 22, 2006, among Velocity Express Corporation, the subsidiaries
      thereof party thereto, Wells Fargo Foothill, Inc., as arranger and
      administrative agent, and the several lenders from time to time party
      thereto (incorporated by reference from the Company’s Current Report on
      Form 8-K, filed on May 23, 2008).10.33
              
              Fourth
      Supplemental Indenture dated as of May 19, 2008, to Indenture dated as of
      July 3, 2006, as amended by the First Supplemental Indenture dated as of
      August 17, 2006, the Second Supplemental Indenture dated as of December
      22, 2006 and the Third Supplemental Indenture dated as of July 25, 2007,
      among Velocity Express Corporation, the subsidiaries thereof party
      thereto, and Wilmington Trust Company, as successor trustee to Wells Fargo
      Bank, N.A. as Trustee (incorporated by reference from the Company’s
      Current Report on Form 8-K, filed on June 12, 2008).10.34
              
              Form
      of Velocity Express Corporation Senior Secured Note Due 2010 (incorporated
      by reference from the Company’s Current Report on Form 8-K, filed on June
      12, 2008).10.35
              
              Registration
      Rights Agreement dated May 19, 2008, between Velocity Express Corporation
      and the Investors named therein with respect to the Senior Secured Note
      Due 2010 (incorporated by reference from the Company’s Current Report on
      Form 8-K, filed June 12, 2008).10.36
              
              Waiver
      dated October 14, 2008, to Credit Agreement dated as of December 22, 2006,
      among Velocity Express Corporation, the subsidiaries thereof party
      thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent,
      and the several lenders from time to time party thereto (incorporated by
      reference from the Company’s Annual Report on Form 10-K/A, filed October
      27, 2008).
  47
  
 Exhibit
                  Number
              
              Description10.37
              
              Waiver
      dated November 12, 2008, to Credit Agreement dated as of December 22,
      2006, among Velocity Express Corporation, the subsidiaries thereof party
      thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent,
      and the several lenders from time to time party
thereto.10.38
              
              Waiver
      dated February 17, 2009, to Credit Agreement dated as of December 22,
      2006, among Velocity Express Corporation, the subsidiaries thereof party
      thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent,
      and the several lenders from time to time party
thereto.10.39*
              
              First
      Amendment dated May 12, 2009, to Credit Agreement dated as of March 13,
      2009, among Velocity Express Corporation, the subsidiaries thereof party
      thereto, Burdale Capital Finance, Inc., as arranger and administrative
      agent, and the several lenders from time to time party thereto
      (incorporated by reference from the Company’s Current Report on Form 8-K,
      filed on May __, 2009).21.1
              
              Subsidiaries
      (incorporated by reference from the Company’s Annual Report on Form 10-K,
      filed October 15, 2007).31.1*
              
              Section
      302 Certification of CEO.31.2*
              
              Section
      302 Certification of CFO.32.1*
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
 
 *
              Filed
      as an exhibit on this Quarterly Report of Velocity Express Corporation on
      Form 10-Q for the period ended March 28,
2009.
   48