Velocity Express (VEXP)

Overview

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

The Company has one of the largest nationwide networks of time-definite logistics solutions in the United States and is a leading provider of scheduled, distribution and expedited logistics services. Its customers are comprised of multi-location, blue chip customers in the healthcare, office products, financial services, retail & consumer products, commercial, transportation & logistics, energy and technology sectors.

Our service offerings are divided into the following categories:

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The Company’s customers represent a variety of industries and utilize our services across multiple service offerings. Revenue categories and percentages of total revenue for the six-month periods ended December 27, 2008 and December 29, 2007 were as follows:

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

For the six months ended December 27, 2008, the Company had a net loss of $18.4 million, but generated cash from operations of $2.6 million.

Overview

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported significant recurring losses from operations over the past several years including in 2008 a loss of approximately $56.1 million, which includes a goodwill impairment charge of $46.7 million and a $13.9 million non-cash gain on the extinguishment of debt, and for the six months ended December 27, 2008 a loss of approximately $18.9 million. The Company also used cash in operating activities over the past several years, including $11.3 million in 2008. However, for the six months ended December 27, 2008, the Company generated $2.6 million in cash from operating activities. As of December 27, 2008 the Company has negative working capital of approximately $24.3 million and a deficiency in assets of $23.1 million. Further, the Company did not meet the minimum EBITDA levels and minimum driver pay and purchased transportation covenants contained in its credit agreement, as amended, at various times during fiscal 2008 and 2009. The Company also did not meet its minimum quarterly trailing twelve months EBITDA covenant for the period ended December 27, 2008, and its minimum cash and cash equivalents requirement and its minimum cash, cash equivalents and qualified accounts receivable requirements contained in its Indenture and related supplements at various times during

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fiscal 2009. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As described below, the Company is managing to an operating plan under which it expects to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt.

The Company did not meet the minimum EBITDA levels contained in its credit agreement, as amended, for the periods ended October 25, 2008, November 22, 2008 and December 27, 2008, and the maximum driver pay and purchased transportation covenant for the six three-week periods ended July 11, 2008, August 15, 2008, September 12, 2008, October 17, 2008, November 14, 2008 and December 12, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers for these covenant violations dated October 14, 2008, November 12, 2008, and February 17, 2009.

Wells has control of the Company’s lockbox as required by the revolving credit facility, as amended, and sweeps all collections from the lockbox on a daily basis. In turn, Wells advances cash to the Company as requested by the Company but limited to the maximum amount available under the facility. Starting in February of 2009, Wells began to limit the amount of daily cash being advanced to the Company to an amount necessary to cover the cash needs of each day. There can be no assurance that Wells will continue to advance to the Company enough cash to fund its daily cash needs.

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

On February 17, 2009 more than 95% of the Note Holders consented to a fifth supplemental indenture modifying the indenture governing the Modified Senior Notes. The fifth supplemental indenture will, among other things, (1) waive the covenant violations noted above, (2) replace certain existing financial covenants with a lower quarterly trailing twelve months EBITDA covenant, a $20.0 million minimum cash plus accounts receivable covenant, and increase the limit on purchase money obligations and capital lease obligations to $2.75 million in the aggregate, (3) permit the Company to enter into a $12.0 million revolving credit facility with Burdale, proceeds from which will be used to satisfy outstanding borrowings under the Wells revolving credit agreement, and (4) provides that the Company has agreed to hire an investment banker to sell the Modified Senior Notes or the Company. There can be no assurance that a replacement revolving credit facility will be consummated with Burdale. The Note Holders agree to be paid approximately $0.5 million plus 50% of the first $2.0 million of proceeds from certain litigation as consideration for their consent.

The Company is managing to an operating plan under which it expects to result in positive cash flow over the next year. Key components of the operating plan include the following:

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In addition, the Company expects to maintain its cash position in fiscal 2009 with the payment of 50% of its interest in-kind on its Modified Senior Notes, and generate cash from the sale of its Canadian subsidiary

The Company believes that, based on its operating plan, results to date in fiscal 2009 and expected replacement of its revolving credit facility, it will have sufficient cash flow to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt (including any minimum EBITDA or other covenants under its expected replacement revolving credit facility) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the supplemental indenture governing the Modified Senior Notes to maintain a minimum cash balance of $3.0 million and to make the June and December 2009 interest payments on the Modified Senior Notes in cash of $4.5 million and $4.7 million, respectively. As of December 27, 2008, the Company had $3.5 million in cash with no available borrowings under its revolving credit facility. Although no assurances can be given, based on the current operating plan (including the related assumptions), recent results from operations, qualitative feedback from field management since December 27, 2008, its expected replacement of its revolving credit facility and its expected closing on the fifth supplemental indenture, the Company believes it will be in compliance with its covenants, including those summarized above, and will continue to meet its obligations in the ordinary course of business as they become due through December 27, 2009.

As with any operating plan, there are risks associated with the Company’s ability to execute it, including the slowing economic environment in which it operates. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above, including the replacement of its revolving credit facility and fifth supplemental to the Indenture governing the Modified Senior Notes, as contemplated by the current operating plan. If the Company is unable to execute this plan in general, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement, as amended, and the minimum cash requirement under the fourth supplemental indenture. If the Company can not maintain compliance with its covenant requirements and can not obtain appropriate waivers and modifications, the lenders and bondholders may call the debt. If the debt is called, the Company would need to obtain new financing; there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

Overview

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported significant recurring losses from operations over the past several years including in 2008 a loss of approximately $56.1 million, which includes a goodwill impairment charge of $46.7 million and a $13.9 million non-cash gain on the extinguishment of debt, and for the three months ended September 27, 2008 a loss of approximately $9.3 million. The Company also used cash in operating activities over the past several years, including $11.3 million in 2008. However, for the three months ended September 27, 2008, the Company generated $0.6 million in cash from operating activities. As of September 27, 2008 the Company has negative working capital of approximately $20.7 million and a deficiency in assets of $13.6 million. Further, the Company did not meet the minimum EBITDA levels and minimum driver pay and purchased transportation covenants contained in its credit agreement, as amended, at various times during fiscal 2008 and 2009. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As described below, the Company is managing to an operating plan under which it expects to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt.

Wells, in its capacity as agent and lender under the credit agreement, as amended, granted the Company waivers and then entered into additional amendments to the credit agreement, two of which dated April 30, 2008 and May 19, 2008 provided for (1) an increase in LIBOR margin from 4.00% to 6.00% until trailing twelve month EBITDA equals $15.0 million, dropping to a 5.25% LIBOR margin when trailing twelve month EBITDA is greater than $15.0 million and dropping to 4.50% LIBOR margin when trailing twelve month EBITDA is greater than $20.0 million, (2) new financial reporting requirements, (3) revised minimum EDITDA levels and minimum Driver Pay/Purchased Transportation levels measured as percentages of revenue, (4) the requirement to have a special reserve against available borrowing starting at $1,000,000 and rising by $25,000 each week commencing on June 30, 2008 through November 30, 2008, by $37,500 per week from December 1, 2008 to February 28, 2009, by $50,000 per week from March 1, 2009 to May 31, 2009, and $62,500 per week from June 1, 2009 to December 31, 2009 or until the revolving credit facility is paid in full, and (5) defining certain milestones to achieve toward obtaining replacement financing of the Company revolving credit facility. In the event these milestones are not achieved, the Company would be subject to additional fees of up to $500,000. The Company did not achieve the first milestone and incurred the first $250,000 fee in August 2008.

The Company again did not meet the covenant for minimum driver pay and purchased transportation cost as a percentage of revenue for the four three-week periods ended July 11, 2008, August 15, 2008, September 12, 2008, and October 17, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers dated October 14, 2008 and November 12, 2008 and entered into additional amendments to the credit agreement increasing the special reserve against available borrowing by a total of $87,500 during the quarter ending December 27, 2008.

The Company is managing to an operating plan which it expects to result in positive cash flow over the next year. Key components of the operating plan include the following:

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In addition, the Company expects to further improve its cash position in fiscal 2009 with the payment of interest in-kind on its Modified Senior Notes, and the sale of its Canadian subsidiary

The Company believes that, based on its operating plan, results to date in fiscal 2009 and expected replacement of its revolving credit facility, it will have sufficient cash flow to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt (including any minimum EBITDA or other covenants under its expected replacement revolving credit facility) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the Fourth Supplemental Indenture governing the Modified Senior Notes to maintain a minimum cash balance of $3.0 million. As of September 27, 2008, the Company had $4.4 million in cash with no available borrowings under its revolving credit facility. Although no assurances can be given, based on the current operating plan (including the related assumptions), recent results from operations, qualitative feedback from field management since September 27, 2008 and its expected replacement of its revolving credit facility, the Company believes it will be in compliance with its covenants, including those summarized above, and will continue to meet its obligations in the ordinary course of business as they become due through June 27, 2009.

As with any operating plan, there are risks associated with the Company’s ability to execute it, including the slowing economic environment in which it operates. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above, including the replacement of its revolving credit facility as contemplated by the current operating plan. If the Company is unable to execute this plan in general, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement, as amended, and the minimum cash requirement under the Fourth Supplemental Indenture. If the Company can not maintain compliance with its covenant requirements and can not obtain appropriate waivers and modifications, the lenders and bondholders may call the debt. If the debt is called, the Company would need to obtain new financing; there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

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Overview

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported significant recurring losses from operations over the past several years including in 2008 a loss of approximately $56.1 million, which includes a goodwill impairment charge of $46.7 million and a $13.9 million non-cash gain on the extinguishment of debt. The Company also used cash in operating activities over the past several years, including $11.3 million in 2008. As of June 28, 2008 the Company has negative working capital of approximately $21.8 million and a deficiency in assets of $4.4 million. Further, the Company did not meet the minimum EBITDA levels and minimum driver pay and purchased transportation covenants contained in its credit agreement, as amended, at various times during fiscal 2008. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As described below, the Company is managing to an operating plan under which it expects to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt.

Wells, in its capacity as agent and lender under the credit agreement, as amended, granted the Company waivers and then entered into additional amendments to the credit agreement, two of which dated April 30, 2008 and May 19, 2008 provided for (1) an increase in LIBOR margin from 4.00% to 6.00% until trailing twelve month EBITDA equals $15.0 million, dropping to a 5.25% LIBOR margin when trailing twelve month EBITDA is greater than $15.0 million and dropping to 4.50% LIBOR margin when trailing twelve month EBITDA is greater than $20.0 million, (2) new financial reporting requirements, (3) revised minimum EDITDA levels and minimum Driver Pay/Purchased Transportation levels measured as percentages of revenue, (4) the requirement to have a special reserve against available borrowing starting at $1,000,000 and rising by $25,000 each week commencing on June 30, 2008 through November 30, 2008, by $37,500 per week from December 1, 2008 to February 28, 2009, by $50,000 per week from March 1, 2009 to May 31, 2009, and $62,500 per week from June 1, 2009 to December 31, 2009 or until the revolving credit facility is paid in full, and (5) defining certain milestones to achieve toward obtaining replacement financing of the Company revolving credit facility. In the event these milestones are not achieved, the Company would be subject to additional fees of up to $500,000. The Company did not achieve the first milestone and incurred the first $250,000 fee in August 2008.

The Company again did not meet the covenant for minimum driver pay and purchased transportation cost as a percentage of revenue for the four three-week periods ended June 13, 2008, July 11, 2008, August 15, 2008 and September 12, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company a waiver dated October 14, 2008.

The Company is managing to an operating plan which it expects to result in positive cash flow over the next year. Key components of the operating plan include the following:

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In addition, the Company expects to further improve its cash position in fiscal 2009 with the payment of interest in-kind on its Modified Senior Notes, and the sale of its Canadian subsidiary.

The Company believes that, based on its operating plan, results to date in fiscal 2009 and expected replacement of its revolving credit facility, it will have sufficient cash flow to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt (including any minimum EBITDA or other covenants under its expected replacement revolving credit facility) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the Fourth Supplemental Indenture governing the Modified Senior Notes to maintain a minimum cash balance of $3.0 million. As of June 28, 2008, the Company had $4.2 million in cash with no available borrowings under its revolving credit facility. Although no assurances can be given, based on the current operating plan (including the related assumptions), recent results from operations, qualitative feedback from field management since June 28, 2008 and its expected replacement of its revolving credit facility, the Company believes it will be in compliance with its covenants, including those summarized above, and will continue to meet its obligations in the ordinary course of business as they become due through June 27, 2009.

As with any operating plan, there are risks associated with the Company’s ability to execute it, including the slowing economic environment in which it operates. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above, including the replacement of its revolving credit facility as contemplated by the current operating plan. If the Company is unable to execute this plan in general, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement, as amended, and the minimum cash requirement under the Fourth Supplemental Indenture. If the Company can not maintain compliance with its covenant requirements and can not obtain appropriate waivers and modifications, the lenders and bondholders may call the debt. If the debt is called, the Company would need to obtain new financing; there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

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Overview

In 2007, the Company used $7.7 million of net cash in operating activities, which resulted in negative working capital of approximately $6.8 million at June 30, 2007. In the nine-month period ended March 29, 2008, the Company used $11.9 million of net cash in operating activities, which resulted in negative working capital of approximately $18.1 million at March 29, 2008. . Of the $11.9 million use of cash from operating activities, $9.7 million represents payment of interest on the Senior Notes, $0.9 million represents the completion of the integration of CD&L, and $1.3 million represents cash used in other operating activities.

Due to the unanticipated decline of delivery revenue from continuing customers and the effects of rapidly rising fuel costs on the Company’s ability to reduce driver compensation, the Company did not meet the minimum EBITDA levels contained in its amended credit agreement for the periods ended February 23, 2008 and March 29, 2008 and did not meet the Driver Pay/Purchased Transportation covenant for the two three-week periods ended March 14, 2008 and April 11, 2008. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers and entered into two additional amended agreements. The terms of the tenth amendment dated April 30, 2008 included (1) an increase in LIBOR margin from 4.00% to 6.00% until trailing twelve month EBITDA equals $15.0 million, dropping to a 5.25% LIBOR margin when trailing twelve month EBITDA is greater than $15.0 million and dropping to 4.50% LIBOR margin when trailing twelve month EBITDA is greater than $20.0 million, (2) the requirement to have a special reserve of available borrowings at all times starting at $350,000 and increasing $50,000 per week on each Monday following the Tenth Amendment Effective Date as defined in the tenth amendment and (3) new financial reporting requirements. The terms of the eleventh amendment dated May 19, 2008 includes revised minimum EDITDA levels and minimum Driver Pay/Purchased Transportation percentages of revenue commencing for the three week period ending May 16, 2008 and continuing throughout the remainder of 2008 and 2009, revised levels of reserves against available borrowing increasing the reserve to $1,000,000 plus an additional $100,000 each month commencing on July 1, 2008 and increasing in $50,000 increments to a maximum of $250,000 per month commencing in May 2009 until the revolving credit facility is paid in full, elimination of requirement to have at all times between June 1, 2008 and June 30, 2008 at least $5.0 million of excess availability on the revolving credit facility, and defining certain milestones to achieve in order to obtain replacement financing of the Company revolving credit facility. In the event these milestones are not achieved by August 2, 2008, the Company would be subject to an additional $500,000 fee.

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The Company is managing to an operating plan which it expects to result in positive cash flow over the remaining fiscal year. Key components of the operating plan include the following:

As of March 29, 2008, the Company had $5.9 million in cash. The Company believes that, based on its operating plan and results to date, it will have sufficient cash flow to meet its expected cash needs and continue to meet its obligations in the ordinary course of business as they become due, and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the amended credit agreement) in the next twelve month period through March 28, 2009. The Company is factoring into its plan, among other things, to make the June and December 2008 interest payments on the Senior Notes in kind, and finding a replacement lender for its revolving credit facility. . Additionally, incremental to the Company’s plan noted above, the Company has engaged an advisor in China to assist the Company to identify and develop a strategic partnership with a Chinese logistics company that could include either or both of an equity investment into Velocity or a technology license arrangement ,and will continue to pursue the sale of our Canadian subsidiary

As with any operating plan, there are risks associated with the Company’s ability to execute it. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above. If the Company is unable to execute this plan in general, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company might need to amend, or seek one or more further waivers of, the minimum EBITDA covenant and minimum Driver Pay/Purchased Transportation covenant under the amended credit agreement, and the minimum EBITDA and minimum cash covenants under the Indenture and its supplements. Although the Company has been successful obtaining waivers and modifications to its debt agreements in the past, there can be no assurance that it will be able to do so in the future. Further, there can be no assurance that the Company will be successful in obtaining additional sources of cash if the debt is called by the lenders. If the Company cannot obtain waivers and obtain additional sources of cash, The Company would have difficulties meeting its obligations in the normal course of business. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

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Overview

In 2007, the Company used $7.7 million of net cash in operating activities, which resulted in negative working capital of approximately $6.8 million at June 30, 2007. In the six month period ended December 29, 2007, the Company used $7.3 million of net cash in operating activities, which resulted in negative working capital of approximately $13.2 million at December 29, 2007. The reasons for the losses are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Historical Results of Operations” contained in this Report, including, in particular, the continued cost of the integration of CD&L through September 2007. The CD&L integration lasted nine months longer and cost approximately $7 million more than the Company’s original estimates. Due to an unanticipated degree of customer losses related to the migration of financial services customers to electronic check clearing under the Federal Check 21 initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the Company did not meet its minimum EBITDA levels contained in its credit agreement for the periods ending July 28, 2007, August 25, 2007 and December 29, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers and entered into a third amended agreement dated February 12, 2008 which included (1) lower monthly minimum EBITDA requirements through December 2008 , (2) new minimum Driver Pay/Purchased Transportation percentages, (3) an increase in the interest rate of 75 basis points in LIBOR margin (from 3.25% to 4.00%) until trailing twelve month EBITDA equals $15.0 million, dropping to a 3.25% LIBOR margin when trailing twelve month EBITDA is greater than $15.0 million and reverting to the original 2.50% LIBOR margin when trailing twelve month EBITDA is greater than $20.0 million and (4) the requirement to have at all times between June 1, 2008 and June 30, 2008 the sum of at least $5.0 million of excess availability on the line of credit plus qualified cash.

The Company is managing to an operating plan which it expects to result in positive cash flow over the next twelve months. Key components of the operating plan include the following:

In addition, we will continue to pursue the sale of our Canadian subsidiary in the second half of fiscal 2008 to improve our cash position.

The Company believes that, based on its operating plan, cash to be received from the sale of its Canadian subsidiary, and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the credit agreement) in the next twelve month period. The Company is factoring into its plan, among other things, making the December 31, 2007 and June 2008 interest payments on the Senior Notes in cash of $5.1 million each. As of December 29, 2007, the Company had $11.3 million in cash and less than $0.1 million in available borrowings under its revolving credit facility. Based on the current

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operating plan (including the related assumptions), cash to be received from the sale of a subsidiary, and results from operations and qualitative feedback from field management since September 29, 2007, the Company believes it will be in compliance with its covenants, including those summarized above. As such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through December 27, 2008.

As with any operating plan, there are risks associated with the Company’s ability to execute it. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above. If the Company is unable to execute this plan in general or if, after making the June 30, 2008 or December 30, 2008 interest payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement and the minimum cash requirements under the Indenture and the credit agreement. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

Overview

In 2007, the Company reported a loss from operations of approximately $19.6 million, which resulted in negative working capital of approximately $6.8 million at June 30, 2007. In the three month period ended September 29, 2007, the Company reported a loss from operations of approximately $2.6 million, which resulted in negative working capital of approximately $7.3 million at September 29, 2007. The reasons for the losses are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Historical Results of Operations” contained in this Report, including, in particular, the continued cost of the integration of CD&L. The CD&L integration has taken 9 months longer and cost approximately $7 million more than the Company’s original estimates. Due to an unanticipated degree of customer losses related to the migration of financial services customers to electronic check clearing under the Federal Check 21 initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the Company did not meet its minimum EBITDA levels contained in

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its credit agreement for the periods ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers and entered into another amended agreement dated October 15, 2007 which included (1) lower monthly minimum EBITDA requirements through December 2008 and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping to a 25 basis point increase when trailing twelve month EBITDA is greater than $15.0 million and reverting back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million.

The Company is managing to an operating plan which it expects to result in positive cash flow over the remaining fiscal year. Key components of the operating plan include the following:

In addition, we expect to further improve our cash position in fiscal 2008 with the sale of our Canadian subsidiary in the second quarter of fiscal 2008, as negotiations with interested parties have progressed favorably.

The Company believes that, based on its operating plan, cash to be received from the sale of its Canadian subsidiary, and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the credit agreement) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $4.0 million through May 15, 2008 and $8.5 million thereafter through June 28, 2008, which is subject to adjustment in the event that certain conditions are not met, and to make the December 2007 and June 2008 interest payments on the Senior Notes in cash of $5.1 million each. As of September 29, 2007, the Company had $11.0 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions), cash to be received from the sale of a subsidiary, and results from operations and qualitative feedback from field management since September 29, 2007, the Company believes it will be in compliance with its covenants, including those summarized above. As such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through June 28, 2008. Results for the quarter ended September 29, 2007 are consistent with the business plan that formed the basis for the new revolving credit agreement covenants.

As with any operating plan, there are risks associated with the Company’s ability to execute it. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements

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described above. If the Company is unable to execute this plan in general or if, after making the December 30, 2007 or June 30, 2008 interest payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement and the minimum cash requirement under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

Overview

In 2007, the Company reported a loss from operations of approximately $19.6 million, which resulted in negative working capital of approximately $6.8 million at June 30, 2007. The reasons for the losses are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Historical Results of Operations” contained in this Report, including, in particular, the continued cost of the integration of CD&L. The CD&L integration has taken 9 months longer and cost approximately $7 million more than the Company’s original estimates. As a result, the Company did not meet the minimum EBITDA levels contained in its credit agreement for the period ending March 31, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company a waiver and then entered into an amendment to the credit agreement dated May 25, 2007 that provided for lower minimum EBITDA targets and revised reporting requirements. Notwithstanding the May amendment, due to an unanticipated degree of customer losses related to the migration of financial services customers to electronic check clearing under the Federal Check 21 initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the Company again did not meet its minimum EBITDA levels contained in its credit agreement for the periods ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers and entered into another amended agreement dated October 15, 2007 which included (1) lower monthly minimum EBITDA requirements through December 2008 and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping to a 25 basis point increase when trailing twelve month EBITDA is greater than $15.0 million and reverting back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million.

The Company is managing to an operating plan which it expects to result in positive cash flow over the next year. Key components of the operating plan include the following:

In addition, we expect to further improve our cash position in fiscal 2008 by the following steps:

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The Company believes that, based on its operating plan, cash to be received from the pending sale of its Canadian subsidiary, cash received from a private placement of common stock and warrant exercises in July 2007, and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the credit agreement) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $4.0 million through May 15, 2008, and $8.5 million thereafter through June 28, 2008, which is subject to adjustment in the event that certain conditions are not met, and to make the December 2007 and June 2008 interest payments on the Senior Notes in cash of $5.1 million each. As of June 30, 2007, the Company had $14.5 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions), cash to be received from the pending sale of a subsidiary, cash received from a private placement of common stock and warrant exercises in July 2007 and results from operations and qualitative feedback from field management since June 30, 2007, the Company believes it will be in compliance with its covenants, including those summarized above. As such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through June 28, 2008.

As with any operating plan, there are risks associated with the Company’s ability to execute it. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above. If the Company is unable to execute this plan in general or if, after making the December 30, 2007 or June 30, 2008 interest payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses in that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement and the minimum cash requirement under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

Overview

The Company is managing to an operating plan which it expects to result in positive cash flow over the next three and twelve month periods. Key components of the plan include the following:

For the first nine months of fiscal year 2007, the Company reported a loss from operations of approximately $19.4 million, which resulted in negative working capital of approximately $0.4 million at March 31, 2007, including $2.5 million of current liabilities that are being settled in May 2007 through the issuance of common shares as dictated by the terms of a 2005 legal settlement. The reasons for the losses are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Historical Results of Operations” contained in this Report, including, in particular, the continued integration of CD&L. The Company believes the CD&L integration is proceeding successfully but has taken longer than expected and at a higher incremental cost compared to the Company’s original estimates. As a result of the above, for the three-month period ended March 31, 2007, the Company was not in compliance with the minimum EBITDA covenant contained in its credit agreement. The lender under the credit agreement granted the Company a waiver of this covenant breach. The waiver obligates the Company to negotiate and agree with the lender on revised minimum EBITDA and revised reporting requirements no later than May 25, 2007.

The Company believes that, based on its operating plan and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the credit agreement) in the next three and twelve month periods. The Company is factoring into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $7.5 million until August 17, 2007, to maintain a minimum cash balance of $8.5 million between August 17, 2007 and August 16, 2008 and to begin making interest payments on the Senior Notes in cash (rather than a payment in kind) on June 30, 2007 (of $4.7 million). As of March 31, 2007, the Company had $9.0 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions) and results from operations and qualitative feedback from the field since March 31, 2007, the Company believes it will be in compliance with its covenants, including those summarized above.

There is no assurance, however, that the Company will be able to satisfy the requirements summarized in the preceding paragraph or other applicable covenants. As with any operating plan, there are risks associated with the Company’s ability to execute this plan. If the Company is unable to execute this plan in general or if, after making the June 30, 2007 interest payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement and the minimum cash requirement under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”