U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q/A

(Mark One)

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

For the quarterly period ended September 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 ¨

Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ¨            NO x

As of November 7, 2002, there were 4,241,315 shares of common stock of the registrant issued and outstanding.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 28, 2002

		Page
PART I.	FINANCIAL INFORMATION	3
ITEM 1.	Consolidated Financial Statements (Unaudited)
	Balance Sheets as of September 28, 2002 and June 29, 2002	3
	Statements of Operations for the Three Months Ended September 28, 2002 and September 29, 2001	4
	Statement of Shareholders’ Equity for the Three Months Ended September 28, 2002	5
	Statements of Cash Flows for the Three Months Ended September 28, 2002 and September 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	16
PART II.	OTHER INFORMATION	16
ITEM 1.	Legal Proceedings	16
ITEM 2.	Changes in Securities and Use of Proceeds	17
ITEM 3.	Defaults Upon Senior Securities	17
ITEM 4.	Submission of Matters to a Vote of Security Holders	17
ITEM 5.	Other Information	17
ITEM 6.	Exhibits and Reports on Form 8-K	17
SIGNATURES		18

2

PART I.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

	September 28, 2002			June 29, 2002
	(unaudited)
ASSETS
Current assets:
Cash	$	3,199		$	2,704
Accounts receivable, net		42,351			38,816
Accounts receivable—other		1,606			1,895
Prepaid workers’ compensation and auto liability insurance		9,438			11,939
Other prepaid expenses		1,865			1,304
Other current assets		509			552
Total current assets		58,968			57,210
Property and equipment, net		10,917			10,970
Goodwill		42,830			42,830
Deferred financing costs, net		1,853			1,916
Other assets		985			963
Total assets	$	115,553		$	113,889
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	19,402		$	19,543
Accrued insurance and claims		6,021			6,084
Accrued wages and benefits		4,476			2,871
Accrued legal and claims		3,276			4,017
Other accrued liabilities		3,614			3,510
Current portion of long-term debt		21			30
Total current liabilities		36,810			36,055
Long-term debt less current portion		40,943			38,756
Accrued insurance and claims		7,887			9,763
Shareholders’ equity:
Preferred stock, $0.004 par value, 50,000 shares authorized 13,476 and 13,568 shares issued and outstanding at September 28, 2002 and June 29, 2002, respectively		63,653			64,480
Preferred warrants, 1,042 outstanding at September 28, 2002 and June 29, 2002		7,600			7,600
Common stock, $0.004 par value, 150,000 shares authorized 4,162 and 3,663 shares issued and outstanding at September 28, 2002 and June 29, 2002, respectively		17			15
Stock subscription receivable		(8	)		(26	)
Additional paid-in-capital		58,403			57,152
Accumulated deficit		(99,608	)		(99,766	)
Foreign currency translation		(144	)		(140	)
Total shareholders’ equity		29,913			29,315
Total liabilities and shareholders’ equity	$	115,553		$	113,889

See notes to consolidated financial statements.

3

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

	Three Months Ended
	September 28, 2002			September 29, 2001
Revenue	$	77,918		$	95,788
Cost of services		60,008			75,983
Gross profit		17,910			19,805
Operating expenses:
Occupancy		3,186			3,517
Selling, general and administrative		13,740			16,969
Total operating expenses		16,926			20,486
Income (loss) from operations		984			(681	)
Other income (expense):
Interest expense		(810	)		(5,745	)
Common stock warrant charge		—			(1,020	)
Other		(16	)		12
Net income (loss)	$	158		$	(7,434	)
Net income (loss) applicable to common shareholders	$	158		$	(11,414	)
Income (loss) per share:
Basic	$	0.04		$	(3.33	)
Diluted	$	0.01		$	(3.33	)
Weighted average shares outstanding:
Basic		3,940			3,429
Diluted		21,048			3,429

See notes to consolidated financial statements.

4

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				Preferred Stock Warrants			Common Stock			Stock Subscription Receivable			Additional Paid-in Capital		Accumulated Deficit			Foreign Currency Translation			Total
	Shares	Amount		Shares	Amount		Shares		Amount			Shares		Amount			Shares	Amount			Shares	Amount		Shares	Amount
Balance at June 29, 2002	2,807	$	24,304	2,000	$	13,600	1,830		$	10,808		1,066		$	11,389		5,865	$	4,379		1,042	$	7,600	3,663	$	15	$	(26	)	$	57,152	$	(99,766	)	$	(140	)	$	29,315
Payments against stock subscription receivable	—		—	—		—	—			—		—			—		—		—		—		—	—		—		18			—		—			—			18
Amortization of stock option expense	—		—	—		—	—			—		—			—		—		—		—		—	—		—		—			28		—			—			28
Warrant exercises	—		—	—		—	—			—		—			—		—		—		—		—	200		1		—			399		—			—			400
Offering costs	—		—	—		—	—			—		—			—		—		(2	)	—		—	—		—		—			—		—			—			(2	)
Conversion of Series D to Common Stock	—		—	—		—	(63	)		(500	)	—			—		—		—		—		—	152		1		—			499		—			—			—
Conversion of Series F to Common Stock	—		—	—		—	—			—		(29	)		(325	)	—		—		—		—	147		—		—			325		—			—			—
Net income	—		—	—		—	—			—		—			—		—		—		—		—	—		—		—			—		158			—			158
Foreign currency translation	—		—	—		—	—			—		—			—		—		—		—		—	—		—		—			—		—			(4	)		(4	)
Comprehensive income																																							154
Balance at September 28, 2002	2,807	$	24,304	2,000	$	13,600	1,767		$	10,308		1,037		$	11,064		5,865	$	4,377		1,042	$	7,600	4,162	$	17	$	(8	)	$	58,403	$	(99,608	)	$	(144	)	$	29,913

See notes to consolidated financial statements.

5

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

	Three Months Ended
	September 28, 2002			September 29, 2001
OPERATING ACTIVITIES
Net income (loss)	$	158		$	(7,434	)
Adjustments to reconcile net income (loss) to net cash flows used in operating activities:
Depreciation		932			1,029
Amortization		148			209
Equity instruments issued in lieu of payment for services received		—			1,020
Amortization of stock option expense		28			—
Non-cash interest expense		85			4,800
Other		(44	)		171
Gain on retirement of equipment		(11	)		(5	)
Change in operating assets and liabilities:
Accounts receivable		(3,535	)		5,496
Other current assets		2,272			(2,657	)
Other assets		(22	)		14
Accounts payable		(141	)		(400	)
Accrued liabilities		(971	)		(3,056	)
Cash used in operating activities		(1,101	)		(813	)
INVESTING ACTIVITIES
Proceeds from sale of assets		11			5
Capital expenditures		(835	)		(643	)
Other		(13	)		(49	)
Cash used in investing activities		(837	)		(687	)
FINANCING ACTIVITIES
Borrowings (repayments) under revolving credit agreement, net		2,102			(4,067	)
Payments on acquisition notes		—			(2,000	)
Proceeds from subscription notes		18			—
Proceeds from issuance of preferred stock, net		—			6,795
Proceeds from issuance of common stock, net		400			—
Debt financing costs		(87	)		(201	)
Cash provided by financing activities		2,433			527
Net increase (decrease) in cash and cash equivalents		495			(973	)
Cash and cash equivalents, beginning of period		2,704			2,932
Cash and cash equivalents, end of period	$	3,199		$	1,959

See notes to consolidated financial statements.

6

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 September 28, 2002, and the results of its operations for the three months ended September 28, 2002, and its cash flows for the three months ended September 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 income (loss) was $154,000 and ($7.5) million for the three months ended September 28, 2002 and September 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 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 such as options, warrants or convertible preferred stock, were exercised or converted into common stock that then shared in the earnings of the Company.

7

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 income (loss) per common share:

	Three Months Ended
	September 28, 2002		September 29, 2001
	(Amounts in thousands, except per share data)
Numerator:
Net income (loss)	$	158	$	(7,434	)
Beneficial conversion feature		—		(2,700	)
Adjustment of Common Warrants issued in connection with sale of Series F Preferred to market value		—		(258	)
Accretion of Series B Redeemable Preferred Stock to its redemption value		—		(190	)
Accretion of Series D Redeemable Preferred Stock to its redemption value		—		(52	)
Adjustment of Preferred Series C Warrants to market value		—		(130	)
Adjustment of Preferred Series D Warrants to market value		—		(650	)
Net income (loss) applicable to common shareholders	$	158	$	(11,414	)
Denominator:
Weighted average shares		3,940		3,429
Dilutive effect of common stock options and warrants		199		—
Dilutive effect of preferred stock and warrant conversions		16,909		—
Total common equivalents outstanding		21,048		3,429
Net income (loss) per share:
Basic	$	0.04	$	(3.33	)
Diluted	$	0.01	$	(3.33	)

8

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table presents securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented:

	Three Months Ended
	September 28, 2002	September 29, 2001
	(Amounts in thousands)
Stock options	125	77
Common warrants	74	153
Preferred warrants:
Series C Convertible Preferred	734	232
Series D Convertible Preferred	452	437
Convertible preferred stock:
Series B Convertible Preferred	3,721	812
Series C Convertible Preferred	1,785	563
Series D Convertible Preferred	4,024	3,673
Series F Convertible Preferred	5,020	1,898
Series G Convertible Preferred	1,173	—
	17,108	7,845

3.    LONG-TERM DEBT

Long-term debt consisted of the following:

	September 28, 2002			June 29, 2002
	(Amounts in thousands)
Revolving note	$	36,590		$	34,488
Senior subordinated note		4,345			4,260
Other		29			38
		40,964			38,786
Less current maturities		(21	)		(30	)
Total	$	40,943		$	38,756

Borrowings under the revolving note are limited to the lesser of $40 million or an amount based on a defined portion of receivables. Interest for the first year is payable monthly at a rate of prime plus 1.25% (6.0% at September 28, 2002). The Company may elect the rate of LIBOR plus 3% at its discretion in which case interest is payable at the end of a LIBOR advance period. 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 facility matures 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 unamortized discount was $0.7 million at September 28, 2002, and is being amortized over the remaining

9

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

term of the note. The warrant has an exercise price of $8.46 per share and entitles the holder to acquire, in whole or in part 534,939 shares of the Company’s common stock, as adjusted to reflect certain anti-dilution rights as defined in the warrant purchase agreement.

The Company’s accounts receivable have been pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure. The Company is also required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels.

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 for sales growth and continued information technology implementation. In connection with this effort, the Company has authorized the issuance 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 once the subordinated debt facility is in place.

The Company is authorized to raise up to $5.0 million through sales of its Series H Preferred. The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible, upon shareholder approval, 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 29, 2003. In connection with the sales of the Series H Preferred, the Company is also issuing warrants to purchase common stock. Due to the pricing of the Series H Preferred, the Company may be required to take a charge in its second quarter.

10

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.

11

Historical Results of Operations

Revenue for the quarter ended September 28, 2002 decreased $17.9 million or 18.7% to $77.9 million from $95.8 million for the quarter ended September 29, 2001. The decrease in revenue for the quarter ended September 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 $16.4 million, and lower volume experienced in the first quarter as a result of the soft economy.

Revenue by service offering for the three months ended September 28, 2002 was as follows:

Scheduled logistics	53.2%
Distribution logistics	23.4%
Expedited logistics	23.4%

Cost of services for the quarter ended September 28, 2002 was $60.0 million, a reduction of $16.0 million or 21.1% from $76.0 million for the quarter ended September 29, 2001. Cost of services improved 2.3 percentage points as our costs as a percentage of revenue decreased from 79.3% to 77.0% for the quarter ended September 28, 2002. Approximately $14.5 million of the savings in cost of services correlates to the reduced revenue described above, including $3.5 million as a result of the divestiture of a non-core air courier business operation. Approximately $1.5 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. The Company’s objective going forward is to produce gross margins in the 24% to 25% range. To achieve this objective, the Company is working on the following initiatives: (i) acceleration of the transition of the remaining 25% employee drivers to either independent contractors or employee owner-operators, allowing the Company to maximize efficiency in its direct cost structure, and (ii) implementation of rate structures with the independent contractor drivers that are more consistent with the pricing in today’s environment.

Selling, general and administrative (“SG&A”) expenses for the quarter ended September 28, 2002 were $13.7 million or 17.6% of revenue, a reduction of $3.3 million or 19.4% as compared with $17.0 million or 17.7% of revenue for the quarter ended September 29, 2001. The decrease in SG&A for the quarter resulted from integrating, through technology, all back office processes into one common platform resulting in savings of approximately $2.8 million and the sale of a non-core air courier business operation of $0.5 million. This focus has enabled the Company to realize a year-over-year improvement of 0.1 percentage points. Compared to the fourth quarter of fiscal 2002, SG&A as a percentage of revenue improved by 0.8 percentage points.

Occupancy charges for the quarter ended September 28, 2002 were $3.2 million, a reduction of $0.3 million or 8.6% from $3.5 million for the quarter ended September 29, 2001. The improvement for the quarter is due to divestitures of a non-core air courier business operation and the consolidation of operating locations.

Interest expense for the quarter ended September 28, 2002 decreased $4.9 million to $0.8 million from $5.7 million for the quarter ended September 29, 2001. Included in interest expense for the prior-year period are certain non-cash charges related to the conversion of the Series D Bridge Notes and interest thereon amounting to approximately $4.7 million. Interest expense related to the Company’s borrowings decreased 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.

As a result of the foregoing factors, the net income for the quarter ended September 28, 2002 was $0.2 million, compared with a net loss of $7.4 million for the same period in fiscal 2002, an improvement of $7.6 million.

12

Net income applicable to common shareholders was $0.2 million for quarter ended September 28, 2002 as compared with a net loss applicable to common shareholders of $11.4 million for the same period in fiscal 2002. The difference between net loss applicable to common shareholders and net loss in the prior year was comprised of non-cash charges associated with the Company’s redeemable preferred stock. With the elimination of the redemption features in December 2001, the preferred stock is now classified as permanent equity, and the Company is no longer required to take charges of this nature.

Use of EBITDA

The Company evaluates operating performance based on various measures including operating income, net income and EBITDA. EBITDA represents net income (loss) plus interest, income taxes, non-cash depreciation and amortization. The Company considers EBITDA an important indicator of the operational strength and performance of its business because it believes this indicator gives investors and shareholders a benchmark to compare the Company’s results to both other industry competition as well as the Company’s historical results; 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”). Furthermore, EBITDA presented herein may not be comparable to similarly titled measures reported by other companies. Management believes that there is no limitation on its discretionary use of funds depicted by EBITDA.

In the first quarter of fiscal 2003, the Company reported income from operations of $1.0 million as compared to a loss from operations of $0.7 million in the first quarter of fiscal 2002, an improvement of $1.7 million. Furthermore, the Company reported EBITDA of $2.1 million as compared to negative $0.5 million in the first quarter of fiscal 2002, an improvement of $2.6 million. These improvements will be discussed in the following sections.

	Three Months Ended
	September 28, 2002			September 29, 2001
	(Amounts in thousands, except per share data)
Revenue	$	77,918		$	95,788
Income (loss) from operations		984			(681	)
Net income (loss)		158			(7,434	)
Net income (loss) applicable to common shareholders		158			(11,414	)
Net income (loss) per common share:
Basic net income (loss) per share	$	0.04		$	(3.33	)
Diluted net income (loss) per share		0.01			(3.33	)
Other financial data:
Cash used in operating activities		(1,101	)		(813	)
Cash (used in) provided by investing activities		(837	)		(687	)
Cash provided by financing activities		2,433			527
EBITDA		2,074			(451	)

13

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

	Three Months Ended
	September 28, 2002			September 29, 2001
	(Amounts in thousands, except per share data)
EBITDA	$	2,074		$	(451	)
Interest expense		(810	)		(5,745	)
Income taxes		(26	)		—
Depreciation		(932	)		(1,029	)
Amortization		(148	)		(209	)
Net income (loss)	$	158		$	(7,434	)

Liquidity and Capital Resources

Cash flow used in operations was $1.1 million for the first quarter of fiscal 2003 as compared to $0.8 million in the prior year comparable period. In the first quarter of fiscal 2003, the use of funds was comprised of cash generated from operations of $1.3 million offset by cash flows used as a result of working capital changes of $2.4 million, while in fiscal 2002, the use of funds was comprised of cash flow used in operations of $0.2 million and cash flow used as a result of working capital changes of $0.6 million. During the first fiscal quarter of 2003, in September, cash receipts on accounts receivable were off approximately $900,000 per week compared to August’s revenues, resulting in a use of cash of approximately $3.5 million. As a result, the Company is implementing new credit policies and will increase its focus on accounts receivable collection. Prepaid workers’ compensation resulted in $2.3 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 quarter of fiscal 2003 included approximately $1.0 million due to funding of claims, including insurance, cargo and legal. Cash flow used in operations was $0.8 million during the first quarter of fiscal 2002, driven principally by the positive cash flow generated from accounts receivable of $5.5 million offset with negative cash flow from other current assets, accounts payable and miscellaneous accruals of $6.1 million.

Cash flow used as a result of investing activities during the first quarter of fiscal 2003 was $0.8 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. During the first quarter of fiscal 2002, cash flow used as a result of investing activities was primarily for capital expenditures that amounted to $0.7 million.

Cash flow from financing activities amounted to $2.4 million during the first quarter of fiscal 2003. The primary source of cash was from the revolving credit facility, which provided $2.1 million due to the increase in the collateral base. The exercise of common warrants resulted in proceeds of $0.4 million. During the first quarter of fiscal 2002, cash flow generated through financing activities amounted to $0.5 million. Net proceeds from private placement of Preferred Stock of $6.8 million was the primary source of cash during the quarter, while long-term debt and notes payable resulted in negative cash flow of $6.3 million.

The Company reported operating income of approximately $158,000 for the first quarter of fiscal 2003 and has positive working capital of approximately $22.2 million at September 28, 2002.

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

14

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 for sales growth and continued information technology implementation. In connection with this effort, the Company has authorized the issuance 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 once the subordinated debt facility is in place.

The Company is authorized to raise up to $5.0 million through sales of its Series H Preferred. The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible, upon shareholder approval, 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 29, 2003. In connection with the sales of the Series H Preferred, the Company is also issuing warrants to purchase common stock. Due to the pricing of the Series H Preferred, the Company may be required to take a charge in its second quarter.

In the short term, the Company intends to continue the execution of activities it previously initiated over the past 18 months to further improve the operating performance of the Company and to meet its fiscal 2003 financial plan. 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 additional financing from its lenders or through the issuance of additional equity; however, there can be no assurance that such funding can be obtained.

In the long term, the Company intends to continue to fund its operations through its existing revolving credit and senior subordinated debt facilities. The revolving credit facility with Fleet Capital Corporation allows for borrowings under the revolving note limited to the lesser of $40 million or an amount based on a defined portion of receivables. Interest for the first year is payable monthly at a rate of prime plus 1.25% (6.0% at September 28, 2002). The Company may elect the rate of LIBOR plus 3% at its discretion in which case interest is payable at the end of a LIBOR advance period. 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 facility matures January 2004. The Company’s accounts receivable have been pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure. The Company is also required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels. 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 unamortized discount was $0.7 million at September 28, 2002, and is being amortized over the remaining term of the note. The warrant has an exercise price of $8.46 per share and entitles the holder to acquire, in whole or in part 534,939 shares of the Company’s common stock, as adjusted to reflect certain anti-dilution rights as defined in the warrant purchase agreement. If additional funding is required as a result of working capital requirements due to business expansion or changes in working capital requirements, the Company will attempt to secure additional financing from its existing lenders through the expansion of these facilities or through the issuance of additional equity; however, there can be no assurance that such funding can be obtained.

15

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.

The Company has revolving debt of $36.6 million at September 28, 2002. If the entire revolving credit facility were subject to a one percentage point change in the borrowing rate, the corresponding annualized effect on interest expense would be $366,000.

ITEM 4.     CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures

The term “disclosure controls and procedures” is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days before the filing of this quarterly report (the Evaluation Date), and have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in reports filed under the Exchange Act.

(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 September 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 has established reserves for litigation, which it believes, are adequate. The Company reviews its litigation matters on a regular basis to evaluate the demands and likelihood of settlements and litigation related expenses. Based on this review, 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 balance sheet or results of operations. The Company has managed to fund settlements and litigation expenses through cash flow and believes that it will be able to do so going forward. Settlements and litigation expenses have not had a material impact on cash flow and the Company believes they will not have a material impact going forward.

16

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.

• 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.

Not Applicable.

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.

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

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

31.1	Section 302 Certification of CEO
31.2	Section 302 Certification of CFO
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	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.

17

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 July 28, 2003.

VELOCITY EXPRESS CORPORATION.
By:	/S/    Jeffry J. Parell
	Jeffry J. Parell Chief Executive Officer
By:	/S/    Mark E. Ties
	Mark E. Ties Chief Financial Officer (Principal Financial and Accounting Officer)

18