##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K/A  (Mark One) [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Fiscal Year ended December 31, 2003  [ ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-22920 NUMEREX CORP.  Pennsylvania
    
    11-2948749(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)1600 Parkwood Circle
Suite 200
Atlanta, Georgia
    
    30339-2119(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (770) 693-5950 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, no par value(Title of Class)
  Indicate by check mark whether the Registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (ii) has been subject to such filing
requirements for the past 90 days. 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 [ ]       No [ X ]  The aggregate market value of voting and non-voting stock held by
non-affiliates of the Registrant as of June 30, 2003 is
$21,081,062.1The number of shares outstanding of the issuers Class A Common Stock, no
par value as of March 4, 2004 is 10,791,986.




---



##### Table of Contents



While there are no changes to the financial results, the Company is filing this 10-K/A in order to provide more detailed financial information including the following:  
    
    The inclusion of 5 year selected financial date under
Part II, Item 6. Selected Financial Data,  
    
    an update to the statement of operations to break out
product and service revenues and cost of sales, bad debt expense
and foreign currency gains and losses. Managements discussion
and analysis of financial condition and results of operations were
also updated for these changes.  
    
    An update to the Consolidated Statements of Cash Flows to
correct the breakout of bad debt reserves and changes in accounts
receivable.  
    
    There were also some updates to Notes to the Consolidated
Financial Statements, including an update to Note A-6, Impairment
of Long-lived Assets to add a more detailed description of the
testing process,  
    
    and the inclusion of segment information for four
reporting segments of Wireless Data Communications, Digital
Multimedia & Networking, Wireline and unallocated corporate
expenses under the Notes to Consolidated Financial Statements,
Note L  Geographic Information.  
    
    Additionally there was update to Schedule II, Valuation
and Qualifying Accounts to conform to the required format. 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.




---



Table of Contents Description
    
    Page No.Part IIItem 6. Selected Financial Data
    
    
    1Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    3Item 8. Financial Statements and Supplementary Data
    
    
    22Part IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    23EX-23 CONSENT OF GRANT THORNTON LLPEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO




---



##### Table of Contents



PART II 
 Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto contained herein in
Item 8. Financial Statements and Supplementary Data and the information
contained herein in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations. Historical results are not necessarily
indicative of future results. The following financial information was derived using the consolidated
financial statements of Numerex Corp. at and for each of the fiscal years in
the four-year period ended December 31, 2003, the two month period ended
December 31, 1999 and the fiscal year ended October 31, 1999. After October
31, 1999 the Company changed its fiscal year end to December 31. Some amounts
may have been reclassified to match the current presentation. 1




---



##### Table of Contents



Two MonthYear ended
    
    Year ended
    
    Year ended
    
    Year ended
    
    Period ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    October 31,(In thousands, except per share data)
    
    2003
    
    2002
    
    2001
    
    2000
    
    19995
    
    1999Statement of Operations DataRevenues
    
    $
    20,157
    
    
    $
    24,501
    
    
    $
    24,258
    
    
    $
    20,290
    
    
    $
    2,301
    
    
    $
    33,736Gross profit
    
    
    9,029
    
    
    
    10,221
    
    
    
    9,254
    
    
    
    8,000
    
    
    
    555
    
    
    
    19,333Operating income (loss)
    
    
    (2,726
    )
    
    
    (7,468
    )3
    
    
    (7,330
    )
    
    
    (9,006
    )
    
    
    (2,599
    )
    
    
    (2,757
    )Net income (loss)
    
    
    (1,404
    )1
    
    
    (7,450
    )
    
    
    (3,142
    )
    
    
    (3,960
    )
    
    
    9,911
    6
    
    
    (1,617
    )Earnings (loss) per common share (diluted)
    
    
    (0.13
    )
    
    
    (0.71
    )
    
    
    (0.32
    )
    
    
    (0.40
    )
    
    
    0.85
    
    
    
    (0.16
    )Balance Sheet DataTotal assets
    
    $
    33,970
    
    
    $
    37,111
    
    
    $
    42,974
    
    
    $
    45,942
    
    
    $
    56,405
    
    
    $
    46,628Capital lease obligations (short and long
term)
    
    
    344
    
    
    
    1,573
    
    
    
    472
    
    
    
    138
    
    
    
    110
    
    
    
    114Shareholders equity
    
    
    25,366
    2
    
    
    27,615
    
    
    
    34,108
    
    
    
    36,902
    4
    
    
    42,908
    6
    
    
    30,021Cash Flow DataNet cash used in operations
    
    $
    269
    
    
    $
    2,890
    
    
    $
    3,237
    
    
    $
    7,482
    
    
    $
    158
    
    
    $
    2,690
  1
    
    - Includes gain on the sale of business of $1.7 million.2
    
    - Includes purchase of treasury stock of $1.0 million.3
    
    - Includes costs of non-recurring acquisition activity of $1.9 million.4
    
    - Includes purchase of treasury stock of $4.0 million.5
    
    - In 1999 the Company changed its fiscal year end from October 31 to December 31.6
    
    - Includes gain on the disposition of business and assets of $12.7 million. Note  certain items may have been reclassified to match the current presentation. 2




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations. Forward-Looking Statement 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. Overview 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. 2003 marked a year of transition and re-positioning for the Company.
Revenues declined compared to the prior year because of reduced Digital
Multimedia and Wireless Data product sales. However, it is believed that their
decline will be reversed in 2004 primarily as a result of the new product
introductions of Mobile Guardian, VendView and IP Contact that were announced
in 2003. In addition, many of the Companys businesses are built on the model
of recurring service revenues and the expectation is that this will continue to
grow in 2004 as it did in 2003. 2003 also marked a continuation of the focus on controlling expenses in
Selling, General and Administrative as well as Research and Development
categories. As a result, significant expense reductions were achieved in both
categories. These reductions will not continue, but equally it is expected
that any increases will be modest and relevant to supporting greater revenues. Finally in 2003, was focused on strengthening the balance sheet and
improving the liquidity position of the Company. To accomplish these goals,
Data1Source LLC was sold which resulted in an early payment of $1,500,000 to
Cingular, the repayment of the entire amount outstanding under the revolving
line of credit as well as substantially reducing capital lease liabilities. In
addition, in January 2004 a private placement was arranged with the Laurus
Master Fund of a $4,500,000 Term Convertible Note. The net proceeds will be
used primarily for the repayment of the Companys remaining short term debt to
Cingular and to provide additional working capital. It is believed that
operations in 2004 will generate sufficient cash to not only support the
ongoing business of the Company but also service the Laurus Term Note. 3




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal years ended December 31,
2003 and 2002 and 2001. This discussion should be read in conjunction with the
Companys consolidated financial statements, the related notes thereto, and
other financial information included elsewhere in this report. Critical Accounting Policies Note A of the Notes to the Consolidated Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of Numerexs Consolidated Financial Statements. The following is a
brief discussion of the more significant accounting policies and methods used. General The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to
revenue recognition, accounts receivable and allowance for doubtful accounts,
inventories and the adequacy of reserves for excess and obsolete inventories,
accounting for income taxes and valuation of goodwill and other intangible
assets. Actual amounts could differ significantly from these estimates. Revenue Recognition The Company primarily sells products, recurring services (most billed on a
monthly basis) and on-demand services. Product revenues are recognized at the time title passes to the customer,
which in most cases is at the time of shipment. However, the Company did have
one significant product shipment during the year where the Company did not
recognize revenue at the passage of title. In May 2003, pursuant to an
agreement signed by the Company and a customer in Australia, the Company
shipped $583,000 of wireline security detection equipment, in exchange for a
share of the customers future revenues. Under the agreement with the
customer, title passed to the customer at the time of acceptance that occurred
in May 2003. 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. Currently the Company plans to
recognize revenue and related costs as revenues are received. 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. In May 2003, the value of
the wire-line equipment was transferred from inventory to other assets. (See
Discussion of Results from Operations for the fiscal years ended December 31,
2003 and December 31, 2002 below). The Company bills most of its recurring service revenues on a monthly
basis. Most of these revenues are generated by providing customers access to
the Companys wireless machine-to-machine communications network (the Network).
The Company sells these services to retailers and wholesalers of the service.
For services sold to retailers, monthly service fees are generally a fixed
monthly amount billed one month in advance. The Company defers the advance
billing for the service and recognizes the revenue when the services are
provided. For services sold to wholesalers, the customers are billed a fixed
base fee in advance and usage fees in arrears at the end of each month. Again
the Company defers the advance billing of the base fee and recognizes the
revenues when the services are performed. On occasion some customers will have
units that malfunction and cause their Network usage and related fees to
increase dramatically over normal usage. While these customers are
contractually obligated to pay for any such excess usage, the Company has
experienced problems in collecting such fees. Therefore, for accounting
purposes, the Company reduces the revenue recognized for such occurrences based
on prior collections experience. These types of incidents have been relatively
rare in the past and the Company does not expect this to change in the
foreseeable future. 4




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) The Company also provides services on a demand basis  such as
installation services. These types are services are generally completed in a
short period of time (usually less than one month) and are billed and the
revenue recognized when the services are completed. The Company does occasionally have multiple element service agreements,
which involve both the supply of product and the provision of services over a
multi-year arrangement. Accounting principles for agreements involving multiple
elements require 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
undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the fair value method.
Under these methods, the fair value of the undelivered element is deferred and
is recognized ratably over the contract term on an earned basis. In the case
of the supply of product the Company maintains title to the product and
transfers title at the completion of the contract term. Accounts Receivable and Allowance For Doubtful Accounts The Companys estimate for its allowance for doubtful accounts related to
trade receivables is based on two methods. The amounts calculated from each of
these methods are combined to determine the total amount reserved. First, the
Company evaluates specific accounts where information exists that the customer
may have an inability to meet its financial obligations. In these cases, the
Company uses its judgment, based on the best available facts and circumstances,
and records a specific reserve for that customer to reduce the receivable to
the amount that is expected to be collected. These specific reserves are
reevaluated and adjusted as additional information is received that impacts the
amount reserved. Second, the Company establishes a general reserve for all
customers based on a range of percentages applied to aging categories. These
percentages are based on historical collection and write-off experience. If
circumstances change (i.e. higher than expected defaults or an unexpected
material adverse change in a major customers ability to meet its financial
obligation to the Company), the Companys estimates of the recoverability of
amounts due the Company could be reduced by a material amount. During 2002 there was a significant downturn in the general economic
conditions in the communications industry. While the Company has relatively
few substantial customers, the Company has a very large number of low volume
small business customers (mostly in the security industry). Many of these
customers were particularly vulnerable to the economic downturn and they
experienced significant liquidity problems as their customers slowed payments
to them and their access to financing and capital diminished. This forced many
of these customers to sell their companies and led to significant consolidation
in the industry. This created significant collections problems for the
Company in 2002 as many of these customers sold their businesses as asset
sales, with the acquiring companies refusing to pay for prior products and
services provided by the Company. As a result, the Company had to
significantly increase its bad debt reserves to $1,275,000 and had $1,837,000
in bad debt expense for the year ended December 31, 2002. The Company reviewed
and tightened its credit polices and put more resources into collections
efforts. As a result of these changes, the Company experienced a significant
reduction in bad debt expense to $555,000 for the year ended December 31, 2003.
The Companys accounts receivable aging also significantly improved due to
these efforts, thus reducing the necessary bad debt reserve to $609,000. While
the Company still expects to see some improvement in bad debt expense as the
general economic conditions improve, it does not expect the significant
improvement that occurred between 2002 and 2003. The Company recognizes that material differences may result in the amount
and timing of expenses for any period if the Company made different judgments
or utilized different estimates. 5




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Inventories and Reserves For Excess, Slow-Moving and Obsolete Inventory The Company values inventory at the lower of cost or market, which equates
to net realizable value. The Company continually evaluates the composition of
its inventory and identifies, with estimates, potential future excess, obsolete
and slow-moving inventories. The Company specifically identifies obsolete
products for reserve purposes and analyzes historical usage, forecasted
production based on demand forecasts, current economic trends, and historical
write-offs when evaluating the adequacy of the reserve for excess and
slow-moving inventory. If the Company is not able to achieve its expectations
of the net realizable value of the inventory at its current value, the Company
would adjust its reserves accordingly. Material differences in estimates of excess, slow-moving and obsolete
inventory may affect the amount and timing of cost of sales for any period if
the Company made different judgments or utilized different estimates. The
Companys reserve for excess, slow-moving and obsolete inventory amounted to
$681,000, as of December 31, 2003. Valuation of Goodwill and Other Intangible Assets The Company assesses the impairment of goodwill and identifiable
intangible assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important which could
trigger an impairment review include the following:  
    
    significant underperformance relative to expected historical or
projected future operating results;  
    
    significant changes in the manner of use of the acquired assets
or the strategy for the overall
business; and  
    
    significant negative industry or economic trends. When determined that the carrying value of goodwill and other intangible
assets may not be recoverable based upon the existence of one or more of the
above indicators of impairment, the Company measures any impairment based on a
projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in the Companys current
business model. Net goodwill and intangible assets amounted to $22,993,000 as
of December 31, 2003. In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective and as a result, the Company ceased to amortize $10,983,000 of
goodwill. On March 28, 2003 the Company purchased the 40% share Cingular owned
in Cellemetry LLC. This gave the Company 100% ownership of Cellemetry LLC and
increased total goodwill to $15,014,000 at December 31, 2003. The Company had
recorded $733,000 of amortization during 2001 and would have recorded
approximately $768,000 of amortization during 2002 and approximately $918,000
in 2003. In lieu of amortization, the Company is required to perform an annual
impairment review of goodwill. Based on this initial review at January 1, 2002
and the annual review at December 31, 2002 and 2003, the Company did not record
an impairment charge. The above listing is not intended to be a comprehensive list of all of the
Companys accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted
accounting principles, with no need for managements judgment in their
application. There are also areas in which managements judgment in selecting
any available alternative would not produce a materially different result. See
the Companys audited consolidated financial statements and notes thereto which
begin on page F-1 of this Annual Report on Form 10-K which contain accounting
policies and other disclosures required by generally accepted accounting
principles. 6




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) SELECTED CONSOLIDATED STATEMENTS OF OPERATION 2002 to
    
    2001 toTwelve Month Period EndedDecember 31,
    
    2003%
    
    2002%2003
    
    2002
    
    2001
    
    Change
    
    ChangeNet sales:Wireless Data CommunicationsProduct
    
    $
    4,839
    
    
    $
    7,461
    
    
    $
    7,007
    
    
    
    (35.1
    %)
    
    
    6.5
    %Service
    
    
    7,848
    
    
    
    6,748
    
    
    
    4,493
    
    
    
    16.3
    %
    
    
    50.2
    %Sub-total
    
    
    12,687
    
    
    
    14,209
    
    
    
    11,500
    
    
    
    (10.7
    %)
    
    
    23.6
    %Digital Multimedia and NetworkingProduct
    
    
    2,647
    
    
    
    5,668
    
    
    
    7,948
    
    
    
    (53.3
    %)
    
    
    (28.7
    %)Service
    
    
    3,518
    
    
    
    3,686
    
    
    
    3,696
    
    
    
    (4.6
    %)
    
    
    (0.3
    %)Sub-total
    
    
    6,165
    
    
    
    9,354
    
    
    
    11,644
    
    
    
    (34.1
    %)
    
    
    (19.7
    %)Wireline SecurityProduct
    
    
    449
    
    
    
    230
    
    
    
    392
    
    
    
    95.2
    %
    
    
    (41.3
    %)Service
    
    
    856
    
    
    
    708
    
    
    
    722
    
    
    
    20.9
    %
    
    
    (1.9
    %)Sub-total
    
    
    1,305
    
    
    
    938
    
    
    
    1,114
    
    
    
    39.1
    %
    
    
    (15.8
    %)Total net salesProduct
    
    
    7,935
    
    
    
    13,359
    
    
    
    15,347
    
    
    
    (40.6
    %)
    
    
    (13.0
    %)Service
    
    
    12,222
    
    
    
    11,142
    
    
    
    8,911
    
    
    
    9.7
    %
    
    
    25.0
    %Total net sales
    
    
    20,157
    
    
    
    24,501
    
    
    
    24,258
    
    
    
    (17.7
    %)
    
    
    1.0
    %Cost of product sales (excluding depreciation)
    
    
    6,043
    
    
    
    9,836
    
    
    
    10,674
    
    
    
    (38.6
    %)
    
    
    (7.9
    %)Cost of services (excluding depreciation and
amortization)
    
    
    4,443
    
    
    
    4,116
    
    
    
    4,063
    
    
    
    7.9
    %
    
    
    1.3
    %Depreciation and amortization
    
    
    642
    
    
    
    328
    
    
    
    267
    
    
    
    95.7
    %
    
    
    22.8
    %Gross profit
    
    
    9,029
    
    
    
    10,221
    
    
    
    9,254
    
    
    
    (11.7
    %)
    
    
    10.4
    %%
    
    
    44.8
    %
    
    
    41.7
    %
    
    
    38.1
    %Selling, general, administrative and
other expenses
    
    
    8,371
    
    
    
    10,672
    
    
    
    10,168
    
    
    
    (21.6
    %)
    
    
    5.0
    %Research and development expenses
    
    
    905
    
    
    
    1,097
    
    
    
    2,755
    
    
    
    (17.5
    %)
    
    
    (60.2
    %)Bad debt expense
    
    
    551
    
    
    
    1,837
    
    
    
    542
    
    
    
    (70.0
    %)
    
    
    239.0
    %Depreciation and amortization
    
    
    1,928
    
    
    
    2,184
    
    
    
    2,701
    
    
    
    (11.7
    %)
    
    
    (19.1
    %)Costs related to non-recurring
acquisition activity
    
    
    
    
    
    
    1,899
    
    
    
    
    
    
    
    (100.0
    %)
    
    
    100.0
    %Business restructuring charges
    
    
    
    
    
    
    
    
    
    
    418
    
    
    
    0.0
    %
    
    
    100.0
    %Operating loss
    
    
    (2,726
    )
    
    
    (7,468
    )
    
    
    (7,330
    )
    
    
    63.5
    %
    
    
    (1.9
    %)Net loss
    
    
    (1,404
    )
    
    
    (7,450
    )
    
    
    (3,142
    )
    
    
    81.2
    %
    
    
    (137.1
    %)Net loss applicable to common
Shareholders
    
    
    (1,404
    )
    
    
    (7,690
    )
    
    
    (3,382
    )
    
    
    81.7
    %
    
    
    (127.4
    %)Basic loss per share
    
    
    (0.13
    )
    
    
    (0.71
    )
    
    
    (0.32
    )Weighted average shares outstanding
    
    
    10,934
    
    
    
    10,766
    
    
    
    10,446
 7




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Result of Operations The following table sets forth, for the periods indicated, the percentage
of net sales represented by selected items in the Companys Consolidated
Statements of Operations. Twelve Month Period EndedDecember 31,2003
    
    2002
    
    2001Net sales:Wireless Data CommunicationsProduct
    
    
    24.0
    %
    
    
    30.5
    %
    
    
    28.9
    %Service
    
    
    38.9
    %
    
    
    27.5
    %
    
    
    18.5
    %Sub-total
    
    
    62.9
    %
    
    
    58.0
    %
    
    
    47.4
    %Digital Multimedia and NetworkingProduct
    
    
    13.1
    %
    
    
    23.1
    %
    
    
    32.8
    %Service
    
    
    17.5
    %
    
    
    15.0
    %
    
    
    15.2
    %Sub-total
    
    
    30.6
    %
    
    
    38.2
    %
    
    
    48.0
    %Wireline SecurityProduct
    
    
    2.2
    %
    
    
    0.9
    %
    
    
    1.6
    %Service
    
    
    4.2
    %
    
    
    2.9
    %
    
    
    3.0
    %Sub-total
    
    
    6.5
    %
    
    
    3.8
    %
    
    
    4.6
    %Total net salesProduct
    
    
    39.4
    %
    
    
    54.5
    %
    
    
    63.3
    %Service
    
    
    60.6
    %
    
    
    45.5
    %
    
    
    36.7
    %Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of product sales (excluding depreciation)
    
    
    30.0
    %
    
    
    40.1
    %
    
    
    44.0
    %Cost of services (excluding depreciation and
amortization)
    
    
    22.0
    %
    
    
    16.8
    %
    
    
    16.7
    %Depreciation and amortization
    
    
    3.2
    %
    
    
    1.3
    %
    
    
    1.1
    %Gross profit
    
    
    44.8
    %
    
    
    41.7
    %
    
    
    38.1
    %Selling, general, administrative and
other expenses
    
    
    41.5
    %
    
    
    43.6
    %
    
    
    41.9
    %Research and development expenses
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    11.4
    %Bad debt expense
    
    
    2.7
    %
    
    
    7.5
    %
    
    
    2.2
    %Depreciation and amortization
    
    
    9.6
    %
    
    
    8.9
    %
    
    
    11.1
    %Costs related to non-recurring
acquisition activity
    
    
    0.0
    %
    
    
    7.8
    %
    
    
    0.0
    %Business restructuring charges
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.7
    %Operating loss
    
    
    (13.5
    %)
    
    
    (30.5
    %)
    
    
    (30.2
    %)Net loss
    
    
    (7.0
    %)
    
    
    (30.4
    %)
    
    
    (13.0
    %)Net loss applicable to common
shareholders
    
    
    (7.0
    %)
    
    
    (31.4
    %)
    
    
    (13.9
    %)
 See notes to consolidated financial statements 8




---



##### Table of Contents



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




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Operating expense depreciation and amortization expense decreased 11.7% to
$1,928,000 for the year ended December 31, 2003 as compared to $2,184,000 for
the year ended December 31, 2002. This was due to some older assets becoming
fully depreciated while the Company has had a limited requirement for the
purchase of new equipment. Costs related to non-recurring acquisition activity were $1,899,000 for
the year ended December 31, 2002. This write-off was the result of the Company
reaching an impasse in the second quarter of 2002 in its negotiations with BT
Group plc to acquire their RedCARE division, its security products and service
business. These costs were primarily related to legal and accounting expenses
incurred during diligence and negotiations. Interest expense (net) increased to $354,000 in 2003 compared to $199,000
for the prior year. This increase in net interest expense was primarily the
result of increased interest expense on the $5,000,000 note payable incurred on
March 28, 2003 to Cingular for the purchase of their interest in Cellemetry
(see explanation under Liquidity and Capital Resources). There was also
additional interest expense in the year ended December 31, 2003 versus the same
period in 2002 on the Companys revolving line of credit. Gain on sale of business of $1,712,000 for the year ended December 31,
2003 was due to the sale of the Companys Data1Source mobile messaging service
through an entity Data1Source LLC. The selling price was approximately
$3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six
months on March 15, 2004, if certain criteria are met. Currently it has not
been determined if these criteria have been met. Costs associated with the
transaction included the net book value of the assets sold, including software
and computer hardware, and transaction costs including finders fees and legal
costs. While the sale of Data1Source LLC did not meet the requirements to be
considered a significant disposition, its sale will have a negative impact on
future revenues, gross margins and cash flow because of the profitable nature
of the business. Foreign currency gain of $56,000 for the year ended December 31, 2003
versus a loss of $13,000 was mostly the result of foreign currency gains on
sales to Canadian customers due to the weakening of the U.S. dollar versus the
Canadian dollar. Minority interest for the year ended December 31, 2003 was $0 compared to
$326,000 for the year ended December 31, 2002. The principle reason for the
decrease in Minority interest was the depletion of Minority Interest on the
Companys balance sheet related to a joint venture. The Company purchased the
minority parties interest on March 28, 2003. Due to its net loss from operations, the Company did not record a tax
provision in the years ended December 31, 2003 and 2002, respectively. The
$92,000 in income tax expense recorded for 2003 relates the Companys
operations in Australia and certain state income taxes. The Company is
entitled to the benefits of certain net operating loss carry forwards, however,
net operating loss carry forwards of approximately $2,900,000 and $8,500,000
for the years ended December 31, 2001 and 2002 respectively may not be
available in future years. 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. The Company believes it has a reasonable
chance of receiving a favorable ruling on this matter. The Company recorded a net loss of $1,404,000 for the year ended December
31, 2003 compared to a net loss of $7,450,000 for the year ended December 31,
2002. Preferred stock dividend for the year ended December 31, 2003 was $0 as
compared to $240,000 for the year ended December 31, 2002. This decrease was
due to the conversion of the preferred stock to the Companys common stock in
December 2002. The Company recorded a net loss applicable to common shareholders of
$1,404,000 for the year ended December 31, 2003 as compared to net loss
applicable to common shareholders of $7,690,000 for the year ended December 31,
2002. Basic and diluted loss per common share decreased to $(0.13) for year
ended December 31, 2003 as compared to $(0.71) for the year ended December 31,
2002. 10




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) The weighted average and diluted shares outstanding increased to
10,934,000 for the year ended December 31, 2003 as compared to 10,766,000 for
the year ended December 31, 2002. The increase in weighted average basic and
diluted shares outstanding was primarily due to the conversion of preferred
stock to 625,000 shares of the Companys common stock in December 2002, the
exercise of stock options, and share issued under the employee stock purchase
plan. The 625,000 shares of common stock were repurchased on March 28, 2003
(see explanation under Liquidity and Capital Resources). Fiscal Years Ended December 31, 2002 and December 31, 2001 Net sales increased 1.0% to $24,501,000 for the year ended December 31,
2002 as compared to $24,258,000 for the year ended December 31, 2001. This
increase in total net sales was the result of increased net sales from Wireless
Data Communication products and services, partially offset by a decrease in net
sales from Digital Multimedia and Networking and Wireline Security products and
services. As a percentage of total net sales, services revenues of the Company
increased to 45.5% for the year ended December 31, 2002 compared to 36.7% in
the comparable period in 2001. Cost of product sales decreased 7.9% to $9,836,000 for the year ended
December 31, 2002 as compared to $10,674,000 for the year ended December 31,
2001. This decrease was primarily due to the lower product sales volume in
Digital Multimedia and Networking and lower product costs due to the redesign
of the certain wireless devices that were introduced in the first quarter of
2002. Cost of services increased 1.3% to $4,116,000 for the year ended December
31, 2002 as compared to $4,063,000 for the year ended December 31, 2001. This
increase was due to increased service revenue volumes in Wireless Data
Communications. Cost of services increased only slightly versus the significant
increase in the services sales volumes. This was due to improved utilization
of Companys wireless communications network and its support personnel which
have components that are fixed or partially fixed in nature. Cost of sales depreciation and amortization expense increased 23.2% to
$328,000 for the year ended December 31, 2002 as compared to $267,000 for the
year ended December 31, 2001. Gross profit, as a percentage of net sales, was 41.7% for the year ended
December 31, 2002 as compared to 38.1% for the year ended December 31, 2001.
The reason for the increase in the gross profit rate for the year was primarily
attributable to the higher service activities of Wireless Data Communications,
along with the lower product costs due to the redesign of certain wireless
devices. The sale of a gateway software license recorded in the second quarter
of 2002 had a significant positive impact on margin percentage for the year
ended in December 31, 2002, since this software was originally developed for
Cellemetrys internal use, there was little additional costs associated with
this sale to an external customer. This added approximately 1.2% to the margin
percentage for 2002. Selling, general, administrative and other expenses increased 5.0% to
$10,672,000 for the year ended December 31, 2002 as compared to $10,168,000 for
the year ended December 31, 2001. As a percentage of sales, selling, general,
administrative and other expenses increased to 43.6% for the year ended
December 31, 2002 as compared to 41.9% for the year ended December 31, 2001.
This increase was primarily due to increased sales efforts for the Companys
Wireless Data Communications products and services. Research and development expenses decreased 60.2% to $1,097,000 for the
year ended December 31, 2002 as compared to $2,755,000 for the year ended
December 31, 2001. The principal reasons for the decrease in research and
development expenses was the reduced requirement for development efforts in
2002 for the Companys product and services and the capitalization of
development costs of $872,000 during the year for new products and services
that reached technical feasibility and for internal use software developed
during these periods. Bad debt expense increase 239.0% to $1,837,000 for the year ended December
31, 2002 as compared to $542,000 for the year ended December 31, 2001. This
increase was due to write-offs and increases in allowances for doubtful
accounts due to an increase in customers not being able to pay as a result of
significant weakening of economic conditions in the communications industry.
This led to a tightening of the Companys credit policy. 11




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Operating expense depreciation and amortization expense decreased 19.1% to
$2,184,000 for the year ended December 31, 2002 as compared to $2,701,000 for
the year ended December 31, 2001. The principal reason for the decrease is due
to the reduction in goodwill amortization expense resulting from the
implementation of SFAS 142 on January 1, 2002. Costs related to non-recurring acquisition activity were $1,899,000 for
the year ended December 31, 2002. This write-off was the result of the Company
reaching an impasse in the second quarter of 2002 in its negotiations with BT
Group plc to acquire their RedCARE division, its security products and service
business. These costs were primarily related to legal and accounting expenses
incurred during diligence and negotiations. Non-recurring employee separation costs amounted to $418,000 for the year
ended December 31, 2001. Interest expense (net) for the year ended December 31, 2002 was an expense
of $199,000 compared to interest income of $483,000 for the year ended December
31, 2001. This change from net interest income to net interest expense was
primarily the result of a decrease in income earned on cash balances and an
increase in interest expense from capital leases established in the first
quarter of 2002. Other income of $451,000 for the year ended December 2001 was proceeds
from business interruption insurance. There were no such proceeds in 2002. Minority interest for the year ended December 31, 2002 was $326,000
compared to $3,139,000 for the year ended December 31, 2001. The principle
reason for the decrease in Minority interest was the depletion of Minority
Interest on the Companys balance sheet related to a joint venture. Due to its net loss from operations, the Company did not record a tax
provision in the years ended December 31, 2002 and 2001, respectively. The
$96,000 in income tax expense recorded for 2002 relates principally to an
income tax withholding on an international product and service sale and the
$(115,000) provision for the recovery of income tax recorded in the 2001
followed the completion and submission of the Companys federal income tax
returns in connection with an assessed over payment of federal income tax
installments in connection with the sale of the Companys derived channel
technology. The Company recorded a net loss of $7,450,000 for the year ended December
31, 2002 compared to a net loss of $3,142,000 for the year ended December 31,
2001. The Company recorded a net loss applicable to common shareholders of
$7,690,000 for the year ended December 31, 2002 as compared to net loss
applicable to common shareholders of $3,382,000 for the year ended December 31,
2001. Basic and diluted earnings (loss) per common share decreased to $(0.71)
for year ended December 31, 2003 as compared to $(0.32) for the year ended
December 31, 2001. The weighted average and diluted shares outstanding increased to
10,766,000 for the year ended December 31, 2002 as compared to 10,466,000 for
the year ended December 31, 2001. The increase in shares outstanding was
primarily due to the exercise of stock options. 12




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Segment Information Twelve Month Period Ended
    
    2002 to
    
    2001 toDecember 31,
    
    2003
    
    2002Net Sale by Segment:
    
    
    
    %
    
    %(In thousands)
    
    2003
    
    2002
    
    2001
    
    Change
    
    ChangeNet sales:Wireless Data CommunicationsProduct
    
    $
    4,839
    
    
    $
    7,461
    
    
    $
    7,007
    
    
    
    (35.1
    )%
    
    
    6.5
    %Service
    
    
    7,848
    
    
    
    6,748
    
    
    
    4,493
    
    
    
    16.3
    %
    
    
    50.2
    %Sub-total
    
    
    12,687
    
    
    
    14,209
    
    
    
    11,500
    
    
    
    (10.7
    )%
    
    
    23.6
    %Digital Multimedia and NetworkingProduct
    
    
    2,647
    
    
    
    5,668
    
    
    
    7,948
    
    
    
    (53.3
    )%
    
    
    (28.7
    )%Service
    
    
    3,518
    
    
    
    3,686
    
    
    
    3,696
    
    
    
    (4.6
    )%
    
    
    (0.3
    )%Sub-total
    
    
    6,165
    
    
    
    9,354
    
    
    
    11,644
    
    
    
    (34.1
    )%
    
    
    (19.7
    )%Wireline SecurityProduct
    
    
    449
    
    
    
    230
    
    
    
    392
    
    
    
    95.2
    %
    
    
    (41.3
    )%Service
    
    
    856
    
    
    
    708
    
    
    
    722
    
    
    
    20.9
    %
    
    
    (1.9
    )%Sub-total
    
    
    1,305
    
    
    
    938
    
    
    
    1,114
    
    
    
    39.1
    %
    
    
    (15.8
    )%Total net salesProduct
    
    
    7,935
    
    
    
    13,359
    
    
    
    15,347
    
    
    
    (40.6
    )%
    
    
    (13.0
    )%Service
    
    
    12,222
    
    
    
    11,142
    
    
    
    8,911
    
    
    
    9.7
    %
    
    
    25.0
    %Total net sales
    
    $
    20,157
    
    
    $
    24,501
    
    
    $
    24,258
    
    
    
    (17.7
    )%
    
    
    1.0
    %
 Percent of Total Sales2003
    
    2002
    
    2001Net sales:Wireless Data CommunicationsProduct
    
    
    24.0
    %
    
    
    30.5
    %
    
    
    28.9
    %Service
    
    
    38.9
    %
    
    
    27.5
    %
    
    
    18.5
    %Sub-total
    
    
    62.9
    %
    
    
    58.0
    %
    
    
    47.4
    %Digital Multimedia and NetworkingProduct
    
    
    13.1
    %
    
    
    23.1
    %
    
    
    32.8
    %Service
    
    
    17.5
    %
    
    
    15.0
    %
    
    
    15.2
    %Sub-total
    
    
    30.6
    %
    
    
    38.2
    %
    
    
    48.0
    %Wireline SecurityProduct
    
    
    2.2
    %
    
    
    0.9
    %
    
    
    1.6
    %Service
    
    
    4.2
    %
    
    
    2.9
    %
    
    
    3.0
    %Sub-total
    
    
    6.5
    %
    
    
    3.8
    %
    
    
    4.6
    %Total net salesProduct
    
    
    39.4
    %
    
    
    54.5
    %
    
    
    63.3
    %Service
    
    
    60.6
    %
    
    
    45.5
    %
    
    
    36.7
    %Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 2003 versus 2002 Net sales from Wireless Data Communications decreased 10.7% to $12,687,000
for the year ended December 31, 2003 as compared to $14,209,000 for the year
ended December 31, 2002. Wireless Data Communications product sale decreased
by 35.1%, which was partially offset by an increase of service revenues of
16.3%. The decrease in product sales was primarily the result of changes made
to the Companys distribution strategy for wireless mobile telemetry product
lines, which resulted in a decline in unit sales while new markets were
developed during 2003. This included exiting the radio distribution market
because of intense competition and slim margins as well as a revised focus with
regard to mobile tracking. With regard to mobile tracking the Company launched
its MobileGuardian product line, which provides vehicle security and tracking 13




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) services, early in 2003. The Company continues to develop its automotive
dealer distribution network for this product line and anticipates that the
decline in product sales of mobile tracking units is temporary. The 16.3%
increase in service revenues was primarily due to increased connections on the
Companys Cellemetry® network, mainly related to security monitoring. The
second quarter of 2002 net service revenues included a sale of a license of the
Companys Cellemetry® gateway software to a customer in Colombia, South America
for $500,000. Excluding this sale, service revenue derived from connections
to Cellemetry® network increased 25.6% in 2003 versus the same period in 2002.
In addition there was an increase in digital subscribers utilizing the
Companys Data1Source mobile messaging service prior to being sold on
September 15, 2003 (see comments on Gain on sale of business ). Net sales from Digital Multimedia and Networking decreased 34.1% to
$6,165,000 for the year ended December 31, 2003 as compared to $9,354,000 for
the year ended December 31, 2002. The decrease was primarily in product sales
in both Digital Multimedia and Networking. The decrease in Digital Multimedia
product sales was largely due to a decrease in PowerPlay purchases by distance
learning customers. The decline in Network monitoring equipment sales was due
to a reduction in capital spending by telecommunications customers for the year
ended December 31, 2003 versus the same period in 2002. The reduction in
Network monitoring equipment also translated into a decline in installation
service revenues of 4.6%. While a reversal in the decline in capital spending
for distance learning and telecommunications customers remains uncertain, the
Company introduced IPContact in December of 2003. This high performance
desktop videoconferencing software package is expected to supplement PowerPlay
sales in 2004. Net sales from Wireline Security increased 39.1% to $1,305,000 for the
year ended December 31, 2003 as compared to $938,000 for the year ended
December 31, 2002. This increase was primarily due to an increase in product
sales, which is due to additional sales of maintenance parts to a customer in
Australia with which we have an equipment supply agreement (the Agreement).
Pursuant to the Agreement, in May 2003, the Company shipped $583,000 of
wireline security detection equipment to the customer, in exchange for a share
of the customers future revenues. Although the customer retains title to this
equipment from acceptance, it must meet certain obligations under the
Agreement, or pay amounts specified in the 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. The sales of maintenance parts to the customer, however, was not
pursuant to the Agreement and therefore we recognized revenues from those sales
in the period ended December 31, 2003 since the sales price was a fixed amount
and payable upon our normal terms. Installation of the equipment was completed
by December 31, 2003. Our customer in Australia plans to promote the new
service (made available by the equipment we provided) in the first quarter of
2004. This is when we expect to receive our first share of revenues from the
service. 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.
(In May 2003, the value of the wire-line equipment was transferred from
inventory to other assets.) The Company expects to continue to sell maintenance
parts and perform services for this customer for the term of the Agreement. 2002 versus 2001 Net sales from Wireless Data Communications increased 23.6% to $14,209,000
for the year ended December 31, 2002 as compared to $11,500,000 for the year
ended December 31, 2001 and as a percentage of the Companys total net sales,
Wireless Data Communications increased to 58.0% for the year ended December 31,
2002 compared to 47.4% in the comparable period in 2001. This increase in net
sales was primarily due to higher services revenues from increased connections
on the Companys Cellemetry® network, primarily related to security monitoring,
and from an increase in digital subscribers utilizing the Companys
Data1Source mobile messaging service. Also contributing to the increase in net
sales was higher product sales, primarily in the Companys wireless security
devices from the introduction of mobile wireless devices in the beginning of
2002. Net sales from Digital Multimedia and Networking decreased 19.7% to
$9,354,000 for the year ended December 31, 2002 as compared to $11,644,000 for
the year ended December 31, 2001. This decrease in net sales was primarily due
to lower product sales as the result of decreases in capital spending by
distance learning customers. Net sales from Wireline Security decreased 15.8% to $ 938,000 for the year
ended December 31, 2002 as compared to $1,114,000 for the year ended December
31, 2001. This decrease was the result of continued decline in derived channel
sales activity resulting from the divestiture of the Companys derived channel
technology in November 1999 and the resulting de-emphasis on the sale and
marketing of derived channel technology. 14




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Segment Profit (Loss) (See Note L-Geographic Information)
    
    2003
    
    2002
    
    2001(In Thousands)% of Total
    
    
    
    
    
    % of Total
    
    
    
    
    
    % of TotalWireless Data Communications
    
    $
    (1,947
    )
    
    
    168
    %
    
    $
    (7,125
    )
    
    
    96
    %
    
    $
    (6,634
    )
    
    
    117
    %Digital Multimedia and
Networking
    
    
    320
    
    
    
    (28
    )%
    
    
    (1,057
    )
    
    
    14
    %
    
    
    450
    
    
    
    (8
    )%Wireline Security
    
    
    468
    
    
    
    (40
    )%
    
    
    786
    
    
    
    (11
    )%
    
    
    499
    
    
    
    (9
    )%Operating profit
    
    $
    (1,159
    )
    
    
    100
    %
    
    $
    (7,396
    )
    
    
    100
    %
    
    $
    (5,685
    )
    
    
    100
    %
 2003 versus 2002 Loss from Wireless Data Communications decreased 73% to $1,947,000 for the
year ended 2003 from $7,125,000 in the year ended December 31, 2002. This
decrease was due to a number of factors including reduced personnel costs,
lower bad debt expenses and the gain on the sale of Data1Source. In addition,
absolute gross margins increased because service revenues, which typically earn
higher margins, represented a much greater proportion of total revenues in 2003
that in 2002. Finally, Wireless Data Communications losses also improved as a
result of lower depreciation charges. Digital Multimedia and Networking earned a profit of $320,000 for the year
ended December 31, 2003 compared to a loss of $1,057,000 for the year ended
December 31, 2002. This improvement was primarily due to substantial headcount
reductions in both selling, general and administrative as well as research and
development functions. These headcount reductions an other initiatives to
reduce costs resulted in a total savings of $2,105,000 which was partially
offset by the lower absolute gross margin due to revenue declines. Wireline Security segment profit decreased 39% to $468,000 for the year
ended December 31, 2003 from $768,000 for the year ended December 31, 2002.
This decrease was primarily attributable to lower gross margins as product
sales made up a greater portion of total sales in 2003 versus 2002, which were
generally at lower margins than service sales. Additionally, in 2002, cost of
sales received a favorable impact of a reduction of inventory reserves due to
the pending sale of inventory previously reserved that did not recur in 2003. 2002 versus 2001 Loss from Wireless Data Communications increased 7% to $7,125,000 for the
year ended December 31, 2002 from $6,634,000 for the year ended December 31,
2001. This increase was primarily due to increased selling, general and
administrative expenses as well as research and development costs of $1,529,000
as the Company increased marketing and development efforts in 2002 versus 2001.
There was also an increase in bad debt expense of $1,258,000 as general
economic conditions deteriorated in the second half of 2002 compared to the
same period in 2001. These expense increases were partially offset by the
increased absolute amount of gross profit as Wireless Data Communications sales
increased by 23.6% in 2002 from 2001. Digital Multimedia and Networking recorded a loss of $1,057,000 for the
year ended December 31, 2002 compared to a profit of $450,000 for the year
ended December 31, 2001. This loss was primarily due to lower gross margins as
the result of a 19.7% decrease in sales. However. selling, general and
administrative and research and development costs were relatively constant from
year to year. Wireline Security segment profit increased 35% to $768,000 for the year
ended December 31, 2002 from $499,000 for the year ended December 31, 2001.
This increase was primarily due to the release of obsolete inventory reserves
pending the transfer of the associated equipment to our customer in Australia. 15




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Selected Quarterly Financial Data The following tables detail certain unaudited financial data of the
Company for each quarter of the last two fiscal years ended December 31, 2003,
and 2002, respectively. The Companys financial results may fluctuate from quarter to quarter as a
result of factors, including the timing of product shipments, new product
introductions and equipment, product and system sales that historically have
been of a non-recurring nature. The information has been prepared from the books and records of the
Company in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all (including only
normal, recurring adjustments) considered necessary for fair presentation have
been included. Interim results for any quarter are not necessarily indicative
of the results that may be expected for any future period. 16




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Selected Quarterly Financial Data (Unaudited) Three Months EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2003
    
    2003
    
    2003
    
    2003(in thousands, except per share data)Net sales:Wireless Data CommunicationsProduct
    
    $
    1,027
    
    
    $
    1,073
    
    
    $
    1,229
    
    
    $
    1,510Service
    
    
    1,859
    
    
    
    2,081
    
    
    
    1,964
    
    
    
    1,944Sub-total
    
    
    2,886
    
    
    
    3,154
    
    
    
    3,193
    
    
    
    3,454Digital Multimedia and NetworkingProduct
    
    
    504
    
    
    
    395
    
    
    
    944
    
    
    
    804Service
    
    
    1,042
    
    
    
    809
    
    
    
    898
    
    
    
    769Sub-total
    
    
    1,546
    
    
    
    1,204
    
    
    
    1,842
    
    
    
    1,573Wireline SecurityProduct
    
    
    39
    
    
    
    172
    
    
    
    173
    
    
    
    65Service
    
    
    216
    
    
    
    190
    
    
    
    248
    
    
    
    202Sub-total
    
    
    255
    
    
    
    362
    
    
    
    421
    
    
    
    267Total net salesProduct
    
    
    1,570
    
    
    
    1,640
    
    
    
    2,346
    
    
    
    2,379Service
    
    
    3,117
    
    
    
    3,080
    
    
    
    3,110
    
    
    
    2,915Total net sales
    
    
    4,687
    
    
    
    4,720
    
    
    
    5,456
    
    
    
    5,294Cost of product sales (excluding depreciation)
    
    
    1,219
    
    
    
    1,309
    
    
    
    1,731
    
    
    
    1,784Cost of services (excluding depreciation and
amortization)
    
    
    1,235
    
    
    
    960
    
    
    
    1,158
    
    
    
    1,090Depreciation and amortization
    
    
    180
    
    
    
    174
    
    
    
    181
    
    
    
    107Gross profit
    
    
    2,053
    
    
    
    2,277
    
    
    
    2,386
    
    
    
    2,313Selling, general, administrative and
other expenses
    
    
    2,235
    
    
    
    2,085
    
    
    
    2,060
    
    
    
    1,991Research and development expenses
    
    
    298
    
    
    
    284
    
    
    
    261
    
    
    
    62Bad debt expense
    
    
    152
    
    
    
    149
    
    
    
    150
    
    
    
    100Depreciation and amortization
    
    
    489
    
    
    
    505
    
    
    
    480
    
    
    
    454Operating loss
    
    
    (1,121
    )
    
    
    (746
    )
    
    
    (565
    )
    
    
    (294
    )Net earnings (loss)
    
    
    (1,117
    )
    
    
    (854
    )
    
    
    992
    
    
    
    (425
    )Basic earnings (loss) per share
    
    
    (0.10
    )
    
    
    (0.08
    )
    
    
    0.09
    
    
    
    (0.04
    )Basic weighted average shares outstanding
    
    
    11,384
    
    
    
    10,785
    
    
    
    10,787
    
    
    
    10,790Diluted earnings (loss) per share
    
    
    (0.10
    )
    
    
    (0.08
    )
    
    
    0.09
    
    
    
    (0.09
    )Diluted weighted average shares outstanding
    
    
    11,384
    
    
    
    10,785
    
    
    
    10,878
    
    
    
    10,790
 17




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Selected Quarterly Financial Data (Unaudited) Three Months EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2002
    
    2002
    
    2002
    
    2002(in thousands, except per share data)Net sales:Wireless Data CommunicationsProduct
    
    $
    2,658
    
    
    $
    2,211
    
    
    $
    2,215
    
    
    $
    377Service
    
    
    1,591
    
    
    
    2,303
    
    
    
    1,539
    
    
    
    1,315Sub-total
    
    
    4,249
    
    
    
    4,514
    
    
    
    3,754
    
    
    
    1,692Digital Multimedia and NetworkingProduct
    
    
    2,199
    
    
    
    1,748
    
    
    
    952
    
    
    
    769Service
    
    
    437
    
    
    
    987
    
    
    
    1,086
    
    
    
    1,176Sub-total
    
    
    2,636
    
    
    
    2,735
    
    
    
    2,038
    
    
    
    1,945Wireline SecurityProduct
    
    
    40
    
    
    
    69
    
    
    
    67
    
    
    
    54Service
    
    
    169
    
    
    
    189
    
    
    
    177
    
    
    
    173Sub-total
    
    
    209
    
    
    
    258
    
    
    
    244
    
    
    
    227Total net salesProduct
    
    
    4,897
    
    
    
    4,028
    
    
    
    3,234
    
    
    
    1,200Service
    
    
    2,197
    
    
    
    3,479
    
    
    
    2,802
    
    
    
    2,664Total net sales
    
    
    7,094
    
    
    
    7,507
    
    
    
    6,036
    
    
    
    3,864Cost of product sales (excluding depreciation)
    
    
    2,747
    
    
    
    2,537
    
    
    
    2,666
    
    
    
    1,885Cost of services (excluding depreciation and
amortization)
    
    
    788
    
    
    
    1,032
    
    
    
    1,095
    
    
    
    1,202Depreciation and amortization
    
    
    49
    
    
    
    54
    
    
    
    105
    
    
    
    120Gross profit
    
    
    3,510
    
    
    
    3,884
    
    
    
    2,170
    
    
    
    657Selling, general, administrative and
other expenses
    
    
    2,361
    
    
    
    2,699
    
    
    
    2,994
    
    
    
    2,618Research and development expenses
    
    
    602
    
    
    
    188
    
    
    
    (63
    )
    
    
    370Bad debt expense
    
    
    95
    
    
    
    253
    
    
    
    811
    
    
    
    678Depreciation and amortization
    
    
    518
    
    
    
    549
    
    
    
    552
    
    
    
    565Cost related to non-recurring acquisition activity
    
    
    
    
    
    
    1,714
    
    
    
    185
    
    
    
    Operating loss
    
    
    (66
    )
    
    
    (1,519
    )
    
    
    (2,309
    )
    
    
    (3,574
    )Net earnings (loss)
    
    
    199
    
    
    
    (1,642
    )
    
    
    (2,338
    )
    
    
    (3,669
    )Basic earnings (loss) per share
    
    
    0.02
    
    
    
    (0.16
    )
    
    
    (0.22
    )
    
    
    (0.35
    )Basic weighted average shares outstanding
    
    
    10,582
    
    
    
    10,729
    
    
    
    10,773
    
    
    
    10,973Diluted earnings (loss) per share
    
    
    0.92
    
    
    
    (0.16
    )
    
    
    1.00
    
    
    
    (0.35
    )Diluted weighted average shares outstanding
    
    
    11,512
    
    
    
    10,729
    
    
    
    10,773
    
    
    
    10,973
 18




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources The Company has been able to fund its operations and working capital
requirements from cash flow generated by operations, the proceeds from a public
offering completed in April 1995, the proceeds from the sale of its derived
channel technology in November 1999, the proceeds from capital leases, the
proceeds from the exercise of stock options, the establishment of a revolving
line of credit in March of 2003, the sale of Data1Source on September 5th, 2003
(see below) and on January 13, 2004, a private placement to Laurus of a
Convertible Term Note in the principal amount of $4,500,000 (see below). Net cash used in operating activities decreased to $269,000 for the year
ended December 31, 2003 as compared to $2,890,000 for the year ended December
31, 2002. The reduction in cash used in operating activities was primarily due
to reductions in operating losses and a more aggressive management of working
capital in 2003 compared to the same period in 2002. The aging of accounts
receivable also significantly improved at December 31, 2003 versus December 31,
2002. Net cash provided by investing activities was $518,000 for the year ended
December 31, 2003 as compared to cash used by investing activities of
$1,149,000 for the year ended December 31, 2002. The cash provided by investing
activities in 2003 was primarily due to the sale of Data1Source LLC. Net cash used by financing activities was $1,726,000 for the year ended
December 31, 2003 as compared to cash provided by financing activities of
$757,000 for the year ended December 31, 2002. Cash used in 2003 was primarily
due to the payoff of the lease payable of $605,000 for the software sold with
Data1Source LLC, payoff of the balance due on the line of credit borrowed
earlier in the year (see explanation of the line of credit below) and the
regular payments on capital lease obligations. Cash usage also included the
payments of preferred stock dividends. The sources of cash during the
comparable period in 2002 were from the exercise of stock options, which
resulted in the issuance of an additional 255,000 shares of the Companys Class
A Common Stock, which was partially offset by the regular payments on capital
lease obligations. The Company had a working capital deficit of $455,000 as of December 31,
2003 compared to a working capital balance of $4,951,000 at December 31, 2002.
Included in working capital were notes receivable with certain customers of
$99,000 at December 31, 2003 and $823,000 at December 31, 2002. The Company had
cash balances of $734,000 and $2,137,000, respectively, as of December 31, 2003
and 2002. The majority of the reduction in working capital is due to a note
payable, $3,500,000 of which is classified as current, in connection with the
Companys acquisition of Cingulars interest in Cellemetry and Cingulars
common stock of the Company (see explanation of the transaction below). In
order to provide additional short-term liquidity to the Company, 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 a lien on
all the assets of the Company subsequent to the rights of Laurus Group (see
below). 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 is considering
extending the line of credit for an additional year. On January 13, 2004, the
Company completed a private placement to Laurus of a Convertible Term Note in
the principal amount of $4,500,000, and a Common Stock Purchase Warrant to
purchase up to 300,000 shares of the Companys Class A common stock, no par
value per share. The Company used the net proceeds of $4,270,000 to retire the
$3,500,000 debt owed to Cingular and to provide additional working capital (see
the description of the financing below). This transaction eliminated the
working capital deficit. 19




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) The Companys business has traditionally not been capital intensive and,
accordingly, capital expenditures have not been material. To date, the Company
has funded all capital expenditures from operations, capital leases and other
long-term obligations, proceeds from the public offering and the proceeds from
the sale of its derived channel technology in November 1999 and the proceeds
from sale of Data1Source LLC. 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 million by
March 31,
2004 and $1,500,000 million 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 paid the first installment of $1,500,000 and on
January 13, 2004, the Company paid off the remaining $3,500,000 (see below). On January 13, 2004, the Company completed a private placement to Laurus
(Laurus Transaction)of (i) a Convertible Term Note in the principal amount of
$4,500,000 (the Laurus Note), and (ii) a Common Stock Purchase Warrant (the
Warrant and together with the Laurus 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 Cingular (see above) and to provide additional working
capital. The Laurus 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 Laurus 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 Laurus 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 the 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 Laurus 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 Laurus Note) has
occurred, Laurus may not voluntarily convert, on a monthly basis, a portion of
the Company Note that exceeds 10% of that number of 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. 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. The Company intends to fund the Laurus Transaction through a combination
of operating cash flow, cash on hand, and additional funding sources. Such
additional funding sources could include the public or private sale of
securities or proceeds from the sale of assets. If the Company is successful
in raising additional funds through the issuance of equity securities,
stockholders may experience dilution, or the equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
If the Company raises funds through the issuance of additional debt securities,
those securities would have rights, preferences and privileges senior to those
of the common stock. There can be no assurance, however, that additional
funding will be available on terms favorable to the Company or at all or that
the Company will raise significant proceeds from the sale of assets. If the
Company is unable to pay the Laurus Note, Laurus could take action to realize
on its security interests described above. 20




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED) The Companys operations used cash in 2003. The Company continues to add
products and distribution channels for its products, but the Companys
longer-term success will depend upon increased cash flow. The Company believes
that the combination of additional funding provided by the Laurus transaction
along with cash generated from future operations, will be sufficient to meet
the Companys operating requirements through at least December 31, 2004 and
beyond 2004, the Company expects to fund its operations from operating cash
flows, assuming no material adverse change in the operation of the Companys
business. The Company is also considering other sources of funding, including
the sale of certain non-core assets. Additionally, cash requirements for future expansion of the Companys
operations will be evaluated on an as-needed basis and may involve additional
external financing. The Company does not expect that such additional
financing, should it occur, will have a materially negative impact on the
Companys ability to fund its existing operations. Contractual Obligations Payments due by periodLess
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    1 - 3
    
    3 - 5
    
    than 5(in thousands)
    
    Total
    
    Year
    
    years
    
    years
    
    yearsLong-term Debt*
    
    $
    4,500
    
    
    $
    468
    
    
    $
    4,032
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    378
    
    
    
    343
    
    
    
    35
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    2,996
    
    
    
    608
    
    
    
    1,610
    
    
    
    548
    
    
    
    230Total
    
    $
    7,874
    
    
    $
    1,419
    
    
    $
    5,677
    
    
    $
    548
    
    
    $
    230
 * This debt is convertible into the Companys common stock at both the Companys and Lenders
option depending on the Companys stock price (see the description of this financing in the
Liquidity and Capital Resources section above) Effect of Inflation Inflation has not been a material factor affecting the Companys business.
In recent years the cost of electronic components has remained relatively
stable, due to competitive pressures within the industry, which has enabled the
Company to contain its manufacturing and operations costs. The Companys
general operating expenses, such as salaries, employee benefits, and facilities
costs are subject to normal inflationary pressures. Foreign Currency The Companys functional and reporting currency is the U.S. Dollar.
Fluctuations in foreign currency exchange rates are not expected to have a
material impact on the Companys results of operations or liquidity. 21




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data. The response to this item is submitted in a separate section of this
report. See Index to Financial Statements on Page F-1 below for a list of the
financial statements being filed herein. 22




---



##### 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 Statements2.
    
    Financial Statement SchedulesReport of Independent Certified Public AccountantsSchedule II - Valuation and qualifying accounts3.
    
    List of Exhibits filed pursuant to Item 601 of Regulation S-K.
The following exhibits are filed herewith:  2.11
    
    Securities Purchase Agreement among Numerex Corp.,
Broadband Networks, Inc. and the Shareholders of Broadband
Networks, Inc. dated February 21, 1997.2.22
    
    Shareholders Agreement among Broadband Networks, Inc.,
Numerex Corp. and the Shareholders of Broadband Networks, Inc.
dated February 21, 1997.2.33
    
    Numerex Corp. and British Telecommunications plc, Agreement
Relating to the sale and purchase of the whole of the issued shares
capital of Bronzebase Limited.3.14
    
    Amended and Restated Articles of Incorporation of the Company, as amended.3.24
    
    Bylaws of the Company.4.110
    
    Securities Purchase Agreement, dated January 13, 2004, by and between the Company and Laurus.4.210
    
    Convertible Term Note, dated January 13, 2004, by and between the Company and Laurus.4.310
    
    Common Stock Purchase Warrant, dated January 13, 2004, by and between the Company and Laurus.4.410
    
    Security Agreement, dated January 13, 2004, by and among the
Company, its U.S. subsidiaries, and Laurus.4.510
    
    Guaranty, dated January 13, 2004, entered into by each of the
Companys U.S. Subsidiaries.4.610
    
    Intercreditor Agreement, dated January 13, 2004, by and among
Althea Limited Partnership, Laurus, the Company and its U.S.
subsidiaries.4.710
    
    Registration Rights Agreement, dated January 13, 2004, by and
between the Company and Laurus. 23




---



##### Table of Contents



10.14
    
    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, 1992.10.56
    
    Letter Agreement between the Company and Dominion (now
Gwynedd) dated October 25, 1994 re: designation of director.10.64
    
    Office Space Lease Agreement between the Company and LBA
Associates dated May 31, 1995.10.711
    
    1999 Long-Term Incentive Plan (Management Compensation Plan).10.88
    
    Formation Agreement among Numerex Corp., BellSouth
Wireless, Inc. and BellSouth Corporation dated February 25, 1998.10.99
    
    Operating Agreement between Numerex Corp. and BellSouth
Wireless, Inc. dated May 15, 1998.10.103
    
    First Amendment to Operating Agreement of Cellemetry LLC between
Numerex Corp. and BellSouth Wireless, Inc. effective as of November
1, 1999.1112
    
    Computation of Earnings Per Share.2112
    
    Subsidiaries of Numerex Corp.  23
    
    Consent of Grant Thornton LLP31.1
    
    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 29, 1998 for the year ended October 31, 1997 (File
No. 0-22920).3
    
    Incorporated by reference to the Exhibits filed with the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 26, 1999 (File No. 0-22920).4
    
    Incorporated by reference to the Exhibits filed with the Companys
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended October 31, 1995 (File No. 0-22920).5
    
    Incorporated by reference to the Exhibits filed with the Companys
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on January 27, 1997 for the year ended October 31, 1996 (File
No. 0-22920).6
    
    Incorporated by reference to the Exhibits filed with the Companys
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission (File No. 33-89794).7
    
    Incorporated by reference to the Exhibit filed with the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 20, 1994 (File No. 0-22920). 24




---



##### Table of Contents



8
    
    Incorporated by reference to the Exhibits filed with the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 26, 1998 (File No. 0-22920).9
    
    Incorporated by reference to the Exhibits filed with the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 1, 1998 (File No. 0-22920).10
    
    Incorporated by reference to the Exhibits filed with the Companys
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on January 15, 2004 (File No. 0-22920).11
    
    Incorporated by reference to the Exhibits filed with the Companys
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2000 (File No. 0-22920).12
    
    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 March 11, 2004 for the year ended December 31, 2003 (File
No. 0-22920). (b) Reports on Form 8-K. None. 25




---



##### 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 Amendment No. 2 to
its Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized. NUMEREX CORP.Date:
November 12, 2004
    
    By:
    
    /s/ Alan B. CatherallAlan B. Catherall,Chief Financial Officer and Executive Vice President
 26




---



##### Table of Contents



NUMEREX CORP
INDEX TO FINANCIAL STATEMENTS 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




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Shareholders and Board
of
  Directors of Numerex Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of Numerex Corp.
and subsidiaries (the Company) as of December 31, 2003, and 2002 and the
related consolidated statements of operations and comprehensive income,
shareholders equity and cash flows for each of three the 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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. As discussed in Notes A-24 and L, the accompanying consolidated financial
statements as of December 31, 2003 and 2002 and for the three years ended
December 31 , 2003 have been amended in order to include more detailed
financial information. /s/ Grant Thornton LLPAtlanta, GeorgiaFebruary 20, 2004, except for Notes A-24and L as to which the date is October 26, 2004
 F-2




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares) ASSETS December 31,2003
    
    2002CURRENT 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares) LIABILITIES AND SHAREHOLDERS EQUITY December 31,2003
    
    2002CURRENT 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data) For the years ended December 31,2003
    
    2002
    
    2001Net product sales
    
    $
    7,935
    
    
    $
    13,359
    
    
    $
    15,347Net service sales
    
    
    12,222
    
    
    
    11,142
    
    
    
    8,911Total net sales
    
    
    20,157
    
    
    
    24,501
    
    
    
    24,258Cost of product sales (excluding depreciation of $2, $1 and
$72 included below)
    
    
    6,043
    
    
    
    9,836
    
    
    
    10,674Cost of services (excluding depreciation and amortization)
    
    
    4,443
    
    
    
    4,116
    
    
    
    4,063Depreciation and amortization
    
    
    642
    
    
    
    328
    
    
    
    267Gross profit
    
    
    9,029
    
    
    
    10,221
    
    
    
    9,254Selling, general, administrative and other expenses
    
    
    8,371
    
    
    
    10,672
    
    
    
    10,168Research and development expenses
    
    
    905
    
    
    
    1,097
    
    
    
    2,755Bad debt expense
    
    
    551
    
    
    
    1,837
    
    
    
    542Depreciation 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 income (expense), net
    
    
    (354
    )
    
    
    (199
    )
    
    
    483Gain on sale of business (Note C)
    
    
    1,712
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    451Foreign currency gain/(loss)
    
    
    56
    
    
    
    (13
    )
    
    
    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 taxes:Foreign 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES CONSOLIDATED 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
    
    
    551
    
    
    
    1,837
    
    
    
    542Inventory reserves
    
    
    272
    
    
    
    358
    
    
    
    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
    
    
    1,411
    
    
    
    855
    
    
    
    (846
    )Inventory
    
    
    775
    
    
    
    (470
    )
    
    
    (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 provided by (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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES CONSOLIDATED 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
    
    
    
    (524
    )Income 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




---



##### 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
Data1Source 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




---



##### 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  Continued 4. Intangible Assets  Continued 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. December 31,(In thousands)
    
    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 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. SFAS 142 also requires that an impairment test be performed on goodwill
at least annually. This test requires that the fair value of each reporting
unit as a whole be compared to its carrying value including goodwill. If the
reporting units fair value exceeds its carrying value, goodwill is not
impaired. If, however, the carrying value of the reporting unit exceeds its
fair value, a second step of the impairment test is required. This second test
requires that an estimate of the implied fair value of goodwill be compared to
its carrying amount. If the carrying amount of goodwill exceeds the implied
value, the goodwill is impaired and is written down to the implied fair value.
The implied fair value of goodwill is the excess of the fair value of the
reporting unit as a whole, over the fair values that would be assigned to its
assets and liabilities in a purchase business combination. The Company tested
goodwill for impairment as of January 1, 2002, December 31, 2002 and December
31, 2003 and determined that there was no goodwill impairment at those dates.
At December 31, 2003 the Company used its 3 year business plan and calculated
a discounted cash flow based on that plan to determine the fair value of the
reporting units. As a result, the Company determined that the fair value of
its reporting units exceeded their carrying value, thus no impairment was
recorded. A similar test was performed at January 1, 2002 and December 31,
2002. F-10




---



##### Table of Contents



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. 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. F-11




---



##### 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  Continued 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. 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. F-12




---



##### 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  Continued 16. Revenue Recognition (Continued) 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 undelivered elements exists but evidence does
not exist for one or more delivered elements, then revenue is recognized using
the fair value method. Under these methods, the fair value of the undelivered
element is deferred and is recognized ratably over the contract term on an
earned basis. In the case of 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 While the majority of transactions of the Company and its subsidiaries occur
in the United States in U.S. dollars, a limited number are made in Canadian
dollars, Australian dollars, and British pounds sterling. Such transactions
include recurring service revenues billed to customers in Canada that are
denominated in Canadian dollars, some transactions between Numerex Corp. and
its small subsidiary in Australia are denominated in Australian dollars and
occasional purchases from a supplier in England are made in British pounds.
Gains and losses from these transactions are included in income as they occur.
For the year ended December 31, 2003 the Company had a foreign currency gain
of $60,000, and a loss of $49,000 for the years ended December 31, 2002 and
2001. 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




---



##### 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  Continued 20. Stock-Based Compensation Effective November 1, 1996, the Company adopted the provisions of SFAS No.
123, Accounting for Stock-Based Compensation.SF
AS 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: For the years ended December 31,(In thousands except per share data)

    
    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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued 21. Earnings (Loss) Per Share  continued 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: For the year ended December 31,(In thousands except per share data)
    

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




---



##### 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  Continued 22. Recent Accounting Pronouncements (Continued) 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(R). Statement
132(R) 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




---



##### 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  Continued 22. Recent Accounting Pronouncements (Continued) The additional annual disclosures in Statement 132I 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 132I 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. 24. Amendments to Previously Issued Financial Statements The Company is amending previously issued financial statements in order to
provide more detailed financial information including:  
    
    an amendment to the Consolidated Statements of Operations
to break out product and service revenues and cost of sales, bad
debt expense and foreign currency gains and losses,
    
    an amendment to the Consolidated Statements of Cash Flows
to breakout changes in the bad debt reserves and changes in
accounts receivable,
    
    amendments to the Notes to the Consolidated Financial
Statements, including an update to Note A-6, Impairment of
Long-lived Assets to add a more detailed description of the
impairment testing process
    
    and an amendment to include segment information for the
four reporting segments of Wireless Data Communications, Digital
Multimedia & Networking, Wireline and unallocated corporate
expenses in the Notes to Consolidated Financial Statements, Note L
  Geographic Information. 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE C  INVESTMENTS AND DIVESTITURES Cellemetry On May 15, 1998, the Company, Bellsouth Wireless LLC (BellSouth Wireless),
currently known as Cingular, 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE C  INVESTMENTS AND DIVESTITURES  Continued 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: December 31,(In thousands)
    
    2003
    
    2002Raw materials
    
    $
    1,237
    
    
    $
    1,346Work-in-progress
    
    
    8
    
    
    
    20Finished goods
    
    
    2,216
    
    
    
    3,823Inventory, net
    
    $
    3,461
    
    
    $
    5,189
 F-19




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE F  PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 31,(In thousands)
    
    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: For the years endedDecember 31,(in thousands)
    
    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. corporate tax rate of 34%
    
    $
    (595
    )
    
    $
    (2,500
    )
    
    $
    (1,107
    )Adjustments attributable toValuation allowance
    
    
    595
    
    
    
    2,500
    
    
    
    1,107State tax
    
    
    30
    
    
    
    
    
    
    
    Foreign tax
    
    
    62
    
    
    
    96
    
    
    
    Recovery of previously paid tax
    
    
    
    
    
    
    
    
    
    
    (115
    )$
    92
    
    
    $
    96
    
    
    $
    (115
    )
 F-20




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE G  INCOME TAXES  Continued The components of the Companys net deferred tax assets and (liabilities)
are as follows: December 31,(In thousands)
    
    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: Year of(in thousands)
    
    Amount
    
    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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE I  COMMITMENTS AND CONTINGENCIES  Continued 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE K  STOCK OPTION PLANS  Continued 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




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE K  STOCK OPTION PLANS  Continued 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 Segment Information Due to improvements in internal management reporting, the Company has amended
previously issued financial statements to include segment information for four
reporting segments, including unallocated corporate expenses. The four
reporting segments are Wireless Data Communications, which is made up of all
the Companys wireless machine-to-machine communications products and
services, Digital Multimedia and Networking, which includes the Companys
networking products and services and video conferencing products, Wireline,
which is the Companys wire-line security detection products and services, and
unallocated corporate expenses. The internal management reporting for the year ended December 31, 2003
included additional financial information for the Wireless Data Communications
brands of Uplink Security, Cellemetry, Mobile Guardian, Vending, Numerex
Solutions and Data1Source and were aggregated under this reportable segment.
For the year ended December 31, 2003, certain economic characteristic,
specifically gross margins, were not similar for this period for all brands
and, therefore, would appear to preclude the operating segments from being
aggregated. However, management believes these characteristics will converge
over the long-term for the following reasons. The Company has one wireless
communications network and one group of employees that support all brands,
thus the service cost structure is the same. The service pricing methodology
is similar across these brands, thus the service long-term gross margins are
expected to be similar and are generally higher than product gross margins.
The products all perform similar functions of transmitting receiving data via
the Cellemetry wireless communications network and are made of similar
components, thus the individual product costs are similar. The product
pricing methodology is also similar among all the Wireless Data Communications
brands, which generally have lower gross margins in order to be competitive in
the market and to encourage connections so that the Company can obtain the
associated monthly recurring service revenue that is at higher gross margins.
Then the newer brands total long-term gross margins are expected to converge
with the older more established brands because as the new brands gain more and
more connections and recurring service revenues, their long-term gross margins
are expected to improve as their service revenues make up a greater and
greater portion of the total revenues for the particular brand. F-25




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE L  GEOGRAPHIC INFORMATION (continued) Year Ended December 31, 2003DigitalWireless Data
    
    Multimedia &(in thousands)
    
    Communications
    
    Networking
    
    Wireline
    
    TotalRevenues from external
customers
    
    $
    12,687
    
    
    $
    6,164
    
    
    $
    1,306
    
    
    $
    20,157Interest income
    
    
    3
    
    
    
    11
    
    
    
    2
    
    
    
    16Interest expense
    
    
    38
    
    
    
    86
    
    
    
    
    
    
    
    124Depreciation and amortization
    
    
    1,709
    
    
    
    579
    
    
    
    107
    
    
    
    2,395Income tax expense
    
    
    23
    
    
    
    3
    
    
    
    66
    
    
    
    92Gain on sale of assets
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    1,712Segment profit/(loss)
    
    
    (1,947
    )
    
    
    320
    
    
    
    468
    
    
    
    (1,159
    )Segment assets
    
    
    21,763
    
    
    
    9,514
    
    
    
    1,562
    
    
    
    32,839
 Year Ended December 31, 2002DigitalWireless Data
    
    Multimedia &(in thousands)
    
    Communications
    
    Networking
    
    Wireline
    
    TotalRevenues from external
customers
    
    $
    14,209
    
    
    $
    9,354
    
    
    $
    938
    
    
    $
    24,501Interest income
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    6Interest expense
    
    
    93
    
    
    
    138
    
    
    
    
    
    
    
    231Depreciation and amortization
    
    
    1,768
    
    
    
    618
    
    
    
    18
    
    
    
    2,404Income tax expense
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Segment profit/(loss)
    
    
    (7,125
    )
    
    
    (1,057
    )
    
    
    786
    
    
    
    (7,396
    )Segment assets
    
    
    22,042
    
    
    
    10,927
    
    
    
    1,088
    
    
    
    34,057
 Year Ended December 31, 2001DigitalWireless Data
    
    Multimedia &(in thousands)
    
    Communications
    
    Networking
    
    Wireline
    
    TotalRevenues from external
customers
    
    $
    11,344
    
    
    $
    11,644
    
    
    $
    1,270
    
    
    $
    24,258Interest income
    
    
    
    
    
    
    157
    
    
    
    3
    
    
    
    160Interest expense
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Depreciation and amortization
    
    
    1,814
    
    
    
    1,037
    
    
    
    29
    
    
    
    2,880Income tax expense
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Segment profit/(loss)
    
    
    (6,634
    )
    
    
    450
    
    
    
    499
    
    
    
    (5,685
    )Segment assets
    
    
    24,005
    
    
    
    11,802
    
    
    
    1,091
    
    
    
    36,898
 F-26




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE L  GEOGRAPHIC INFORMATION (continued) Reconciliation of segment items to consolidated amounts:     (in thousands) Net Loss Year ended December 31,2003
    
    2002
    
    2001Total loss for reportable segments
    
    $
    (1,159
    )
    
    $
    (7,396
    )
    
    $
    (5,685
    )Unallocated corporate expenses
    
    
    245
    
    
    
    380
    
    
    
    596Minority interest share of losses
    
    
    
    
    
    
    326
    
    
    
    3,139Net loss
    
    $
    (1,404
    )
    
    $
    (7,450
    )
    
    $
    (3,142
    )
 Assets Year ended December 31,2003
    
    2002
    
    2001Total assets for reportable segments
    
    $
    32,839
    
    
    $
    34,057
    
    
    $
    36,898Elimination of receivables from corporate
    
    
    (358
    )
    
    
    (338
    )
    
    
    Other unallocated assets
    
    
    1,489
    
    
    
    3,392
    
    
    
    6,076Consolidated total assets
    
    $
    33,970
    
    
    $
    37,111
    
    
    $
    42,974
 Other Significant Items Segment
    
    Unallocated
    
    ConsolidatedTotals
    
    Corporate
    
    TotalsYear Ended December 31, 2003Interest income
    
    $
    16
    
    
    $
    17
    
    
    $
    33Interest expense
    
    
    124
    
    
    
    263
    
    
    
    387Net interest expense
    
    
    108
    
    
    
    246
    
    
    
    354Depreciation and amortization
    
    
    2,395
    
    
    
    175
    
    
    
    2,570Income tax expense
    
    
    92
    
    
    
    
    
    
    
    92Gain on sale of assets
    
    
    1,712
    
    
    
    
    
    
    
    1,712Year Ended December 31, 2002Interest income
    
    
    6
    
    
    
    39
    
    
    
    45Interest expense
    
    
    231
    
    
    
    13
    
    
    
    244Net interest income/(expense)
    
    
    (225
    )
    
    
    26
    
    
    
    (199
    )Depreciation and amortization
    
    
    2,404
    
    
    
    108
    
    
    
    2,512Income tax expense
    
    
    96
    
    
    
    
    
    
    
    96Year Ended December 31, 2001Interest income
    
    
    160
    
    
    
    357
    
    
    
    517Interest expense
    
    
    32
    
    
    
    2
    
    
    
    34Net interest income
    
    
    128
    
    
    
    355
    
    
    
    483Depreciation and amortization
    
    
    2,880
    
    
    
    88
    
    
    
    2,968Income tax expense
    
    
    (4
    )
    
    
    (111
    )
    
    
    (115
    )
 F-27




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 NOTE L  GEOGRAPHIC INFORMATION (continued) 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
    
    
    
    37,1112001 - year
    
    
    42,613
    
    
    
    361
    
    
    
    42,974
 F-28




---



##### Table of Contents



NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001 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-29




---



##### 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, except for Notes A-24 and L as to which the date is October 26, 2004,
which is included in the Part IV of this Form 10-K/A, 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




---



##### Table of Contents



SCHEDULE II NUMEREX CORP.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands) Col. A
    
    Col. B
    
    Col. C
    
    Col. D
    
    Col. EBalance at
    
    Charged to
    
    
    
    
    
    Balance atbeginning of
    
    costs and
    
    
    
    
    
    end ofDescription
    
    Period
    
    expenses
    
    Deductions
    
    PeriodYear ended December 31, 2003:Accounts receivableAllowance for uncollectible accounts
    
    
    1,275
    
    
    
    551
    
    
    
    (1,217
    )(a)
    
    
    609InventoryAllowance for obsolescence
    
    
    776
    
    
    
    272
    
    
    
    (367
    )(b)
    
    
    681Year ended December 31, 2002:Accounts receivableAllowance for uncollectible accounts
    
    
    534
    
    
    
    1,837
    (c)
    
    
    (1,096
    )(a)
    
    
    1,275InventoryAllowance for obsolescence
    
    
    931
    
    
    
    358
    
    
    
    (513
    )(b)
    
    
    776Year ended December 31, 2001:Accounts receivableAllowance for uncollectible accounts
    
    
    431
    
    
    
    542
    
    
    
    (439
    )(a)
    
    
    534InventoryAllowance for obsolescence
    
    
    1,020
    
    
    
    
    
    
    
    (89
    )(b)
    
    
    931
 (a) Amounts written off as uncollectible, net of recoveries. (b) Inventory physically disposed. (c ) The Company experienced a significant increase in bad expense due to an increase in customers not being able to pay as a
result of significant weakening of economic conditions in the communications industry. S-2