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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549



---



FORM 10-Q



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(Mark One)



x    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE
ACT OF 1934



For the quarterly period ended
December 28, 2002





 ̈TRANSITION REPORT UNDER 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 jurisdiction of
incorporation)       |  | (IRS Employer Identification No.)
|                                                    
|7803 Glenroy Road, Suite 200, Minneapolis,
Minnesota |  | 55439                            
|(Address of Principal Executive Offices)             |  | (Zip Code)                       





|(612) 492-2400                                      
|----------------------------------------------------
|(Registrants telephone number, including area
code)



---



Check 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 ̈



As of January 29, 2003, there were 4,670,550 shares of common
stock of the registrant issued and outstanding.



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##### Table of Contents



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



INDEX TO FORM 10-Q



December 28, 2002



|               |  |                                                                                                    |  | Page
|-------------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|PART I.        |  | FINANCIAL INFORMATION                                                                              |  | 3   
|              
|ITEM 1.        |  | Consolidated Financial Statements (Unaudited)                                                      |  |     
|              
|               |  | Balance Sheets as of December 28, 2002 and June 29, 2002                                           |  | 3   
|              
|               |  | Statements of Operations for the Three and Six Months EndedDecember 28, 2002 and December 29, 2001 |  | 4   
|              
|               |  | Statement of Shareholders Equity for the Six Months EndedDecember 28, 2002                        |  | 5   
|              
|               |  | Statements of Cash Flows for the Six Months EndedDecember 28, 2002 and December 29, 2001           |  | 6   
|              
|               |  | Notes to Consolidated Financial Statements                                                         |  | 7   
|              
|ITEM 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 11  
|              
|ITEM 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 16  
|              
|ITEM 4.        |  | Controls and Procedures                                                                            |  | 17  
|              
|PART II.       |  | OTHER INFORMATION                                                                                  |  | 17  
|              
|ITEM 1.        |  | Legal Proceedings                                                                                  |  | 17  
|              
|ITEM 2.        |  | Changes in Securities and Use of Proceeds                                                          |  | 18  
|              
|ITEM 3.        |  | Defaults Upon Senior Securities                                                                    |  | 18  
|              
|ITEM 4.        |  | Submission of Matters to a Vote of Security Holders                                                |  | 18  
|              
|ITEM 5.        |  | Other Information                                                                                  |  | 18  
|              
|ITEM 6.        |  | Exhibits and Reports on Form 8-K                                                                   |  | 19  
|              
|SIGNATURES     |  | 19                                                                                                
|              
|CERTIFICATIONS |  | 20                                                                                                



2



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##### Table of Contents



PART I.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)



|                                                                                                                                                                 |  | December 28, 2002 |          |   | June 29, 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------- | -
|                                                                                                                                                                 |  | (unaudited)       |          |   |               |  
|ASSETS                                                                                                                                                           |  |                   |          |   |               |  
|                                                                                                                                                                
|Current assets:                                                                                                                                                  |  |                   |          |   |               |  
|Cash                                                                                                                                                             |  | $                 | 1,531    |   |               | $
|Accounts receivable, net                                                                                                                                         |  |                   | 41,151   |   |               |  
|Accounts receivableother                                                                                                                                        |  |                   | 1,781    |   |               |  
|Prepaid workers' compensation and auto liability insurance                                                                                                       |  |                   | 8,636    |   |               |  
|Other prepaid expenses                                                                                                                                           |  |                   | 2,058    |   |               |  
|Other current assets                                                                                                                                             |  |                   | 378      |   |               |  
|                                                                                                                                                                 |  |                   |          |   |               |  
|Total current assets                                                                                                                                             |  |                   | 55,535   |   |               |  
|                                                                                                                                                                
|Property and equipment, net                                                                                                                                      |  |                   | 10,378   |   |               |  
|                                                                                                                                                                
|Goodwill                                                                                                                                                         |  |                   | 42,830   |   |               |  
|Deferred financing costs, net                                                                                                                                    |  |                   | 1,877    |   |               |  
|Other assets                                                                                                                                                     |  |                   | 991      |   |               |  
|                                                                                                                                                                 |  |                   |          |   |               |  
|Total assets                                                                                                                                                     |  | $                 | 111,611  |   |               | $
|                                                                                                                                                                 |  |                   |          |   |               |  
|                                                                                                                                                                
|LIABILITIES AND SHAREHOLDERS'
EQUITY                                                                                                                             |  |                   |          |   |               |  
|                                                                                                                                                                
|Current liabilities:                                                                                                                                             |  |                   |          |   |               |  
|Trade accounts payable                                                                                                                                           |  | $                 | 19,592   |   |               | $
|Accrued insurance and claims                                                                                                                                     |  |                   | 5,280    |   |               |  
|Accrued wages and benefits                                                                                                                                       |  |                   | 2,983    |   |               |  
|Accrued legal and claims                                                                                                                                         |  |                   | 2,918    |   |               |  
|Other accrued liabilities                                                                                                                                        |  |                   | 1,931    |   |               |  
|Current portion of long-term debt                                                                                                                                |  |                   | 13       |   |               |  
|                                                                                                                                                                 |  |                   |          |   |               |  
|Total current liabilities                                                                                                                                        |  |                   | 32,717   |   |               |  
|                                                                                                                                                                
|Long-term debt less current portion                                                                                                                              |  |                   | 39,997   |   |               |  
|Accrued insurance and claims                                                                                                                                     |  |                   | 6,987    |   |               |  
|                                                                                                                                                                
|Shareholders' equity:                                                                                                                                            |  |                   |          |   |               |  
|Preferred stock, $0.004 par value, 50,000 shares authorized 13,650 and 13,568 shares
issued and outstanding at December 28, 2002 and June 29, 2002, respectively |  |                   | 64,741   |   |               |  
|Preferred warrants, 1,042 outstanding at December 28, 2002 and June 29,
2002                                                                                     |  |                   | 7,600    |   |               |  
|Common stock, $0.004 par value, 150,000 shares authorized 4,671 and 3,663 shares issued
and outstanding at December 28, 2002 and June 29, 2002, respectively     |  |                   | 19       |   |               |  
|Stock subscription receivable                                                                                                                                    |  |                   | (8       | ) |               |  
|Additional paid-in-capital                                                                                                                                       |  |                   | 60,367   |   |               |  
|Accumulated deficit                                                                                                                                              |  |                   | (100,657 | ) |               |  
|Foreign currency translation                                                                                                                                     |  |                   | (152     | ) |               |  
|                                                                                                                                                                 |  |                   |          |   |               |  
|Total shareholders' equity                                                                                                                                       |  |                   | 31,910   |   |               |  
|                                                                                                                                                                 |  |                   |          |   |               |  
|Total liabilities and shareholders' equity                                                                                                                       |  | $                 | 111,611  |   |               | $
|                                                                                                                                                                 |  |                   |          |   |               |  



See notes
to consolidated financial statements.



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##### Table of Contents



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)



|                                                                       |  | Three Months Ended |        |   | Six Months Ended  |  
|---------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                       |  | December 28, 2002  |        |   | December 29, 2001 |  
|Revenue                                                                |  | $                  | 75,041 |   |                   | $
|Cost of services                                                       |  |                    | 58,188 |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Gross profit                                                           |  |                    | 16,853 |   |                   |  
|                                                                      
|Operating expenses:                                                    |  |                    |        |   |                   |  
|Occupancy                                                              |  |                    | 3,199  |   |                   |  
|Selling, general and administrative                                    |  |                    | 13,638 |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Total operating expenses                                               |  |                    | 16,837 |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Income (loss) from operations                                          |  |                    | 16     |   |                   |  
|Other income (expense):                                                |  |                    |        |   |                   |  
|Interest expense                                                       |  |                    | (761   | ) |                   |  
|Common stock warrant charge                                            |  |                    |       |   |                   |  
|Other                                                                  |  |                    | (28    | ) |                   |  
|                                                                       |  |                    |        |   |                   |  
|Net loss                                                               |  | $                  | (773   | ) |                   | $
|                                                                       |  |                    |        |   |                   |  
|Net loss applicable to common shareholders                             |  | $                  | (1,049 | ) |                   | $
|                                                                       |  |                    |        |   |                   |  
|                                                                      
|Basic and diluted net loss per share                                   |  | $                  | (0.24  | ) |                   | $
|                                                                       |  |                    |        |   |                   |  
|                                                                      
|Basic and diluted weighted average number of common shares outstanding |  |                    | 4,442  |   |                   |  
|                                                                       |  |                    |        |   |                   |  







See notes to consolidated financial statements.



|
|





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##### Table of Contents



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

(Amounts in thousands)



|                                                                              |  | Series B Preferred Stock |  | Series C Preferred Stock |        | Series D Preferred Stock |       |        | Series F Preferred Stock |        |  | Series G Preferred Stock |        |  | Series H Preferred Stock |       
|----------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------ | ------ | ------------------------ | ----- | ------ | ------------------------ | ------ |  | ------------------------ | ------ |  | ------------------------ | ------
|                                                                              |  | Shares                   |  | Amount                   |        | Shares                   |       | Amount |                          | Shares |  |                          | Amount |  |                          | Shares
|Balance at June 29, 2002                                                      |  | 2,807                    |  | $                        | 24,304 |                          | 2,000 |        | $                        | 13,600 |  | 1,830                    |        |  | $                        | 10,808
|Payments against stock subscription receivable                                |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Amortization of stock option expense                                          |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Warrant exercises                                                             |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Offering costs                                                                |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Issuance of Series H Preferred Stock                                          |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Value of Common Warrants issued in connection with sale of Series H
Preferred |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Accretion of beneficial conversion feature for Series H Preferred Stock       |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Conversion of Series D to Common Stock                                        |  |                         |  |                          |       |                          |      |        |                          |       |  | (63                      | )      |  |                          | (500  
|Conversion of Series F to Common Stock                                        |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Net loss                                                                      |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Foreign currency translation                                                  |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Comprehensive loss                                                            |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       
|Balance at December 28, 2002                                                  |  | 2,807                    |  | $                        | 24,304 |                          | 2,000 |        | $                        | 13,600 |  | 1,767                    |        |  | $                        | 10,308
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       



[Table continues below]



|                                                                              |  | Preferred Stock Warrants |  | Common Stock |       | Stock Subscription Receivable |       |        | Additional Paid-in Capital |    | Accumulated Deficit |   |     | Foreign Currency Translation |  |   | Total  | 
|----------------------------------------------------------------------------- |  | ------------------------ |  | ------------ | ----- | ----------------------------- | ----- | ------ | -------------------------- | -- | ------------------- | - | --- | ---------------------------- |  | - | ------ | 
|                                                                              |  | Shares                   |  | Amount       |       | Shares                        |       | Amount |                            |    |                     |   |    
|Balance at June 29, 2002                                                      |  | 1,042                    |  | $            | 7,600 |                               | 3,663 |        | $                          | 15 |                     | $ | (26 | )                            |  | $ | 57,152 | 
|Payments against stock subscription receivable                                |  |                         |  |              |      |                               |      |        |                            |   |                     |   | 18  |                              |  |   |       | 
|Amortization of stock option expense                                          |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   | 56     | 
|Warrant exercises                                                             |  |                         |  |              |      |                               | 200   |        |                            | 1  |                     |   |    |                              |  |   | 399    | 
|Offering costs                                                                |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Issuance of Series H Preferred Stock                                          |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Value of Common Warrants issued in connection with sale of Series H
Preferred |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   | 828    | 
|Accretion of beneficial conversion feature for Series H Preferred Stock       |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Conversion of Series D to Common Stock                                        |  |                         |  |              |      |                               | 152   |        |                            | 1  |                     |   |    |                              |  |   | 499    | 
|Conversion of Series F to Common Stock                                        |  |                         |  |              |      |                               | 656   |        |                            | 2  |                     |   |    |                              |  |   | 1,433  | 
|Net loss                                                                      |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Foreign currency translation                                                  |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                                                                              |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 
|Comprehensive loss                                                            |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                                                                              |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 
|Balance at December 28, 2002                                                  |  | 1,042                    |  | $            | 7,600 |                               | 4,671 |        | $                          | 19 |                     | $ | (8  | )                            |  | $ | 60,367 | 
|                                                                              |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 



See notes
to consolidated financial statements.





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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Uaudited)

(Amounts in thousands)



|                                                                                  |  | Six Months Ended  |       
|--------------------------------------------------------------------------------- |  | ----------------- | ------
|                                                                                  |  | December 28, 2002 |       
|OPERATING ACTIVITIES                                                              |  |                   |       
|Net loss                                                                          |  | $                 | (615  
|Adjustments to reconcile net loss to net cash flows used in operating
activities: |  |                   |       
|Depreciation                                                                      |  |                   | 1,778 
|Amortization                                                                      |  |                   | 405   
|Equity instruments issued in lieu of payment for services received                |  |                   |      
|Amortization of stock option expense                                              |  |                   | 56    
|Non cash interest expense                                                         |  |                   | 171   
|Other                                                                             |  |                   | (32   
|Gain on sale of assets                                                            |  |                   |      
|Gain on retirement of equipment                                                   |  |                   | (11   
|Change in operating assets and liabilities:                                       |  |                   |       
|Accounts receivable                                                               |  |                   | (2,335
|Other current assets                                                              |  |                   | 2,963 
|Other assets                                                                      |  |                   | (28   
|Accounts payable                                                                  |  |                   | 461   
|Accrued liabilities                                                               |  |                   | (6,850
|                                                                                  |  |                   |       
|Cash used in operating activities                                                 |  |                   | (4,037
|                                                                                 
|INVESTING ACTIVITIES                                                              |  |                   |       
|Proceeds from sale of assets                                                      |  |                   | 11    
|Purchases of equipment                                                            |  |                   | (1,154
|Other                                                                             |  |                   | (30   
|                                                                                  |  |                   |       
|Cash used in investing activities                                                 |  |                   | (1,173
|                                                                                 
|FINANCING ACTIVITIES                                                              |  |                   |       
|Borrowings (repayments) under revolving credit agreement, net                     |  |                   | 1,071 
|Payments on acquisition notes                                                     |  |                   |      
|Proceeds from subscription notes                                                  |  |                   | 18    
|Proceeds from issuance of preferred stock, net                                    |  |                   | 2,748 
|Proceeds from issuance of common stock, net                                       |  |                   | 400   
|Debt financing costs                                                              |  |                   | (200  
|                                                                                  |  |                   |       
|Cash provided by financing activities                                             |  |                   | 4,037 
|                                                                                  |  |                   |       
|Net (decrease) increase in cash and cash equivalents                              |  |                   | (1,173
|Cash and cash equivalents, beginning of period                                    |  |                   | 2,704 
|                                                                                  |  |                   |       
|Cash and cash equivalents, end of period                                          |  | $                 | 1,531 
|                                                                                  |  |                   |       







See notes to consolidated financial statements.





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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)

---





1.    DESCRIPTION OF BUSINESS



Velocity Express Corporation and its subsidiaries (collectively, the Company) are engaged in the business of providing same-day transportation and distribution/logistics 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 and thus additional disclosures under Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, are not required.



2.    SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation The consolidated financial statements included herein have been
prepared by Velocity Express Corporation which, together with its wholly-owned subsidiaries, shall be referred to herein as the Company, without audit, 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 December 28, 2002, and the results of its operations for the three and six
months ended December 28, 2002, and its cash flows for the six months ended December 28, 2002 have been included. 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 consolidated financial
statements should be read in conjunction with the financial statements for the year ended June 29, 2002, and the footnotes thereto, included in the Companys Report on Form 10-K, filed with the Securities and Exchange Commission.



Principles of Consolidation The
consolidated financial statements include the accounts of Velocity Express Corporation and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in the consolidation.



Reclassifications Certain
reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.



Comprehensive income (loss) Comprehensive loss was $627,000 and $11.3 million for the six months ended December 28,
2002 and December 29, 2001, respectively. The difference between net income and total comprehensive income in the respective periods related to foreign currency translation adjustments.



New accounting pronouncements In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. This statement develops one accounting model (based on the model in SFAS No. 121) for long-lived assets to be
disposed of, expands the scope of discontinued operations and modifies the accounting for discontinued operations. The adoption of this statement beginning fiscal 2003 has not had a material impact on the Companys consolidated financial
position or results of operations.



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



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



(Unaudited)

---





The
following table sets forth a reconciliation of the numerators and denominators of basic and diluted net loss per common share:



|                                                                                                   |  | Three Months Ended                            |        |   | Six Months Ended  |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ----------------- | -
|                                                                                                   |  | December 28, 2002                             |        |   | December 29, 2001 |  
|                                                                                                   |  | (Amounts in thousands, except per share data) |       
|Numerator                                                                                          |  |                                               |        |   |                   |  
|Net loss                                                                                           |  | $                                             | (773   | ) |                   | $
|Beneficial conversion feature                                                                      |  |                                               |       |   |                   |  
|Adjustment of Common Warrants issued in connection with sale of Series F Preferred to
market value |  |                                               |       |   |                   |  
|Accretion of Series B Preferred Stock                                                              |  |                                               |       |   |                   |  
|Accretion of Series D Preferred Stock                                                              |  |                                               |       |   |                   |  
|Accretion of beneficial conversion feature for Series H Preferred Stock                            |  |                                               | (276   | ) |                   |  
|Adjustment of Preferred Series C Warrants to market value                                          |  |                                               |       |   |                   |  
|Adjustment of Preferred Series D Warrants to market value                                          |  |                                               |       |   |                   |  
|                                                                                                   |  |                                               |        |   |                   |  
|Net loss applicable to common shareholders                                                         |  | $                                             | (1,049 | ) |                   | $
|                                                                                                   |  |                                               |        |   |                   |  
|                                                                                                  
|Denominator for basic and diluted loss per share                                                   |  |                                               |        |   |                   |  
|Weighted average shares                                                                            |  |                                               | 4,442  |   |                   |  
|                                                                                                   |  |                                               |        |   |                   |  
|                                                                                                  
|Basic and diluted loss per share                                                                   |  | $                                             | (0.24  | ) |                   | $
|                                                                                                   |  |                                               |        |   |                   |  







3.    LONG-TERM DEBT



Long-term debt consisted of the following:



|                         |  | December 28, 2002      |        |   | June 29, 2002 |  
|------------------------ |  | ---------------------- | ------ | - | ------------- | -
|                         |  | (Amounts in thousands) |       
|Revolving note           |  | $                      | 35,559 |   |               | $
|Senior subordinated note |  |                        | 4,431  |   |               |  
|Other                    |  |                        | 20     |   |               |  
|                         |  |                        |        |   |               |  
|                         |  |                        | 40,010 |   |               |  
|Less current maturities  |  |                        | (13    | ) |               |  
|                         |  |                        |        |   |               |  
|Total                    |  | $                      | 39,997 |   |               | $
|                         |  |                        |        |   |               |  



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



(Unaudited)

---





Borrowings
under the revolving note are limited to the lesser of $40 million or an amount based on a defined portion of receivables. Interest is payable monthly at a rate of prime plus 1.25% (5.5% at December 28, 2002), or, at the Companys election, at
LIBOR plus 3%. Further, the Company has the ability to lower these margins by 0.50% over the remainder of the agreement provided it meets certain conditions as defined in the agreement. In addition, the Company is required to pay a commitment fee of
0.375% on unused amounts of the total commitment, as defined in the agreement. The term of the facility is two years, ending January 2004.



The senior subordinated note has interest payable quarterly at 12% per annum and is due September 30, 2004. The note is subordinate to the
revolving note. The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated lender. The warrant is subject to anti-dilution provisions. The
unamortized discount was $0.6 million at December 28, 2002, and is being amortized over the remaining term of the note.



Substantially all of the assets and operations of Velocity have been pledged to secure borrowings under the revolving note and the senior
subordinated note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on dividends, loans and investments, capital expenditures, new indebtedness and changes in capital structure. The Company
is also required to maintain a financial covenant related to its interest coverage ratio. The agreements with the lenders also require the Company to obtain the consent of the lenders for additional acquisitions.



4.    SHAREHOLDERS EQUITY



Series H Convertible Preferred Stock The
Company is in the process of raising subordinated debt in order to refinance its current subordinated debt facility and to provide working capital support. In connection with this effort, the Company has authorized the issuance of up to $5.0 million
of its Series H Convertible Preferred Stock (Series H Preferred). The Series H Preferred contains a call provision to allow the Company to buy back, at its discretion, the Series H Preferred.



The initial conversion price of the Series H Preferred is
$1.00 per common share, and is convertible, upon the later of shareholder approval or April 30, 2003, into the Companys common stock. Both the conversion price and the number of common shares into which the Series H Preferred is convertible
are subject to adjustment in order to prevent dilution. The Series H Preferred call provision provides the Company with the right to repurchase any or all of the shares of Series H Preferred at a purchase price of $1.00 per share of common stock
until the expiration of the call provision on April 30, 2003.



During the second quarter, the Company received $5.0 million in purchase commitments from investors to purchase shares of Series H Preferred. In the quarter, the Company sold 275,000 shares of Series H Preferred to investors for net
proceeds of $2.75 million. In connection with the sales of Series H Preferred in the second quarter, the Company issued warrants to purchase 1.4 million shares of common stock at an exercise price of $0.01 per share.



The remaining 225,000 shares of Series H Preferred will be
issued in the third quarter. In connection with these shares, the Company will issue 1.1 million common stock warrants at an exercise price of $0.01 per share.



9



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



(Unaudited)

---





In the
event the Company does not call the Series H Preferred on or before April 30, 2003, it will be required to issue an additional 3.6 million common stock warrants at an exercise price of $0.01 per share to the holders of the Series H Preferred. As a
result of allocating fair value of the warrants from the carrying amount of the Series H Preferred to the warrants, a beneficial conversion on the Series H Preferred results. The amount of the beneficial conversion will range from $1.5 million to
$2.9 million, depending upon whether or not the Company elects to call the Series H Preferred prior to the April 30, 2003 call date, and depending on the stock price at the time that any additional warrants are issued. The beneficial conversion
amount will be charged to accumulated deficit over period between the issue date and the earliest conversion date of the Series H Preferred. In the second quarter, the Company accounted for $0.3 million of this charge.





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##### Table of Contents



|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS
|------- |  | --------------------------------------------------------------------------------------





VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



In accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain statements in this Form 10-Q and elsewhere which are forward-looking and
which provide other than historical information, involve risks and uncertainties that may impact the Companys results of operations. These forward-looking statements include, among others, statements concerning the Companys general
business strategies, financing decisions, and expectations for funding capital expenditures and operations in the future. When used herein, the words believe, plan, continue, hope,
estimate, project, intend, expect, and similar expressions are intended to identify such forward-looking statements. Although the Company believes that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, no statements contained in this Form 10-Q should be relied upon as predictions of future events. Such statements are necessarily dependent on assumptions, data or methods that may be
incorrect or imprecise and may be incapable of being realized. The risks and uncertainties inherent in these forward-looking statements could cause results to differ materially from those expressed in or implied by these statements.



Readers are cautioned not to place undue
reliance on the forward-looking statements contained herein, which speak only as of the date hereof. The information contained in this Form 10-Q is believed by the Company to be accurate as of the date hereof. Changes may occur after that date, and
the Company will not update that information except as required by law in the normal course of its public disclosure practices.



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Performance Metrics



The Company evaluates operating
performance based on various measures including income from operations, net income and EBITDA. EBITDA represents net income (loss) plus interest, income taxes, depreciation and amortization, and non-cash charges associated with the granting of
equity as payment for certain services. The Company considers EBITDA an important indicator of the operational strength and performance of its business, and a measure of the Companys ability to provide cash flows to service debt and fund
capital expenditures; however, EBITDA is a supplemental measure of performance and is not intended to represent a measure of performance in accordance with disclosures required by generally accepted accounting principles (GAAP).



In the second quarter of fiscal 2003, the
Company reported income from operations of $16,000 as compared to $0.3 million in the second quarter of fiscal 2002, a decline of $0.3 million. Furthermore, the Company reported EBITDA of $1.1 million as compared to $2.6 million in the second
quarter of fiscal 2002. In the second quarter of fiscal 2002, the Company recorded a one-time gain associated with the sale of its Air Courier Division. Excluding this gain, the EBITDA produced from operations was $1.5 million.



For the six months ended December 28, 2002, the Company
reported income from operations of $1.0 million as compared to a loss from operations of $0.4 million for the same period in fiscal 2002. The Company also reported EBITDA of $3.2 million as compared to $3.1 million for the same period in fiscal
2002. The prior-year period included a one-time gain of $1.1 million related to the sale of the Air Courier Division. Exclusive of this gain, EBITDA for the first half of fiscal 2003 improved $1.2 million compared to the same period last year. These
improvements will be discussed in the following sections.



|                                                    |  | Three Months Ended                            |        |   | Six Months Ended  |  
|--------------------------------------------------- |  | --------------------------------------------- | ------ | - | ----------------- | -
|                                                    |  | December 28, 2002                             |        |   | December 29, 2001 |  
|                                                    |  | (Amounts in thousands, except per share data) |       
|Revenue                                             |  | $                                             | 75,041 |   |                   | $
|Income (loss) from operations                       |  |                                               | 16     |   |                   |  
|Net income (loss)                                   |  |                                               | (773   | ) |                   |  
|Net income (loss) applicable to common shareholders |  |                                               | (1,049 | ) |                   |  
|EBITDA                                              |  |                                               | 1,119  |   |                   |  
|                                                   
|Net income (loss) per common share:                 |  |                                               |        |   |                   |  
|Basic net income (loss) per share                   |  | $                                             | (0.24  | ) |                   | $
|Diluted net income (loss) per share                 |  |                                               | (0.24  | ) |                   |  
|                                                   
|Basic net income per share  EBITDA basis           |  |                                               | 0.25   |   |                   |  
|Diluted net income per share  EBITDA basis         |  |                                               | 0.05   |   |                   |  



A
reconciliation of EBITDA to net income (loss) is as follows:



|                        |  | Three Months Ended     |       |   | Six Months Ended  |  
|----------------------- |  | ---------------------- | ----- | - | ----------------- | -
|                        |  | December 28, 2002      |       |   | December 29, 2001 |  
|                        |  | (Amounts in thousands) |      
|EBITDA                  |  | $                      | 1,119 |   |                   | $
|Interest                |  |                        | (761  | ) |                   |  
|Taxes                   |  |                        |      |   |                   |  
|Depreciation            |  |                        | (846  | ) |                   |  
|Amortization            |  |                        | (257  | ) |                   |  
|Non-cash equity charges |  |                        | (28   | ) |                   |  
|                        |  |                        |       |   |                   |  
|Net income (loss)       |  | $                      | (773  | ) |                   | $
|                        |  |                        |       |   |                   |  



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Overview



Velocity Express Corporation and its subsidiaries are engaged
in the business of providing same-day transportation and distribution/logistics services to individual consumers and businesses. The Company operates primarily in the United States with limited operations in Canada.



The Company has one of the largest nationwide networks of
customized, time-critical delivery solutions in the United States and is a leading provider of scheduled, distribution and expedited logistics services. The Companys service offerings are divided into the following categories:



| |  |  | Scheduled logistics consisting of the daily pickup and delivery of parcels with narrowly defined time schedules predetermined by the customer, for example,
financial institutions that need a wide variety of services including the pickup and delivery of non-negotiable instruments, primarily canceled checks and ATM receipts, the delivery of office supplies, and the transfer of inter-office mail and
correspondence.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distribution logistics consisting of the receipt of customer bulk shipments that are divided and sorted at major metropolitan locations and delivered into multiple
routes with defined endpoints and more broadly defined time schedules. Customers utilizing distribution logistics normally include pharmaceutical wholesalers, retailers, manufacturers or other companies who must distribute merchandise every day from
a single point of origin to many locations within a clearly defined geographic region.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expedited logistics consisting of unique and expedited point-to-point service for customers with extremely time sensitive delivery requirements. Most expedited
logistics services occur within a major metropolitan area or radius of 40 miles, and the Company usually offers one-hour, two- to four-hour and over four-hour delivery services depending on the customers time requirements. These services are
typically available 24 hours a day, seven days a week. Expedited logistics services also include critical parts management and delivery for companies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Historical Results of Operations



Revenue for the quarter ended December 28, 2002 decreased $9.4 million or 11.1% to $75.0 million from $84.4
million for the quarter ended December 29, 2001. The decrease in revenue for the quarter ended December 28, 2002 compared to the same period last year is the result of the consolidation of unprofitable locations and the divesture of a non-core air
courier business operation of $6.5 million. The remaining decline in revenue was the result of lower volume in the second quarter as a result of the soft economy, which impacted the Company through customer attrition, pricing pressure and existing
customers shipping lower volumes. The total impact was approximately $2.9 million.



Revenue for the six months ended December 28, 2002 decreased $27.2 million or 15.1% to $153.0 million from $180.2 million for the six months ended December 29, 2001. The decrease in revenue for the six
months ended December 28, 2002 compared to the same period last year is the result of the consolidation of unprofitable locations and the divesture of a non-core air courier business operation of $21.3 million, and lower volume experienced in the
first half as a result of the soft economy which impacted the Company through customer attrition, pricing pressure and existing customers shipping lower volumes. The total impact was approximately $5.9 million.



Revenue by service offering was as follows:



|Scheduled logistics    |  | 53.2 | %
|---------------------- |  | ---- | -
|Distribution logistics |  | 23.4 | %
|Expedited logistics    |  | 23.4 | %



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Cost of
services for the quarter ended December 28, 2002 was $58.2 million, a reduction of $6.9 million or 10.6% from $65.1 million for the quarter ended December 29, 2001. Approximately $7.2 million of the savings in cost of services correlates to the
reduced revenue described above. This savings was offset by inefficiencies of approximately $0.3 million primarily related to costs associated with not achieving route density resulting in higher payments to drivers as a percentage of sales compared
to the same quarter last year. The Company continues to move to a variable cost strategy, which may mitigate these inefficiencies going forward as the Company continues to see improved insurance expense and improvement in overall driver and
vehicle-related costs.



Cost of services for the
six months ended December 28, 2002 was $118.2 million, a reduction of $22.9 million or 16.2% from $141.1 million for the six months ended December 29, 2001. Cost of services improved 1.0 percentage point as our costs as a percentage of revenue
decreased from 78.3% to 77.3% for the six months ended December 28, 2002. Approximately $21.7 million of the savings in cost of services correlates to the reduced revenue described above, including $3.7 million as a result of the divestiture of a
non-core air courier business operation. Approximately $1.2 million relates to efficiencies gained as the Company moved to a variable cost model using independent contractors and employee-owner operators in greater proportion to employee drivers.
This variable cost strategy has resulted in improved insurance expense and improvement in overall driver and vehicle-related costs.



Selling, general and administrative (SG&A) expenses for the quarter ended December 28, 2002 were $13.6 million or 18.2% of
revenue, a reduction of $2.1 million or 13.4% as compared with $15.7 million or 18.6% of revenue for the quarter ended December 29, 2001. The decrease in SG&A for the quarter resulted from integrating, through technology, all back office
processes into one common platform.



SG&A expenses for the six months ended December 28, 2002 were $27.4 million or 17.9% of revenue, a reduction of $5.2 million or 16.0% as compared with $32.6 million or 18.1% of revenue for the six months ended December 29,
2001. The decrease in SG&A for the first half of fiscal 2003 resulted from integrating, through technology, all back office processes into one common platform resulting in savings of approximately $4.7 million and the sale of a non-core air
courier business operation which eliminated $0.5 million of related costs.



Occupancy charges for the quarter ended December 28, 2002 were $3.2 million, a reduction of $0.1 million or 3.0% from $3.3 million for the quarter ended December 29, 2001. The improvement for the
quarter is due to lower rent rates being implemented in various locations.



Occupancy charges for the six months ended December 28, 2002 were $6.4 million, a reduction of $0.4 million or 5.9% from $6.8 million for the six months ended December 29, 2001. The improvement for the
first half is due to divestitures of a non-core air courier business operation and lower rental rates being implemented in various locations.



Interest expense for the quarter ended December 28, 2002 decreased $4.4 million to $0.8 million from $5.2 million for the quarter ended
December 29, 2001. Included in interest expense for the prior-year period is a non-cash charge of $4.0 million related to a long-term guarantee the Company received from its largest shareholder on two letters of credit supporting the Companys
revolving credit facility. Exclusive of this charge, interest expense related to the Companys borrowings decreased $0.4 million over the same period in the prior year as a result of lower interest rates.



Interest expense for the six months ended December 28, 2002
decreased $9.3 million to $1.6 million from $10.9 million for the six months ended December 29, 2001. Included in interest expense for the prior-year period are certain non-cash charges related to the preferred stock amounting to approximately $4.7
million and the non-cash charge of $4.0 million discussed above. Interest expense related to the Companys borrowings decreased $0.6 million over the same period in the prior year as a result of lower interest rates.



As compensation for structuring and finalizing the agreement
between the Company and CEX which occurred in July 2001, the Company issued common stock warrants in the first quarter of fiscal 2002. The fair value of the warrants was approximately $1.0 million and was included in other expense in the
statement of operations in fiscal 2002.



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As a result of
the foregoing factors, the net loss for the quarter ended December 28, 2002 was $0.8 million, compared with $3.8 million for the same period in fiscal 2002, an improvement of $3.0 million. Net loss for the six months ended December 28, 2002 was
$0.6 million, compared with $11.2 million for the same period in fiscal 2002, an improvement of $10.6 million.



Net loss applicable to common shareholders was $1.0 million for quarter ended December 28, 2002 as compared with $9.7 million for the
same period in fiscal 2002. Net loss applicable to common shareholders was $0.9 million for six months ended December 28, 2002 as compared with $21.1 million for the same period in fiscal 2002. The difference in the six-month period between net loss
applicable to common shareholders and net loss in the current year relates to the accretion of the charge associated with the common stock warrants issued with the Series H Preferred. In the prior year of the comparable period, the difference
between net loss applicable to common shareholders and net loss was comprised of non-cash charges associated with the Companys redeemable preferred stock and the elimination of the redemption features in December 2001.



Liquidity and Capital Resources



Cash flow used in operations was $4.0 million for the first
half of fiscal 2003. This use of funds was comprised of cash generated from operations of $1.8 million offset by cash flows used as a result of working capital changes of $5.8 million. In the first six months of fiscal 2003, cash receipts on
accounts receivable were off approximately $2.3 million compared to revenues during the same period, resulting in a use of cash of approximately $2.3 million. As a result, the Company has implemented new credit policies and has increased its focus
on accounts receivable collections. Prepaid workers compensation resulted in $2.5 million in working capital due to a loss fund adjustment returned by the insurance carrier because of claims not developing as the insurance carrier expected.
This adjustment is a continued benefit from our transition to the variable cost model. The remaining use of working capital during the first half included approximately $5.2 million due to funding of claims (including insurance, cargo and legal) and
the funding of other miscellaneous accruals.



Cash flow used as a result of investing activities was $1.2 million and consisted primarily of capital expenditures for the Companys continued implementation of the customer-driven technology solutions initiative. The
Companys customer-driven technology solutions initiative is comprised of two elements: (i) smart package tracking technology which will provide a single source of aggregated delivery information to national customers, and (ii) a
customer-oriented web portal for online information access to provide package tracking, chain-of-custody updates, electronic signature capture, and real-time proof of delivery retrieval.



Cash flow from financing activities amounted to $4.0 million
during the first half of fiscal 2003. The primary source of cash was from the issuance of Series H Preferred, which provided net proceeds of $2.7 million. The revolving credit facility provided $1.1 million due to the increase in the collateral
base. The exercise of common warrants resulted in proceeds of $0.4 million.



The Company reported operating income of approximately $1.0 million for the first six months of fiscal 2003 and has positive working capital of approximately $22.8 million at December 28, 2002.



As of December 28, 2002, the Company had no
outstanding purchase commitments for capital improvements.



The Company is in the process of raising subordinated debt in order to refinance its current subordinated debt facility and to provide working capital support. In connection with this effort, the Company has authorized the issuance
of up to $5.0 million of its Series H Convertible Preferred Stock (Series H Preferred). The Series H Preferred contains a call provision to allow the Company to buy back, at its discretion, the Series H Preferred.



The initial conversion price of the Series H Preferred is
$1.00 per common share, and is convertible, upon the later of shareholder approval or April 30, 2003, into the Companys common stock. Both the conversion price and the number of common shares into which the Series H Preferred is convertible
are subject to adjustment in order to prevent dilution. The Series H Preferred call provision provides the Company with the



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right to repurchase any or all
of the shares of Series H Preferred at a purchase price of $1.00 per share of common stock until the expiration of the call provision on April 30, 2003.



During the second quarter, the Company received $5.0 million in purchase commitments from investors to purchase shares of Series H
Preferred. In the quarter, the Company sold 275,000 shares of Series H Preferred to investors for net proceeds of $2.75 million. In connection with the sales of Series H Preferred in the second quarter, the Company issued warrants to purchase
1.4 million shares of common stock at an exercise price of $0.01 per share.



The remaining 225,000 shares of Series H Preferred will be issued in the third quarter. In connection with these shares, the Company will issue 1.1 million common stock warrants at an exercise price of
$0.01 per share.



In the event the Company does
not call the Series H Preferred on or before April 30, 2003, it will be required to issue an additional 3.6 million common stock warrants at an exercise price of $0.01 per share to the holders of the Series H Preferred. As a result of allocating
fair value of the warrants from the carrying amount of the Series H Preferred to the warrants, a beneficial conversion on the Series H Preferred results. The amount of the beneficial conversion will range from $1.5 million to $2.9 million, depending
upon whether or not the Company elects to call the Series H Preferred prior to the April 30, 2003 call date, and depending on the stock price at the time that any additional warrants are issued. The beneficial conversion amount will be charged to
accumulated deficit over period between the issue date and the earliest conversion date of the Series H Preferred. In the second quarter, the Company accounted for $0.3 million of this charge.



The Companys operating plan includes the continued
execution of activities it previously initiated over the past 18 months to further improve the operating performance of the Company. These activities include, but are not limited to, expanding the variable cost model using independent contractors
and employee owner-operators in greater proportion to employee drivers, the implementation of customer-driven technology solutions and continued leveraging of the consolidated back office SG&A platform. Going forward, the Company believes cash
flows from operations and the equity raised via the private placement of the Series H offering will be sufficient to fund its operating needs. If additional funding is required, the Company will continue to secure, if necessary, additional
financing from its lenders or through the issuance of additional equity; however, there can be no assurance that such funding can be obtained.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



The Companys operations are not currently subject to material market risks for interest rates, foreign currency rates, or other
market price risks.



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ITEM 4.    CONTROLS AND PROCEDURES.



| | (a) |  | Evaluation of disclosure controls and procedures
| | --- |  | ------------------------------------------------



Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date (the Evaluation Date) within 90 days prior to the filing date
of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company (or its consolidated subsidiaries) required to be included in its periodic SEC filings.



| | (b) |  | Changes in internal controls
| | --- |  | ----------------------------



The Company maintains a system of internal accounting controls that is designed to provide reasonable assurance that the Companys
books and records accurately reflect its transactions and that the established policies and procedures are followed. For the quarter ended December 28, 2002, there were no significant changes to internal controls or in other factors that could
significantly affect the Companys internal controls.





PART II



ITEM 1.    LEGAL PROCEEDINGS.



Velocity is a party to litigation and has claims asserted against it incidental to its business. Most of such 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. Velocity carries workers compensation insurance and auto liability coverage for its employees for the current policy year.Velocity and its subsidiaries are also named as defendants in various employment-related lawsuits arising in the ordinary course of the business of Velocity. The Company vigorously defends against all of the foregoing claims.



The Company does not believe that the pending lawsuits, if
resolved or settled unfavorably to the Company, would have a material adverse effect upon the Companys financial position or results of operations. The Company has established an accrual for losses it may sustain in the pending actions as of
December 28, 2002. The Company believes that the accrual level is adequate for purposes of its financial statements.



Cautionary Statements Regarding Pending Litigation and Claims



The Companys statements above concerning pending litigation constitute forward-looking statements.
Investors should consider that there are many important factors that could adversely affect the Companys assumptions and the outcome of claims, and cause actual results to differ materially from those projected in the forward-looking
statements. These factors include:



| |  |  | The Company has made estimates of its 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, the Companys liability for claims may increase or decrease depending upon the ultimate development of those claims.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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| |  |  | In estimating the Companys exposure to claims, the Company is relying upon its assessment of insurance coverages and the availability of insurance. In some
instances insurers could contest their obligation to indemnify the Company for certain claims, based upon insurance policy exclusions or limitations. In addition, from time to time, in connection with routine litigation incidental to the
Companys business, plaintiffs may bring claims against the Company that may include undetermined amounts of punitive damages. The Company is currently not aware of any such punitive damages claim or claims in the aggregate which would exceed
10% of its current assets. Such punitive damages are not normally covered by insurance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS.



The following describes sales of the Companys securities in the last fiscal quarter without registration under the Securities Act of
1933 (the Securities Act):



The
Company has authorized the issuance of up to $5.0 million of its Series H Convertible Preferred Stock (Series H Preferred). The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible, upon the
later of shareholder approval or April 30, 2003, into the Companys common stock. Both the conversion price and the number of common shares into which the Series H Preferred is convertible are subject to adjustment in order to prevent dilution.
The Series H Preferred call provision provides the Company with the right to repurchase any or all of the shares of Series H Preferred at a purchase price of $1.00 per share of common stock until the expiration of the call provision on April 30,
2003.



During the second quarter, the Company
received approimately $5.0 million in purchase commitments from investors to purchase shares of Series H Preferred. In the quarter, the Company sold 275,000 shares of Series H Preferred to investors for net proceeds of $2.75 million. The remaining
225,000 shares of Series H Preferred will be issued in the third quarter.



The Company did not use an underwriter or placement agent in connection with this securities transaction, and no underwriting commissions were paid. No means of general solicitation was used in offering the securities. The
securities were sold to a limited group of accredited investors within the meaning of Rule 501(a) of Regulation D under the Securities Act of 1933 (the Securities Act) in a private placement transactions, exempt from registration under
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.



ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.



Not Applicable



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



Not Applicable



ITEM 5.    OTHER INFORMATION.



Not Applicable.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.



| | a. |  | Exhibits required by Item 601 of Regulation S-K:
| | -- |  | ------------------------------------------------



| | 3.1 |  | Certificate of Designation of Preferences and Rights of Series H Convertible Preferred Stock and Articles of Amendment to the Restated Articles of Incorporation.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.1 |  | Employment Agreement between Velocity Express Corporation and Jeffry J. Parell dated November 7, 2002.
| | ---- |  | ------------------------------------------------------------------------------------------------------



| | 10.2 |  | Form of Stock Purchase Agreement to purchase Series H Convertible Preferred Stock
| | ---- |  | ---------------------------------------------------------------------------------



| | 10.3 |  | Form of Common Stock Warrant issued in connection with the Companys Series H Convertible Preferred Stock financing.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------



| | 99.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | 99.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Reports on Form 8-K
| | -- |  | -------------------



None





SIGNATURES



In
accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Minneapolis, State of Minnesota on February 11, 2003.





VELOCITY EXPRESS CORPORATION.By:

/s/    JEFFRY J. PARELLJeffry J. Parell Chief Executive OfficerBy:

/s/    MARK E.
TIESMark E. Ties Chief Financial Officer (Principal Financial and Accounting Officer)




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CERTIFICATIONS



I,
Jeffry J. Parell, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Velocity Express Corporation;
| | -- |  | -----------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Dated: February 11, 2003 |  |  |  |                                         
|------------------------ |  |  |  | ----------------------------------------
|                        
|                         |  |  |  | /s/    JEFFRY J. PARELL                 
|                         |  |  |  | Jeffry J. Parell Chief Executive Officer







20



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##### Table of Contents



I, Mark E.
Ties, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Velocity Express Corporation;
| | -- |  | -----------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Dated: February 11, 2003 |  |  |  |                                     
|------------------------ |  |  |  | ------------------------------------
|                        
|                         |  |  |  | /s/    MARK E. TIES                 
|                         |  |  |  | Mark E. Ties Chief Financial Officer







21