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FORM 10-K

Commission File Number: 000-03905

Transcat, Inc.

(Registrant’s telephone number, including area code) (585) 352-7777

Securities registered pursuant to section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.50 par value per share

     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     or     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 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. (     )

      The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant on September 30, 2002 (the last business day of the registrant’s most recently completed second quarter) was approximately $6,689,887. The market value calculation was determined using the closing sale price of the Registrant’s Common Stock on September 30, 2002, as reported on the NASDAQ SmallCap Market System.

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

      The number of shares of Common Stock of the Registrant outstanding as of June 6, 2003 was 6,180,535.

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DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III, Items 10, 11, 12, 13 and 15, of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on August 19, 2003, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

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Part I

Item 1.     Business

     Forward-Looking Statements

      This report and, in particular, the “critical accounting policies and estimates” and “outlook” sections of this report, contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1935. These include statements concerning current expectations, estimates, and projections about Transcat’s industry, management beliefs and assumptions. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, Transcat’s actual results may materially differ from those expressed or forecast in any such forward-looking statements. Transcat undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

     Introduction

      Transcat, Inc. (“Transcat”, “we”, “us”, “our”), formerly Transmation, Inc. (see Recent Developments below in Item 1), is a leading global distributor of professional grade test, measurement, and calibration instruments and a provider of calibration and repair services primarily throughout the process, life science, and manufacturing industries.

      Through our distribution products segment, Transcat markets and distributes national and proprietary brand instruments to approximately 10,000 global customers. Our catalog (“Master Catalog”) offers easy access to more than 25,000 instruments, such as: calibrators, deadweight testers, temperature devices, multimeters, oscilloscopes, pressure pumps, testers, recorders, and related accessories, from nearly 250 of the industry’s leading manufacturers including Fluke, Hart Scientific, Agilent, Ametek, and GE-Druck. In addition, Transcat is the exclusive worldwide distributor for Altek and Transmation products. The majority of this instrumentation requires expert calibration service to ensure that it maintains the most exacting measurements.

      Through our calibration services segment, we offer precise, reliable, fast calibration services through ten Calibration Centers of Excellence strategically located across the United States and Canada to approximately 8,000 customers. To support our customers calibration service needs, Transcat delivers the industry’s highest quality calibration services and repairs. Each of our calibration laboratories is ISO-9000: 2000 registered with Underwriter’s Laboratories, Inc. and our scope of accreditation to ISO/ IEC 17025 is the widest in the industry. See Quality below in Item 1.

      CalTrak™, our proprietary documentation and asset management system, is used to manage the workflow at our Calibration Centers of Excellence. Additionally, CalTrak™ provides calibration certificates, calibration data, and access to other key documents required in the calibration process. CalTrak™ has been validated to 21CFR 820.75, which addresses validation of the process. This validation is especially significant in the life science industry, where federal regulations are especially stringent. See Information Systems below in Item 1.

      At Transcat, our attention to quality goes well beyond the products and services we deliver. From our field sales personnel to our customer service and sales support team, our entire organization stands ready to provide expert advice, application assistance and technical support where ever and whenever our customers need it.

      Transcat intends to become a major player in the process and life science markets. Our combination of breadth in product offering and our commitment to quality calibration practices provides the foundation for deeper penetration in the market segments we are engaged in.

      Transcat’s Internet website address is www.transcat.com. The information contained on our website is not a part of this Form 10-K. On our investor relations internet web page, http://www.transcat.com/ AboutTranscat/ InvestorRelations.asp, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): annual reports on Form 10K,

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      An Ohio corporation founded in 1964, Transcat is headquartered in Rochester, New York and employs more than 200 personnel worldwide. Transcat executive officers are located at 35 Vantage Point Drive, Rochester, New York 14624. Our telephone number is 585-352-7777.

     Recent Developments

      We changed our corporate name from Transmation, Inc. to Transcat, Inc. on October 1, 2002 to leverage our successful heritage and our quality reputation within the industries we serve. Transcat is the name that our customers, business partners, and overall industry know and trust. Our calibration laboratories and our product catalogs have been doing business under the Transcat brand for many years. In 2001, Transmation, Inc. divested our Transmation Products Group business unit (“TPG”), manufacturer of Transmation and Altek brand test instruments, to Fluke Electronics Corporation (“Fluke”) in order to focus on our core distribution products and calibration services business. See Divestitures below in Item 1. The Transmation name was included in the sale. A Form 8-K was filed with the SEC on October 1, 2002, disclosing the change in name.

      Transcat moved our corporate headquarters into the facility that had housed the TPG business at 35 Vantage Point Drive, Rochester, NY 14624. The lease at 10 Vantage Point Drive, Rochester, NY 14624 expired in October 2002.

      Transcat has operated within a conventional 52-week accounting fiscal year ending on March 31st of each year. As of April 1, 2003, we changed our fiscal year end from March 31 to a 52/53 week fiscal year end, ending the last Saturday in March. As a result of this change, in a 52-week fiscal year, each of our four quarters will be a 13-week period, and the final month of each quarter will be a 5-week period. This is not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or 15d-10 since the new fiscal year commences with the end of the old fiscal year. A Form 8-K was filed with the SEC on April 1, 2003, disclosing the change in fiscal year.

     Strategy

      Our business strategy is to increase our revenue, primarily through expansion of our calibration customer base, and leveraging that growth to improve both calibration and total company operating margins.

      Our key growth strategies are as follows:

	•	Position Transcat to satisfy the product requirements of the markets we serve, while focusing on the calibration services segment;
	•	Focus on customers and industries that require the highest standards of quality, where these customers would be those that require calibration laboratories, their technicians, and their procedures and processes to be audited and accredited by the highest level of industry standards;
	•	Increase our market share within the markets we serve;
	•	Select key, strategic markets and increase our market share with a long-term goal to be a leading provider through targeted marketing efforts;
	•	Increase awareness and brand recognition through strategic marketing efforts; and
	•	Obtain new customers using the products catalog, business-to-business direct marketing, and sales efforts through telephone and field sales contact.

     Segments

      We service our customers through two business segments: Distribution Products and Calibration Services. We serve approximately 16,000 customers with no customer or controlled group accounting for more than 10%

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      Distribution Products. Our customers facilities in the process, life science, and manufacturing industries use test, measurement, and calibration equipment to calibrate and test their processes and end products. Through the use of a variety of diagnostic test equipment, users can ensure that their process and/or end product are within specification. Utilization of such diagnostic equipment also allows for continuous improvement processes to be in place, increasing the accuracies of their measurements. The industrial distribution products industry for test and measurement instrumentation, in the geographic markets in which we predominately operate, is characterized by national broad based distribution organizations and uniquely focused organizations such as Transcat.

      Due in part to the number of stock keeping units (“sku”) that would be necessary to inventory by industrial customers, the distribution of test and measurement instrumentation has traditionally been characterized by frequent, small quantity orders combined with a need for rapid, reliable and substantially complete order fulfillment. The purchasing decision is generally made by plant engineers, quality managers, or their purchasing function. Products are generally purchased from more than one distributor.

      We believe that the distribution product customer chooses a distributor based on a number of different criteria including the timing and accurate delivery of orders, consistent product quality, value added services and price. Value added services include providing technical support to insure our customer receives the right product for his/her specific need through application knowledge and product compatibility. We also provide calibration of product purchases, on-line procurement, same day shipment of products, a variety of custom product offerings and training programs, and the operational efficiency of dealing with one distributor for our customer product needs.

      Transcat’s distribution products segment accounted for approximately 67% of our revenue in fiscal year 2003, which we anticipate declining as a percentage of total sales as a result of the higher growth rates in calibration. Within the distribution products segment, our routine business is comprised of customers who place orders to acquire or to replace specific instruments, which typically average $950 per order.

      Calibration Services. Calibration is the act of comparing a unit or instrument of unknown value to a standard of known value and reporting the result in some rigorously defined form. After the act of calibration has been completed, a decision is made, again based on rigorously defined parameters, on what is to be done to the unit. The decision may be to adjust the unit, optimize the unit, repair the unit, limit its use, range or rating, scrap the unit, or leave as is. The purpose of calibration is to significantly reduce the risk of product or process failures caused by inaccurate measurements.

      The billion-dollar calibration services industry is extremely fragmented with an estimated 750 companies participating, ranging from national accredited organizations such as Transcat to one-person organizations. In addition, many manufacturers perform in-house calibration. Our typical customer is a technically based individual who is employed in a quality, engineering or manufacturing engineering position.

      The calibration services industry has its origins in the military, and approximately 60% of our calibration technicians and laboratory managers have calibration expertise with the military prior to joining Transcat.

      Sourcing decisions are based on quality, customer service, turn-around time, documentation, price, and a one-source solution.

      Transcat’s calibration services segment provides periodic calibration and repair services for our customers’ test, measurement, and diagnostic instruments. We perform over 100,000 calibrations annually. These are performed at one of our ten Calibration Centers of Excellence, or at the customer’s physical location. Calibration services accounted for approximately 33% of Transcat’s total fiscal year 2003 revenue. We anticipate that calibration sales as a percentage of total sales will increase given the higher growth rates in this segment.

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      This segment of the market is critically aligned with our strategic focus on quality accreditations. Our calibration services are of the highest technical and quality levels, with broad ranges of accreditation and registration. Our quality systems are further detailed below in Quality of Item 1.

     Marketing and Sales

      We market and sell to our customers through multiple sales channels consisting of direct catalog marketing, a direct field sales organization, proactive outbound sales, and an inbound call center. Our direct field sales, outbound telesales, and customer sales and service organizations are each staffed with technically trained personnel. These direct sales representatives cover territories in North America and Asia, concentrating on attracting new customers and increasing product and calibration sales (North America only) to existing customers. Sales efforts are also focused on cross selling. Approximately 11% of our customers utilize both segments of our business, which provides us with an opportunity to increase average revenue per customer, adding to our value as a single source supplier. In addition, Transcat has sales representation in various countries throughout Latin America, Asia-Pacific, Middle East, and Europe.

      Our sales to customers are located in the following regions:

      Through our comprehensive Master Catalog, supplemental catalogs, opt-in email newsletter, and other direct sales and marketing programs, we offer our customers a broad selection of highly visible branded products at competitive prices. During fiscal year 2003, we distributed approximately 280,000 pieces of direct marketing materials including catalogs, flyers, supplements and other promotional materials to approximately 16,000 customers and 200,000 potential customers. The number of catalogs and other direct marketing materials received by each customer depends upon a number of factors, including purchase history.

      Distribution Products. In this business segment we focus primarily in the process, life science, and manufacturing industries. Process manufacturing has been and continues to be the foundation of our core business competencies. The process industry includes petroleum refining, chemical, water treatment, industrial power, steel, petrochemical, gas and pipeline, textile, pulp and paper, food and dairy, and utility companies. The life science industry includes pharmaceutical and biotechnology companies, medical device manufacturers, and healthcare service providers.

      Through our comprehensive catalogs and other direct marketing and sales promotions, Transcat offers customers a broad product selection. Approximately 10,000 instruments account for the majority of our sales. The instruments typically range in price from $100 to over $5,000 for large calibration test systems and are sold and marketed to approximately 10,000 customers in the process (petrochemical and automotive), life science, and manufacturing markets.

      The majority of our product sales are derived from catalog marketing. Our Master Catalog consists of approximately 700 pages of products relevant to the process, life science, and manufacturing industries. We distribute our Master Catalog to approximately 100,000 existing and prospective customers in the United States and Canada approximately every 18 months. The Master Catalog, in addition to standard make/model and related information, also provides value-added technical information such as the “Engineer’s Notebook” and over 100 pages of reference material. Smaller catalog supplements, often featuring new products, promotions, or specific product categories are direct mailed at interim periods throughout the year. The catalogs are also available in “CD” format upon request and on-line at our website: www.transcat.com.

      The remainder of our product sales is derived from our project business. Orders generally range from $10,000 to $200,000 per project. Projects are large, generally one-time opportunities, primarily sold through the

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(1)

The pro forma fiscal year 2002 results have been adjusted for a number of events and transactions that are disclosed below in the Pro Forma Statements of Operations in Item 7. To enhance comparability, management believes that the unaudited pro forma information for fiscal year 2002 provides additional information that is useful in analyzing the underlying business results. However, the pro forma operating results should be considered in addition to, not as a substitute for, reported results of operations. The unaudited pro forma information is not necessarily reflective of the results of operations had these events occurred at the beginning of fiscal year 2002, nor is it necessarily indicative of future results.

      Calibration Services. Calibration allows for maximum productivity and efficiency by assuring accurate, reliable equipment and processes. Through our calibration services segment, we perform periodic calibrations on new and used equipment as well as repair services for our customers. Each of Transcat’s ten Calibration Centers of Excellence provides accredited calibration in commonly used measurement parameters including electrical, temperature, pressure, dimensional, and frequency.

      Our calibration services are provided to our customers with a strategic focus in the highly regulated industries including process, life science, and manufacturing. This segment is synergistic with our quality process and standards as this market is highly regulated (e.g., FDA), and has a strong commitment to quality and a comprehensive calibration program.

      The approximate percentage of our calibration services in these industry segments is as follows:

     Customer Service and Support

      Our breadth of products and services along with our strong commitment to customer sales and service enable us to satisfy our customer needs through convenient selection and ordering, rapid, accurate, and complete order fulfillment and on-time delivery.

      A key element of our customer service approach is technically trained field sales, telesales and customer service personnel. Most customer orders are placed through our customer sales service personnel who often provide technical assistance to our customers to facilitate the purchasing decision. We frequently monitor our customer service through customer surveys, interpersonal communication and daily statistical reports.

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      Customers may place orders by: 1) mail at Transcat, Inc., 35 Vantage Point Drive, Rochester, NY 14624, 2) fax at 1-800-395-0543, 3) telephone at 1-800-828-1470, 4) email at sales@transcat.com, or 5) our website at www.transcat.com.

     Competition

      Distribution Products. The markets we serve are highly competitive. Competition for sales in distribution and service is quite fragmented and ranges from large, well-financed national distributors and manufacturers to small local distribution organizations and service providers. Key competitive factors typically include customer service and support, service, quality, turn around time, inventory availability, product brand name, and price. To maintain our competitive position with respect to such products and services, we must continually demonstrate our commitment to our customers and continue to compete effectively in the areas described above.

      Calibration Services. Calibration services providers are diverse and often local businesses with no single company clearly defined as the market leader. There is a clear distinction between nationally recognized calibration service providers, such as Transcat, that generally have some higher level of quality accreditation (see Quality below in Item 1) and numerous one-person operations where customer requirements may not be as demanding as in the markets we target.

     Quality

      The accreditation process is the only system currently in existence that assures measurement competence. Each laboratory is audited and reviewed by outside accredited institutions proficient in the technical aspects of calibration, metrology, and physics, insuring that measurements are properly made. Accreditation also requires that all standards used for accredited measurements have a fully documented path; known as the traceability chain, either directly or through other accredited laboratories, back to the national or international standard for that measurement parameter. This ensures proper measurement techniques throughout the process.

      To ensure the quality and consistency of our calibrations to customers, Transcat has sought and achieved several national levels of quality and accreditation. Transcat calibration laboratories are ISO 9002 registered with Underwriters Laboratories, Inc. Transcat calibration is traceable to National Institute of Standards and Technology (“NIST”) and National Research Council of Canada (“NRC”) standards and American Association for Laboratory Accreditation (“A2LA”) accredits our laboratories to ISO/ IEC 17025. We also meet a variety of stringent requirements imposed by the FDA including 21CFR and cGMP.

      To provide the widest range of service to our customers, our A2LA accreditations extend across a wide range of technical disciplines, each requiring and meeting separate and unique accreditation standards. Some of the major parameters for which each laboratory has received accreditations by A2LA are as follows:

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     Distribution

      Transcat distributes our products in the United States and internationally from our distribution center in Rochester, New York. Customers in Canada are serviced from our New York location as well as a re-distribution center in Eastern Canada. We maintain appropriate inventory levels in order to satisfy customer demand for prompt delivery and complete order fulfillment of their product needs. These inventory levels are managed on a daily basis with the aid of our sophisticated purchasing and stock management information system. Our automated freight manifesting and laser bar code scanning facilitates prompt and accurate order fulfillment. We ship our United States orders predominantly by a worldwide express carrier. International orders are shipped by a number of different carriers.

     Suppliers and Purchasing

      We believe that effective purchasing is a key element to maintaining and enhancing our position as a provider of high quality test and measurement equipment. We frequently evaluate our purchase requirements and suppliers’ price offerings to obtain products at the best possible cost. We obtain our products from about 250 suppliers of brand name and private labeled equipment. In fiscal year 2003 our top 10 vendors accounted for approximately 68% of our aggregate business.

      We plan our product mix, including stocked and non-stocked inventory items, to best serve the needs of our customers whose individual purchases vary in size. We can provide our customers with our top selling products the same day they are ordered.

     Distribution Agreement

      In conjunction with the sale of TPG in fiscal year 2002, detailed in Divestitures of Item 1, we entered into a distribution agreement with Fluke, which was revised effective September 1, 2002. Under the terms of the revised agreement, which extends through December 31, 2006, we are the exclusive worldwide distributor of TPG products and have agreed to purchase a pre-determined amount of inventory across a broad array of products and brands, including TPG. We believe that this commitment to future purchases is consistent with our business needs and plans. We were in compliance with all terms of the agreement at December 31, 2002 and as of March 31, 2003.

     Information Regarding Export Sales

      Approximately 14% of our sales in fiscal year 2003 resulted from sales to customers outside the United States. This compares with approximately 14% and 12% in fiscal year 2002 and 2001, respectively. Our percentage of foreign sales is impacted by the strength of the United States dollar in relation to other currencies. When the United States dollar is stronger than foreign currencies, we have historically had weaker foreign sales. Specifically, we believe that the stronger United States dollar contributed to reduced sales during the three-year period from 2001 to 2003 to below levels that would otherwise have been anticipated by us based on past performance and reasonable future expectations from Asian markets. We believe that continued weakness in Asian currencies relative to the United States dollar could have a negative influence on our future sales to Asia,

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     Backlog

      Transcat’s product backlog consists generally of product orders for which a purchase order has been received and which are scheduled for shipment within one day to three months. While we attempt to fulfill every order directly from inventory of the time, a certain portion of our customer’s orders is backordered at any given time. This is primarily due to a customer ordering a non-stocking or custom product. At the end of fiscal year 2003, the value of our backlog was approximately $1.4 million, compared to approximately $1.3 million at the end of fiscal year 2002. During fiscal year 2003 the level of backlog varied between a low of $1.0 million and a high of $1.9 million. This variation is due primarily to seasonality and to variations in customer ordering patterns. This variation is consistent with recent years.

     Operations

      Our distribution operations take place within an approximate 27,000 square foot facility located in Rochester, New York. This location is our headquarters and also houses the customer service, sales, and administrative functions. Approximately 40,000 product orders are shipped from this facility annually with an average order size of approximately $950 per order. This average is consistent with recent years.

     Information Systems

      We utilize two basic software platforms to manage our business and operations: CalTrak™ and Application Plus.

      CalTrak™ and CalTrak-Online is our proprietary metrology management system that provides a comprehensive calibration quality program. Many of our customers have unique calibration service requirements to which we have tailored specific services. CalTrak™ allows customers to track calibration cycles via the Internet and provides the customer with safe and secure off-site archive of calibration records that can be accessed 24 hours a day. Access to our records data is managed through our secure password protected web site. Calibration assets are tracked with records that are automatically cross-referenced to the equipment that was used to calibrate. CalTrak™ has also been validated to meet the most stringent requirements within the industry.

      We utilize a turnkey enterprise software solution. This software includes a suite of fully integrated modules to manage our business functions including: customer service, warehouse management, inventory management, financial management, customer management, and business intelligence. This solution is a fully mature business package with over 20 years of refinement and currently supports over 1,200 organizations to run their mission critical operations.

     Divestitures

      During fiscal year 2002, Transcat divested the TPG and the Measurement and Control (“MAC”) unit (the “Divestitures”). Our strategic focus is centered on our core competencies, which are the distribution of test, measurement, and calibration instrumentation and providing calibration services.

      In December 2001, we sold TPG to Fluke for $11.0 million. In connection with this agreement, we entered into a distribution agreement with Fluke that included an agreement to purchase a specific amount of inventory from Fluke. The distribution agreement was subsequently revised as of September 1, 2002. See Distribution Agreement below in Item 1. As a result of the terms of the distribution agreement, the gain on the sale of TPG of $1.5 million has been deferred (see “Deferred Gain on TPG” of Critical Accounting Policies and Estimates below in Item 7). As a result of the divestiture of TPG, we no longer incur R&D expense.

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      In January 2002, we sold MAC to Hughes Corporation for $2.9 million and recorded a loss of $4.5 million on the sale in fiscal year 2002.

     Seasonality

      We believe that our line of business has certain historical seasonal factors. Our second quarter is generally weaker and the fourth quarter historically stronger due to typical industrial operating cycles. We believe that the decline in our product sales results in the fourth quarter of fiscal year 2003 was an anomaly, significantly impacted by both the economy and military actions.

     Environmental Matters

      Transcat does not believe that compliance with federal, state, or local provisions relating to the protection of the environment have any material effect on our capital expenditures, earnings, or competitive position.

     Employees

      As of March 31, 2003, we had 222 employees, compared to 247 and 345 employees at March 31, 2002 and 2001, respectively. The decrease from March 31, 2002 was primarily the result of positions eliminated as a result of laboratory consolidations.

      The decrease from March 31, 2001 was primarily the result of the Divestitures, which included manufacturing operations, and a corporate restructuring announced and implemented as of March 31, 2002.

     Executive Officers

      The following table sets forth certain information regarding our executive officers and certain key employees as of March 31, 2003:

Item 2.     Properties

      Transcat leases the following properties:

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      Transcat also leases storage space in Toronto, ON and Chicago, IL. We believe that our properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on our business.

Item 3.     Legal Proceedings

      In May 2002, Transcat’s former Vice President – Finance sued us in New York State Supreme Court, Monroe County, alleging, among other items, that we breached the terms of his employment agreement with us when his employment was terminated. He is seeking approximately $0.5 million to compensate him for lost wages and unpaid vacation. Transcat disagrees with his claim against us, does not believe he is entitled to any relief and is defending this action to the maximum extent possible.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of Transcat’s stockholders during the quarter ended March 31, 2003.

Part II.

Item 5.     Market for Common Equity and Related Stockholder Matters

      Transcat’s Common Stock is traded on the NASDAQ SmallCap Market under the symbol “TRNS”. As of March 31, 2003, we had approximately 780 shareholders of record.

      The following table sets forth, on a per share basis, for the periods indicated, the high and low reported sales prices of Transcat’s Common Stock as reported on the NASDAQ SmallCap Market System for each quarterly period in fiscal 2003 and 2002.

      Transcat has not declared any cash dividends since our inception.

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Item 6.     Selected Financial Data

      The following table provides selected financial data for the current fiscal year and the previous four fiscal years (in thousands, except per share data): (See Divestitures in Item 1 for information regarding businesses divested in fiscal year 2002, which are included in the following table for fiscal years 1999 to 2002.)

      Certain reclassifications of prior year financial information have been made to conform with current year presentation.

Item 7.     Management’s Discussion and Analysis of Financial Condition an Results of Operations

     Reclassification of Amounts

      Certain prior year and prior quarter financial information have been made to conform to current quarter and twelve month presentation.

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     Overview

      We appreciate that understanding the nature and magnitude of changes that have taken place over the last two years at Transcat is complex. Therefore, it is appropriate to review the extent of those changes, and relate those changes to the Pro Forma Statements of Operations that are included in Item 7 of this report.

      At the end of fiscal year 2001, we had manufacturing operations to support our distribution products business, assets of $47.7 million, including $19.9 million of net goodwill, and $25.2 million of debt.

      During fiscal year 2002, a number of actions were taken to begin repositioning Transcat, including both our organizational and operational structure. Those actions included:

	•	Divesting the MAC and TPG business units, with the proceeds of the Divestitures reducing our bank debt. The Divestitures allowed us to strategically focus on our distribution products business and growth in our calibration services. See Divestitures above in Item 1 and “Deferred Gain on TPG” of the Critical Accounting Policies and Estimates in Item 7;
	•	Amending our bank lending agreement for the eighth time;
	•	Announcing and implementing a corporate consolidated restructuring which resulted in a reduction of 22 employees at March 31, 2002;
	•	Opening two new calibration laboratories in Ottawa and San Francisco; and
	•	Signing a distribution agreement with the purchaser of TPG that included long-term purchase requirements. See Distribution Agreement above in Item 1.

      At the completion of fiscal year 2002, and throughout fiscal year 2003, we believed it was important to present pro forma statements of operations, to facilitate the understanding of our ongoing business and the comparability of reported operating results. These pro forma operating results were reconciled to accounting principles generally accepted in the United States of America (“GAAP”) prepared, as- reported operating results, and were intended to be used in addition to, and not as a replacement for as- reported operating results. See Pro Forma Statement of Operations below in Item 7.

      Mr. Carl Sassano moved from an external Board member to Chief Executive Officer as of April 1, 2002, replacing Mr. Robert Klimasewski, who resigned on March 31, 2002.

      During fiscal year 2003, we continued our execution of actions we deemed necessary to develop the foundation for a consistent, profitable business model. Those actions included:

	•	Executing a new three year credit agreement, including a $1.6 million net gain on extinguishment of debt, which reduced our debt by $2.2 million (see Note 4 of the Consolidated Financial Statements);
	•	Creating ten calibration centers of excellence and, in the process, consolidating four laboratories into existing laboratory operations;
	•	Completing restructuring of the organization, incurring $0.4 million of severance charges;
	•	Changing the senior management team: replacing the Chief Financial Officer and eliminating the positions of President – Calibration Services and President – Distribution Products.

      At the completion of fiscal year 2003, our balance sheet reflects assets of $16.8 million, including $2.5 million of goodwill, and debt of $6.6 million. We believe that these actions, which were implemented in a very challenging economic environment, have laid the foundation for profitable growth.

     Critical Accounting Policies and Estimates

      Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting principles or methods used in the preparation of financial statements. Note 1 of the Consolidated Financial Statements includes a complete discussion of the significant accounting policies and methods used in the

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      Revenue Recognition. Sales are recorded when products are shipped or services are rendered to customers, as we generally have no significant post delivery obligations, the product price is fixed and determinable, collection of the resulting receivable is probable and product returns are reasonably estimated. Provisions for customer returns are provided for in the period the related sales are recorded based upon historical data.

      Goodwill. On April 1, 2002, Transcat adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Upon adopting SFAS 142, we were required to calculate the fair value of recorded goodwill. If the fair value of the goodwill does not exceed the carrying value of the goodwill, a write down of the remaining goodwill is necessitated. We evaluated the fair value of our goodwill and determined that a non-cash goodwill impairment of $6.5 million existed at April 1, 2002. Accordingly, in the first quarter of fiscal year 2003, we reported a $6.5 million charge as a cumulative effect of a change in accounting principle. We re-evaluated the fair value of our remaining goodwill, consistent with the provisions of SFAS No. 142, as of March 31, 2003 and determined no further impairment existed. At March 31, 2003 and 2002, goodwill amounted to $9.0 million and $2.5 million, respectively. A change in business could cause additional write-off or impairment.

      Deferred Catalog Costs. Transcat amortizes the cost of each Master Catalog mailed over such catalog’s estimated productive life. We review response results from catalog mailings on a continuous basis; and if warranted, we may modify the period over which costs are recognized. In the fourth quarter of fiscal year 2002, we determined that useful life for the Master Catalog approximated the mailing cycle, reducing its productive life from 24 to 18 months, and recognized an additional $0.1 million in catalog related amortization expense in fiscal year 2002. Deferred catalog costs totaled $0.7 million at March 31, 2002. There were no deferred catalog costs at March 31, 2003.

      Deferred Gain on TPG. As a result of certain post divestiture commitments, Transcat, according to GAAP, is unable to recognize the gain of $1.5 million on the divestiture of TPG until those commitments expire in fiscal year 2006.

      Valuation Allowance on Deferred Tax Assets. A valuation allowance for the full amount of the net deferred tax asset was recorded at March 31, 2003 and 2002. The valuation allowance represents the portion of the foreign tax credit carry forwards and other items for which it is more likely than not that the benefit of such items will not be realized. Such valuation allowance increased by approximately $1.1 million and $2.4 million for the fiscal years ended March 31, 2003 and 2002, respectively.

      Stock Options. Transcat has elected the use of the Accounting Principle Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, which does not require compensation costs related to stock options to be recorded in net income, as all options granted under the stock option plan had exercise prices equal to the market value of the underlying common stock at grant date. SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” requires pro forma disclosure of net income and earnings per share determined as of the fair value method of accounting for stock options had been applied in measuring compensation cost. If we chose to adopt SFAS No. 148, our stock-based employee compensation expense for the fiscal years ending 2003, 2002, and 2001 would be $0.2 million, $0.2 million, and $0.5 million, respectively. See Notes 1 and 7 of the Consolidated Financial Statements for further information regarding stock options.

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     Results of Operations

      The following table sets forth, for the prior three fiscal years, the components of our Consolidated Statements of Operations. Fiscal years 2002 and 2001 include amounts from businesses divested in fiscal year 2002. See Divestitures above in Item 1 and Pro Forma Statements of Operations below in Item 7.

      Certain reclassifications of prior year financial information, and therefore the applicable percentages, have been made to conform with current year presentation.

     Pro Forma Statements of Operations

      As a result of a number of events and transactions that occurred in fiscal years 2003 and 2002, which are described below, our ongoing operations differ significantly from those as reported. Those events and transactions are:

      Fiscal Year 2003:

	•	Elimination of SFAS No. 142 goodwill impairment
	•	Elimination of net gain on debt restructuring

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      Fiscal Year 2002:

	•	Elimination of the sales, direct costs, and expenses (non-allocated) of the Divestitures
	•	Elimination of the manufacturing profit of the Divestitures
	•	Elimination of goodwill amortization
	•	Elimination of interest expense attributable to the Divestitures
	•	Elimination of life insurance proceeds
	•	Elimination of inventory write down
	•	Elimination of asset impairment charge due to the Divestitures

      The following schedules provide a reconciliation from the reported operating results for the twelve months ended March 31, 2003 and 2002 prepared under GAAP to the pro forma adjusted operating results of our ongoing operations.

      To enhance comparability, management believes that the unaudited pro forma information that follows provides additional information that is useful in analyzing the underlying business results. However, the pro forma operating results should be considered in addition to, not as a substitute for, reported results of operations. The unaudited pro forma information is not necessarily reflective of the results of operations had these events occurred at the beginning of fiscal years 2003 and 2002, nor is it necessarily indicative of future results.

      We had previously reported in these quarterly reconciliations adjustments of $0.3 million of severance charges in the fourth quarter of fiscal year 2002 and $1.3 million from the elimination of the cost of restructured personnel in all quarters of fiscal year 2002. Under recent SEC guidance, because we incurred $0.4 million of severance charges in fiscal year 2003, the items should not be included in reconciliations of this nature and therefore are now excluded from adjustments. The following table shows the amounts expensed and paid fiscal years 2003 and 2002 for restructuring and severance costs that were initially incurred and accrued in these years:

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TRANSCAT, INC.

Reconciliation of Reported FY 2003 and FY 2002 Operating Results to