SECURITIES AND EXCHANGE COMMISSION

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 February 29, 2004

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

MINORPLANET SYSTEMS USA, INC.

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

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.

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

2

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

Form 10-Q

INDEX

3

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

4

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

5

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

6

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

7

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

1. Reorganization and Going Concern Uncertainty

Voluntary Bankruptcy Filing

     On February 2, 2004, (the “Commencement Date”), Minorplanet Systems USA Inc., a Delaware corporation (the “Company”), and two of its wholly-owned subsidiaries, Caren (292) Limited and Minorplanet Systems USA Limited, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas Dallas Division (the “Bankruptcy Court”), in order to facilitate the restructuring of the Company’s debt, trade liabilities, and other obligations. The Company has remained in possession of its assets and is operating as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. As “debtors-in-possession”, the Company is authorized to continue to operate as an ongoing business but may not engage in transactions outside of the ordinary course of business without obtaining approval from the Bankruptcy Court.

     Under Section 362 of the Bankruptcy Code, the filing of the bankruptcy petition automatically stays most actions against the Company including most actions to collect pre-petition indebtedness or exercise control over the property of the Company’s estate. Unless otherwise ordered by the Bankruptcy Court, substantially all pre-petition liabilities will be addressed under a plan of reorganization to be filed by the Company. The Bankruptcy Court has established April 9, 2004 as the bar date for creditors and other parties-in-interest (other than governmental entities) to file their proofs of claims and proofs of interest. The bar date for governmental entities to file their proofs of claims and proofs of interest is May 10, 2004. Thus, the aggregate amount of all pre-petition claims is not known at this time.

     Under Section 365 of the Bankruptcy Code, the Company may assume or reject certain pre-petition executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Upon rejection of an executory contract or unexpired lease, the debtor is generally excused from further performance under the contract. The contracting party will have a claim for the debtor’s failure to perform as if the breach of contract occurred immediately prior to the filing of the bankruptcy petition. Contracting parties to these rejected contracts or unexpired leases may file proofs of claim against the Company’s estate for damages, if any, relating to such rejections. The Company cannot presently determine with certainty the ultimate aggregate liability that will result from the filing of claims relating to such contracts or unexpired leases that have been or may be rejected.

     The United States Trustee has appointed an official committee of unsecured creditors (the “Creditors Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court. The rights and claims of various creditors and security holders will be determined by a plan of reorganization that is confirmed by the Bankruptcy Court. There can be no assurance that the Creditor’s Committee will support the Company’s positions or ultimate plan of reorganization, once proposed, and disagreements between the Creditor’s Committee and the Company could protract the Chapter 11 cases and could negatively impact the Company’s ability to operate during the Chapter 11 cases.

     In order to successfully emerge from Chapter 11 bankruptcy, the Company will need to propose a plan of reorganization and obtain confirmation of the plan of reorganization by the Bankruptcy Court. For the first 120 days after the Commencement Date, and if no trustee is appointed, the Company has the exclusive right to file a plan of reorganization in accordance with the Bankruptcy Code. If the Company fails to file a plan of reorganization within this period (or any extended period approved by the Bankruptcy Court), or if such reorganization plan is not accepted by the required number of creditors within the applicable time period, any party in interest may subsequently file its own plan of reorganization. Although the Company intends to file its plan of reorganization timely and expects the plan will fully satisfy all creditor claims, at this time it is not possible to accurately predict the effect of the bankruptcy filing on the Company’s business, creditors, or stockholders, when the Company may emerge from bankruptcy, or what the disposition will be of any claims against the Company. The Company’s future results depend on the timely and successful confirmation and implementation of a plan of reorganization.

8

     Any plan of reorganization that is ultimately approved by the Creditors Committee and confirmed by the Bankruptcy Court will likely result in the substantial dilution of the Company’s existing stockholders. Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any of the Company’s securities.

Commitment for Debtor-in-Possession Financing

     The Company has received a minimum commitment for $1.3 million of debtor-in-possession financing, subject to Bankruptcy Court approval. The $1.3 million convertible promissory note principal balance is due 36 months from the date of closing, with an annual interest rate of 12 percent. The Company is required to pay 36 monthly accrued interest-only payments on the principal balance, with the initial interest payment due 30 days from closing. Following the initial year of the note, the Company may elect to repay the loan without premium or penalty.

     The lender may elect at any time prior to the maturity date of the note to convert all or any part of the principal or accrued interest to common stock, discounted at a rate of 20 percent of the market value if the election is made within the initial year of the loan or 15 percent of the market value if the election is made thereafter. Market value for purposes of conversion is defined as the average trading price of the common stock five days before and five days after the date the lender elects to exercise the conversion. The Company intends to obtain approval of the debtor-in-possession financing upon confirmation of its plan of reorganization.

Accounting Impact of Voluntary Bankruptcy Filing

     The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the provisions of Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). In accordance with SOP 90-7, the Company’s pre-petition liabilities that are subject to compromise are reported separately on the balance sheet at an estimated amount that will ultimately be allowed by the Bankruptcy Court. As of February 29, 2004, the Company’s pre-petition liabilities subject to compromise were as follows (in thousands):

     Pursuant to SOP 90-7, an objective of financial statements issued by an entity in Chapter 11 is to reflect its financial evolution during the proceeding. For that purpose, the financial statements of periods including and subsequent to filing the Chapter 11 petition should distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Certain expenses, realized gains and losses and provisions for losses resulting from the reorganization and restructuring of the business should be reported separately as reorganization items pursuant to SOP 90-7. Total reorganization items incurred to date by the Company are as follows (in thousands):

     In accordance with SOP 90-7, the Company stopped accruing interest on its 13.75% senior notes payable due September 15, 2005 as of the Commencement Date. Total interest expense not accrued for the post-petition period after the Commencement Date through February 29, 2004 was approximately $160,000.

     As part of the current plan of reorganization, the Company is required to accept, accept as modified, or reject all executory contracts including the Vehicle Management Information (“VMI”) license rights. In the event the Company elects and obtains approval from the Bankruptcy Court to accept as modified or reject the VMI license rights, such action would result in a material decrease in the carrying value of the license rights. Currently, the Company cannot determine the potential decrease in the carrying value of the license rights should the Company elect and obtain approval from the Bankruptcy Court to accept as modified the VMI license rights. Should the Company elect and obtain approval from the Bankruptcy Court to reject the VMI license rights, a loss of substantially all of the carrying value of the VMI license rights would be recognized. As of February 29, 2004, the carrying value of the license rights was $32.2 million.

     The unaudited condensed consolidated financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern, and do not purport to reflect or to provide all of the possible consequences of the ongoing Chapter 11 reorganization cases. The

9

unaudited condensed consolidated financial statements do not present the amount which will ultimately be paid to settle all liabilities and contingencies which may be required in the Chapter 11 reorganization. The Company intends to file its reorganization plan in the near future at which time it will be subject to approval by the required creditors and the Bankruptcy Court.

     Due to the ongoing Chapter 11 reorganization cases, the outcome of which is not presently determinable, the unaudited condensed consolidated financial statements contained herein are subject to material uncertainties and may not be indicative of the results of the Company’s future operations or financial position. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings.

     As a result of the items discussed above, there is substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, but not limited to, formulation, approval, and confirmation of a plan of reorganization and the ability of the Company to ultimately achieve positive results of operations. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recorded amounts or reflect any amounts that may ultimately be paid to settle liabilities and contingencies which may be required in the bankruptcy reorganization, or the effect of any changes, which may be made in connection with the Company’s operations resulting from the plan of reorganization.

2. Business Overview

     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 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 the calendar year 2001. The Company currently markets and sells the VMI product in Dallas, Texas; Houston, Texas; Atlanta, Georgia; Los Angeles, California; and Austin, Texas. 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 wireless digital standard in the world. The VMI application is intended to be targeted to small and medium sized fleets in the metro marketplace, which the Company believes represents a total U.S. market of approximately 20 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 Company’s initial product offering, the 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. (“SBC Companies”), pursuant to the service vehicle contract (the “Service Vehicle 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®. During the first calendar quarter of 2001, the Company began marketing and selling 20/20V™, 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 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

10

March 15, 2002, by and between the Company and Aether (the “Sale”). Under the terms of the Sale, the Company sold to Aether assets and related license rights to its Platinum Service software solution, 20/20V™, and TrackWare® 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.

3. Basis of Presentation & Significant Accounting Policies

     The unaudited condensed 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 condensed 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 condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto in its Annual Report on Form 10-K and Form 10-K/A for the year ended August 31, 2003. The accompanying condensed 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 fiscal year.

Reverse Stock Split

     All shares and earnings per share amounts for all periods presented have been restated to reflect the reverse stock split effected December 3, 2003, as described in Note 8.

Revenue Recognition

     The Company recognizes revenue from its long haul trucking Series 5000 mobile units under the provisions of EITF No. 00-21, “Revenue Arrangements With Multiple Deliverables” (“EITF 00-21”) and Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Under EITF 00-21 and 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 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 Condensed Consolidated Statement of Operations as “Ratable product revenues.” The related deferred revenue is classified as a current and long term liability on the Condensed Consolidated Balance Sheets 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 periodically reviews its estimates of the customer relationship period as compared to historical results and adjusts 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 give the customer the right of acceptance. Sales arrangements recognized upon delivery and acceptance 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 these components, revenue recognition is governed by EITF 00-21, SAB 101, and Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”). Under EITF 00-21 and 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. Currently, the Company resells wireless airtime to most customers of its VMI products over the contract term; therefore, in accordance with SAB 101,

11

the Company defers these VMI product revenues. In addition, the Company has also deferred revenue consistent with the provisions of SOP 97-2. For those customers that do not purchase wireless airtime service directly from the Company, revenue is deferred under the provisions of SOP 97-2 which requires deferral if a significant portion of the software licensing fee is not due until more than twelve months after delivery and vendor specific objective evidence of fair value for post contract services is not available. VMI product sales are recognized ratably over the customer contract term. Such terms range from one to five years. VMI product sales proceeds recognized under this method are portrayed in the accompanying Condensed Consolidated Statement of Operations as “Ratable product revenues.” The related deferred revenue is classified as a current and long term liability on the Condensed Consolidated Balance Sheets 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 customer contract term, such deferred sales proceeds are recognized as revenue in the period of termination.

     Service revenue generally commences upon product installation and customer acceptance, and is billed and recognized during the period such services are provided.

Stock Based Compensation

     The Company applies the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock option plans. Accordingly, compensation expense would be recorded at the date of grant only if the current market price of the underlying stock exceeded the exercise price. On December 3, 2003, the Company effected a reverse stock split (see Note 8) at which time the terms of all outstanding stock options were not adjusted triggering variable accounting for such options in accordance with Emerging Issues Task Force 00-23. Thus, compensation cost associated with these stock options will be measured and accrued at the end of each accounting period at the amount by which the quoted market value of the Company’s stock exceeds the stock option exercise price.

     Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value based method of accounting described above, and has adopted the disclosure requirements of SFAS 123. In accordance with the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” pro forma net loss and net loss per share disclosures, as if the Company