##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______to ______
 Commission file number 1-5356 PENN ENGINEERING & MANUFACTURING CORP. 
  Delaware
    
    23-0951065(State or other jurisdiction of
    
    (I.R.S. employerincorporation 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 registeredClass A Common Stock, $.01 par value
    
    New York Stock ExchangeCommon 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
þ.   No
o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act 1934). Yes
þ.   No o. As of June 30, 2004, 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
$290,100,000. Indicate the number of shares outstanding of each of the Registrants classes of common stock as of
the latest practicable date: 14,505,028 shares of Common Stock and 3,350,164 shares of Class A
Common Stock outstanding on March 1, 2005. DOCUMENTS INCORPORATED BY REFERENCE: None.




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PENN ENGINEERING & MANUFACTURING CORP.   INDEX TO FORM 10-K REPORT   PAGEI.
    
    PART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    7Item 3.
    
    Legal Proceedings
    
    
    8Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    9II.
    
    PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
    
    
    10Item 6.
    
    Selected Financial Data
    
    
    11Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 8.
    
    Financial Statements and Supplementary Data
    
    
    23Item 9.
    
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    49Item 9A.
    
    Controls and Procedures
    
    
    49Item 9B.
    
    Other Information
    
    
    49III.
    
    PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    49Item 11.
    
    Executive Compensation
    
    
    52Item 12.
    
    Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
    
    
    54Item 13.
    
    Certain Relationships and Related Transactions
    
    
    59Item 14.
    
    Principal Accountant Fees and Services
    
    
    59IV.
    
    PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    61
 (i)




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PART I Item 1. Business. (a) General Development of Business. Penn Engineering & Manufacturing Corp., a Delaware corporation (the Company), was
incorporated in 1942. The primary businesses of the Company are:  
    The development, manufacture, and sale, through the Companys PennEngineering
Fastening Technologies division (Fastening Technologies), of PEM® self-clinching
and broaching fasteners, automatic insertion equipment for such fasteners sold under
the PEMSERTER® trademark, inserts for plastics sold under the SI® trademark, small
screw insertion systems sold under the StickScrew® trademark, and blind-threaded
inserts sold under the Atlas® trademark;
    The development, manufacture, and sale through the Companys PennEngineering Motion
Technologies division (Motion Technologies), of permanent magnet brush-commutated dc
motors under the Pittman® brand and Lo-Cog® trademark, electronically commutated
brushless dc servomotors under the Elcom® trademark, and stepper, brush, and
brushless dc motors under the MAE trademark; and
    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). On January 17, 2005, the Company announced that it has entered into a definitive merger
agreement (the Merger Agreement) whereby the Company will be acquired by PEM Holding Co., an
affiliate of Tinicum Capital Partners II, L.P., a New York-based private investment partnership, in
a cash transaction. Under the terms of the Merger Agreement, stockholders of the Company will receive $18.25 in
cash for each share of the Companys Common Stock and Class A Common Stock. The market value of
the transaction is expected to be approximately $330 million. The transaction is expected to be
completed in the first half of 2005. A special committee of the Companys Board of Directors consisting of the Companys
independent directors (the Special Committee) unanimously recommended to the Companys full Board
of Directors that it approve and authorize the Merger Agreement and the transactions contemplated
thereby. The Companys Board of Directors unanimously determined that the merger is fair to and in
the best interests of the Companys stockholders and that the merger is advisable, and approved and
authorized the Merger Agreement and -1-




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the related merger and resolved to recommend approval and adoption of the Merger Agreement and
the related merger by holders of the Companys Class A Common Stock. The obligations of the parties
to the Merger Agreement to complete the merger are subject to various conditions including PEM
Holding Co. or its wholly owned subsidiary having received the proceeds of a financing under a
signed financing commitment letter. Upon termination of the Merger Agreement under specified
circumstances, the Company has agreed to pay PEM Holding Co. a termination fee of $10.0 million and
reimburse PEM Holding Co. up to $5.0 million for costs and expenses. Kenneth A. Swanstrom, the Companys Chairman of the Board and Chief Executive Officer, Daryl
L. Swanstrom, a director, and the Swanstrom family trusts, of which Kenneth A. Swanstrom and Daryl
L. Swanstrom are the principal beneficiaries, who in the aggregate own 53.1% of the outstanding
shares of the Companys Class A Common Stock, have agreed with PEM Holding Co., if requested by PEM
Holding Co., to grant PEM Holding Co. a proxy to vote shares representing approximately 49% of the
outstanding shares of Class A Common Stock in favor of the Merger Agreement and the related merger
and, unless PEM Holding Co. votes such shares directly pursuant to a proxy, to vote these shares in
favor of the Merger Agreement and the related merger. (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 Company included in Item 8
of this Form 10-K Annual Report. (c) Narrative Description of Business. Fastening Technologies 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® self-clinching fasteners were first developed by the
Company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 Companys fastener products include personal
computers, computer cabinetry, power supplies, instrumentation, telecommunications equipment, and
certain automobile components, such as air bags, sun roofs, and windshield wipers. The Companys fasteners are primarily used by sheet metal fabricators, which utilize the
Companys fasteners to produce sub-assemblies for OEMs. Both OEMs and their subcontractors seek
fastening solutions that provide lower total installed cost and high reliability, thereby lowering
production and service costs. The Company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 -2-




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appropriate fastener applications and to engineer fastening solutions. This collaboration
often results in OEMs specifying the Companys fasteners in their products. Self-clinching
fasteners generally compete against loose hardware, such as nuts and bolts. Even though the
Companys fasteners typically sell at a premium to loose hardware, its fasteners generally result
in lower overall manufacturing costs. Fastening Technologies also manufactures and sells manual and automated presses for fastener
installation under the PEMSERTER® trademark, small screw insertion systems sold under the
StickScrew® trademark, and blind-threaded inserts sold under the Atlas® trademark. The rapid
and accurate installation provided by PEMSERTER® presses, together with the Companys broad range
of fastener products, provides the Companys customers with a complete fastening system. Motion Technologies, under the Pittman® and Lo-Cog® trademarks, 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,
and, under the MAE trademark, produces high quality, high performance stepper, brush, and brushless
dc motors serving similar applications and markets in Europe and Asia. Motion Technologies 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. Arconix Group 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 Companys principal segments that accounted for 10% or more of
consolidated revenues in each of the fiscal years ended December 31, 2002, 2003, and 2004: Percentage of Total SalesYear EndedDecember 31,
    
    Fasteners
    
    Motors
    
    Distribution2002
    
    
    51
    %
    
    
    21
    %
    
    
    28
    %2003
    
    
    50
    
    
    
    23
    
    
    
    272004
    
    
    53
    
    
    
    21
    
    
    
    26
 The Companys fastener products are sold through a worldwide network of approximately 60
authorized independent distributors located in approximately 40 countries, including the Companys
own subsidiaries in California, China, England, Singapore, and Mexico. Many of the independent
distributors and engineering representative organizations have been affiliated with the Company for
more than 20 years. The Companys independent -3-




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distributors, which maintain their own inventories of the Companys products, typically sell
other complementary industrial components. The Companys return allowances, which are made through
the exchange of inventory, have generally averaged less than 1% of sales. The Company 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 the Companys motor products are made through independent sales
representatives and authorized independent distributors. During the year ended December 31, 2004, 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 Fastening Technologies in the market for self-clinching, broaching, and
insert fasteners. The Company believes that Fastening Technologies has maintained its market share
during 2004. Approximately ten other companies are known to be competing with the Company in the
manufacture and sale of such fasteners, some of which also manufacture products other than
self-clinching, broaching, and insert fasteners. The Company also believes that Motion Technologies has maintained its competitive position in
the dc motor market in 2004, and that Arconix Group has maintained its competitive position in the
distribution and inventory management services arena in 2004. Among Fastening Technologies principal customers for fasteners and PEMSERTER® 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. Motion Technologies
principal customers for the dc motors, servomotors, and stepper motors are manufacturers of mass
data storage units, automated production equipment, instruments, computer peripherals, business
machines, medical equipment and textile industry equipment. Arconix Groups customers are
generally the same as those of Fastening Technologies. In the opinion of the Company, 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 Company. For the year
ended December 31, 2004, sales to one of the Companys authorized distributors totaled
approximately $25,887,000, or approximately 11% of the Companys 2004 consolidated net sales. For
the year ended December 31, 2003, sales to the same distributor totaled approximately $18,900,000,
or approximately 10% of the Companys 2003 consolidated net sales. For the year ended December 31,
2002, there were no sales to any one customer that exceeded 10% of the Companys 2002 consolidated
net sales. As of December 31, 2004, the Company had an order backlog of $87,243,000 compared with
$79,498,000 as of December 31, 2003. The Company estimates that substantially all of its -4-




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backlog as of December 31, 2004 will be shipped during its fiscal year ending December 31,
2005. The raw materials used by the Company are generally available in adequate supply. The Company 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 Companys
business is not materially dependent on any patent or group of patents. The principal trademarks
of the Company are registered in the United States and various foreign countries. Research and development is carried on by the operating personnel of the Company on a
continuing basis. The amounts expended for research and development for the fiscal years ended
December 31, 2002, 2003, and 2004 were approximately $4,342,000, $4,570,000, and $4,728,000,
respectively. The Company 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 Company. As of December 31, 2004, 1,361 persons were employed by the Company, or 94 more than were
employed as of December 31, 2003. The Company believes that its labor rates are comparable to
those of its competitors and that the Companys relations with its employees are good. The Company
does not consider its business to be seasonal in any material respect, nor is any material portion
of the Company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 of the Notes to Consolidated
Financial Statements Financial Reporting for Business Segments of the Company included in Item 8
of this Form 10-K Annual Report. Approximately 37% of the Companys foreign sales in 2004 were payable in U.S. dollars. Of the
remaining foreign sales, sales by certain of the Companys wholly owned subsidiaries are
denominated as follows: (i) sales in the United Kingdom and Western Europe through Arconix/UK Ltd.
and PennEngineering Fastening Technologies (Europe) Ltd. are denominated in pounds sterling, U.S.
dollars, and Euros; (ii) sales in the Pacific Rim through Arconix/Singapore Pte Ltd. and Arconix
Fastening & Inventory Management Solutions (Shanghai) Co., Ltd. are denominated in Chinese yuan,
Singapore dollars, and U.S. dollars; and (iii) sales in Mexico through Arconix/Mexico, S. de R.L.
de C.V., are denominated in Mexican pesos and U.S. dollars. -5-




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(e) Available Information. The Company 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 Securities and Exchange Commission (the
Commission). The Company is in compliance with the requirements of the New York Stock Exchange
to make available on the Companys website and in printed form upon request the Companys Code of
Business Conduct and Ethics and the respective charters of its Audit, Compensation, and
Nominating/Corporate Governance Committees. Risk Factors Many of the Companys customers are in cyclical industries, and their purchases from the
Company may decline substantially during periods of economic slowdown. A majority of the Company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 Companys products is
affected by the business success of the Company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 in the future could
have, a material adverse effect on the Company and its business, results of operations, and
financial condition. The Companys foreign operations are subject to numerous risks, including currency
fluctuations and other risks that may impact the Companys results of operations. Foreign sales accounted for approximately 39% of the Companys 2004 consolidated sales.
Because approximately 63% of the Companys foreign sales and expenses were incurred in foreign
currencies, the Company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. From time to time, the Company purchases forward foreign currency exchange contracts
to attempt to insulate the Company 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. -6-




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Forward-Looking Statements Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933
(the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), under the Private Securities Litigation Reform Act of 1995, are made throughout
this Form 10-K. The Companys results may differ materially from those set forth in the
forward-looking statements. Forward-looking statements are based on managements current views and
assumptions, and involve risks and uncertainties that significantly affect expected results. For
example, operating results may be affected by external factors such as: changes in laws and
regulations, changes in accounting standards, fluctuations in demand in markets served by the
Company, particularly the computer and telecommunications markets, fluctuations in the cost and
availability of the supply chain resources, and foreign economic conditions, including currency
rate fluctuations. The forward-looking statements contained in this Form 10-K reflect the
Companys views and assumptions only as of the date of this Form 10-K. Except as required by law,
the Company does not intend to, and assumes no responsibility for, updating any forward-looking
statements. The Company qualifies all of its forward-looking statements by these cautionary
statements. Item 2. Properties. The Companys principal plants and offices, all of which (other than the Singapore, China, and
Mexico offices) are owned by the Company, were as follows at December 31, 2004: Location
    
    Size of Facility
    
    Use of FacilityDanboro, Pennsylvania
    
    230,000 sq. ft building
on 107 acres
    
    Executive offices and
manufacture of
fastenersWinston-Salem,
North Carolina
    
    120,000 sq. ft. building
on 16.3 acres; and 58,280
sq. ft. building on 6
acres
    
    Manufacture of fastenersKent, Ohio
    
    75,000 sq. ft. building
on 10 acres
    
    Manufacture of fastenersGalway, Ireland
    
    55,000 sq. ft. building on
2 acres
    
    Manufacture of fastenersPipersville, Pennsylvania
    
    51,000 sq. ft. building
on 10 acres
    
    Manufacture of
installation presses
and toolingHarleysville, Pennsylvania
    
    58,000 sq. ft. building on
6 acres
    
    Manufacture of dc motors
 -7-




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Location
    
    Size of Facility
    
    Use of FacilityOffanengo, Italy*
    
    129,000 sq. ft. building
on 8 acres
    
    Manufacture of dc motorsOxnard, California
    
    30,600 sq. ft. building on
2 acres
    
    Office and warehouse
for the distribution of
fasteners and related
componentsDoncaster, England
    
    33,250 sq. ft. building on
5 acres
    
    Office and warehouse
for the distribution of
fasteners and related
components
   *
    
    Pursuant to the stock purchase agreement between an affiliate of the Company and the seller by
which Maelux SA and its sole operating company, M.A.E. S.p.A. of Offanengo, Italy, were
acquired by the Company, the seller has purportedly exercised the option to purchase this facility
and property, which purchase is scheduled to close in February 2006. Upon the closing of the
purchase, the Company will have the option of renting the facility and the property for a term of
one year. The Company 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 Company carries fire, casualty, business interruption, and
public liability insurance for all of its facilities in amounts which it deems adequate. Item 3. Legal Proceedings. As
of March 14, 2005, the Company is aware that four complaints
have been filed in the Delaware Court of Chancery against the Company
and each of its directors. One of the complaints also names Tinicum
Capital Partners II, L.P. and PEM Holding Co. as co-defendants. The
complaints purport to be class actions filed on behalf of holders of
the Companys Common Stock arising from certain alleged actions
by the Company and its directors in connection with the proposed
merger of the Company with an affiliate of Tinicum Capital Partners
II, L.P. The complaints include various allegations that: each of the
defendants breached and/or aided and abetted the other
defendants' breaches of fiduciary duties of loyalty, due care,
candor, good faith and fair dealing; that the director defendants
spent substantial effort tailoring the structural terms of the merger
to meet the specific needs of Tinicum Capital Partners II, L.P. to
ensure the sale of the Company to it on preferential terms instead of
attempting to obtain the highest price reasonably available for the
Company and its stockholders, which was subversive to the interests
of the public stockholders of the Company; the directors structured
and approved the transaction in contravention of the Companys
restated certificate of incorporation, agreeing to provisions in
agreements that effectively preclude a competing bid and approving an
acquisition that favors insiders to the detriment of the
Companys public stockholders, including the price per share
offered to the holders of the Companys Common Stock; and the
defendants failed to provide material information concerning the
transaction to the Companys public stockholders. The complaints
seek equitable relief in the form of an injunction enjoining the
consummation of the merger or, if the merger is consummated to the
detriment of the public stockholders, then rescission of the
transaction or unspecified damages, in addition to costs and
disbursements, including reasonable attorneys and experts
fees. -8-




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The Company is in the process of preparing responses to these complaints, and the time for the
Company to respond to these complaints has not yet expired. Item 4. Submission of Matters to a Vote of Security Holders. None. -9-




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PART II  Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities. The Companys Common Stock (non-voting), par value $0.01 per share, is traded on the New York
Stock Exchange under the symbol PNN. The Companys Class A Common Stock (voting), par value
$0.01 per share, is traded on the New York Stock Exchange under the symbol PNNA. As of March 1,
2005, there were approximately 540 holders of record of the Companys Common Stock and 300 holders
of record of the Companys Class A Common Stock. The following table shows, for the quarters indicated, the high and low closing sales prices
of the Companys Common Stock and Class A Common Stock as reported by the New York Stock Exchange
and the dividends declared on the Companys Common Stock and Class A Common Stock. Class ACommon Stock
    
    
    Common Stock
    
    
    DividendsHigh
    
    
    Low
    
    
    High
    
    
    Low
    
    
    Declared per Share2003First Quarter
    
    $
    11.31
    
    
    $
    10.85
    
    
    $
    11.77
    
    
    $
    10.25
    
    
    $
    0.06Second Quarter
    
    
    13.61
    
    
    
    10.80
    
    
    
    15.35
    
    
    
    11.95
    
    
    
    0.06Third Quarter
    
    
    15.50
    
    
    
    11.50
    
    
    
    17.16
    
    
    
    12.80
    
    
    
    0.06Fourth Quarter
    
    
    17.25
    
    
    
    13.80
    
    
    
    19.25
    
    
    
    15.43
    
    
    
    0.062004First Quarter
    
    $
    17.59
    
    
    $
    12.50
    
    
    $
    19.80
    
    
    $
    14.00
    
    
    $
    0.06Second Quarter
    
    
    18.27
    
    
    
    13.99
    
    
    
    21.44
    
    
    
    15.47
    
    
    
    0.07Third Quarter
    
    
    18.45
    
    
    
    14.40
    
    
    
    21.58
    
    
    
    17.16
    
    
    
    0.07Fourth Quarter
    
    
    16.85
    
    
    
    14.20
    
    
    
    20.18
    
    
    
    16.75
    
    
    
    0.072005First Quarter (through February 15, 2005)
    
    $
    18.24
    
    
    $
    14.88
    
    
    $
    18.34
    
    
    $
    17.75
    
    
    
    
 The Merger Agreement prevents the Company from declaring or paying any additional
dividends on its Common Stock and Class A Common Stock before completion of the merger. -10-




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Item 6. Selected Financial Data. Years Ended December 31,(Dollars in thousands except per share amounts)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net sales
    
    $
    240,862
    
    
    $
    190,747
    
    
    $
    150,801
    
    
    $
    188,178
    
    
    $
    264,563Cost of products sold
    
    
    160,611
    
    
    
    136,292
    
    
    
    104,219
    
    
    
    129,420
    
    
    
    171,100Provision for income taxes
    
    
    8,691
    
    
    
    1,542
    
    
    
    326
    
    
    
    3,063
    
    
    
    13,175Net income
    
    
    18,467
    
    
    
    4,883
    
    
    
    3,987
    
    
    
    9,280
    
    
    
    27,464Capital expenditures
    
    
    3,429
    
    
    
    3,386
    
    
    
    2,816
    
    
    
    13,083
    
    
    
    13,174Depreciation and amortization
    
    
    10,484
    
    
    
    10,587
    
    
    
    10,931
    
    
    
    11,710
    
    
    
    10,518Total assets
    
    
    253,481
    
    
    
    236,124
    
    
    
    224,979
    
    
    
    228,826
    
    
    
    209,996Long-term debt
    
    
    2,819
    
    
    
    3,173
    
    
    
    
    
    
    
    12,000
    
    
    
    Stockholders equity
    
    
    216,758
    
    
    
    191,600
    
    
    
    183,217
    
    
    
    180,426
    
    
    
    176,288Working capital
    
    $
    99,782
    
    
    $
    69,508
    
    
    $
    76,022
    
    
    $
    80,545
    
    
    $
    78,536Number of employees (at year end)
    
    
    1,361
    
    
    
    1,267
    
    
    
    1,166
    
    
    
    1,344
    
    
    
    1,657Number of stockholders of record (at year end):PNN
    
    
    542
    
    
    
    575
    
    
    
    591
    
    
    
    510
    
    
    
    487PNNA
    
    
    304
    
    
    
    329
    
    
    
    347
    
    
    
    355
    
    
    
    373Average number of common shares
outstanding used to compute
per share information (in thousands) (1):Basic
    
    
    17,672
    
    
    
    17,439
    
    
    
    17,375
    
    
    
    17,268
    
    
    
    17,152Diluted
    
    
    17,966
    
    
    
    17,657
    
    
    
    17,605
    
    
    
    17,647
    
    
    
    17,424Per share information (1):Net income  basic
    
    $
    1.04
    
    
    $
    .28
    
    
    $
    .23
    
    
    $
    .54
    
    
    $
    1.60Net income  diluted
    
    
    1.03
    
    
    
    .28
    
    
    
    .23
    
    
    
    .53
    
    
    
    1.58Stockholders equity
    
    
    12.14
    
    
    
    10.93
    
    
    
    10.54
    
    
    
    10.45
    
    
    
    10.28Dividends declared
    
    
    .27
    
    
    
    .24
    
    
    
    .28
    
    
    
    .32
    
    
    
    .26
   (1)
    
    Share and per share information is adjusted to reflect a two-for-one stock split on May
1, 2001. Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. Managements discussion and analysis of results of operations and financial condition provides
an account of the Companys financial performance and financial condition that should be read in
conjunction with the accompanying consolidated financial statements. It includes the following
sections:  
    Consolidated Results -11-




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##### 




    Business Segment Results
    Liquidity and Capital Resources
    Accounting Policies and Estimates
    Forward-Looking Statements Consolidated Results Overview The following tables set forth for the periods indicated certain information derived from the
Companys consolidated statements of income expressed in dollars and as a percentage of total net
sales. Years Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %NET SALES:United States
    
    $
    145,874
    
    
    
    60.6
    %
    
    $
    113,908
    
    
    
    59.7
    %
    
    $
    101,268
    
    
    
    67.2
    %Foreign
    
    
    94,988
    
    
    
    39.4
    
    
    
    76,839
    
    
    
    40.3
    
    
    
    49,533
    
    
    
    32.8Total
    
    $
    240,862
    
    
    
    100.0
    %
    
    $
    190,747
    
    
    
    100.0
    %
    
    $
    150,801
    
    
    
    100.0
    %Gross Profit
    
    $
    80,251
    
    
    
    33.3
    %
    
    $
    54,455
    
    
    
    28.5
    %
    
    $
    46,582
    
    
    
    30.9
    %Selling, general, and
administrative
expenses
    
    
    53,566
    
    
    
    22.2
    
    
    
    47,989
    
    
    
    25.2
    
    
    
    42,188
    
    
    
    28.0Operating income
    
    
    26,685
    
    
    
    11.1
    
    
    
    6,466
    
    
    
    3.3
    
    
    
    4,394
    
    
    
    2.9Net income
    
    
    18,467
    
    
    
    7.7
    
    
    
    4,883
    
    
    
    2.6
    
    
    
    3,987
    
    
    
    2.6
 2004 vs. 2003 Consolidated net sales increased 26.3% from 2003 to 2004 as a result of the strong business
recovery that began in 2003 and continued throughout 2004. Increased volume accounted for the
majority of this increase; however, average selling prices also increased for both fasteners and
motors due to price increases as a result of higher material and transportation costs. The weaker
dollar overseas also contributed somewhat to the Companys sales increase. Consolidated gross profit increased 47.4% from 2003 to 2004. As a percentage of sales,
consolidated gross margins increased from 28.5% in 2003 to 33.3% in 2004. Increased volume led to
the improvement in gross margin as increased costs for wages and benefits were offset by
productivity improvements and better utilization of capacity. Consolidated selling, general, and administrative (SG&A) expenses for 2004 increased 11.6%
from 2003 to 2004; however, as a percent of sales, SG&A decreased from -12-




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##### 



25.2% in 2003 to 22.2% in 2004. Legal and professional fees increased 110.5% from 2003 to
2004 due mainly to increased audit and expenses related to the implementation of the requirements
under the Sarbanes-Oxley Act of 2002 and increased legal expenses relating to the proposed merger
transaction. Because of the Companys continued strong cash position during 2004, the Company repaid all
domestic debt, which decreased interest expense. Interest income increased during the year due to
increased cash on hand, and the Company benefited from the weaker dollar overseas. The Companys
effective tax rate increased to 32% due to the fact that a greater proportion of income was
generated in the United States, with a higher corporate income tax rate compared to the locations
where income had been generated in 2003. 2003 vs. 2002 Consolidated net sales increased 26.5% from 2002 to 2003. Business conditions improved in
2003 for all Company business segments and in all regions. In the United States, economic trends
were positive, and that region continued to be the Companys largest revenue producer. Sales
volume increased in all business segments while average selling prices increased slightly as a
result of the weaker dollar. M.A.E. S.p.A. (now called PennEngineering Motion Technologies
(Europe) Srl), which the Company acquired on February 5, 2003, contributed $9.7 million of revenue
in 2003 and helped to increase the Companys percentage of foreign sales to 40% of consolidated net
sales. Consolidated gross profit increased 16.9% from 2002 to 2003. As a percentage of sales,
however, consolidated gross margins decreased from 30.9% in 2002 to 28.5% in 2003. All business
segments experienced increases in wages and employee benefit costs that contributed to the decline
in gross margin percentage. The cost for employee medical insurance increased 17.8% from 2002 to
2003, while the cost for the Companys contribution to employee retirement plans increased 26.4%. Consolidated SG&A expenses for 2003 increased 13.8% from 2002 to 2003; however, as a percent
of sales, SG&A decreased from 28.0% in 2002 to 25.2% in 2003. In addition to the increased cost
for wages and benefits as mentioned above, software and hardware rental and maintenance costs
increased 15.0% and insurance costs increased 23.1% from 2002 to 2003. Because of the Companys continued strong cash position during 2003, approximately $17.8
million of debt was repaid, which resulted in a decrease in interest expense from $845,000 in 2002
to $782,000 in 2003. In addition, the weaker dollar resulted in increased currency gains of
approximately 37% from 2002 to 2003. The Companys effective tax rate, which was unusually low in
2002 due to an increased tax benefit from foreign-source income, increased to 24%, resulting in an
increase in the provision for income taxes from $326,000 in 2002 to $1.5 million in 2003. -13-




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##### 



Business Segment Results Overview The Company operates in three reportable business segments. The Companys Fastening
Technologies segment, which accounted for 53% of consolidated net sales in 2004, includes the
operations of PEM Fastening Systems, PennEngineering Technologies, (Europe) Ltd., and Atlas
Engineering, Inc. This segment manufactures and sells PEM® brand and Atlas® brand fasteners,
and PEMSERTER® fastener insertion machines. The Companys Motion Technologies segment, which
accounted for 21% of consolidated net sales in 2004, consists of the Pittman operation, which
manufactures and sells Pittman® brush and brushless dc motors, and the PennEngineering Motion
Technologies (Europe) Srl operation in Offenango, Italy, which manufactures and sells brush,
brushless, and stepper dc motors. The Companys Distribution segment, which accounted for 26% of
consolidated net sales in 2004, consists of the Arconix Group, which sells a portion of the
Companys own manufactured products as well as complementary products from other manufacturers. In total, the sale of fasteners and fastener-related products, including Arconix Group
products, accounted for 79.0% of total product sales in 2004 compared to 77.5% in 2003 and 79.1% in
2002. Of the total 2004 fastener sales, telecommunications, datacommunications, and computer
markets accounted for 49%, automotive markets accounted for 13%, industrial markets accounted for
24%, and the remaining balance was distributed among other markets including medical, security,
networking, and gaming. Motors are marketed in North America and Europe primarily through
independent distributors and sales representatives. Of the total 2004 motor sales, data storage
markets accounted for 25%, medical/biotech markets accounted for 20%, robotic markets accounted for
18%, electronic equipment markets accounted for 15%, and the balance was distributed among other
markets including industrial automation, transportation, hobbyist, and other commercial and
industrial products. The following tables set forth for the periods indicated certain segment information derived
from the Companys consolidated statements of income expressed in dollars and as a percentage of
total net sales. Segment net income before taxes is segment net sales less segment costs and
expenses, including an allocation of certain corporate expenses and excluding interest expense,
certain other income and expenses and income taxes. Certain functions including payroll,
information services, human resources, treasury, benefits administration, marketing, and general
administration are centralized at the Companys corporate office. Allocations of corporate
expenses are made to specific segments when either a direct expense was incurred by the corporate
office for a specific segment or a segment received general services that it would have otherwise
incurred on a stand-alone basis. Any corporate expenses that do not meet these criteria are
presented in the table below as unallocated corporate expenses. -14-




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##### 



Years Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %NET SALES:Fastening Technologies
    
    $
    127,848
    
    
    
    53.1
    %
    
    $
    96,030
    
    
    
    50.3
    %
    
    $
    77,581
    
    
    
    51.5
    %Distribution
    
    
    62,403
    
    
    
    25.9
    
    
    
    51,871
    
    
    
    27.2
    
    
    
    41,644
    
    
    
    27.6Motion Technologies
    
    
    50,611
    
    
    
    21.0
    
    
    
    42,846
    
    
    
    22.5
    
    
    
    31,576
    
    
    
    20.9Total
    
    $
    240,862
    
    
    
    100.0
    %
    
    $
    190,747
    
    
    
    100.0
    %
    
    $
    150,801
    
    
    
    100.0
    %NET INCOME BEFORE TAXES:Fastening Technologies
    
    $
    32,041
    
    
    
    13.3
    %
    
    $
    11,517
    
    
    
    6.0
    %
    
    $
    5,254
    
    
    
    3.5
    %Distribution
    
    
    3,114
    
    
    
    1.3
    
    
    
    1,746
    
    
    
    0.9
    
    
    
    1,769
    
    
    
    1.2Motion Technologies
    
    
    3,242
    
    
    
    1.3
    
    
    
    2,151
    
    
    
    1.1
    
    
    
    1,946
    
    
    
    1.3Unallocated Corp. Exp.
    
    
    (10,540
    )
    
    
    (4.4
    )
    
    
    (8,338
    )
    
    
    (4.4
    )
    
    
    (3,444
    )
    
    
    (2.3
    )Interest Expense
    
    
    (272
    )
    
    
    (0.1
    )
    
    
    (782
    )
    
    
    (0.4
    )
    
    
    (845
    )
    
    
    (0.6
    )Other Income (Expense)
    
    
    (427
    )
    
    
    (0.2
    )
    
    
    131
    
    
    
    0.1
    
    
    
    (367
    )
    
    
    (0.2
    )Net Income Before Taxes
    
    $
    27,158
    
    
    
    11.2
    %
    
    $
    6,425
    
    
    
    3.3
    %
    
    $
    4,313
    
    
    
    2.9
    %
 Fastening Technologies 2004 vs. 2003 Within the Fastening Technologies segment, sales volume to outside customers increased 26.9%
in 2004 from 2003, while the average selling price increased approximately 4.7%. This segment
continues to benefit from the improved economy, especially in the gaming, security, and medical
markets as well as the segments traditional telecommunications and datacommunications markets. In
addition, a 2.0% price increase went into effect on January 1, 2004 as well as an additional 2.0%
surcharge in May 2004 on selected products to cover additional raw material cost increases. The
segments sales into Europe benefited from the weaker U.S. dollar. Gross profit increased 72.2%
in 2004 compared to 2003 due to increased volume which led to greater plant and machinery
utilization without corresponding increases in fixed costs. SG&A expenses increased 8.5% in 2004
from 2003 due mainly to wage increases (approximately 3.5%) and increases in certain benefits
costs. Segment net income before income tax increased 178.2% primarily as a result of increased
sales volume. 2003 vs. 2002 Within the Fastening Technologies segment, sales volume to outside customers increased 21.6%
in 2003 from 2002, while the average selling price increased approximately 4.3%. As the business
climate improved in all markets served by the Company, distributors gradually replenished
inventory levels. The Companys average selling price increased mainly as a result of the weaker
dollar. Gross profit increased 26.1% in 2003 compared to 2002. The segment was able to maintain
its gross profit margins in spite of increasing wage and benefits costs through productivity
improvements as well as increased plant and -15-




---



##### 



machinery utilization. In addition, the segment was able to satisfy the increasing global
demand for its products in Europe and Asia as well as lower costs by utilizing its Ireland
production facility as well as outsourcing some manufacturing to sources within Asia. SG&A
expenses remained level from 2002 to 2003 leading to a 119.2% increase in segment net income before
income tax in 2003 from 2002. Motion Technologies 2004 vs. 2003 The Motion Technologies segments net sales to outside customers increased 18.1% in 2004
compared to 2003. The number of motors sold from the Pittman operation increased 12.9% in 2004
from 2003, while the average selling price increased 9.9%. An average price increase of 5% was
effective January 1, 2004. Motor sales from PMT Europe increased 8.7% in 2004 from 2003. Gross
profit increased 23.7% in 2004 from 2003 due to the volume and price increase as well as increased
sales of higher margin brushless motors. SG&A expenses increased 18.8% from 2003 to 2004 due
mainly to increased commission expense (up 20.4%) and increased advertising and marketing expense
(up 23.9%) as well as increases in wages and certain benefits costs. Segment net income increased
50.7% in 2004 from 2003. 2003 vs. 2002 The Motion Technologies segments net sales to outside customers increased 35.7%. Sales from
this segments most recent acquisition (PMT Europe, formerly MAE) amounted to $9.7 million, or
approximately 85.8% of the total sales increase. The number of motors sold from the Pittman
operation increased 6.4% in 2003 from 2002, while the average selling price remained the same.
This segments gross profit increased 16.7% in 2003 from 2002. The segment was unable to realize
the full effect of planned savings from outsourcing certain sub-assemblies that would have offset
the wage and benefits increases. As a result, gross margins declined from 28.3% of sales in 2002
to 24.1% of sales in 2003. SG&A expenses increased 18.0% in 2003 from 2002 due to the acquisition
of PMT Europe. Segment net income increased 10.5% from 2002 to 2003. Distribution 2004 vs. 2003 Within the Distribution segment, net sales to outside customers increased 20.3% in 2004 from
2003. By geographic region, sales in North America (approximately 42.8% of total segment sales in
2004) increased 12.2% in 2004 from 2003, sales in Europe (approximately 18.7% of total segment
sales in 2004) increased 23.4% in 2004 from 2003, and sales in the Asia-Pacific region
(approximately 38.5% of total segment sales in 2004) increased 29.2% in 2004 from 2003. All
regions experienced favorable market conditions with the weaker dollar helping to increase
international sales. Gross profit increased 14.4% in 2004 compared to -16-




---



##### 



2003. Gross profit was negatively affected in 2004 by increased transportation costs as well
as increased provisions for slow-moving and obsolete inventory. SG&A expenses increased 8.5% in
2004 from 2003 due mainly to increased wage and benefits costs. Segment net income increased 78.4%
in 2004 from 2003. This segment recorded a $261,000 foreign currency gain in 2004 versus a
$153,000 foreign currency loss in 2003. 2003 vs. 2002 Within the Distribution segment, net sales to outside customers increased 24.6% in 2003 from
2002. By geographic region, sales in North America (approximately 46.0% of total segment sales in
2003) increased 6.6% in 2003 from 2002, sales in Europe (approximately 18.3% of total segment sales
in 2003) increased 13.4% in 2003 from 2002, while sales in the Asia-Pacific region (approximately
35.7% of total segment sales in 2003) increased 69.9% in 2003 from 2002. This segment benefited
from increased ordering activity in both the computer market in Asia and the automotive market in
Europe. Gross profit increased 10.7% in 2003 compared to 2002. The gross profit margin as a
percent of sales however decreased from 28.2% in 2002 to 25.1% in 2003 as increased freight and
duty costs as well as inventory reserve adjustments negatively impacted gross profit. SG&A
expenses increased 8.9% in 2003 from 2002 due to increased wages and benefits as well as increased
costs to bring the Shanghai, China distribution facility into full operation including
implementation of the Companys distribution software system in both Singapore and China. Segment
net income declined slightly in 2003 compared to 2002. Unallocated Corporate Expenses 2004 vs. 2003 Unallocated corporate expenses increased 26.4% in 2004 from 2003 (approximately 4.4% of
consolidated net sales in both years). Legal and professional expenses increased 110.5% in 2004
from 2003 and other public company related expenses such as registration fees, directors fees, and
compliance fees increased 43.2% during the same period due primarily to expenses related to
compliance with the requirements of the Sarbanes-Oxley Act of 2002 as well as expenses incurred
relating to the proposed merger of the Company. The expenses in these two areas accounted for
$1,500,000 of the total $2,202,000 increase in unallocated corporate expenses in 2004 from 2003. 2003 vs. 2002 Unallocated corporate expenses increased $4,894,000, or 142.1%, in 2003 from 2002. The primary
reason for this increase was a change in the method of allocating corporate expenses in 2003. As
stated above, allocation of corporate expenses are made to specific segments when either a direct
expense was incurred by the corporate office for a specific segment or a segment received general
services that it would have otherwise incurred on a -17-




---



##### 



stand-alone basis. Prior to 2003, other corporate expenses not meeting these criteria (mainly
wages and benefits of employees including executive officers) were also allocated to segments.
This change resulted in an allocation decrease of $2,103,000 in 2003 from 2002. Also contributing
to the increase in 2003 from 2002 was an additional $1,237,000 of unallocated benefit expenses
relating to bonuses, workers compensation, and medical insurance. Finally, the difference between
the intercompany profit in inventory elimination amount in 2003 compared to 2002, which is also
part of the unallocated corporate expenses, amounted to a $943,000 increase in expenses in 2003. Liquidity And Capital Resources Cash and cash equivalents at December 31, 2004 were $32.9 million compared to $8.4 million at
December 31, 2003. Working capital totaled $99.8 million at December 31, 2004 compared to $69.5
million at December 31, 2003. Net cash of $32.7 million was provided by operating activities for the year ended December 31,
2004 compared to $21.2 million provided by operating activities for the year ended December 31,
2003. The Company continues to generate cash from further reductions in overall inventory levels. Net cash used in investing activities totaled $1.5 million for the year ended December 31,
2004 compared to $14.0 million for the year ended December 31, 2003. The Company spent $3.4
million for capital additions in both 2003 and 2004, the majority of which was for machinery
upgrades and additions at the Companys fastener manufacturing facilities in Ireland and the United
States. The Company also sold its former manufacturing site in Virginia in 2004 for $1.9 million. Net cash used in financing activities totaled $7.9 million for the year ended December 31,
2004 compared to $20.1 million for the year ended December 31, 2003. Because of the decreased
capital expenditures and its strong cash position, the Company repaid bank debt in both years. The
Companys strong cash and working capital position have allowed for the payment of cash dividends
of $4.6 million for the year ended December 31, 2004. The Companys principal contractual obligations are the repayment of its bank debt, the
planned funding of its defined benefit pension plan, and the payment of operating lease
commitments covering certain automobiles, office space, and office equipment. The following table
represents the expected significant contractual cash obligations of the Company as of December 31,
2004. -18-




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##### 



ContractualCashObligations
    
    Total
    
    
    Due in 2005
    
    
    Due in 2006
    
    
    Due in 2007
    
    
    Due in 2008
    
    
    Due in 2009
    
    
    Thereafter(Dollars in thousands)Debt
    
    $
    4,483
    
    
    $
    1,664
    
    
    $
    626
    
    
    $
    626
    
    
    $
    626
    
    
    $
    626
    
    
    $
    315Interest
    
    
    482
    
    
    
    199
    
    
    
    107
    
    
    
    82
    
    
    
    57
    
    
    
    31
    
    
    
    6Operating Leases
    
    
    3,473
    
    
    
    1,675
    
    
    
    1,027
    
    
    
    634
    
    
    
    126
    
    
    
    10
    
    
    
    1Total Contractual
Cash Obligations
    
    $
    8,438
    
    
    $
    3,538
    
    
    $
    1,760
    
    
    $
    1,342
    
    
    $
    809
    
    
    $
    667
    
    
    $
    322
 The
Company anticipates that funding of its defined benefit pension plan
in 2005 will approximate $7,000,000. The Company has not presented
such estimated pension funding in the table above as the funding can
vary from year to year based upon changes in the fair value of the
plan assets and actuarial assumptions. The Company anticipates that existing capital resources and cash flow generated from
future operations as well as existing short-term lines of credit will enable it to fully fund the
Companys current level of operations and its planned growth for the foreseeable future. Accounting Policies and Estimates The Company has identified a number of its accounting polices that it has determined to be
critical. These critical accounting policies primarily relate to financial statement assertions
that are based on the estimates and assumptions of management and the effect that changes in those
estimates and assumptions could have a material effect on the Companys financial statements. The
following summary describes those critical accounting policies. Inventories The Companys domestic fastener inventories are priced on the last-in, first-out (LIFO) method
of accounting. Other inventories, representing approximately 76% and 79% of total inventories at
December 31, 2004 and 2003, respectively, are priced on the first-in, first-out (FIFO) method.
Reserves are recorded for obsolete, excess, and slow-moving inventories based on managements
estimates about future demand and market conditions. At December 31, 2004, the Companys inventory
balance of $46,731,000 was net of a reserve for obsolete, excess, and slow-moving inventories of
approximately $5,136,000. At December 31, 2003, the Companys inventory balance of $48,512,000 was
net of a reserve for obsolete, excess, and slow-moving inventory of approximately $3,512,000. If
the estimated reserves for obsolete, excess, and slow-moving inventories are not sufficient based
on actual future demand, additions to the reserves may be required. -19-




---



##### 



Accounts Receivable The Company maintains an allowance for doubtful accounts for trade receivables for which
collectibility is uncertain. At December 31, 2004 and 2003, this allowance was approximately
$829,000 and $886,000, respectively. In estimating uncollectible accounts, the Company considers
factors such as current overall economic conditions, industry-specific economic conditions, and
historical and anticipated customer performance. While the Company believes that its processes
effectively address exposure for doubtful accounts, changes in the economy, industry, or specific
customer conditions may require adjustments to the allowance. Goodwill As discussed in Note 4 to the Companys Consolidated Financial Statements, the Company adopted
Statement of Financial Accounting Standards No. 142 (SFAS No. 142) Goodwill and Other Intangible
Assets on January 1, 2002. SFAS No. 142 requires that goodwill no longer be amortized, and
instead, be tested for impairment on a periodic basis. At December 31, 2004, the Company had
$45,090,000 in goodwill. The process of evaluating the potential impairment of goodwill is highly
subjective and requires significant judgments at many points during the analysis. In estimating
the fair value of the reporting units with recognized goodwill for the purposes of the Companys
fiscal 2004 financial statements, the Company made estimates and judgments about the future cash
flows of these reporting units. The Companys cash flow forecasts were based on assumptions that
are consistent with the plans and estimates the Company is using to manage the underlying
businesses. In addition, the Company made certain judgments about allocating shared assets to the
balance sheet for those reporting units. Based on the Companys estimates, it has concluded that
there is no impairment of the Companys goodwill. However, changes in these estimates could cause
one or more of the reporting units to be valued differently in the future. Pensions The Company accounts for its defined benefit pension plan in accordance with FASB No. 132,
Employers Disclosures About Pensions and Other Postretirement Benefits, which requires that
amounts recognized in the financial statements be determined on an actuarial basis. The most
significant elements in determining the Companys pension expense are pension liability discount
rates and the expected return on plan assets. The pension discount rate reflects the current
interest rate at which pension liabilities could be settled at the end of the year. At the end of
each year, the Company determines the rate to be used to discount plan liabilities. In estimating
this rate, the Company looks to rates of return on high-quality, fixed-income investments. At
December 31, 2004, the Company determined this rate to be 6.00%. Historically, the Company has
assumed that the expected long-term rate of return on plan assets would be 8.00%, and this expected
rate of return was used for many years. Because in the last two years pension plan assets have
earned substantially less than 8.00%, -20-




---



##### 



the Company reduced the expected long-term rate of return to 7.00% in 2003 and no further
adjustment was made for 2004. Should the downward trend in return on pension assets continue,
future pension expense would likely increase. The net effect of changes in the discount rate, as
well as the effect of differences between the expected return and the actual return on plan assets
have been deferred in accordance with FASB No. 132 and will ultimately affect future pension
expense. Derivative Instruments and Hedging From time to time, the Company manages risks associated with foreign exchange rates and
interest rates with derivative instruments. The Company does not use derivative instruments for
trading or speculative purposes and only uses derivatives when there is an underlying exposure.
The evaluation of hedge effectiveness is subject to assumptions based on the terms and the timing
of the underlying exposures. All derivative instruments are recognized in the Consolidated Balance
Sheet at fair value, which is generally based on quoted market prices. At December 31, 2004, no
derivative instruments were outstanding. Forward-Looking Statements Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Exchange Act under the Private Securities Litigation Reform Act of 1995, are
made throughout this Managements Discussion and Analysis. The Companys results may differ
materially from those in the forward-looking statements. Forward-looking statements are based on
managements current views and assumptions, and involve risks and uncertainties that significantly
affect expected results. For example, operating results may be affected by external factors such
as: changes in laws and regulations, changes in accounting standards, fluctuations in demand in
markets served by the Company, particularly the computer and telecommunications markets,
fluctuations in the cost and availability of the supply chain resources, and foreign economic
conditions, including currency rate fluctuations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Companys earnings and cash flow are subject to fluctuations due to changes in foreign
currency exchange rates and interest rates. The Company has manufacturing and sales activities in
foreign locations. The Company currently manufactures its products in the United States, Ireland,
and Italy and sells those products in those markets as well as throughout Europe, North America,
and the Asia-Pacific region. As a result, the Companys financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak economic conditions
in the foreign markets in which the Company distributes its products. The Companys operating
results are primarily exposed to changes in exchange rates between the U.S. dollar and the Euro,
British pound sterling, and Singapore dollar. Generally, when the U.S. dollar strengthens against
these foreign currencies, the -21-




---



##### 



value of nonfunctional currency sales decreases. When the U.S. dollar weakens, the value of
functional currency sales increases. To mitigate a portion of the short-term effect of changes in the exchange rate between the
U.S. dollar and the Euro and British pound sterling on the Companys sales, the Company from time
to time hedges forecasted sales by entering into foreign exchange contracts. The Companys risk
management objective is to reduce its exposure to the effect of changes in exchange rates on sales
revenue over quarterly time horizons. To a certain extent, foreign currency rate movements also
affect the Companys competitive position compared to non-U.S. based competitors. The Companys
foreign currency risk policies entail entering into foreign currency derivative instruments only to
manage risk, and not as speculative investments. The Companys financial officers annually approve the outlook for expected currency exchange
rate movements, as well as the policy on desired future foreign currency cash flow positions (i.e.,
long, short, balanced) for those currencies where there is significant activity. These officers
receive reports on open foreign currency hedges on a regular basis. Expected future cash flow
positions and strategies are continuously monitored. Foreign exchange practices, including the use
of derivative financial instruments, are reviewed with the Audit Committee of the Companys Board
of Directors at least annually. At December 31, 2004, the Company had no foreign exchange contracts outstanding. Considering the forecasted 2005 cash flows from sales denominated in a foreign currency, a
hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially
adversely affect expected 2005 earnings or cash flows. This analysis is dependent on actual
non-functional currency sales during 2005 occurring within at-least 90% of the budgeted forecasts.
The effect of the hypothetical change in exchange rates ignores the effect that this movement may
have on other variables including competitive risk. If it were possible to quantify this
competitive impact, the results could well be different from the sensitivity effect mentioned
above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken
relative to the U.S. dollar. In reality, some currencies may weaken while others strengthen. The fair values of the Companys bank loans are not significantly affected by changes in
market interest rates. The change in fair value of the Companys long-term debt resulting from a
hypothetical 10% change in interest rates is not material. -22-




---



##### 



Item 8. Financial Statements and Supplementary Data. CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003(Dollars in thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    32,893
    
    
    $
    8,361Short-term investments
    
    
    225
    
    
    
    228Accounts receivable (less allowance for doubtful accounts -
2004, $829; 2003, $886)
    
    
    37,138
    
    
    
    37,629Inventories
    
    
    46,731
    
    
    
    48,512Refundable income taxes
    
    
    1,410
    
    
    
    2,129Other current assets
    
    
    3,120
    
    
    
    1,881Total current assets
    
    $
    121,517
    
    
    $
    98,740Property  at Cost:Land and improvements
    
    
    9,180
    
    
    
    9,112Buildings and improvements
    
    
    50,636
    
    
    
    48,856Machinery and equipment
    
    
    134,815
    
    
    
    132,908Total
    
    
    194,631
    
    
    
    190,876Less accumulated depreciation
    
    
    109,872
    
    
    
    99,774Total property  net
    
    
    84,759
    
    
    
    91,102Goodwill, net
    
    
    45,090
    
    
    
    41,844Prepaid Pension Cost
    
    
    1,315
    
    
    
    Other Assets
    
    
    800
    
    
    
    4,438Total Assets
    
    $
    253,481
    
    
    $
    236,124LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    8,135
    
    
    $
    6,865Bank debt
    
    
    1,664
    
    
    
    9,042Dividends payable
    
    
    1,249
    
    
    
    1,052Accrued expenses:Profit sharing
    
    
    1,490
    
    
    
    2,104Payroll and commissions
    
    
    3,887
    
    
    
    3,040Other
    
    
    5,310
    
    
    
    7,129Total current liabilities
    
    
    21,735
    
    
    
    29,232Accrued Pension Cost
    
    
    
    
    
    
    1,192Deferred Income Taxes
    
    
    12,169
    
    
    
    10,927Long-Term Bank Debt
    
    
    2,819
    
    
    
    3,173Stockholders Equity:Common Stock  authorized 50,000,000 shares of $.01 par value each;
issued 15,261,663 shares in 2004 and 14,942,645 shares in 2003
    
    
    153
    
    
    
    150Class A Common Stock  authorized 10,000,000 shares of $.01 par
value each; issued 3,544,050 shares in 2004 and 2003
    
    
    35
    
    
    
    35
 -23-




---



##### 



December 31,2004
    
    
    2003(Dollars in thousands)Additional paid-in capital
    
    
    47,354
    
    
    
    42,573Retained earnings
    
    
    162,590
    
    
    
    148,906Accumulated other comprehensive income
    
    
    12,712
    
    
    
    6,022Total
    
    
    222,844
    
    
    
    197,686Less cost of treasury stock - 956,368 shares in 2004 and 2003
    
    
    (6,086
    )
    
    
    (6,086
    )Total stockholders equity
    
    
    216,758
    
    
    
    191,600Total Liabilities and Stockholders Equity
    
    $
    253,481
    
    
    $
    236,124
 See the accompanying notes to consolidated financial statements. -24-




---



##### 



STATEMENTS OF CONSOLIDATED INCOME Years Ended December 31,(Dollars in thousands except share and per share amounts)
    
    2004
    
    
    2003
    
    
    2002Net sales
    
    $
    240,862
    
    
    $
    190,747
    
    
    $
    150,801Cost of products sold
    
    
    160,611
    
    
    
    136,292
    
    
    
    104,219Gross profit
    
    
    80,251
    
    
    
    54,455
    
    
    
    46,582Selling expenses
    
    
    24,544
    
    
    
    22,146
    
    
    
    19,621General and administrative expenses
    
    
    29,022
    
    
    
    25,843
    
    
    
    22,567Operating income
    
    
    26,685
    
    
    
    6,466
    
    
    
    4,394Other income (expense):Interest income
    
    
    205
    
    
    
    128
    
    
    
    322Interest expense
    
    
    (272
    )
    
    
    (782
    )
    
    
    (845
    )Other, net
    
    
    540
    
    
    
    613
    
    
    
    442Total other income (expense)
    
    
    473
    
    
    
    (41
    )
    
    
    (81
    )Income before income taxes
    
    
    27,158
    
    
    
    6,425
    
    
    
    4,313Provision for income taxes
    
    
    8,691
    
    
    
    1,542
    
    
    
    326Net income
    
    $
    18,467
    
    
    $
    4,883
    
    
    $
    3,987Net income per share basic
    
    $
    1.04
    
    
    $
    .28
    
    
    $
    .23Weighted average shares outstanding
    
    
    17,672,299
    
    
    
    17,439,010
    
    
    
    17,375,497Net income per share diluted
    
    $
    1.03
    
    
    $
    .28
    
    
    $
    .23Weighted average shares outstanding
    
    
    17,672,299
    
    
    
    17,439,010
    
    
    
    17,375,497Net effect of dilutive securities
    
    
    293,859
    
    
    
    217,570
    
    
    
    229,764Total shares outstanding used in computing
diluted earnings per share
    
    
    17,966,158
    
    
    
    17,656,580
    
    
    
    17,605,261
 See the accompanying notes to consolidated financial statements. -25-




---



##### 



STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS EQUITY (Dollars in thousands except per
share amounts) AccumulatedClass A
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Paid-in
    
    
    Treasury
    
    
    Retained
    
    
    Comprehensive
    
    
    Stockholders'Stock
    
    
    Stock
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at December 31, 2001
    
    $
    147
    
    
    $
    35
    
    
    $
    39,424
    
    
    $
    (5,436
    )
    
    $
    149,090
    
    
    $
    (2,834
    )
    
    $
    180,426Net income for 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,987
    
    
    
    
    
    
    
    3,987Decrease in unrealized investment
loss reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    84Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,603
    
    
    
    3,603Unrealized loss on derivative
instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (626
    )
    
    
    (626
    )Comprehensive income  total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,048Dividends declared  $.28 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,866
    )
    
    
    
    
    
    
    (4,866
    )Stock issued under employee stock
purchase plan and stock option plan
    
    
    1
    
    
    
    
    
    
    
    1,258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,259Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    
    
    
    
    (650
    )Balance at December 31, 2002
    
    
    148
    
    
    
    35
    
    
    
    40,682
    
    
    
    (6,086
    )
    
    
    148,211
    
    
    
    227
    
    
    
    183,217Net income for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,883
    
    
    
    
    
    
    
    4,883Increase in unrealized investment
loss reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,774
    
    
    
    6,774Unrealized loss on derivative
instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (976
    )
    
    
    (976
    )Comprehensive income  total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,678Dividends declared  $.24 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,188
    )
    
    
    
    
    
    
    (4,188
    )Stock issued under employee stock
purchase plan and stock option plan
    
    
    2
    
    
    
    
    
    
    
    1,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,893Balance at December 31, 2003
    
    
    150
    
    
    
    35
    
    
    
    42,573
    
    
    
    (6,086
    )
    
    
    148,906
    
    
    
    6,022
    
    
    
    191,600Net income for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,467
    
    
    
    
    
    
    
    18,467Increase in unrealized investment
loss reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,090
    
    
    
    5,090Reclassification adjustment for
realized losses on derivative
instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,602
    
    
    
    1,602Comprehensive income  total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,157Dividends declared  $.27 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,783
    )
    
    
    
    
    
    
    (4,783
    )Stock issued under employee stock
purchase plan and stock option plan
    
    
    3
    
    
    
    
    
    
    
    4,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,784Balance at December 31, 2004
    
    $
    153
    
    
    $
    35
    
    
    $
    47,354
    
    
    $
    (6,086
    )
    
    $
    162,590
    
    
    $
    12,712
    
    
    $
    216,758
 See the accompanying notes to consolidated financial statements. -26-




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##### 



STATEMENTS OF CONSOLIDATED CASH FLOWS Years Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002CASH FLOW FROM OPERATING ACTIVITIES:Net income
    
    $
    18,467
    
    
    $
    4,883
    
    
    $
    3,987Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    10,481
    
    
    
    10,584
    
    
    
    10,918Amortization
    
    
    3
    
    
    
    3
    
    
    
    13Deferred income taxes
    
    
    78
    
    
    
    79
    
    
    
    1,592Foreign currency transaction gains
    
    
    (312
    )
    
    
    (12
    )
    
    
    (414
    )Loss on disposal of property
    
    
    1,224
    
    
    
    192
    
    
    
    31Loss on disposal of investments
    
    
    
    
    
    
    
    
    
    
    137Changes in assets and liabilities, net of acquisitions:Decrease (increase) in accounts receivable
    
    
    1,341
    
    
    
    (7,248
    )
    
    
    1,922Decrease in inventories
    
    
    2,477
    
    
    
    12,075
    
    
    
    5,857Decrease (increase) in refundable income taxes
    
    
    719
    
    
    
    (305
    )
    
    
    3,656(Increase) decrease in other current assets
    
    
    (1,164
    )
    
    
    102
    
    
    
    155Decrease in other assets
    
    
    478
    
    
    
    238
    
    
    
    500Increase (decrease) in accounts payable
    
    
    987
    
    
    
    (192
    )
    
    
    (364
    )Increase (decrease) in accrued expenses
    
    
    417
    
    
    
    3,341
    
    
    
    (1,696
    )Decrease in accrued pension costs
    
    
    (2,507
    )
    
    
    (2,586
    )
    
    
    (2,156
    )Net cash provided by operating activities.
    
    $
    32,689
    
    
    $
    21,154
    
    
    $
    24,138CASH FLOWS FROM INVESTING ACTIVITIES:Property additions
    
    
    (3,429
    )
    
    
    (3,386
    )
    
    
    (2,816
    )Acquisitions of businesses (net of cash acquired)
    
    
    
    
    
    
    (10,665
    )
    
    
    Additions to available-for-sale investments
    
    
    
    
    
    
    
    
    
    
    (46
    )Proceeds from sale of available-for-sale investments
    
    
    
    
    
    
    
    
    
    
    531Proceeds from sale of property
    
    
    1,970
    
    
    
    31
    
    
    
    130Net cash used in investing activities
    
    
    (1,459
    )
    
    
    (14,020
    )
    
    
    (2,201
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net bank debt repayments
    
    
    (8,082
    )
    
    
    (17,772
    )
    
    
    (4,664
    )Issuance of common stock
    
    
    4,784
    
    
    
    1,893
    
    
    
    1,259Dividends paid
    
    
    (4,586
    )
    
    
    (4,178
    )
    
    
    (5,210
    )Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    (650
    )Net cash used in financing activities
    
    
    (7,884
    )
    
    
    (20,057
    )
    
    
    (9,265
    )Effect of exchange rate changes on cash
    
    
    1,186
    
    
    
    357
    
    
    
    (166
    )Net increase (decrease) in cash and cash equivalents
    
    
    24,532
    
    
    
    (12,566
    )
    
    
    12,506Cash and cash equivalents at beginning of year
    
    
    8,361
    
    
    
    20,927
    
    
    
    8,421Cash and cash equivalents at end of year
    
    $
    32,893
    
    
    $
    8,361
    
    
    $
    20,927SUPPLEMENTAL CASH FLOW DATA:Cash paid during the year for:Income taxes
    
    $
    8,029
    
    
    $
    1,516
    
    
    $
    246Interest
    
    
    272
    
    
    
    782
    
    
    
    845
 See the accompanying notes to consolidated financial statements. -27-




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##### 



Notes to Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 Note 1: Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company include the accounts of Penn Engineering
& Manufacturing Corp. and its wholly owned subsidiaries. All significant intercompany transactions
and balances are eliminated in consolidation. Short-Term Investments Management determines the appropriate classifications of securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Bonds and commercial paper
investments are classified as held-to-maturity as the Company has the positive intent and ability
to hold the securities to maturity. Bonds are stated at amortized cost. Securities not classified
as held-to-maturity have been classified as available-for-sale. Available-for-sale securities are
stated at fair value, with unrealized gains and losses reported as a separate component of
stockholders equity. The fair value of all securities is determined based upon the current value
quoted on public exchanges. Investments are classified as short-term if the maturities at December
31 are less than one year. Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The allowance is determined through an
analysis of the aging of accounts receivable and assessments of risk that are based on historical
trends and an evaluation of the impact of current and projected economic conditions. The Company
evaluates the past-due status of its trade receivables based on contractual terms of sale. If the
financial condition of the Companys customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. Inventories The Companys domestic fastener inventories are priced on the last-in, first-out (LIFO)
method, at the lower of cost or market. Other inventories, representing approximately 76% and 79%
of total inventories at December 31, 2004 and 2003, respectively, are priced on the first-in,
first-out (FIFO) method, at the lower of cost or market. -28-




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##### 



Property Depreciation is calculated under the straight-line method over the estimated useful lives of
the respective assets, generally 3-5 years for tooling and computer equipment, 10-15 years for
furniture, fixtures, and machinery, and 25-40 years for buildings. Maintenance and repairs are
charged to income and major renewals and betterments are capitalized. At the time properties are
retired or sold, the cost and related accumulated depreciation are eliminated and any gain or loss
is included in income. As of December 31, 2001, the Company ceased operations at its Suffolk,
Virginia fastener manufacturing plant and reclassified the net book value of the building to other
assets until its sale in October 2004. The Company received proceeds of $1,874,000 and recorded a
pre-tax loss of $325,000 in 2004 on the sale of the land and building. Goodwill Goodwill is the excess of the purchase price over the fair value of identifiable net assets
acquired in business combinations accounted for as purchases. The Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and
Other Intangible Assets. The Company tests goodwill for impairment using the two-step process
prescribed by SFAS No. 142 for its three reporting units, which are the same as its operating
segments (Note 13). The first step tests for potential impairment, while the second step measures
the amount of impairment, if any. The Company uses a discounted cash flow analysis to complete the
first step in this process. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on deposit, cash
in excess of daily requirements, which is invested in overnight repurchase agreements, and other
interest-bearing accounts withdrawable on a daily basis. Research and Development Costs Research and development costs were $4,728,000, $4,570,000, and $4,342,000 for the years ended
December 31, 2004, 2003, and 2002, respectively. All research and development costs are charged to
operations as incurred. Foreign Currency Translation The effect of translating the financial statements of the Companys foreign subsidiaries is
recorded as a separate component of other comprehensive income in the consolidated financial
statements. All assets and liabilities are translated at year-end exchange rates while all income
and expense accounts are translated at weighted average exchange rates for the year. -29-




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##### 



Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that may affect
the reported amounts of assets and liabilities and 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. Fair Values of Financial Instruments At December 31, 2004, the Company had the following financial instruments: cash and cash
equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, and
long and short-term bank debt. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses approximate their fair value because of their
short-term nature. Short-term investments include available-for-sale securities whose carrying
value approximates fair value based on quoted market prices. The carrying amounts of the bank debt
approximate fair value because the interest rates are reflective of rates that the Company would be
able to obtain on debt with similar terms and conditions. Capital Stock The Companys capital stock consists of $.01 par value Common Stock and $.01 par value Class
A Common Stock. Holders of Class A Common Stock have one vote per share, while holders of Common
Stock have no votes. All other rights of the Common Stock and Class A Common Stock, including
rights with respect to dividends, stock splits, the consideration payable in a merger or
consolidation, and distributions upon liquidation, are the same. Revenue Recognition Revenues are recognized when the earnings process is complete. For all revenues, the earnings
process is complete when products are shipped in accordance with terms of agreements, title and
risk of loss transfers to customers, pricing is fixed or determinable and collection is reasonably
assured. Shipping and Handling Costs Shipping and handling costs are included in cost of products sold. -30-




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##### 



Concentrations of Credit Risk The Company has operations and affiliates in the United States, the United Kingdom, Ireland,
Italy, Singapore, Mexico, and China. The Company performs ongoing credit evaluations of its
customers financial condition, and except where risk warrants, requires no collateral. The
Company may require, however, prepayment terms for certain customers. Short-term investments are
placed with high credit quality financial institutions. The Company limits the amount of credit
exposure in any one institution or single investment. Accounting for Stock Options The Company follows Accounting Principles Board Opinion No. 25 (APB 25), Accounting for
Stock Issued to Employees and related interpretations in accounting for stock options. Under APB
25, if the exercise price of stock options granted equals or exceeds the market price of the
underlying common stock on the date of grant, no compensation expense is recognized. Statement of
Financial Accounting Standards No. 123 (SFAS No. 123) requires pro forma information regarding
net income and earnings per share as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. The fair value of each option granted was estimated
on the date of grant using the Black-Scholes option-pricing model. No stock options were granted
in 2004. The following assumptions were used in the Black-Scholes option-pricing model: 2003
    
    
    2002Expected life
    
    6 years
    
    6 yearsDividend yield
    
    
    1.5
    %
    
    
    2.0
    %Assumed volatility
    
    
    34.0
    %
    
    
    33.0
    %Risk-free interest rate
    
    
    3.6
    %
    
    
    3.6
    %
 For purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period. Had compensation costs for the Companys
plans been determined based on the fair value at the grant date for awards under these plans
consistent with the method of SFAS No. 123, the impact on the Companys financial results would
have been as follows: (Dollars in thousands except per share amounts) 2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    18,467
    
    
    $
    4,883
    
    
    $
    3,987Pro forma compensation cost, net of tax
    
    
    (1,335
    )
    
    
    (1,125
    )
    
    
    (1,175
    )Pro forma net income
    
    $
    17,132
    
    
    $
    3,758
    
    
    $
    2,812Basic earnings per share:As reported
    
    $
    1.04
    
    
    $
    .28
    
    
    $
    .23Pro forma
    
    
    .97
    
    
    
    .22
    
    
    
    .16Diluted earnings per share:As reported
    
    
    1.03
    
    
    
    .28
    
    
    
    .23Pro forma
    
    
    .95
    
    
    
    .21
    
    
    
    .16
 -31-




---



##### 



Net Income Per Share Basic and diluted earnings per share are calculated in accordance with FASB Statement No. 128,
Earnings Per Share. Basic earnings per share is calculated by dividing net income by the
weighted average shares outstanding for the year, and diluted earnings per share is calculated by
dividing net income by the weighted average shares outstanding for the year plus the dilutive
effect of stock options. For the year ended December 31, 2004, all options were dilutive and
included in the calculation of diluted earnings per share. For the years ended December 31, 2003
and 2002, options to purchase approximately 1,169,000 and 818,000 shares of common stock,
respectively, were excluded from the calculation of diluted earnings per share because the effect
thereof would have been anti-dilutive. Derivative Instruments And Hedging Activities The Company accounts for its derivative instruments and hedging activities under the
provisions of Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive income, depending
on whether a derivative is designated as part of a hedge transaction and, if it is, depending on
the type of hedge transaction. For foreign currency cash flow hedges in which the Company is hedging the
variability of cash flows related to forecasted foreign currency denominated sales, changes in the
fair value of the derivative instruments are reported in other comprehensive income. Gains and
losses on derivatives that are reported in other comprehensive income are reclassified as earnings
or losses in the periods in which the forecasted transactions occur. Impact Of Recently Issued Accounting Standards On December 21, 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position No. FAS 109-2 (FSP No. 109-2), Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provisions within the American Jobs Creation Act of 2004 (the Jobs Act).
FSP No. 109-2 provides guidance with respect to reporting the potential impact of the repatriation
provisions of the Jobs Act on an enterprises income tax expense and deferred tax liability. The
Jobs Act was enacted on October 22, 2004, and provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period. The deduction would
result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the
deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment
plan established by a companys chief -32-




---



##### 



executive officer and approved by a companys board of directors. Certain other criteria in
the Jobs Act must be satisfied as well. FSP No. 109-2 states that an enterprise is allowed time
beyond the financial reporting period to evaluate the effect of the Jobs Act on its plan for
reinvestment or repatriation of foreign earnings. The Company has not yet completed its evaluation
of the impact of the repatriation provisions of the Jobs Act. Accordingly, as provided for in FSP
No. 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the
repatriation provisions of the Jobs Act. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123(R)), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values beginning with the first interim period
after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition.
The Company is required to adopt SFAS No. 123(R) in the third quarter of 2005. Under SFAS No.
123(R), the Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the transition method to be
used at the date of adoption. The permitted transition methods include either retrospective or
prospective adoption. Under the retrospective option, prior periods may be restated either as of
the beginning of the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested stock options at the beginning of
the first quarter of adoption of SFAS No. 123(R), while the retrospective methods would record
compensation expense for all unvested stock options beginning with the first period presented. The
Company is currently evaluating the requirements of SFAS No. 123(R) and expects that adoption of
SFAS No. 123(R) will have a material impact on the Companys consolidated financial position and
consolidated results of operations. The Company has not yet determined the method of adoption or
the effect of adopting SFAS No. 123(R), and it has not determined whether the adoption will result
in amounts that are similar to the current pro forma disclosures under SFAS No. 123. See
Accounting for Stock Options in Note 1 above. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an Amendment of ARB No. 43,
Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, handling costs
and wasted material (spoilage). Among other provisions, the new rule requires that such items be
recognized as current-period charges, regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June
15, 2005. The Company does not expect that adoption of SFAS No. 151 will have a material effect on
its consolidated financial position, consolidated results of operations, or liquidity. -33-




---



##### 



Reclassifications Certain reclassifications have been made to prior year amounts and balances to conform with
the 2004 presentation. Note 2: Short-Term Investments Unrealized losses on short-term investments classified as available-for-sale were $15,000, net
of taxes of $10,000, at December 31, 2004, and were $14,000, net of taxes of $8,000, at December
31, 2003. The Companys only short-term available-for-sale investment is a state and municipal
bond fund. The estimated fair value of this short-term available-for-sale investment was $225,000
and $228,000 at December 31, 2004 and 2003, respectively. Note 3: Inventories Inventories consist of the following: December 31,(Dollars in thousands)
    
    2004
    
    
    2003Raw material
    
    $
    2,802
    
    
    $
    2,807Tooling
    
    
    6,392
    
    
    
    5,540Work-in-process
    
    
    11,626
    
    
    
    11,541Finished goods
    
    
    25,911
    
    
    
    28,624TOTAL
    
    $
    46,731
    
    
    $
    48,512
 If the FIFO method of inventory valuation had been used for all inventories held by the
Company, inventories at December 31, 2004 and 2003 would have been $10,175,000 and $10,072,000
higher, respectively. Long-term tooling inventory, totaling $800,000 at December 31, 2004 and $1,285,000 at
December 31, 2003, is included in Other Assets. Note 4: Goodwill and Intangible Assets The Company conducted the required annual impairment review as of October 1, 2004 and 2003 in
accordance with SFAS No. 142 and determined that there was no goodwill impairment as of those
dates. The changes in the carrying value of goodwill for 2003 and 2004 by reporting unit are as
follows: -34-




---



##### 



(Dollars in thousands)
    
    Fasteners
    
    
    Distribution
    
    
    Motors
    
    
    ConsolidatedBalance as of December 31, 2002
    
    $
    18,359
    
    
    $
    8,647
    
    
    $
    41
    
    
    $
    27,047Goodwill from acquisitions
    
    
    834
    
    
    
    
    
    
    
    10,687
    
    
    
    11,521Impact of foreign currency exchange rate fluctuations
    
    
    1,512
    
    
    
    
    
    
    
    1,764
    
    
    
    3,276Balance as of December 31, 2003
    
    
    20,705
    
    
    
    8,647
    
    
    
    12,492
    
    
    
    41,844Goodwill from acquisitions
    
    
    57
    
    
    
    
    
    
    
    977
    
    
    
    1,034Impact of foreign currency exchange rate fluctuations
    
    
    884
    
    
    
    
    
    
    
    1,328
    
    
    
    2,212Balance as of December 31, 2004
    
    $
    21,646
    
    
    $
    8,647
    
    
    $
    14,797
    
    
    $
    45,090
 Note 5: Acquisitions On February 5, 2003, the Company acquired all of the issued and outstanding capital stock of
Maelux SA and its sole operating company, M.A.E. S.p.A. (now called PennEngineering Motion
Technologies (Europe) Srl) of Offanengo, Italy for $11,642,000, including acquisition-related
expenses. The acquisition was accounted for using the purchase method. Of the total amount paid,
$2,000,000 was placed in escrow, of which $1,000,000 remains in escrow, pending the final
determination of the purchase price. The results of the operations of these companies have been
included in the accompanying consolidated statements of income since the acquisition date. The
purchase price was allocated to: accounts receivable  $4,100,000, inventory  $3,214,000, property
- $7,889,000, other current assets  $295,000, goodwill  $11,664,000, accounts payable -
$2,809,000, short-term debt  $5,029,000, other current liabilities  $1,777,000, mortgage payable
- $3,713,000, and deferred tax liability  $2,192,000. Additional compensation to the seller may
be required based on the future operating results of these companies through 2006. Such amount, if
any, will be recorded as additional purchase price if and when it becomes payable in the future. Note 6: Bank Debt As of December 31, 2004, the Company had four unsecured line-of-credit facilities available,
all of which bear interest at interest rate options provided in the facilities and are reviewed
annually by the banks for renewal. The facilities are as follows:  
    a working capital facility that allows for borrowings of up to $7,000,000, under
which no amounts were outstanding at December 31, 2004;
    a facility that allows for borrowings of up to $15,000,000, under which no amounts
were outstanding at December 31, 2004;
    a facility that permits borrowings of up to $30,000,000, under which no amounts were
outstanding at December 31, 2004.
    a committed line-of-credit that permits borrowings of up to $8,000,000, under which
no amounts were outstanding at December 31, 2004. -35-




---



##### 



These line-of-credit facilities require that the Company comply with certain financial
covenants. At December 31, 2004, the Company was in compliance with all financial covenants under
these facilities. In addition to the above domestic line-of-credit facilities, the Companys subsidiary,
PennEngineering Motion Technologies (Europe) Srl, has two short-term credit facilities in place
under which a total of $1,038,000 was outstanding as of December 31, 2004. PennEngineering Motion
Technologies (Europe) Srl also has an outstanding mortgage on its building, where $626,000 is
classified as short-term debt and $2,819,000 is classified as long-term debt as of December 31,
2004. Note 7: Pension and Profit Sharing Plans The Company has a defined benefit pension plan covering all eligible employees in the United
States. Effective January 1, 2002, the plan was converted to a cash balance plan for all eligible
employees. Participants were credited with an initial account balance equal to the present value
of their accrued benefit as determined under the plan in effect on December 31, 2001. At the end
of each Plan Year, participants receive pay credits equal to a percentage of annual compensation,
and participant accounts are also credited with annual interest based on a one-year constant
maturity Treasury bill rates plus 1%, equal to 3.63% and 2.39% in 2004 and 2003, respectively. The
percentage of annual compensation credited to participant accounts is based on the participants
age and length of service with the Company. Participants whose age and years of benefit service as
of December 31, 2001 totaled 45 or more will have their pension benefit calculated under both the
old and new formula and will automatically receive the higher of the two. Plan provisions and
funding meet the requirements of the Employee Retirement Income Security Act of 1974. The
following table sets forth the financial status of the plan: Obligations and Funded Status December 31,(Dollars in thousands)
    
    2004
    
    
    2003Change in benefit obligationBenefit obligation at beginning of year
    
    $
    44,873
    
    
    $
    41,500Service cost
    
    
    2,656
    
    
    
    2,004Interest cost
    
    
    3,106
    
    
    
    2,628Actuarial loss
    
    
    8,289
    
    
    
    2,133Benefits paid
    
    
    (2,336
    )
    
    
    (3,555
    )Plan amendments
    
    
    
    
    
    
    163Benefit obligation at end of year
    
    $
    56,588
    
    
    $
    44,873Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    34,513
    
    
    $
    28,739Actual return on assets
    
    
    2,439
    
    
    
    3,997Employer contributions
    
    
    6,383
    
    
    
    5,300
 -36-




---



##### 



December 31,(Dollars in thousands)
    
    2004
    
    
    2003Benefits paid
    
    
    (2,336
    )
    
    
    (3,555
    )Other
    
    
    
    
    
    
    32Fair value of plan assets at end of year
    
    $
    40,999
    
    
    $
    34,513Funded status
    
    $
    (15,589
    )
    
    $
    (10,360
    )Unrecognized actuarial loss
    
    
    17,645
    
    
    
    9,988Unamortized prior service cost
    
    
    (741
    )
    
    
    (820
    )Prepaid (accrued) pension cost
    
    $
    1,315
    
    
    $
    (1,192
    )
 Components of Net Periodic Pension Cost Years Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Net pension costs included the following components:Service cost
    
    $
    2,656
    
    
    $
    2,004
    
    
    $
    2,261Interest cost
    
    
    3,106
    
    
    
    2,628
    
    
    
    2,638Expected return on plan assets
    
    
    (2,583
    )
    
    
    (2,022
    )
    
    
    (2,385
    )Net amortization and deferral
    
    
    696
    
    
    
    104
    
    
    
    (92
    )Net periodic pension cost
    
    $
    3,875
    
    
    $
    2,714
    
    
    $
    2,422
 Assumptions The weighted-average assumptions used to determine benefit obligations at December 31 were as
follows: 2004
    
    
    2003Discount rate
    
    
    6.00
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    5.25
    
    
    
    5.25
 The weighted-average assumptions used to determine net periodic pension cost for years
ended December 31 were as follows: 2004
    
    
    2003Discount rate
    
    
    6.25
    %
    
    
    7.00
    %Expected return on plan assets
    
    
    7.00
    
    
    
    7.00Rate of compensation increase
    
    
    5.25
    
    
    
    5.25
 Plan Assets The Companys defined benefit pension plans assets are managed in accordance with investment
guidelines approved by the Board of Directors. Investments are restricted to domestic and
international equity investments, fixed income securities of the U.S. Government, its agencies,
and investment grade corporate issues, and cash and equivalents such as commercial paper,
repurchase agreements, Treasury Bills, certificates of deposit, and money market funds. Alternate
investments, such as hedge funds and real estate investment -37-




---



##### 



trusts, may be used as part of the allocation only with the consent of the Companys
investment committee and may not exceed the stated percentage of plan funds. Equity securities
must be in liquid securities listed on national exchanges. Investment managers returns are
expected to exceed selected market indices by prescribed margins. The target allocation percentage
for equity securities and equity based alternate investments is between 50% and 75% of the funds
market value and the target allocation percentage for fixed income securities and fixed income
alternative investments is between 25% and 50% of the funds market value. The Companys pension
plan weighted-average asset allocations at December 31, 2004 and 2003, by category are as follows: 2004
    
    
    2003Equity securities
    
    
    44
    %
    
    
    45
    %Debt securities
    
    
    37
    
    
    
    35Alternate (mainly equity-based funds)
    
    
    19
    
    
    
    20Total
    
    
    100
    %
    
    
    100
    %
 The plans assumed future returns are based principally on the asset allocation and on
the historic returns for the plans asset classes determined from both actual returns and, over
longer time periods, market returns for those asset classes. Cash Flows Contributions The Company expects to contribute $7,000,000 to its pension plan in 2005. Estimated Future Benefit Payments The following benefit payments, which reflect future service, as appropriate, are expected to
be paid (actual amounts may differ as certain participants may elect
a lump-sum distribution): Year
    
    Amount2005
    
    $
    661,0002006
    
    
    749,0002007
    
    
    885,0002008
    
    
    982,0002009
    
    
    1,156,000Years 2010-2014
    
    
    10,054,000
 The Company has a profit-sharing plan covering all eligible employees in the United
States. Contributions and costs are determined as the lesser of 25% of income before income taxes
and profit-sharing cost or 10% of each covered employees salary, and totaled $4,490,000 in 2004,
$2,141,000 in 2003, and $1,463,000 in 2002. The Company also provides retirement benefits to all
eligible participants at its foreign operations. -38-




---



##### 



Note 8: Stock Options and Stock Purchase Plan The Company currently has three fixed stock option plans: the 1996 Equity Incentive Plan, the
1998 Stock Option Plan for Non-Employee Directors, and the 1999 Employee Stock Option Plan. The
1996 Equity Incentive Plan and the 1999 Employee Stock Option Plan provide for the granting of
options to eligible employees of the Company. The 1998 Stock Option Plan for Non-Employee
Directors provides for the granting of options to eligible directors. All plans provide for the
granting of options that do not qualify as incentive stock options under the Code (non-qualified
stock options). The Company is authorized under the plans to grant options for shares of the
Companys non-voting Common Stock not to exceed in the aggregate: 1,000,000 shares for the 1996
Equity Incentive Plan, 200,000 shares for the 1998 Stock Option Plan for Non-Employee Directors,
and 2,000,000 shares for the 1999 Employee Stock Option Plan. The plans provide for the granting
of options with exercise prices equal to the closing market price of the Companys non-voting
Common Stock on the date of the grant with a maximum term of ten years. All options granted under
these plans vest in four equal installments commencing on the first, second, third, and fourth
anniversaries of the grant date of the option. A summary of the Companys option activity, and related information for the years ended

December 31, 2002, December 31, 2003, and December 31, 2004 is as follows: Weighted-AverageOptions
    
    
    Exercise PricesOutstanding  December 31, 2001
    
    
    1,932,586
    
    
    $
    14.33Granted
    
    
    435,760
    
    
    
    11.70Exercised
    
    
    (66,620
    )
    
    
    12.07Canceled
    
    
    (113,985
    )
    
    
    16.17Outstanding  December 31, 2002
    
    
    2,187,741
    
    
    
    13.76Granted
    
    
    421,920
    
    
    
    17.30Exercised
    
    
    (131,571
    )
    
    
    11.11Canceled
    
    
    (148,226
    )
    
    
    14.52Outstanding  December 31, 2003
    
    
    2,329,864
    
    
    
    14.50Granted
    
    
    0
    
    
    
    Exercised
    
    
    (300,357
    )
    
    
    13.43Canceled
    
    
    (51,525
    )
    
    
    16.04Outstanding  December 31, 2004
    
    
    1,977,982
    
    
    
    14.63Exercisable at December 31, 2004
    
    
    1,426,597
    
    
    
    14.33Weighted-average remaining life of options outstanding at
December 31, 2004
    
    6.34 years
 A summary of the status of the Companys stock options at December 31, 2004 is as
follows: -39-




---



##### 



Options Outstanding
    
    
    Options ExercisableWeighted-AverageNumber of
    
    
    Remaining
    
    Weighted-
    
    
    Number of
    
    
    WeightedRange of
    
    Shares Subject
    
    
    Contractual
    
    Average
    
    
    Shares Subject
    
    
    AverageExercise Prices
    
    to Options
    
    
    Life
    
    Exercise Price
    
    
    to Options
    
    
    Exercise Price$9.19-$12.00
    
    
    608,267
    
    
    
    5.85
    
    
    $
    11.09
    
    
    
    430,517
    
    
    $
    10.84$12.01-$16.00
    
    
    335,310
    
    
    
    4.08
    
    
    
    12.74
    
    
    
    335,310
    
    
    
    12.74$16.01-$18.06
    
    
    1,034,405
    
    
    
    7.36
    
    
    
    17.32
    
    
    
    660,770
    
    
    
    17.42
 The Company also has one stock purchase plan, the 1996 Employee Stock Purchase Plan (the
Purchase Plan) that provides for the purchase of the Companys non-voting Common Stock by
eligible employees of the Company. The Purchase Plan commenced on October 1, 1996 and has a term
of 10 years with 20 semi-annual subscription periods. During its term, the Purchase Plan permits
employees to purchase the Companys non-voting Common Stock on a regular basis through payroll
deductions, not exceeding 10% of base wages, at a 10% discount from the lower of the market price
on the last trading day before the first day of the subsequent subscription period or on the last
trading day of such subscription period. The maximum number of shares to be issued under the
Purchase Plan is 300,000 shares of the Companys non-voting Common Stock. Shares under the
Purchase Plan are subscribed during each subscription period and purchased on the last business day
of such subscription period. The Company had a balance of $75,000 in employee withholdings at the
beginning of the year and had employee withholdings of $61,000 for the current subscription period
at December 31, 2004. The Plan has issued 279,156 shares to employees as of December 31, 2004. Note 9: Financial Instruments and Risk Management At times, the Company hedges forecasted British Pound and Euro denominated sales of its
subsidiary based in the United Kingdom with foreign currency contracts (cash flow hedges). The
hedge contracts generally mature during the year following the date the Company enters into the
contracts. Changes in the fair value of the effective portion of the Companys cash flow hedges
are recognized in Other Comprehensive Income. These amounts are reclassified from Other
Comprehensive Income and recognized in earnings when either the forecasted transaction occurs or it
becomes probable that the forecasted transaction will not occur. The fair market value of the
foreign exchange contracts is the amount the Company would receive or pay to terminate the
contracts using quoted market rates. At December 31, 2004, the Company did not have any outstanding foreign exchange contracts. At
December 31, 2003, the Company had foreign exchange contracts outstanding with a notional amount of
$12,720,000 hedging 2004 forecasted Euro denominated sales (cash flow hedges). The fair value of
the contracts of $(2,288,000) is included in other accrued expenses in the accompanying December
31, 2003 consolidated balance sheet. -40-




---



##### 



Net foreign currency transaction gains recorded in Other Income (Expense) totaled $1,266,000,
$564,000, and $411,000 for the years ended December 31, 2004, 2003, and 2002, respectively. Note 10: Income Taxes Income before income taxes consists of the following components: Years Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Domestic
    
    $
    15,565
    
    
    $
    (1,349
    )
    
    $
    (305
    )Foreign
    
    
    11,593
    
    
    
    7,774
    
    
    
    4,618Income before income taxes
    
    $
    27,158
    
    
    $
    6,425
    
    
    $
    4,313
 The income tax provision consists of the following: Years Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    5,341
    
    
    $
    (591
    )
    
    $
    (2,335
    )State
    
    
    427
    
    
    
    14
    
    
    
    4Foreign
    
    
    2,845
    
    
    
    2,040
    
    
    
    1,065Total current tax provision
    
    $
    8,613
    
    
    $
    1,463
    
    
    $
    (1,266
    )Deferred:Federal
    
    $
    151
    
    
    $
    251
    
    
    $
    1,080State
    
    
    46
    
    
    
    (35
    )
    
    
    197Foreign
    
    
    (119
    )
    
    
    (137
    )
    
    
    315Total deferred tax
    
    
    78
    
    
    
    79
    
    
    
    1,592Total income tax provision
    
    $
    8,691
    
    
    $
    1,542
    
    
    $
    326
 The significant components of the Companys net deferred tax assets and liabilities are
as follows: December 31,(Dollars in thousands)
    
    2004
    
    
    2003Deferred tax assets:Accrued pension
    
    $
    
    
    
    $
    467Allowance for doubtful accounts
    
    
    201
    
    
    
    251Foreign tax credit carryforward
    
    
    854
    
    
    
    927Other
    
    
    1,582
    
    
    
    1,882Total deferred tax asset
    
    $
    2,637
    
    
    $
    3,527Deferred tax liabilities:Property
    
    $
    12,410
    
    
    $
    11,801Prepaid pension
    
    
    495
    
    
    
    Other
    
    
    1,901
    
    
    
    2,653Total deferred tax liability
    
    
    14,806
    
    
    
    14,454Net deferred tax liability
    
    $
    12,169
    
    
    $
    10,927
 -41-




---



##### 



The foreign tax credit carryforward begins to expire in 2013. Deferred taxes have not
been provided on approximately $8,900,000 of cumulative undistributed earnings of foreign
subsidiaries that could be subject to taxation if remitted to the U.S. because the Company plans to
keep these amounts permanently invested overseas. The Company, however, is currently evaluating
the effects of the repatriation provision included in the Jobs Act, which was signed into law on
October 22, 2004. The Company has not made a decision to repatriate any earnings and consequently
the income tax effects of any potential repatriation cannot be reasonably estimated at this time. A reconciliation between the provision for income taxes, computed by applying the statutory
federal income tax rate to income before taxes, and the actual provision for income taxes on such
income, is as follows: December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Federal income tax provision at statutory rate
    
    $
    9,505
    
    
    $
    2,249
    
    
    $
    1,510State income taxes, after deducting federal income tax benefit
    
    
    308
    
    
    
    (14
    )
    
    
    131Export sales tax benefit
    
    
    (569
    )
    
    
    (438
    )
    
    
    (840
    )Foreign tax rate differential and operating loss benefits (net)
    
    
    (760
    )
    
    
    (280
    )
    
    
    (59
    )Other
    
    
    207
    
    
    
    25
    
    
    
    (416
    )Provision for income taxes
    
    $
    8,691

    
    
    $
    1,542
    
    
    $
    326
 Note 11: Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive income (loss) are as follows: Unrealized Losseson DerivativeCurrency
    
    
    Unrealized Losses
    
    
    InstrumentsTranslation
    
    
    on Available-for-
    
    
    Qualifying as Cash(Dollars in thousands)
    
    Adjustments
    
    
    Sale Securities
    
    
    Flow Hedges
    
    
    TotalBalance at December 31, 2002
    
    $
    864
    
    
    $
    (11
    )
    
    $
    (626
    )
    
    $
    227Currency translation adjustments
    
    
    6,774
    
    
    
    
    
    
    
    
    
    
    
    6,774Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Unrealized loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    (1,394
    )
    
    
    (1,394
    )Deferred taxes
    
    
    
    
    
    
    1
    
    
    
    418
    
    
    
    419Balance at December 31, 2003
    
    
    7,638
    
    
    
    (14
    )
    
    
    (1,602
    )
    
    
    6,022Currency translation adjustments
    
    
    5,090
    
    
    
    
    
    
    
    
    
    
    
    5,090Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Reclassification adjustment for realized losses
on derivative instruments
    
    
    
    
    
    
    
    
    
    
    2,173
    
    
    
    2,173Deferred taxes
    
    
    
    
    
    
    1
    
    
    
    (571
    )
    
    
    (570
    )Balance at December 31, 2004
    
    $
    12,728
    
    
    $
    (16
    )
    
    $
    0
    
    
    $
    12,712
 -42-




---



##### 



Note 12: Commitments and Contingencies The Company has operating leases covering certain automobiles, office space, and office
equipment. The future minimum annual payments on these non-cancelable operating leases that were
in effect at December 31, 2004, having initial or remaining terms of more than one year, are
$1,675,000 for 2005, $1,027,000 for 2006, $634,000 for 2007, $126,000 for 2008, and $10,000 for
2009. Rental and operating lease expenses charged against earnings were $1,854,000, $1,701,000, and
$1,716,000 in 2004, 2003, and 2002, respectively. The Company is exposed to asserted and unasserted potential claims arising in the normal
course of business. Based on the advice of legal counsel, management believes that the final
resolution of these matters will not materially affect the Companys consolidated financial
position or results of operations. Note 13: Financial Reporting For Business Segments of the Company The Company has three reportable segments: fasteners, motors, and distribution. Segment
income is net sales less segment costs and expenses excluding certain corporate expenses, interest
expense, income taxes, and certain other income and expenses. Corporate expenses are allocated to
segments when either a direct expense was incurred by the corporate office for a specific segment
or a segment received general services from the corporate office that it would otherwise have to
contract for or provide internally. Examples of direct expenses are advertising, trade show, and
communication expenses. Examples of allocated general corporate expenses are expenses related to
the payroll and benefit administration function that are allocated to segments based on the number
of employees. In addition, amounts incurred by the corporate office for workers compensation
insurance, medical insurance, and pension benefits are also allocated to segments based on employee
related factors. Any other corporate expenses that do not meet these criteria are presented as
unallocated corporate expenses. Examples include officer salaries and benefits, legal and
professional services, treasury services, and other corporate expenses such as director fees.
Prior to 2003, other corporate expenses not meeting these allocation criteria (mainly wages and
benefits of employees including executive officers) were also allocated to segments. This change
resulted in an allocation decrease of $2,103,000 in 2003 from 2002. Identifiable assets by segment
are those assets that are used in the Companys operations in each segment. Sales of fasteners to one customer (an authorized distributor of the Company) totaled
approximately $25,887,000 and $18,900,000 for the years ended December 31, 2004 and 2003,
respectively (approximately 11% of consolidated net sales in 2004 and 10% of consolidated net sales
in 2003). For the year ended December 31, 2002, there were no sales to any one customer that
exceeded 10% of consolidated net sales. -43-




---



##### 



The Company records intersegment sales and transfers at published distributor prices less an
agreed-upon markdown. Segment data is as follows: Year Ended December 31, 2004 (Dollars in thousands)
    
    Fasteners
    
    
    Distribution
    
    
    Motors
    
    
    ConsolidatedRevenues:Sales to external customers
    
    $
    127,848
    
    
    $
    62,403
    
    
    $
    50,611
    
    
    $
    240,862Intersegment sales
    
    
    36,917
    
    
    
    
    
    
    
    1,536
    
    
    
    38,453Intersegment elimination
    
    
    (36,917
    )
    
    
    
    
    
    
    (1,536
    )
    
    
    (38,453
    )Net sales
    
    $
    127,848
    
    
    $
    62,403
    
    
    $
    50,611
    
    
    $
    240,862Net income before taxes:Segment income
    
    $
    32,041
    
    
    $
    3,114
    
    
    $
    3,242
    
    
    $
    38,397Unallocated corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,540
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (272
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (427
    )Consolidated income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,158Depreciation, amortization, and capital
expenditures:Depreciation and amortization
    
    $
    8,111
    
    
    $
    1,061
    
    
    $
    1,312
    
    
    $
    10,484Capital expenditures
    
    
    2,434
    
    
    
    171
    
    
    
    824
    
    
    
    3,429Segment assets:Identifiable assets
    
    $
    133,033
    
    
    $
    62,940
    
    
    $
    47,542
    
    
    $
    243,515Corporate assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,966Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    253,481
 Year Ended December 31, 2003 (Dollars in thousands)
    
    Fasteners
    
    
    Distribution
    
    
    Motors
    
    
    ConsolidatedRevenues:Sales to external customers
    
    $
    96,030
    
    
    $
    51,871
    
    
    $
    42,846
    
    
    $
    190,747Intersegment sales
    
    
    27,899
    
    
    
    
    
    
    
    451
    
    
    
    28,350Intersegment elimination
    
    
    (27,899
    )
    
    
    
    
    
    
    (451
    )
    
    
    (28,350
    )Net sales
    
    $
    96,030
    
    
    $
    51,871
    
    
    $
    42,846
    
    
    $
    190,747Net income before taxes:Segment income
    
    $
    11,517
    
    
    $
    1,746
    
    
    $
    2,151
    
    
    $
    15,414Unallocated corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,338
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (782
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Consolidated income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,425Depreciation, amortization, and capital
expenditures:Depreciation and amortization
    
    $
    8,187
    
    
    $
    1,159
    
    
    $
    1,241
    
    
    $
    10,587Capital expenditures
    
    
    2,362
    
    
    
    285
    
    
    
    739
    
    
    
    3,386Segment assets:
 -44-




---



##### 



(Dollars in thousands)
    
    Fasteners
    
    
    Distribution
    
    
    Motors
    
    
    ConsolidatedIdentifiable assets
    
    $
    130,171
    
    
    $
    57,580
    
    
    $
    45,365
    
    
    $
    233,116Corporate assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,008Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    236,124
 Year Ended December 31, 2002 (Dollars in thousands)
    
    Fasteners
    
    
    Distribution
    
    
    Motors
    
    
    ConsolidatedRevenues:Sales to external customers
    
    $
    77,581
    
    
    $
    41,644
    
    
    $
    31,576
    
    
    $
    150,801Intersegment sales
    
    
    24,887
    
    
    
    
    
    
    
    
    
    
    
    24,887Intersegment elimination
    
    
    (24,887
    )
    
    
    
    
    
    
    
    
    
    
    (24,887
    )Net sales
    
    $
    77,581
    
    
    $
    41,644
    
    
    $
    31,576
    
    
    $
    150,801Net income before taxes:Segment income
    
    $
    5,254
    
    
    $
    1,769
    
    
    $
    1,946
    
    
    $
    8,969Unallocated corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,444
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (845
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (367
    )Consolidated income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,313Depreciation, amortization, and capital
expenditures:Depreciation and amortization
    
    $
    9,104
    
    
    $
    1,123
    
    
    $
    704
    
    
    $
    10,931Capital expenditures
    
    
    1,067
    
    
    
    1,216
    
    
    
    533
    
    
    
    2,816Segment assets:Identifiable assets
    
    $
    160,021
    
    
    $
    45,964
    
    
    
    16,265
    
    
    $
    222,250Corporate assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,729Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    224,979
 The Company has operations in the United States, Ireland, the United Kingdom, Italy,
Mexico, Singapore, and China. Information about the operations of the Company in different
geographic segments is as follows: (Dollars in thousands) United States OperationsNorth
    
    
    
    
    
    
    Asia-Pacific
    
    
    
    
    
    
    
    
    
    
    United
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalAmerica
    
    
    Europe
    
    
    & Other
    
    
    Total
    
    
    Ireland
    
    
    Kingdom
    
    
    Italy
    
    
    Singapore
    
    
    China
    
    
    ConsolidatedSales
    
    
    2004
    
    
    $
    153,454
    
    
    $
    2,902
    
    
    $
    3,339
    
    
    $
    159,695
    
    
    $
    2,212
    
    
    $
    44,456
    
    
    $
    10,523
    
    
    $
    19,303
    
    
    $
    4,673
    
    
    $
    240,8622003
    
    
    
    120,155
    
    
    
    2,737
    
    
    
    3,069
    
    
    
    125,961
    
    
    
    1,806
    
    
    
    34,741
    
    
    
    9,679
    
    
    
    16,276
    
    
    
    2,284
    
    
    
    190,7472002
    
    
    
    106,788
    
    
    
    2,521
    
    
    
    2,256
    
    
    
    111,565
    
    
    
    1,879
    
    
    
    26,433
    
    
    
    
    
    
    
    10,924
    
    
    
    
    
    
    
    150,801Identifiable assets
    
    
    2004
    
    
    $
    136,144
    
    
    
    
    
    
    
    
    
    
    $
    136,144
    
    
    $
    39,502
    
    
    $
    26,428
    
    
    $
    31,039
    
    
    $
    15,285
    
    
    $
    5,083
    
    
    $
    253,4812003
    
    
    
    131,294
    
    
    
    
    
    
    
    
    
    
    
    131,294
    
    
    
    33,275
    
    
    
    21,904
    
    
    
    29,622
    
    
    
    16,320
    
    
    
    3,709
    
    
    
    236,1242002
    
    
    
    167,214
    
    
    
    
    
    
    
    
    
    
    
    167,214
    
    
    
    23,726
    
    
    
    21,599
    
    
    
    
    
    
    
    12,196
    
    
    
    244
    
    
    
    224,979
 Note 14: Subsequent Events On January 17, 2005, the Company entered into a definitive merger agreement whereby the
Company would be acquired by PEM Holding Co., an affiliate of Tinicum -45-




---



##### 



Capital Partners II, L.P. in a cash transaction. Under the terms of the agreement,
stockholders of the Company will receive $18.25 in cash for each share of the Companys Common
Stock and Class A Common Stock. The transaction is expected to be completed in the first half of
2005. The obligations of the parties to the Merger Agreement to complete the merger are subject to
various conditions including PEM Holding Co. or its wholly owned subsidiary having received the
proceeds of a financing under a signed financing commitment letter. Upon termination of the Merger
Agreement under specified circumstances, the Company has agreed to pay PEM Holding Co. a
termination fee of $10.0 million and reimburse PEM Holding Co. up to $5.0 million for costs and
expenses. As
of March 14, 2005, the Company is aware that four complaints
have been filed in the Delaware Court of Chancery against the Company
and each of its directors. One of the complaints also names Tinicum
Capital Partners II, L.P. and PEM Holding Co. as co-defendants. The
complaints purport to be class actions filed on behalf of holders of
the Companys Common Stock arising from certain allege actions
by the Company and its directors in connection with the proposed
merger of the Company with an affiliate of Tinicum Capital Partners
II, L.P. The complaints include various allegations that: each of the
defendants breached and/or aided and abetted the other
defendants' breaches of fiduciary duties of loyalty, due care,
candor, good faith and fair dealing; that the director defendants
spent substantial effort tailoring the structural terms of the merger
to meet the specific needs of Tinicum Capital Partners II, L.P. to
ensure the sale of the Company to it on preferential terms instead of
attempting to obtain the highest price reasonably available for the
Company and its stockholders, which was subversive to the interests
of the public stockholders of the Company; the directors structured
and approved the transaction in contravention of the Companys
restated certificate of incorporation, agreeing to provisions in
agreements that effectively preclude a competing bid and approving an
acquisition that favors insiders to the detriment of the
Companys public stockholders, including the price per share
offered to the holders of the Companys Common Stock; and the
defendants failed to provide material information concerning the
transaction to the Companys public stockholders. The complaints
seek equitable relief in the form of an injunction enjoining the
consummation of the merger or, if the merger is consummated to the
detriment of the public stockholders, then rescission of the
transaction or unspecified damages, in addition to costs and
disbursements, including reasonable attorneys and experts
fees. -46-




---



##### 



The Company is in the process of preparing responses to these complaints, and the time for the
Company to respond to these complaints has not yet expired. Note 15: Supplementary Data (unaudited) (Unaudited, dollars in thousands except per share amounts) 2004 Quarters EndedMar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31
    
    
    Total YearNet sales
    
    $
    63,307
    
    
    $
    61,709
    
    
    $
    59,962
    
    
    $
    55,884
    
    
    $
    240,862Gross profit
    
    
    22,522
    
    
    
    20,594
    
    
    
    19,082
    
    
    
    18,053
    
    
    
    80,251Net income
    
    
    5,867
    
    
    
    5,311
    
    
    
    4,381
    
    
    
    2,908
    
    
    
    18,467Net income per share-basic
    
    
    .33
    
    
    
    .30
    
    
    
    .25
    
    
    
    .16
    
    
    
    1.04Net income per share-diluted
    
    
    .33
    
    
    
    .30
    
    
    
    .24
    
    
    
    .16
    
    
    
    1.03Dividends declared per share
    
    $
    .06
    
    
    $
    .07
    
    
    $
    .07
    
    
    $
    .07
    
    
    $
    .27
 2003 Quarters EndedMar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31
    
    
    Total YearNet sales
    
    $
    44,814
    
    
    $
    47,439
    
    
    $
    46,321
    
    
    $
    52,173
    
    
    $
    190,747Gross profit
    
    
    12,574
    
    
    
    12,999
    
    
    
    13,593
    
    
    
    15,289
    
    
    
    54,455Net income
    
    
    540
    
    
    
    1,320
    
    
    
    1,477
    
    
    
    1,546
    
    
    
    4,883Net income per share-basic
    
    
    .03
    
    
    
    .08
    
    
    
    .08
    
    
    
    .09
    
    
    
    .28Net income per share-diluted
    
    
    .03
    
    
    
    .08
    
    
    
    .08
    
    
    
    .09
    
    
    
    .28Dividends declared per share
    
    $
    .06
    
    
    $
    .06
    
    
    $
    .06
    
    
    $
    .06
    
    
    $
    .24
 -47-




---



##### 



Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
Penn Engineering & Manufacturing Corp. We have audited the accompanying consolidated balance sheets of Penn Engineering & Manufacturing
Corp. as of December 31, 2004 and 2003, and the related consolidated statements of income, changes
in stockholders equity and cash flows for each of the three years in the period ended December 31,
2004. Our audits also included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule 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 audit 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 statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Penn Engineering & Manufacturing Corp. at
December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement 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/ Ernst & Young LLP Philadelphia, Pennsylvania
March 14, 2005 -48-




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None. Item 9A. Controls and Procedures. Disclosure Controls and Procedures The Companys management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of
the end of the period covered by this report. Based on such evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
the Companys disclosure controls and procedures are effective in recording, processing,
summarizing, and reporting, on a timely basis, information required to be disclosed by the Company
in the reports that the Company files or submits under the Exchange Act. Internal Control over Financial Reporting Managements annual report on internal control over financial reporting and the related
attestation report of the Companys independent auditors are not included in this Form 10-K Annual
Report in accordance with the Commissions Order Under Section 36 of the Exchange Act Granting an
Exemption from Specified Provisions of Exchange Act Rules 13a-1 and 15d-1 dated November 30, 2004. Changes in Internal Control over Financial Reporting There have not been any changes in the Companys internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth
quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. Item 9B. Other Information. None. PART III Item 10. Directors and Executive Officers of the Registrant. Directors Certain information with respect to each Class A Director, Class B Director and Class C
Director of the Company is as follows: -49-




---



##### 



Principal Occupation
    
    DirectorName
    
    Age
    
    for Past Five Years
    
    Since
    
    Term ExpiresClass A Directors:Martin Bidart
    

    
    68
    
    
    President and Chief
Operating Officer
of the Company
since August 1998;
Vice President -
Manufacturing of
the Company from
August 1990 to July
1998
    
    
    1998
    
    
    
    2007Maurice D. Oaks
    
    
    71
    
    
    Retired; Former
Vice President of
Worldwide
Operations Planning
of Bristol-Myers
Squibb
    
    
    1994
    
    
    
    2007Charles R. Smith
    
    
    60
    
    
    Professor,
Mechanical
Engineering
Department of
Lehigh University
    
    
    1997
    
    
    
    2007Class B Directors:Kenneth A.
Swanstrom(1)
    
    
    65
    
    
    Chairman of the
Board and Chief
Executive Officer
of the Company
    
    
    1970
    
    
    
    2005Mark W. Simon
    
    
    66
    
    
    Senior Vice
President, Chief
Financial Officer,
and Corporate
Secretary of the
Company
    
    
    1983
    
    
    
    2005John J. Sickler(2)
    
    
    63
    
    
    Vice Chairman of
Teleflex
Incorporated,
manufacturer of
engineered
products, since
December 2000;
President of TFX
Equities, a wholly
owned subsidiary of
Teleflex
Incorporated, from
1990 to December
2000
    
    
    2001
    
    
    
    2005Class C Directors:Daryl L. Swanstrom(3)
    
    
    57
    
    
    President, Spyraflo, Inc.,
manufacturer of miniature
self-aligning
sleeve bearings and
needle roller
bearings
    
    
    1987
    
    
    
    2006Andrew B. Williams
    
    
    50
    
    
    President,
Philadelphia
International
Advisors, asset
management, since
2002; Senior Vice
President of
Glenmede Trust
Company, asset
management, from
1985 to 2002
    
    
    2003
    
    
    
    2006
 -50-




---



##### 



(1)
    
    Mr. Swanstrom is also a director of Third Federal Bank.(2)
    
    Mr. Sickler is also a director of Microlog Corporation.(3)
    
    Mrs. Swanstrom is the widow of Lawrence W. Swanstrom, Kenneth A. Swanstroms brother. Executive Officers of the Company Certain information about the executive officers of the Company is as follows: Name
    
    Age
    
    Position Held with the CompanyKenneth A. Swanstrom
    
    
    65
    
    
    Chairman of the Board and
Chief Executive OfficerMartin Bidart
    
    
    68
    
    
    President and
Chief Operating OfficerMark W. Simon
    
    
    66
    
    
    Senior Vice President,
Chief Financial Officer, and Corporate SecretaryRichard F. Davies
    
    
    55
    
    
    Treasurer and Assistant SecretaryWilliam E. Sarnese
    
    
    51
    
    
    Corporate Controller and Assistant SecretaryRonald J. Bean
    
    
    49
    
    
    Vice President and General Manager  Motion
TechnologiesAlan M. Kay
    
    
    57
    
    
    President  Arconix GroupFrancis P. Wilson
    
    
    65
    
    
    President  Fastening Technologies
 All of the executive officers of the Company have been principally employed as officers or
employees of the Company for more than the past five years. The executive officers of the Company are elected each year at the organization meeting of the
Board of Directors of the Company. -51-




---



##### 



Item 11. Executive Compensation. Executive Compensation The following table sets forth certain information with respect to compensation paid or
accrued by the Company in each of the last three years to the Companys Chief Executive Officer and
the Companys four other most highly compensated executive officers. SUMMARY COMPENSATION TABLE Annual Compensation
    
    
    Long-TermCompensationAwardsSecuritiesUnderlying
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary($)
    
    
    Bonus($)
    
    
    Options(#)
    
    
    Compensation($)(1)Kenneth A. Swanstrom,
    
    
    2004
    
    
    $
    494,400
    
    
    $
    333,720
    
    
    
    
    
    
    $
    23,275Chairman and
    
    
    2003
    
    
    
    480,000
    
    
    
    209,693
    
    
    
    40,000
    
    
    
    13,198Chief Executive Officer
    
    
    2002
    
    
    
    470,000
    
    
    
    
    
    
    
    40,000
    
    
    
    10,598Martin Bidart, President and
    
    
    2004
    
    
    
    355,350
    
    
    
    213,210
    
    
    
    
    
    
    
    23,574Chief Operating Officer
    
    
    2003
    
    
    
    345,000
    
    
    
    133,970
    
    
    
    35,000
    
    
    
    13,4982002
    
    
    
    338,000
    
    
    
    
    
    
    
    35,000
    
    
    
    10,598Mark W. Simon, Senior Vice
    
    
    2004
    
    
    
    252,350
    
    
    
    132,484
    
    
    
    
    
    
    
    23,574President, Chief Financial
    
    
    2003
    
    
    
    245,000
    
    
    
    83,246
    
    
    
    30,000
    
    
    
    13,498Officer, and Corporate Secretary
    
    
    2002
    
    
    
    240,000
    
    
    
    
    
    
    
    30,000
    
    
    
    10,598Francis P. Wilson,
    
    
    2004
    
    
    
    231,235
    
    
    
    104,056
    
    
    
    
    
    
    
    20,500President, PennEngineering
    
    
    2003
    
    
    
    224,500
    
    
    
    80,102
    
    
    
    20,000
    
    
    
    10,548Fastening Technologies
    
    
    2002
    
    
    
    220,000
    
    
    
    
    
    
    
    20,000
    
    
    
    7,773Alan M. Kay, President,
    
    
    2004
    
    
    
    162,180
    
    
    
    52,400
    
    
    
    
    
    
    
    16,198Arconix Group
    
    
    2003
    
    
    
    153,000
    
    
    
    15,606
    
    
    
    20,000
    
    
    
    8,2182002
    
    
    
    150,000
    
    
    
    
    
    
    
    20,000
    
    
    
    5,829
   (1)
    
    Includes profit-sharing plan contributions of $20,500, $10,548, and $7,773 in 2004, 2003, and
2002 to each named executive officer other than Mr. Kay, who received the contributions
listed in the table. The Companys contribution to the profit-sharing plan for each year is
allocated among the participants in proportion to their compensation for that year. These
amounts also include directors fees of $2,775 paid to Mr. Swanstrom and $3,074 to Mr. Bidart
and Mr. Simon for meetings attended during 2004. No stock options were granted to the persons named in the Summary Compensation Table during
the fiscal year ended December 31, 2004. -52-




---



##### 



The following table sets forth information with respect to options to purchase shares of
Common Stock held at December 31, 2004 by the persons named in the Summary Compensation Table. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
 Number of Securities
    
    
    Value of UnexercisedShares
    
    
    
    
    
    Underlying Unexercised
    
    
    In-the-Money OptionsAcquired
    
    Value
    
    Options at FY-End (#)

    
    
    at FY-End ($) (1)Name
    
    on Exercise
    
    Realized
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableKenneth A. Swanstrom
    
    
    
    
    
    
    
    
    
    
    220,000
    (2)
    
    
    60,000
    
    
    
    984,475
    (2)
    
    
    167,200Martin Bidart
    
    
    
    
    
    
    
    
    
    
    167,500
    
    
    
    52,500
    
    
    
    694,463
    
    
    
    146,300Mark W. Simon
    
    
    
    
    
    
    
    
    
    
    155,000
    
    
    
    45,000
    
    
    
    671,575
    
    
    
    125,400Francis P. Wilson
    
    
    
    
    
    
    
    
    
    
    110,000
    
    
    
    30,000
    
    
    
    447,550
    
    
    
    83,600Alan M. Kay
    
    
    
    
    
    
    
    
    
    
    31,000
    
    
    
    30,000
    
    
    
    82,500
    
    
    
    83,600
   (1)
    
    Represents the difference between the aggregate exercise price and the aggregate market value
of the Companys Common Stock as of December 31, 2004.(2)
    
    In connection with the Merger Agreement, Mr. Swanstrom has agreed to surrender, immediately
prior to the effective time of the merger, stock options to purchase 40,740 shares of Common
Stock, having a value at December 31, 2004 of $343,629. The following table is representative of the annual benefits payable under the Companys
qualified retirement plans to an employee currently age 65 whose annual compensation remained
unchanged during the last five years of employment and whose benefits will be paid for the
remainder of the employees life. Pension Plan Table Years of ServiceAnnual Compensation
    
    10
    
    
    20
    
    
    30
    
    
    40$   150,000
    
    $
    18,420
    
    
    $
    36,840
    
    
    $
    55,260
    
    
    $
    73,680175,000
    
    
    21,545
    
    
    
    43,090
    
    
    
    64,635
    
    
    
    86,180200,000
    
    
    24,670
    
    
    
    49,340
    
    
    
    74,010
    
    
    
    98,680300,000 and up
    
    
    24,795
    
    
    
    49,590
    
    
    
    74,385
    
    
    
    99,180
 This Pension Plan Table may be used for Mr. Wilson, who has eight credited full years of
service. The covered compensation under the Pension Plan Table is that amount shown in the salary
and bonus columns of the Summary Compensation Table. The amounts shown in the Pension Plan Table
do not reflect any deduction for social security or other offset amounts. Benefits are subject to
maximum limitations under the Code. Therefore, with respect to 2004, the maximum salary that can
be recognized under the plan is $205,000 and the maximum annual benefit at age 65 is limited to
$165,000. -53-




---



##### 



The Companys pension plan permits covered persons who reach the age of 65 to elect to receive
a lump-sum settlement. Benefits for Mr. Bidart are not included in the Pension Plan Table because
he elected to receive a lump-sum settlement of $375,329 for all benefits earned through December
2003. Benefits for Mr. Simon are not included in the Pension Plan Table because he elected to
receive a lump-sum settlement of $812,129 for all benefits earned through October 31, 2004.
Benefits for Mr. Swanstrom are not included in the Pension Plan Table as he elected to receive a
lump-sum settlement of $1,320,518 for all benefits earned through December 31, 2004. Future
benefit entitlements for Messrs. Bidart, Simon, Swanstrom, and Kay, if any, will be determined
under the cash balance feature of the plan and not as illustrated in the Pension Plan Table. Under
the cash balance plan, participants receive pay credits equal to a percentage of annual
compensation, and participant accounts are also credited with annual interest based on a one-year
constant maturity Treasury bill rate plus 1%, equal to 3.63% and 2.39% in 2004 and 2003,
respectively. The percentage of annual compensation credited to participant accounts is based on
the participants age and length of service with the Company. As of December 31, 2004, credited
full years of service for these persons are as follows: Mr. Swanstrom, 44 years; Mr. Bidart, 14
years; Mr. Simon, 28 years; and Mr. Kay, 5 years. Compensation of Directors For 2004, the Companys non-employee directors each received an annual retainer of $30,000
plus a fee of $1,000 for each Board of Directors meeting attended in person, $500 for each Board of
Directors meeting attended by teleconference, and reimbursement for travel expenses. Employees who
are directors of the Company each received a fee of $250 for each meeting attended in person and
$125 for each meeting attended by teleconference. The Chairman of the Audit Committee received an
additional annual retainer of $5,000 in 2004, and the Chairman of each other committee received an
additional annual retainer of $2,000 in 2004. Each member of the Special Committee received a fee
of $15,000 for service on the Special Committee and reimbursement for travel expenses. Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table sets forth the number of shares of the Companys Class A Common Stock, the
number of shares of the Companys Common Stock and the percentage of total voting power that,
according to the information furnished to the Company, are beneficially owned by:  
    each stockholder who is known by the Company to be the beneficial owner of more than
5% of the Companys Common Stock or Class A Common Stock;
    each of the Companys current directors; -54-




---



##### 




    the Companys chief executive officer and the Companys four other most highly
compensated executive officers; and
    all current executive officers and directors as a group. The number and percentage of shares beneficially owned is based on 3,350,164 shares of the
Companys Class A Common Stock and 14,505,028 shares of the Companys Common Stock outstanding as
of March 1, 2005. Beneficial ownership includes any shares as to which the holder has voting power
or investment power and any shares that the holder has the right to acquire within 60 days of March
1, 2005, through the exercise of stock options. Shares ofShares of Common
    
    
    Percent of
    
    Class A Common
    
    Percent ofName of Individual
    
    Stock Beneficially
    
    
    Outstanding Common
    
    Stock Beneficially
    
    Outstanding Class Aor Identity of Group
    
    Owned(1)
    
    
    Stock(1)
    
    Owned(1)
    
    Common Stock(1)5% or Greater Holders:
Kenneth A. Swanstrom(2)(3)
P.O. Box 1000
Danboro, PA 18916
    
    
    1,798,986
    
    
    12.3%
    
    803,242
    
    24.0%Daryl L. Swanstrom(2)(4)
P.O. Box 2309
Peachtree City, GA 30269
    
    
    688,418
    
    
    4.7
    
    750,964
    
    22.4Frederick W. Dreher, in his capacity
as co-trustee of certain trusts(2)(5)
c/o Duane Morris LLP
4200 One Liberty Place
Philadelphia, PA 19103
    
    
    1,478,920
    
    
    10.2
    
    674,881
    
    20.1PNC Bank, National Association(6)
398 North Main Street
Doylestown, PA 18901
    
    
    762,332
    
    
    5.3
    
    422,444
    
    12.6Royce & Associates, LLC(7)
1414 Avenue of the Americas
New York, NY 10019
    
    
    1,019,100
    
    
    7.0
    
    371,400
    
    11.1Private Capital Management, Inc.(7)
8889 Pelican Bay Boulevard
Naples, FL 34108
    
    
    3,156,298
    
    
    21.8
    
    
    
    T. Rowe Price Associates, Inc.(7)
100 East Pratt Street
Baltimore, MD 21202
    
    
    980,000
    
    
    6.8
    
    330,000
    
    9.9Wellington Management Company, LLP(7)
75 State Street
Boston, MA 02109
    
    
    1,012,400
    
    
    7.0
    
    
    
    
 -55-




---



##### 



Shares ofShares of Common
    
    
    Percent of
    
    Class A Common

    Percent ofName of Individual
    
    Stock Beneficially
    
    
    Outstanding Common
    
    Stock Beneficially

    Outstanding Class Aor Identity of Group
    
    Owned(1)
    
    
    Stock(1)
    
    Owned(1)

    Common Stock(1)Directors(8):Martin Bidart(9)
    
    
    174,002
    
    
    1.2
    
    200
    

    *Maurice D. Oaks(10)
    
    
    23,512
    
    
    *
    
    
    

    John J. Sickler(10)
    
    
    5,250
    
    
    *
    
    
    

    Mark W. Simon(11)
    
    
    161,647
    
    
    1.1
    
    200
    

    *Charles R. Smith(10)
    
    
    22,500
    
    
    *
    
    
    

    Andrew B. Williams(10)
    
    
    1,750
    
    
    *
    
    
    

    Executive Officers(12):Francis P. Wilson(13)
    
    
    119,865
    
    
    *
    
    
    

    Alan M. Kay (14)
    
    
    31,595
    
    
    *
    
    
    

    All Executive Officers and
Directors as a Group
(13 persons)(15)
    
    
    3,229,666
    
    
    20.9
    
    1,554,606
    

    46.4
   *
    
    Less than 1%.  (1)
    Under the rules of the SEC, a person is deemed to be the beneficial owner of securities if
such person has, or shares, voting power, which includes the power to vote, or to direct the
voting of, such securities, or investment power, which includes the power to dispose, or to
direct the disposition, of such securities. Under these rules, more than one person may be
deemed the beneficial owner of the same securities. The information set forth in the above
table includes all shares of the Companys Common Stock and Class A Common Stock over which
the above-named persons individually or together share voting power or investment power.(2)
    As a result of a voting agreement dated January 17, 2005 between PEM Holding Co. and members
of the Swanstrom family, PEM Holding Co. may be deemed the beneficial owner of 1,637,329
shares of the Companys Class A Common Stock owned by the Swanstrom family, which constitutes
approximately 48.9% of the issued and outstanding shares of the Companys Class A Common
Stock. As the result of being under common control with Tinicum Investors, an affiliate of
Tinicum Capital Partners II, L.P. that owns 2,000 shares of the Companys Class A Common
Stock, PEM Holding Co. may also be deemed the beneficial owner of Tinicum Investors 2,000
shares of the Companys Class A Common Stock, which constitutes less than 1% of the issued and
outstanding shares of the Companys Class A Common Stock. As a result of the voting
agreement, PEM Holding Co. may be also be deemed the beneficial owner of an aggregate of
2,652,144 shares of the Companys Common Stock owned by the Swanstrom family, which
constitutes approximately 18.3% of the outstanding shares of the Companys Common Stock.
Also, pursuant to the voting agreement, PEM Holding Co. may be deemed the beneficial owner of
an aggregate of 201,760 shares of the -56-




---



##### 



Companys Common Stock purchasable under currently
exercisable options held by
Kenneth A. Swanstrom and Daryl L. Swanstrom. Assuming exercise of the currently exercisable
options held by Kenneth A. Swanstrom and Daryl L. Swanstrom, PEM Holding Co. may be deemed
the beneficial owner of approximately 19.4% of the outstanding shares of the Companys Common
Stock. PEM Holding Co. disclaims beneficial ownership of the shares and options owned by the
Swanstrom family and Tinicum Investors.(3)
    Mr. Swanstrom has sole voting and dispositive power with respect to 1,041,044 shares of the
Companys Common Stock and 480,348 shares of the Companys Class A Common Stock, and 179,260
shares of the Companys Common Stock are purchasable under currently exercisable stock
options. Mr. Swanstrom, as co-trustee of certain trusts, has shared voting and dispositive
power with respect to 578,682 shares of the Companys Common Stock and 322,894 shares of the
Companys Class A Common Stock. These shares exclude 22,602 shares of the Companys Common
Stock and 7,534 shares of the Companys Class A Common Stock owned individually by Mr.
Swanstroms wife as to which he disclaims beneficial ownership.(4)
    Mrs. Swanstrom has sole voting and dispositive power with respect to 127,180 shares of the
Companys Common Stock and 629,477 shares of the Companys Class A Common Stock, and 22,500
shares of common stock are purchasable under currently exercisable stock options. Mrs.
Swanstrom, as co-trustee of certain trusts, has shared voting and dispositive power with
respect to 538,738 shares of the Companys Common Stock and 121,487 shares of the Companys
Class A Common Stock.(5)
    Mr. Dreher shares voting and dispositive power with respect to 945,182 shares of the
Companys Common Stock and 548,394 shares of the Companys Class A Common Stock as co-trustee
with Kenneth A. Swanstrom and PNC Bank, N.A. of certain trusts and 538,738 shares of the
Companys Common Stock and 121,487 shares of the Companys Class A Common Stock as co-trustee
with Daryl L. Swanstrom of certain trusts. Mr. Dreher disclaims beneficial ownership of
these shares, except in his capacity as co-trustee of these trusts. Mr. Dreher also
individually owns 5,000 shares of the Companys Class A Common Stock.(6)
    PNC Bank, N.A. shares voting and dispositive power with respect to 762,332 shares of the
Companys Common Stock and 422,444 shares of the Companys Class A Common Stock as co-trustee
with Kenneth A. Swanstrom and Frederick W. Dreher of certain trusts.(7)
    As of December 31, 2004 as reported in filings such holders have made with the SEC.(8)
    Excludes directors listed under 5% or Greater Holders.(9)
    Of these shares, 167,500 shares of the Companys Common Stock are purchasable under currently
exercisable stock options. These shares also include 800 shares of the -57-




---



##### 



Companys Common Stock and 200 shares of the Companys Class A Common Stock owned by Mr.
Bidarts wife, as to which Mr. Bidart disclaims beneficial ownership.(10)
    These shares include currently exercisable stock options to purchase 22,500 shares of the
Companys Common Stock for each such person, other than Mr. Sickler and Mr. Williams, whose shares include currently exercisable stock options to purchase 5,250 shares and 1,750 shares,
respectively, of the Companys Common Stock.(11)
    Of these shares, 155,000 shares of the Companys Common Stock are purchasable under currently
exercisable stock options. These shares also include 238 shares of the Companys Common Stock
owned by Mr. Simons daughter, as to which Mr. Simon disclaims beneficial ownership.(12)
    Excludes executive officers listed under 5% or Greater Holders or Directors.(13)
    These shares include currently exercisable stock options to purchase 110,000 shares of the
Companys Common Stock.(14)
    These shares include currently exercisable stock options to purchase 31,000 shares of the
Companys Common Stock.(15)
    These shares include currently exercisable stock options to purchase an aggregate of 913,860
shares of the Companys Common Stock. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires that the Companys officers and directors, and
persons who own more than 10% of either class of the Companys common stock, file reports of
ownership and changes in ownership with the Commission. Based solely on the Companys review of
the copies of such reports received by it, or written representations from certain reporting
persons, the Company believes that, during the period January 1, 2004 through December 31, 2004,
all reports required to be filed by these persons were timely filed. Information Regarding Equity Compensation Plans of the Company as of December 31, 2004 The following table sets forth information regarding equity compensation plans of the Company
as of December 31, 2004. Only shares of the Companys Common Stock may be issued under the
Companys equity compensation plans. The Company does not have any equity compensation plans that
have not been approved by the stockholders of the Company. -58-




---



##### 



Equity Compensation Plan Information Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflectedPlan category
    
    and rights
    
    
    and rights
    
    
    in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,977,982
    
    
    $
    14.63
    
    
    
    577,098Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,977,982
    
    
    $
    14.63
    
    
    
    577,098
 Item 13. Certain Relationships and Related Transactions. None. Item 14. Principal Accountant Fees and Services. Ernst & Young LLP served as the Companys auditors for the Companys year ended December 31,
2004. The Company has been advised by such firm that none of its members or any of its associates
has any direct financial interest or material indirect financial interest in the Company or its
subsidiaries. Fees of Independent Auditors The work performed for the Company by Ernst & Young LLP during the year ended December 31,
2004 was approved by the Companys Audit Committee. Ernst & Young LLPs fees during the years
ended December 31, 2004 and 2003 are set forth below. Year Ended December 31,Fee Category
    
    2004
    
    
    2003Audit Fees(1)
    
    $
    1,353,000
    
    
    $
    568,000Audit-Related Fees(2)
    
    
    0
    
    
    
    334,000Tax Fees(3)
    
    
    418,000
    
    
    
    296,000All Other Fees
    
    
    
    
    
    
    
 -59-




---



##### 



(1)
    
    Audit fees consisted of fees related to the annual audit of the Companys consolidated
financial statements, audits of subsidiaries, reviews of the financial statements in the
Companys quarterly reports on Form 10-Q, audit of internal control over financial reporting,
and accounting consultations on matters addressed during the audit or interim reviews.(2)
    
    Audit-related fees in 2003 consisted of fees related to consultation and due diligence with
respect to merger and acquisition matters.(3)
    
    Tax fees consisted of fees related to corporate tax planning and preparation. Audit and Non-Audit Services Pre-Approval Policy The Audit Committee is required to pre-approve the audit and non-audit services performed by
the independent auditors in order to assure that the provision of such services does not impair the
auditors independence. The Audit Committee annually reviews and pre-approves the services that
may be provided by the independent auditors. The Audit Committee will revise the list of
pre-approved services from time to time, based on subsequent determinations. The Audit Committee
does not delegate its responsibilities to pre-approve services performed by the independent
auditors to management, but may delegate pre-approval authority to one or more of its members. The
member or members to whom such authority is delegated is required to report any pre-approval
decisions to the Audit Committee at its next scheduled meeting. Pre-approval fee levels for all
services to be provided by the independent auditors will be established annually by the Audit
Committee. Any proposed services exceeding these levels require specific pre-approval. The annual audit services engagement terms and fees are subject to the pre-approval of the
Audit Committee. In addition, the Audit Committee may grant pre-approval for other audit services,
including statutory audits or financial audits for subsidiaries or affiliates of the Company and
services associated with registration statements, periodic reports and other documents filed with
the Commission. Audit-related services and tax services must also be pre-approved by the Audit Committee.
Audit-related services include, among others, due diligence services pertaining to potential
business acquisitions/dispositions; accounting consultations related to accounting, financial
reporting or disclosure matters not classified as Audit services; financial audits of employee
benefit plans; and agreed upon or expanded audit procedures related to accounting and/or billing
records required to respond to or comply with financial, accounting or regulatory reporting
matters. Tax services to the Company include tax compliance, tax planning and tax advice services. The Audit Committee may grant pre-approval to those permissible non-audit services classified
as All Other services that it believes are routine and recurring services, and would not impair the
independence of the independent auditors. -60-




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PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial Statements, Financial Schedules and Exhibits Filed. 1. Consolidated Financial Statements. The following Consolidated Financial Statements of the
Company and its subsidiaries are filed as part of Item 8 of this Form 10-K Annual Report: Consolidated Balance Sheets at December 31, 2004 and 2003 Statements of Consolidated Income for the years ended December 31, 2004, 2003,
and 2002. Statements of Changes in Consolidated Stockholders Equity for the years ended
December 31, 2004, 2003, and 2002. Statements of Consolidated Cash Flows for the years ended December 31, 2004,
2003, and 2002. Notes to Consolidated Financial Statements. Report of Independent Auditors. 2. Financial Schedules. Valuation and Qualifying Accounts (Dollars in thousands) Balance at
    
    
    Provision
    
    
    
    
    
    
    
    
    
    
    BalanceBeginning
    
    
    Charged to
    
    
    
    
    
    
    
    
    
    
    at End(Dollars in Thousands)
    
    of Year
    
    
    Expense
    
    
    Deductions
    
    
    Other(1)
    
    
    of YearAllowance for Doubtful AccountsYear Ended December 31, 2004
    
    $
    886
    
    
    $
    68
    
    
    $
    (151
    )(2)
    
    $
    26
    
    
    $
    829Year Ended December 31, 2003
    
    
    830
    
    
    
    357
    
    
    
    (335
    )(2)
    
    
    34
    
    
    
    886Year Ended December 31, 2002
    
    
    834
    
    
    
    195
    
    
    
    (218
    )(2)
    
    
    19
    
    
    
    830Inventory ReservesYear Ended December 31, 2004
    
    $
    3,512
    
    
    $
    4,637
    
    
    $
    (3,101
    )(3)
    
    $
    88
    
    
    $
    5,136Year Ended December 31, 2003
    
    
    2,423
    
    
    
    4,129
    
    
    
    (3,077
    )(3)
    
    
    37
    
    
    
    3,512Year Ended December 31, 2002
    
    
    2,279
    
    
    
    2,003
    
    
    
    (1,885
    )(3)
    
    
    26
    
    
    
    2,423
 -61-




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##### 



(1)
    
    Primarily the effect of currency changes.(2)
    
    Uncollectible accounts written off net of recoveries.(3)
    
    Inventory disposed of during the year.   Reference is made to the exhibit index located after the signature pages to this Form 10-K
Annual Report. -62-




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. PENN ENGINEERING &MANUFACTURING CORP.Date: March 16, 2005
    
    By:
    
    /s/ Kenneth A. SwanstromKenneth 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 16, 2005Chief Executive Officer, andKenneth A. Swanstrom
    
    Director (PrincipalExecutive Officer)/s/ Martin Bidart
    
    President, Chief Operating
    
    March 16, 2005Officer, and DirectorMartin Bidart
    
    (Principal Operating Officer)/s/ Mark W. Simon
    
    Senior Vice President, Chief
    
    March 16, 2005Financial Officer, CorporateMark W. Simon
    
    Secretary, and Director(Principal Financial andAccounting Officer)/s/ Maurice D. Oaks
    
    Director
    
    March 16, 2005Maurice D. Oaks/s/ John J. Sickler
    
    Director
    
    March 16, 2005John J. Sickler
 -63-




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##### 



SIGNATURE
    
    TITLE
    
    DATE/s/ Charles R. Smith
    
    Director
    
    March 16, 2005Charles R. Smith/s/ Daryl L. Swanstrom
    
    Director
    
    March 16, 2005Daryl L. Swanstrom/s/ Andrew B. Williams
    
    Director
    
    March 16, 2005Andrew B. Williams
 -64-




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##### 



EXHIBIT INDEX Item
    
    Description3.1
    
    Restated Certificate of Incorporation of the Company. (Incorporated
by reference to Exhibit 3.1 of the Companys Form 10-Q Quarterly
Report for the quarter ended March 31, 2001.)3.2
    
    By-laws of the Company, as amended. (Incorporated by reference to
Exhibit 3(ii) of the Companys Form 10-K Annual Report for the year
ended December 31, 2001.)10.1
    
    Right of First Refusal dated as of September 5, 1986 between the
Company and Lawrence W. Swanstrom and Daryl L. Swanstrom.
(Incorporated by reference to Exhibit A to the Companys Form 8-K
Current Report dated September 5, 1986.)10.2
    
    1996 Equity Incentive Plan. (Incorporated by reference to the
Companys Form S-8 Registration Statement No. 333-20101 filed on
January 21, 1997.)10.3
    
    1996 Employee Stock Purchase Plan. (Incorporated by reference to the
Companys Form S-8 Registration Statement No. 333-13073 filed on
September 30, 1996.)10.4
    
    1998 Stock Option Plan for Non-Employee Directors. (Incorporated by
reference to the Companys Form S-8 Registration Statement No.
333-92907 filed on December 16, 1999.)10.5
    
    1999 Employee Stock Option Plan. (Incorporated by reference to the
Companys Form S-8 Registration Statement No. 333-92903 filed on
December 16, 1999.)10.6
    
    Agreement and Plan of Merger dated as of January 17, 2005 among PEM
Holding Co., PN Merger Sub, Inc. and the Company. (Incorporated by
reference to the Companys Form 8-K Current Report filed on January
18, 2005 (the January 18, 2005 Form 8-K Report)10.7
    
    Form of Change of Control Agreement between the Company and the
persons listed in Item 1.01 of the January 18, 2005 Form 8-K Report.
(Incorporated by reference to the January 18, 2005 Form 8-K Report.)




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##### 



Item
    
    Description14.1
    
    Code of Ethics. (Incorporated by reference to Exhibit 14 of the
Companys Form 10-K Annual Report for the year ended December 31,
2003.)21.1
    
    Subsidiaries of the Company.23.1
    
    Consent of Independent Auditors.31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.