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


FORM 10-K

(Mark One)[ X ]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year ended December 31, 2003or[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For 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 200
Atlanta, Georgia 30339-2119(Address of principal executive offices)Registrants Telephone Number, Including Area Code: (770) 693-5950Securities 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.

Yes  [ X ]    No  [  ]

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.  [  ]

Indicate by check mark whether the registration is an accelerated filer
(as defined in Exchange Act Rule 12b-2).

Yes  [X]    No  [  ]

The aggregate market value of voting and non-voting stock held by
non-affiliates of the Registrant as of June 30, 2003 is $30,629,0001

The number of shares outstanding of the issuers Class A Common Stock, no
par value as of March 4, 2004: 10,791,986





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DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Companys Annual Report to Shareholders for the
year ended December 31, 2003, 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 2003 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
    
    The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Companys Common Stock outstanding, reduced by the
amount of Common Stock held by officers, directors and shareholders owning
10% or more of the Companys Common Stock, multiplied by $2.84, the last
reported sale price for the Companys Common Stock on June 30, 2003. The
information provided shall in no way be construed as an admission that any
officer, director or 10% shareholder in the Company may be deemed an
affiliate of the Company or that such person is the beneficial owner of
the shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission. PRELIMINARY NOTE Unless otherwise indicated or the context otherwise requires: (i) the
Company refers to Numerex Corp. and its wholly-owned and controlled
subsidiaries, (ii) all references to Common Stock in this report refer to the
Companys Class A Common Stock and (iii) all references in this report to
fiscal years are to the Companys fiscal years ended December 31, 2003, 2002,
and 2001 respectively.




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TABLE OF CONTENTS Page(i
    )PART IItem 1.
    
    Business
    
    
    1Item 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 and Related Shareholder Matters
    
    
    16Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 8.
    
    Financial Statements and Supplementary Data
    
    
    18Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial DisclosureItem 9A.
    
    Controls and Procedures
    
    
    18PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    18Item 11.
    
    Executive Compensation
    
    
    18Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    18Item 13.
    
    Certain Relationships and Related Transactions
    
    
    18Item 14.
    
    Principal Accounting Fees and Services
    
    
    19PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    20List of Financial Statements
    
    
    20List of Exhibits
    
    
    20Signatures
    
    
    23Index to Financial Statements
    
    
    F-1EX-11 COMPUTATION OF EARNINGS PER SHAREEX-21 SUBSIDIARIES OF NUMEREX CORP.EX-23 CONSENT OF GRANT THORNTON LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  (i)




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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. (the Company) is a communications technology business
comprised of operating subsidiaries that primarily utilize existing wireless or
cellular, Internet and cable infrastructure thereby enabling network access and
information management through the deployment of proprietary software and
technology which provides an entrance to and exit from a communications
network. Such technology is referred to as a gateway in the communications
industry. The Company primarily markets and sells products and services in
wireless data communications through Cellemetry®, Uplink, MobileGuardian,
VendView, and digital multimedia through PowerPlay and IPContact. These
products and 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, the Company offers wireline alarm security
products and services, as well as telecommunications network support. The Companys vision is to be recognized as a leading enabler of
interactive communication products and services for the virtual marketplace,
which we intend to achieve by:  
    
    Adding value to the existing infrastructure of public networks such
as the internet, cable or cellular networks through the deployment of
our proprietary software and gateway technology,
    
    Enabling public network access by developing applications to assist
businesses in a variety of industries in monitoring their assets,
    
    Designing, developing and marketing cost effective data and video
products and services which provide interactive communications or the
real-time, accurate, two-way transfer of video or data, and
    
    Virtually linking people to other people or to their business devices and assets,
    
    Focusing on a financial model of recurring service and software revenue. 1




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Background The Companys business began in July 1992 with the acquisition of
technology that enables data transmission over an existing telephone line
without interfering with voice communications over the same telephone line
(Derived Channel). The Company expanded its business primarily through the
acquisition of complementary businesses, product lines, and proprietary
technologies. In November 1999, the Company sold its Derived Channel
technology to British Telecommunications plc (BT). In May 1998, the Company, BellSouth Wireless and BellSouth Corporation,
now Cingular, completed a transaction whereby Cellemetry LLC, a joint venture
between the Company 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, Dutch Antilles and
Puerto Rico, with plans for further expansion in other international markets.
On March 28, 2003, the Company acquired Cingulars interest in Cellemetry LLC
(the Cellemetry Transaction). MACHINE to MACHINE COMMUNICATIONS Wireless Data Communications
Products and Services Cellemetry® The term Cellemetry is used when referring to the technology developed
and offered by Cellemetry LLC. Cellemetry is a means of wireless data
communications that taps the unused capacity of the cellular telephone
networks overhead control channels and the SS7/IS-41 network protocol to
deliver two-way short data messages, without affecting the voice channels of
the cellular network. In other words, Cellemetry takes advantage of the
existing cellular telephone network without affecting cellular telephone calls
or operation, as further explained below. Using Cellemetry technology, remote equipment or vehicles can (i) be
contacted, (ii) 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. That means, for example, 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. The phrase Cellemetry Data Service refers to wireless machine to machine
communication (telemetry) or remote monitoring over the cellular telephone
network. It provides a means of sending short, telemetry-like messages over
the cellular telephone system in a manner that is virtually transparent to the
cellular operator. Cellemetry Data Service does not use or impact 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, 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 Cellemetry-compatible applications and equipment across urban, rural,
and industrial markets. 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 impacting 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 is required by the existing cellular system, even during the
busiest times of the day. 2




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The 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) which links all of the
cellular systems together across Canada, Mexico and the U.S. and parts of South
and Central America. This provides the customer with ubiquitous coverage. Cellemetry radios behave like roaming telephones except the cellular
telephone switchs database is set to route the registrations (MIN and ESN
data) to the Cellemetry Service Bureau, (the Service Bureau) connected to the
same intra-cellular network. The MIN serves to identify the Cellemetry radio
and the ESN is the data field, which contains the telemetry message. In
addition, Cellemetrys centralized Service Bureau adds a timestamp and the
SS7/IS41 network adds point of origin data. The centralized 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. Uplink Uplink designs, develops, markets and sells interface and routing
technologies that use Cellemetry® for security alarm communications
applications. Because Cellemetry utilizes the existing cellular network and
relatively inexpensive radio transmitters, Cellemetry applications can quickly
and economically monitor and control equipment at remote locations. Uplink markets wireless alarm communication equipment, which is installed
at customer premises, administers and offers air time packages on a consistent
price basis, and provides technical services that route alarm signals from the
cellular networks to any Alarm Receiving Center (ARC) central station in North
America without requiring either modifications to the ARCs central stations
receiving equipment or dedicated receiving equipment. The Company believes that Uplinks products and airtime communications
charges are competitively priced. As a result of combining Cellemetry
technology with low cost communication equipment and routing technologies,
significant improvements in security communication services are now available
to the industry. The Company also believes that Cellemetry and Derived Channel technology,
as security alarm communications platforms, may be complementary. As a result,
the technologies can be implemented independently or collectively. MobileGuardian MobileGuardian, a product and service offering, is a Web-based vehicle
location and recovery product that combines the accuracy of GPS (Global
Positioning System) and Cellemetry wireless data communications technology.
The Companys sales channel for MobileGuardian is automotive dealerships, where
the wireless device is professionally installed in the owners vehicle. Once
the device is installed and service has been initiated, the vehicle owner
accesses the secure MobileGuardian Web site using their selected login and
password to locate or recover their vehicle. If the cars alarm system is triggered, a message is sent to the
MobileGuardian device located in the vehicle, which will then wirelessly
transmit a theft alert notification over the Cellemetry wireless data
communications network to the vehicles owner via their 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. Owners may then remotely disable
the vehicle at the touch of a button and prevent it from being re-started while
they call the police authorities to report the theft and give them the location
of the vehicle. This improves the prospects of vehicle recovery and the time
frames in which the recovery occurs. In addition, the vehicles owner can
utilize the MobileGuardian system for purposes of simply tracking the vehicle,
without the alarm system triggering. The 3




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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
their vehicle at anytime. The Company believes MobileGuardians attractive pricing and valued added
features such as ubiquitous coverage, immediate notification on car alarm
activation and vehicle tracking ability,will allow it to compete in the
established vehicle location and recovery markets and, because of the
nationwide coverage of Cellemetry®, allow it to develop markets in areas of the
country that currently do not have access to such service offerings. Vending Products and Services VendView, a product and service offering, is a Web-based vending machine
monitoring application that combines the Companys wireless monitoring devices
and Cellemetry wireless data communications technology. Once installed in
vending machines, the device will report on a real time basis critical data
such as inventory levels, machine operating information (i.e.: temperature
levels), and authorized/unauthorized entry into the machine. 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. The Company is initially targeting the bottling industry for this product
and service, but believes it can be marketed to an expanded audience utilizing
a variety of vending applications. FastTrack Wireless Solutions The Company markets FastTrack Wireless Solutions as a service offering to
Cellemetry application and potential application partners as a means to reduce
the development and engineering time for applications by providing most of the
information and resources, including generic Cellemetry product, necessary to
more speedily bring applications to market. As a result, the Company can offer
application developers with an interactive Web-based wireless machine to
machine (M2M) interface product and/or service, which monitor and control
geographically remote systems and applications. Sales and Marketing The Companys services are marketed directly to alarm companies (Uplink),
automotive dealerships (MobileGuardian), and bottling companies (VendView).
Cellemetry services are also sold to application providers who are offered
communication capability, radio and product development as well as other
ongoing support services. A Customer Technical Assistance Center (CTAC)
provides customer support 24 hours a day, seven days a week. The Company currently offers Cellemetry service in the United States,
Canada, Mexico, Argentina, Colombia, Dutch Antilles, Paraguay, and Puerto Rico
through licensing agreements with both cellular carriers and local resellers.
The Company intends to offer Cellemetry in various international markets
directly and through strategic partnerships, alliances and other channels of
distribution. Wireline Data Communications (Wireline Telemetry) Although the Company has sold its Derived Channel technology to BT, the
Company retains the right to market this service in North, Central and South
America, South Korea and Australia. The Company provides this service through
its DCX Systems and DCX Australia subsidiaries. As a result of technological advances in the telecommunications industry,
telephone companies (Telecomms) are able to broaden their product portfolios
by offering enhanced services to their customers. The Company believes that
Telecomms may be attracted to niche technologies, such as the Companys Derived
Channel technology, that offer a cost effective solution for applications that
typically require dedicated lines, thereby providing a more productive use of
the existing telephone network. 4




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The Company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. The 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 and dedicated lines with no interference, whether or not
the telephone is in use. In addition, the low tone signal can be encrypted for
additional security. The Company believes that Derived Channel differs from most other alarm
transport technologies in three meaningful 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. The Company believes that Derived Channel represents an improvement over
the most common monitored alarm signaling system, such as the automatic dialer
(also know as a digital communicator). These devices are reactive by nature.
When an intrusion is detected, an automatic dialer attempts to seize the
subscribers telephone line and dial the number of the alarm monitoring company
to report the intrusion. Generally, in the event the telephone line is in use
or has been cut, a standard automatic dialer will be unable to report the alarm
condition. Unlike the standard automatic dialer, Derived Channel is proactive.
As such, it continuously monitors line and system integrity, and automatically
reports any line disruption or failure to the Alarm Receiving Center.
Therefore, if a telephone line were cut, an intrusion would not go undetected. Sales and Marketing The Company will provide a level of marketing support to the Telecomms and
alarm system distributors, in its licensed territories, and to seek more
comprehensive associations with Telecomms, enabling the Company to market its
Derived Channel security alarm transport directly to the industry in an effort
to capture a share of the recurring revenue generated by the applications.
This segment of the market needs smaller systems and has fewer connection
points than the systems that have been marketed to the major telephone
companies. The Company is not actively marketing Derived Channel in the US, or
any of its licensed territories other than Australia, where it is expanding its
relationship with a major Telecomm. DIGITAL MULTIMEDIA AND NETWORKING Digital Multimedia Products and Services The Company designs, develops, and markets complete digital multimedia
system products and services for high quality communications networks. The
Company both manufactures the products upon which its systems are based and
incorporates third party products where appropriate. The Companys 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. The Company believes that its digital
multimedia systems enable the deployment of sophisticated architectures
generally at lower costs and with less hardware and complexity than competing
offerings. The Company has developed and continues to enhance its line of software,
data, and fiber optic transmission products. In addition, the Company has
developed a digital multimedia solution, PowerPlay, which provides capability
for interactive videoconferencing over the same network platform that carries
standard data traffic. The Company believes that PowerPlay represents a
significant advance over the prior generation product EDCOMM, which was
targeted at the distance learning market, because of PowerPlays broader range
of potential uses. 5




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System Solution Services. The Company designs and implements wide area
networks utilizing in-house manufactured products and products supplied by
third parties. It also trains the end-users as an integral aspect of providing
complete system solutions. The Company believes its total system solution
focus differentiates it from competitors while providing an additional source
of revenue growth. PowerPlay Solution.PowerPlay is the Companys digital multimedia
solution for high bandwidth private network applications. PowerPlay is an
integrated hardware-software system, which 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. The Company believes that PowerPlay is unique with
respect to its capability to deliver full motion video signals while using a
relatively small amount of bandwidth. IPContact. In December 2003, the Company supplemented PowerPlay by
announcing the release of IPContact, which is a desktop videoconferencing
software package that boasts high quality and high performance video. Data Solution. The Company also provides high-speed wide area network, or
WAN, data solution. 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. First is the data switch product, which the Company
obtains from other vendors. Second is the transport converter device, which
the Company manufactures. Analog Products. The Company also offers an analog transport product
line, EDCOMM that consists of a variety of fiber optic transmitters and
receivers. The typical application is for the delivery of video over a private
network. Sales and Marketing The Company markets its digital multimedia products and services through a
combination of system integrators and value added resellers. The Company
believes it will be necessary to expand its sales and marketing efforts in the
future to remain competitive and to take advantage of market opportunities, as
well as to expand into international markets. The Company has established relationships with a number of multiple system
cable operators, or 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. The Company has developed relationships with a number of traditional
systems integrators under which it
has provided system design services and has assisted with the
installation. The Company believes that systems integrators provide a viable
avenue to the market and intends to continue to expand its efforts in this
area. 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 re-dial, call blocking and many other
features. In addition, Federal guidelines now mandate Local Number Portability
(LNP), a capability that will allow customers to keep the same telephone number
as they change their carriers. The Company provides products 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 broken down into three
categories: Test Access, Interconnecting Devices, and Services including System
Integration (rack and stack) and Installation. 6




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Test Access.The Digilog Network Analysis and Monitoring System, or 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, the Company
supplies 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. This product was developed to meet a strong need to interconnect several
applications monitoring computers to a single network tap point. In addition
to the CAU, the Companys interconnect products include resistor panels,
special cables, fuse panels, and the integration of other third-party
equipment. System Integration (rack and stack) and Installation. The Company is an
approved installer for a number of major telecommunications companies. The
Company also provides System Integration services. Integration Services are
the assembly of both customer-supplied and Digilog manufactured components into
rack and cabinet configurations for installation in the telephone central
office. Sales and Marketing The Companys Digilog networking products are sold direct by the
Companys sales personnel, who work within the telephone central office and are
encouraged to develop practical products and services for wireline and wireless
program managers. The Company believes that this approach has proven to be
very efficient. In addition, the Company has developed partnerships with a
major Telecom vendor and other suppliers of monitoring equipment. Establishing
relationships such as these facilitates access to a much broader market without
the additional expense of a large and specialized sales force. GENERAL Suppliers The Company relies on third party subcontractors, both in the USA and
overseas, to manufacture most of the equipment used to provide its wireless
data product solutions, Derived Channel and networking equipment and products.
In addition, some of the Companys products are obtained from sole source
suppliers. The loss of a subcontractor or supplier could cause a disruption in
the Companys business due to the short lead-times demanded by certain of the
Companys customers. Competition The Company has one direct competitor for its Cellemetry® technology 
Aeris.net, formerly Aeris Communication, Inc., which uses the service name
Micro Burst. 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. The Company believes that its ubiquitous North American
coverage, pricing, and system performance will enable it to effectively
maintain and increase its current market share. However, many of the
competitors have greater financial and other resources than the Company, 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. The Companys 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 that face the
business and consumer security industry when selecting which product to
purchase are primarily price, reliability and industry certification status. GE
Interlogix and DSC Skyrate also offer competitive hardware product solutions,
but their service is provided by the Companys Cellemetry® wireless
communication solution. The Company believes that Uplinks products and
airtime communications charges are competitively priced. The Company has two direct competitors in the vehicle location and
recovery business, LoJack Corporation, the industry market leader, and OnStar
Corp., a subsidiary of General Motors Corp., which offers a full suite of
concierge services. The principal competitive factors are 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. 7




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The market for the Companys 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, 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, have also become critically important vendor selection
criteria in recent years. Additionally, users require applications to make
best use of these networks. The Companys competitors for its digital multimedia products and services
include a number of companies that have developed videoconferencing technology,
including PictureTel, Polycom, Tandberg and VTEL. 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 the Company. Because of its proprietary nature, the Company believes that it is the
only licensed provider of Derived Channel products in Australia. The Companys
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 the Companys Derived
Channel. The Company believes that 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
technologies. The Company believes that its networking business is unique among vendors
of support systems for SS7 in that it has been a long-term provider of both
diagnostic equipment and testing systems. The Company believes that its
presence in telephone central offices on a day-to-day basis gives its
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 the Companys markets could
adversely affect the Companys business. The Companys success will depend, in
part, on its ability to enhance existing products and introduce new products
and applications on a timely basis. The Company plans to continue to devote a
portion of its resources to the research and development function. The Company continues to invest in improvements to various Numerex
technologies, including Cellemetry and its service capabilities on an ongoing
basis, focused primarily on the development of expanded service bureau
capabilities, further communications costs reductions, and additional
enhancement to application-specific capabilities. Product Warranty and Service The Companys wireless communications business, depending on the product,
provides a one-year to three-year, parts and labor warranty. The Companys
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- or two-year
labor and materials warranty. The Companys digital multimedia business
provides either a one- or two-year warranty on parts and labor, depending on
the scale and type of product provided. The Companys 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 to the Company of
its warranty programs have not been material. Intellectual Property The Company holds patents covering its Cellemetry related technology in
the U.S. and various foreign countries. These patents expire between 2011 and
2016. The Company through Cellemetry licenses certain Cellemetry related
technologies under licenses with BellSouth Corporation. The Company also owns
other intellectual property relating to its products. The Company holds
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 the Companys practice to apply for patents as new
products or processes suitable for patent protection are developed. No
assurance can be given as to the scope of the patent protection. 8




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The Company believes that the rapid technological developments in the
telecommunications industry may limit the protection afforded by patents.
Accordingly, the Company believes that its success will also be dependent upon
its manufacturing, engineering and marketing know-how and the quality and
economic value of its products. The mark Cellemetry is a registered trademark of the Company. The Company
believes that no individual trademark or trade name is material to the
Companys competitive position in the industry. Regulation Federal, state and local telecommunications laws and regulations have not
posed any significant impediments either to the delivery of wireless data
signals using the Cellemetry network or the provision of alarm services by
telephone companies using Derived Channel technology. The Company may be
subject to certain telecommunications taxes and fees, including the federal
universal service charge. By 2008, the FCC will eliminate its requirement that cellular carriers
offer analog service pursuant to the Advanced Mobile Phone Service, or 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 TDMA or CDMA wireless
service or to the Short Message Services of digital GSM wireless service, and
customers that use Cellemetry based services would have to replace incompatible
radios. The Companys wireless products and services that make use of
Cellemetry would be similarly affected. While the Company expects that AMPS
standard to be available for period of time after 2008, the Company continues
to work on digital alternatives and plans to introduce its first digital
products during 2004. This will allow the provision of Cellemetry based
services into the foreseen future. Also, by going to the digital standard, the
Company will be able to add greater functionality compared to the current
products on the AMPS standard. In addition, the Companys 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. The Companys products
currently used in the U.S., which are subject to these requirements, have
received all required certifications. However, anticipated design changes to
products sold in the U.S. will require compliance testing and certification. In the U.S. the Companys products require certification from Underwriters
Laboratories in order to serve monitoring applications with higher levels of
insurance risk. Certain products of the Companys digital multimedia business
also require certification from Underwriters Laboratories. The Company makes
every effort to obtain required Underwriters Laboratories certifications for
products currently marketed in the U.S. Regulations similar to the above may exist in other countries. In the
event that the Company did not comply with any such regulations, or if the
Companys current or future products did not meet various regulatory standards
or receive and maintain all required certifications, the Companys business
could be adversely affected. Employees The Company, as of March 5, 2004, employs 81 employees in the U.S.,
consisting of 4 in manufacturing, 21 in sales, marketing and customer service,
30 in engineering and operations and 26 in management and administration. No
union represents any of the Companys employees. The Company believes that its
relationship with its employees is good. Available Information The Company makes available free of charge through its website at
www.nmrx.com its annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, and all amendments thereto, as soon as
reasonably practicable after such reports are filed with or furnished to the
Securities and Exchange Commission. 9




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Executive Officers and Key Employees of Registrant The following sets forth the names, ages and positions of the executive
officers and certain key employees of the Company as of March 11, 2004: Stratton J. Nicolaides, age 50, 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. Michael A. Marett, age 49, has been an Executive Vice President of the
Company since February 2001. 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. Alan Catherall, age 50, has been the 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, Mr. Catherall held a number of executive
and management positions at MCI Communications. Richard
C. Rose, age 56, recently joined Numerex in March 2004, in the
position of Executive Vice President, Marketing and Business
Development. From 2001 to 2003, Mr. Rose served as Corporate Vice
President of Sales and Marketing for Precision Partners, a privately
held manufacturer of precision machined parts for a wide variety of
industries. From 1998 to 2001, Mr. Rose was the Vice President
of Sales and Marketing for Interliant Corporation, a publicly traded
ASP providing internet services throughout the world. Prior to this,
Mr. Rose was the CEO of Dataflex Corporation, a public
corporation providing desktop computer equipment and related services
to large, diversified corporations in North America. 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 thisForm 10-Kor 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 2001, we had an operating loss of
$3,142,000 and a net loss applicable to common stockholders of $3,382,000. In
2002, we had an operating loss of $7,450,000 and a net loss applicable to
common stockholders of $7,690,000. For the year ended December 31, 2003, we
had an operating loss and net loss applicable to common stockholders of
$1,404,000. 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 January 31, 2004, our total debt (including obligations
under capital leases and equipment financings) was $4.8 million. The terms of
our outstanding debt limits us, but does not prohibit us, from incurring
additional debt. 10




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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. We pay principal and
interest on some of our debt that may be repaid using common stock if our stock
is above a predetermined fixed price. The principal amount and any interest
that has accrued on some of our debt may also 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 our other stockholders, possibly substantially. Substantially all of our property and assets are subject to a lien to
secure our debt. If we default on our debt, this would subject us to
foreclosure on substantially all of our assets to the extent necessary to repay
any amounts due. Any such default and resulting foreclosure will 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 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 or comply with our covenants, we would be in default under our
existing arrangements. Approximately $4,500,000 of our debt is evidenced by a convertible note.
This note payable is convertible into our common stock and is accompanied by a
common stock purchase warrant. The Company is required to register the shares
of common stock for resale within six months. Failure to do so would lead to
monthly penalties for the next six months and, if the Company fails to register
the shares for common stock after one year, the lender has the right to require
full payment of the unpaid principal and interest and can invoke its rights
under a security agreement that includes a lien on all the our assets in the
United States. 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.
If we sell assets that do generate revenue and contribute to our net income,
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 our debt agreements;
    
    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. 11




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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 twelve months 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 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. 12




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We primarily sell our products through distributors. Our sales could be
affected by disruptions in the relationships between our distributors and us 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. Our principal stockholders, directors and executive officers have significant
voting power and may take actions that are not in the best interests of our
other stockholders. 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.
As of March 10, 2003, our executive officers, directors and greater-than-five
percent stockholders and their affiliates, in the aggregate, beneficially own
43.5% 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. Changing telecommunications 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. It is
likely that 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 depend on Cellemetry, such as
FastTrack Wireless Solutions and Mobile Guardian, would be similarly affected.
While we are currently developing a digital standard, we might not be
successful in such development. As of January 2003, the FCC eliminated most of its rules that restricted
wireless carriers from consolidating. Consolidation of wireless carriers could
reduce the number of potential suppliers for our Cellemetry® service. 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
adversely 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. 13




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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 integration 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 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. We have a subsidiary operating in Australia and are doing business in the
Caribbean, South America and Japan. In addition, the laws of certain countries do not protect our products as
much as the laws of the United States, 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, financial condition,
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 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. 14




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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 (FCC), 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. 15




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Item 2. Properties. All of the Companys facilities are leased. Set forth below is certain
information with respect to the Companys leased facilities: Location
    
    Principal Business
    
    Square Footage
    
    Lease TermWillow Grove,
Pennsylvania
    
    Networking and
Wireline Data Communications
    
    
    10,000
    
    
    
    2004State College,
Pennsylvania
    
    Digital Multimedia
    
    
    10,788
    
    
    
    Month to MonthAtlanta, Georgia
    
    Wireless Data Communications
and Principal Executive Office
    
    
    20,973
    
    
    
    2010Norcross, Georgia
    
    Wireless Data Communications
    
    
    1,658
    
    
    
    2005
 The Company conducts engineering, sales and marketing, and administrative
activities at many of these locations. The Company believes that its existing
facilities are adequate for its current needs. As the Company grows and expands
into new markets and develops additional products, it may require additional
space, which the Company believes will be available at reasonable rates. The Company engages in limited manufacturing, equipment and product
assembly and testing for certain of the Companys products. The Company also
uses contract manufacturers for production, sub-assembly and final assembly of
certain products. The Company believes there are other manufacturers that
could perform this work on comparable terms. The semiconductors, microprocessors and other components used in the
Companys products are obtained from various suppliers and manufacturers, some
of which are the sole source of such component. 
 Item 3. Legal Proceedings. On May 5, 2003, Hawkeye Switching LLC (Hawkeye) and an apparently
affiliated entity, RSA No. 2, sued Numerex Solutions (Solutions), one of the
Companys subsidiaries, 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 (the D1S Contract).
Solutions removed the action to the United States District Court for the
Southern District of Iowa, Western Division (Iowa Federal Court) on June 20,
2003. On June 19, 2003 Solutions initiated arbitration proceedings against
Hawkeye in Atlanta, Georgia related to the D1S Contract based on a mandatory
arbitration clause contained therein. Hawkeye subsequently conceded that it
was bound to arbitrate under the D1S Contract. The Iowa Federal Court denied
Solutions Motion to Dismiss or Compel Arbitration against RSA No. 2, and
accordingly RSA No. 2s action remains in Iowa Federal Court. The arbitration
is scheduled for May 24 to 27, 2004. Numerex intends to vigorously contest
these actions. 
 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 
 PART II 
 Item 5. Market for the Registrants Common Stock and Related Shareholder Matters. The Company does not currently 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 the Companys earnings,
financial condition and working capital, capital expenditure requirements, any
restrictions contained in loan agreements and market factors and conditions. 16




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##### Table of Contents



The Companys 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 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
    
    
    
    2.65Fiscal 2002
    
    High
    
    LowFirst Quarter (January 1, 2002 to March 31, 2002)
    
    $
    9.50
    
    
    $
    7.00Second Quarter (April 1, 2002 to June 30, 2002)
    
    
    11.47
    
    
    
    7.11Third Quarter (July 1, 2002 to September 30, 2002)
    
    
    8.93
    
    
    
    3.99Fourth Quarter (October 1, 2002 to December 31,
2002)
    
    
    5.08
    
    
    
    2.00
 As of March 4, 2004, there were 65 shareholders of record of the Companys
Common Stock, which include shares held in street name by brokers or nominees. On January 13, 2004, the Company completed a private placement to Laurus
Master Fund, Ltd. (Laurus) of (i) a Convertible Term Note in the principal
amount of $4,500,000 and (ii) a Common Stock Purchase Warrant to purchase up to
300,000 shares of the Companys common stock. The principal amount of the
note, together with any accrued interest, may be converted into the Companys
common stock at a price equal to $4.56 per share, subject to certain
limitations. In addition, if conditions are met, the Company may pay interest
and principal on the note in either cash or in Common Stock. The Warrant is
exercisable by Laurus until January 13, 2011, and has three separate pricing
tranches. The first pricing tranche is exercisable for up to 150,000 shares of
common stock at a price of $4.75 per share. The second pricing tranche is
exercisable for up to 100,000 shares of common stock at a price of $5.17 per
share. The third pricing tranche is exercisable for up to 50,000 shares of
common stock at a price of $5.99 per share. 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. Equity Compensation Plan Information (a)
    
    (b)
    
    (c)Plan category
    
    Number of securities to
    
    Weighted-average
    
    Number of securities remainingbe issued upon exercise
    
    exercise price of
    
    available for future issuance underof outstanding options,
    
    outstanding options,
    
    equity compensation plans (excludingwarrants and rights
    
    warrants and rights
    
    securities reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    1,700,515
    
    
    $
    4.60
    
    
    
    1,610,458Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,700,515
    
    
    $
    4.60
    
    
    
    1,610,458
 17




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##### Table of Contents



Item 6. Selected Financial Data. Incorporated by reference from the Companys 2003 Annual Report to
Shareholders, pursuant to General Instruction G (2) to Form 10-K, the relevant
portions of which are filed as Exhibit 13 hereto. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference from the Companys 2003 Annual Report to
Shareholders pursuant to General Instruction G (2) to Form 10-K, the relevant
portions of which are filed as Exhibit 13 hereto. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. 
 Item 8. Financial Statements and Supplementary Data. The Financial Statements and Supplementary Data of the Company required by
this Item are set forth at the pages indicated herein at Item 14(a). 
 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 the Companys Chief
Executive Officer and Chief Financial Officer, management has evaluated the
effectiveness of the design and operation of the Companys 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, 2003. No changes were made in the Companys
internal control over financial reporting during the quarter ended December 31,
2003 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 2004 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 2004 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 2004 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 2004 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K. 18




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##### Table of Contents



Item 14. Principal Accounting Fees and Services Incorporated by reference from the Companys Proxy Statement relating to
the 2004 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K. During the quarter ended December 31, 2003 the Companys audit committee did
not engage its auditors (Grant Thornton LLP) for any non-audit services. 19




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents filed as part of this report: 
  1.
    
    Consolidated Financial Statements. The following financial
statements and the notes thereto of the Company are attached hereto
beginning on page F-1:  Index to Financial Statements of the CompanyReport of Independent Certified Public AccountantsConsolidated Balance Sheets as of December 31, 2003, and 2002Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001Consolidated Statements of Shareholders Equity for the years ended
December 31, 2003, 2002, and 2001Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001Notes to Consolidated Financial Statements  2.
    
    Financial Statement Schedules  Report of Independent Certified Public AccountantsSchedule II  Valuation and qualifying accounts 
  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 January 13,
2004, by and between the Company and Laurus4.210
    
    Convertible Term Note, dated January 13, 2004, by
and between the Company and Laurus4.310
    
    Common Stock Purchase Warrant, dated January 13,
2004, by and between the Company and Laurus4.410
    
    Security Agreement, dated January 13, 2004, by and
among the Company, its U.S. subsidiaries, and Laurus4.510
    
    Guaranty, dated January 13, 2004, entered into by
each of the Companys U.S. Subsidiaries
 20




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##### Table of Contents



4.610
    
    Intercreditor Agreement, dated January 13, 2004, by
and among Althea Limited Partnership, Laurus, the Company and
its U.S. subsidiaries4.710
    
    Registration Rights Agreement, dated January 13,
2004, 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, 199510.710
    
    1999 Long-Term Incentive Plan. (Management Compensation
Plan).10.88
    
    Formation Agreement among Numerex Corp., BellSouth
Wireless, Inc. and BellSouth Corporation dated February 25, 199810.99
    
    Operating Agreement between Numerex Corp. and
BellSouth Wireless, Inc. dated May 15, 199810.103
    
    First Amendment to Operating Agreement of Cellemetry LLC
between Numerex Corp. and BellSouth Wireless, Inc. effective as
of November 1, 199911
    
    Computation of Earnings Per Share13
    
    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 2003 Annual Report to
Shareholders and are being filed in electronic format. No
other sections of the Companys 2003 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) 21




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##### Table of Contents



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)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 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 January 1, 2004 (File No. 0-22920) (b) Reports on Form 8-K. None. 22




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##### Table of Contents



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 11, 2004
    
    
    
    By:
    
    /s/ Stratton J. NicolaidesSTRATTON J. NICOLAIDES,
Chairman and Chief 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 11, 2004/s/ Brian C. Beazer
Brian C. Beazer
    
    Director
    
    March 11, 2004/s/ George Benson
George Benson
    
    Director
    
    March 11, 2004/s/ Matthew J. Flanigan
Matthew J. Flanigan
    
    Director
    
    March 11, 2004/s/ Allan H. Liu
Allan H. Liu
    
    Director
    
    March 11, 2004/s/ John G. Raos
John G. Raos
    
    Director
    
    March 11, 2004/s/ Andrew J. Ryan
Andrew J. Ryan
    
    Director
    
    March 11, 2004/s/ Alan B. Catherall
Alan B. Catherall
    
    Executive Vice President,
Chief Financial Officer,
Principal Financial and
Accounting Officer
    
    March 11, 2004
 23




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##### Table of Contents



C O N T E N T S PageConsolidated Financial Statements of the Company:Report of Independent Certified Public Accountants
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations and Comprehensive
Income for the years ended December 31, 2003, 2002 and
2001.
    
    
    F-5Consolidated Statements of Shareholders Equity for the
years ended December 31, 2003, 2002, and 2001.
    
    
    F-6Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9
 F-1




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##### Table of Contents



Report of Independent Certified Public Accountants 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, 2003, and 2002 and the
related consolidated statements of operations and comprehensive
income, shareholders equity and cash
flows for each of the three years ended December 31, 2003, 2002, and 2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements 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, 2003, and 2002 and the
results of their operations and their cash flows for each of the
three years ended December
31, 2003, 2002, and 2001 in conformity with accounting principles generally
accepted in the United States of America. As discussed in Note A-22 to the consolidated financial statements, the Company
adopted Statement of Financial Standards No. 142, Goodwill and Other
Intangibles on January 1, 2002. /s/ Grant Thornton LLP Atlanta, Georgia
February 20, 2004 F-2




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares) December 31,2003
    
    2002ASSETSCURRENT ASSETSCash and cash equivalents (Note A-3)
    
    $
    734
    
    
    $
    2,137Accounts receivable (net of allowances of
$609, and $1,275, respectively (Note A-10)
    
    
    3,093
    
    
    
    4,459Notes receivable (Notes A-9 and A-10)
    
    
    99
    
    
    
    823Inventory (Notes A-8 and E)
    
    
    3,461
    
    
    
    5,189Prepaid taxes (Notes A-7 and G)
    
    
    24
    
    
    
    Prepaid expenses & interest receivable
    
    
    676
    
    
    
    976TOTAL CURRENT ASSETS
    
    
    8,087
    
    
    
    13,584Property and equipment, net (Notes A-5 and F)
    
    
    1,296
    
    
    
    2,475Goodwill, net (Notes A-4 and A-22)
    
    
    15,014
    
    
    
    10,983Intangible assets, net (Note A-4)
    
    
    7,979
    
    
    
    8,050Software, net (Note A-4)
    
    
    825
    
    
    
    1,963Notes receivable, long term
    
    
    176
    
    
    
    48Other assets (Note A-11)
    
    
    593
    
    
    
    8$
    33,970
    
    
    $
    37,111
 The accompanying notes are an integral part of these statements. F-3




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares) December 31,2003
    
    2002LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    2,498
    
    
    $
    5,238Note payable, current (Note A-12)
    
    
    3,500
    
    
    
    Deferred revenues
    
    
    775
    
    
    
    819Other accrued liabilities
    
    
    1,487
    
    
    
    1,866Obligations under capital leases, current portion (Note I)
    
    
    282
    
    
    
    710TOTAL CURRENT LIABILITIES
    
    
    8,542
    
    
    
    8,633LONG-TERM DEBTObligations under capital leases
    
    
    62
    
    
    
    863MINORITY INTEREST (Note C)
    
    
    
    
    
    
    COMMITMENTS AND CONTINGENCIES(Notes H and I)SHAREHOLDERS EQUITYPreferred stock  no par value; authorized
3,000,000 shares; none issued
    
    
    
    
    
    
    Class A common stock  no par value; authorized
30,000,000 shares; issued 13,181,547 and 13,168,889 shares
    
    
    36,793
    
    
    
    36,769Class B common stock  no par value; authorized
5,000,000 shares; none issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    439
    
    
    
    439Treasury stock, at cost, 2,391,400 and 1,766,400 shares
    
    
    (10,197
    )
    
    
    (9,222
    )Accumulated other comprehensive income
    
    
    97
    
    
    
    (9
    )Retained earnings
    
    
    (1,766
    )
    
    
    (362
    )TOTAL SHAREHOLDERS EQUITY
    
    
    25,366
    
    
    
    27,615$
    33,970
    
    
    $
    37,111
 The accompanying notes are an integral part of these statements. F-4




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data) For the years ended December 31,2003
    
    2002
    
    2001Net sales
    
    $
    20,157
    
    
    $
    24,501
    
    
    $
    24,258Cost of sales
    
    
    10,486
    
    
    
    13,952
    
    
    
    14,737Depreciation and amortization
    
    
    642
    
    
    
    328
    
    
    
    267Gross profit
    
    
    9,029
    
    
    
    10,221
    
    
    
    9,254Selling, general, administrative and other expenses
    
    
    8,922
    
    
    
    12,509
    
    
    
    10,710Research and development expenses
    
    
    905
    
    
    
    1,097
    
    
    
    2,755Depreciation and amortization
    
    
    1,928
    
    
    
    2,184
    
    
    
    2,701Costs related to non-recurring acquisition activity (Note D)
    
    
    
    
    
    
    1,899
    
    
    
    Non-recurring employee separation costs (Note D)
    
    
    
    
    
    
    
    
    
    
    418Operating loss
    
    
    (2,726
    )
    
    
    (7,468
    )
    
    
    (7,330
    )Interest and other income (expense), net
    
    
    (298
    )
    
    
    (212
    )
    
    
    934Gain on sale of business (Note C)
    
    
    1,712
    
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    326
    
    
    
    3,139Loss before income taxes
    
    
    (1,312
    )
    
    
    (7,354
    )
    
    
    (3,257
    )Income taxes (benefit) (Notes A-7 and G)
    
    
    92
    
    
    
    96
    
    
    
    (115
    )Net loss
    
    
    (1,404
    )
    
    
    (7,450
    )
    
    
    (3,142
    )Preferred stock dividend
    
    
    
    
    
    
    240
    
    
    
    240Net loss applicable to common shareholders
    
    $
    (1,404
    )
    
    $
    (7,690
    )
    
    $
    (3,382
    )Other comprehensive income (loss),
net of income taxesForeign currency translation adjustment (Note A-17)
    
    
    106
    
    
    
    18
    
    
    
    (7
    )Comprehensive loss
    
    $
    (1,298
    )
    
    $
    (7,672
    )
    
    $
    (3,389
    )Basic loss per share (Note A-21)
    
    $
    (0.13
    )
    
    $
    (0.71
    )
    
    $
    (0.32
    )Diluted loss per share
    
    $
    (0.13
    )
    
    $
    (0.71
    )
    
    $
    (0.32
    )Weighted average number of shares used in per share
calculation (Note A-21):Basic
    
    
    10,934
    
    
    
    10,766
    
    
    
    10,446Diluted
    
    
    10,934
    
    
    
    10,766
    
    
    
    10,446
 The accompanying notes are an integral part of these statements. F-5




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In Thousands) AccumulatedAdditional
    
    
    
    
    
    OtherPreferred
    
    Stock
    
    Common
    
    Stock
    
    Paid-In
    
    Treasury
    
    Comprehensive
    
    RetainedShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Stock
    
    Earnings
    
    Earnings
    
    TotalBalance, December 31, 2000
    
    
    30
    
    
    $
    3,000
    
    
    
    12,157
    
    
    $
    32,064
    
    
    $
    370
    
    
    $
    (9,222
    )
    
    $
    (20
    )
    
    $
    10,710
    
    
    $
    36,902Issuance of shares in connection with
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344Issuance of shares under Directors
Stock Plan
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Issuance of shares in connection with
Stock Exchange Agreement
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173Option repricing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,382
    )
    
    
    (3,382
    )Balance, December 31, 2001
    
    
    30
    
    
    $
    3,000
    
    
    
    12,286
    
    
    $
    32,590
    
    
    $
    439
    
    
    $
    (9,222
    )
    
    $
    (27
    )
    
    $
    7,328
    
    
    $
    34,108Issuance of shares under Directors
Stock Plan
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Issuance of shares in connection with
exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    1,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,167Conversions of Preferred Stock to
common shares
    
    
    (30
    )
    
    
    (3,000
    )
    
    
    625
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,690
    )
    
    
    (7,690
    )Balance, December 31, 2002
    
    
    
    
    
    $
    
    
    
    
    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, December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    13,182
    
    
    $
    36,793
    
    
    $
    439
    
    
    $
    (10,197
    )
    
    $
    97
    
    
    $
    (1,766
    )
    
    $
    25,366
 The accompany notes are an integral part of this statement. F-6




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) For the years ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net loss
    
    $
    (1,404
    )
    
    $
    (7,450
    )
    
    $
    (3,142
    )Adjustments to reconcile net loss used in
operating activities:Depreciation
    
    
    1,062
    
    
    
    1,312
    
    
    
    1,454Amortization
    
    
    1,508
    
    
    
    1,200
    
    
    
    1,514Bad debt reserves
    
    
    667
    
    
    
    738
    
    
    
    (3
    )Inventory reserves
    
    
    273
    
    
    
    
    
    
    
    Gain on sale of business
    
    
    (1,712
    )
    
    
    
    
    
    
    Compensation expense
    
    
    
    
    
    
    
    
    
    
    12Minority interest
    
    
    
    
    
    
    (326
    )
    
    
    (3,139
    )Changes in assets and liabilities
which provided (used) cash:Accounts and notes receivable
    
    
    1,295
    
    
    
    1,954
    
    
    
    (301
    )Inventory
    
    
    774
    
    
    
    (112
    )
    
    
    (959
    )Prepaid expenses & interest receivable
    
    
    303
    
    
    
    69
    
    
    
    (1,078
    )Other assets
    
    
    86
    
    
    
    61
    
    
    
    (33
    )Accounts payable
    
    
    (2,588
    )
    
    
    (1,412
    )
    
    
    1,566Income taxes
    
    
    
    
    
    
    48
    
    
    
    (10
    )Other accrued liabilities
    
    
    (533
    )
    
    
    1,028
    
    
    
    882Net cash used in operating activities
    
    
    (269
    )
    
    
    (2,890
    )
    
    
    (3,237
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (75
    )
    
    
    (107
    )
    
    
    (1,075
    )Purchase of intangible and other assets
    
    
    (2,604
    )
    
    
    (1,042
    )
    
    
    (345
    )Proceeds from sale of business
    
    
    3,197
    
    
    
    
    
    
    
    Acquisition of minority interest
    
    
    
    
    
    
    
    
    
    
    (794
    )Net cash provided by (used in) investing activities
    
    
    518
    
    
    
    (1,149
    )
    
    
    (2,214
    )
 The accompanying notes are an integral part of these statements. F-7




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NUMEREX CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS  CONTINUED
(in thousands) For the years ended December 31,2003
    
    2002
    
    2001Cash flows from financing activities:Proceeds from exercise of stock options
    
    $
    25
    
    
    $
    1,177
    
    
    $
    362Proceeds from revolving line of credit
    
    
    400
    
    
    
    
    
    
    
    Payments on revolving line of credit
    
    
    (400
    )
    
    
    
    
    
    
    Principal payments on capital lease obligations
    
    
    (1,271
    )
    
    
    (420
    )
    
    
    (48
    )Payment of preferred stock dividends
    
    
    (480
    )
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    (1,726
    )
    
    
    757
    
    
    
    314Effect of exchange differences on cash
    
    
    74
    
    
    
    18
    
    
    
    (29
    )Net (decrease) in cash and cash equivalents
    
    
    (1,403
    )
    
    
    (3,264
    )
    
    
    (5,166
    )Cash and cash equivalents,
beginning of year
    
    
    2,137
    
    
    
    5,401
    
    
    
    10,567Cash and cash equivalents, end of year
    
    $
    734
    
    
    $
    2,137
    
    
    $
    5,401Supplemental Disclosures of Cash
Flow InformationCash (receipts) payments for:Interest
    
    
    354
    
    
    
    198
    
    
    
    524Income taxes
    
    
    92
    
    
    
    97
    
    
    
    (115
    )Disclosure of non-cash activities:Capital leases
    
    
    3
    
    
    
    1,755
    
    
    
    350
 The accompanying notes are an integral part of these statements. F-8




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##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 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. (the Company) is a technology company comprised of operating
subsidiaries that develop and market a wide range of communications products
and services. The Companys primary focus is wireless data communications
utilizing proprietary network technologies. The Company primarily offers
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 the Company 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. The company
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, the Company offers
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 the Company and its wholly owned or controlled
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation. 3. Cash and Cash Equivalents For purposes of financial reporting, the Company considers all highly liquid
investments purchased with original maturities of less than three months to be
cash equivalents. During the quarter ended September 30, 2003, $231,000 of
cash previously restricted to support letters of credit was released due to
the payment of the underlying obligation. This was related to the sale of
Data1Souce LLC (see Note C  Investments and Divestitures). 4. Intangible Assets Intangible assets consist of developed software, patents and acquired
intellectual property, and goodwill. These assets, except for goodwill, are
amortized over its expected useful life. Developed software is amortized
using the straight-line method over 3 to 5 years. Patents and acquired
intellectual property is 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 2003 and 2002 (see Note
A-22). For the year ended December 31, 2001, goodwill was amortized on the
straight-line method over 12 to 20 years. The Company capitalizes software development costs when project technological
feasibility is established and concludes capitalization when the product is
ready for release. Software development costs incurred prior to the
establishments of technological feasibility are expensed as incurred. The Company adopted SFAS 142 on January 1, 2002. In connection with the
adoption, the Company reviewed the classification of its goodwill and other
tangible assets, reassessed the useful lives previously assigned to other
intangible assets, and discontinued amortization of goodwill, which will
result in reduced expense of approximately $768,000 on an annualized basis in
2002. The Company also tested goodwill for impairment by comparing the fair
values of the Companys reporting units to their carrying values as of January
1, 2002, December 31, 2002 and December 31, 2003 and determined that there was
no goodwill impairment at those dates. The components of intangible assets
are as follows: F-9




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##### Table of Contents



Amortization expense were $1,508,000, $1,200,000 and $1,514,000 for the years
ended December 31, 2003, 2002, and 2001 respectively. Amortization expense on
existing intangible assets will be $1,206,000 for 2004, $1,022,000 for 2005,
$821,000 for 2006, $734,000 for 2007, and $725,000 for 2008. (In thousands)
    
    December 31,2003
    
    2002Goodwill
    
    $
    17,631
    
    
    $
    13,600Purchased and developed software
    
    
    1,881
    
    
    
    2,768Patents, trade and service marks
    
    
    11,150
    
    
    
    11,125Intangible and other assets
    
    
    1,056
    
    
    
    284Total intangible assets
    
    
    31,718
    
    
    
    27,777Accumulated amortization
    
    
    (7,900
    )
    
    
    (6,781
    )Intangible assets, net
    
    $
    23,818
    
    
    $
    20,996
 5. Property and Equipment Depreciation is provided for 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, equipment and buildings 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
 6. Impairment of Long-lived Assets The Company periodically evaluates the recoverability of its long-lived assets
or when a specific event indicates that the carrying value of a long-lived
asset may not be recoverable. Recoverability is assessed based on estimates
of future cash flows expected to result from the use and eventual disposition
of the asset. If the sum of expected undiscounted cash flows is less than the
carrying value of the asset, an impairment loss is recognized for the amount
of such deficiency, using discounted cash methodologies. No such impairment
losses have been recognized during the years ended December 31, 2003, 2002,
and 2001, respectively. 7. Income Taxes The Company accounts 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 temporary differences 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. 8. Inventory Inventory and work-in progress are stated at the lower of cost (first-in,
first-out method) or market. F-10




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9. Notes Receivable At December 31, 2003, the company had $275,000 of notes receivable. These
notes receivable are payable in installments from 9 to 48 months at interest
rates between 4% to 8% with $99,000 being short term and $176,000 long term.
$179,000 of the notes receivable balance at December 31, 2003 is also
supported by a security agreement. In 2002, the company converted $612,000 of
accounts receivable to notes receivable payable from 9 to 18 months. For
purposes of valuation, notes receivable and accounts receivable are considered
in total in determining the allowance for doubtful accounts. 10. Allowance for Doubtful Accounts The Company maintains 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 operations
when that determination is made. 11. Other Assets In May 2003, the Company 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. This Agreement will allow them to generate additional revenues
by providing additional services to their customers. The Company will share
in these revenues as payment for the equipment. While this customer retains
title to this equipment from acceptance (which occurred May 2003), they 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, the Company did not recognize revenue on
the equipment sale as of December 31, 2003. Installation was completed in the
quarter ended December 31, 2003 and had its initial connections to the
network. Our customer in Australia plans to promote the new service available
now that equipment is installed in the first quarter of 2004 when the
Companys expects to receive its first share of revenues. Currently the
Company expects to receive at least the full value of the equipment from this
revenue share, however, as more information becomes available, the Company
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. 12. Note Payable On March 28, 2003, the Company acquired Cingulars interest in Cellemetry and
the 625,000 shares of the Companys stock owned by Cingular for $5,000,000
(the Cellemetry Transaction). Under the terms of the agreement, the Company
agreed to pay Cingular $1,500,000 by December 15, 2003, $2,000,000 by March
31, 2004 and $1,500,000 by December 15, 2004. The Companys obligation is
secured by a pledge of the stock of all the Companys subsidiaries (except
Digilog) and a lien on the assets of all the Companys subsidiaries (except
Digilog) and bears interest at a rate of eight percent (8%) per annum. On
September 15, 2003, the company made the first $1,500,000 payment to Cingular
using a portion of the proceeds from the sale of Data1Source LLC (see Note C 
Investments and Divestitures). On January 13, 2004, the Company completed a
private placement to Laurus Master Fund, Ltd. (Laurus) of a Convertible Term
Note in the principal amount of $4,500,000 (see Note M  Subsequent Events).
A portion of the proceeds from this note were used to pay the remaining
balance of $3,500,000 due Cingular. 13. Fair Value of Financial Instruments The Companys 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 interest at 8% which approximates market rates of similar instruments. F-11




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14. Use of Estimates In preparing the Companys 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 The Company maintains its cash balances in financial institutions, which at
times may exceed federally insured limits. The Company had cash
balances in excess of these limits of $634,000 and $2,037,000 for the
years ended December 31, 2003 and 2002, respectively. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents. 16. Revenue Recognition The Companys 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. The Company recognizes revenue from product sales at the time of shipment and
passage of title. The Company offers customers the right to return products
that do not function properly within a limited time after delivery. The
Company continuously monitors and tracks such product returns and records 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, the Company cannot guarantee that it will continue to experience
the same return rates that it has 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. The Company recognizes 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 the Company recognizes revenue ratably over
the contract term. In certain instances the Company may under an appropriate
agreement advance charge for the service to be provided. In these instances
the Company recognizes the advance charge as deferred revenue (classified as a
liability) and releases the revenue ratably over future periods in accordance
with the contract term as the service is completed, delivered or performed. The Company also recognizes revenue from the provision of 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 the Company 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. The Company determines 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 delivered elements exists but evidence does
not exist for one or more undelivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair F-12




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##### Table of Contents



value of the undelivered element is deferred and is recognized ratably over
the contract term on an earned basis. Regarding the supply of product the
Company maintains title to the product and transfers title at the completion
of the contract term. The Companys arrangements do not generally include acceptance clauses.
However, arrangements involving multiple element service agreements include
certain milestones and levels of certification, acceptance occurs upon the
Companys certification of its completion of each of the various elements. The Company recognizes revenue from the provision of its data transportation
services when the Company performs the services or processes 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 the Company may
under an appropriate agreement advance charge for the data transport service
to be provided. In these instances the Company recognizes the advance charge
(even if nonrefundable) as deferred revenue (classified as a liability) and
releases the revenue over future periods in accordance with the contract term
as the data transport service is delivered or performed. 17. Foreign Currency Transactions Some transactions of the Company and its subsidiaries are made in Canadian
dollars, Australian dollars, and British pounds sterling. Gains and losses
from these transactions are included in income as they occur. 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 to the
Company. F-13




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20. Stock-Based Compensation Effective November 1, 1996, the Company 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. The Company has elected to continue to
account for stock-based compensation in accordance with Accounting Principles
Board (APB) 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
the Companys 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 the Companys 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, the Companys net earnings
(loss) and earnings (loss) per share would have been changed to the following
pro forma amounts: (In thousands except per share data)
    
    For the years ended December 31,2003
    
    2002
    
    2001Net loss  as reported
    
    
    (1,404
    )
    
    
    (7,690
    )
    
    
    (3,382
    )Net loss  pro forma
    
    
    (2,495
    )
    
    
    (8,858
    )
    
    
    (4,503
    )Loss per share  as reported
    
    
    (0.13
    )
    
    
    (0.71
    )
    
    
    (0.32
    )Loss per share  pro forma
    
    
    (0.23
    )
    
    
    (0.82
    )
    
    
    (0.43
    )
 The pro forma effect on net loss and loss per share for the years ended
December 31, 2003, 2002, and 2001, 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, and SFAS No. 128, 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 the Companys
common stock for the period. F-14




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For the years ended December 31, 2003, 2002, and 2001, the Companys 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 common shares outstanding. Potential common shares resulting from options
and warrants that would be used to determine diluted earnings (loss) per share
were 62,149, 1,059,000, and 1,985,000 for the years ended December 31, 2003,
2002 and 2001, respectively. 22. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations(SFAS No. 141)
and No. 142, Goodwill and Other Intangible Assets(SFAS No. 142). SFAS No.
141 changed the accounting for business combinations, requiring that all
business combinations be accounted for using the purchase method and that
intangible assets be recognized as assets apart from goodwill if they arise
from contractual or other legal rights, or if they are separable or capable of
being separated from the acquired entity and sold, transferred, licensed,
rented or exchanged. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001. SFAS No. 142 specifies the financial accounting
and reporting for acquired goodwill and other intangible assets. Goodwill and
indefinite life intangible assets will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. The Company adopted SFAS 142
effective January 1, 2002. Pro forma results for the year ended December 31,
2001 assuming the discontinuation of amortization of Goodwill, is shown below: (In thousands except per share data)
    
    For the year endedDecember 31,2001Net loss  as reported
    
    $
    (3,382
    )Goodwill amortization
    
    
    713Net loss  pro forma
    
    
    (2,669
    )Loss per share  as reported
    
    
    (0.32
    )Loss per share  pro forma
    
    
    (0.26
    )
 In November 2002, the Financial Accounting Standards Board (FASB) issued
EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. This issue addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services, and/or
rights to use assets. The final consensus of this issue is applicable to
agreements entered into in fiscal periods beginning after September 15, 2003.
Additionally, companies will be permitted to apply the consensus guidance in
this issue to all existing arrangements as the cumulative effect of a change
in accounting principle in accordance with APB Opinion No. 20, Accounting
Changes. The company does not believe that adoption of this issue will have
a material impact on its consolidated financial position, consolidated results
of operations, or liquidity. The FASB issued Statement 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, in May 2003. Statement
150 changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in the fair value or the redemption amount, as
applicable, in earnings. F-15




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##### Table of Contents



Statement 150 requires an issuer to classify the following financial instruments as liabilities:  
    
    
    mandatorily redeemable preferred and common stocks
    
    
    forward purchase contracts that obligate the issuer to repurchase shares of its stock by transferring assets
    
    
    freestanding put options that may obligate the issuer to repurchase shares of its stock by transferring assets
    
    
    freestanding financial instruments that require or permit the issuer to settle
an obligation by issuing a variable number of its shares if, at inception, the monetary value
of the obligation is based solely or predominantly on any of the following:
    
    
    a fixed monetary amount known at inception
    
    
    variations in something other than the issuers shares, such as the price of gold multiplied by a fixed notional amount
    
    
    variations inversely related to changes in the value of the
issuers shares, such as a written put option that can be net share settled. Statement 150 is effective immediately for financial instruments (except for
mandatorily redeemable financial instruments issued by nonpublic companies)
entered into or modified after May 31, 2003. It is effective for financial
instruments (except for mandatorily redeemable financial instruments issued by
nonpublic companies) issued on or before May 31, 2003 at the beginning of the
first interim period beginning after September 15, 2003. Finally, it is
effective for mandatorily redeemable financial instruments issued by nonpublic
companies for fiscal years beginning after December 15, 2003. The effect of
adopting Statement 150 will be recognized as a cumulative effect of an
accounting change as of the beginning of the period of adoption. Restatement
of prior periods is not permitted. The adoption of this issue did not have a material impact on its consolidated financial
position, consolidated results of operations, or liquidity. In November 2002, the FASB issued Financial Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
guarantor must recognize, at the inception of a guarantee, a liability for the
fair value of the obligation that it has undertaken in issuing a guarantee.
FIN 45 also addresses the disclosure requirements that a guarantor must
include in its financial statements for guarantees issued, including matters
such as commercial product warranties. The disclosure requirements in this
interpretation are effective for financial statements for periods ending after
December 15, 2002. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. We adopted the recognition provisions of FIN
45 effective January 1, 2003 for guarantees issued or modified after December
31, 2002. The adoption of FIN 45 did not have a material impact on our
financial position, results of operations or cash flows. (See Note B-19 
Provisions for Warranty Claims). In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, which addresses consolidation by a business of
variable interest entities in which it is the primary beneficiary. In October
2003, the FASB deferred the effective date of FIN 46 to interim periods ending
after December 15, 2003 in order to address a number of interpretation and
implementation issues. The Company does not expect the adoption of the final
interpretation to have a material impact on its financial statements. The FASB recently issued Statement 132 (revised 2003), Employers Disclosures
about Pensions and Other Postretirement Benefits (Statement 132®).
Statement 132® retains all of the disclosures that are required by FASB
Statement 132, Employers Disclosures about Pensions and Other Postretirement
Benefits, and includes several additional disclosures. The additional
disclosures apply to both public and private companies, although there is a
delayed effective date for private companies. It also amends APB Opinion 28,
Interim Financial Reporting, to require certain disclosures about pension and
other postretirement benefit plans in interim financial statements. F-16




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##### Table of Contents



The additional annual disclosures in Statement 132(R) are required in
financial statements of public companies with fiscal years ending after
December 15, 2003 (December 31, 2003 financial statements for an entity with a
calendar year-end) except for disclosures about estimated future benefit
payments and the additional disclosures for foreign plans, which are effective
for fiscal years ending after June 15, 2004. The provisions of Statement
132(R) are effective for nonpublic companies and foreign plans for fiscal
years ending after June 15, 2004. The interim-period disclosures are required
in interim periods beginning after December 15, 2003 (March 31, 2004 for a
calendar year-end company). The adoption of the
final interpretation did not have a material impact on its financial statements. 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, the Companys operations used
significant amounts of cash in 2003. The Company continues to add products
and distribution channels for its products and closely monitor its costs, but
the Companys longer-term success will depend upon 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 (See Note C  Investments and Divestitures).
On January 13, 2004, the Company completed a private placement to Laurus
Master Fund, Ltd. (Laurus) of a Convertible Term Note in the principal
amount of $4,500,000 (see Note M  Subsequent Events). The proceeds from this
note were used to pay the $3,500,000 due Cingular, financing costs, and to
provide additional working capital. In order to provide additional
short-term liquidity the Company also intends to extend its revolving line of
credit. This line of credit was established on March 28, 2003. Alethea
Limited Partnership, an entity affiliated with the family of the Companys
chairman and CEO, agreed to provide to Digilog a one-year revolving line of
credit for $1,000,000. Under its terms, the line is secured by a lien on all
the assets of the Company subsequent to the rights of Laurus Group. Interest
on the line of credit is at a rate of ten percent (10%) per annum. There are
no restrictions on the use of the line. The minimum amount of any draw under
the line is $100,000. The Company guarantees the line of credit. As of
December 31, 2003, the Company had full availability to the entire $1,000,000
revolving line of credit. The Company believes that the combination of the convertible long term debt,
additional funding provided by the line of credit, and cash generated from
future operations will be sufficient to meet the Companys operating
requirements through at least December 31, 2004, assuming no material adverse
change in the operation of the Companys business or unforeseen issues
delaying or preventing the timely registering of the securities required by
the agreement with Laurus. The Company is also considering other sources of
funding, including the sale of certain non-core assets. F-17




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NOTE C  INVESTMENTS AND DIVESTITURES Cellemetry On
May 15, 1998, the Company, Bellsouth Wireless LLC
(BellSouth Wireless), currently known as Cingular and
formerly BellSouth Wireless, Inc., and Bellsouth Corporation completed a
transaction whereby Cellemetry LLC (Cellemetry) a joint venture between the
Company and BellSouth Wireless, was formed. Cellemetry, a Delaware limited
liability company, was owned 60% by the Company and 40% by BellSouth Wireless.
The parties entered into an operating agreement (the Operating Agreement),
which deals with, among other things, the conduct of the business of
Cellemetry. The Companys subsidiary recorded the assets contributed to Cellemetry by
BellSouth Wireless at fair value on the date of contribution. The fair
value of the patents contributed was $10,603,000, which is being
amortized over their remaining life of 15 years. In addition, BellSouth
Wireless contributed property and equipment valued at $285,000. The
results of operations and financial position of Cellemetry were
consolidated with the Company effective May 15, 1998, since the Company
controls the operations of Cellemetry. On November 18, 1999, effective as of November 1, 1999, the Company and
BellSouth Wireless completed the restructuring of the Cellemetry Operating
Agreement. Under the terms of the restructuring, the operating agreement of Cellemetry
has been modified (First Amendment to the Operating Agreement) and the
Cellemetry Business Plan has been modified, revised and extended through
November 1, 2004, (Modified Business Plan). All respective rights under the
Operating Agreement that triggered on May 15, 2001, three years from the date
of the formation of Cellemetry, have been revised to trigger on November 1,
2002, and all financial performance tests have been amended to reflect the
Modified Business Plan. In addition, the price at which the Company may, at
its sole option, elect that BellSouth Wireless put its ownership interest in
Cellemetry to the Company has been revised and set at $17,000,000.
Additionally, the agreement provided for the cancellation of the Cellemetry
Share Option Plan with the intent that the Company exchanges all outstanding
options for options to acquire shares of the capital stock of the Company. The restructuring also provided for Cellemetry to seek to find either a
foreign carrier or strategic investor (Third Party Investment) to invest new
capital in exchange for up to 15% of Cellemetry. In connection with any such
Third Party Investment, the Companys ownership interest in Cellemetry will
not be diluted below 51% and BellSouth Wirelesss will not be diluted below
34%. Pursuant to the First Amendment to the Operating Agreement, the Company, from
and including May 15, 1999, is no longer under an obligation to make any
additional capital contributions to Cellemetry. The Company committed to
provide up to $5,500,000 in interest bearing debt financing to Cellemetry. As
of December 31, 2003, the Company has provided total interest bearing
debt-financing amounting to $19,286,000. Also, pursuant to the First Amendment to the Operating Agreement, the Company
conveyed 100% of the capital stock of its wholly owned subsidiary Uplink to
Cellemetry. In addition, the Company issued to BellSouth Wireless 30,000
Series A Convertible Redeemable Preferred Stock of the Company (Preferred
Stock) at 8% yield. The preferred stock was redeemable, at the Companys
option, commencing November 1, 2000, on the basis of a pre-set annual
redemption price per share. Also, the Preferred Stock, at BellSouth Wirelesss
option, commencing November 1, 2003, or November 1, 2002, should the Companys
common stock exceed a pre-set market price for a given period of time, is
convertible into 625,000 shares of common stock of the Company, approximately
6% of the Companys common stock. The Preferred Stock carries certain
registration rights for the common stock upon such conversion. At December
31, 2003, the company had a dividend payable to BellSouth Wireless of $60,000
on the preferred stock. On December 2, 2002, BellSouth Wireless exercised its option to convert the
30,000 Series A Convertible Redeemable Preferred Stock to 625,000 shares of
the Companies common stock. This was approximately 5.5% of the Companys
common stock outstanding at December 31, 2002. F-18




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##### Table of Contents



On March 28, 2003, the Company acquired Cingulars interest in Cellemetry and
the 625,000 shares of the Companys stock owned by Cingular for $5,000,000.
Under the terms of the agreement, the Company has agreed to pay Cingular
$1,500,000 by December 15, 2003, $2,000,000 by March 31, 2004 and $1,500,000
by December 15, 2004. The Companys obligation is secured by a pledge of the
stock of all the Companys subsidiaries (except Digilog) and a lien on the
assets of all the Companys subsidiaries (except Digilog) and bears interest
at a rate of eight percent (8%) per annum. On September 15, 2003, the Company
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 (see below). Subsequent to
December 31, 2003, the Company paid the balance due Cingular of $3,500,000
from the proceeds of long term financing (see Note M  Subsequent Events). Data1Source On September 15, 2003, the Company sold the 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, if certain criteria are 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 finders fees and legal costs. The sale agreement included some
indemnification clauses up to a maximum of $500,000 if the Company failed to
meet certain commitments. The Company believes that it was adequately
provided for such potential indemnifications at December 31, 2003. At
closing, certain obligations of the Company were paid. This included the
first payment due on the note payable to Cingular (see above) of $1,500,000
and $605,000 payoff of the lease obligation on the software sold with
Data1Source. Subsequent to the sale of Data1Source LLC, the Company used a
portion of the proceeds to pay off the entire outstanding balance of $400,000
on its revolving line of credit (see Note D  Liquidity). The sale of
Data1Source LLC does not meet the requirements to be considered a significant
disposition. NOTE D   COSTS RELATED TO NON-RECURRING ACQUISITION ACTIVITY AND EMPLOYEE SEPARATION COSTS For year ended December 31, 2002, the Company 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. During the year ended December 31, 2001, the Company recorded a pre tax charge
of $418,000 to cover employee separation costs. NOTE E  INVENTORY Inventory consisted of the following: (In thousands)
    
    December 31,2003
    
    2002Raw materials
    
    $
    1,237
    
    
    $
    1,346Work-in-progress
    
    
    8
    
    
    
    20Finished goods
    
    
    2,216
    
    
    
    3,823Inventory, net
    
    $
    3,461
    
    
    $
    5,189
 F-19




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##### Table of Contents



NOTE F  PROPERTY AND EQUIPMENT Property and equipment consisted of the following: (In thousands)
    
    December 31,2003
    
    2002Leasehold improvements
    
    $
    461
    
    
    $
    461Plant and machinery
    
    
    6,838
    
    
    
    7,183Equipment, fixtures and fittings
    
    
    949
    
    
    
    930Total property and equipment
    
    
    8,248
    
    
    
    8,574Accumulated depreciation
    
    
    (6,952
    )
    
    
    (6,099
    )Property and equipment, net
    
    $
    1,296
    
    
    $
    2,475
 NOTE G  INCOME TAXES For the periods noted below, the provisions for income taxes consists of the following: (In thousands)
    
    For the years endedDecember 31,2003
    
    2002
    
    2001Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    (115
    )State
    
    
    30
    
    
    
    
    
    
    
    Foreign
    
    
    62
    
    
    
    96
    
    
    
    Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    $
    92
    
    
    $
    96
    
    
    $
    (115
    )
 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 31,2003
    
    2002
    
    2001Income tax (benefit) computed at
U.S. corporatetax rate of 34%
    
    $
    (595
    )
    
    $
    (2,500
    )
    
    $
    (1,107
    )Adjustments attributable to
Valuation allowance
    
    
    595
    
    
    
    2,500
    
    
    
    1,107State tax
    
    
    30
    
    
    
    
    
    
    
    Foreign tax
    
    
    62
    
    
    
    96
    
    
    
    Recovery of previously paid tax
    
    
    
    
    
    
    
    
    
    
    (115
    )$
    92
    
    
    $
    96
    
    
    $
    (115
    )
 F-20




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The components of the Companys net deferred tax assets and (liabilities)
are as follows:
(In thousands) December 31,2003
    
    2002Non-Current deferred tax liability:Differences between book and tax
basis of property and equipment
    
    $
    (192
    )
    
    $
    (124
    )(192
    )
    
    
    (124
    )Current deferred tax assetInventories
    
    
    354
    
    
    
    315Accruals
    
    
    116
    
    
    
    54Other
    
    
    325
    
    
    
    630795
    
    
    
    999Non-Current deferred tax Asset:Intangibles
    
    
    798
    
    
    
    693Net operating loss carry forward
    
    
    5,985
    
    
    
    5,223Tax credit carry forward
    
    
    1,892
    
    
    
    1,8928,675
    
    
    
    7,808Net deferred tax asset
    
    
    9,278
    
    
    
    8,683Valuation allowance
    
    
    (9,278
    )
    
    
    (8,683
    )Total
    
    $
    
    
    
    $
    
 Net operating loss carry forwards for federal and state income taxes available
at December 31, 2003, expire as follows: (In thousands)
    
    
    
    
    
    Year ofAmount
    
    ExpirationFederal Operating losses
    
    $
    5,810
    
    
    
    2023State operating losses
    
    $
    50,811
    
    
    
    2007-2023
 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. 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. Accordingly,
the Company may not have the future benefit of these operating loss carry
forwards to offset any future earnings for tax liability purposes. The Company
has not classified its net operating loss carry forwards as an asset in its
financial statements and thus a loss of net operating loss carry forwards does
not impact current operating results. 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 the net operating losses in question.
There is no assurance at this time that the IRS will grant the Companys ruling
request. F-21




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##### Table of Contents



NOTE H  SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES During the year ended December 31, 2002 there were two customers whos
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 2001. The company had one supplier from which the Companys purchases were
approximately 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. The components
included in the products purchased from this supplier can be sourced from
other suppliers. The company conducted business with three related parties during the year
ended December 31, 2003. (i) BellSouth Wireless owned 40% of Cellemetry LLC
and 5.5% (see Note C) of the Company up to March 28, 2003. BellSouth Wireless
provided $102,000 in communication services to the Company for the year ended
December 31, 2003 and the Company had an accounts payable balance with
BellSouth Wireless of $30,000 at December 31, 2003. Mr. Ryan, a director on
the Companys Board of Directors is also partner in the law firm of (ii)
Salisbury & Ryan LLP. Salisbury & Ryan LLP provided legal services to the
Company in fiscal 2003 and will continue to provide such services during
fiscal 2004. During fiscal 2003, Salisbury & Ryan LLP charged the Company
legal fees of approximately $360,000. The Companys accounts payable to
Salisbury & Ryan LLP was $64,000 at December 31, 2003. In order to provide
additional short-term liquidity to the Company, on March 28, 2003, (iii)
Alethea Limited Partnership, an entity affiliated with the family of the
Companys chairman and CEO, agreed to provide to Digilog a one-year revolving
line of credit for $1,000,000. Under its terms, the line is secured by lien
on all the assets of the Company subsequent to the rights of the Laurus Group
(see Note M-Subsequent Events). Interest on the line of credit is at a rate
of ten percent (10%) per annum. There are no restrictions on the use of the
line. The minimum amount of any draw under the line is $100,000. The Company
guarantees the line of credit. As of December 31, 2003 the Company had full
availability to the entire $1,000,000 revolving line of credit. NOTE I  COMMITMENTS AND CONTINGENCIES Capital Leases The Company conducts a portion of its 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 the Companys
incremental borrowing rate at the inception of the lease. The leases expire
at various dates through 2007. 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, 2003, (in thousands). 2004
    
    $
    3432005
    
    
    332006
    
    
    12007
    
    
    1Total minimum lease payments
    
    
    378Less amount representing interest
    
    
    (35
    )Present value of net minimum lease payments
    
    $
    343Current portion
    
    
    310Non-current portion
    
    
    33Total
    
    $
    343
 F-22




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##### Table of Contents



Operating Leases The Company leases certain property and equipment under noncancelable
operating leases with initial terms in excess of one year. Future minimum
lease payments under such noncancelable operating leases subsequent to
December 31, 2003, (in thousands) are as follows: 2004
    
    $
    6082005
    
    
    5352006
    
    
    5332007
    
    
    5422008
    
    
    548Beyond 2008
    
    
    230Total minimum lease payments
    
    $
    2,996
 Rent expense, including short-term leases, amounted to approximately $759,000,
$689,000, and $794,000 in the years ended December 31, 2003, 2002, and 2001
respectively. NOTE J  BENEFIT PLANS Savings and Investment Plan The Company sponsors a 401k savings and investment plan, a plan that covers
all Numerex Corp and its subsidiaries for employees who elect to participate.
Employees are eligible for participation on the enrollment date following six
months of service. The Company contributed 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. The Companys contribution is made in cash on a
monthly basis. Matching contributions of the Company are vested over a three
year period at a rate of 33% per year. Approximately $44,000, $143,000, and
$122,000 were expensed for the years ended December 31, 2003, 2002 and 2001. Employee Stock Purchase Plan All employees of the Company 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 share issued to the employee. There are
a total of 500,000 shares authorized of which 897 were issued in the year
ended December 31, 2003 at an average share price of $2.41. The
Company had 499,103 shares available to be issued for this plan at December
31, 2003. NOTE K  STOCK OPTION PLANS The Company has 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 the Company 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 and from October 25,
1999. F-23




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##### Table of Contents



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 the Companys 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. At December 31, 2003, 2002, and 2001, 2,070,701, 1,741,701, and
1,587,201 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, 853,006 have
either expired or been cancelled, 316,440 are currently exercisable, and the
remaining options will become exercisable in 2004 through 2008. At December 31, 2003, 2002, and 2001, 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, 210,000 have either expired and been cancelled or been cancelled,
79,750 are currently exercisable and the remaining options will become
exercisable beginning in 2004 or earlier if the accelerated vesting conditions
are met. The Company has a Non-Employee Director Stock Option Plan (the Director
Plan), which provides for the granting of stock options to non-employee
members of the Companys 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 the Companys 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, 2003, 2002, and 2001, 64,700, 60,700, 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, 51,700 are currently exercisable and the remaining options will
become exercisable in 2004. At December 31, 2003, 2002, and 2001, options to purchase 193,750, 193,750,
and 143,750, 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 the Company. Of these options 168,750 are currently
exercisable and the remaining options will become exercisable in 2004 through
2005. The fair value of each option on the date of grant for 2003, 2002, and 2001
was estimated using the Black-Scholes options pricing model with the following
weighted average assumptions: no dividend yield for all years; expected
volatility of 137% for 2003, 143% for 2002, and 121% for 2001; risk-free
interest rate of 3.79% for 2003, 3.35% for 2002, and 4.86% for 2001; and
expected option lives of 6.9 years for 2003, 7.3 years for 2002, and 7.5 years
for 2001. F-24




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##### Table of Contents



The exercise price for 1,200,515 options outstanding at December 31, 2003, 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 2003, 2002, and 2001
was $2.30, $5.71, and $5.76, 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, 2003, 2002 and 2001. For the years ended December 31,2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageShares
    
    Ex. Price
    
    Shares
    
    Ex. Price
    
    Shares
    
    Ex. PriceOutstanding,
beginning of year
    
    
    1,058,873
    
    
    $
    6.18
    
    
    
    1,253,455
    
    
    $
    5.91
    
    
    
    1,007,384
    
    
    $
    5.66Options granted
    
    
    333,000
    
    
    
    2.45
    
    
    
    154,500
    
    
    
    6.00
    
    
    
    444,701
    
    
    
    6.27Options exercised
    
    
    
    
    
    
    
    
    
    
    (254,832
    )
    
    
    4.56
    
    
    
    (104,601
    )
    
    
    3.30Options cancelled
    
    
    (191,358
    )
    
    
    5.67
    
    
    
    (94,250
    )
    
    
    6.87
    
    
    
    (94,029
    )
    
    
    7.78Outstanding, end of year
    
    
    1,200,515
    
    
    $
    5.21
    
    
    
    1,058,873
    
    
    $
    6.18
    
    
    
    1,253,455
    
    
    $
    5.91Exercisable, end of year
    
    
    616,640
    
    
    $
    6.18
    
    
    
    525,048
    
    
    $
    5.80
    
    
    
    489,130
    
    
    $
    4.86
 NOTE L  GEOGRAPHIC INFORMATION The Company operates in a single industry segment. Information about the
Companys operations in different geographic areas for the years ended
December 31, 2003, 2002, and 2001 respectively, are as follows: (In
thousands) U.S.
    
    Australia
    
    ConsolidatedNet sales:2003 - year
    
    $
    19,513
    
    
    $
    644
    
    
    $
    20,1572002 - year
    
    
    24,213
    
    
    
    288
    
    
    
    24,5012001 - year
    
    
    23,907
    
    
    
    351
    
    
    
    24,258Operating profit (loss):2003 - year
    
    $
    (2,911
    )
    
    $
    185
    
    
    $
    (2,726
    )2002 - year
    
    
    (7,553
    )
    
    
    85
    
    
    
    (7,468
    )2001 - year
    
    
    (7,353
    )
    
    
    23
    
    
    
    (7,330
    )Identifiable assets:2003 - year
    
    $
    32,757
    
    
    $
    1,213
    
    
    $
    33,9702002 - year
    
    
    37,057
    
    
    
    54
    
    
    
    37,0032001 - year
    
    
    42,613
    
    
    
    361
    
    
    
    42,974
 F-25




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##### Table of Contents



NOTE M  SUBSEQUENT EVENTS On January 13, 2004, the Company completed a private placement to 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).
The Company used the net proceeds of $4,270,000 to retire the $3,500,000 debt
owed to BellSouth Personal Communications LLC (see Note C  Investments and
Divestitures) and to provide additional working capital. The Company Note has a
term of three years maturing on January 12, 2007 and is secured by
substantially all of the assets of the Company and its U.S. subsidiaries except
DCX Systems Australia Pty Limited. Each of the Companys U.S. subsidiaries
also has provided a guaranty to Laurus. Interest accrues on the Company Note
at an annual rate of 8%, and interest and principal may be paid by the Company
in either cash or in Common Stock. The Company 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 Company Note, and any
accrued interest, may be converted by Laurus into the Companys 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 the Company
using Common Stock, the number of shares to be issued to Laurus by the Company
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 month to month basis, a portion of the
Company Note that exceeds 10% of that number of shares of the Company 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. The Company has 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 the Company and Laurus. The Company
is required to register these Securities within six months from January 13,
2004. Failure to do so would lead to monthly penalties for the next six months
and if the Company fails to register the Securities after one year, Laurus has
the right to require full payment of the unpaid principal and interest and can
invoke its rights under the security agreement. F-26




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##### Table of Contents



Report of Independent Certified Public Accountants To the Shareholders and Board of
     Directors of Numerex Corp. and Subsidiaries In connection with our audit of the consolidated financial statements of
Numerex Corp. and Subsidiaries referred to in our report dated February 20,
2004, which is included in the Part IV of this Form 10-K, we have also audited
Schedule II for each of the three years in the period ended December 31, 2003.
In our opinion, this schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. /s/ Grant Thornton LLP Atlanta, Georgia
February 20, 2004 S-1




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##### Table of Contents



NUMEREX CORP.VALUATION AND QUALIFYING ACCOUNTS (in thousands) SCHEDULE II Balance at
    
    
    
    
    
    Charges
    
    
    
    
    
    Balance atbeginning of
    
    
    
    
    
    to
    
    
    
    
    
    end ofDescription
    
    Period
    
    Provisions
    
    expense
    
    Deductions
    
    PeriodYear ended December 31, 2001:Accounts receivableAllowance for
uncollectible accounts
    
    
    431
    
    
    
    158
    
    
    
    (55
    )
    
    
    0
    
    
    
    534InventoryAllowance for obsolescence
    
    
    1,020
    
    
    
    0
    
    
    
    0
    
    
    
    (89
    )
    
    
    931Year ended December 31, 2002:Accounts receivableAllowance for
uncollectible accounts
    
    
    534
    
    
    
    2,578
    
    
    
    (1,837
    )
    
    
    0
    
    
    
    1,275InventoryAllowance for obsolescence
    
    
    931
    
    
    
    358
    
    
    
    0
    
    
    
    (513
    )
    
    
    776Year ended December 31, 2003:Accounts receivableAllowance for
uncollectible accounts
    
    
    1,275
    
    
    
    551
    
    
    
    (551
    )
    
    
    (666
    )
    
    
    609InventoryAllowance for obsolescence
    
    
    776
    
    
    
    272
    
    
    
    0
    
    
    
    (367
    )
    
    
    681
 S-2