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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year ended December 31, 2004  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission File No. 0-22920 NUMEREX CORP. 
  Pennsylvania
    
    11-2948749(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)1600 Parkwood Circle
Suite 200Atlanta, Georgia
    
    30339-2119(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (770) 693-5950 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, no par value(Title of Class)
 Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registration is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes o                    No þ The aggregate market value of voting and non-voting stock held by non-affiliates of the
Registrant as of June 30, 2004 is $34,835,502.1 The number of shares outstanding of the issuers Class A Common Stock, no par value as of
March 15, 2005: 10,850,041 DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Companys Annual Report to Shareholders for the year ended December
31, 2004, are incorporated by reference in Part I and Part II of this Report and certain
provisions of the Companys Proxy Statement to be filed in connection with its 2004 Annual
Meeting of Shareholders are incorporated by reference in Part III of this Report. Other documents incorporated by reference are listed in the Exhibit Index.   1
   1




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TABLE OF CONTENTS PagePART IItem 1.     Business
    
    
    3Item 2.     Properties
    
    
    16Item 3.     Legal Proceedings
    
    
    16Item 4.     Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5.     Market for Registrants Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
    
    
    18Item 6.     Selected Financial Data
    
    
    19Item 7.     Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 7A   Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8.     Financial Statements and Supplementary Data
    
    
    34Item 9.     Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    56Item 9A.   Controls and Procedures
    
    
    56PART IIIItem 10.     Directors and Executive Officers of the Registrant
    
    
    56Item 11.     Executive Compensation
    
    
    56Item 12.     Security Ownership of Certain Beneficial Owners and Management
    
    
    56Item 13.     Certain Relationships and Related Transactions
    
    
    56Item 14.     Principal Accounting Fees and Services
    
    
    56PART IVItem 15.     Exhibits and Financial Statement Schedules
    
    
    57SignaturesEX-11 COMPUTATION OF EARNINGS PER SHAREEX-21 SUBSIDIARIES OF NUMEREX CORP.EX-23 CONSENT OF GRANT THORNTON LLP.EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICEREX-32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
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Forward-Looking Statements This document contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements
include, among other things, statements regarding trends, strategies, plans, beliefs, intentions,
expectations, goals and opportunities. Forward-looking statements are typically identified by
words or phrases such as believe, expect, anticipate, intend, estimate, assume,
strategy, plan, outlook, outcome, continue, remain, trend, and variations of such
words and similar expressions, or future or conditional verbs such as will, would, should,
could, may, or similar expressions. All statements and information herein and incorporated by
reference herein, other than statements of historical fact, are forward-looking statements that are
based upon a number of assumptions concerning future conditions that ultimately may prove to be
inaccurate. Many phases of the Companys operations are subject to influences outside its control.
The Company cautions that these forward-looking statements are subject to numerous assumptions,
risks and uncertainties, which change over time. These forward-looking statements speak only as of
the date of this Annual Report, and the Company assumes no duty to update forward-looking
statements. Actual results could differ materially from those anticipated in these forward-looking
statements and future results could differ materially from historical performance. Any one or any combination of factors could have a material adverse effect on the Companys results
of operations or could cause actual results to differ materially from forward-looking statements or
historical performance. These factors include: the pace of technological change; variations in
quarterly operating results; delays in the development, introduction and marketing of new wireless
products and services; customer acceptance of products and services; economic conditions; the
inability to attain revenue and earnings growth; changes in interest rates; inflation; the
introduction, withdrawal, success and timing of business initiatives and strategies; competitive
conditions; the extent and timing of technological changes; changes in customer spending; the loss
of intellectual property protection; general economic conditions and conditions affecting the
capital markets. Actual events, developments and results could differ materially from those
anticipated or projected in the forward-looking statements as a result of certain uncertainties set
forth below and elsewhere in this document. Subsequent written or oral statements attributable to
the Company or persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements in this report and those in the Companys reports previously and subsequently
filed with the Securities and Exchange Commission. 
 PART I 
  Item 1.
    Business Overview Numerex Corp.is a solutions provider of wireless machine-to-machine (M2M) communications,
delivering comprehensive wireless solutions over the companys proprietary wireless data network,
CellemetryXG. Our wireless data network is dedicated to the delivery of M2M communications
throughout the United States, Canada, Mexico, the Caribbean and much of Latin America. M2M is defined as electronic data communications between people, devices, and systems that
turn data into information that companies can act upon. Whether it is called machine-to-machine,
man-to-machine, mobile-to-machine or machine-to-mobile, the meaning is the same. Beginning in the
mid-1990s, when the M2M market was beginning to take shape, it was known by a variety of terms,
such as pervasive Internet, telemetry, telematics, device-relationship management, and remote
monitoring. Regardless of the terminology, however, the objective of M2M is to facilitate
communication among people, devices, and systems. We develop, operate, market, and sell products and services in wireless data communications through
CellemetryXG, Cellemetry®, Uplink, MobileGuardian®, and VendView brands, as well as distribution
through Value Added Resellers (VARs) who have integrated the CellemetryXG Network and components
into their own offerings. In addition, we develop and market products and services for video and
data collaboration under the PowerPlay and IPContact® brands; we also develop and market
telecommunications networking support and wireline alarm security products and services through its
Digilog® and DCX brands. These products and services enable customers around the globe to monitor, move, and act on
information through a variety of applicationsfrom home and business security to smart vending
machines to distance learning. Our strategic vision is to be recognized as the leading provider of M2M wireless solutions for
customers in its target markets by:  
    Providing best-in-class solutions to the M2M communications market primarily serving
security needs across all industries.
    Creating a culture of excellence in customer service and product integrity through innovation and vigilance.
    Delivering quality products and services that meet and anticipate the evolving needs of our customers.
    Enhancing shareholder value through a financial model of sustainable growth based on
long-term recurring service revenues. Background Our business began in July 1992 with the acquisition of technology referred to as
Derived Channel, which enables data 3




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transmission over an existing telephone line without
interfering with voice communications over that same telephone line. We expanded our business
primarily through the acquisition of complementary businesses, product lines, and proprietary
technologies. In November 1999, we sold the Derived Channel technology to British
Telecommunications PLC (BT). In May 1998, Numerex Corp., BellSouth Corporation and BellSouth Wireless, now Cingular,
completed a transaction whereby Cellemetry LLC, a joint venture between Numerex and Cingular, was
formed. Cellemetry LLC provides a cost-effective, two-way wireless data communications network
throughout the United States, Canada, Mexico, Colombia, Argentina, Paraguay, the Dutch Antilles,
and Puerto Rico, with plans for further expansion into other international markets. On March 28,
2003, we acquired Cingulars interest in Cellemetry LLC. We operate in three segments, Wireless Data Communications, Digital Multimedia and Networking
and Wireline. Our Wireless Data Communications segment is made up of all our wireless
machine-to-machine communications products and services. Our Digital Multimedia and Networking
segment includes the Companys networking products and services and video conferencing products.
Our Wireline segment is our wire-line security detection products and services division. Our primary business focus is the design, development, and delivery of M2M solutions that
combine our wireless data network with remote management and monitoring applications that allow
organizations to acquire, monitor, and control data from their extended enterprise. SEGMENT 1  WIRELESS
DATA COMMUNICATIONS) Machine to Machine
Communications(M2M) Our M2M solutions are comprised of four categories: Networks, Network Services, Network
Access Technology, and End-To-End Solutions. End-to-End solutions are typically delivered under
their own distinct brands, including Uplink, MobileGuardian, and VendView; all non End-to-End
solutions are delivered under the Cellemetry or CellemetryXG brand. Products and Services CellemetryXG CellemetryXG is the umbrella M2M offering that provides our network product strategy and an
array of solution components that support the M2M value chain. These components include Cellemetry,
our wireless data network dedicated to M2M communications, and CellemetryXG Network Services,
comprised of application engineering and development, customized billing, GPS mapping for mobile
applications, network and application implementation management, back-end message delivery
management, application and network support, and interactive voice and Web services. The CellemetryXG offering also includes network access technology. This technology typically
consists of network access modules that provide wireless network access and remote wireless
management of assets and activities. These modules are capable of supporting a variety of remote
applications that are either fixed or mobile. Another component of CellemetryXG is XgpertTM Support, a premium, 24/7/365 network
support service providing customers with online voice, video, and data collaboration with the
Numerex Network Operations Center. The CellemetryXG Network strategy supports continued expansive coverage, legacy network
interoperability, and expanded gateway capabilities for higher bandwidth M2M applications in the
future. The CellemetryXG Network: Cellemetry® The term
Cellemetry is an acronym that stands for cellular
telemetry and is used when referring to the technology developed and offered by
Cellemetry LLC. It is a means of wireless data communications that taps the unused capacity of the
cellular telephone networks overhead control channels and the
SS7/IS41/IS95 network protocols to
deliver two-way short data messages, without affecting the voice channels of the cellular network.
In other words, Cellemetry utilizes the existing cellular telephone network without
affecting cellular telephone calls or voice operation. Using Cellemetry technology, remote equipment or vehicles can (i) be contacted, (ii) be
scheduled to perform a task at a preprogrammed time, and/or (iii) autonomously exchange information
with a customers central location. Information gathered is relayed to and from the customers
designated site for collection or for response. Based on remote conditions, control actions can be
relayed as well. This means, for example, that equipment can be turned on or off remotely,
switches and gates can be closed, and pumps triggered. When used in combination with low-cost Global Positioning System (GPS) applications,
Cellemetry radios can pinpoint the precise geographic location of trucks, automobiles, railroad
cars, barges, containers, or other movable assets and signal control actions or operator-response
messages. 4




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The phrase Cellemetry
Data Service refers to wireless M2M communications and
remote monitoring over the cellular network. It provides a means of sending short data messages
over the cellular telephone system in a manner that is virtually transparent to the cellular
operator. Cellemetry Data Service does not use or affect voice channels, and is a patented
technology of Cellemetry LLC. We have negotiated licensing agreements with cellular carriers
throughout the United States, Canada, Mexico, Argentina, Colombia, the Dutch Antilles, Paraguay,
and Puerto Rico to make Cellemetry Data Services widely available. We have also negotiated
licensing agreements with application developers and radio manufacturers to provide applications
and equipment across urban, rural, and industrial markets that are compatible with Cellemetry. Cellemetry Data Service enables messaging for many different business applications. It can,
for example, report alarm messages, read utility meters, identify vehicle and trailer location, and
report a number of items regarding vending machine status. It is unique because it uses the
underused portion of the cellular system, the overhead control channels, to convey short data
messages without affecting or using the voice channels. These control channels are used to
transmit necessary information for all call initiations (both incoming and outgoing) between the
cellular system and the cellular customers equipment. The message-handling capacity of these
control channels is far greater than what is required by the existing
cellular system to handle its voice traffic, even during the busiest times of the day. Cellemetry Data Service operates in the same manner in which roaming telephones operate in the
cellular system. A roaming cellular telephone is defined as a cellular telephone operating in any
system other than its home system. When a roaming cellular telephone is turned on, it recognizes
the fact that it is not in its home system and accordingly registers by sending its Mobile
Identification Number (MIN) and its Electronic Serial Number (ESN) to the cellular system via one
of the control channels. The cellular system recognizes the roamer number and routes the MIN and
ESN to the roamers home system for validation via a special
network (SS7/IS41/IS95), which links all of the cellular systems together across Canada, Mexico, and the United States, and parts of South and
Central America. Cellemetry radios behave like roaming cell phones, except that the cellular telephone switchs
database is set to route the registrations (MIN and ESN data) to the Cellemetry centralized
Service Bureau (the Service Bureau), connected to the same intracellular network. The MIN serves
to identify the Cellemetry radio and the ESN is the data field that contains the telemetry message.
In addition, the Service Bureau adds a time stamp and the SS7/IS41/IS95 network adds point-of-origin
data. The Service Bureau processes, stores, and routes the Cellemetry Data Service messages
according to customer requirements. Some applications may require immediate processing, as is the
case with alarm monitoring, while an application such as vending machine status may only need the
messages stored and transferred in a single batch once a day. CellemetryXG Network Services We market Cellemetry Network
Services as an inclusive service to our network offerings or as an
optional support service. Application Engineering and Development Services helps reduce the development and engineering time
for applications by providing most of the information and resources, including generic Cellemetry
products, necessary to more rapidly bring applications to market. As a result, we can offer
application developers an interactive Web-based wireless M2M interface product
and/or service, which monitors and controls geographically remote systems and applications. Other CellemetryXG Network Services available include custom Web services, network and application
implementation management, back-end data message delivery, interactive voice response services, GPS
mapping, and customized billing plans and administration. All CellemetryXG customers receive
7/24/365 network support from our Network Operations Center in Atlanta, Georgia. CellemetryXG Network Access Technology We design, develop, manufacture, and market a suite of network access modules that provide the
physical and electrical interface between the customers application and the CellemetryXG Network.
Examples of the various modules include the DigiCell 1500, a cellular unit designed to signal a
designated central monitoring station if telephone lines have been cut or damaged. Because the
transceiver auto-acquires the network, connection is automatic upon installation.
The EV-501 is a self-contained, pre-wired, assembled, and packaged unit designed to monitor
virtually any critical-event condition in any setting. The MMP Network Access Module, scheduled
for release in 2005, is comprised of single radio modules supporting multiple analog and digital
radio technologies. Supported technologies will include GSM, CDMA, AMPS, and SMS for either GSM or
CDMA. Support is also provided for future expansion to broadband wireless. In addition, the MMP can
be optionally configured with an integrated IP communications module, providing encrypted 10/100
Ethernet network connectivity. The Network Modules are configured as generic product offerings for VAR application development, as
fully configured modules for OEM integration, or as a component of the Companys end-to-end
solutions. 5




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End-to-End Solutions
Uplink: Wireless Security Communications Uplink is a dedicated wireless communications solution for security monitoring that reports
all alarms, status, and messages generated by security systems. Uplink delivers this solution by
providing a secure, dedicated cellular link and network access module that transmits alarms to
virtually any alarm-receiving center or monitoring service. A stand-alone sensor, alarm panel output, or alarm panel serial connection provides the trigger to
one of Uplinks family of network access modules, which in turn transmits the alarm event over the
CellemetryXG Network. The Numerex Gateway accepts the incoming signal and logs it for immediate
viewing through the SSL/password-secured Web interface. Depending on the selected reporting
options and alarm monitoring station receiver, the decoded signal can be forwarded via encrypted IP
or PSTN to the alarm monitoring station. As an option, a customizable text message can be sent to
any email-enabled device or to an alphanumeric pager. Uplink service is sold and
installed by certified Uplink dealers in both residential and
commercial premises. The Uplink Network Operations
Center in Atlanta activates and manages the service through the dealers. We believe that Uplinks products and communications charges are competitively priced. As a result
of combining CellemetryXG M2M technology with low-cost communication equipment and routing
technologies, significant improvements in security communication services are now available to the
industry. MobileGuardian®: Wireless Vehicle Location and Recovery MobileGuardian, a product and service offering, is a Web-based vehicle location and recovery
solution that combines the accuracy of the GPS (Global Positioning System) and CellemetryXG
wireless communications technology. MobileGuardian customers can accesses the secure
MobileGuardian Web site using their selected login and password to locate their vehicle and prevent
restarting of the vehicle by temporarily disabling it. If the cars alarm system is triggered, a message is sent to the MobileGuardian device located
in the vehicle, which then wirelessly transmits a theft alert notification over the CellemetryXG
M2M network to the vehicles owner via the owners wireless phone, email, or pager. The owner may
log on to the secure MobileGuardian Web site to send an immediate locate request to the vehicle;
the owner may then remotely disable the vehicle at the touch of a button and prevent it from being
restarted while he or she calls the authorities to report the theft and give them the location of
the vehicle. This improves the prospect of vehicle recovery and the timeframes in which the
recovery occurs. In addition, the vehicles owner can use the MobileGuardian system to simply
track the vehicle, without the alarm system triggering. The owner can purchase, via the Web site,
additional locates, or messaging, beyond those allotted at the time of purchase in order to track
or disable his or her vehicle at any time. Our distribution strategy for
MobileGuardian involves multiple sales channels that service auto
dealerships. Currently, Southwest Dealer Services is the primary
MobileGuardian product sales channel. The MobileGuardian product is
typically installed at the auto dealership location by the
dealer/distributor. Application and network support is provided to
dealers by the CTAC and Network Operations Center in Atlanta.
MobileGuardian is competitively priced and offers value-added features,
such as extensive network coverage, immediate notification of a
breach and/or activation of the vehicle's alarm system and vehicle
tracking. We believe MobileGuardian is competitively well positioned
in the established vehicle location and recovery markets. VendView Wireless Vending Solution VendView, a product and service offering, is a dedicated wireless vending machine monitoring
solution that combines our wireless network access modules, monitoring devices, and the
CellemetryXG wireless data network. Once installed in vending machines, the devices report critical data, such as inventory levels,
machine operating information (i.e., temperature levels), and authorized/unauthorized entry into
the vending machine. The information is encrypted and available to the customer through a secure VendView
Internet portal. This application is particularly valuable to vending operators that have machines
widely dispersed in large geographic areas or in remote locations and where wireline communications
are unavailable or unreliable. Sales and Marketing We utilize multiple
distribution channels to market and sell our M2M network, components, and
solutions. CellemetryXG is licensed and marketed directly to end user organizations for internal
application development. Cellemetry is also licensed to VARs to develop and market VAR-branded
solutions incorporating CellemetryXG components. CellemetryXG network and services are bundled
and distributed as a network product and service offering through solution-provider companies
like Geologix and GE Transportation. Uplink is distributed through a network of over 200 alarm security distributors and 4,500 alarm
security dealers in North America for both commercial and residential
alarm security markets. 6




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MobileGuardian is distributed in the United States under a comprehensive distribution agreement
with Southwest Dealer Services, who supply and install auto security
systems at several hundred dealership locations nationwide. VendView is marketed and sold directly to bottlers in the United States, Mexico, and the
Caribbean. We currently offer the CellemetryXG network and services in the United States, Canada, Mexico,
Argentina, Colombia, the Dutch Antilles, Paraguay, and Puerto Rico through licensing agreements
with both cellular carriers and local resellers. We intend to offer CellemetryXG, Uplink, and
VendView in various international markets directly and through strategic partnerships, alliances,
and other channels of distribution. SEGMENT 2  DIGITAL MULTIMEDIA AND NETWORKING Digital Multimedia Products and Services We design, develop, and market complete video conferencing and digital multimedia system
products and services for high-quality communications networks. We manufacture both the products
upon which the systems are based and incorporate third-party products where appropriate. Our digital multimedia systems permit network operators to provide a wide range of video and data
services, including Internet access, high-speed data transfer, and interactive video conferencing
and voice service. The use of fiber optics in the broadband transmission network provides improved
signal quality for long-distance transmission, increased bandwidth, immunity to interfering
signals, and significant cost savings and reliability over coaxial cable-based network
technologies. We believe that our digital multimedia systems enable the deployment of
sophisticated architectures at generally lower costs and with less hardware and complexity than
competing offerings. We have developed and continue to enhance our line of software, data, and fiber optic
transmission products. In addition, we have developed a digital multimedia solution, PowerPlay,
which provides capability for interactive videoconferencing over the same network platform that
carries standard data traffic. PowerPlay Solution. PowerPlay, our digital multimedia solution for high-bandwidth private network
applications, is an integrated hardware-software system that supports user-friendly control of all
network devices, including VCRs, cameras, and switches. This product permits the scheduling and
conduct of video conferencing via a desktop workstation, a roll-about cart, or a configured
classroom or business environment. The PowerPlay system incorporates proprietary software and both
Company and third-party-developed hardware, and is compatible with all standards-based transmission
networks. We believe that PowerPlay is unique in its capability to deliver full-motion video
signals while using a relatively small amount of bandwidth. IPContact® In December 2003, we supplemented PowerPlay by announcing the release of IPContact, a
desktop videoconferencing software package that boasts high-quality and high-performance video.
The product is also used as a customer support tool within the CellemetryXG offering. Data Solution. We also provide high-speed wide area networks (WAN) data solutions. This
solution is offered as a data-only capability or as part of delivering the PowerPlay application.
The data product line consists of two main components: the data switch product, which we obtain
from other vendors, and the transport converter device, which we manufacture. System Solution
Services. We design and implement wide area networks using in-house
manufactured products and products supplied by third parties. We also train end users as an
integral aspect of providing complete system solutions. We believe our total system solution focus
differentiates us from our competitors while providing an additional source of revenue growth. Sales and Marketing We market our digital multimedia products and services through a combination of system
integrators and VARs. We have established relationships with a number of multiple system cable operators (MSOs).
MSOs have generally looked to these private networks as a means of augmenting and extending their
public networks, and as a source of new revenues in the increasingly competitive environment. We have developed relationships with a number of traditional systems integrators under which we
have provided system design services and have assisted with the installation. We believe that
systems integrators provide a viable avenue to the market and intend to continue to expand our
efforts in this area. 7




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Networking Products and Services In the last decade the telecommunications industry has changed its networks to establish, control,
and track connections. The improved network is responsible for most of the enhanced services
implemented in the last few years. Using Signaling System Seven (SS7) protocol, the improved
network has added call forwarding, last-number redial, call blocking, and many other features. In
addition, federal guidelines now mandate Local Number Portability (LNP), a capability that allows
customers to keep the same telephone number should they change carriers. We provide products under the Digilog® brand that assist both wireline and wireless carriers
in the engineering, installation, and servicing of this new telecommunications control network.
These telecommunications network operational support systems and services can be categorized as:
Services, including system integration (rack and stack) and installation, Test Access, and
Interconnecting Devices. System Integration (rack
and stack) and Installation. We are an approved to provide
installation services for a number of
major telecommunications companies. We also provide system integration services. Integration
services are the assembly of both customer-supplied components and components manufactured by
Digilog into rack and cabinet configurations for installation in the telephone central office. Test Access.The Digilog Network Analysis and Monitoring System (NAMS) is a network overlay system
that enables a user to monitor the operation of the SS7 network from a central site. The system
provides prompt alarm notification of a network failure, automatic activation of backup devices,
and a means to track down operational database errors. In this application, we supply the access
products and the system software in partnership with Agilent Technologies, which supplies the
remote-controlled Protocol Analyzers. Interconnecting Devices.The Digilog Channel Access Unit (CAU) is a product used to provide the
physical interconnection between the SS7 network and complex monitoring devices such as the AcceSS7
system from a major telecommunications equipment provider. It was developed to meet a strong need
to interconnect several applications monitoring computers to a single network tap point. In
addition to the CAU, our interconnect products include resistor panels, special cables, fuse
panels, and the integration of other third-party equipment. Sales and Marketing Our networking products are sold and marketed under the Digilog brand. Distribution is focused
on wireless and wireline telecommunications companies through system integration agreements with
Agilent and other suppliers of telecommunications and monitoring equipment and services.
Establishing relationships with existing telecom suppliers and vendors facilitates access to a much
broader market without the additional expense of a large and specialized sales force. SEGMENT 3  WIRELINE DATA COMMUNICATIONS Although we have sold our Derived Channel technology to BT, we retain the right to market this
service in North, Central, and South America, South Korea, and Australia. We provide this service
through our DCX Systems and DCX Australia subsidiaries. Our licensed technology creates a Derived Channel on an existing telephone line by using an
inaudible frequency below the voice communications spectrum for data transmission. Derived Channel
technology uses this inaudible or low-tone frequency to transmit monitoring information between a
microprocessor at the users protected premises and a microprocessor located at the telephone
companys central office. This creates a two-way communication system that continuously monitors
the integrity of a users telephone line and security system. Derived Channel operates over a
regular voice telephone line with no interference, whether or not the telephone is in use. In
addition, the low-tone signal can be encrypted for additional security. We believe that Derived Channel differs from most other alarm transport technologies in three
significant ways: 1) Derived Channel operates over existing telephone lines, eliminating the need
for a dedicated line service to the telephone customer; 2) Derived Channel communicates by means of
an encrypted, continuous, and inaudible signal and is transmitted even while the telephone is
otherwise in use; and 3) telephone line integrity and security system operation are automatically
monitored at frequent intervals through test signals generated by network equipment located at the
telecommunication companys central office. The continuous signaling originating at the protected
premises provides prompt reporting of line disruptions, telephone system outages, or alarm
conditions. Sales and Marketing We are not actively marketing the Derived Channel in the United States or in any of our licensed
territories other than Australia, where we are expanding our relationship with a major telecom
company. 8




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GENERAL Suppliers We rely on third-party subcontractors, both in the United States and overseas, to manufacture most
of the equipment used to provide our wireless data product solutions, Derived Channel, and
networking equipment and products. In addition, some of our products are obtained from sole-source
suppliers. The loss of a subcontractor or supplier could cause a disruption in our business due to
the short lead times demanded by certain customers. Competition We have one direct competitor
for our Cellemetry network technologyAeris.net, formerly Aeris
Communication, Inc., which uses the service name Micro Burst. Several competitors are emerging that
provide M2M network services on GSM and CDMA technology. There is also some renewed interest by
the wireless carriers in this market as well. Numerous indirect competitors are actively pursuing
the short message wireless data transport market, principally two-way paging, dedicated packet
radio, private radio, low earth orbit satellites, and PCS. Principal competitive factors when
selecting a network provider are network reliability and overall coverage. We believe that our
ubiquitous North American coverage, pricing, end-to-end solution offerings, and system performance
will enable us to effectively maintain and increase our current market share. However, many of the
competitors have greater financial and other resources than we do, which may provide them a
competitive advantage in marketing and selling, as well as technological advantages obtained
through greater outlays of resources for research and development. Our Uplink security products and services have two primary competitors in its existing
channels of distributionAdemcos Alarmnet C and Telulars Teleguard Databurst, both of which use
the Aeris.net wireless communications solution. The principal competitive factors when making a
product selection in the business and consumer security industry are price, reliability, and
industry certification status. GE Interlogix and DSC Skyroute also offer competitive hardware
product solutions, with their network service provided by Cellemetrys wireless communication solution.
We believe that Uplinks products and airtime communications charges are competitively priced. We have several competitors
offering vehicle location and recovery services, but our principal
direct competitor in the new car dealer after-market vehicle location and recovery business is LoJack
Corporation, the industry market leader. Network OnStar Corp., a subsidiary of General Motors Corp.,
which offers a full suite of concierge services, markets and sells
their services primarily through the auto manufacturer. The principal
competitive factors are network coverage,
user interactions, timely notification, and the ability to locate a vehicle at any time on demand.
There are also numerous other companies that currently offer or are developing other wireless
products and services in this area. The market for our digital multimedia high-bandwidth broadband transmission equipment and software
has been characterized by rapid technological change. The principal competitive factors in this
market include product performance, ease of use, reliability, price, breadth of product line, sales
and distribution capability, technical support and service, customer relations, and general
industry and economic conditions. The ability to provide complete systems solutions, including
system integration, network management capabilities, and the expertise to migrate existing systems
to more complete broadband networks, has also become a critically important vendor selection
criterion in recent years. In addition, users require increasingly sophisticated applications to
make the best use of these networks. Our competitors for our digital multimedia products and services include a number of companies that
have developed videoconferencing technology, including Polycom, Tandberg, and VCON. Other
competitors include manufacturers of fiber transmission equipment, who offer comparable products
but do not provide a complete system solution, including software. Many of the competitors have
greater financial and other resources than we do. Because of its proprietary nature, we believe that we are the only licensed provider of
Derived Channel products in Australia. Our principal competition in the commercial security market
consists of alternative methods of monitoring line integrity, such as dedicated telephone line
service. Although security systems using a dedicated telephone line are considered reliable, they
are a more expensive alternative to our Derived Channel technology. We believe that our Derived
Channel represents, from a price performance perspective, the most secure and most reliable form of
primary alarm data transport. However, there are other competing wireline and wireless
technologies. We believe that our networking business is unique among vendors of support systems for SS7 in
that we have been a long-term provider of both diagnostic equipment and testing systems. We
believe that our presence in telephone central offices on a day-to-day basis gives our networking
business a unique perspective on the needs of the central office project manager. Research and Development Technology is subject to rapid change, so the introduction of new products, technologies, and
applications in our markets could adversely affect our business. Our success will depend, in
part, on our ability to enhance existing products and introduce new products and applications on a
timely basis. We plan to continue to devote a portion of our resources to the research and
development function. We continue to invest in improvements to various Numerex technologies, including Cellemetry
and its service capabilities on an 9




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ongoing basis, focused primarily on the development of expanded service bureau capabilities,
further communications costs reductions, and additional enhancement to application-specific
capabilities. The Cellemetry Network currently supports both TDMA and CDMA switch technologies. It is our
opinion that the CDMA protocol will continue to expand domestically because it is the preferred
technology of the two of the largest cellular providers in the U.S. We are finalizing efforts on
the integration of a Cellemetry digital CDMA radio into our products. These Cellemetry digital
radios will operate on both the CDMA and AMPs networks to ensure continued ubiquitous, reliable
coverage along with legacy support. In parallel with our CDMA development initiative, we are
focused on providing a multi-protocol SMS offering that provides greater bandwidth.
Other major advantages of this supplemental offering are that, unlike other data transport methods,
SMS operates across the new switch technologies (CDMA and GSM) as well as legacy technologies
(TDMA). Digital Cellemetry will also offer a wireless solution by combining existing analog and
digital technologies into multi-mode/multi-band radios, allowing for maximum coverage and
obsolescence protection. This strategy will also provide our customers a high level of flexibility
for deployment not restricted by location or application. Numerex offers this choice in a logical,
flexible, and cost-effective migration plan that is designated to
maintain our current functionality, secure our
and our customers investment in existing solutions, embraces new
and evolving technology, and provide a new array of wireless solutions. We have focused on providing customers with industry benchmark solutions that go beyond
control channel transport of machine messages. With digital network migration well under way, it is
important to provide the market and customers with a clear migration path from legacy analog
networks and services to the new digital networks and IP platforms. Prudent integration of new digital and web technology into our wireless businesses is an
active and on-going process. We are committed to taking full advantage of such new technology
whenever and wherever it makes sense for our customers. Product Warranty and Service Our wireless communications business provides a one-year parts and labor warranty on all
products. Our Wireline Data communications (Derived Channel) business provides customers with
limited one-year warranties on scanners and message switch software, while Subscriber Terminal
Units (STUs) are typically sold with a one-year labor and materials warranty. Our digital
multimedia business provides either a one-year warranty on parts and labor, depending on the scale
and type of product provided. Our networking business provides a one- or two-year warranty on all
telecommunications networking products. In addition, a help desk and training support is offered to
users of telecommunications networking products. To date, the cost of our warranty programs have
not been material. Intellectual Property We hold patents covering its technology related to Cellemetry in the United States and various
other countries. These patents expire between 2011 and 2016. Through Cellemetry, we license
certain technologies related to Cellemetry under licenses with BellSouth Corporation. We also own
other intellectual property relating to our products. We hold patents through Cellemetry LLC,
which primarily cover the delivery of the Cellemetry wireless data communications service. These
patents expire between 2010 and 2012. It is our practice to apply for patents as new products or
processes suitable for patent protection are developed. No assurance can be given about the scope
of the patent protection. We believe that the rapid technological developments in the telecommunications industry may
limit the protection afforded by patents. Accordingly, we believe that our success will also be
dependent upon our manufacturing, engineering, and marketing know-how and the quality and economic
value of our products and solutions. Cellemetry is a registered trademark of Numerex Corp. We believe that no individual trademark
or trade name is material to our competitive position in the industry. Regulation Federal, state, and local telecommunications laws and regulations have not posed any
significant impediments to either the delivery of wireless data signals using the Cellemetry
network or the provision of alarm services by telephone companies using Derived Channel technology.
We may be subject to certain telecommunications taxes and fees, including the federal universal
service charge. By February 2008, the FCC
plans to eliminate its requirement that cellular carriers offer analog service
pursuant to the Advanced Mobile Phone Service (AMPS) standard. At that time, cellular carriers may
stop offering analog AMPS cellular service and use the spectrum for other purposes. Cellemetry,
which currently uses the control channel of AMPS cellular service, would have to migrate its
service to the control channels of digital CDMA wireless service or to the Short Message Services
of digital CDMA or GSM wireless service, and customers that use services based on Cellemetry would
have to replace incompatible radios where AMPS service is no longer
available. Our wireless products and services that make use of the
Cellemetry network would be similarly affected. While we expect that AMPS standard to be available
for period of time after 2008, we continue to work on digital alternatives. This will allow the
provision of services based on Cellemetry into the foreseen future. Also, by going to the digital
standard, we will be able to add greater functionality compared to the current products on the AMPS
standard. 10




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In addition, our products, such as derived-channel STUs, Uplink radios, and certain digital
multimedia products, require certification from the FCC for compliance with standards designed to
prevent damage to the telephone network and to restrict radio frequency interference. Our products
currently used in the United States, which are subject to these requirements, have received all
required certifications. However, anticipated design changes to products sold in the United States
will require compliance testing and certification. In the United States, our products require certification from Underwriters Laboratories in
order to serve monitoring applications with higher levels of insurance risk. Certain products of
our digital multimedia business also require certification from
Underwriters Laboratories. We expect to obtain required Underwriters Laboratories certifications for products
currently marketed in the United States. Regulations similar to the above may exist in other countries. In the event that we did not
comply with any such regulations, or if our current or future products did not meet various
regulatory standards or receive and maintain all required certifications, our business could be
adversely affected. Employees As of March 15, 2005, we employed 83 employees in the U.S., consisting of 4 in
manufacturing, 30 in sales, marketing and customer service, 30 in engineering and operations and 19
in management and administration. We have experienced no work stoppages and no employees are
represented under collective bargaining arrangements. We believe our relationship with our
employees is good. Available Information We make available free of charge through our website at www.nmrx.com our annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto
filed or furnished pursuant to 13(a) or 15(d) of the Securities and Exchange act of 1934, as soon
as reasonably practicable after such reports are filed with or furnished to the Securities and
Exchange Commission. Our filings are also available through the Securities and Exchange Commission
via their website, http://www.sec.gov. The information contained on our website is not
incorporated by reference in this annual report on form 10-K and should not be considered a part of
this report. Risk Factors An investment in our common stock involves a high degree of risk. You should carefully
consider the following information about these risks before buying shares of our common stock. The
following risks and uncertainties are not the only ones facing us. Additional risks and
uncertainties of which we are unaware or we currently believe are not material could also adversely
affect us. In any case, the value of our common stock could decline, and you could lose all or
part of your investment. You should also refer to the other information contained in this Form
10-K or incorporated herein by reference, including our consolidated financial statements and the
notes to those statements. See also, Special Note Regarding Forward-Looking Statements. Risks Related to Our Financial Condition We have a history of losses and are uncertain as to our future profitability. We may not achieve or sustain operating income, net income or positive cash flow from operations in
the future. In 2002, we had a net loss of $7,450,000 and a net loss applicable to common
stockholders of $7,690,000. In 2003, we had a net loss applicable to common stockholders of
$1,404,000. For the year ended December 31, 2004, we had a net loss applicable to common
stockholders of $2,079,000. In addition, we expect to continue to incur significant operating costs and, as a result, will need
to generate significant additional revenues to achieve profitability, which may not occur. If our
revenues do not grow as needed to offset these costs, our business may not succeed. We have debt obligations that may adversely affect our financial and operating flexibility. We currently have indebtedness and may incur additional indebtedness in the future. As of December
31, 2004, our total debt (including obligations under capital leases and equipment financings) was
$6.2 million. The terms of our outstanding debt limits us, but does not prohibit us, from
incurring additional debt. As a result of this debt and debt that we may incur in the future, we will need to devote a portion
of our available cash towards debt service payments. In addition, our ability to borrow additional
money is restricted by our current debt arrangements. Some of our debt is convertible into common stock. The principal amount and any interest that has
accrued on some of our debt may be converted at any time by the holder into common stock at a
predetermined fixed price. The conversion of our debt into common stock, or payment of principal
and interest by us using common stock, would dilute stockholders, possibly 11




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substantially. Substantially all of our property and assets are subject to a lien to secure our debt. If we
default on our debt, we would be subject to foreclosure on substantially all of our assets to the
extent necessary to repay any amounts due. Any such default and resulting foreclosure would have a
material adverse effect on us. Our ability to repay or refinance our debt depends on our successful financial and operating
performance and on our ability to implement our business strategy successfully. We cannot assure
you that our future cash flows and capital resources will be sufficient to repay our existing
indebtedness and any indebtedness we may incur in the future, or that we will be successful in
obtaining alternative financing, if deemed necessary. Further, our borrowings are secured by
substantially all of our assets and guaranteed by most of our subsidiaries. In the event that we
are unable to repay our debts, we may be forced to reduce or delay the completion or expansion of
our business strategy, sell some of our assets, obtain additional equity capital or refinance or
restructure our debt. If we are unable to meet our debt service obligations, we would be in
default under our existing arrangements. We may seek to sell assets to pay off some of our debt. One of our strategies to pay off some of our debt is to sell assets. These assets may currently
generate revenue for us and contribute to our net income and cash flow. If we sell assets that do
generate revenue and contribute to our net income and cash flow, this could adversely affect our
profitability and our results from operations. A sale of some of our assets could also adversely
affect our business strategy, by either delaying or slowing its implementation. We are a holding company and therefore our ability to make payments on our debt depends on cash
flow from our subsidiaries. We are a holding company. Our only material assets are our ownership interests in our
subsidiaries. Consequently, we will depend on distributions or other intercompany transfers from
our subsidiaries to make payments on our debt. In addition, distributions and intercompany
transfers to us from our subsidiaries will depend on:  
    the earnings of our subsidiaries;
    covenants contained in other agreements to which we or our subsidiaries are or may become subject;
    business and tax considerations; and
    applicable law, including laws regarding the payment of dividends and distributions. We cannot assure you that the operating results of our subsidiaries at any given time will be
sufficient to make distributions or other payments to us or that any distribution and/or payments
will be adequate to pay our debt, including interest payments, when due. Risks Related to Our Business The businesses in which we operate are highly competitive, and we may not be able to compete
effectively. We face competition from many companies with significantly greater financial resources,
well-established brand names and large customer bases. Numerous companies also may try to enter
our market and expose us to greater price competition for our services. We expect competition to
intensify in the future. If our competitors successfully focus on the markets we serve, our
business could be adversely affected. We operate in new and rapidly evolving markets where rapid technological change can quickly make
products, including those that we offer, obsolete. We operate in industries that are subject to evolving industry standards, rapid technological
changes and rapid changes in customer demands. These changes, individually or collectively, can
adversely affect our business. If the demand for our products declines due to changes in
technology, and we are unable to develop new products and services that successfully address market
demand, our business will be adversely affected. In the event we keep pace with technological
change, any delays in the development, introduction and marketing of new wireless or digital
multimedia products and services by us, or our suppliers, could have an adverse effect on our
business. Failure of our products and services to gain market acceptance would adversely affect our financial
condition. Over the past two years we have introduced MobileGuardian, a vehicle tracking solution, VendView, a
vending management service, and IPContact, a desktop videoconferencing software package. If these
products and services, or any of our other existing products and services, do not perform as
expected, or if our sales are less than expected, our business may be adversely affected. Our current business plan contemplates significant expansion, which we may be unable to manage. To the extent that we are successful in implementing our business strategy, we may experience
periods of rapid expansion in the future. In order to manage growth effectively, we will need to
maintain and improve our operating systems and expand, train and manage our employees. In
addition, we must carefully manage product inventory levels to meet demand. Inaccuracies in
expected 12




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demand could result in insufficient or excessive inventories and unexpected additional expenses. We
must also expand the capacity of our sales, distribution and installation networks in order to
achieve continued growth in our existing and future markets. The failure to manage growth
effectively in any of these areas could have a material adverse effect on our business, financial
condition and results of operations. We may require additional capital to fund further development, and our competitive position could
decline if we are unable to obtain additional capital. We may need to raise additional funds to support operations, respond to competitive pressures and
changes in technology or respond to unanticipated requirements. To do so, we may need to raise
additional funds through public or private equity or debt financings. We cannot assure you that
additional funding will be available to us at the time it is needed, or on terms acceptable to us.
This could have a material adverse effect on our business. If we experience product defects or failures, our costs could increase and delay product shipments. Our products and services are complex. While we test our products, they may still have errors,
defects or bugs that we find only after commercial production has begun. In the past, we have
experienced errors, defects and bugs in connection with new products. Our customers may not
purchase our products if the products have reliability, quality or compatibility problems.
Furthermore, product errors, defects or bugs could result in additional development costs,
diversion of resources from our other development efforts, claims by our customers or others
against us, or the loss of credibility with our current and prospective customers. Historically,
the time required for us to correct defects has caused delays in product shipments and resulted in
lower than expected revenues. Significant capital and resources may be required to address and fix
problems in new products. If our products do not function properly, we may have lower than expected revenues, and net income
would likely be adversely impacted. We depend on contract manufacturers to manufacture substantially all of our products, and any delay
or interruption in manufacturing would result in delayed or reduced shipments to our customers. We outsource the manufacturing of our products to independent companies and do not have internal
manufacturing capabilities to meet the demands of our customers. Any delay, interruption or
termination of the manufacture of our products could harm our ability to provide our products to
our customers and, consequently, could have a material adverse effect on our business and
operations. A large portion of our revenues is derived from sales to distributors, and changes in the
productivity of our distribution channels or any disruption of our distribution channel could
adversely affect the sale of our products and services. We primarily sell our products through distributors. Our sales could be affected by disruptions in
the relationships between our distributors or between our distributors and end users of our
products or services. Also, distributors may choose not to emphasize our products and services to
their customers. Any of these actions or results could lead to decreased sales. Certain Factors May Inhibit Changes in Control of the Company. The concentration of ownership of our common stock may have the effect of delaying, deferring or
preventing a change in control, merger, consolidation or tender offer that could involve a premium
over the price of our common stock. Currently, our executive officers, directors and
greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own
approximately 47.6% of our outstanding common stock. These stockholders, if they vote together,
are able to exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions and matters. Our articles of incorporation generally limit holdings by persons of our common stock to no more
than 10% without prior approval by our Board. Except as otherwise permitted by the Board, no
stockholder has the right to cast more than 10% of the total votes regardless of the number of
shares of common stock owned. In addition, if a person acquires holdings in excess of this
ownership limit, our Board may terminate all voting rights of the person during the time that the
ownership limit is violated, bring a lawsuit against the person seeking divestiture of amounts in
excess of the limit, or take other actions as the Board deems appropriate. Our articles of
incorporation also have a procedure that gives us the right to purchase shares of common stock held
in excess of the ownership limit. Our articles of incorporation permit our Board to authorize the issuance of preferred stock without
stockholder approval. Also, any future series of preferred stock may have voting provisions that
could delay or prevent a change in control or other transaction that might involve a premium price
or otherwise be in the best interests of our common stockholders. Changing regulations could affect us. By 2008, cellular carriers will no longer be required by the FCC to provide analog service
compatible with Advanced Mobile Phone Service (AMPS). It is likely that many cellular carriers may
stop offering analog AMPS cellular service. Cellemetry, which currently operates using AMPS
cellular service, would have to begin operating on other wireless service channels, and customers
that use services that involve Cellemetry would have to replace incompatible equipment. Other
products and services that we make and that 13




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depend on Cellemetry, such as Mobile Guardian, would be similarly affected. While we are currently
developing a digital standard, we might not be successful in such development. Many of the ultimate consumers of our PowerPlay products and services are elementary and secondary
schools that pay for their purchases with funding that they receive through the FCCs e-rate
program. Changes in this program could affect demand for our PowerPlay products and services. We may not be able to achieve our operational growth goals if we do not operate our Cellemetry
network efficiently and generate additional traffic. Our long-term success depends on our ability to operate, manage and maintain a reliable and cost
effective network, as well as our ability to keep pace with changes in technology. Furthermore,
our network operations are dependent on third parties. If we experience technical or logistical
impediments to our ability to transfer traffic onto our network, fail to generate additional
traffic on our network, or if we experience difficulties with our third party providers, we may not
achieve our revenue goals or otherwise be successful in growing our business. We may lose customers if we experience system failures that significantly disrupt the availability
and quality of the service our network provides. The operation of our Cellemetry network depends on our ability to avoid or limit any interruptions
in service to our customers. Interruptions in service or performance problems, for whatever
reason, could undermine confidence in our services and cause us to lose customers or make it more
difficult to attract new customers. In addition, because most of our customers are businesses, any
significant interruption in service could result in lost profits or other losses to our customers.
Although we attempt to disclaim or limit liability in our agreements with these customers, a court
may not enforce a limitation on liability, which could expose us to losses. The failure of any equipment on our network, or those of our customers, could result in the
interruption of that customers service until necessary repairs are made or replacement equipment
is installed. Network failures, delays and errors may result from natural disasters, power losses,
security breaches, viruses or terrorist acts. These failures or faults cause delays, service
interruptions, expose us to customer liability or require expensive modifications that could have a
material adverse effect on our business and operating results. We may have difficulty identifying the source of a problem in our Cellemetry network. If and when a problem occurs on our Cellemetry network, it may be difficult to identify the source
of the problem due to the overlay of our network with the cellular telephone network and our
networks reliance on the cellular network. The occurrence of hardware or software errors,
regardless of whether such errors are caused by our products or our Cellemetry network, may result
in the delay or loss of market acceptance of our products and services, and any necessary revisions
may result in significant and additional expenses. The occurrence of some of these types of
problems may seriously harm our business, financial condition or operations. We operate internationally, which subjects us to international regulation and business
uncertainties that create additional risk for us. We have a subsidiary operating in Australia and are doing business in the Caribbean, South America,
Canada and Japan. Accordingly, we are subject to international regulation and business
uncertainties. International sales and operations may be subject to additional risks than those
risks in the United States, such as the following:  
    imposition of government controls,
    political instability,
    export license requirements,
    restrictions on the export of critical technology,
    currency exchange rate fluctuations,
    generally longer receivables collection periods and difficulty in collecting
accounts receivable,
    trade restrictions and changes in tariffs,
    difficulties in staffing and managing international operations, and
    potential insolvency of international dealers. In addition, the laws of certain countries do not protect our products as much as the laws of the
United States do, which may lead to the potential loss of our proprietary technology through theft,
piracy or a failure to protect our rights. These factors may have a material adverse effect on our
future international sales and, consequently, on our business and results of operations. The loss of intellectual property protection, specifically, our patents, both U.S. and
international, could have a material adverse effect on our operations. Our future success and competitive position depend upon our ability to obtain and maintain
intellectual property protection, especially with regard to patents on the technology used in our
core business. Loss of such protection could compromise any advantage obtained and, therefore,
impact our sales, market share and results. Furthermore, our future or pending patent applications
may not be issued with the scope of the claims sought by us, if at all. In addition, others may
develop technologies that are similar or superior to our 14




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technology, duplicate our technology or design around the patents owned or licensed by us.
Effective patent, trademark, copyright and trade secret protection may be unavailable or limited in
foreign countries where we may need protection. We cannot be sure that steps taken by us to
protect our technology will prevent misappropriation of the technology. Our services are highly dependent upon our technology and the scope and limitations of our
proprietary rights therein. In order to protect our technology, we rely on a combination of
patents, copyrights and trade secret laws, as well as certain customer licensing agreements,
employee and third-party confidentiality and non-disclosure agreements, and other similar
arrangements. If our assertion of proprietary rights is held to be invalid, or if another partys
use of our technology were to occur to any substantial degree, our business, financial condition
and results of operations could be materially adversely affected. Our competitors may obtain patents that could restrict our ability to offer our products and
services, or subject us to additional costs, which in either case could adversely affect us. Several of our competitors have obtained and can be expected to obtain patents that cover products
or services directly or indirectly related to those offered by us. There can be no assurance that
we are aware of all patents containing claims that may pose a risk of infringement by its products
or services. In addition, patent applications in the United States are confidential until a patent
is issued and, accordingly, we cannot evaluate the extent to which our products or services may
infringe on future patent rights held by others. Furthermore, a third party may claim that we are using inventions claimed by their patents and may
go to court to stop us from engaging in our normal operations and activities, such as research and
development and the sale of any of our products. These lawsuits are expensive and would consume
time and other resources. There is a risk that the court will decide that we are infringing the
third partys patents and would order us to stop the activities claimed by the patent. In
addition, there is a risk that a court will order us to pay the other party damages for having
infringed their patents. There is no guarantee that the prevailing patent owner would offer us a
license so that we could continue to engage in activities claimed by the patent, or that such a
license, if made available to us, could be acquired on commercially acceptable terms. Some
licenses may be nonexclusive and, therefore, our competitors may have access to the same technology
licensed to us. If we fail to obtain a required license or are unable to design around a patent,
we may be unable to sell some of our products, and there can be no assurance that we would be able
to design and incorporate alternative technologies, without a material adverse effect on our
business, financial condition and results of operations. Our products and information are subject to secrecy and confidentiality obligations, violations of
which may not be able to be remedied. Although we have taken, and will continue to take, steps to protect the confidential nature of our
proprietary and trade secret information, we cannot control whether secrecy obligations will be
honored or whether disputes will arise related to this information. There is a risk that the steps
we have taken will not prevent misappropriation of our technology or that others might
independently develop substantially equivalent products and processes or otherwise gain access to
our technology. In addition, we cannot rule out that we will not be subjected to claims from
others that we are infringing on their patents or are misappropriating their trade secrets or
confidential proprietary information. We seek to protect our trade secrets and proprietary know-how, in part, through confidentiality
agreements with our employees and licensees. We cannot guarantee you that the other parties will
not violate these agreements, that we will have adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently developed by competitors. We cannot be
certain that we will, in connection with every relationship, be able to maintain the
confidentiality of our technology, which if released could materially affect our business. To the
extent that our licensees develop inventions or processes independently that may be applicable to
our products, disputes may arise as to the ownership of the proprietary rights to this information.
These inventions or processes will not necessarily become our property, but may remain the
property of these persons or their full-time employers. We could be required to make payments to
the owners of these inventions or processes, either in the form of cash, equity or a combination
thereof. Our products are subject to certification requirements. Some of our products are subject to certification requirements from the Federal Communications
Commission, or Underwriters Laboratories. Failure to obtain such certifications for new products
could have a material adverse effect on us. Our services are indirectly subject to regulation. In providing our services, we rely on carriers who are subject to government regulation. The FCC
regulates interstate and international telecommunications, while state commissions regulate
telecommunications that originate and terminate within the same state. While such regulations have
not significantly impeded us in providing services to our customers, such regulations could change,
and such changes could have an effect on our carriers, possibly resulting in a material adverse
affect on us. Additional Expenses may be incurred due to compliance with changing regulation of corporate
governance and public disclosure. Changing laws, regulations and standards relating to the corporate governance and public
disclosure, including the Sarbanes-Oxley 15




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Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for
companies such as ours. These new or changed laws, regulations and standards are subject to
varying interpretations in many cases due to their lack of specificity and, as a result, their
application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. Due to our
commitment to maintain high standards of corporate governance and public disclosure, our efforts to
comply with evolving laws, regulations and standards have resulted in and are likely to continue to
result in increased general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. In particular, our efforts
to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding
our required assessment of our internal controls over financial reporting and our external
auditors audit of that assessment has required the commitment of significant financial and
managerial resources. 
  Item 2.
    Properties. All of our facilities are leased. Set forth below is certain information with respect
to our leased facilities: Location
    
    Principal Business
    
    Square Footage
    
    Lease TermWillow Grove,
    
    Networking and
    
    
    10,000
    
    
    2008Pennsylvania
    
    Wireline Data CommunicationsState College,
    
    Digital Multimedia
    
    
    10,788
    
    
    Month to MonthPennsylvaniaAtlanta, Georgia
    
    Wireless Data Communications
    
    
    20,973
    
    
    2010and Principal Executive OfficeNorcross, Georgia
    
    Wireless Data Communications
    
    
    1,658
    
    
    2005
 We conduct engineering, sales and marketing, and administrative activities at many of these
locations. We believe that our existing facilities are adequate for our current needs. As we grow
and expands into new markets and develop additional products, we may require additional space,
which we believe will be available at reasonable rates. We engage in limited manufacturing, equipment and product assembly and testing for certain
products. We also use contract manufacturers for production, sub-assembly and final assembly of
certain products. We believe there are other manufacturers that could perform this work on
comparable terms. The semiconductors, microprocessors and other components used in our products are obtained from
various suppliers and manufacturers, some of which are the sole source of such components. 
  Item 3.
    Legal Proceedings. As previously disclosed, on May 5, 2003 Hawkeye Switching LLC and an affiliated entity, RSA
No. 2 (collectively Hawkeye), sued Numerex Solutions LLC (Numerex) a wholly owned subsidiary of
the Company in Iowa District Court for Mills County, alleging breach of contract and fraudulent
inducement related to a Data1Source contract for over-the-air activation and SMS text messaging.
Hawkeye settled this matter, which included a full release of Numerex, on April 20, 2004. The
settlement did not have a material impact on our financial statements. 
  Item 4.
    Submission of Matters to a Vote of Security Holders. Not applicable. 16




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##### Table of Contents



Executive Officers of the Registrant Our executive officers, and all persons chosen to become executive officers, and their ages
and positions as of March 15, 2005, are as follows: Name
    
    Age
    
    PositionStratton J. Nicolaides*
    
    
    51
    
    
    Chairman of the Board of Directors, Chief Executive OfficerMichael A. Marett
    
    
    50
    
    
    Executive Vice President, Chief Operating OfficerAlan B. Catherall
    
    
    51
    
    
    Executive Vice President, Chief Financial Officer
    Mr. Nicolaides has served as Chief Executive Officer of the Company since April 2000, having
served as Chief Operating Officer from April 1999 until March 2000 and as Chairman of the Board
since December 1999. From July 1994 until April 1999, Mr. Nicolaides managed a closely held
investment partnership and provided consulting services to Dominion Group Limited. Mr. Marett has been an Executive Vice President of the Company since February 2001. In
February 2005 he was named Chief Operating Officer. From 1999 to 2001, Mr. Marett was Vice
President, Sales and Marketing, of TManage, Inc., which provided planning, installation, and
support services to companies with large remote workforces. From 1997 to 1999 Mr. Marett was Vice
President, Business Development, of Mitel Business Communications Systems, a division of Mitel
Corporation. Prior to this position Mr. Marett held a number of executive positions at Bell
Atlantic. Mr. Catherall has been the Executive Vice President and Chief Financial Officer of the Company
since June 2003. From 1998 to 2002, Mr. Catherall served as Chief Financial Officer of AirGate
PCS, a NASDAQ-listed wireless company. From 1996 to 1998, Mr. Catherall was a partner in Tatum CFO
LLP, a financial services consulting company. Prior to this, he held a number of executive and
management positions at MCI Communications. 17




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##### Table of Contents



PART II 
  Item 5.
    Market for the Registrants Common Stock and Related Shareholder Matters. We currently do not pay any cash dividends. In deciding whether or not to declare or
pay dividends in the future, the Board of Directors will consider all relevant factors, including
our earnings, financial condition and working capital, capital expenditure requirements, any
restrictions contained in loan agreements and market factors and conditions. Our Common Stock is quoted on the NASDAQ National Market and traded under the symbol NMRX. The following table sets forth, for the fiscal quarters indicated, the high and low sales
prices per share for the Common Stock on the NASDAQ National Market for the applicable periods. Fiscal 2004
    
    High
    
    
    LowFirst Quarter (January 1, 2004 to March 31, 2004)
    
    $
    5.10
    
    
    $
    3.50Second Quarter (April 1, 2004 to June 30, 2004)
    
    
    5.71
    
    
    
    3.68Third Quarter (July 1, 2004 to September 30, 2004)
    
    
    4.99
    
    
    
    3.50Fourth Quarter (October 1, 2004 to December 31, 2004)
    
    
    5.25
    
    
    
    3.50
 Fiscal 2003
    
    High
    
    
    LowFirst Quarter (January 1, 2003 to March 31, 2003)
    
    $
    3.34
    
    
    $
    1.05Second Quarter (April 1, 2003 to June 30, 2003)
    
    
    3.58
    
    
    
    1.50Third Quarter (July 1, 2003 to September 30, 2003)
    
    
    5.00
    
    
    
    2.61Fourth Quarter (October 1, 2003 to December 31, 2003)
    
    
    4.13
    
    
    
    2.65
 As of March 15, 2005, there were 63 shareholders of record of our Common Stock, which include
shares held in street name by brokers or nominees. On January 28, 2005, we completed a private placement to Laurus Master Fund, Ltd. (Laurus)
of (i) a Convertible Term Note in the aggregate principal amount of $1,500,000 and (ii) a Common
Stock Purchase Warrant to purchase up to 100,000 shares of our common stock. The principal amount
of the note may be converted into our common stock at a price equal to $5.31 per share. In
addition, if conditions are met, we may pay principal on the note in either cash or in Common
Stock. The Warrant is exercisable by Laurus until January 28, 2012, and has two separate pricing
tranches. The first pricing tranche is exercisable for up to 50,000 shares of common stock at a
price of $5.51 per share. The second pricing tranche is exercisable for up to 50,000 shares of
common stock at a price of $5.72 per share. We are required to
register these Securities and have the registration declared
effective by August 28, 2005. If the Registration Statement has
not been declared effective by August 28, 2005, then for each 30 day period
thereafter (or portion thereof), the number of shares of Common Stock
represented shall be increased by 5,000 shares (at an exercise price
of $5.99), until the earlier number of (i) the day on which the
Registration Statement is declared effective, and (ii)
January 28, 2006. Laurus is an accredited investor as defined in Rule 501(d) of Regulation D under the
Securities Act of 1933, as amended (the Securities Act). The Company issued the securities to
Laurus in reliance on the exemption from registration provided by Section 4(2) under the Securities
Act. 18




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##### Table of Contents



Equity Compensation Plan Information (a)
    
    
    
    (b)
    
    
    
    (c)Number of securities to be
    
    
    
    Weighted-average
    
    
    
    Number of securities remaining availableissued upon exercise of
    
    
    
    exercise price of
    
    
    
    for future issuance underoutstanding options,
    
    
    
    outstanding options,
    
    
    
    equity compensation plans (excludingPlan category
    
    
    warrants and rights
    
    
    
    warrants and rights
    
    
    
    securities reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    
    2,270,515
    
    
    
    $
    4.50
    
    
    
    
    1,770,783Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    2,270,515
    
    
    
    $
    4.50
    
    
    
    
    1,770,783
 
  Item 6.
    Selected Financial Data. The following selected financial data should be read in conjunction with the consolidated financial
statements and the notes contained in Item 8. Financial Statements and Supplementary Data and
the information contained in Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations. Historical results are not necessarily indicative of future results. The following financial information was derived using the consolidated financial statements of
Numerex Corp. at and for each of the fiscal years in the five-year period ended December 31, 2004. Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,(in thousand, except share data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of Operations DataRevenues
    
    $
    22,993
    
    
    $
    20,157
    
    
    $
    24,501
    
    
    $
    24,258
    
    
    $
    20,290Gross profit
    
    
    10,039
    
    
    
    9,029
    
    
    
    10,221
    
    
    
    9,254
    
    
    
    8,000Operating income (loss)
    
    
    (1,631
    )
    
    
    (2,726
    )
    
    
    (7,468
    )3
    
    
    (7,330
    )
    
    
    (9,006
    )Net income (loss)
    
    
    (2,079
    )
    
    
    (1,404
    )1
    
    
    (7,450
    )
    
    
    (3,142
    )
    
    
    (3,960
    )Earnings (loss) per common share (diluted)
    
    
    (0.19
    )
    
    
    (0.13
    )
    
    
    (0.71
    )
    
    
    (0.32
    )
    
    
    (0.40
    )Balance Sheet DataTotal Assets
    
    $
    32,612
    
    
    $
    33,970
    
    
    $
    37,111
    
    
    $
    42,974
    
    
    $
    45,942Capital lease obligations (short and long
term)
    
    
    35
    
    
    
    344
    
    
    
    1,573
    
    
    
    472
    
    
    
    138Shareholders equity
    
    
    23,652
    
    
    
    25,366
    2
    
    
    27,615
    
    
    
    34,108
    
    
    
    36,902
    4Cash Flow DataNet cash provided by (used in) operations
    
    $
    1,520
    
    
    $
    706
    
    
    $
    (2,890
    )
    
    $
    (3,237
    )
    
    $
    (7,482
    )
    2 - Includes purchase of
treasury stock of $1.0 million 3 - Includes costs of non-recurring
acquisition activity of $1.9 million 4 - Includes purchase of treasury stock of
$4.0 million 19




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##### Table of Contents



Item 7.
    Managements Discussion and Analysis of Financial Condition and Results of
Operations. Overview Numerex Corp. is a technology company comprised of operating subsidiaries that develop and
market a wide range of communications products and services. Our primary focus is wireless data
communications utilizing proprietary network technologies. The year 2004 marked a milestone year for Numerex in which our products and services gained
significant traction and heightened visibility. We continued the development of our network
strategy to support continued expansive coverage, legacy network interoperability and expanded
digital capabilities for higher bandwidth applications. For example, we announced a joint
development agreement to deliver multi-mode digital radios with new features that increase our
network and solution capabilities as well as provide a technology migration path for analog only
customers. Excluding the impact of Data 1Source LLC, which was sold in September of 2003, total revenues in
2004 grew to $22.8 million, a $4 million increase compared to 2003. Wireless data revenues
contributed over 75% of this growth, increasing over $3.1 million compared to the prior year. Most
of this growth came from service revenues which are not only recurring in nature but are also
profitable. Digital Multimedia also grew in 2004 compared to 2003 as a result of both increased
shipments of video-conferencing equipment and stronger integration and installation service
revenues. Gross margins slightly declined in 2004 compared to the prior year; however, again excluding the
impact of Data1Source, gross margins grew in all segments of the business, particularly in wireless
data where there was an increase in recurring service revenues. Overheads, which include both SG&A as well as R&D, increased nominally in 2004 compared to the prior
year. This increase occurred in the first part of 2004 prior to the distribution agreement with
South West Dealer Services, by virtue of which they now assume the sales costs of selling directly
to auto dealerships. As a result of these many improvements, Numerex recorded significantly reduced operating losses in
2004 compared to 2003. Numerex has a stronger cash position at the end of 2004 than it had a year ago. At the end of 2004
our cash balance was more than twice the cash balance compared to the end of 2003. Current assets
now exceed current liabilities. In 2004, we generated cash flows from operating activities of over
$1.5 million compared to an operating account deficit in 2003. In addition, our financial position
was further strengthened at the end of January 2005 with the sale of a $1.5 million convertible
term note to the Laurus Master Fund, Ltd. The net proceeds from the financing will be used
primarily to provide additional working capital. The following is a discussion of the consolidated financial condition and results of
operations of the Company for the fiscal years ended December 31, 2004 and 2003 and 2002. This
discussion should be read in conjunction with our consolidated financial statements, the related
notes thereto, and other financial information included elsewhere in this report. Critical Accounting Policies Note A of the Notes to the Consolidated Financial Statements includes a summary of the
significant accounting policies and methods used in the preparation of Numerexs Consolidated
Financial Statements. The following is a brief discussion of the more significant accounting
policies and methods used. General The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The most significant estimates and assumptions relate to
revenue recognition, accounts receivable and allowance for doubtful accounts, inventories and the
adequacy of reserves for excess and obsolete inventories, accounting for income taxes and valuation
of goodwill and other intangible assets. Actual amounts could differ significantly from these
estimates. 20




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##### Table of Contents



Revenue Recognition We primarily sell products, recurring services (most billed on a monthly basis) and on-demand
services. Product revenues are recognized at the time title passes to the customer, which in most cases
is at the time of shipment. However, we did have one significant product shipment in 2003 where we
did not recognize revenue at the passage of title. In May 2003, we shipped $583,000 of wire-line
security detection equipment to a customer in Australia. This equipment has been installed at
several sites based on an equipment supply agreement (the Agreement) with this customer. The
Agreement allows the customer to generate additional revenues by providing additional services to
its customers. We will share in these revenues as payment for the equipment. While this customer
retains title to this equipment from acceptance (which occurred May 2003), it must meet certain
obligations under the Agreement or pay amounts specified in the Agreement. Since the actual
revenue that will be generated by the sale of the equipment is uncertain at this time, we are
recognizing revenue on the sale of the equipment equal to the payments received from this customer
from this revenue share. We also recognized cost of sales equal to the payments received from the
customer and reduced the value of this asset. While we only received our first payment from this
customer in September 2004, we and our customer in Australia continue to promote the new service
now that the installation has been completed and tested. Currently we expect to receive at least
the full value of the equipment from this revenue share, however, as more information becomes
available, we will reassess the accounting treatment for the project. In May 2003, the value of
the wire-line equipment was transferred from inventory to other assets. We bill most of our recurring service revenues on a monthly basis, which are generated by
providing customers access to our wireless machine-to-machine communications network (the
Network). We sell these services to retailers and wholesalers of the service. For services sold
to retailers, monthly service fees are generally a fixed monthly amount billed one month in
advance. We defer the advance billing for the service and recognize the revenue when the services
are provided. For services sold to wholesalers, the customers are billed a fixed base fee in
advance and usage fees in arrears at the end of each month. Again, we defer the advance billing of
the base fee and recognize the revenues when the services are performed. We also provide services on a demand basis  such as installation services. These types of
services are generally completed in a short period of time (usually less than one month) and are
billed and the revenue recognized when the services are completed. We do occasionally have multiple element service agreements, which involve both the supply of
product and the provision of services over a multi-year arrangement. Accounting principles for
agreements involving multiple elements require us to allocate earned revenue to each element based
on the relative fair value of the elements. The arrangement fee for multiple-element arrangements
is allocated to each element, such as design, product supply, product integration, installation,
maintenance, support and warranty services, based on the relative fair values of the elements. We
determine the fair value of each element in multi-element arrangements based on vendor-specific
objective evidence (VSOE). VSOE for each element is based on the price charged when the same
element is sold separately or could be purchased from an unrelated supplier. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or more delivered
elements, then revenue is recognized using the fair value method. Under these methods, the fair
value of the undelivered element is deferred and is recognized ratably over the contract term on an
as earned basis. In the case of the supply of product we maintain title to the product and
transfer title at the completion of the contract term. Accounts Receivable and Allowance for Doubtful Accounts Our estimate for our allowance for doubtful accounts related to trade receivables is estimated
based on two methods. The amounts calculated from each of these methods are combined to determine
the total amount reserved. First, we evaluate specific accounts where information exists that the
customer may have an inability to meet its financial obligations. In these cases, we use our
judgment, based on the best available facts and circumstances, and record a specific reserve for
that customer to reduce the receivable to the amount that is expected to be collected. These
specific reserves are reevaluated and adjusted as additional information is received that impacts
the amount reserved. Second, we establish a general reserve for all customers based on a range of
percentages applied to aging categories. These percentages are based on historical collection and
write-off experience. If circumstances change, (i.e. higher than expected defaults or an unexpected
material adverse change in a major customers ability to meet its financial obligation to us), our
estimates of the recoverability of amounts due to us could be changed by a material amount. Inventories and Reserves for Excess, Slow-Moving and Obsolete Inventory We value our inventory at the lower of cost or market. We continually evaluate
the composition of our inventory and identify, with estimates, potential future excess, obsolete
and slow-moving inventories. We specifically identify obsolete products for reserve purposes and
analyze historical usage, forecasted production based on demand forecasts, current economic trends,
and historical write-offs when evaluating the adequacy of the reserve for excess and slow-moving
inventory. If we are not able to achieve our expectations of the net realizable value of the
inventory at its current carrying value, we would adjust our reserves accordingly. 21




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##### Table of Contents



Valuation of Goodwill and Other Intangible Assets We assess the impairment of goodwill and identifiable intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. Factors
considered important which could trigger an impairment review include the following:  
    significant underperformance relative to expected historical or projected future
operating results;
    significant changes in the manner of use of the acquired assets or the strategy for
the overall business; and
    significant negative industry or economic trends. When determined that the carrying value of goodwill and other intangible assets may not be
recoverable based upon the existence of one or more of the above indicators of impairment, we
measure any impairment based on a projected discounted cash flow method using a discount rate
determined by management to be commensurate with the risk inherent in our current business model.
Net goodwill and intangible assets amounted to $22,825,000 as of December 31, 2004. Recent Accounting
Pronouncements In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became effective and as a result,
we ceased to amortize $10,983,000 of goodwill. On March 28, 2003 we purchased the 40% share
Cingular owned in Cellemetry LLC. This gave us 100% ownership of Cellemetry LLC and increased
total goodwill to $15,014,000 at December 31, 2003. We had recorded $733,000 of amortization
during 2001 and would have recorded approximately $768,000 of amortization during 2002 and
approximately $918,000 in 2003. In lieu of amortization, we are required to perform an annual
impairment review of goodwill. Based on this initial review at January 1, 2002 and the annual
review at December 31, 2002, 2003 and 2004, we did not record an impairment charge. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement (SFAS) No.
123 (Revised 2004), Share-Based Payment (SFAS
No. 123(R)). SFAS No. 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants of employee stock
options, be recognized in financial statements. That cost will be measured based on the fair value
of the equity or liability instruments at the time of issuance. SFAS
No. 123(R) covers a wide range
of share-based compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. The effect
of the standard will be to require entities to measure the cost of employee services received in
exchange for stock awards based on its grant-date fair value and to recognize the cost over the
period the employee is required to provide services for the award. We
expect to adopt the provisions of SFAS No. 123(R) effective July 1, 2005, as required, and
plan to use the modified prospective transition method for our existing stock-based compensation
plans. Under the modified prospective transition method, the fair value-based accounting method
will be used for all employee awards granted, modified, or settled after the adoption date.
Compensation cost related to the nonvested portion of awards outstanding as of that date will be
based on the grant-date fair value of those awards as calculated under the original provisions of
SFAS No. 123. Under this method, it is estimated that the
adoption of SFAS No. 123(R) will result
in approximately $150,000 of stock-based compensation expense in the second half of 2005 related to
non-vested employee options issued prior to the adoption date. In November 2004, the FASB released revised SFAS No. 151, Inventory Costs  an amendment of
ARB No. 43 (SFAS No. 151). The new standard requires abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) to be recognized as current-period charges.
It also requires that allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. The requirements of the standard will be
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Although
we are still evaluating the impact that the adoption of SFAS No. 151 will have on our Consolidated
Financial Statements, we currently do not believe it will have a material impact as we have not
historically had any abnormally low levels of production, unplanned downtime, labor or material
shortages. The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United Sates of America, with no need
for managements judgment in their application. There are also areas in which managements judgment
in selecting any available alternative would not produce a materially different result. See our
audited consolidated financial statements and notes which begin on page 43 of this Annual Report on
Form 10-K which contain accounting policies and other disclosures required by generally accepted
accounting principles. 22




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##### Table of Contents



Result of Operations The following table sets forth, for the periods indicated, certain revenue and expense items
and the percentage increases and decreases for those items in the Companys Consolidated Statements
of Operations. For the years ended December 31,
    
    
    2004 vs. 2003
    
    
    2003 vs. 2002(in thousands, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002
    
    
    % Change
    
    % ChangeNet sales:Wireless Data CommunicationsProduct
    
    $
    5,913
    
    
    $
    4,839
    
    
    $
    7,461
    
    
    
    22.2
    %
    
    
    -35.1
    %Service
    
    
    8,687
    
    
    
    7,848
    
    
    
    6,748
    
    
    
    10.7
    %
    
    
    16.3
    %Sub-total
    
    
    14,600
    
    
    
    12,687
    
    
    
    14,209
    
    
    
    15.1
    %
    
    
    -10.7
    %Digital Multimedia and NetworkingProduct
    
    
    3,434
    
    
    
    2,647
    
    
    
    5,668
    
    
    
    29.7
    %
    
    
    -53.3
    %Service
    
    
    3,968
    
    
    
    3,518
    
    
    
    3,686
    
    
    
    12.8
    %
    
    
    -4.6
    %Sub-total
    
    
    7,402
    
    
    
    6,165
    
    
    
    9,354
    
    
    
    20.1
    %
    
    
    -34.1
    %Wireline SecurityProduct
    
    
    350
    
    
    
    449
    
    
    
    230
    
    
    
    -22.0
    %
    
    
    95.2
    %Service
    
    
    641
    
    
    
    856
    
    
    
    708
    
    
    
    -25.1
    %
    
    
    20.9
    %Sub-total
    
    
    991
    
    
    
    1,305
    
    
    
    938
    
    
    
    -24.1
    %
    
    
    39.1
    %Total net salesProduct
    
    
    9,697
    
    
    
    7,935
    
    
    
    13,359
    
    
    
    22.2
    %
    
    
    -40.6
    %Service
    
    
    13,296
    
    
    
    12,222
    
    
    
    11,142
    
    
    
    8.8
    %
    
    
    9.7
    %Total net sales
    
    
    22,993
    
    
    
    20,157
    
    
    
    24,501
    
    
    
    14.1
    %
    
    
    -17.7
    %Cost of product sales (excluding depreciation)
    
    
    7,626
    
    
    
    6,043
    
    
    
    9,836
    
    
    
    26.2
    %
    
    
    -38.6
    %Cost of services (excluding depreciation and amortization)
    
    
    4,943
    
    
    
    4,443
    
    
    
    4,116
    
    
    
    11.3
    %
    
    
    7.9
    %Depreciation and amortization
    
    
    385
    
    
    
    642
    
    
    
    328
    
    
    
    -40.0
    %
    
    
    95.7
    %Gross Profit
    
    
    10,039
    
    
    
    9,029
    
    
    
    10,221
    
    
    
    11.2
    %
    
    
    -11.7
    %Gross Profit %
    
    
    43.7
    %
    
    
    44.8
    %
    
    
    41.7
    %Selling, general, and administrative expenses
    
    
    8,625
    
    
    
    8,371
    
    
    
    10,672
    
    
    
    3.0
    %
    
    
    -21.6
    %Research and development expenses
    
    
    906
    
    
    
    905
    
    
    
    1,097
    
    
    
    0.1
    %
    
    
    -17.5
    %Bad debt expense
    
    
    475
    
    
    
    551
    
    
    
    1,837
    
    
    
    -13.8
    %
    
    
    -70.0
    %Depreciation and amortization
    
    
    1,664
    
    
    
    1,928
    
    
    
    2,184
    
    
    
    -13.7
    %
    
    
    -11.7
    %Costs related to non-recurring charges
    
    
    
    
    
    
    
    
    
    
    1,899
    
    
    
    
    
    
    
    -100.0
    %Operating loss
    
    
    (1,631
    )
    
    
    (2,726
    )
    
    
    (7,468
    )
    
    
    -40.2
    %
    
    
    -63.5
    %Interest income and (expense), net
    
    
    (637
    )
    
    
    (354
    )
    
    
    (199
    )
    
    
    79.9
    %
    
    
    77.9
    %Other income and (expense), net
    
    
    (52
    )
    
    
    56
    
    
    
    313
    
    
    
    -192.9
    %
    
    
    -82.1
    %Gain on sale of business
    
    
    250
    
    
    
    1,712
    
    
    
    Provision for income taxes
    
    
    (9
    )
    
    
    (92
    )
    
    
    (96
    )
    
    
    -85.4
    %Net loss
    
    
    (2,079
    )
    
    
    (1,404
    )
    
    
    (7,450
    )
    
    
    48.1
    %
    
    
    -81.2
    %Net loss applicable to common shareholders
    
    $
    (2,079
    )
    
    $
    (1,404
    )
    
    $
    (7,690
    )
    
    
    48.1
    %
    
    
    -81.7
    %Basic and Diluted loss per common share
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.71
    )Weighted average shares outstanding
    
    
    10,798
    
    
    
    10,934
    
    
    
    10,766
 See notes to consolidated financial statements Fiscal Years Ended December 31, 2004 and December 31, 2003 Net sales increased 14.1% to $22,993,000 for the year ended December 31, 2004 as
compared to $20,157,000 for the year ended December 31, 2003. The increase in total net sales for
the year ended December 31, 2004 is attributable to a 22.2% increase in total product sales and
an 8.8% increase in sales of services. Most of the product and service sales increase for the year
ended December 31, 2004, compared to the same period in 2003, was in Digital Multimedia and
Networking and Wireless Data Communications in the amount of $3,150,000. These increases were
partially offset by a decrease in Wireline Security product and service sales of $314,000. Cost of product sales increased 26.2% to $7,626,000 for the year ended December 31, 2004 as
compared to $6,043,000 for the year ended December 31, 2003. The increase in cost of sales was
primarily the result of higher product sales volume in the Wireless Data Communications and Digital
Multimedia & Networking, which were partially offset by lower Wireline product sales. We also
experienced an increase in the cost of our Wireless Services products during the year ended
December 31, 2004 versus the same periods in 2003. We have identified alternative sources of
these products that we 23




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##### Table of Contents



believe should defray some of these increases in future periods. Cost of services increased 11.2% to $4,943,000 for the year ended December 31, 2004 as
compared to $4,443,000 for the year ended December 31, 2003. The increase in cost of services
for the twelve months ended December 31, 2004 versus the same period in 2003 was primarily the
result of higher service sales volume in Wireless Data Communications and higher service sales
volume in Digital Multimedia and Networking. Additionally, we received a one-time credit
against network service provider costs that occurred in quarter ended June 30, 2003 that did
not occur in 2004. Cost of sales depreciation and amortization expense decreased 40% to $385,000 for the year
ended December 31, 2004 as compared to $642,000 for the year ended December 31, 2003. This
decrease was primarily due to the sale of the assets relating to Data1Source, which was sold in
September 2003. Gross profit, as a percentage of net sales, was 43.7% for the year ended December 31, 2004
as compared to 44.8% for the year ended December 31, 2003. The total gross profit as a
percentage of sales decreased for the twelve month period ended December 31, 2004 compared to
the same period in 2003 because product sales were 33.2% of total sales for the year ended
December 31, 2004 versus 30.0% for the year ended December 31, 2003. Since, gross profit as a
percentage of sales is generally less on product sales than for service sales, the increase in
product sales versus service sales decreased the total gross profit as a percentage of sales.
The decreases in gross profit as a percentage of sales for the twelve months period ended
December 31, 2004 versus the same period in 2003 were partially offset by a reduction of
depreciation expense due to the sale of the assets relating of Data1Source. Selling, general, administrative and other expenses increased 4.4% to $8,743,000 for the year
ended December 31, 2004 as compared to $8,371,000 for the year ended December 31, 2003. As a
percentage of sales, selling, general, administrative and other expenses decreased to 38.0% for the
year ended December 31, 2004 as compared to 41.5% for the year ended December 31, 2003. Selling,
general, administrative and other expenses decreased as a percentage of revenue for the year
primarily due to reductions in personnel in our Mobile Guardian division. Research and development expenses remained constant at $906,000 for the year ended December
31, 2004. We expense research and development costs and expect such costs to continue at current
levels. Bad debt expense decreased 35.2% to $357,000 for the year ended December 31, 2004 as
compared to $551,000 for the year ended December 31, 2003. Bad debt decreased during the
period as a result of the implementation of more stringent credit policies and collections
processes as well as an improvement in general economic conditions. Operating expense depreciation and amortization expense decreased 13.7% to $1,664,000 for the
year ended December 31, 2004 as compared to $1,928,000 for the year ended December 31, 2003. This
was due to some older assets becoming fully depreciated while we have had a limited requirement for
the purchase of new equipment. Interest expense (net) increased to $637,000 in 2004 compared to $354,000 for the prior year.
This increase was primarily the result of interest expense on the $4,500,000 we received from a
convertible note payable to Laurus Master Fund on January 15, 2004. This convertible note payable
replaced the $3,500,000 note payable to Cingular. The note payable to Laurus Master Fund has a
higher effective interest rate than the Cingular note payable, however, the Laurus note payable has
a longer term. We issued the note payable to Cingular on March 28, 2003, thus the twelve month
period ended December 31, 2003 had approximately nine months of interest expense, while the Laurus
Master Fund note payable was issued by us on January 15, 2004, therefore, the twelve month period
ended December 31, 2004 had approximately eleven and a half months of interest expense. Gain
on the sale of business of $250,000 for the twelve-month period ended December 31,
2004 was due to the receipt of a contingent payment in March 2004 on the sale of Data1Source in
September 2003 since the contingency was favorably met. The gain on the sale of business of
$1,712,000 twelve-month period ended December 31, 2003 was attributable to the sale of
Data1Source. Foreign currency loss of $52,000 for the year ended December 31, 2004 versus a gain of $56,000
was mostly the result of foreign currency loses on sales to Canadian customers. More likely than not, we will not utilize the deferred tax items so we have not recorded a
federal tax benefit for the year ended December 31, 2004. The $9,000 for the twelve-month period
ended December 31, 2004 is related to certain state and foreign income taxes. The $92,000 in
income tax expense for the twelve-month period ended December 31, 2003 is related to our operations
in Australia and certain state income taxes. We recorded a net loss of $2,079,000 for the year
ended December 31, 2004 compared to a net loss of $1,404,000 for the year ended December 31, 2003. Basic and diluted loss per common share increased to $(0.19) for year ended December 31, 2004
as compared to $(0.13) for the year ended December 31, 2003, which includes the gain on the sale of
Data1Source. 24




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##### Table of Contents



The weighted average and diluted shares outstanding decreased to 10,798,000 for the year ended
December 31, 2004 as compared to 10,934,000 for the year ended December 31, 2003. The decrease in
weighted average basic shares outstanding for the twelvemonth period ended was primarily due to
our repurchase on March 28, 2003 of 625,000 shares of our common stock held by Cingular. This was
partially offset by shares issued under the employee stock purchase plan. Fiscal Years Ended December 31, 2003 and December 31, 2002 Net sales decreased 17.7% to $20,157,000 for the year ended December 31, 2003 as
compared to $24,501,000 for the year ended December 31, 2002. This decrease in sales was due to a
decrease in Digital Multimedia, Networking sales and in Wireless Data Communication. These
decreases were partially offset by an increase in Wireless Data Communication services revenues and
an increase in Wireline Security sales. As a percentage of total net sales, services revenues of
the Company increased to 60.6% for the year ended December 31, 2003 which comprised of a 16.3%
increase in Wireless Data Communication service revenues partially offset by decrease in Digital
Multimedia and Networking services of 4.6%. Cost of product sales decreased 38.6% to $6,043,000 for the year ended December 31, 2003 as
compared to $9,836,000 for the year ended December 31, 2002. This decrease was primarily due to
the lower volume of product sales in Wireless Data Communications and Digital Multimedia and
Networking. Cost of services increased 7.9% to $4,443,000 for the year ended December 31, 2003 as compared
to $4,116,000 for the year ended December 31, 2002. This increase was primarily due to the
increased service revenue volume in Wireless Data Communications. Cost of sales depreciation and amortization expense increased 95.7% to $642,000 for the year
ended December 31, 2003 as compared to $328,000 for the year ended December 31, 2002. This
increase was primarily due to the purchase of software and hardware for the Data1Source service
line (that was sold on September 5, 2003), the capitalization of software developed internally in
both 2002 and 2003 and the purchase of a license agreement in 2003 for our wireline business in
Australia. Gross profit, as a percentage of net sales, was 44.8% for the year ended December 31, 2003 as
compared to 41.7% for the year ended December 31, 2002. The reason for the increase in the gross
profit for the year was primarily attributable to service revenues being a higher portion of total
revenues in 2003 versus 2002. Service revenues were 60.6% of total revenues in 2003 versus 45.5%
for 2002 and we generally achieve higher margin than product sales. Service revenues were also up
9.7% in total, which allowed us to make up some of the gross profit dollars lost from the decline
in product sales. The sale of a gateway software license recorded in the second quarter of 2002
had a significant positive impact on margin percentage for the year ended in December 31, 2002,
since this software was originally developed for Cellemetrys internal use, there was little
additional costs associated with this sale to an external customer. This added approximately 1.2%
to the margin percentage for 2002. The twelve-month period ended December 31, 2003 did not include
such a gateway software license sale, thus the margin did not receive such a benefit. Selling, general, administrative and other expenses decreased 21.6% to $8,371,000 for the year
ended December 31, 2003 as compared to $10,672,000 for the year ended December 31, 2002. As a
percentage of sales, selling, general, administrative and other expenses decreased to 41.5% for the
year ended December 31, 2003 as compared to 43.6% for the year ended December 31, 2002. Selling,
general, administrative and other expenses decreased primarily due to reductions in personnel. Research and development expenses decreased 17.5% to $905,000 for the year ended December 31,
2003 as compared to $1,097,000 for the year ended December 31, 2002. This was primarily the result
of reductions in research and
development personnel that was partially offset by lower capitalization than in the prior
year. Most of the research and development was more general in 2003, as opposed to the major
projects in 2002. We expense research and development costs and expect it to continue at current
levels. Bad debt expense decreased 70.0% to $551,000 for the year ended December 31, 2003 as compared
to $1,837,000 for the year ended December 31, 2002. Bad debt expense was unusually high in 2002
due to an increase in customers not being able to pay as a result of a decline in the general
economic conditions in the telecommunications industry and severely curtailed access to additional
sources of capital and credit facilities. This led us to tighten our credit policy beginning in the
latter part of 2002. The $1,837,000 bad debt expense in 2002 included $361,000 written off for a
specific customer. We accepted product in lieu of payment for the goods and services billed to the
customer. The sales value of the goods and services sold to this customer totaled $1,735,000;
$1,102,000 was invoiced in the forth quarter ended December 31, 2001 and the balance of $633,000
was invoiced in the first quarter of 2002. The $361,000 written off to bad debt expense represents
the margin earned on the sale. The balance, $1,374,000, represented the expected net realizable
value (in this case at cost) of the product repossessed and placed in inventory. Operating expense depreciation and amortization expense decreased 11.7% to $1,928,000 for the
year ended December 31, 2003 as compared to $2,184,000 for the year ended December 31, 2002. This
was due to some older assets becoming fully depreciated while we had a limited requirement for the
purchase of new equipment. 25




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##### Table of Contents



Costs related to non-recurring acquisition activity were $1,899,000 for the year ended
December 31, 2002. This write-off was the result of us reaching an impasse in the second quarter of
2002 in its negotiations with BT Group plc to acquire their RedCARE division, its security products
and service business. These costs were primarily related to legal and accounting expenses incurred
during diligence and negotiations. Interest expense (net) increased to $354,000 in 2003 compared to $199,000 for the prior year.
This increase in net interest expense was primarily the result of increased interest expense on
the $5,000,000 note payable incurred on March 28, 2003 to Cingular for the purchase of their
interest in Cellemetry (see explanation under Liquidity and Capital Resources). There was also
additional interest expense in the year ended December 31, 2003 versus the same period in 2002 on
our revolving line of credit. Gain on sale of business of $1,712,000 for the year ended December 31, 2003 was due to the
sale of our Data1Source mobile messaging service through an entity Data1Source LLC. The selling
price was approximately $3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six
months on March 15, 2004, if certain criteria are met. Currently it has not been determined if
these criteria have been met. Costs associated with the transaction included the net book value of
the assets sold, including software and computer hardware, and transaction costs including finders
fees and legal costs. While the sale of Data1Source LLC did not meet the requirements to be
considered a significant disposition, its sale will have a negative impact on future revenues,
gross margins and cash flow because of the profitable nature of the business. Foreign currency gain of $56,000 for the year ended December 31, 2003 versus a loss of $13,000
was mostly the result of foreign currency gains on sales to Canadian customers due to the weakening
of the U.S. dollar versus the Canadian dollar. Minority interest for the year ended December 31, 2003 was $0 compared to $326,000 for the
year ended December 31, 2002. The principle reason for the decrease in Minority interest was the
depletion of Minority Interest on the Companys balance sheet related to a joint venture. We
purchased the minority parties interest on March 28, 2003. Due to its net loss from operations, we did not record a federal tax provision in the years
ended December 31, 2003 and 2002, respectively. The $92,000 in income tax expense recorded for
2003 relates to our operations in Australia and certain state income taxes. We are entitled to the
benefits of certain net operating loss carry forwards, however, net operating loss carry forwards
of approximately $2,900,000 and $8,500,000 for the years ended December 31, 2001 and 2002
respectively may not be available in future years. We have not classified our net operating loss
carry forwards as an asset in our financial statements and thus a loss of net operating loss carry
forwards does not impact current operating results. We recorded a net loss of $1,404,000 for the year ended December 31, 2003 compared to a net
loss of $7,450,000 for the year ended December 31, 2002. Preferred stock dividend for the year ended December 31, 2003 was $0 as compared to $240,000
for the year ended December 31, 2002. This decrease was due to the conversion of the preferred
stock to our common stock in December 2002. We recorded a net loss applicable to common shareholders of $1,404,000 for the year ended
December 31, 2003 as compared to net loss applicable to common shareholders of $7,690,000 for the
year ended December 31, 2002. Basic and diluted loss per common share decreased to $(0.13) for year ended December 31, 2003
as compared to $(0.71) for the year ended December 31, 2002. The weighted average and diluted shares outstanding increased to 10,934,000 for the year ended
December 31, 2003 as compared to 10,766,000 for the year ended December 31, 2002. The increase in
weighted average basic and diluted shares outstanding was primarily due to the conversion of
preferred stock to 625,000 shares of our common stock in December 2002, the exercise of stock
options, and share issued under the employee stock purchase plan. The 625,000 shares of common
stock were repurchased on March 28, 2003 (see explanation under Liquidity and Capital Resources). 26




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##### Table of Contents



Segment Information Net Sale by Segment:
    
    For the years ended December 31,
    
    
    2004 vs. 2003
    
    
    2003 vs. 2002(In thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    % Change
    
    
    % ChangeNet sales:Wireless Data CommunicationsProduct
    
    $
    5,913
    
    
    $
    4,839
    
    
    $
    7,461
    
    
    
    22.2
    %
    
    
    -35.1
    %Service
    
    
    8,687
    
    
    
    7,848
    
    
    
    6,748
    
    
    
    10.7
    %
    
    
    16.3
    %Sub-total
    
    
    14,600
    
    
    
    12,687
    
    
    
    14,209
    
    
    
    15.1
    %
    
    
    -10.7
    %Digital Multimedia and NetworkingProduct
    
    
    3,434
    
    
    
    2,647
    
    
    
    5,668
    
    
    
    29.7
    %
    
    
    -53.3
    %Service
    
    
    3,968
    
    
    
    3,518
    
    
    
    3,686
    
    
    
    12.8
    %
    
    
    -4.6
    %Sub-total
    
    
    7,402
    
    
    
    6,165
    
    
    
    9,354
    
    
    
    20.1
    %
    
    
    -34.1
    %Wireline SecurityProduct
    
    
    350
    
    
    
    449
    
    
    
    230
    
    
    
    -22.0
    %
    
    
    95.2
    %Service
    
    
    641
    
    
    
    856
    
    
    
    708
    
    
    
    -25.1
    %
    
    
    20.9
    %Sub-total
    
    
    991
    
    
    
    1,305
    
    
    
    938
    
    
    
    -24.1
    %
    
    
    39.1
    %Total net salesProduct
    
    
    9,697
    
    
    
    7,935
    
    
    
    13,359
    
    
    
    22.2
    %
    
    
    -40.6
    %Service
    
    
    13,296
    
    
    
    12,222
    
    
    
    11,142
    
    
    
    8.8
    %
    
    
    9.7
    %Total net sales
    
    
    22,993
    
    
    
    20,157
    
    
    
    24,501
    
    
    
    14.1
    %
    
    
    -17.7
    %
 Percent of Total Sales2004
    
    
    2003
    
    
    2002Net sales:Wireless Data CommunicationsProduct
    
    
    25.7
    %
    
    
    24.0
    %
    
    
    30.5
    %Service
    
    
    37.8
    %
    
    
    38.9
    %
    
    
    27.5
    %Sub-total
    
    
    63.5
    %
    
    
    62.9
    %
    
    
    58.0
    %Digital Multimedia and NetworkingProduct
    
    
    14.9
    %
    
    
    13.1
    %
    
    
    23.1
    %Service
    
    
    17.3
    %
    
    
    17.5
    %
    
    
    15.0
    %Sub-total
    
    
    32.2
    %
    
    
    30.6
    %
    
    
    38.2
    %Wireline SecurityProduct
    
    
    1.5
    %
    
    
    2.2
    %
    
    
    0.9
    %Service
    
    
    2.8
    %
    
    
    4.2
    %
    
    
    2.9
    %Sub-total
    
    
    4.3
    %
    
    
    6.5
    %
    
    
    3.8
    %Total net salesProduct
    
    
    42.2
    %
    
    
    39.4
    %
    
    
    54.5
    %Service
    
    
    57.8
    %
    
    
    60.6
    %
    
    
    45.5
    %Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Fiscal Years Ended December 31, 2004 and December 31, 2003 Net sales from Wireless Data Communications increased 15.1% to $14,600,000 for the year
ended December 31, 2004 as compared to $12,687,000 for the year ended December 31, 2003. The
increase in net sales for the twelvemonth period ended December 31, 2004 was the result of an
increase in product sales (up 22.2% from the same period last year) and an
increase in service sales (up 10.7% versus the same period last year). The increase in
Wireless Data Communications product sales of $1,074,000 for the year ended December 31, 2004
versus the same period in 2003 was primarily the result of increased sales of its new wireless
vending machine monitoring product (VendView) and an increase in vehicle security products and
tracking services, MobileGuardian® The VendView product was only introduced in the fourth
quarter of 2003. We expect VendView to continue to supplement the sales of our other wireless
products. Product sales also increased due to higher demand for Uplink Security devices used for
wireless communications between alarm installations and central monitoring stations. The increase
in the Wireless Data Communication services was primarily due to an increase in the number of
connections to our Cellemetry wireless network. These increases were achieved even though we sold
our short messaging service Data1Source in September 2003. Connection increases were generated by
sales of our security products as well as those generated by value added resellers who utilize the
Cellemetry network to provide customer solutions. We also anticipate that VendView will continue
to add additional connections in subsequent periods. We continue to focus on increasing
connections to our network due to the recurring nature of service revenues. Net sales from Digital Multimedia and Networking increased 20.1% to $7,402,000 for the
year ended December 31, 2004 as compared to $6,165,000 for the year ended December 31, 2003.
The increase in revenues compared to the 2003 was due to a 29.7% increase in product revenues
to $3,434,000 primarily due to increased sales of our interactive videoconferencing products
(PowerPlay) directly or indirectly (as a subcontractor) to distance-learning customers. 27




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##### Table of Contents



Capital spending by targeted distance learning customers is largely funded by government
entities and, as a result, is difficult to predict and can fluctuate significantly from period
to period, however we continue to see signs of increased activity in this area. Digital
Multimedia and Networking service sales increased 12.8% to $3,968,000 for the year ended
December 31, 2004 over the same period in 2003. Most of this was from integration and
installation services, which increased substantially compared to the same period in the prior
year. Installation and integration services are primarily, either directly or indirectly,
provided to large wireline and wireless telecommunication companies. Demand for these services
from the wireline carriers has declined as they have reduced capital spending. Wireless
carrier demand for these services can fluctuate dramatically in response to an environment of
increasing customer demand for their services while at the same time they attempt to control
their own capital expenditures. There was a significant increase of installation and
integration services by the wireless carriers in the second and third quarter of 2004 as a
result of government mandated provision of emergency 911 services by the end of this year.
While service revenues have increased for the year, we cannot predict whether
telecommunications customers will maintain their current level of capital expenditures. Net sales from Wireline Security decreased 24.1% to $991,000 for the year ended December 31,
2004 as compared to $1,305,000 for the year ended December 31, 2003. Most of the Wireline product
sales in 2003 were the sales of maintenance parts to a customer in Australia with which we have an
equipment supply agreement (the Agreement). Pursuant to the Agreement, in May 2003, we shipped
$583,000 of wireline security detection equipment to the customer, in exchange for a share of the
customers future revenues. Although, under the Agreement, the customer retains title to this
equipment following its acceptance, it must meet certain obligations under the Agreement, or pay
amounts specified in the Agreement. Since the actual revenue that will be generated by the sale of
the equipment is uncertain at this time, we did not recognize revenue on the equipment sale as of
December 31, 2004. During the twelvemonth period ended December 31, 2004 there were sales of
maintenance parts to the customer that were not made pursuant to the Agreement. The sale price was
fixed and payable in accordance with our normal terms and conditions. Accordingly, we recognized
revenues from the sales of the maintenance parts to the customer in the twelve month period ended
December 31, 2004 and 2003. The customer completed installation of the wireline security detection
equipment in December 2003. Currently, the customer and Numerex are promoting the new expanded
service. We received our first share of revenues from the services in the third quarter of 2004.
Currently, we expect to receive at least the full value of the equipment from this revenue share,
however, as more information becomes available, we will reassess the accounting treatment for the
project. (In May 2003, the value of the wire-line equipment was transferred from inventory to
other assets.) We expect to continue to sell maintenance parts and perform services for this
customer for the term of the Agreement. Fiscal Years Ended December 31, 2003 and December 31, 2002 Net sales from Wireless Data Communications decreased 10.7% to $12,687,000 for the year
ended December 31, 2003 as compared to $14,209,000 for the year ended December 31, 2002. Wireless
Data Communications product sale decreased by 35.1%, which was partially offset by an increase of
service revenues of 16.3%. The decrease in product sales was primarily the result of changes made
to our distribution strategy for wireless mobile telemetry product lines, which resulted in a
decline in unit sales while new markets were developed during 2003. This included exiting the
radio distribution market because of intense competition and slim margins as well as a revised
focus with regard to mobile tracking. With regard to mobile tracking we launched our
MobileGuardian product line, which provides vehicle security and tracking services, early in 2003.
We continue to develop our automotive dealer distribution network for this product line and
anticipate that the decline in product sales of mobile tracking units is temporary. The 16.3%
increase in service revenues was primarily due to increased connections on our Cellemetry network,
mainly related to security monitoring. The second quarter of 2002 net service revenues included a
sale of a license of our Cellemetry gateway software to a customer in Colombia, South America for
$500,000. Excluding this sale, service revenue derived from connections to Cellemetry network
increased 25.6% in 2003 versus the same period in 2002. In addition there was an increase in
digital subscribers utilizing our Data1Source mobile messaging service prior to being sold on
September 15, 2003 (see comments on Gain on sale of business ). Net sales from Digital Multimedia and Networking decreased 34.1% to $6,165,000 for the year
ended December 31, 2003 as compared to $9,354,000 for the year ended December 31, 2002. The
decrease was primarily in product sales in both Digital Multimedia and Networking. The decrease in
Digital Multimedia product sales was largely due to a decrease in PowerPlay purchases by distance
learning customers. The decline in Network monitoring equipment sales was due to a reduction in
capital spending by telecommunications customers for the year ended December 31, 2003 versus the
same period in 2002. The reduction in Network monitoring equipment also translated into a decline
in installation service revenues of 4.6%. While a reversal in the decline in capital spending for
distance learning and telecommunications customers remains uncertain, we introduced IPContact in
December of 2003. This high performance desktop videoconferencing software package is expected to
supplement PowerPlay sales in 2004. Net sales from Wireline Security increased 39.1% to $1,305,000 for the year ended December 31,
2003 as compared to $938,000 for the year ended December 31, 2002. This increase was primarily due
to an increase in product sales, which is due to additional sales of maintenance parts to a
customer in Australia with which we have an equipment supply agreement (the Agreement). Pursuant
to the Agreement, in May 2003, the Company shipped $583,000 of wireline security detection
equipment to the customer, in exchange for a share of the customers future revenues. Although the
customer retains title to this equipment from acceptance, it must meet certain obligations under
the Agreement, or pay amounts specified in the 28




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##### Table of Contents



Agreement. Since the actual revenue that will be
generated by the sale of the equipment is uncertain at this time, we did not recognize revenue on
the equipment sale as of December 31, 2003. The sales of maintenance parts to the customer,
however, was not pursuant to the Agreement and therefore we recognized revenues from those sales in
the period ended December 31, 2003 since the sales price was a fixed amount and payable upon our
normal terms. Installation of the equipment was completed by December 31, 2003. Selected Quarterly Financial Data The following tables detail certain unaudited financial data of Numerex for each quarter
of the last two fiscal years ended December 31, 2004, and 2003, respectively. Our financial results may fluctuate from quarter to quarter as a result of factors, including
the timing of product shipments, new product introductions and equipment, product and system sales
that historically have been of a non-recurring nature. The information has been prepared from our books and records in accordance with generally
accepted accounting principles for interim financial information. In the opinion of management,
all (including only normal, recurring adjustments) considered necessary for fair presentation have
been included. Interim results for any quarter are not necessarily indicative of the results that
may be expected for any future period. 29




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##### Table of Contents



Selected Quarterly Financial Data (Unaudited) For the Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(in thousands)
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004Net sales:Wireless Data CommunicationsProduct
    
    $
    1,421
    
    
    $
    1,309
    
    
    $
    1,485
    
    
    $
    1,698Service
    
    
    1,991
    
    
    
    2,143
    
    
    
    2,150
    
    
    
    2,403Sub-total
    
    
    3,412
    
    
    
    3,452
    
    
    
    3,635
    
    
    
    4,101Digital Multimedia and NetworkingProduct
    
    
    320
    
    
    
    819
    
    
    
    1,322
    
    
    
    973Service
    
    
    709
    
    
    
    1,153
    
    
    
    1,028
    
    
    
    1,078Sub-total
    
    
    1,029
    
    
    
    1,972
    
    
    
    2,350
    
    
    
    2,051Wireline SecurityProduct
    
    
    151
    
    
    
    143
    
    
    
    45
    
    
    
    11Service
    
    
    177
    
    
    
    186
    
    
    
    142
    
    
    
    136Sub-total
    
    
    328
    
    
    
    329
    
    
    
    187
    
    
    
    147Total net salesProduct
    
    
    1,892
    
    
    
    2,271
    
    
    
    2,852
    
    
    
    2,682Service
    
    
    2,877
    
    
    
    3,482
    
    
    
    3,320
    
    
    
    3,617Total net sales
    
    
    4,769
    
    
    
    5,753
    
    
    
    6,172
    
    
    
    6,299Cost of product sales (excluding depreciation)
    
    
    1,630
    
    
    
    1,858
    
    
    
    2,043
    
    
    
    2,095Cost of services (excluding depreciation and amortization)
    
    
    910
    
    
    
    1,288
    
    
    
    1,395
    
    
    
    1,350Depreciation and amortization
    
    
    110
    
    
    
    100
    
    
    
    87
    
    
    
    88Gross Profit
    
    
    2,119
    
    
    
    2,507
    
    
    
    2,647
    
    
    
    2,766Selling, general, and administrative expenses
    
    
    2,153
    
    
    
    2,310
    
    
    
    2,074
    
    
    
    2,118Research and development expenses
    
    
    278
    
    
    
    202
    
    
    
    205
    
    
    
    221Bad debt expense
    
    
    168
    
    
    
    116
    
    
    
    131
    
    
    
    60Depreciation and amortization
    
    
    427
    
    
    
    409
    
    
    
    411
    
    
    
    417Operating loss
    
    
    (909
    )
    
    
    (508
    )
    
    
    (155
    )
    
    
    (59
    )Research and development expenses
    
    
    136
    
    
    
    (179
    )
    
    
    (166
    )
    
    
    (209
    )Net loss
    
    
    (771
    )
    
    
    (709
    )
    
    
    (340
    )
    
    
    (259
    )Net loss applicable to common shareholders
    
    $
    (771
    )
    
    $
    (709
    )
    
    $
    (340
    )
    
    $
    (259
    )Basic and Diluted loss per common share
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )Weighted average shares outstanding
    
    
    10,792
    
    
    
    10,796
    
    
    
    10,798
    
    
    
    10,798
 30




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##### Table of Contents



Selected Quarterly Financial Data (Unaudited) For the Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2003
    
    
    2003
    
    
    2003
    
    
    2003Net sales:Wireless Data CommunicationsProduct
    
    $
    1,027
    
    
    $
    1,073
    
    
    $
    1,229
    
    
    $
    1,510Service
    
    
    1,859
    
    
    
    2,081
    
    
    
    1,964
    
    
    
    1,944Sub-total
    
    
    2,886
    
    
    
    3,154
    
    
    
    3,193
    
    
    
    3,454Digital Multimedia and NetworkingProduct
    
    
    504
    
    
    
    395
    
    
    
    944
    
    
    
    804Service
    
    
    1,042
    
    
    
    809
    
    
    
    898
    
    
    
    769Sub-total
    
    
    1,546
    
    
    
    1,204
    
    
    
    1,842
    
    
    
    1,573Wireline SecurityProduct
    
    
    39
    
    
    
    172
    
    
    
    173
    
    
    
    65Service
    
    
    216
    
    
    
    190
    
    
    
    248
    
    
    
    202Sub-total
    
    
    255
    
    
    
    362
    
    
    
    421
    
    
    
    267Total net salesProduct
    
    
    1,570
    
    
    
    1,640
    
    
    
    2,346
    
    
    
    2,379Service
    
    
    3,117
    
    
    
    3,080
    
    
    
    3,110
    
    
    
    2,915Total net sales
    
    
    4,687
    
    
    
    4,720
    
    
    
    5,456
    
    
    
    5,294Cost of product sales (excluding depreciation)
    
    
    1,219
    
    
    
    1,309
    
    
    
    1,731
    
    
    
    1,784Cost of services (excluding depreciation and amortization)
    
    
    1,235
    
    
    
    960
    
    
    
    1,158
    
    
    
    1,090Depreciation and amortization
    
    
    180
    
    
    
    174
    
    
    
    181
    
    
    
    107Gross Profit
    
    
    2,053
    
    
    
    2,277
    
    
    
    2,386
    
    
    
    2,313Selling, general, and administrative expenses
    
    
    2,235
    
    
    
    2,085
    
    
    
    2,060
    
    
    
    1,991Research and development expenses
    
    
    298
    
    
    
    284
    
    
    
    261
    
    
    
    62Bad debt expense
    
    
    152
    
    
    
    149
    
    
    
    150
    
    
    
    100Depreciation and amortization
    
    
    489
    
    
    
    505
    
    
    
    480
    
    
    
    454Net loss
    
    
    (1,121
    )
    
    
    (746
    )
    
    
    (565
    )
    
    
    (294
    )Net loss applicable to common shareholders
    
    $
    (1,117
    )
    
    $
    (854
    )
    
    $
    992
    
    
    $
    (425
    )Basic and Diluted loss per common share
    
    $
    (0.10
    )
    
    $
    (0.08
    )
    
    $
    0.09
    
    
    $
    (0.04
    )Weighted average shares outstanding
    
    
    11,384
    
    
    
    10,785
    
    
    
    10,878
    
    
    
    10,790
 31




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##### Table of Contents



Liquidity and Capital Resources We had working capital of $1,228,000 as of December 31, 2004 compared to a working
capital deficit of $455,000 at December 31, 2003. We had cash balances of $1,684,000 and $734,000,
respectively, as of December 31, 2004 and December 31, 2003. The majority of the increase in working capital reflects the repayment of $3,500,000 in
short-term debt payable to Cingular. We repaid Cingular using a portion of the net proceeds from
our Company Note with Laurus, $1,637,000 of which is classified as current and $2,178,000 of which
is classified as long term. This Company Note also provided additional working capital. Net cash provided by operating activities was $1,520,000 for the year ended December 31, 2004
as compared to $706,000 for the year ended December 31, 2003. This $814,000 improvement was due to
decreased net operating by $1,095,000 to $1,631,000 in 2004 as compared to $2,726,000 for the same
period in 2003. Net cash used in investing activities was $570,000 for the year ended December 31, 2004 as
compared to a source of cash of $518,000 for the year ended December 31, 2003. The increase in
cash used in investing activities as opposed to a source of cash from investing activities was
primarily due to the addition of tangible and intangible assets as
well as a reduction to long-term
receivables. This was partially offset by additional proceeds
received from the sale of Data1Source
of $250,000. These proceeds were contingent on certain criteria being met within six months
following the original sale. We received this payment during the quarter ended March 31, 2004
since the contingency was satisfied. The cash provided by investing activities for the year of
2003 was primarily due to the sale of Data1Source LLC. The selling price was approximately
$3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six months, if certain
criteria are met. Net cash provided by financing activities was $84,000 for the twelve months ended December 31,
2004 as compared to net cash used in financing activities of $2,701,000 for the twelve months ended
December 31, 2003. The increase in cash provided by financing activities was primarily due to
proceeds from the Company Note partially offset by principal payments on this note of $468,000 and
principal payments on capital lease obligations of $309,000. The cash used in financing activities
during the year ended December 31, 2003 was primarily due to the purchase of the treasury stock
from Cingular in the amount of $975,000 and to payoff the lease payable of $605,000 for the
software sold with Data1Source LLC and the regular payments on capital lease obligations. The cash
usage also included the payments of preferred stock dividends and the payoff of the entire
outstanding balance of $400,000 on our revolving line of credit that offset cash provided by the
line of credit during the year ended December 31, 2003. Our business has traditionally not been capital intensive; accordingly, capital expenditures
have not been material. To date, we have funded all capital expenditures from working capital,
capital leases and other long-term obligations, proceeds from the public offering, from the sale of
its derived channel technology in November 1999 and the proceeds from the sale of Data1Source LLC. While
our operations provided cash during the twelve-month period ended December 31, 2004, we
continue to generate operating losses. Even though we continue to launch new products and
establish new distribution channels for our products and services, our longer-term success will
depend upon further reductions in operating losses and further increases in positive cash flow. We
paid principal and interest of approximately $468,000 on our note in the year ended December 31,
2004, and will be required to pay principal and interest of approximately $1,900,000 in the
calendar year 2005. However, if our common stock price exceeds $5.02 within the appropriate time
frames, we will consider using shares of common stock to repay amounts due on the Company Note and
reduce cash expenditures. Laurus could also convert the principle amount of the Company Note into
company stock at a price of $4.56 per share. In order to further enhance our liquidity position, we closed a second round of financing with
the Laurus Master Fund at the end of January 2005. The financing consists of a $1.5 million Secured
Convertible Term Note and is convertible into shares of Numerex common stock at a conversion price
of $5.31 per share. The note bears a fixed interest rate of 8% with principal repayments beginning
in July 2005. As a result of the transactions with the Laurus Master Fund, stockholders may experience
dilution, or the equity securities may have rights, preferences or privileges senior to those of
the common stockholders. In addition, as a result of issuing debt, those securities have rights,
preferences and privileges senior to those of the common stock holders. If we are unable to repay
the Company Note, Laurus could take action on its security interests, Laurus has the right to
demand full payment of all outstanding principal and interest due under the Company Note and invoke
its right to the collateral under a related security agreement. 32




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##### Table of Contents



Contractual Obligations Payments due by periodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1 - 3
    
    
    3 - 5
    
    
    than 5(in thousands)
    
    Total
    
    
    Year
    
    
    years
    
    
    years
    
    
    yearsLong-term Debt*
    
    $
    3,815
    
    
    $
    1,637
    
    
    $
    2,178Capital lease obligations
    
    
    32
    
    
    
    30
    
    
    
    2Operating lease obligations
    
    
    2,396
    
    
    
    542
    
    
    
    1,624
    
    
    
    230Total
    
    $
    6,243
    
    
    $
    2,209
    
    
    $
    3,804
    
    
    $
    230
    
    
    $
    0
   *
    
    This debt is convertible into the Companys common stock at both the Companys and
Lenders option depending on the Companys stock price (see the description of this
financing in the Liquidity and Capital Resources section above) Off-Balance Sheet Arrangements As of December 31, 2004, we did not have any off-balance sheet arrangements, as defined
in Item 303(a)(4)(ii) of SEC regulation S-K. 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Effect of Inflation Inflation has not been a material factor affecting our business. In recent years the
cost of electronic components has remained relatively stable, due to competitive pressures within
the industry, which has enabled us to contain our manufacturing and operations costs. Our general
operating expenses, such as salaries, employee benefits, and facilities costs are subject to normal
inflationary pressures. Foreign Currency Our functional and reporting currency is the U.S. Dollar. Fluctuations in foreign
currency exchange rates are not expected to have a material impact on our results of operations or
liquidity. 33




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageConsolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    35Consolidated Statements of Operations of the Years ended December 31, 2004, 2003 and 2002
    
    
    36Consolidated Statements of Shareholders Equity for the Years ended December 31, 2004,
2003 and 2002
    
    
    37Consolidated Statements of Cash Flows for the Years ended December 31, 2004, 2003 and 2002
    
    
    38Notes to Consolidated Financial Statements
    
    
    39Report of Independent Registered Certified Public Accounting Firm
    
    
    54
 34




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##### Table of Contents



NUMEREX CORP. AND
SUBSIDIARIES 
 CONSOLIDATED BALANCE
SHEETS
 DECEMBER 31,
    
    
    DECEMBER 31,2004
    
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,684
    
    
    $
    734Accounts receivable, net of allowance for doubtful accounts
of $1,084 and $609, respectively
    
    
    3,986
    
    
    
    3,093Notes Receivable
    
    
    41
    
    
    
    99Inventory
    
    
    1,561
    
    
    
    3,461Prepaid expenses and other current assets
    
    
    736
    
    
    
    700TOTAL CURRENT ASSETS
    
    
    8,008
    
    
    
    8,087PROPERTY AND EQUIPMENT, NET
    
    
    840
    
    
    
    1,296GOODWILL, NET
    
    
    15,014
    
    
    
    15,014OTHER INTANGIBLES, NET
    
    
    7,213
    
    
    
    7,979SOFTWARE, NET
    
    
    598
    
    
    
    825OTHER ASSETS
    
    
    939
    
    
    
    769TOTAL ASSETS
    
    $
    32,612
    
    
    $
    33,970LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    2,601
    
    
    $
    2,498Other current liabilities
    
    

    1,603
    
    
    
    1,487Note payable, current
    
    
    1,637
    
    
    
    3,500Deferred revenues
    
    
    906
    
    
    
    775Obligations under capital leases, current portion
    
    
    33
    
    
    
    282TOTAL CURRENT LIABILITIES
    
    
    6,780
    
    
    
    8,542LONG TERM LIABILITIESObligations under capital leases and other long term liabilities
    
    
    2
    
    
    
    62Note Payable
    
    
    2,178
    
    
    
    TOTAL LONG TERM LIABILITIES
    
    
    2,180
    
    
    
    62SHAREHOLDERS EQUITYPreferred stock  no par value; authorized 3,000,000; none issued
    
    
    
    
    
    
    Class A common stock  no par value; authorized 30,000,000; issued
13,203,660 and 13,181,547 shares, respectively
    
    
    36,872
    
    
    
    36,793Additional paid-in-capital
    
    
    809
    
    
    
    439Treasury stock, at cost, 2,391,400 shares on December 31, 2004 and
December 31, 2003
    
    
    (10,197
    )
    
    
    (10,197
    )Class B common stock  no par value; authorized 5,000,000; none
issued
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    13
    
    
    
    97Retained deficit
    
    
    (3,845
    )
    
    
    (1,766
    )23,652
    
    
    
    25,366TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    32,612
    
    
    $
    33,970
 See accompanying notes to consolidated financial statements. 35




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 FOR THE YEARSENDED DECEMBER 31,2004
    
    
    2003
    
    
    2002Net sales:Product
    
    $
    9,697
    
    
    $
    7,935
    
    
    $
    13,359Service
    
    
    13,296
    
    
    
    12,222
    
    
    
    11,142Total net sales
    
    
    22,993
    
    
    
    20,157
    
    
    
    24,501Cost of product sales (excluding depreciation)
    
    
    7,626
    
    
    
    6,043
    
    
    
    9,836Cost of services (excluding depreciation and amortization)
    
    
    4,943
    
    
    
    4,443
    
    
    
    4,116Depreciation and amortization
    
    
    385
    
    
    
    642
    
    
    
    328Gross Profit
    
    
    10,039
    
    
    
    9,029
    
    
    
    10,221Selling, general, and administrative expenses
    
    
    8,624
    
    
    
    8,371
    
    
    
    10,672Research and development expenses
    
    
    906
    
    
    
    905
    
    
    
    1,097Bad debt expense
    
    
    476
    
    
    
    551
    
    
    
    1,837Depreciation and amortization
    
    
    1,664
    
    
    
    1,928
    
    
    
    2,184Costs related to non-recurring acquisition activity
    
    
    
    
    
    
    
    
    
    
    1,899Operating loss
    
    
    (1,631
    )
    
    
    (2,726
    )
    
    
    (7,468
    )Interest income and (expense), net
    
    
    (637
    )
    
    
    (354
    )
    
    
    (199
    )Gain on sale of business
    
    
    250
    
    
    
    1,712
    
    
    
    Other income and (expense), net
    
    
    (52
    )
    
    
    56
    
    
    
    (13
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    326Loss before income taxes
    
    
    (2,070
    )
    
    
    (1,312
    )
    
    
    (7,354
    )Provision for income taxes
    
    
    9
    
    
    
    92
    
    
    
    96Net loss
    
    
    (2,079
    )
    
    
    (1,404
    )
    
    
    (7,450
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    240Net loss applicable to common shareholders
    
    
    (2,079
    )
    
    
    (1,404
    )
    
    
    (7,690
    )Other comprehensive income (loss), net of income taxes:Foreign currency translation adjustment
    
    
    (84
    )


    
    
    106
    
    
    
    18Comprehensive loss
    
    $
    (2,163
    )
    
    $
    (1,298
    )
    
    $
    (7,672
    )Basic loss per share
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.71
    )Diluted loss per share
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.71
    )Weighted average common shares used in per share calculationBasic
    
    
    10,798
    
    
    
    10,934
    
    
    
    10,766Diluted
    
    
    10,798
    
    
    
    10,934
    
    
    
    10,766
 See accompanying notes to consolidated financial statements. 36




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##### Table of Contents



NUMEREX CORP. AND
SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF SHAREHOLDERSEQUITY
(in thousands)
 AccumulatedOtherPREFERRED
    
    
    
    
    
    
    COMMON
    
    
    
    
    
    
    
    
    
    
    TREASURY
    
    
    Comprehensive
    
    
    RETAINEDDESCRIPTION:
    
    SHARES
    
    
    $AMT
    
    
    SHARES
    
    
    $AMT
    
    
    APIC
    
    
    STOCK
    
    
    Income
    
    
    EARNINGS
    
    
    TOTALBalance at December 31, 2001
    
    
    30
    
    
    $
    3,000
    
    
    
    12,286
    
    
    $
    32,590
    
    
    $
    439
    
    
    $
    (9,222
    )
    
    $
    (27
    )
    
    $
    7,328
    
    
    $
    34,108Issuance of shares under Directors Stock Plan
    
    
    
    
    
    
    0
    
    
    
    3
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Issuance of shares in connection with
exercise of stock options and warrants
    
    
    
    
    
    
    0
    
    
    
    255
    
    
    
    1,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,167Conversion s of Preferred Stock to common
shares
    
    
    (30
    )
    
    
    (3,000
    )
    
    
    625
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,690
    )
    
    
    (7,690
    )Balance at December 31, 2002
    
    
    0
    
    
    $
    
    
    
    
    13,169
    
    
    $
    36,769
    
    
    $
    439
    
    
    $
    (9,222
    )
    
    $
    (9
    )
    
    $
    (362
    )
    
    $
    27,615Issuance of shares under Directors Stock Plan
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Issuance of shares in connection with
employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )
    
    
    
    
    
    
    
    
    
    
    (975
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    106Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,404
    )
    
    
    (1,404
    )Balance at December 31, 2003
    
    
    0
    
    
    $
    
    
    
    
    13,182
    
    
    $
    36,793
    
    
    $
    439
    
    
    $
    (10,197
    )
    
    $
    97
    
    
    $
    (1,766
    )
    
    $
    25,366Issuance of shares under Directors Stock Plan
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Issuance of shares in connection with
employee stock purchase plan
    
    
    0
    
    
    
    0
    
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Issuance of warrants with convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Issuance of shares in lieu of debt payment
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Translation adjustment
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )Net loss
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,079
    )
    
    
    (2,079
    )Balance at December 31, 2004
    
    
    0
    
    
    $
    
    
    
    
    13,205
    
    
    $
    36,872
    
    
    $
    809
    
    
    $
    (10,197
    )
    
    $
    13
    
    
    $
    (3,845
    )
    
    $
    23,652
 See accompanying notes to consolidated financial statements. 37




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##### Table of Contents



NUMEREX CORP. AND
SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net loss
    
    $
    (2,079
    )
    
    $
    (1,404
    )
    
    $
    (7,450
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation
    
    
    671
    
    
    
    1,062
    
    
    
    1,312Amortization
    
    
    1,380
    
    
    
    1,508
    
    
    
    1,200Allowance for Doubtful Accounts
    
    
    476
    
    
    
    551
    
    
    
    1,837Inventory Reserves
    
    
    284
    
    
    
    272
    
    
    
    358Non-cash
interest expense
    
    
    255
    
    
    
    
    
    
    
    Gain on Sale of business unit
    
    
    (250
    )
    
    
    (1,712
    )
    
    
    Minority Interest
    
    
    
    
    
    
    
    
    
    
    (326
    )Changes in assets and liabilities which provided
(used) cash:Accounts and notes receivable
    
    
    (1,310
    )
    
    
    1,411
    
    
    
    855Inventory
    
    
    1,615
    
    
    
    775
    
    
    
    (470
    )Prepaid expenses & interest receivable
    
    
    79
    
    
    
    303
    
    
    
    69Other assets
    
    
    
    
    
    
    86
    
    
    
    61Accounts payable
    
    
    101
    
    
    
    (1,613
    )
    
    
    (1,412
    )Other accrued liabilities
    
    
    167
    
    
    
    (489
    )
    
    
    867Deferred Revenue
    
    
    131
    
    
    
    (44
    )
    
    
    161Income taxes
    
    
    
    
    
    
    
    
    
    
    48Net cash provided by (used in) operating
activities:
    
    

    1,520
    
    
    
    706
    
    
    
    (2,890
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (215
    )
    
    
    (75
    )
    
    
    (107
    )Purchase of intangible and other assets
    
    
    (386
    )
    
    
    (2,604
    )
    
    
    (1,042
    )Proceeds the from sale of a business
    
    
    200
    
    
    
    3,197
    
    
    
    Increase (decrease) in deposits and long term receivables
    
    
    (169
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (570
    )
    
    
    518
    
    
    
    (1,149
    )Cash flows from financing activities:Proceeds from exercise of common stock options
    
    
    
    
    
    
    25
    
    
    
    1,177Proceeds from line of credit
    
    
    
    
    
    
    400
    
    
    
    Proceeds from note payable and debt
    
    
    4,283
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (975
    )
    
    
    Principal payments on capital lease obligations
    
    
    (309
    )
    
    
    (1,271
    )
    
    
    (420
    )Principal payments on notes payable and debt
    
    
    (3,890
    )
    
    
    (400
    )
    
    
    Dividend payment on preferred stock
    
    
    
    
    
    
    (480
    )
    
    
    Net cash provided by (used in) financing activities:
    
    
    84
    
    
    
    (2,701
    )
    
    
    757Effect of exchange differences on cash
    
    
    (84
    )
    
    
    74
    
    
    
    18Net increase in cash and cash equivalents
    
    
    950
    
    
    
    (1,403
    )
    
    
    (3,264
    )Cash and cash equivalents at beginning of year
    
    
    734
    
    
    
    2,137
    
    
    
    5,401Cash and cash equivalents at end of year
    
    $
    1,684
    
    
    $
    734
    
    
    $
    2,137Supplemental Disclosures of Cash Flow InformationCash (receipts) payments for:Interest
    
    $
    351
    
    
    $
    354
    
    
    $
    198Income taxes
    
    $
    26
    
    
    $
    92
    
    
    $
    97Disclosure of non-cash activities:Capital leases
    
    $
    32
    
    
    $
    3
    
    
    $
    1,755Non-cash
interest expense
    
    $
    255
    
    
    $
    
    
    
    $
    
 See accompanying notes to consolidated financial statements. 38




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##### Table of Contents



NUMEREX CORP. AND
SUBSIDIARIES 
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
 Years ended December 31, 2004, 2003 and 2002
 NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  A summary of the significant accounting policies consistently applied in the preparation of
the accompanying financial statements follows: 1.Nature of Business Numerex Corp. is a technology company comprised of operating subsidiaries that develop and
market a wide range of communications products and services. Our primary focus is wireless data
communications utilizing proprietary network technologies. We primarily offer products and services
in wireless data communications through Cellemetry, and digital multimedia networking through
PowerPlay and IPContact Uplink Security, Inc., a wholly owned subsidiary of Cellemetry, provides
cost effective, alarm security products, services, and related technical support utilizing
Cellemetry wireless data communications technology. In February 2003 we introduced MobileGuardian
a Web-based vehicle location and recovery solution that combines the accuracy of GPS (Global
Positioning System) and Cellemetry wireless data communications technology. We also introduced
VendView, a product and service offering that is a Web-based vending machine monitoring solution
that also uses the Cellemetry wireless data communications technology. These services enable
customers around the globe to monitor and move information for a variety of applications from home
and business security to distance learning. In addition, we offer wireline alarm security products
and services, as well as telecommunications network operational support systems. 2.Principles of Consolidation The consolidated financial statements include the results of operations and financial position
of Numerex and its wholly owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation. 3.Cash and Cash Equivalents For purposes of financial reporting, we consider all highly liquid investments purchased with
original maturities of less than three months to be cash equivalents. 4.Intangible Assets Intangible assets consist of developed software, patents and acquired intellectual property,
and goodwill. These assets, except for goodwill, are amortized over their expected useful lives.
Developed software is amortized using the straight-line method over 3 to 5 years. Patents and
acquired intellectual property are amortized using the straight-line method over 7 to 16 years. In
accordance with the Statement of Financial Accounting Standards No. 142 (SFAS 142), there is no
goodwill amortization in 2004, 2003 and 2002. We capitalize software development costs when project technological feasibility is established
and conclude capitalization when the product is ready for release. Software development costs
incurred prior to the establishments of technological feasibility are expensed as incurred. We adopted SFAS 142 on January 1, 2002. In connection with the adoption, we reviewed the
classification of our goodwill and other intangible assets, reassessed the useful lives previously
assigned to other intangible assets, and discontinued amortization of goodwill, which resulted in
reduced expense of approximately $768,000 on an annualized basis
in 2002. SFAS 142 also requires that an impairment test be performed on goodwill at least
annually. This test requires that the fair value of each reporting unit as a whole be compared to
its carrying value including goodwill. If the reporting units fair value exceeds its carrying
value, goodwill is not impaired. If, however, the carrying value of the reporting unit exceeds its
fair value, a second step of the impairment test is required. This second test requires that an
estimate of the implied fair value of goodwill be compared to its carrying amount. If the carrying
amount of goodwill exceeds the implied value, the goodwill is impaired and is written down to the
implied fair value. The implied fair value of goodwill is the excess of the fair value of the
reporting unit as a whole, over the fair values that would be assigned to its assets and
liabilities in a purchase business combination. We tested goodwill for impairment as of January 1,
2002, December 31, 2002 and December 31, 2003 and determined that there was no goodwill impairment
at those dates. We used our 3-year business plan and calculated a discounted cash flow based on
that plan to determine the fair value of the reporting units. As a result, we determined that the
fair value of our reporting units exceeded their carrying value, thus no impairment was recorded.
The components of intangible assets are as follows: 39




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##### Table of Contents



December 31,(In thousands)
    
    2004
    
    
    2003Goodwill
    
    $
    17,693
    
    
    $
    17,693Purchased and developed software
    
    
    2,664
    
    
    
    1,881Patents, trade and service marks
    
    
    11,449         1
    
    
    
    1,150Intangible and other assets
    
    
    361
    
    
    
    1,056Total intangible assets
    
    
    32,167
    
    
    
    31,718Accumulated amortization
    
    
    (9,342)
    
    
    
    (7,962
    )Intangible assets, net
    
    $
    22,825
    
    
    $
    23,818
 4.Property and Equipment Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. Leased property under capital leases is amortized
over the lives of the respective leases or over the service lives of the assets for those leases,
whichever is shorter. Depreciation for property and equipment is calculated using the
straight-line method over the following estimated lives. 
    
    Short-term leasehold improvements over the term of the lease
    
    3-10 years
    
    Plant and machinery
    
    4-10 years
    
    Equipment, fixtures and fittings
    
    3-10 years
 5.Impairment of Long-lived Assets We adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No. 144, long-lived
assets, such as property and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an assets to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale would be
separately presented in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities
of a disposed group classified as held for sale would be presented separately in the appropriate
asset and liability sections of the consolidated balance sheet. Prior to the adoption of SFAS No.
144, the company accounted for long-lived assets in accordance with SFAS No.121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.The adoption of SFAS
No. 144 did not affect the Companys consolidated financial condition or results of operations. 6.Income Taxes We account for income taxes using the asset and liability method in accordance with SFAS 109,
Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of 2temporary differences2 by applying enacted
statutory tax rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is
provided for deferred tax assets when it is more likely than not that the assets will not be
realized. 7.Inventory Inventory and work-in progress are stated at the lower of cost (first-in, first-out method) or
market. 8. Notes Receivable We had $133,000 of notes receivable ($41,000 short term and $92,000 long term) at December 31,
2004 and $275,000 ($99,000 short term and $176,000 long term) at December 31, 2003. These notes
are payable to us in installments for periods ranging from 9 to 48 months. For purposes of
valuation, the collectibility of notes receivable and accounts receivable is evaluated separately
and any required allowance is included in total under accounts receivable allowance for doubtful
accounts. 40




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##### Table of Contents



9.Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts based upon the expected collectibility of the
accounts receivable and notes receivable. When amounts are determined to be uncollectible, they
will be charged to the allowance. 10.Other Assets In May 2003, we shipped $583,000 of wire-line security detection equipment to a customer in
Australia. This equipment has been installed at several sites based on an equipment supply
agreement (the Agreement) with this customer. The Agreement allows the customer to generate
additional revenues by providing additional services to its customers. We will share in these
revenues as payment for the equipment. While this customer retains title to this equipment from
acceptance (which occurred May 2003), it must meet certain obligations under the Agreement or pay
amounts specified in the Agreement. Since the actual revenue that will be generated by the sale of
the equipment is uncertain at this time, we are recognizing revenue on the sale of the equipment
equal to the payments received from this customer from this revenue share. We also recognized
cost of sales equal to the payments received from the customer and reduced the value of this asset.
We received our first payments from this customer in September 2004. Currently we expect to
receive at least the full value of the equipment from this revenue share, however, as more
information becomes available, we will reassess the accounting treatment for the project. At June
30, 2003, the value of the wire-line equipment was transferred from inventory to other assets. The
carrying value of the equipment was $477,000 at December 31, 2004 and $583,000 at December 31,
2003. 11.Note Payable On January 13, 2004, we completed a private placement to Laurus Master Fund, Ltd. (Laurus)
of (i) a Convertible Term Note in the principal amount of $4,500,000 (the Company Note), and (ii)
a Common Stock Purchase Warrant (the Warrant and together with the Company Note, the
Securities) to purchase up to 300,000 shares of the Companys Class A common stock, no par value
per share (Common Stock). We used the net proceeds of $4,270,000 to retire the $3,500,000 debt
owed to Cingular (see Note C  Investments) and to provide additional working capital. The Note has
a term of three years maturing on January 12, 2007, and is secured by substantially all of our
assets and our U.S. subsidiaries except DCX Systems Australia Pty Limited. Each of our U.S.
subsidiaries also has provided a guaranty to Laurus. Interest accrues on the Note at an annual
rate of 8%, and interest and principal may be paid by us in either cash or in Common Stock. We may
only use Common Stock to make such payment if the price per share of its Common Stock is greater
than $5.02. However, the entire principal amount of the Note, and any accrued interest, may be
converted by Laurus into our Common Stock at a price equal to $4.56 per share (the Fixed
Conversion Price), subject to certain limitations. If the amount due and payable is paid by us
using Common Stock, the number of shares to be issued to Laurus by us will be determined based upon
the Fixed Conversion Price. Otherwise, cash payments of interest and principal due on the Note must
be paid at 102% of the amount then payable. During the six-month period following the effectiveness
of a registration statement (as discussed below) and if no Event of Default (as defined in the
terms of the Note) has occurred, Laurus may not voluntarily convert, on a month to month basis, a
portion of the Note that exceeds 10% of that number of our shares traded in the one-month period
preceding a voluntary conversion by Laurus. The Warrant is exercisable by Laurus until January 13,
2011, and has three separate tranches. The first tranche is exercisable for up to 150,000 shares of
Common Stock at a price of $4.75 per share. The second tranche is exercisable for up to 100,000
shares of Common Stock at a price of $5.17 per share. The third tranche is exercisable for up to
50,000 shares of Common Stock at a price of $5.99 per share. We also agreed to register all of the
Common Stock that can be issued to Laurus pursuant to the Securities, as described in the
Registration Rights Agreement between Numerex and Laurus. The total potential common shares that
could be issued relating to this transaction are 1,400,980. We were required to register these
Securities and have the registration declared effective by August 13, 2004. Since the registration
statement had not been declared effective by August 13, 2004, then for each 30 day period
thereafter (or portion thereof), we had to issue to Laurus warrants covering 15,000 shares of the
our common stock (at an exercise price of $5.99). The registration statement was declared
effective on November 22, 2004 and as a result an additional 66,000 warrants were issued. 12.Shareholders Equity Shareholders Equity decreased by $1,714,000 for the twelve months ended December 31, 2004.
For the year ended December 31, 2004, Shareholders Equity decreased due to the net loss of
$2,079,000, foreign currency translation of $83,000 and was partially offset by the valuation of
the warrants issued of $370,000 related to the Company Note. We valued these warrants using a
Black-Scholes model, which was used to allocate a portion of the Company Note to Additional Paid-in
Capital. The $370,000 is being amortized to interest expense over the term of the note. The
decrease in Shareholders Equity for the year ended December 31, 2004 was also partially offset by
$79,000 relating to the issuance of 12,580 shares of Class A Common Stock under the employee and
director stock purchase plan and the issuance of 10,000 shares of Class A Common Stock in lieu of
debt payment on the Company Note. 41




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13.Fair Value of Financial Instruments Our financial instruments include cash, accounts receivable, notes receivable and accounts
payable. The carrying value of the financial instruments approximates fair value due to the
relatively short period to maturity. The carrying value of the note payable approximates fair
value and bears cash interest at 8%, which approximates market rates of similar instruments. 14.Use of Estimates In preparing our financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates. 15.Concentration of Credit Risk We maintain our cash balances in financial institutions, which at times may exceed federally
insured limits. We had cash balances in excess of these limits of $1,584,000 and $634,000 for the
years ended December 31, 2004 and 2003, respectively. We have not experienced any losses in such
accounts and believe we are not exposed to any significant credit risk on cash and cash
equivalents. 16.Revenue Recognition Our revenue is generated from three sources:  
    the supply of product, under non recurring agreements,  
    the provision of services, under non recurring agreements, and,  
    the provision of data transportation services, under recurring or multi-year contractually based agreements. Revenue is recognized when persuasive evidence of an agreement exists, the product or service
has been delivered, fees and prices are fixed and determinable, collectibility is probable and when
all other significant obligations have been fulfilled. We recognize revenue from product sales at the time of shipment and passage of title. We offer
customers the right to return products that do not function properly within a limited time after
delivery. We continuously monitor and track such product returns and record a provision for the
estimated amount of such future returns, based on historical experience and any notification
received of pending returns. While such returns have historically been within expectations and the
provisions established, we cannot guarantee that we will continue to experience the same return
rates that we have experienced in the past. Any significant increase in product failure rates and
the resulting credit returns could have a material adverse impact on operating results for the
period or periods in which such returns materialize. We recognize revenue from the provision of services at the time of the completion, delivery or
performance of the service. In the case of revenue derived from maintenance services we recognize
revenue ratably over the contract term. In certain instances we may under an appropriate agreement
advance charge for the service to be provided. In these instances we recognize the advance charge
as deferred revenue (classified as a liability) and release the revenue ratably over future periods
in accordance with the contract term as the service is completed, delivered or performed. Our arrangements do not generally include acceptance clauses. However, arrangements involving
multiple element service agreements include certain milestones and levels of certification,
acceptance occurs upon our certification of our completion of each of the various elements. We recognize revenue from the provision of its data transportation services when we perform
the services or process transactions in accordance with contractual performance standards. Revenue
is earned monthly on the basis of the contracted
monthly fee and an excess message fee charge, should it apply, that is volume based. In certain
instances we may under an appropriate agreement advance charge for the data transport service to be
provided. In these instances we recognize the advance charge (even if nonrefundable) as deferred
revenue (classified as a liability) and release the revenue over future periods in accordance with
the contract term as the data transport service is delivered or performed. 17.Foreign Currency Transactions While the majority of our transactions and the transactions of our subsidiaries occur in the
United States in U.S. dollars, a limited number are made in Canadian dollars, Australian dollars,
and British pounds sterling. Such transactions include recurring service revenues billed to
customers in Canada that are denominated in Canadian dollars, some transactions between Numerex
Corp. and its small subsidiary in Australia are denominated in Australian dollars and occasional
purchases from a supplier in England are made in British pounds. Gains and losses from these
transactions are included in income as they occur. For the year ended December 31, 2004 the
Company had a foreign currency loss of $52,000, a loss of $60,000 for the year ended December 31,
2003 and a loss of $49,000 for the year ended December 31, 2002. 42




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18.Research and
Development Research and development expenses are charged to operations in the period in which they are
incurred. 19.Provision for Warranty Claims Estimated warranty expense is charged over the warranty period of the warranted products.
Warranty expenses have not been significant. 20.Stock-Based Compensation Effective November 1, 1996, we adopted the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation.SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based compensation plans at fair value. We have elected to continue to
account for stock-based compensation in accordance with Accounting Principles Board
(2APB2) Opinion No. 25, Accounting For Stock Issued to Employees, and related
interpretations, as permitted by SFAS 123. Compensation expense for stock options is measured as
the excess, if any, of the quoted market price of our stock at the date of the grant over the
amount an employee must pay to acquire the stock (see Note K). Had compensation expense for our aforementioned stock option plans been determined based on
the fair value at the grant dates for awards under those plans under the provisions of SFAS No.
123, our net earnings (loss) and earnings (loss) per share would have been changed to the following
pro forma amounts: For the years ended December 31,(In thousands, except per share data)
    
    2004
    
    
    2003
    
    
    2002Net loss  as reported
    
    $
    (2,079
    )
    
    $
    (1,404
    )
    
    $
    (7,690
    )Less total stock-based compensation expense determined
under fair value based method for all awards
    
    
    511
    
    
    
    2,355
    
    
    
    1,168Pro forma net loss
    
    $
    (2,590
    )
    
    $
    (2,495
    )
    
    $
    (8,858
    )Basic loss per share:As reported
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.71
    )Pro forma
    
    $
    (0.24
    )
    
    $
    (0.23
    )
    
    $
    (0.82
    )Diluted loss per share:As reported
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.71
    )Pro forma
    
    $
    (0.24
    )
    
    $
    (0.23
    )
    
    $
    (0.82
    )
 The pro forma effect on net loss and loss per share for the years ended December 31,
2004, 2003, and 2002, respectively, by applying SFAS No. 123, may not be indicative of the pro
forma effect on net earnings (loss) in future years since SFAS No. 123 does not take into
consideration pro forma compensation expense related to awards made prior to November 1, 1995, and
since additional awards in future years are anticipated. 21.Earnings (Loss) Per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per
Share, which supersedes APB No. 15, Earnings Per Share, requires a dual presentation of basic and
diluted earnings per share as well as other disclosures. Basic earnings per share excludes the
dilutive impact of common stock equivalents and is computed by dividing net earnings (loss) by the
weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share includes the effect of potential dilution from the exercise
of outstanding common stock equivalents into common stock, using the treasury stock method at the
average market price of our common stock for the period. For the years ended December 31, 2004, 2003, and 2002, our potential common shares have an
anti-dilutive effect on earnings (loss) per share and, therefore, have not been used in determining
the total weighted average number of diluted common shares outstanding. Potential common shares
resulting from options and warrants that would be used to determine diluted earnings (loss) per
share were 200,710, 62,149 and 1,059,000 for the years ended December 31, 2004, 2003 and 43




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##### Table of Contents



2002, respectively. 22.Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement
(SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R)
requires that the compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will be measured based
on the fair value of the equity or liability instruments at the time of issuance. SFAS No. 123(R)
covers a wide range of share-based compensation arrangements including stock options, restricted
share plans, performance-based awards, share appreciation rights, and employee share purchase
plans. The effect of the standard will be to require entities to measure the cost of employee
services received in exchange for stock awards based on its grant-date fair value and to recognize
the cost over the period the employee is required to provide services for the award. The Company expects to adopt the provisions of SFAS No. 123(R) effective July 1, 2005, as
required, and plan to use the modified prospective transition method for our existing stock-based
compensation plans. Under the modified prospective transition method, the fair value-based
accounting method will be used for all employee awards granted, modified, or settled after the
adoption date. Compensation cost related to the non-vested portion of awards outstanding as of that
date will be based on the grant-date fair value of those awards as calculated under the original
provisions of SFAS No. 123. Under this method, it is estimated that the adoption of SFAS No. 123(R)
will result in approximately $150,000 of stock-based compensation expense in the second half of
2005 related to non-vested employee options issued prior to the adoption date. In November 2004, the FASB released revised SFAS No. 151, Inventory Costs  an amendment of
ARB No. 43 (SFAS No. 151). The new standard requires abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) to be recognized as current-period charges.
It also requires that allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. The requirements of the standard will be
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Although
we are still evaluating the impact that the adoption of SFAS No. 151 will have on our Consolidated
Financial Statements, we currently do not believe it will have a material impact as we have not
historically had any abnormally low levels of production, unplanned downtime, labor or material
shortages. 23.Reclassification Certain prior year amounts have been reclassified to conform to the current period
presentation. NOTE B  LIQUIDITY As disclosed in the financial statements, our operations generated cash in 2004. We continue
to add products and distribution channels for our products and we closely monitor our costs. Our
long term success will depend upon further reductions in operating losses and increased cash flow.
At December 31, 2003 the Company had a short-term principal balance due Cingular on its note
payable of $3,500,000. The proceeds from the Company Note were used to pay the $3,500,000 due
Cingular, financing costs, and to provide additional working capital. Under the financing
agreement on the Company Note, we only paid interest during the first six-months of 2004. We began
paying interest and principal on the Company Note during the second half of 2004. Laurus has the
option to convert the note payable into the Companys common stock if the stock price is greater
than $4.56. If the trading price of the Companys common stock exceeds certain thresholds, we have
the right to repay principal and interest due under the Company Note using the Companys common
stock. We believe that the combination of the convertible long-term debt, and reduction in operating
losses will be sufficient to meet our operating requirements through at least December 31, 2005.
This belief could be affected by future operating losses in excess of expectations, a material
adverse change in our operating business or a default under the Company Note. The Company is also
considering other sources of funding, including the sale of certain non-core assets. NOTE C  INVESTMENTS AND DIVESTITURES On September 15, 2003, we sold the Data1Source mobile messaging service through our
entity Data1Source LLC. The selling price was approximately $3,400,000 with $3,200,000 paid in
cash at closing and $200,000 due in six months, if certain criteria were met. The resulting gain
included in other income in the year ended December 31, 2003 was $1,712,000.
Cost associated with the transaction included the net book value of the assets sold, including
software and computer hardware, and transaction costs, including finders fees and legal costs. At
closing, certain obligations of ours were paid. These costs included the first payment due on the
note payable to Cingular (see below) of $1,500,000 and a $605,000 payoff of the lease obligation on
the software sold with Data1Source. Subsequent to the sale of Data1Source LLC, we used a 44




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##### Table of Contents



portion
of the proceeds to pay off the entire outstanding balance of $400,000 on our revolving line of
credit. The sale of Data1Source LLC did not meet the requirements to be considered a significant
disposition. In March 2004, we received the contingent payment on the sale of Data1Source LLC
because the criteria specified in the agreement had been met, accordingly we recognized an
additional $250,000 gain on the sale during the year ended December 31, 2004. On March 28, 2003, we acquired Cingulars interest in Cellemetry and the 625,000 shares of our
stock owned by Cingular for $5,000,000. Under the terms of the agreement, we agreed to pay
Cingular $1,500,000 by December 15, 2003, $2,000,000 by September 30, 2004 and $1,500,000 by
December 15, 2004. Our obligation was secured by the pledge of the stock of all our subsidiaries
(except Digilog) and a lien on the assets of all our subsidiaries (except Digilog) and accrued
interest at a rate of eight percent (8%) per annum. On September 15, 2003, we made the first
payment of $1,500,000 due Cingular on the note using a portion of the proceeds from the sale of
Data1Source LLC and paid the remaining balance on January 13, 2004 from a portion of the proceeds
from the term note payable to Laurus Master Fund, Ltd. NOTE D  COSTS RELATED TO NON-RECURRING ACQUISITION ACTIVITY AND EMPLOYEE SEPARATION COSTS For year ended December 31, 2002, we expensed $1,899,000 of costs relating to a
potential business acquisition. These costs were primarily legal and accounting services incurred
during due diligence. During the three-month period ended June 30, 2002, management determined that
consummation of the business acquisition was unlikely; as a result, the costs previously
capitalized up to June 30, 2002 were expensed. Of these costs, $172,000 was deferred in the year
ended December 31, 2001. The balance of $1,727,000 was incurred in the year ended December 31,
2002. NOTE E  INVENTORY Inventory consisted of the following: December 31,(In thousands)
    
    2004
    
    
    2003Raw materials
    
    $
    830
    
    
    $
    1,237Work-in-progress
    
    
    13
    
    
    
    8Finished goods
    
    
    718
    
    
    
    2,216Inventory, net
    
    $
    1,561
    
    
    $
    3,461
 NOTE F  PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 31,(In thousands)
    
    2004
    
    
    2003Leasehold improvements
    
    $
    449
    
    
    $
    431Plant, machinery and equipment
    
    
    7,327
    
    
    
    7,143Furniture, fixtures, fittings
    
    
    687
    
    
    
    674Total property and equipment
    
    
    8,463
    
    
    
    8,248Accumulated depreciation
    
    
    (7,623
    )
    
    
    (6,952
    )Property and equipment, net
    
    $
    840
    
    
    $
    1,296
 NOTE G  INCOME TAXES For the periods noted below, the provisions for income taxes consists of the following: 45




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##### Table of Contents



December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    9
    
    
    
    30
    
    
    
    Foreign
    
    
    (42
    )
    
    
    62
    
    
    
    96Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    $
    9
    
    
    $
    92
    
    
    $
    96
 Income taxes recorded by the Company differ from the amounts computed by applying the
statutory U.S. federal income tax rate to income before income taxes. The following schedule
reconciles income tax expense (benefit) at the statutory rate and the actual income tax expense as
reflected in the consolidated statements of operations for the respective periods: (in thousands) December 31,2004
    
    
    2003
    
    
    2002Income tax (benefit) computed at
U.S. corporate tax rate of 34%
    
    $
    (704
    )
    
    $
    (595
    )
    
    $
    (2,500
    )Adjustments attributable toValuation allowance
    
    
    677
    
    
    
    595
    
    
    
    2,500State Tax
    
    
    9
    
    
    
    30
    
    
    
    Foreign Tax
    
    
    21
    
    
    
    62
    
    
    
    96Non-deductible
Expenses
    
    
    
    
    
    
    
    
    
    
    $
    9
    
    
    $
    92
    
    
    $
    96
 The components of the Companys net deferred tax assets and liabilities are as follows: December 31,(in thousands)
    
    2004
    
    
    2003Non-Current deferred tax liability:Differences between book and
tax basis of property & equipment
    
    $
    (224
    )
    
    $
    (192
    )(224
    )
    
    
    (192
    )Current deferred tax assetInventories
    
    
    392
    
    
    
    354Accruals
    
    
    471
    
    
    
    116Other
    
    
    337
    
    
    
    3251,200
    
    
    
    795Non-Current deferred tax assetIntangibles
    
    
    185
    
    
    
    798Foreign net operating loss carry forward
    
    
    42
    
    
    
    Net operating loss carry forward
    
    
    9,051
    
    
    
    5,985Tax credit carry forward
    
    
    1,202
    
    
    
    1,89210,480
    
    
    
    8,675Net deferred tax asset
    
    
    11,456
    
    
    
    9,278Valuation allowance
    
    
    (11,456
    )
    
    
    (9,278
    )Total
    
    $
    
    
    
    $
    
 The change in the valuation
allowance is attributable to current year book/tax differences and
state net operating losses presented on a gross rather than net basis. 46




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##### Table of Contents



Net operating loss carry forwards
for available at December 31, 2004, expire as follows: (in thousands)
    
    
    
    
    
    Year ofAmount
    
    
    ExpirationFederal operating losses
    
    $
    17,846
    
    
    
    2006-2024State operating losses
    
    $
    55,040
    
    
    
    2007-2024Foreign
    
    $
    42
    
    
    
    N/A
 The
Company is entitled to the benefits of certain net operating loss
carry forwards for income tax purposes. Subject to applicable
regulations, net operating loss carry forwards may be offset against
income in future years to reduce the Companys future tax liability.
In March 2004, the Company filed a ruling request with the
Internal Revenue Service (IRS) for an extension of time to file an
election to carry forward some net operating losses that were in
question. In July 2004, the Company received permission to carry
the net operating losses forward. Therefore, the Company is entitled
to the benefits of the net operating loss carry forwards. The net
operating loss carry forwards  have been recorded as an
asset in the financial statements with a corresponding valuation
allowance as the Company believes it is more likely than not that the
asset will not be recognized in the carry forward period. NOTE H  SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES During the year ended
December 31, 2002 there were two customers whose revenues were
greater than 10% of the total Companys revenues. Customer A comprised 12% and Customer B
comprised 10% of the Companys total revenues. Company A had an accounts receivable balance of
$472,000 at December 31, 2002. Company B had no accounts receivable balance as of December 31,
2002. There were no such concentrations for the years ended December 31, 2003 and December 31,
2004. The company had one supplier from which the Companys purchases were approximately 14% of cost
of sales for the year ended December 31, 2004, 13% of cost of sales for the year ended December 31,
2003 and 28% of cost of sales for the year ended December 31, 2002. Our accounts payable to this
supplier was approximately $700,000 at December 31, 2004. The components included in the products
purchased from this supplier can be sourced from other suppliers. The company conducted business with one related party during the year ended December 31, 2004.
Mr. Ryan, a director on the Companys Board of Directors is also partner in the law firm of
Salisbury & Ryan LLP. Salisbury & Ryan LLP provided legal services to the Company in fiscal 2004
and will continue to provide such services during fiscal 2005. During fiscal 2004, Salisbury &
Ryan LLP charged the Company legal fees of approximately $104,000. Our accounts payable to
Salisbury & Ryan LLP was $27,000 at December 31, 2004. During fiscal 2003, Salisbury & Ryan LLP
charged us approximately $360,000. During fiscal 2002, Salisbury & Ryan LLP charged us
approximately $489,000. NOTE I  COMMITMENTS AND CONTINGENCIES Capital Leases We conduct a portion of our operations with leased equipment. For financial reporting
purposes, minimum lease rentals relating to the equipment have been capitalized. The related assets and obligations have been recorded using our incremental borrowing rate at
the inception of the lease. The leases expire at various dates through 2006. The following is a
schedule by years of future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 31, 2004 , (in
thousands). 2005
    
    $
    352006
    
    
    2Total minimum lease payments
    
    
    37Less amount representing interest
    
    
    (2
    )Present value of net minimum lease payments
    
    $
    35
 47




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##### Table of Contents



Operating Leases We
lease certain property and equipment under non-cancelable operating leases with initial
terms in excess of one year. Future minimum lease payments under such
non-cancelable operating
leases subsequent to December 31, 2004, (in thousands) are as follows: 2005
    
    $
    5982006
    
    
    6692007
    
    
    6772008
    
    
    6262009
    
    
    323Beyond 2009
    
    
    Total minimum lease payments
    
    $
    2,893
 Rent expense, including short-term leases, amounted to approximately $777,000, $759,000
and $689,000 in the years ended December 31, 2004, 2003, and 2002 respectively. NOTE J  BENEFIT PLANS Savings and Investment Plan We sponsor a 401k savings and investment plan, a plan that covers all eligible employees of
Numerex Corp and its subsidiaries. Employees are eligible for participation on the enrollment date
following six months of service. We contribute an amount equal to 50% of the portion of the
employees elective deferral contribution that do not exceed 6% of the employees total
compensation for each payroll period in which an elective deferral is
made. Our contribution is made in cash on a monthly basis. Our matching contributions are vested over a three year period at
a rate of 33% per year. Approximately $82,000, $44,000 and $143,000 were expensed for the years
ended December 31, 2004, 2003 and 2002. Employee Stock Purchase Plan All employees of Numerex and its subsidiaries are entitled to participate in a discounted
Employee Stock Purchase Plan. This plan allows employees to elect to have an amount withheld from
their pay that is held in an account for the purchase of the Companys common stock. The plan has
two measurement dates per year  July 1 and January 1, which is used to determine the stock price
at a 15% discount and number of shares issued to the employee. There are a total of 500,000 shares
authorized of which 1,675 and 897 were issued in the year ended December 31, 2004 and December 31,
2003 at an average share price of $2.60. We had 497,428 shares available to be issued for this
plan at December 31, 2004. NOTE K  STOCK OPTION PLANS We have a Long-Term Incentive Plan (the 1999 Plan), which provides for the granting
of incentive stock options and nonqualified stock options to employees, officers, directors and
consultants of Numerex and its subsidiaries at prices, which represent the closing market price at
the grant dates. The aggregate number of shares, which may be issued upon the exercise of options
under the 1999 Plan, is 1,500,000 shares of Class A Common Stock. The 1999 Plan replaced the
Amended and Restated 1994 Employee Stock Option Plan (the 1994 Plan) effective for options
granted as of and from October 25, 1999. Options issued under the 1999 Plan typically vest ratably over a four-year period. Options issued under the 1994 Plan typically vest over a five-year period. Certain options
issued under the 1994 Plan have cliff-vesting terms at the end of a five-year period and terms
which provide for the acceleration of vesting upon the attainment of specified market prices for
our common stock for a period of 60 days. In the event of a change in control as defined in the 1999 and 1994 Plans, respectively, all
outstanding options become fully vested and are subject to exercise. Incentive stock options and nonqualified stock options granted under the 1999 and 1994 Plans,
respectively, expire 10 years after the grant date unless an option holders employment is
terminated. Under such circumstances, the options typically expire three months from the date of
employment termination. 48




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##### Table of Contents



At December 31, 2004, 2003, and 2002, 2,170,701, 2,070,701 and 1,741,701 respectively, ratably
vesting common share options under the 1999 and 1994 Plans, respectively, have been granted at
prices ranging between $1.00 and $10.25. Of these options 381,630 have been exercised, 1,059,006
have either expired or been cancelled, 337,288 are currently exercisable, and the remaining options
will become exercisable in 2005 through 2008. At December 31, 2004, 2003, and 2002, 685,000, 685,000, and 685,000 respectively,
cliff-vesting options under the 1994 Plan have been granted at prices ranging between $4.44 and
$7.13. Of these options 360,000 have been exercised, 217,500 have either expired and been cancelled
or been cancelled, 107,500 are currently exercisable. We have a Non-Employee Director Stock Option Plan (the Director Plan), which provides for
the granting of stock options to non-employee members of our Board of Directors at the closing
market price at the grant dates. On April 1, 1996, and each anniversary date thereafter, each
non-employee director, who has served as a director for at least one year, will receive an option
to purchase 2,500 shares of our common stock. On December 5, 1997, the Director Plan was amended,
and on February 26, 1998, shareholders approved an increase to 4,000 the annual number of shares
that each director would receive. The aggregate number of shares, which may be issued upon the
exercise of options granted under the Director Plan, is 62,500 shares of common stock. Options
issued under the Director Plan fully vest one year after the grant date. In the event of a change in control as defined in the Director Plan, all outstanding options
become fully vested and are subject to exercise. Options granted under the Director Plan expire 10
years after the grant date, unless an option holder ceases to be a director of the Company. Under
such circumstances, the options expire three months from the date that the option holder ceases to
be a director. At December 31, 2004, 2003, and 2002, 64,700, 64,700 and 60,700 respectively, options under
the Director Plan have been granted to directors of the Company at prices ranging between $3.38 and
$12.94. Of these options 9,000 have been exercised, 55,700 are currently exercisable. At December 31, 2004, 2003, and 2002, options to purchase 193,750, 193,750, and 193,750,
respectively, of Class A Common Stock at prices ranging from $3.50 to $10.00 were granted as
nonqualified stock options in connection with services rendered to Numerex. Of these options
18,750 have either expired or have been cancelled and 162,500 are currently exercisable and the
remaining options will become exercisable in 2005. The fair value of each option on the date of grant for 2004, 2003, and 2002 was estimated
using the Black-Scholes options pricing model with the following weighted average assumptions: no
dividend yield for all years; expected volatility of 77% for 2004, 137% for 2003 and 143% for 2002;
risk-free interest rate of 3.69% for 2004, 3.79% for 2003 and 3.35% for 2002; and expected option
lives of 4.2 years for 2004, 6.9 year for 2003 and 7.3 years for 2002. The exercise price for 1,404,515 options outstanding at December 31, 2004, is between $1.00
and $12.94. Such options will expire on average in 6.9 years. The weighted average fair value of
options granted during 2004, 2003, and 2002 was $5.04, $2.30 and $5.71, respectively, on the date
of grant. The following table summarizes the activity of the stock option plans as of and for the years
ended December 31, 2004, 2003 and 2002. For the years ended December 31,FYE 12-31-04
    
    
    FYE 12-31-03
    
    
    FYE 12-31-02Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Ex. Price
    
    
    Shares
    
    
    Ex. Price
    
    
    Shares
    
    
    Ex. PriceOutstanding,
beginning of year
    
    
    1,200,515
    
    
    $
    5.21
    
    
    
    1,058,873
    
    
    $
    6.17
    
    
    
    1,253,455
    
    
    $
    5.91Options granted
    
    
    458,250
    
    
    
    4.47
    
    
    
    333,000
    
    
    
    2.45
    
    
    
    154,500
    
    
    
    6.00Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (254,832
    )
    
    
    4.56Options cancelled
    
    
    (254,250
    )
    
    
    5.86
    
    
    
    (191,358
    )
    
    
    5.67
    
    
    
    (94,250
    )
    
    
    6.87Outstanding, end of year
    
    
    1,404,515
    
    
    $
    4.85
    
    
    
    1,200,515
    
    

    $
    5.21
    
    
    
    1,058,873
    
    
    $
    6.18Exercisable, end of year
    
    
    662,988
    
    
    $
    5.83
    
    
    
    616,640
    
    
    $
    6.18
    
    
    
    525,048
    
    
    $
    5.80
 49




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##### Table of Contents



NOTE L  GEOGRAPHIC INFORMATION Segment Information Numerex is a technology company comprised of operating subsidiaries that develop and
market a wide range of communications products and services. Our primary focus is wireless data
communications utilizing proprietary network technologies. The four reporting segments are
Wireless Data Communications, which is made up of all of our wireless machine-to-machine
communications products and services, Digital Multimedia and Networking, which includes our
networking products and services and video conferencing products, Wireline, which is our wire-line
security detection products and services, and unallocated corporate expenses. Wireless Data Segment The Wireless Data segment is a solutions provider of wireless machine-to machine (M2M)
communications, delivering comprehensive wireless solutions over the companys proprietary wireless
data network, CellemetryXG. The Companys wireless data network is dedicated to the delivery of
M2M communications throughout the United States, Canada, Mexico, the Caribbean and much of Latin
America. M2M is defined as electronic data communications between people, devices, and systems that
turn data into information that companies can act upon. The Wireless Data segment develops, operates, markets, and sells products and services
CellemetryXG, Cellemetry®, Uplink, MobileGuardian, and VendView brands, as well as distribution
through Value Added Resellers (VARs) who have integrated the CellemetryXG Network and components
into their own offerings. Digital Multimedia and Networking Segment The Digital Multimedia and Networking segment systems permit network operators to provide a
wide range of video and data services, including Internet access, high-speed data transfer, and
interactive video conferencing and voice service. The use of fiber optics in the broadband
transmission network provides improved signal quality for long-distance transmission, increased
bandwidth, immunity to interfering signals, and significant cost savings and reliability over
coaxial cable-based network technologies. The Company markets its digital multimedia products and
services through a combination of system integrators and VARs. In addition, Digital Multimedia and Networking segment provides products under the Digilog
brand that assist both wireline and wireless carriers in the engineering, installation, and
servicing of this new telecommunications control network. These telecommunications network
operational support systems and services include system integration (rack and stack) and
installation, Test Access, and Interconnecting Devices. Wireline Data Communications Segment The Wireline Data Communications segments licensed technology creates a Derived Channel on an
existing telephone line by using an inaudible frequency below the voice communications spectrum for
data transmission. This creates a two-way communication system that continuously monitors the
integrity of a users telephone line and security system. Derived Channel operates over a regular
voice telephone line with no interference, whether or not the telephone is in use. The Company
provides this service through its DCX Systems and DCX Australia subsidiaries. Financial information for each reportable segment is as follows as of and for the years ended
December 31, 2004, 2003 and 2002: 50




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##### Table of Contents



Year Ended December 31, 2004Wireless Data
    
    
    Digital MultimediaCommunications
    
    
    & Networking
    
    
    Wireline
    
    
    TotalRevenues from external customers
    
    $
    14,600
    
    
    $
    7,402
    
    
    $
    991
    
    
    $
    22,993Interest income
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Interest expense
    
    
    4
    
    
    
    30
    
    
    
    
    
    
    
    34Depreciation and amortization
    
    
    1,312
    
    
    
    495
    
    
    
    120
    
    
    
    1,927Income tax expense
    
    
    4
    
    
    
    2
    
    
    
    (6
    )
    
    
    0Gain on sale of assets
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Segment profit/(loss) before tax
    
    
    (1,862
    )
    
    
    402
    
    
    
    77
    
    
    
    (1,383
    )Segment assets
    
    
    23,954
    
    
    
    6,815
    
    
    
    1,153
    
    
    
    31,922
 Year Ended December 31, 2003Wireless Data
    
    
    Digital MultimediaCommunications
    
    
    & Networking
    
    
    Wireline
    
    
    TotalRevenues from external customers
    
    $
    12,687
    
    
    $
    6,164
    
    
    $
    1,306
    
    
    $
    20,157Interest income
    
    
    3
    
    
    
    11
    
    
    
    2
    
    
    
    16Interest expense
    
    
    38
    
    
    
    86
    
    
    
    
    
    
    
    124Depreciation and amortization
    
    
    1,709
    
    
    
    579
    
    
    
    107
    
    
    
    2,395Income tax expense
    
    
    23
    
    
    
    3
    
    
    
    66
    
    
    
    92Gain on sale of assets
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    1,712Segment profit/(loss) before tax
    
    
    (1,947
    )
    
    
    320
    
    
    
    468
    
    
    
    (1,159
    )Segment assets
    
    
    21,763
    
    
    
    9,514
    
    
    
    1,562
    
    
    
    32,839
 Year Ended December 31, 2002Wireless Data
    
    
    Digital MultimediaCommunications
    
    
    & Networking
    
    
    Wireline
    
    
    TotalRevenues from external customers
    
    $
    14,209
    
    
    $
    9,354
    
    
    $
    938
    
    
    $
    24,501Interest income
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    6Interest expense
    
    
    93
    
    
    
    138
    
    
    
    
    
    
    
    231Depreciation and amortization
    
    
    1,768
    
    
    
    618
    
    
    
    18
    
    
    
    2,404Income tax expense
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Segment profit/(loss) before tax
    
    
    (7,125
    )
    
    
    (1,057
    )
    
    
    786
    
    
    
    (7,396
    )Segment assets
    
    
    22,042
    
    
    
    10,927
    
    
    
    1,088
    
    
    
    34,057
 51




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##### Table of Contents



Year ended December 31,Net Loss
    
    2004
    
    
    2003
    
    
    2002Total loss for reportable segments
    
    $
    (1,383
    )
    
    $
    (1,159
    )
    
    $
    (7,396
    )Unallocated corporate expenses
    
    
    (696
    )
    
    
    (245
    )
    
    
    (380
    )Minority interest share of losses
    
    
    
    
    
    
    
    
    
    
    326Net loss
    
    $
    (2,079
    )
    
    $
    (1,404
    )
    
    $
    (7,450
    )
 Year ended December 31,Assets
    
    2004
    
    
    2003
    
    
    2002Total assets for reportable segments
    
    $
    31,922
    
    
    $
    32,839
    
    
    $
    34,057Elimination of receivables from corporate
    
    
    
    
    
    
    (358
    )
    
    
    (338
    )Other unallocated assets
    
    
    690
    
    
    
    1,489
    
    
    
    3,392Consolidated total assets
    
    $
    32,612
    
    
    $
    33,970
    
    
    $
    37,111
 Segment
    
    
    Unallocated
    
    
    ConsolidatedOther Significant Items
    
    Totals
    
    
    Corporate
    
    
    TotalsYear ended December 31, 2004Interest income
    
    $
    2
    
    
    $
    1
    
    
    $
    3Interest expense
    
    
    34
    
    
    
    606
    
    
    
    640Net interest expense
    
    
    32
    
    
    
    605
    
    
    
    637Depreciation and amortization
    
    
    1,927
    
    
    
    121
    
    
    
    2,048Income tax expense
    
    
    
    
    
    
    9
    
    
    
    9Gain on sale of assets
    
    
    250
    
    
    
    
    
    
    
    250Year ended December 31, 2003Interest income
    
    
    16
    
    
    
    17
    
    
    
    33Interest expense
    
    
    124
    
    
    
    263
    
    
    
    387Net interest expense
    
    
    108
    
    
    
    246
    
    
    
    354Depreciation and amortization
    
    
    2,395
    
    
    
    175
    
    
    
    2,570Income tax expense
    
    
    92
    
    
    
    
    
    
    
    92Gain on sale of assets
    
    
    1,712
    
    
    
    
    
    
    
    1,712Year ended December 31, 2002Interest income
    
    
    6
    
    
    
    39
    
    
    
    45Interest expense
    
    
    231
    
    
    
    13
    
    
    
    244Net interest expense
    
    
    (225
    )
    
    
    26
    
    
    
    (199
    )Depreciation and amortization
    
    
    2,404
    
    
    
    108
    
    
    
    2,512Income tax expense
    
    
    96
    
    
    
    
    
    
    
    96
 52




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##### Table of Contents



Information about the Companys operations in different geographic areas for the years ended
December 31, 2004, 2003, and 2002 respectively, are as follows: (In thousands) U.S.
    
    
    Australia
    
    
    ConsolidatedNet Sales2004 - Year
    
    $
    22,588
    
    
    $
    405
    
    
    $
    22,9932003 - Year
    
    
    19,513
    
    
    
    644
    
    
    
    20,1572002 - Year
    
    
    24,213
    
    
    
    288
    
    
    
    24,501Operating profit/(loss)2004 - Year
    
    
    (1,496
    )
    
    
    (135
    )
    
    
    (1,631
    )2003 - Year
    
    
    (2,911
    )
    
    
    185
    
    
    
    (2,726
    )2002 - Year
    
    
    (7,553
    )
    
    
    85
    
    
    
    (7,468
    )Identifiable assets2004 - Year
    
    
    31,656
    
    
    
    956
    
    
    
    32,6122003 - Year
    
    
    32,757
    
    
    
    1,213
    
    
    
    33,9702002 - Year
    
    
    37,057
    
    
    
    54
    
    
    
    37,111
 NOTE M  SUBSEQUENT EVENTS Effective as of January 28, 2005, Numerex Corp. completed a private placement to Laurus
Master Fund, Ltd. (Laurus) of (i) a Convertible Term Note in the principal amount of $1,500,000
(the Company Note), and (ii) a Common Stock Purchase Warrant (the Warrant and together with the
Company Note, the Securities) to purchase up to 100,000 shares of our Class A common stock, no
par value per share (Common Stock). The Company Note has a term of three years and is secured by substantially all of our assets
and the assets of our U.S. subsidiaries and guarantees by each of our U.S. subsidiaries. The same
collateral secures the Convertible Term Note in the principal amount of $4,500,000 sold to Laurus
in January 2004. Interest accrues on the Company Note at an annual rate of 8%, and interest and principal may
be paid by us in either cash or in Common Stock. We may only use Common Stock to make such payment
if the price per share of our Common Stock is greater than $5.84. However, the entire principal
amount of the Company Note, and any accrued interest thereon, may be converted by Laurus into our
Common Stock at a price equal to $5.31 per share (the Fixed Conversion Price), subject to the
limitations in the paragraph below. If the amount due and payable is paid by us using Common Stock,
the number of shares to be issued to Laurus by us will be determined based upon the Fixed
Conversion Price. Otherwise, cash payments of interest and principal due on the Company Note must
be paid at 102% of the amount then payable. During the six-month period following the effectiveness of a registration statement (as
discussed below) and if no Event of Default (as defined in the terms of the Company Note) has
occurred, Laurus may not voluntarily convert, on a monthly basis, a portion of the Company Note
that exceeds 10% of that number of our shares traded in the one-month period preceding a voluntary
conversion by Laurus. The Warrant is exercisable by Laurus until January 28, 2012, and has two separate pricing
tranches. The first pricing tranche is exercisable for up to 50,000 shares of Common Stock at a
price of $5.51 per share. The second pricing tranche is exercisable for up to 50,000 shares of
Common Stock at a price of $5.72 per share. We have also agreed to register all of the Common Stock issuable to Laurus pursuant to
the Securities, as set forth in a Registration Rights Agreement between Numerex and Laurus. In the
event that the Registration Statement (S-3) has not been declared effective by the SEC by August
28, 2005, then on August 28, 2005, and for each thirty (30) day period thereafter (or portion
thereof), the number of shares of Common Stock represented hereby shall be increased by 5,000
shares (at an exercise price of $5.99), until the earlier of (i) the day on which the Registration
Statement is declared effective, and (ii) January 28, 2006. 53




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Report of Independent Registered Public Accounting Firm To the Shareholders and Board of
Directors of Numerex Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of Numerex Corp. and subsidiaries
(the Company) as of December 31, 2004, and 2003 and the related consolidated statements of
operations and comprehensive income, shareholders equity and cash flows for each of the three
years ended December 31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Numerex Corp. and subsidiaries as of
December 31, 2004 and 2003 and the results of their operations and their cash flows for each of the
three years ended December 31, 2004, in conformity with accounting principles generally accepted in
the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The Schedule II for the years ended December 31, 2004, 2003
and 2002, listed in the Index at Item 15(a) is presented for purposes of additional analysis and is
not a required part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic consolidated financial
statements taken as a whole. /s/ Grant Thornton LLP Atlanta, Georgia
February 17, 2005 54




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 
 Item 9A. Controls and Procedures. Under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that these disclosure controls and procedures are effective as of
December 31, 2004. No changes were made in the Companys internal control over financial reporting
during the year ended December 31, 2004 that have materially affected, or are reasonably likely to
materially affect, the internal control over financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. Incorporated by reference from the Companys Proxy Statement relating to the 2005 Annual
Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. Also
incorporated by reference is the information under the caption Section 16(a) Beneficial Ownership
Reporting Compliance. 
 Item 11. Executive Compensation. Incorporated by reference from the Companys Proxy Statement relating to the 2005
Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference from the Companys Proxy Statement relating to the 2005 Annual
Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. 
 Item 13. Certain Relationships and Related Transactions. Incorporated by reference from the Companys Proxy Statement relating to the 2005 Annual
Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. 
 Item 14. Principal Accounting Fees and Services Incorporated by reference from the Companys Proxy Statement relating to the 2005 Annual
Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. During the year ended December 31, 2004 the Companys audit committee engaged its auditors
(Grant Thornton LLP) for non-audit services related to responding to SEC comment letters. 55




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement
Schedules (a) Documents filed as part of this report:  1.
    Consolidated Financial Statements; All financial statements of the Company as
described in Item I of this report onForm 10-K.2.
    Financial statement schedule included in Part IV of this Form: PageReport of Independent Registered Public Accounting Firm
    
    
    61Schedule II  Valuation and qualifying accounts
    
    
    62
  3.
    List of Exhibits filed pursuant to Item 601 of Regulation S-K. The following
exhibits are incorporated by reference herein, or are being filed herewith:  2.11 Securities Purchase Agreement among Numerex Corp., Broadband Networks,
Inc. and the Shareholders of Broadband Networks, Inc. dated February 21, 19972.22 Shareholders Agreement among Broadband Networks, Inc., Numerex Corp.
and the Shareholders of Broadband Networks, Inc. dated February 21, 19972.33 Numerex Corp. and British Telecommunications plc, Agreement Relating to
the sale and purchase of the whole of the issued shares capital of Bronzebase
Limited3.14 Amended and Restated Articles of Incorporation of the Company, as
amended3.24 Bylaws of the Company4.110 Securities Purchase
Agreement, dated Jan. 28, 2005, by and between
the Company and Laurus4.210 Convertible Term
Note, dated January 28, 2005, by and between the
Company and Laurus4.310 Common Stock
Purchase Warrant, dated January 28, 2005, by and between
the Company and Laurus4.410 Security Agreement,
dated January 28, 2005, by and among the Company,
its U.S. subsidiaries, and Laurus4.510 Guaranty, dated
January 28, 2005, entered into by each of the
Companys U.S. Subsidiaries4.610 Registration
Rights Agreement, dated January 28, 2005, by and between
the Company and Laurus10.14 The Numerex Corp. Savings and Profit Sharing Plan  Summary Plan
Description (Management Compensation Plan)10.25 Amended and Restated 1994 Employee Stock Option Plan (Management
Compensation Plan)10.36 Amended and Restated Stock Option Plan for Non-Employee Directors
(Management Compensation Plan)10.47 Registration Agreement between the Company and Dominion dated July 13,
199210.56 Letter Agreement between the Company and Dominion (now Gwynedd) dated
October 25, 1994 re: designation of director10.64 Office Space Lease Agreement between the Company and LBA Associates
dated May 31, 199510.7 10 1999 Long-Term Incentive Plan. (Management Compensation Plan).11 Computation of Earnings Per Share 56




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##### Table of Contents



13
    Pursuant to Note 2 of Instruction G (2) to Form 10-K, in response to
Item 6. Selected Financial Data, Selected Consolidated Financial Data and in
response to Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations, Managements Discussion and Analysis of Financial
Condition and Results of Operations are incorporated by reference from the
Companys 2004 Annual Report to Shareholders and are being filed in electronic
format. No other sections of the Companys 2004 Annual Report to Shareholders
shall be deemed filed as part of this filing21
    Subsidiaries of Numerex Corp.23
    Consent of Grant Thornton LLP.31.1
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    Rule 13a-14(b) Certification of Chief Executive Officer32.2
    Rule 13a-14(b) Certification of Chief Financial Officer 1
    
    Incorporated by reference to the Exhibits filed with the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on March 5, 1997 (File No. 0-22920)2
    
    Incorporated by reference to the Exhibits filed with the Companys Annual Report on
Form 10-K filed with the Securities and Exchange Commission on January 31, 2000 for the year
ended October 31, 1997 (File No. 0-22920)3
    
    Incorporated by reference to the Exhibits filed with the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 26, 1999 (File No.
0-22920)4
    
    Incorporated by reference to the Exhibits filed with the Companys Annual Report on
Form 10-K filed with the Securities and Exchange Commission for the year ended October 31,
1995 (File No. 0-22920)5
    
    Incorporated by reference to the Exhibits filed with the Companys Annual Report on
Form 10-K filed with the Securities and Exchange Commission on January 27, 1997 for the year
ended October 31, 1996 (File No. 0-22920)6
    
    Incorporated by reference to the Exhibits filed with the Companys Registration
Statement on Form S-1 filed with the Securities and Exchange Commission (File No. 33-89794)7
    
    Incorporated by reference to the Exhibit filed with the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on July 20, 1994
(File No. 0-22920)8
    
    Incorporated by reference to the Exhibits filed with the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on February 26, 1998 (File No.
0-22920)9
    
    Incorporated by reference to the Exhibits filed with the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 1, 1998 (File No. 0-22920)10
    
    Incorporated by reference to the Exhibits filed with the Companys Current Report on Form
8-K Filed with the Securities and Exchange Commission on
February 3, 2005 (File No. 0-22920)
 57




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SCHEDULE II NUMEREX CORP. VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2004, 2003, 2002
(in thousands) Balance at
    
    
    Additionsbeginning of
    
    
    charged to
    
    
    
    
    
    
    Balance at endDescription
    
    Period
    
    
    expense
    
    
    Deductions
    
    
    of PeriodYear ended December 31, 2004:Accounts receivableAllowance for uncollectible accounts
    
    
    609
    
    
    
    475
    
    
    
    
    
    
    
    1,084InventoryAllowance for obsolescence
    
    
    681
    
    
    
    286
    
    
    
    
    
    
    
    967Year ended December 31, 2003:Accounts receivableAllowance for uncollectible accounts
    
    
    1,275
    
    
    
    551
    
    
    
    (1,217)a
    
    
    
    609InventoryAllowance for obsolescence
    
    
    776
    
    
    
    272
    
    
    
    (367)b
    
    
    
    681Year ended December 31, 2002:Accounts receivableAllowance for uncollectible accounts
    
    
    534
    
    
    
    1,837
    c
    
    
    (1,096)a
    
    
    
    1,275InventoryAllowance for obsolescence
    
    
    931
    
    
    
    358
    
    
    
    (513)b
    
    
    
    776
   (a)
    
    Amounts written off as uncollectible, net of recoveries.(b)
    
    Inventory physically disposed.(c)
    
    The Company experienced a significant increase in
bad expense due to an increase in the number of customers not being able to pay as a result of
significant weakening of economic conditions in the communications industry. 58




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized. NUMEREX CORP. Date: March 23, 2005
    
    By:  /s/Stratton J. NicolaidesStratton J. Nicolaides, Chairman andChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K
has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated. Signature
    
    
    
    Capacity
    
    Date/s/ Stratton J. Nicolaides
 Stratton
J. Nicolaides
    
    
    
    Chairman and
Chief Executive Officer
    
    March 23, 2005/s/ Brian C. Beazer
 Brian
C. Beazer
    
    
    
    Director
    
    March 23, 2005/s/ George Benson
 George
Benson
    
    
    
    Director
    
    March 23, 2005/s/ Matthew J. Flanigan
 Matthew
J. Flanigan
    
    
    
    Director
    
    March 23, 2005/s/ Allan H. Liu
 Allan
H. Liu
    
    
    
    Director
    
    March 23, 2005/s/ John G. Raos
 John
G. Raos
    
    
    
    Director
    
    March 23, 2005/s/ Andrew J. Ryan
 Andrew
J. Ryan
    
    
    
    Director
    
    March 23, 2005/s/ Nicholas Davidge
 Nicholas
Davidge
    
    
    
    Director
    
    March 23, 2005/s/ Alan B. Catherall
 Alan
B. Catherall
    
    
    
    Executive Vice President,
Chief Financial Officer,Principal Financial and
    
    March 23, 2005Accounting Officer
 59