PENN ENGINEERING & MANUFACTURING CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________________
to _________________

Commission file number 1-5356

PENN ENGINEERING & MANUFACTURING CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 23-0951065
- ------------------------------ --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

P.O. BOX 1000, DANBORO, PENNSYLVANIA 18916
- ------------------------------------ ------
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (215) 766-8853
Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
Common Stock, $.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

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

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

As of June 28, 2002, the aggregate market value based on the closing sales price
on that date of the voting and non-voting common equity held by non-affiliates
of the Registrant was approximately $226,825,000.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date: 14,022,000 shares of Common
Stock and 3,350,164 shares of Class A Common Stock outstanding on March 4, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

1. Portions of the Registrant's 2002 Annual Report to Stockholders filed as
Exhibit (13) are incorporated by reference in Items 1, 3, 5, 6, 7, 7A, 8,
and 15.

2. Portions of the Proxy Statement for the Registrant's 2003 Annual Meeting
of Stockholders filed with the Commission on March 27, 2002 are
incorporated by reference in Items 10, 11, 12, and 13.

PENN ENGINEERING & MANUFACTURING CORP.
-----------

INDEX TO FORM 10-K REPORT

-----------

PAGE
----

I. PART I

Item 1. Business...............................................................................1
Item 2. Properties.............................................................................5
Item 3. Legal Proceedings......................................................................6
Item 4. Submission of Matters to a Vote of Security Holders....................................6
Executive Officers of the Registrant ..................................................6

II. PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................................7
Item 6. Selected Financial Data................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................8
Item 8. Financial Statements and Supplementary Data............................................8
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...............................................................8

III. PART III

Item 10. Directors and Executive Officers of the Registrant.....................................8
Item 11. Executive Compensation.................................................................8
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.............................................8
Item 13. Certain Relationships and Related Transactions.........................................9
Item 14. Controls and Procedures................................................................9

IV. PART IV

Item 15. Exhibits, Financial Statements and Schedules, and Reports on
Form 8-K..............................................................................10

PART I

BUSINESS.

(a) GENERAL DEVELOPMENT OF BUSINESS.

The Registrant, a Delaware corporation, was incorporated in 1942. The
primary businesses of the Registrant are:

(i) The development, manufacture, and sale, through Registrant's PEM(R)
Fastening Systems division ("PEM Fastening Systems"), of PEM(R) self-clinching
and broaching fasteners, inserts for plastics, and automatic insertion equipment
for such fasteners sold under the PEMSERTER(R) trademark, and blind-threaded
inserts sold under the Atlas(R) trademark;

(ii) The development, manufacture, and sale through the Registrant's
Pittman division ("Pittman"), of permanent magnet brush-commutated dc motors
under the Lo-Cog(R) trademark, and electronically commutated brushless dc
servomotors under the Elcom(R) trademark; and

(iii) The distribution of fasteners and other components utilized by
original equipment manufacturers ("OEMs") and the provision of comprehensive
logistical and inventory management services, through Arconix Group, Inc. and
its subsidiaries ("Arconix Group"), which the Registrant commenced reporting as
a separate business segment for the fiscal year ended December 31, 2001.

On February 5, 2003, the Registrant acquired all of the issued and
outstanding capital stock of Maelux SA and its sole operating company, M.A.E.
S.p.A., of Offanengo, Italy, for approximately $9.7 million. M.A.E. is a
manufacturer of stepper, brush, and brushless dc motors serving customers
throughout Europe. The purchase price was paid using existing cash on hand.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

The answer to this Item is incorporated by reference to Note 13 of the
Notes to Consolidated Financial Statements "Financial Reporting for Business
Segments of the Registrant" on pages 26, 27, and 28 of the Registrant's 2002
Annual Report to Stockholders (the "Annual Report"), which is included as
Exhibit (13) to this Form 10-K Annual Report.

(c) NARRATIVE DESCRIPTION OF BUSINESS.

PEM Fastening Systems is the world's leading manufacturer of self-clinching
fasteners, which are used principally by the computer, data communications,
telecommunications, general electronics, automotive, and avionics industries.
PEM(R) self-clinching fasteners were first developed by the Registrant's founder
in 1942. Self-clinching fasteners become an integral part of the material in
which they are installed and provide a reliable means of attaching components to
sheet metal and other thin materials. Typical applications for the Registrant's
fastener products include personal computers, computer cabinetry, power
supplies, instrumentation, telecommunications equipment, and certain automobile
parts, such as air bags and windshield wipers.

1

The Registrant's fasteners are primarily used by sheet metal
fabricators, which utilize the Registrant's fasteners to produce sub-assemblies
for OEMs. Both OEMs and their subcontractors seek fastening solutions that
provide lower total installed cost and are highly reliable, thereby lowering
production and service costs. The Registrant's application engineers, its
distributors and its independent distributors continually work in close
collaboration with OEMs and their subcontractors early in the design process to
determine appropriate fastener applications and to engineer fastening solutions.
This collaboration often results in OEMs specifying the Registrant's fasteners
in their products. Self-clinching fasteners generally compete against loose
hardware, such as nuts and bolts. Even though the Registrant's fasteners
typically sell at a premium to loose hardware, its fasteners generally result in
lower overall manufacturing costs for the end user.

PEM Fastening Systems also manufactures and sells manual and automated
presses for fastener installation under the PEMSERTER(R) trademark, and
blind-threaded inserts sold under the Atlas(R) trademark. The rapid and accurate
installation provided by PEMSERTER(R) presses, together with the Registrant's
broad range of fastener products, provides the Registrant's customers with a
complete fastening system.

Pittman produces high-quality, high-performance, permanent magnet dc
motors and electronically commutated brushless dc servomotors used in
light-weight precision electronics, medical, and manufacturing applications such
as archival storage, printing, copying, robotics, and medical diagnostic
equipment and centrifuges. Pittman's broad range of products are typically
adapted to the specific requirements of individual customers.

Arconix Group is a global distribution organization that offers a
single source of supply for fastening and electronic hardware products and other
components utilized by OEMs and their subcontractors and also provides a broad
range of logistical and on-site inventory management services.

The following table sets forth information with respect to the
percentage of total sales attributable to each of the Registrant's principal
products which accounted for 10% or more of consolidated revenues in each of the
fiscal years ended December 31, 2000, 2001, and 2002:

PERCENTAGE OF TOTAL SALES
-------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, FASTENERS MOTORS DISTRIBUTION
------------ --------- ------ ------------

2000 84% 16% *
2001 63 18 19%
2002 55 21 24

- --------------------
* Prior to 2001, the sales of the distribution segment were included with those
of the fastener segment.

The Registrant's fastener products are sold through a worldwide network
of approximately 53 authorized independent distributors located in 38 countries,
including the Registrant's own subsidiaries in California, China, England,

2

Singapore, and Mexico. Many of the independent distributors and engineering
representative organizations have been affiliated with the Registrant for more
than 20 years. The Registrant's independent distributors, which maintain their
own inventories of the Registrant's products, typically sell other complementary
industrial components. The Registrant's return allowances, which are made
through the exchange of inventory, have generally averaged less than 1% of
sales. The Registrant supplies its customers and distributors through warehouses
in: Oxnard, California; Shanghai, China; Doncaster, England; Singapore; and
Guadalajara, Mexico, in addition to maintaining inventory at its facilities in
Danboro, Pennsylvania, Winston-Salem, North Carolina, and Kent, Ohio.

Domestic and European sales of Pittman motors are made through
independent sales representatives.

During the year ended December 31, 2002, conditions in the domestic
market for fasteners continued to be highly competitive. It is not possible to
determine with accuracy the relative competitive position of PEM Fastening
Systems in the market for self-clinching, broaching, and insert fasteners. The
Registrant believes that PEM Fastening Systems has maintained its market share
during 2002. Approximately ten other companies are known to be competing with
the Registrant in the manufacture and sale of such fasteners, some of which also
manufacture products other than self-clinching, broaching, and insert fasteners.

The Registrant also believes that Pittman has maintained its
competitive position in the dc motor market in 2002, and that Arconix Group has
maintained its competitive position in the distribution and inventory management
services arena in 2002.

Among PEM Fastening Systems' principal customers for fasteners and
PEMSERTER(R) presses are manufacturers of business machines, personal computers,
computer peripherals, electronic and communications equipment, electrical
equipment, industrial controls instrumentation, vending machines, automotive
subcontractors, and other fabricated metal products. Pittman's principal
customers for the dc motors and servomotors are manufacturers of mass data
storage units, automated production equipment, instruments, computer
peripherals, business machines, and medical equipment. Arconix Group's customers
are generally the same as those of PEM Fastening Systems. In the opinion of the
Registrant, no material part of its business is dependent upon a single customer
or a few customers, the loss of any one or more of which would have a material
adverse effect on the business of the Registrant. For the year ended December
31, 2002, there were no sales to any one customer that exceeded 10% of the
Registrant's 2002 consolidated net sales. However, sales of fasteners to one of
the Registrant's authorized distributors totaled approximately $32,557,000 for
the year ended December 31, 2000, and $22,105,000 for the year ended December
31, 2001, or approximately 12% each year of the Registrant's consolidated net
sales during such years.

As of December 31, 2002, the Registrant had an order backlog of
$33,718,000 compared with $24,028,000 as of December 31, 2001. The Registrant
estimates that substantially all of its backlog as of December 31, 2002 will be
shipped during its fiscal year ending December 31, 2003.

The raw materials used by the Registrant are generally available in
adequate supply.

3

The Registrant holds a number of patents and trademarks, and has patent
applications pending in the United States and various foreign countries.
Management believes, however, that the Registrant's business is not materially
dependent on any patent or group of patents. The principal trademarks of the
Registrant are registered in the United States and various foreign countries.

Research and development is carried on by the operating personnel of
the Registrant on a continuing basis. The amounts expended for research and
development for the fiscal years ended December 31, 2000, 2001, and 2002 were
approximately $5,635,000, $5,111,000, and $4,342,000, respectively.

The Registrant believes that compliance with federal, state, and local
laws and regulations that have been enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, will not have a material adverse effect upon the earnings or
competitive position of the Registrant.

As of December 31, 2002, 1,166 persons were employed by the Registrant,
178 fewer than were employed as of December 31, 2001. The Registrant believes
that its labor rates are comparable to those of its competitors and that the
Registrant's relations with its employees are good. The Registrant does not
consider its business to be seasonal in any material respect, nor is any
material portion of the Registrant's business subject to the renegotiation of
profits or termination of contracts at the election of the Government.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES.

The answer to this Item is incorporated by reference to Note 13
"Financial Reporting for Business Segments of the Company" on pages 26, 27, and
28 of the Annual Report. All foreign sales, except for those of Arconix/UK Ltd.,
Arconix/Mexico, S. de R.L. de C.V., Arconix/Singapore Pte Ltd., and PEM
Fastening Systems/Europe Ltd., are sold F.O.B. the Registrant's United States
factory, payable in U.S. dollars. Sales in the United Kingdom and Western Europe
are made through the Registrant's wholly owned subsidiaries, Arconix/UK Ltd. and
PEM Fastening Systems/Europe Ltd., and are denominated in pounds sterling, U.S.
dollars, and Euros. Sales in the Pacific Rim are made through the Registrant's
wholly owned subsidiary, Arconix/Singapore Pte Ltd., and are denominated in
Singapore dollars and U.S. dollars. Sales in Mexico are made through the
Registrant's wholly owned subsidiary, Arconix/Mexico, S. de R.L. de C.V., and
are denominated in Mexican pesos and U.S. dollars. In 2003, the Registrant will
commence selling in China through its Arconix/Shanghai affiliate, which sales
will be denominated in Chinese remnimbi and U.S. dollars. All foreign sales are
subject to special risks of exchange controls and restrictions on the
repatriation of funds and also may be affected by the imposition or increase of
taxes and/or tariffs and international instability.

(e) AVAILABLE INFORMATION.

The Registrant files reports, proxy statements and other information
with the Securities and Exchange Commission. The Registrant's filings are
available over the Internet at the SEC's web site at http://www.sec.gov. The

4

public may also read and copy any document the Registrant files at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for more information about the public reference
room.

The Registrant maintains an Internet web site at
http://www.penn-eng.com and makes available free of charge on or through the web
site its Annual Report on Form 10-K, its quarterly reports on Form 10-Q and its
current reports on Form 8-K as soon as reasonably practicable after it
electronically files such material with, or furnishes it to, the SEC.

RISK FACTORS

MANY OF THE REGISTRANT'S CUSTOMERS ARE IN CYCLICAL INDUSTRIES, AND
THEIR PURCHASES FROM THE REGISTRANT MAY DECLINE SUBSTANTIALLY DURING PERIODS OF
ECONOMIC SLOWDOWN.

A majority of the Registrant's revenues are derived from customers and
OEMs that are in industries and businesses that are cyclical in nature and
subject to change in general economic conditions, such as business machines,
personal computers, computer peripherals, electronic and communications
equipment, and other electronic equipment. Demand for the Registrant's products
is affected by the business success of the Registrant's OEM and indirect
customers who purchase products from those OEM customers. General economic or
industry-specific downturns, particularly such as those in the telecommunication
and datacommunications industries, have had and could continue to have a
material adverse effect on the Registrant and its business, results of
operations, and financial condition.

THE REGISTRANT'S FOREIGN OPERATIONS ARE SUBJECT TO NUMEROUS RISKS,
INCLUDING CURRENCY FLUCTUATIONS AND OTHER RISKS THAT MAY IMPACT THE REGISTRANT'S
RESULTS OF OPERATIONS.

Foreign sales accounted for approximately 33% of the Registrant's 2002
consolidated sales. Because not all of the Registrant's sales and expenses are
incurred in U.S. dollars, the Registrant's operations have been and may continue
to be affected by fluctuations in currency exchange rates. Furthermore, currency
fluctuations may cause reported sales to fluctuate from period to period
regardless of the fluctuation in the volume of such sales in foreign currencies.
The Registrant purchases forward foreign currency exchange contracts to attempt
to insulate the Registrant from the impact of foreign currency exchange rate
fluctuations.

Foreign sales are subject to numerous other risks, including political
and economic instability in foreign markets, restrictive trade policies of
foreign governments, economic conditions in local markets, the imposition of
product tariffs, and the burdens of complying with a wide variety of
international and U.S. export laws.

ITEM 2. PROPERTIES.

The Registrant's principal plants and offices, all of which (other than
the Singapore, China and Mexico offices) are owned by the Registrant, were as
follows at December 31, 2002 (except for the Offanengo, Italy facility, which
was acquired on February 5, 2003):

5

LOCATION SIZE OF FACILITY USE OF FACILITY
-------- ---------------- ---------------

Danboro, Pennsylvania 230,000 sq. ft building on 107 Executive offices and manufacture of
acres fasteners

Winston-Salem, 120,000 sq. ft. building on 16.3 Manufacture of fasteners
North Carolina acres; and 58,280 sq. ft.
building on 6 acres

Kent, Ohio 75,000 sq. ft. building on 10 Manufacture of fasteners
acres

Galway, Ireland 55,000 sq. ft. building on 2 Manufacture of fasteners
acres

Bedminster, Pennsylvania 51,000 sq. ft. building on 10 Manufacture of installation presses and
acres tooling

Harleysville, Pennsylvania 58,000 sq. ft. building on 6 Manufacture of dc motors
acres

Offanengo, Italy 129,000 sq. ft. building on 8 Manufacture of dc motors
acres

Oxnard, California 30,600 sq. ft. building on 2 Office and warehouse for the
acres distribution of fasteners and related
components

Doncaster, England 33,250 sq. ft. building on 5 Office and warehouse for the
acres distribution of fasteners and related
components

The Registrant also has leased 8,000 sq. ft. of office and warehouse
space in Shanghai, China, 9,758 sq. ft. of office and warehouse space in
Guadalajara, Mexico, and 7,000 sq. ft. of office and warehouse space in
Singapore. The Registrant's facility in Suffolk, Virginia is currently vacant
and for sale. The Registrant carries fire, casualty, business interruption, and
public liability insurance for all of its facilities in amounts which it deems
adequate.

ITEM 3. LEGAL PROCEEDINGS.

The answer to this Item is incorporated by reference to Note 12 of
Notes to Consolidated Financial Statements "Commitments & Contingencies" on page
26 of the Annual Report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information about the executive officers of the Registrant is
as follows:

6

NAME AGE POSITION HELD WITH THE REGISTRANT
- ---- --- ---------------------------------

Kenneth A. Swanstrom 63 Chairman of the Board and Chief Executive
Officer

Martin Bidart 66 President and Chief Operating Officer

Mark W. Simon 64 Senior Vice President, Chief Financial
Officer, and Corporate Secretary

Francis P. Wilson 63 President - PEM Fastening Systems

Kent R. Fretz 65 President - Pittman

Richard F. Davies 53 Treasurer and Assistant Secretary

William E. Sarnese 49 Corporate Controller and Assistant
Secretary

All of the executive officers of the Registrant have been principally
employed as officers or employees of the Registrant for more than the past five
years.

The executive officers of the Registrant are elected each year at the
organization meeting of the Board of Directors of the Registrant, which is held
following the Annual Meeting of Stockholders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Registrant's Common Stock (non-voting), par value $0.01, is traded
on the New York Stock Exchange under the symbol "PNN." The Registrant's Class A
Common Stock (voting), par value $0.01, is traded on the New York Stock Exchange
under the symbol "PNNA." As of March 4, 2003, there were 592 holders of record
of the Registrant's Common Stock and 346 holders of record of the Registrant's
Class A Common Stock. Additional information with respect to this Item 5 is
incorporated by reference to page 14 of the Annual Report.

ITEM 6. SELECTED FINANCIAL DATA.

The Five-Year Financial Data and other financial information for the
Registrant is incorporated by reference to page 13 of the Annual Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The answer to this item is incorporated by reference to pages 9
through 13 of the Annual Report.

7

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The answer to this Item is incorporated by reference to pages 12
through 13 of the Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The answer to this Item is incorporated by reference to pages 15
through 28 of the Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The response to this Item with respect to the Registrant's directors is
incorporated by reference to pages 5 through 6 of the proxy statement relating
to the Registrant's 2003 annual meeting of stockholders to be held May 1, 2003
(the "Proxy Statement"). Information with respect to executive officers of the
Registrant is included in Part I of this Form 10-K Annual Report.

ITEM 11. EXECUTIVE COMPENSATION.

The response to this Item is incorporated by reference to pages 7
through 12 of the Proxy Statement, other than the "Report of the Compensation
Committee of the Board of Directors" and the "Performance Graph," which are not
incorporated by reference into this Form 10-K Annual Report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The response to this Item is incorporated by reference to pages 2
through 4 of the Proxy Statement.

The following table sets forth information regarding equity
compensation plans of the Registrant as of December 31, 2002. Only shares of the
Registrant's common stock (non-voting) may be issued under the Registrant's
equity compensation plans. The Registrant does not have any equity compensation
plans that have not been approved by the stockholders of the Registrant.

8

EQUITY COMPENSATION PLAN INFORMATION

NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS IN COLUMN (A))
- ------------- -------------------------- ------------------------- -------------------------
(a) (b) (c)

Equity compensation plans 2,187,741 $13.76 845,307
approved by security holders

Equity compensation plans not -- -- --
approved by security holders

Total 2,187,741 $13.76 845,307

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Not applicable.

ITEM 14. CONTROLS AND PROCEDURES.

Within the 90 days prior to the date of this Annual Report on Form
10-K, the Registrant carried out an evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures. This evaluation
was performed under the supervision and with the participation of management,
including the Registrant's Chairman and Chief Executive Officer and Chief
Financial Officer.

Under the rules of the Securities and Exchange Commission, the term
"disclosure controls and procedures" means controls and other procedures of the
Registrant that are designed to ensure that information required to be disclosed
by the Registrant in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported, within
the time periods specified in the rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Registrant in such
report is accumulated and communicated to the Registrant's management, including
the Chairman and Chief Executive Officer and the Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, the Registrant's Chairman and Chief Executive
Officer and the Registrant's Chief Financial Officer concluded that the

9

Registrant's disclosure controls and procedures are effective for gathering,
analyzing, and disclosing the information that the Registrant is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. There have been no significant changes in the Registrant's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of this evaluation.

A control system, no matter how well-designed and operated, cannot
provide absolute assurance that the objectives of the controls system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K.

(A) FINANCIAL STATEMENTS, FINANCIAL SCHEDULES AND EXHIBITS FILED.

1. Consolidated Financial Statements.The following Consolidated Financial
Statements of the Registrant and its subsidiaries are filed as part of this Form
10-K Report:

PAGE

Consolidated Balance Sheets at December 31, 2002 and 2001 15*

Statements of Consolidated Income for the years ended December 31, 2002, 16*
2001, and 2000.

Statements of Changes in Consolidated Stockholders' Equity for the years 17*
ended December 31, 2002, 2001, and 2000.

Statements of Consolidated Cash Flows for the years ended December 31, 18*
2002, 2001, and 2000.

Notes to Consolidated Financial Statements. 19-28*

Report of Independent Auditors. 28*

- -------------------
* Refers to the respective pages of the Annual Report. With the exception of
the portions of such Annual Report specifically incorporated by reference
in this Item, and in Items 1, 3, 5, 6, 7, 7A, 8, and 15 hereof, such Annual
Report shall not be deemed filed as a part of this Form 10-K Report or
otherwise deemed subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934.

10

2. FINANCIAL SCHEDULES.

None.

3. EXHIBITS.

Reference is made to the Exhibit Index on page 18 of this
Form 10-K.

(b) REPORTS ON FORM 8-K.

None during the quarter ended December 31, 2002. Registrant
filed a Form 8-K Current Report with the Securities and Exchange Commission
on February 26, 2003 disclosing information under Item 5.

11

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PENN ENGINEERING &
MANUFACTURING CORP.

Date: March 27, 2003 By:/S/ KENNETH A. SWANSTROM
------------------------------------
Kenneth A. Swanstrom,
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/S/ KENNETH A. SWANSTROM Chairman of the Board, March 27, 2003
- --------------------------- Chief Executive Officer, and
Kenneth A. Swanstrom Director (Principal Executive
Officer)

/S/ MARK BIDART President, Chief Operating Officer, March 27, 2003
- --------------------------- and Director (Principal Operating
Martin Bidart Officer)

/S/ MARK W. SIMON Senior Vice President, Chief March 27, 2003
- --------------------------- Financial Officer, Corporate
Mark W. Simon Secretary, and Director (Principal
Financial and Accounting Officer)

/S/ WILLARD S. BOOTHBY, JR. Director March 27, 2003
- ---------------------------
Willard S. Boothby, Jr.

/S/ THOMAS M. HYNDMAN, JR. Director March 27, 2003
- ---------------------------
Thomas M. Hyndman, Jr.

/S/ MAURICE D. OAKS Director March 27, 2003
- ---------------------------
Maurice D. Oaks

/S/ JOHN J. SICKLER Director March 27, 2003
- ---------------------------
John J. Sickler

12

SIGNATURE TITLE DATE
--------- ----- ----

/
/S/ CHARLES R. SMITH Director March 27, 2003
- ---------------------------
Charles R. Smith

/S/ DARYL L. SWANSTROM Director March 27, 2003
- ---------------------------
Daryl L. Swanstrom

/S/ ANDREW B. WILLIAMS Director March 27, 2003
- ---------------------------
Andrew B. Williams

13

CERTIFICATION

I, Kenneth A. Swanstrom, Chairman and Chief Executive Officer of Penn
Engineering & Manufacturing Corp., certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended
December 31, 2002 of Penn Engineering & Manufacturing Corp.;

2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being prepared;

(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and

(c) presented in this Annual Report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

14

6. The registrant's other certifying officers and I have indicated in
this Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 27, 2003 /S/ KENNETH A. SWANSTROM
------------------------------
Kenneth A. Swanstrom, Chairman
and Chief Executive Officer

15

CERTIFICATION

I, Mark W. Simon, the Senior Vice President, Chief Financial Officer
and Corporate Secretary of Penn Engineering & Manufacturing Corp., certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended
December 31, 2002 of Penn Engineering & Manufacturing Corp.;

2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being prepared;

(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and

(c) presented in this Annual Report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

16

6. The registrant's other certifying officers and I have indicated in
this Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 27, 2003 /S/ MARK W. SIMON
----------------------------------
Mark W. Simon, Senior Vice
President, Chief Financial Officer
and Corporate Secretary

17