MINORPLANET SYSTEMS USA - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2002

OR

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

For the period from ________________ to ________________

Commission file number 0-26140
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MINORPLANET SYSTEMS USA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 51-0352879
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1155 Kas Drive, Suite 100, Richardson, Texas 75081
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (972) 301-2000
--------------

- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)

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

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

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

Number of Shares Outstanding as of
Title of each class January 10, 2003
------------------- ----------------------------------
Common Stock, $.01 par value 48,349,161

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

Form 10-Q

INDEX

2

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)

See accompanying notes to consolidated financial statements.

3

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share)

See accompanying notes to consolidated financial statements.

4

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

See accompanying notes to consolidated financial statements.

5

MINORPLANET SYSTEMS USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share information)

See accompanying notes to consolidated financial statements.

6

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements
(Unaudited)

1. BUSINESS OVERVIEW

Minorplanet Systems USA, Inc., a Delaware Corporation (the "Company"),
develops and implements mobile communications solutions for service vehicle
fleets, long-haul truck fleets, and other mobile-asset fleets, including
integrated voice, data and position location services. As a result of the
completion of the transactions contemplated by the Stock Purchase and Exchange
Agreement by and among the Company, Minorplanet Systems PLC, a United Kingdom
public limited company ("Minorplanet UK"), and Mackay Shields LLC, dated
February 14, 2001, the Company commenced marketing the Vehicle Management
Information (TM) ("VMI") product licensed from Minorplanet Limited, the
operating subsidiary of Minorplanet UK, into the automatic vehicle location
("AVL") market in the United States during the last half of 2001. VMI is
designed to maximize the productivity of a mobile workforce as well as reduce
vehicle mileage and fuel-related expenses. The VMI technology consists of: (i) a
data control unit ("DCU") that continually monitors and records a vehicle's
position, speed and distance traveled; (ii) a command and control center ("CCC")
which receives and stores in a database information downloaded from the DCU's;
and (iii) software used for communication, messaging and detailed reporting. VMI
uses satellite-based Global Positioning System ("GPS") location technology to
acquire a vehicle location on a minute-by-minute basis and a global system for
mobile communications ("GSM") based cellular network to transmit data between
the DCU's and the CCC. GSM is a digital technology developed in Europe and has
been adapted for North America. GSM is the most widely used digital standard in
the world. The VMI application is targeted to small and medium sized fleets in
the metro marketplace which the Company believes represents a total U.S. market
of approximately 21 million vehicles.

VMI provides minute-by-minute visibility into the activities of a
mobile workforce via an extensive reporting system that provides real-time and
exception-based reporting. Real-time reports provide information regarding a
vehicle's location, idling, stop time, speed and distance traveled. With
real-time reporting, the user can view when an employee starts or finishes work,
job site arrival times and site visit locations. In addition, exception reports
allow the user to set various parameters within which vehicles must operate, and
the system will report exceptions including speeding, extended stops,
unscheduled stops, route deviations, visits to barred locations and excessive
idling.

The initial application for the Company's wireless enhanced services,
HighwayMaster Series 5000 ("Series 5000"), was developed for and sold to
companies that operate in the long-haul trucking market. The Company provides
long-haul trucking companies with a comprehensive package of mobile
communications and management information services, thereby enabling its
trucking customers to effectively monitor the operations and improve the
performance of their fleets. The initial product application was customized and
has been sold to and installed in the service vehicle fleets of the member
companies of SBC Communications, Inc., pursuant to the service vehicle contract
(the "Service Vehicle Contract" or "Contract"). During the fourth calendar
quarter of 1999, the Company entered the mobile asset tracking market with the
introduction of its trailer-tracking product, TrackWare(R). During the first
calendar quarter of 2001, the Company began marketing and selling 20/20V(TM), a
low-cost tracking product designed for small and medium sized fleets in the
transportation marketplace.

On March 15, 2002, the Company completed the sale to Aether Systems,
Inc. ("Aether") of certain assets and licenses related to the Company's
long-haul trucking and asset-tracking businesses pursuant to the Asset Purchase
Agreement effective as of March 15, 2002, by and between the Company and Aether
(the "Sale"). Under the terms of the Asset Purchase Agreement, the Company sold
to Aether assets and related license rights to its Platinum Service software
solution, 20/20V(TM), and TrackWare(R) asset and trailer-tracking products. In
addition, the Company and Aether agreed to form a strategic relationship with
respect to the Company's long-haul customer products, pursuant to which the
Company assigned to Aether all service revenues generated post-closing from its
Series 5000 customer base. Aether, in turn, agreed to reimburse the Company for
the network and airtime service costs related to providing the Series 5000
service. The two companies also agreed to work jointly in the adaptation of the
VMI product technology for the potential distribution of VMI by Aether to the
long-haul-trucking market.

7

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements presented herein
include those of Minorplanet Systems USA Inc. and its wholly-owned subsidiaries:
HighwayMaster of Canada, LLC, Caren (292) Limited and Minorplanet Systems USA
Limited. All significant intercompany accounts and transactions have been
eliminated in consolidation. The unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all footnote disclosures
required by accounting principles generally accepted in the United States of
America. These consolidated financial statements should be read in conjunction
with the Company's audited financial statements for the eight month transition
period ended August 31, 2002. The accompanying consolidated financial statements
reflect all adjustments (all of which are of a normal recurring nature), which
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods in accordance with accounting principles generally accepted in
the United States of America. The results for any interim period are not
necessarily indicative of the results for the entire year.

3. CHANGE IN FISCAL YEAR END

On May 21, 2002, the Company's Board of Directors approved changing the
Company's fiscal year end to August 31st. Accordingly, the Company is presenting
unaudited financial statements for the three month period ending November 30,
2002, the first quarter of the new fiscal year, as well as comparable unaudited
financial statements for the three month period ending November 30, 2001, in
this Form 10-Q.

4. REVENUE RECOGNITION

The Company recognizes revenue from its long haul trucking Series 5000
mobile units, TrackWare, and 20/20V products under the provisions of Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Under SAB 101, initial sale proceeds received under multiple-element
sales arrangements which require the Company to deliver products or services
over a period of time and which are not determined by the Company to meet
certain criteria are deferred. These criteria include requirements for a
separate earnings process, fair value determinations, and that the delivery of
future products or services under the arrangement are not required for the
delivered items to serve their intended purpose. Sales proceeds related to
delivered products that are deferred are recognized over the greater of the
contract life or the estimated life of the customer relationship. The Company
has estimated such periods to range from three to ten years. The Company's
estimate of the life of a customer relationship is determined based upon the
Company's historical experience with its customers together with the Company's
estimate of the remaining life of the applicable product offering. Sales
proceeds recognized under this method are portrayed in the accompanying
Consolidated Statement of Operations as "Ratable Product Revenues." The related
deferred revenue is classified as a current and long term liability on the
balance sheet under the captions "Deferred product revenues - current portion"
and "Deferred product revenues- non-current portion." If the customer
relationship is terminated prior to the end of the estimated customer
relationship period, such deferred sales proceeds are recognized as revenue in
the period of termination. The Company will periodically review its estimates of
the customer relationship period as compared to historical results and adjust
its estimates prospectively. Under sales arrangements which meet the three
criteria described above, revenues are recognized upon shipment of the products
or upon customer acceptance of the delivered products, if terms of the sales
arrangement gives the customer right of acceptance. Sales arrangements
recognized under this method relate primarily to products delivered under the
Service Vehicle Contract.

The VMI product includes both hardware and software components. Due to
the interdependency of the functionality of the elements, revenue recognition is
governed by SAB101 and Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). Currently, the Company resells wireless airtime to
customers of its VMI products. Therefore, in accordance with SAB 101, the
Company defers VMI product revenues and recognizes this revenue ratably over the
longer of the term of the customer contract or the estimated life of the
customer relationship. Such terms range from one to five years. In addition, the
Company has also deferred revenue consistent with the provisions of SOP 97-2.
Sales proceeds recognized under this method are portrayed in the accompanying
Consolidated Statement of Operations as "Ratable Product Revenues." The related
deferred revenue is classified as a current and long term liability on the
balance sheet under the captions "Deferred product revenues - current portion"
and "Deferred product revenues non-current portion."

Service revenue generally commences upon product installation and is
recognized ratably over the period such services are provided.

8

As a result of the Sale to Aether, the Company recorded deferred
service revenues totaling $12.2 million in March of 2002, which reflected the
estimated fair value of services to be provided to Aether net of cash
reimbursements from Aether under the terms of the agreement. The deferred
service revenue is being recognized, based on the number of active network
service subscriber units, over the term of the agreement with Aether that
expires in September of 2003.

5. LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred significant operating losses since inception
and has limited financial resources to support itself until such time that it is
able to generate positive cash flow from operations. Net cash used for operating
activities was $5.0 million and $1.3 million for the three months ended November
30, 2002 and 2001 respectively. During the three months ended November 30, 2002,
cash used for operating activities was primarily attributable to the continued
expansion of VMI sales operations. The Company currently markets and sells the
VMI product in Dallas, Texas; Houston, Texas; Atlanta, Georgia; Los Angeles,
California; and Austin, Texas.

During June of 2001, the Company issued 12,670,497 shares of common
stock to holders of its Senior Notes due 2005 ("Senior Notes") in exchange for
the cancellation of Senior Notes with an aggregate principle amount of
$80,022,000 (the "Exchange Offer"). As a result of the Exchange Offer the
Company has reduced its annual cash outflow for interest service by $11 million.
In addition, the Company believes the acquisition of the VMI license rights will
provide the Company significant marketing potential of the licensed VMI
technology, enhancing future results of operations and reducing the need for
capital resources to develop similar technology. Also, as a result of the Sale
to Aether of certain assets and licenses related to the Company's long-haul
trucking and asset-tracking businesses, Aether is contractually obligated to
continue to reimburse the Company for the network and airtime service costs
related to providing the Series 5000 service.

Critical success factors in Management's plans to achieve positive cash flow
from operations include:

o Significant market acceptance of the VMI product line in the U.S.
Management believes the market for products such as VMI represents a
total potential of approximately 21 million vehicles. Currently,
management believes this market is approximately 5 percent penetrated
with asset tracking and vehicle information management solutions.

o Maintain and expand the Company's direct sales channel. New
salespersons will require training and time to become productive. In
addition, there is significant competition for qualified salespersons,
and the Company must continue to offer attractive compensation plans
and opportunities to attract qualified salespersons.

o Renewal of the Service Vehicle Contract with SBC. At November 30, 2002,
the Company had approximately 36,000 units in service with the SBC
Companies that accounted for approximately 55% of the Company's
installed base, including network services subscribers. The current
Service Vehicle Contract with the SBC Companies expires on January 30,
2003 and may be renewed under the same terms for an additional one-year
term at the option of the SBC Companies. Management currently believes
that SBC intends to renew the Service Vehicle Contract for an
additional year.

o Securing and maintaining adequate third party leasing sources for
customers who purchase VMI.

Based on projected operating results, the Company believes its existing
capital resources will be sufficient to fund its currently anticipated operating
needs and capital expenditure requirements for the next 12 months. If cash
generated from operations is not sufficient to meet its working capital
requirements, the Company may seek to sell additional equity or debt securities.
The sale of additional equity or convertible debt securities could result in
additional dilution to existing stockholders. If additional funds are raised
through debt securities, holders of these securities could obtain certain rights
and preferences senior to holders of the Company's common stock, as well as
restrict the Company's operations. If additional working capital is required,
there can be no assurance that additional financing will be available, which in
this case, the Company may be required to reduce the scope of its operations
which could negatively impact its financial condition and operating results.

6. OTHER ASSETS

The Company provides lease financing to certain customers of its VMI
products. Leases under these arrangements are classified as sales-type leases or
operating leases. These leases typically have terms of one to five years, and
all sales type leases are discounted at interest rates ranging from 14% to 18%
depending on the customer's credit risk. The net present value of the lease
payments for sales-type leases is recognized as sales revenue and deferred

9

under the Company's revenue recognition policy. The net investment in sales-type
leases, contained within other assets on the Company's balance sheet, is
composed of total minimum lease payments net of unearned interest income and
allowance for uncollectible accounts.

7. COMMITMENTS AND CONTINGENCIES

During the first calendar quarter of 2001, the outsource manufacturer
(the "vendor") that supplied substantially all of the Company's finished goods
inventory asserted a claim for reimbursement for excess and obsolete inventory
purchased in its capacity for use in the manufacture of the Company's products.
This claim was disputed by the Company. As a result of this dispute, beginning
in April 2001, the vendor ceased to perform on its contract to provide finished
goods inventory and certain other services to the Company. The claims and
counterclaims ultimately led to each of the parties filing litigation against
the other. The vendor and the Company executed a Compromise Settlement Agreement
on October 9, 2001. The ultimate liability in connection with this settlement
will not be known until January 31, 2003. Based on information currently
available, the Company recorded a provision of $2.1 million during 2001 as its
estimate of the cost to be incurred to settle this litigation, of which $0.5
million had been paid as of November 30, 2002.

8. RELATED PARTY TRANSACTIONS

Minorplanet UK owns 62 percent of the Company's outstanding common
stock and thus controls the Company. Transactions with Minorplanet UK and its
operating subsidiaries are summarized below (in thousands).

The Company currently pays Minorplanet Limited an annual fee of $1.0
million to aid in funding research and development of future products covered by
the license rights. The fee is to be evaluated and may be increased based on
actual research and development costs incurred by Minorplanet UK. The research
and development costs in the above table represent the annual $1.0 million fee
pro-rated for the three months ended November 30, 2002 and 2001 respectively.

On September 26, 2002, the Company entered into a letter addendum to
the exclusive license and distribution agreement with Minorplanet Limited to
provide executive sales and marketing consulting services for the three-month
period from August 23, 2002 to November 22, 2002 as well as non-executive sales
and marketing services for the six month period from August 23, 2002 to February
22, 2003. Under terms of the agreement, the Company is not required to pay the
initial executive consulting fees totaling $880,000 unless and until the Company
has filed a Form 10-K reporting net income and positive cash flow for the
previous 12-month period. As of November 30, 2002 and August 31, 2002, a
contingent liability for $880,000 payable to Minorplanet Limited was included on
the Company's consolidated balance sheet under other non-current liabilities.
The associated deferred asset in the amount of $794,000, which was net of
$86,000 amortization, was reflected in other current assets on the Company's
consolidated balance sheet as of August 31, 2002. This deferred asset was
subsequently amortized to expense during the three months ended November 30,
2002 and is included in contract services expenses in the above table.

Other current liabilities in the above table primarily includes the
unpaid portion of the non-executive sales and marketing contract services and
research and development costs as of November 30, 2002 and August 31, 2002.

10

9. SEGMENT REPORTING

In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes accounting standards for the way that public
business enterprises report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
adopted SFAS 131 beginning with the effective date of January 1, 1998.

The Company's reportable segments offer different products and/or
services. Each segment also requires different technology and marketing
strategies. The company's two reportable segments are VMI and Network Service
Center Systems ("NSC Systems").

During the last half of 2001, the Company commenced marketing the VMI
product licensed from Minorplanet Limited into the AVL marketplace in the United
States. VMI is designed to maximize the productivity of a mobile workforce as
well as reduce vehicle mileage and fuel related expenses. The VMI technology
consists of: (i) a data control unit ("DCU") that continually monitors and
records a vehicle's position, speed and distance traveled; (ii) a command and
control center ("CCC") which receives and stores in a database information
downloaded from the DCU's; and (iii) software used for communication, messaging
and detailed reporting. VMI uses the satellite-based global positioning system
("GPS") to acquire a vehicle location on a minute-by-minute basis and a global
system for mobile communications ("GSM") based cellular network to transmit data
between the DCU's and the CCC. The VMI application is targeted to small and
medium-sized fleets in the metro marketplace, which the Company believes
represents a total U.S. market of approximately 21 million vehicles.

Through its NSC Systems segment, the Company provides long-haul
trucking companies with a comprehensive package of mobile communications and
management information services, thereby enabling its trucking customers to
effectively monitor the operations and improve the performance of their fleets.
The initial product application was customized and has been sold to and
installed in the service vehicle fleets of the member companies of SBC
Communications, Inc., pursuant to the service vehicle contract. Prior to the
Sale to Aether, the Company also provided mobile asset tracking solutions with
its trailer-tracking products, TrackWare(R) and 20/20V(TM). These products use
the Company's Network Service Center to relay voice and messages between the
mobile units and the customer's dispatchers.

On March 15, 2002, the Company completed the Sale to Aether of certain
assets and licenses related to the Company's long-haul trucking and
asset-tracking businesses pursuant to an Asset Purchase Agreement effective as
of March 15, 2002, by and between the Company and Aether.

Operating expenses are allocated to each segment based on management's
estimate of the utilization of resources by each segment. The following tables
set forth segment financial information (in thousands).

12

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

As a result of the completion of the transactions contemplated by the
Stock Purchase and Exchange Agreement by and among the Company, Minorplanet
Systems PLC, a United Kingdom public limited company ("Minorplanet UK"), and
Mackay Shields LLC, dated February 14, 2001, the Company commenced marketing the
Vehicle Management Information (TM) ("VMI") product licensed from Minorplanet
Limited, the operating subsidiary of Minorplanet UK, into the automatic vehicle
location ("AVL") market in the United States during the last half of 2001. VMI
is designed to maximize the productivity of a mobile workforce as well as reduce
vehicle mileage and fuel related expenses. The VMI technology consists of: (i) a
data control unit ("DCU") that continually monitors and records a vehicle's
position, speed and distance traveled; (ii) a command and control center ("CCC")
which receives and stores in a database information downloaded from the DCU's;
and (iii) software used for communication, messaging and detailed reporting. VMI
uses satellite-based Global Positioning System ("GPS") location technology to
acquire a vehicle location on a minute-by-minute basis and a global system for
mobile communications ("GSM") based cellular network to transmit data between
the DCU's and the CCC. GSM is a digital technology developed in Europe and has
been adapted for North America. GSM is the most widely used digital standard in
the world. The VMI application is targeted to small and medium sized fleets in
the metro marketplace which the Company believes represents a total U.S. market
of approximately 21 million vehicles.

VMI provides minute-by-minute visibility into the activities of a
mobile workforce via an extensive reporting system that provides real-time and
exception-based reporting. Real-time reports provide information regarding a
vehicle's location, idling, stop time, speed and distance traveled. With
real-time reporting, the user can view when an employee starts or finishes work,
job site arrival times and site visit locations. In addition, exception reports
allow the user to set various parameters within which vehicles must operate, and
the system will report exceptions including speeding, extended stops,
unscheduled stops, route deviations, visits to barred locations and excessive
idling.

Through its NSC Systems segment, the Company provides long-haul
trucking companies with a comprehensive package of mobile communications and
management information services, thereby enabling its trucking customers to
effectively monitor the operations and improve the performance of their fleets.
The initial product application was customized and has been sold to and
installed in the service vehicle fleets of the member companies of SBC
Communications, Inc., pursuant to the service vehicle contract (the "Service
Vehicle Contract" or "Contract"). Prior to the sale to Aether Systems Inc. of
certain assets and licenses, the Company also provided mobile asset tracking
solutions with its trailer-tracking products, TrackWare(R) and 20/20V(TM).

On March 15, 2002, the Company completed the sale to Aether Systems,
Inc. ("Aether") of certain assets and licenses related to the Company's
long-haul trucking and asset-tracking businesses pursuant to an Asset Purchase
Agreement effective as of March 15, 2002, by and between the Company and Aether
(the "Sale"). Under the terms of the Asset Purchase Agreement, the Company sold
to Aether assets and related license rights to its Platinum Service software
solution, 20/20V(TM), and TrackWare(R) asset and trailer-tracking products. In
addition, the Company and Aether agreed to form a strategic relationship with
respect to the Company's long-haul customer products, pursuant to which the
Company assigned to Aether all service revenues generated post-closing from its
HighwayMaster Series 5000 ("Series 5000") customer base. Aether, in turn, agreed
to reimburse the Company for the network and airtime service costs related to
providing the Series 5000 service. Hereinafter, Series 5000 units for which the
Company provides network services are referred to as network services
subscribers. The two companies also agreed to work jointly in the adaptation of
the VMI product technology for the potential distribution of VMI by Aether to
the long-haul-trucking market.

RESULTS OF OPERATIONS

THREE MONTHS ENDED NOVEMBER 30, 2002, COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 2001

Total revenues for the three months ended November 30, 2002 decreased
to $13.6 million from $18.5 million during the three months ended November 30,
2001. Product revenues, including ratable product revenue, for the same periods
decreased to $3.3 million during 2002 from $7.0 million in 2001 due to a
reduction in NSC Systems sales. The decrease in NSC Systems product revenue was
primarily due to lower sales under the Service Vehicle Contract with SBC as well
as a reduction in long haul trucking product sales due to the sale of certain
assets to Aether in March of 2002.

13

The Company began marketing the VMI product in the Dallas, Texas and
Houston, Texas markets during the last half of 2001, the Atlanta, Georgia market
in January of 2002, and the Los Angeles, California and Austin, Texas markets
beginning in July of 2002. Total VMI units sold during the three months ended
November 30, 2002 were over 1,740 units up from approximately 100 units sold
during the same period in 2001, when the Company had just begun marketing the
VMI product. However, in accordance with the Company's revenue recognition
policies, revenue and the associated cost of sales are deferred under SAB 101
and SOP 97-2, and recognized over the greater of the contract life or the
estimated life of the customer relationship. Thus, total VMI product revenue
during the three months ended November 30, 2002 was $0.7 million up from $0.1
million during the three months ended November 30, 2001. The Company has a total
of $5.7 million in deferred product revenues, net of amortization, associated
with VMI product sales reflected on the Company's balance sheet as of November
30, 2002.

Service revenues for the three months ended November 30, 2002 decreased
to $10.3 million from $11.5 million during the three months ended November 30,
2001. The decrease in service revenues is primarily attributable to a reduction
in the number of NSC Systems network services subscriber units from 31,249 at
November 30, 2001 to 24,004 as of November 30, 2002 and a lower monthly average
service revenue per unit for the total installed base. The proportion of service
vehicles relative to long-haul trucking has increased resulting in a lower
average revenue per mobile unit. Average revenue for service vehicles is
significantly less than that of long-haul trucking because of different product
functionality.

Total gross profit margin of 41.1% for the three months ended November
30, 2002 increased from 35.8% during the same period last year. The improved
gross profit margin was primarily due to higher ratable product margins
associated with VMI product sales and higher service revenue margins within the
NSC Systems operating segment. NSC Systems service revenue margins improved
primarily due to rate reductions obtained from wireless carriers as well as
increased margins on maintenance services under the Service Vehicle Contract
with SBC. The Company provided much of the SBC maintenance service work using
internal resources during the three months ended November 30, 2002 rather than
outsourcing all of the service to third party vendors as was done during 2001.
Total product gross profit margin was 20.7% during the three months ended
November 30, 2002 compared to 23.0% during the three months ended November 30,
2001.

Total operating expenses increased to $9.6 million during the three
months ended November 30, 2002 from $9.2 million during the same period in 2001.
Sales and marketing costs for the three months ending November 30, 2002
increased to $4.2 million from $1.3 million during the three months ended
November 30, 2001. This increase is primarily due to expenditures related to the
VMI product launch including the hiring of new sales personnel and the opening
of three new VMI sales and operations offices in Houston, Atlanta, and Los
Angeles. Also, on September 26, 2002, the Company entered into a letter addendum
to the exclusive license and distribution agreement with Minorplanet Limited to
provide executive sales and marketing consulting services for the three-month
period from August 23, 2002 to November 22, 2002 as well as non-executive sales
and marketing services for the six month period from August 23, 2002 to February
22, 2003. During the three months ended November 30, 2002, total sales and
marketing contract service expenses incurred under this agreement were
approximately $1.3 million. However, under terms of the agreement, the Company
is not required to pay the initial executive consulting fees totaling $0.9
million unless and until the Company has filed a Form 10-K reporting net income
and positive cash flow for the previous 12-month period.

The increase in VMI sales and marketing costs during the three months
ended November 30, 2002 was partially offset by reductions in operating expenses
across all other departments including customer service, engineering, network
services, and general and administrative. These decreases were primarily
associated with personnel reductions made as a consequence of the cancellation
of various technology initiatives, as well as personnel reductions associated
with the sale to Aether of certain assets and license rights to the Company's
long haul trucking and asset tracking businesses. Depreciation and amortization
expense also decreased to $1.5 million during the three months ended November
30, 2002 versus $2.1 million during the same period in 2001 primarily due to
several Network Service Center assets becoming fully depreciated in early 2002.

Operating losses increased to $4.0 million during the three months
ended November 30, 2002 from $2.6 million during the three months ended November
30, 2001 primarily due to lower sales under the Service Vehicle Contract and
increased VMI sales and marketing costs. The Company's NSC Systems segment
reported operating income of $3.8 million for the three months ended November
30, 2002, which was offset by the $7.8 million VMI segment operating loss
associated with the continued expansion of the VMI sales and marketing efforts.
During the three months ended November, 2001, the Service Vehicle Contract was
responsible for the majority of product revenues. Product shipments

14

under that contract are expected to be minimal during the 2003 fiscal year.
Thus, the Company's financial condition and results of operations are heavily
dependent upon the Company's ability to market and sell the VMI products.

LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred significant operating losses since inception
and has limited financial resources to support itself until such time that it is
able to generate positive cash flow from operations. Net cash used for operating
activities was $5.0 million and $1.3 million for the three months ended November
30, 2002 and 2001 respectively. During the three months ended November 30, 2002,
cash used for operating activities was primarily attributable to the continued
expansion of VMI sales operations. The Company currently markets and sells the
VMI product in Dallas, Houston, Austin, Atlanta, and Los Angeles.

During June of 2001, the Company issued 12,670,497 shares of common
stock to holders of its Senior Notes due 2005 ("Senior Notes") in exchange for
the cancellation of Senior Notes with an aggregate principle amount of
$80,022,000 (the "Exchange Offer"). As a result of the Exchange Offer the
Company has reduced its annual cash outflow for interest service by $11 million.
In addition, the Company believes the acquisition of the VMI license rights will
provide the Company significant marketing potential of the licensed VMI
technology, enhancing future results of operations and reducing the need for
capital resources to develop similar technology. Also, as a result of the Sale
to Aether of certain assets and licenses related to the Company's long-haul
trucking and asset-tracking businesses, Aether is contractually obligated to
continue to reimburse the Company for the network and airtime service costs
related to providing the Series 5000 service.

Critical success factors in Management's plans to achieve positive cash flow
from operations include:

o Significant market acceptance of the VMI product line in the U.S.
Management believes the market for products such as VMI represents a
total potential of approximately 21 million vehicles. Currently,
management believes this market is approximately 5 percent penetrated
with asset tracking and vehicle information management solutions.

o Maintain and expand the Company's direct sales channel. New
salespersons will require training and time to become productive. In
addition, there is significant competition for qualified salespersons,
and the Company must continue to offer attractive compensation plans
and opportunities to attract qualified salespersons.

o Renewal of the Service Vehicle Contract with SBC. At November 30, 2002,
the Company had approximately 36,000 units in service with the SBC
Companies that accounted for approximately 55% of the Company's
installed base, including network services subscribers. The current
Service Vehicle Contract with the SBC Companies expires on January 30,
2003 and may be renewed under the same terms for an additional one-year
term at the option of the SBC Companies. Management currently believes
that SBC intends to renew the Service Vehicle Contract for an
additional year.

o Securing and maintaining adequate third party leasing sources for
customers who purchase VMI.

Based on projected operating results, the Company believes its existing
capital resources will be sufficient to fund its currently anticipated operating
needs and capital expenditure requirements for the next 12 months. If cash
generated from operations is not sufficient to meet its working capital
requirements, the Company may seek to sell additional equity or debt securities.
The sale of additional equity or convertible debt securities could result in
additional dilution to existing stockholders. If additional funds are raised
through debt securities, holders of these securities could obtain certain rights
and preferences senior to holders of the Company's common stock, as well as
restrict the Company's operations. If additional working capital is required,
there can be no assurance that additional financing will be available, which in
this case, the Company may be required to reduce the scope of its operations
which could negatively impact its financial condition and operating results.

15

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have any material exposure to market risk
associated with its cash and short-term investments due to the short-term nature
of these investments. The Company's 13 3/4% Senior Notes due 2005 are at a fixed
rate and, thus, are not exposed to interest rate risk.

FORWARD LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based upon
management's current beliefs and projections, as well as assumptions made by and
information currently available to management. When used in this Form 10-Q, the
words "anticipate," "believe," "estimate," "expect" and similar expressions are
intended to identify forward-looking statements. Any statement or conclusion
concerning future events is a forward-looking statement, and should not be
interpreted as a promise or conclusion that the event will occur. The Company's
actual operating results or the actual occurrence of any such event could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed in this
report, and the Company's Transition Report on Form 10-K for the eight month
period ended August 31, 2002.

ITEM 4: CONTROLS AND PROCEDURES

(a) EVALUATION OF CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, which it has
designed to ensure that material information related to the Company, including
its consolidated subsidiaries, is made known to the Company's disclosure
committee on a regular basis. Within 90 days prior to the filing of this report,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), an evaluation of the effectiveness of the Company's disclosure
controls and procedures was performed. Based on this evaluation, the CEO and CFO
have concluded that the Company's disclosure controls and procedures are
effective to ensure that material information is recorded, processed, summarized
and reported by management of the Company on a timely basis in order to comply
with the Company's public disclosure obligations under the relevant federal
securities laws and the SEC rules promulgated thereunder.

(b) CHANGES IN INTERNAL CONTROLS

There were no significant changes in the Company's internal controls or
in other factors, including any corrective actions with regard to significant
deficiencies and material weaknesses, that could significantly affect these
controls subsequent to the date of the Company's evaluation.

16

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits - See the Index to Exhibits.

(b) Reports on Form 8-K - The following current report on Form 8-K
was filed by the Company subsequent to August 31, 2002:

(1) On September 9, 2002, the Company reported under Item
5 the resignation of Jana A. Bell as CEO and the
appointment of Andrew Tillman as CEO on an interim
basis effective August 25, 2002.

17

SIGNATURES

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

MINORPLANET SYSTEMS USA, INC.

Date: January 10, 2003

By: /s/ Andrew Tillman
-------------------------------------
Andrew Tillman
Chief Executive Officer

By: /s/ W. Michael Smith
-------------------------------------
W. Michael Smith
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)

18

CERTIFICATION

I, Andrew Tillman, certify that:

1. I have reviewed this quarterly report of Form 10-Q of Minorplanet
Systems USA, Inc.;

2. Based upon my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary 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 upon 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 the Exchange Act Rules 13a-14 and 15d-14), for the
registrant and we have:

a. 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 this
quarterly report is being prepared;

b. 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 Report"); and

c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based upon 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 the registrant's board of directors (or persons
performing the equivalent functions);

a. 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

b. 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 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.

Date January 10, 2003

By /s/ Andrew Tillman
-----------------------------------------
Andrew Tillman, Chief Executive Officer

19

CERTIFICATION

I, W. Michael Smith, certify that:

1. I have reviewed this quarterly report of Form 10-Q of Minorplanet
Systems USA, Inc.;

2. Based upon my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary 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 upon 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 the Exchange Act Rules 13a-14 and 15d-14), for the
registrant and we have:

a. 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 this
quarterly report is being prepared;

b. 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 Report"); and

c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based upon 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 the registrant's board of directors (or persons
performing the equivalent functions);

a. 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

b. 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 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.

Date January 10, 2003

By /s/ W. Michael Smith
-------------------------------------------
W. Michael Smith, Executive Vice President,
Chief Financial Officer & Treasurer

20

INDEX TO EXHIBITS

21

Services Incorporated and HighwayMaster Corporation
on May 3, 1999. (13)(14)

10.18 - Stock Option Agreement dated September 3, 1999, by
and between the Company and J. Raymond Bilbao. (15)

10.19 - Stock Option Agreement dated September 3, 1999, by
and between the Company and W. Michael Smith. (15)

10.20 - Limited Liability Company Agreement of HighwayMaster
of Canada, LLC executed March 3, 2000. (16)

10.21 - Monitoring Services Agreement dated May 25, 2000, by
and between the Company and Criticom International
Corporation. (17) (18)

10.22 - Commercial Lease Agreement dated April 26, 2000 by
and between the Company and 10th Street Business
Park, Ltd. (18)

10.23 - Stock Option Agreement dated July 18, 2001, by and
between the Company and J. Raymond Bilbao (19)

10.24 - Stock Option Agreement dated June 21, 2001, by and
between the Company and J. Raymond Bilbao (19)

10.25 - Stock Option Agreement dated July 18, 2001, by and
between the Company and W. Michael Smith (19)

10.26 - Stock Option Agreement dated June 21, 2001, by and
between the Company and W. Michael Smith (19)

10.27 - Employment Agreement, dated June 21, 2001, between J.
Raymond Bilbao and the Company (20)

10.28 - Employment Agreement, dated June 21, 2001, between W.
Michael Smith and the Company (20)

10.29 - Agreement No. 980427-03, dated January 31, 2002
between SBC Ameritech, SBC Pacific Bell, SBC Southern
New England Telephone, SBC Southwestern Bell
Telephone, L.P. and the Company (27) (28)

10.30 Agreement and General Release Between the Company and
Todd A. Felker dated October 8, 2002 (31)

10.31 Agreement and Mutual Release Between the Company and
Jana A. Bell dated September 24, 2002 (31)

10.32 Addendum dated September 26, 2002 to Exclusive
Licence and Distribution Agreement (32)

16.1 - Letter from Arthur Andersen to the SEC (Omitted
pursuant to Item 304T of Regulation S-K)

99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by Andrew Tillman, Chief Executive
Officer (32)

99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by W. Michael Smith, Executive Vice
President and Chief Financial Officer (32)

- ----------

(1) Filed in connection with the Company's Registration Statement on Form
S-1, as amended (No. 33-91486), effective June 22, 1995.

(2) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.

(3) Certain confidential portions deleted pursuant to Application for
Confidential Treatment filed in connection with the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.

(4) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).

(5) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1996.

(6) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 1997.

(7) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential

22

Treatment issued in connection with the Company's Form 10-Q Quarterly
Report for the quarterly period ended March 31, 1997.

(8) Filed in connection with the Company's Registration Statement on Form
S-4, as amended (No. 333-38361).

(9) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended September 30, 1998.

(10) Filed in connection with the Company's Form 10-K fiscal year ended
December 31, 1998.

(11) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 1999.

(12) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued June 22, 1999 in
connection with the Company's Form 10 -Q Quarterly Report for the
quarterly period ended March 31, 1999.

(13) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1999.

(14) Certain confidential portions deleted pursuant to letter granting
application for confidential treatment issued October 10, 1999 in
connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 1999.

(15) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended September 30, 1999.

(16) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 2000.

(17) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued December 5, 2000 in
connection with the Company's Form 10 -Q Quarterly Report for the
quarterly period ended June 30, 2000.

(18) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 2000.

(19) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended September 30, 2001.

(20) Filed in connection with the Company's Current Report on Form 8-K filed
with the SEC on June 29, 2001.

(21) Filed as Appendix A to the Company's Definitive Proxy Statement on
Schedule 14A filed with the SEC on May 11, 2001.

(22) Filed in connection with the Company's Current Report on Form 8-K filed
with the SEC on March 27, 2002. Certain confidential portions deleted
pursuant to Order Granting Application for Confidential Treatment
issued in connection with the Company's Current Report on Form 8-K
filed with the SEC on March 27, 2002.

(23) Filed in connection with the Company's Form S-3 Registration Statement
filed with the SEC on October 10, 2001 (File No. 333-71340).

(24) Incorporated by reference to Exhibit A to the proxy statement contained
in the Company's Definitive Schedule 14A with the SEC on April 25,
2000.

(25) Incorporated by reference to Exhibit F to the proxy statement contained
in the Company's Definitive Schedule 14A filed with the SEC on May 11,
2001.

(26) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.

(27) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ending March 31, 2002.

(28) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued in connection with the
Company's Quarterly Report on Form 10-Q for the quarterly period ending
March 31, 2002.

(29) Incorporated by reference to Exhibit A to the information statement
contained in the Company's Definitive Schedule 14C filed with the SEC
on June 27, 2002.

(30) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ending June 30, 2002.

(31) Filed in connection with the Company's Form 10-K Transition Report for
the eight month period ending August 31, 2002.

(32) Filed herewith.

23