Transcat, Inc. Annual Report 2005

FY2005 Annual Report · Transcat, Inc.
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Transcat, Inc.

2005 Annual  Report

A LETTER FROM OUR CHAIRMAN, PRESIDENT,  AND CHIEF EXECUTIVE OFFICER

To Our  Shareholders:

Fiscal year 2005 was pivotal for building our business and positioning ourselves for the future. The strategic
initiatives we began implementing at the beginning of the ﬁscal year, the addition of new products and services,
and a strengthening economy all contributed  to our strong performance at the  close of the ﬁscal year.

Excellent Business and Financial Results  at the Close of Fiscal Year 2005

Our  net  sales  increased  3.7%  to  $55.3  million  and  our  operating  income  increased  $0.6  million  to
$0.9  million  in  ﬁscal  year  2005.  Net  income  for  ﬁscal  year  2005  was  $0.3  million,  or  $0.04  per  diluted  share,
compared with net income of $0.4 million, or $0.05  per diluted  share,  in ﬁscal year  2004.

We  are  pleased  with  our  performance  in  the  fourth  quarter  of  ﬁscal  2005,  which  was  the  result  of  an

incremental building process that began at the  beginning of  the ﬁscal year in April,  2004.

) Net sales for the ﬁscal 2005 fourth quarter increased 1.8% to $15.6 million from the ﬁscal 2004 fourth

quarter.

) Operating  income  for  the  ﬁscal  2005  fourth  quarter  increased  to  $0.7  million  from  $0.1  million  in  the

ﬁscal 2004 fourth quarter.

) Net  income  for  the  ﬁscal  2005  fourth  quarter  increased  to  $0.5  million  from  $0.04  million  in  the  ﬁscal

2004 fourth quarter.

) Diluted earnings per share for the ﬁscal 2005 fourth quarter increased to $0.07 from $0.01 in the ﬁscal

2004 fourth quarter.

A Strategic Blueprint for Building Our  Business

Transcat provides signiﬁcant value for our customers who procure vital test and measurement equipment and

require calibration of these assets.

Our growth strategy is to become a technical core supplier, strategic ally, and single-source partner to our
customers,  serving  both  their  calibration  services  and  product  needs,  by  having  the  right  products  and  services
available at the right time and the right  price.

Building Our Calibration Services Business

Calibration  Services  is  a  strategic  core  competency  of  our  company.  Transcat’s  ability  to  calibrate
sophisticated  equipment  to  manufacturers’  speciﬁcations  ensures  that  our  customers’  vital  assets  will  perform
within proper operating parameters to assure  excellent manufacturing quality.

Our goal is to have Transcat Calibration Services become an integral component of a customer’s strategic

supplier network that supports and enhances their  manufacturing, quality, and productivity programs.

During  ﬁscal  year  2005,  we  began  to  identify  larger  industrial  customers  who  recognize  the  beneﬁts  of
outsourcing their calibration services needs to an expert such as Transcat. We also made investments in laboratory
assets, personnel, and systems technology in our Calibration Services business. We were rewarded, at the end of
the ﬁscal year 2005 fourth quarter, with a strong 13.9% increase in sales principally as a result of new customers
who chose to outsource their calibration services functions to Transcat. The growth in revenue increased the gross
proﬁt ratio 3.1 points to 32.1%.

We acquired these new customers as a result of our ability to offer a comprehensive program of value-added
calibration  services.  These  include  our  proprietary  CalTrak˛  management  system,  our  assurance  of  quality
through  laboratory  accreditation,  and  the  ﬂexibility  we  offer  by  being  able  to  meet  our  customer’s  calibration
demands while not interrupting their manufacturing and  operations schedules.

In  April,  after  the  beginning  of  the  2006  ﬁscal  year,  we  acquired  the  ﬁxed  assets  of  Hilton  Engineering’s
calibration services facility in San Juan, Puerto Rico. We then incorporated it into our North American network of
Transcat  Calibration  Services  Laboratories,  expanding  the  network  to  11  Transcat  Calibration  Centers  of
Excellence. Transcat can now provide the island’s pharmaceutical and other industries with an enhanced level of
calibration services, as well as access to  Transcat’s CalTrak˛ calibration quality program.

Building Our Distribution Products Business

We were pleased with the performance of our Distribution Products business in ﬁscal year 2005, where the

4.7% growth in sales and 4.2 point improvement in  the  gross proﬁt ratio  were in  line with our  strategic  plan.

Our targeted sales programs and increased direct mail efforts produced new customers, beneﬁting both our
Distribution  Products  and  Calibration  Services  businesses  throughout  the  year.  These  efforts  included  two
48-page  catalog  supplements  and  several  leading  brand  pieces.  Importantly,  we  added  over  100  pages  of  new
products  to  our  Master  Catalog  as  part  of  our  strategy  to  offer  the  best  test  and  measurement  products  to  our
customers.

During ﬁscal year 2005, we were pleased to announce the addition of two world-class strategic partners that

has enhanced our product offerings.

) In  July,  we  announced  our  appointment  as  an  Authorized  North  American  distributor  of  Tektronix,  a
world leader in test, measurement, and monitoring products for computer, communications, and advanced
electronics  design;  digital  video;  optical  networking;  and  wireless  communications.  We  are  pleased  to
promote  and  distribute  this  leading  family  of  oscilloscopes  and  general-purpose  test  equipment  to  our
customers throughout the industrial marketplace.

) In March, near the close of the ﬁscal 2005 fourth quarter, we announced a partnership with GE Infrastruc-
ture Sensing to offer an expanded range of products, including respected product lines by Panametrics and
Kaye, who are leading manufacturers of temperature, moisture, gas analysis, and ﬂow instruments that are
ideally suited for Transcat’s customers in  the pharmaceutical, utility, and electrical  industries.

Establishing  new  relationships  with  leading  manufacturers  such  as  GE  Infrastructure  and  Tektronix  is
consistent with our strategy to identify and secure new customers in targeted market segments by offering the best
technologies  and  a  comprehensive  range  of  test  and  measurement  instruments  for  the  process,  utility,  and
pharmaceutical industries.

Looking Ahead

We successfully met the challenges of ﬁscal year 2005 and continued to strengthen our company through the

dedicated efforts of the entire Transcat team.

As we look ahead to ﬁscal year 2006, we are conﬁdent that we have the strategies and resources in place that

will win us greater  recognition in our markets and  generate increased demand for our services  and products.

) In  our  Calibration  Services  business,  our  sales  organization  is  focused  on  identifying  companies  that
value  quality  and  are  looking  to  outsource  their  calibration  service  needs,  as  well  as  cross-selling  to
Distribution  Products  customers.  Our  capital  investments,  when  appropriate,  will  be  focused  ﬁrst  on
maintenance  of  laboratory  equipment,  followed  by  expansion  to  meet  increased  volume  and  improve-
ments in efﬁciency.

) In  our  Distribution  Products  business,  we  will  continue  to  use  catalog  supplement  mailings  and  the
distribution of the industry-recognized Transcat Master Catalog to identify new customers and cross-sell
calibration services. We will also add  new products to our  catalog, as appropriate.

Our management team and our business strategies have built a good platform for continued progress in ﬁscal
2006 and beyond. With the ongoing support of our shareholders, our board of directors, and our dedicated staff,
we are optimistic about the opportunities  ahead for  our  company.

We thank you for your conﬁdence, support and  continued  investment in  Transcat.

Carl E. Sassano
Chairman, President, and Chief Executive Ofﬁcer

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

FORM 10-K

(Mark one)
X

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the  ﬁscal year ended: March 26,  2005

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the  transition period from 

 to

Commission File Number: 000-3905

Transcat,  Inc.

(Exact name of registrant as speciﬁed in  its charter)

Ohio
(State or other jurisdiction of
 incorporation or organization)

16-0874418
(I.R.S. Employer Identiﬁcation No.)

35 Vantage Point Drive, Rochester, New York
(Address of principal executive ofﬁces)

14624
(Zip Code)

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

Securities registered pursuant to section  12(b) of  the  Act:
None

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

Common Stock, $0.50 par value per share

(Title of class)

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 ¥ No n

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  25,  2004  (the  last  business  day  of  the  registrant’s  most  recently  completed  second  quarter)  was
approximately  $18,323,000.  The  market  value  calculation  was  determined  using  the  closing  sale  price  of  the
Registrant’s Common Stock on September  25, 2004,  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 n No ¥

The number of shares of Common Stock of the Registrant outstanding as of June 20, 2005 was 6,567,725.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III, Items 10, 11, 12, 13 and 14, 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 16, 2005, which deﬁnitive proxy statement will be ﬁled with the
Securities  and  Exchange  Commission  (‘‘SEC’’)  within  120  days  after  the  end  of  the  ﬁscal  year  to  which  this
report relates.

TABLE OF CONTENTS

Part I.
Item 1.
Item 2.
Item 3.
Item 4.

Business *******************************************************************
Properties ******************************************************************
Legal Proceedings ***********************************************************
Submission of Matters to a Vote  of Security Holders *******************************

Part II.
Item 5. Market for Registrant’s Common  Equity, Related  Stockholder Matters,  and Issuer

Purchases of Equity Securities ***********************************************
Selected Financial Data *******************************************************
Item 6.
Item 7. Management’s Discussion and  Analysis  of  Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk**************************
Financial Statements and Supplementary Data*************************************
Item 8.
Changes in and Disagreements with Accountants on Accounting and  Financial  Disclosure
Item 9.
Item 9A. Controls and Procedures ******************************************************
Item 9B. Other Information************************************************************

Part III.
Item 10. Directors and Executive Ofﬁcers of the Registrant *********************************
Item 11. Executive Compensation ******************************************************
Security Ownership of Certain Beneﬁcial Owners  and  Management and Related
Item 12.

Stockholder Matters ********************************************************
Item 13. Certain Relationships and Related Transactions ************************************
Principal Accountant Fees and  Services ******************************************
Item 14.

Part IV.
Item 15. Exhibits and Financial Statement Schedules***************************************
Signatures ***************************************************************************
Index to Exhibits**********************************************************************

Page(s)

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PART I.

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

This  report  and,  in  particular,  the  Management’s  Discussion  and  Analysis  of  Financial  Condition  and
Results  of  Operations  section  of  this  report,  contains  forward-looking  statements  as  deﬁned  by  the  Private
Securities  Litigation  Reform  Act  of  1995.  These  include  statements  concerning  expectations,  estimates,  and
projections about the industry, management beliefs and assumptions of Transcat, Inc. (‘‘Transcat’’, ‘‘we’’, ‘‘us’’,
or ‘‘our’’). 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, our actual results may materially differ from those expressed
or forecast in any such forward-looking statements. We undertake no obligation to publicly update any forward-
looking statements, whether as a result of  new  information, future events  or otherwise.

INTRODUCTION

Transcat 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. Our reportable business segments offer different products and services to the same customer base. We
conduct our business through two segments:  Distribution  Products and Calibration Services.

Through  our  distribution  products  segment,  we  market  and  distribute  national  and  proprietary  brand
instruments  to  approximately  12,000  global  customers.  Our  catalog  (‘‘Master  Catalog’’)  offers  access  to  more
than  25,000  instruments,  including:  calibrators,  deadweight  testers,  temperature  devices,  multimeters,  oscillo-
scopes,  pressure  pumps,  testers,  recorders,  and  related  accessories,  from  nearly  250  of  the  industry’s  leading
manufacturers  including  Fluke,  Hart  Scientiﬁc,  Agilent,  Ametek,  Tektronix  and  GE-Druck.  In  addition,  we  are
the exclusive worldwide distributor for Altek and Transmation products. The majority of the instrumentation we
sell 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. We operate ten
Calibration  Centers  of  Excellence  strategically  located  across  the  United  States  and  Canada  servicing  approxi-
mately 8,000 customers. In April 2005, we added an additional Calibration Center of Excellence in Puerto Rico,
primarily  focused  on  expanding  our  services  to  pharmaceutical  customers  in  the  region.  To  support  our
customers’  calibration  service  needs,  we  deliver  the  industry’s  highest  quality  calibration  services  and  repairs.
Each  of  our  calibration  laboratories  is  ISO-9001:2000  registered  with  Underwriter’s  Laboratories,  Inc.  and  our
scope  of  accreditation  to  ISO/IEC  17025  is  the  widest  in  the  industry  for  the  market  segments  we  serve.  See
‘‘Calibration Services Segment – Quality’’  below  in Item 1  for more  information.

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  substantiates  the  validation  of  our  process.  This  validation  is  especially  signiﬁcant  in  the  life
science  industry,  where  federal  regulations  are  especially  stringent.  See  CalTrak˛  below  in  Item  1  for  more
information.

At Transcat, our attention to quality goes beyond the products and services we deliver. Our sales teams and
customer  service  and  support  team  stand  ready  to  provide  expert  advice,  application  assistance  and  technical
support wherever and whenever our customers need it.

Among our top 200 customers, representing approximately 34% of our consolidated sales, are Fortune 500/
Global 500 companies, including Wyeth, Merck, DuPont, Exxon Mobil, AK Steel Holding, Johnson & Johnson,
Dow Chemical, and Duke Energy. We believe these customers do business with us because of our commitment to
quality service, our CalTrak˛ asset management system, and access  to  our product  offerings.

3

Transcat has focused on the process and life science markets since its founding in 1964. We are the leading
seller of calibrators into the process industry. We believe that our broad product offering and our commitment to
quality calibration services is the foundation for deeper penetration into  the process  and life science markets.

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  SEC:  annual  reports  on  Form  10-K,  quarterly  reports  on
Form  10-Q,  current  reports  on  Form  8-K,  and  any  amendments  to  those  reports  ﬁled  or  furnished  pursuant  to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such ﬁlings on our investor relations web page
are available free of charge.

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

STRATEGY

We are an accredited provider of calibration services and a distributor of test and measurement equipment.
Our strategy is to focus on gaining business and market share in markets where companies value quality systems
and/or operate in regulated environments. We will differentiate ourselves and build barriers to competitive entry
by offering the best products and calibration services and integrating the two to beneﬁt our customers’ operations
and lower their cost.

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 of customers accounting for 5%
or  more  of  our  consolidated  net  sales  from  ﬁscal  year  2003  to  2005.  We  are  not  dependent  on  any  single
customer, the loss of which would have a material adverse effect on our business, cash ﬂows, balance sheet, or
results  of  operations.  Note  8  of  our  Consolidated  Financial  Statements  in  this  Form  10-K  presents  ﬁnancial
information for these segments.

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 team,
outbound sales team, and inbound sales team are each staffed with technically trained personnel. Our domestic
and international sales organization covers territories in North America, Latin America, Europe, Africa, Asia, and
the Middle East. We concentrate 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 28% of our
customers utilize both segments of our business, which provides us with an opportunity to increase our average
revenue per customer, adding to our value as a single source supplier. Our sales to customers during the periods
indicated were as follows (calculated on dollars in millions):

United States **********************************************
Canada ***************************************************
Other International******************************************
Total ***************************************************

84%
9%
7%

84%
9%
7%

84%
9%
7%

100%

100%

100%

FY 2005

FY 2004

FY 2003

We  focus  primarily  on  the  process,  life  science,  and  manufacturing  industries.  Process  manufacturing  has
been and continues to be the foundation of our core business competency. The process industry, in our deﬁnition,
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, in our deﬁnition, includes

4

pharmaceutical  and  biotechnology  companies,  medical  device  manufacturers,  and  healthcare  service  providers.
The approximate percentage of our business in these industry segments for our largest customers is as follows:

Process ***************************************************
Life Science ***********************************************
Manufacturing *********************************************
Other ****************************************************
Total ***************************************************

39%
19%
12%
30%

38%
20%
11%
31%

43%
19%
11%
27%

100%

100%

100%

FY 2005

FY 2004

FY 2003

DISTRIBUTION PRODUCTS SEGMENT

Summary. Our  customers’  facilities  in  the  process,  life  science,  and  manufacturing  industries  use  test,
measurement,  and  calibration  equipment  to  calibrate  and  test  their  processes  and  ensure  that  their  processes
and/or  end  product(s)  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.

Most  industrial  customers  ﬁnd  that  maintaining  an  in-house  inventory  of  back-up  test,  measurement,  and
calibration  equipment  is  cost  prohibitive  due  to  the  large  number  of  stock  keeping  units.  As  a  result,  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.

The  majority  of  our  products  are  not  consumables  but  are  purchased  as  replacement,  upgrades,  or  for
expansion of manufacturing and research and development facilities. Our catalog and sales activities are designed
to maintain a constant presence in front of the customer to ensure we receive the order when they are ready to
purchase. As a result, we evaluate sales trends over at least a four quarter period as any individual months’ sales
can be impacted by any number of factors.

We believe that a 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 for in-stock items, a variety of custom
product  offerings  and  training  programs,  and  the  operational  efﬁciency  of  dealing  with  one  distributor  for  our
customer product needs.

Our distribution products segment accounted for approximately 67% of our revenue in our ﬁscal year ended
March 26, 2005, referred to as ﬁscal year 2005, which we anticipate declining as a percentage of total sales as a
result  of  the  targeted  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 $1,200 per order.

Marketing  and  Sales. 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
recognized branded products at competitive prices. 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 12,000 customers in the process, life science, and manufacturing markets.

During  ﬁscal  year  2005,  we  distributed  approximately  890,000  pieces  of  direct  marketing  materials
including  catalogs,  brochures,  supplements  and  other  promotional  materials  to  approximately  50,000  customer

5

contacts and 525,000 potential customer contacts. The number of catalogs and other direct marketing materials
received by each customer depends upon  a number of factors,  including purchase history.

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  85,000  existing  and  prospective  customers  in  the  United  States
and  Canada  approximately  every  12  months.  The  Master  Catalog  provides  standard  make/model  and  related
information  and  is  also  available  in  ‘‘CD’’  format  upon  request  and  on-line  at  our  website:  www.transcat.com.
Our  new  customer  acquisition  program  utilizes  smaller  catalog  supplements — which  feature  new  products,
promotions, or speciﬁc product categories. The catalog supplements are launched at varying periods throughout
the year; each publication is mailed to  over  250,000 targeted prospects.

The  approximate  percentage  of  our  distribution  products  business  by  industry  segment  for  our  largest

customers is as follows:

Process ***************************************************
Life Science ***********************************************
Manufacturing *********************************************
Other ****************************************************
Total ***************************************************

42%
12%
8%
38%

40%
15%
7%
38%

49%
15%
8%
28%

100%

100%

100%

FY 2005

FY 2004

FY 2003

Competition. The markets we serve are highly competitive. Competition for sales in distribution products
is  quite  fragmented  and  ranges  from  large  national  distributors  and  manufacturers  to  small  local  distribution
organizations  and  service  providers.  Key  competitive  factors  typically  include  customer  service  and  support,
quality, turn around time, inventory availability, product brand name, and price. To address our customers’ needs
for  technical  support  and  product  application  assistance,  and  to  differentiate  ourselves  from  competitors,  we
employ  a  staff  of  highly  trained  technical  application  specialists.  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.

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  2005  our  top
10  vendors  accounted  for  approximately  70%  of  our  aggregate  business.  Approximately  30%  of  our  product
purchases  on  an  annual  basis  are  from  Fluke  Electronics  Corporation  (‘‘Fluke’’),  which  is  not  believed  to  be
inconsistent with Fluke’s shares of the  markets the Company services.

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 ship our customers our top selling products the same
day they are ordered.

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 31,000 product orders are shipped from this facility annually with
an average order size in ﬁscal year 2005 of approximately $1,200 per order. This average is slightly higher than
recent years.

Distribution. We  distribute  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.

6

We ship our United States orders predominantly by a worldwide express carrier. International orders are shipped
by a number of different carriers.

Distribution  Agreement.

In  late  calendar  year  2001,  we  sold  our  manufacturing  business,  Transmation
Products Group (‘‘TPG’’), to Fluke. See footnote (2) under Item 6. Selected Financial Data. In ﬁscal year 2002,
we  entered  into  a  distribution  agreement  (the  ‘‘Distribution  Agreement’’)  with  Fluke  to  be  the  exclusive
worldwide  distributor  of  TPG  products  until  December  31,  2006.  Under  the  Distribution  Agreement,  we  also
agreed to purchase a pre-determined amount of inventory from Fluke.

On  October  31,  2002,  with  an  effective  date  of  September  1,  2002,  we  entered  into  a  new  distribution
agreement (the ‘‘New Agreement’’) with Fluke, which replaced the Distribution Agreement. The New Agreement
ends on December 31, 2006. Under the terms of the New Agreement, among other items, we agreed to purchase a
larger, pre-determined amount of inventory across a broader array of products and brands during each calendar
year. Our purchases for calendar years 2002 through 2004 met our commitment under the New Agreement and
we  expect  that  our  purchases  for  calendar  year  2005  will  also  meet  the  commitment.  We  believe  that  this
commitment to future purchases is consistent  with  our business needs and  plans.

Backlog. Customer product orders include orders for products that we routinely stock in our inventory, as

well as, customized products and other  products  ordered  less frequently,  which we  do not  stock.

Unshippable  product  orders  are  primarily  backorders,  but  also  include  products  that  are  requested  to  be
calibrated  in  our  calibration  laboratories  prior  to  shipment,  orders  required  to  be  shipped  complete,  orders
required  to be shipped at a future date, and  orders on credit  hold/awaiting letters of  credit.

At the end of ﬁscal year 2005, the value of our unshippable product orders was approximately $1.3 million,
compared to approximately $1.7 million and $1.4 million at the end of ﬁscal years 2004 and 2003, respectively.
During ﬁscal year 2005, the month-end level of unshippable product orders varied between a low of $1.2 million
and  a  high  of  $1.8  million.  This  variation  is  due  primarily  to  seasonality,  the  economy,  supplier  delivery
schedules, and variations in customer ordering patterns.

The  following  graph  shows  the  trend  of  unshippable  product  orders  and  backorders  for  ﬁscal  years  2004

through 2005, on a quarterly basis.

)
s
n
o
i
l
l
i

m
n
i
(

$1.9

$1.6

$1.3

$1.0

$0.7

FY04 Q1

FY04 Q2

FY04 Q3

FY04 Q4

FY05 Q1

FY05 Q2

FY05 Q3

FY05 Q4

Total Unshippable Product Orders

Total Product Backorders

CALIBRATION SERVICES SEGMENT

Summary. 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, optimize, repair, 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.

7

 
Transcat’s calibration strategy encompasses either one of the two ways a company manages its calibration

needs:

1) If  a  company  wishes  to  outsource  its  calibration  needs,  an  ‘‘Integrated  Calibration  Services  Solution’’

provides a complete wrap-around service:

) Program management;
) Calibration;
) Logistics; and,
) Consultation services.

2) If a  company has an in-house calibration operation, we can provide:

) Calibration of primary standards;
) Overﬂow capability either on-site or at one of  our  facilities  during periods  of  high demand; and,
) Consultation services.

In either case, we intend to have the broadest calibration offering to our targeted markets. This includes the
broadest  scope  of  accreditation,  certiﬁcation  of  our  technicians  to  the  American  Society  for  Quality  standards,
complete  calibration  management  encompassing  the  entire  metrology  function,  and  access  to  our  products
offering.

The  billion-dollar  commercial  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 to companies that do not currently outsource their calibrations. 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;  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.

Our  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  our  total  ﬁscal  year  2005  revenue.  During  ﬁscal  year  2006,  we  anticipate
that calibration services sales will increase at a  faster rate than  product sales.

The  calibration  services  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’’.

Marketing  and  Sales. 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  our  ten  Calibration  Centers  of
Excellence  provides  accredited  calibration  in  commonly  used  measurement  parameters  including  electrical,
physical,  and dimensional.

Our  calibration  services  are  provided  to  our  customers  with  a  strategic  focus  in  the  highly  regulated
industries including process, life science, and manufacturing. Our quality process and standards are designed to
meet the needs of companies that are highly regulated (e.g., by the Food and Drug Administration, or ‘‘FDA’’),
and/or  have a strong commitment to quality  and a comprehensive calibration program.

8

The  approximate  percentage  of  our  calibration  services  business  by  industry  segments  for  our  largest

customers for the periods indicated was as  follows:

Process ***************************************************
Life Science ***********************************************
Manufacturing *********************************************
Other ****************************************************
Total ***************************************************

34%
34%
19%
13%

33%
30%
18%
19%

33%
26%
16%
25%

100%

100%

100%

FY 2005

FY 2004

FY 2003

Competition. The  calibration  outsource  industry  is  highly  fragmented  and  is  composed  of  companies
ranging  in  size  from  non-accredited,  sole  proprietorships  to  internationally  recognized  and  accredited  corpora-
tions, such as Transcat, resulting in a tremendous range of service levels and capabilities. A large percentage of
calibration companies are small businesses that provide only basic measurements and service markets in which
quality  requirements  may  not  be  as  demanding  as  the  markets  that  we  strategically  target.  Very  few  of  these
companies are structured to compete on the same  scale and level of quality as us.

Quality. The  accreditation  process  is  the  only  system  currently  in  existence  that  assures  measurement
competence. Each laboratory is audited and reviewed by outside accreditation bodies proﬁcient in the technical
aspects of calibration, metrology, and physics, ensuring 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, we have sought and achieved several
national  levels  of  quality  and  accreditation.  Our  calibration  laboratories  are  ISO  9001:2000  registered  with
Underwriters  Laboratories,  Inc.  Our  calibrations  are  also  traceable  to  National  Institute  of  Standards  and
Technology  (‘‘NIST’’)  or  National  Research  Council  of  Canada  (‘‘NRC’’)  standards.  Our  laboratories,  except
those  in  Puerto  Rico  for  which  we  expect  to  initiate  the  accreditation  process,  are  accredited  by  American
Association  for  Laboratory  Accreditation  (‘‘A2LA’’)  to  ISO/IEC  17025  and  ANSI/NCSL  Z540-1-1994,  who
provides an objective, third party, and internationally accepted evaluation of the quality and consistency of our
calibration process and competency.

To  provide  the  widest  range  of  service  to  our  customers  in  our  target  markets,  our  A2LA  accreditations
extend across a wide range of technical disciplines, each requiring and meeting separate and unique accreditation
standards.  The  following  table  represents  Transcat’s  capabilities  (accredited  and/or  non-accredited)  for  each
Center of Excellence:

Working-level Capabilities

Electrical Metrology Disciplines

DC/ACLF HF/UHF Microwave

RF/

Luminance/
Illuminance Flow Biological Counters Force Analysis

Chemical/

Gas

Physical  Metrology Disciplines
Particle

Boston ********************
Charlotte ******************
Dayton ********************
Houston *******************
Los Angeles****************
Ottawa ********************
Philadelphia ****************
Rochester ******************
San Francisco **************
San Juan, PR ***************
St. Louis ******************

x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x

x

x
x
x
x
x

x
x

x

x

x

x
x

x
x
x
x

x

x

x

x

x
x
x
x
x

9

Physical Metrology Disciplines, Continued

Dimensional
Disciplines

Mass
Relative
Humidity Weight

Pressure,
Vacuum

Temperature

Torque

RPM,
Speed

Vibration,
Acceleration

Length

Optics

Boston *************
Charlotte************
Dayton *************
Houston ************
Los Angeles *********
Ottawa *************
Philadelphia *********
Rochester ***********
San Francisco********
San Juan, PR ********
St. Louis************

x

x
x
x
x

x
x

x
x
x
x
x
x
x
x

x
x

x
x
x
x
x
x
x
x

x
x

x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x

x

x
x
x
x
x
x
x
x

x

x

x

x
x

x

x
x
x
x
x
x
x
x
x

x

Reference-level Capabilities

Dimensional
Standards

Electrical
Standards

Humidity
Standards

Mass
Standards

Pressure
Standards

Temperature
Standards

Charlotte *****************************
Houston ******************************
Philadelphia ***************************
Rochester *****************************
San Francisco *************************

x

x

x

x

x

x

x

CalTrak˛. 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  our  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  records  data  is  managed  through  our  secure  password  protected  website.
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.

CUSTOMER SERVICE AND SUPPORT

Our breadth of distribution products and calibration services along with our strong commitment to customer
sales,  service,  and  support  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 our technically trained direct ﬁeld sales team, outbound
sales team, inbound sales team, and customer service organization. Most customer orders are placed through our
customer  service  organization  who  often  provides  technical  assistance  to  our  customers  to  facilitate  the
purchasing  decision.  To  ensure  the  quality  of  service  provided,  we  frequently  monitor  our  customer  service
through customer surveys, interpersonal communication, and daily statistical  reports.

Customers may place orders by:
) Mail at Transcat, Inc., 35 Vantage Point Drive,  Rochester, NY 14624;
) Fax at 1-800-395-0543;
) Telephone at 1-800-828-1470;
) Email at sales@transcat.com; or,
) Our website at www.transcat.com.

INFORMATION REGARDING EXPORT  SALES

Approximately  16%  of  our  sales  in  ﬁscal  years  2005,  2004,  and  2003,  resulted  from  sales  to  customers
outside the United States (calculated on dollars in millions). Our percentage of foreign sales is impacted by the

10

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.

In  addition,  our  revenues  are  subject  to  the  customary  risks  of  operating  in  an  international  environment,
including  the  potential  imposition  of  trade  or  foreign  exchange  restrictions,  tariff  and  other  tax  increases,
ﬂuctuations in exchange rates and unstable political situations, any one or more of which could have a material
adverse effect on our business, cash ﬂows, balance sheet or results  of operations.

INFORMATION SYSTEMS

We utilize a basic software platform, Application Plus, to manage our business and operations segments. We
also 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.

SEASONALITY

We  believe  that  our  line  of  business  has  certain  historical  seasonal  factors.  Our  ﬁscal  second  quarter  is

generally weaker and the ﬁscal fourth quarter historically stronger  due  to typical industrial operating cycles.

ENVIRONMENTAL MATTERS

We  believe  that  compliance  with  federal,  state,  or  local  provisions  relating  to  the  protection  of  the

environment will not have any material  effect on our  capital expenditures, earnings,  or  competitive  position.

EMPLOYEES

At the end of ﬁscal year 2005, we had 209 employees, compared to 213 and 222 employees at the end of

ﬁscal years 2004 and 2003, respectively.

EXECUTIVE  OFFICERS

The following table sets forth certain information regarding our executive ofﬁcers and certain key employees

as of March 26, 2005:

Name
Carl E. Sassano************
Charles P. Hadeed *********

John A.  De Voldre *********
Robert C. Maddamma ******
Jay F. Woychick ***********
Michael M. Mercurio *******
Joanne B. Hand************

Age

55
55

56
62
48
56
31

Position

Chairman, President and Chief Executive Ofﬁcer
Chief Operating Ofﬁcer, Chief Financial Ofﬁcer and  Vice
President of Finance
Vice President of Human Resources
Vice President of Customer Satisfaction
Vice President of Marketing
Vice President of Sales
Corporate Controller

11

ITEM 2. PROPERTIES

We lease the following properties:

Property

Corporate Headquarters and Calibration Laboratory
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************
Calibration Laboratory ************************

Location

Rochester, NY
Boston,  MA
Charlotte, NC
Philadelphia, NJ
Houston, TX
Los Angeles, CA
Ottawa, ON
San Francisco, CA
St. Louis, MO
Dayton, OH

Approximate
Square Footage

27,250
4,000
4,860
8,550
4,645
3,060
4,159
3,540
4,000
3,417

We also lease storage space in Chicago, Illinois and ofﬁce space in Shanghai, China. We added a calibration
laboratory  in  Puerto  Rico  in  the  ﬁrst  quarter  of  ﬁscal  year  2006  in  which  we  lease  space.  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

None.

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

No matters were submitted to a vote of our  stockholders during the quarter ended March 26, 2005.

PART II.

ITEM 5. MARKET FOR COMMON EQUITY,  RELATED STOCKHOLDER MATTERS, AND ISSUER

PURCHASES OF EQUITY SECURITIES

Our  Common  Stock  is  traded  on  the  NASDAQ  SmallCap  Market  under  the  symbol  ‘‘TRNS.’’  As  of

March 26, 2005, we had approximately 700 shareholders of record.

PRICE RANGE OF COMMON STOCK

The following table sets forth, on a per share basis, for the periods indicated, the high and low reported sales
prices of our Common Stock as reported on the NASDAQ SmallCap Market System for each quarterly period in
ﬁscal years 2005 and 2004.

First Quarter

Second Quarter

Third Quarter

Fourth  Quarter

Fiscal Year 2005:

High ************************
Low*************************

Fiscal Year 2004:

High ************************
Low*************************

$3.26
$2.05

$1.64
$1.23

DIVIDENDS

$3.05
$2.46

$2.90
$1.49

$3.38
$2.52

$3.40
$2.20

$4.00
$3.15

$3.15
$2.40

We have not declared any cash dividends since our inception and do not intend to pay any dividends for the

foreseeable future.

12

ITEM 6. SELECTED FINANCIAL DATA

The  following  table  provides  selected  ﬁnancial  data  for  the  current  ﬁscal  year  and  the  previous  ﬁve  ﬁscal

years (in thousands, except per share data):

FY 2005

FY 2004

FY 2003(1)

FY 2002(2)

FY 2001(2)

Statements of Operations Data:

Net Sales*********************** $55,307
Cost of Sales *******************
41,415
Gross Proﬁt*********************
Operating Expenses **************
Operating Income (Loss) **********
Interest Expense *****************
Gain on Extinguishment of Debt****
Other Expense (Income) **********

899
350
—
293

13,892
12,993

Income (Loss) Before Income Taxes
Beneﬁt for Income Taxes**********

Income (Loss)  Before Cumulative

Effect of a Change in Accounting
Principle**********************

Cumulative Effect of a Change in

Accounting Principle ***********
Net Income (Loss) ***************

Share Data:

Basic Earnings Per Share Before

Cumulative Effect of a Change in
Accounting Principle ***********
Basic Average Shares Outstanding **
Diluted Earnings Per Share Before

Cumulative Effect of a Change in
Accounting Principle ***********
Diluted Average Shares Outstanding
Closing Price Per Share ***********

Balance Sheets and Working Capital

Data:
Inventory, net********************
Properties, net *******************
Goodwill ***********************
Total Assets *********************
Depreciation and Amortization******
Capital Expenditures **************
Revolving Line of Credit **********
Term Loan, current portion ********
Term Loan, less current portion *****
Shareholders’ Equity**************

$53,317
39,919

13,398
13,091

307
434
—
(288)

161
(192)

$57,172
43,853

13,319
12,850

469
657
(1,593)
56

1,349
(408)

$66,782
48,706

18,076
24,081

(6,005)
1,432
—
(206)

(7,231)
(600)

353

1,757

(6,631)

—

(6,472)

—

$76,881
53,671

23,210
20,258

2,952
2,523
—
—

429
(84)

513

—

256
—

256

—

$

256

$

353

$ (4,715)

$ (6,631)

$

513

$

0.04
6,396

$

0.06
6,252

$

0.29
6,147

$ (1.08)
6,103

$

0.09
6,030

$

$

0.04
6,966
3.80

$

$

0.05
6,808
2.40

$

$

0.29
6,147
1.40

$ (1.08)
6,103
1.13

$

$

$

0.09
6,030
1.62

As of or For The Fiscal Years Ended March

26, 2005

27, 2004

31, 2003(1)

31, 2002(2)

31, 2001(2)

$ 3,736
2,025
2,524
18,385
1,299
459
6,441
668
—
3,428

$ 2,842
2,556
2,524
16,758
2,047
291
5,248
666
668
2,698

$ 3,869
3,911
8,996
27,624
4,086
1,364
6,817
1,016
2,080
6,764

$ 8,399
5,747
19,916
47,722
4,546
1,393
9,104
3,980
12,120
13,329

$ 5,902
1,984
2,524
20,112
1,486
866
5,498
758
1,020
4,314

13

(1) In  ﬁscal  year  2003,  we  recorded  a  $6.5  million  impairment  from  the  implementation  of  Statement  of
Financial Accounting Standard (‘‘SFAS’’) No. 142, ‘‘Goodwill and Other Intangible Assets,’’ as a change in
accounting principle. See Note 1 and Note 3 of our Consolidated Financial Statements for further disclosure.
(2) On  December  26,  2001,  we  sold  TPG,  which  produces  instruments  used  to  calibrate,  measure,  and  test
physical  parameters  to  Fluke  for  $11.0  million.  On  January  18,  2002,  we  completed  the  sale  of  our
Measurement and Control unit to Hughes Corporation for $2.9 million and reported a loss of $4.5 million on
the sale.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND

RESULTS OF OPERATIONS

RECLASSIFICATION OF AMOUNTS

Certain  reclassiﬁcations  of  prior  ﬁscal  quarters’  ﬁnancial  information  have  been  made  to  conform  with

current ﬁscal quarter presentation.

OVERVIEW

Operational  Overview. We  are  a  leading  distributor  of  professional  grade  test,  measurement,  and
calibration  equipment  and  provider  of  nationally  recognized  and  accredited  calibration  services  across  a  wide
array of measurement disciplines.

We operate our business through two reportable business segments that offer different products and services

to the same customer base. Those two  segments are  Distribution Products  and Calibration Services.

In  our  distribution  segment,  our  Master  Catalog  is  widely  recognized  by  both  original  equipment
manufacturers and customers as the ultimate source for test and measurement equipment. Additionally, because
we specialize in test and measurement equipment, as opposed to a wide array of industrial products, our sales and
customer  service  personnel  can  provide  value  added  technical  assistance  to  our  customers  to  assist  them  in
determining what product best meets their  particular application requirements.

Our  strength  in  our  calibration  services  segment  is  based  upon  our  wide  range  of  disciplines  and  our
investment in the quality systems that are required in our targeted market segments. Our services range from the
calibration of a single unit to managing  a customer’s entire calibration  program.

Our  revenue  in  our  distribution  products  segment  can  be  heavily  impacted  by  changes  in  the  economic
environment. As industrial customers increase or curtail capital and discretionary spending, our product sales will
typically be directly impacted. Absent signiﬁcant economic volatility, we do not see this segment of our business
as high growth. The majority of our products are not consumables but are purchased as replacements, upgrades,
or  for  expansion  of  manufacturing  and  research  and  development  facilities.  Year  over  year  sales  growth  in  any
one quarter can be impacted by a number of factors including the addition of new product lines or channels of
distribution.

We  believe  our  calibration  services  segment  offers  considerable  growth  opportunity  and  the  potential  for

continuing revenue from established customers from what  is typically an annual calibration cycle.

We  evaluate  sales  growth  in  both  of  our  business  segments  against  a  four  quarter  trend  analysis,  not  by

analyzing any single quarter.

Financial  Overview. Our  distribution  products  segment  beneﬁted  in  ﬁscal  year  2005  from  a  stronger
economy;  and,  year  over  year  sales  growth  was  stronger  in  the  ﬁrst  half  of  the  year  due  to  weaker  prior  year
comparisons.  Calibration  service  sales  continued  to  improve  in  comparison  to  the  prior  year,  as  the  year
progressed, as our sales organization identiﬁed  and closed new business.

Our gross margin overall was consistent with the prior year. Our distribution products segment gross margin
declined approximately four points over the ﬁrst six months of the year, compared to the prior year, as a result of
prior year initiatives of selling into new low margin market segments increased promotional and pricing activity.

14

Over the last six months of ﬁscal year 2005 our product gross proﬁt increased approximately three points as we
decreased our use of promotional pricing in  response  to the strengthened economy.

We  are  pleased  with  our  consistent  calibration  services  gross  proﬁt  margin  resulting  from  our  focus  on
expense  control  and  productivity  improvements.  Calibration  sales  growth  offers  signiﬁcant  leverage  on  gross
proﬁt  due  to  the  relatively  ﬁxed  nature  of  a  calibration  laboratory  cost  structure,  as  evidenced  by  our  fourth
quarter results.

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  our  Consolidated  Financial
Statements  includes  a  complete  discussion  of  the  signiﬁcant  accounting  policies  and  methods  used  in  the
preparation  of  our  Consolidated  Financial  Statements.  A  summary  of  our  most  critical  accounting  policies
follows:

Use of Estimates: The preparation of our Consolidated Financial Statements in accordance with account-
ing  principles  generally  accepted  in  the  United  States  (‘‘GAAP’’)  requires  that  we  make  estimates  and
assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets
and liabilities at the date of the ﬁnancial statements, and the reported amounts of revenues and expenses during
the reporting period. Signiﬁcant estimates and assumptions are used for, but not limited to, allowance for doubtful
accounts  and  returns,  depreciable  lives  of  assets,  estimated  lives  of  our  Master  Catalog,  and  tax  valuation
allowances.  Future  events  and  their  effects  cannot  be  predicted  with  certainty;  accordingly,  our  accounting
estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated
Financial Statements will change as new events occur, as more experience is acquired, as additional information
is obtained and as our operating environment changes. Actual  results could differ from those estimates.

The following table summarizes the more signiﬁcant charges in the Consolidated Statements of Operations

that require management estimates, which are described below (in  millions):

For the Years Ended
March 26, March 27, March 31,
2004

2005

2003

Provision for doubtful accounts receivables and returns ********
Depreciation of property, plant, and equipment***************
Amortization of Master Catalog costs **********************
Deferred tax valuation allowance provisions *****************

$ —
$1.0
$0.5
$ —

$(0.1)
$ 1.0
$ 0.3
$ 0.1

$(0.2)
$ 1.6
$ 0.4
$ 1.1

Changes in Estimates:

In the ordinary course of accounting for items discussed above, we make changes
in estimates as appropriate, and as we become aware of circumstances surrounding those estimates. Such changes
and reﬁnements in estimation methodologies are reﬂected in reported results of operations in the period in which
the  changes  are  made  and,  if  material,  their  effects  are  disclosed  in  the  Notes  to  our  Consolidated  Financial
Statements.

Revenue  Recognition: Sales  are  recorded  when  products  are  shipped  or  services  are  rendered  to
customers, as we generally have no signiﬁcant post delivery obligations. Our prices are ﬁxed and determinable,
collection of the resulting receivable is probable, and returns are reasonably estimated. Provisions for customer
returns are provided for in the period the related sales are recorded based upon historical data. We recognize the
majority  of  our  service  revenue  based  upon  when  the  calibration  or  repair  activity  is  performed  then  shipped
and/or delivered to the customer. Some of our service revenue is generated from managing customers’ calibration
programs in which we recognize revenue in equal amounts at ﬁxed intervals. Our shipments are generally free on
board shipping point and our customers  are  generally invoiced for freight, shipping,  and handling  charges.

Accounts Receivable: Accounts receivable represent receivables from customers in the ordinary course of
business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated
Balance  Sheets.  The  allowance  for  doubtful  accounts  is  based  upon  the  expected  collectibility  of  accounts

15

receivable.  We  apply  a  speciﬁc  formula  to  our  accounts  receivable  aging,  which  may  be  adjusted  on  a  speciﬁc
account basis where the speciﬁc formula may not appropriately reserve for loss exposure. After all attempts to
collect  a  receivable  have  failed,  the  receivable  is  written-off  against  the  allowance  for  doubtful  accounts.  The
returns reserve is calculated based upon the historical rate of returns applied to sales over a speciﬁc timeframe.
The returns reserve will increase or decrease as a result of changes in the level of sales and/or the historical rate
of returns.

Inventories:

Inventories consist of ﬁnished goods and are valued at the lower of cost or market. Costs are
determined using the average cost method of inventory valuation. Inventories are reduced by a reserve for items
not  saleable  at  or  above  standard  cost.  We  reserve  speciﬁcally  for  certain  items  of  our  inventory  and,  for  other
items, we apply a speciﬁc loss factor, based on historical experience, to speciﬁc categories of our inventory. We
evaluate the adequacy of the reserve on  a regular basis.

Properties, Depreciation, and Amortization: Properties are stated at cost. Depreciation and amortization
is computed primarily under the straight-line method with useful lives of 3 to 10 years for the following major
classiﬁcations:  machinery,  equipment,  software,  and  furniture  and  ﬁxtures.  Properties  determined  to  have  no
value are written off at their then remaining net book value. We account for software costs in accordance with
Statement  of  Position  (‘‘FSP’’)  No.  98-1,  ‘‘Accounting  for  the  Costs  of  Computer  Software  Developed  or
Obtained  for  Internal  Use’’.  Leasehold  improvements  are  amortized  under  the  straight-line  method  over  the
estimated useful life or the lease term, whichever is shorter. Maintenance and repairs are expensed as incurred.
See Note 2 of our Consolidated Financial  Statements for further  disclosure.

Goodwill: We estimate the fair value of our reporting units in accordance with SFAS No. 142, ‘‘Goodwill
and Other Tangible Assets’’, using the fair market value measurement requirement, rather than the undiscounted
cash  ﬂows  approach.  We  test  our  goodwill  for  impairment  on  an  annual  basis,  or  immediately  if  conditions
indicate  that  such  impairment  could  exist.  In  the  ﬁrst  quarter  of  ﬁscal  year  2003,  the  Company  recorded  an
impairment  from  the  implementation  of  SFAS  No.  142  as  a  $6.5  million  change  in  accounting  principle  based
upon our determination of the fair market value of the reporting units. The evaluation of our reporting units on a
fair  value  basis  indicated  that  no  additional  impairment  existed  as  of  March  26,  2005,  March  27,  2004,  and
March 31, 2003.

Deferred  Catalog  Costs: We  amortize  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, modify the period over which costs are recognized. We amortize the cost of each Master Catalog over
an  eighteen  month  period  and  amortize  the  cost  of  each  catalog  supplement  over  a  three  month  period.  Total
deferred catalog costs were $0.4 million  at  March 26, 2005  and  March 27, 2004.

Deferred Gain on TPG: As a result of certain post divestiture commitments, we are unable to recognize
the gain of $1.5 million on the divestiture of TPG, which took place in ﬁscal year 2002, until those commitments
expire  in ﬁscal year 2007. See Note 9 of  our Consolidated Financial  Statements for further disclosure.

Deferred  Taxes: We  account  for  certain  income  and  expense  items  differently  for  ﬁnancial  reporting
purposes than for income tax reporting purposes. Deferred taxes are provided in recognition of these temporary
differences. A valuation allowance on deferred tax assets is provided for items for which it is more likely than not
that  the  beneﬁt  of  such  items  will  not  be  realized,  in  accordance  with  the  provisions  of  SFAS  No.  109,
‘‘Accounting for Income Taxes’’. SFAS No. 109 requires an assessment of both positive and negative evidence
when  measuring  the  need  for  a  deferred  tax  valuation  allowance.  See  Note  5  of  our  Consolidated  Financial
Statements for further disclosure.

Stock Options: We follow the provisions of Accounting Practice Board (‘‘APB’’) 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 on exercise prices equal to the market value
of the underlying Common Stock at grant date. See Note 7 of our Consolidated Financial Statements for further
disclosure.

Off-Balance Sheet Arrangements: We do not maintain any off-balance sheet arrangements.

16

RESULTS OF OPERATIONS

The  following  table  sets  forth,  for  the  prior  three  ﬁscal  years,  the  components  of  our  Consolidated

Statements of Operations (calculated on  dollars  in thousands).

FY 2005

FY 2004

FY 2003

Gross Proﬁt Percentage:

Product Gross Proﬁt **************************************
Service Gross Proﬁt***************************************
Total Gross Proﬁt **************************************

23.7%
28.1%
25.1%

23.9%
27.5%
25.1%

26.9%
15.9%
23.3%

As a Percentage of Net Sales:

Product Sales ********************************************
Service Sales ********************************************
Net Sales *********************************************
Selling, Marketing, and Warehouse Expenses ******************
Administrative Expenses ***********************************
Total Operating Expenses ********************************
Operating Income ****************************************
Interest Expense******************************************
Gain on Extinguishment of Debt ****************************
Other Expense (Income) ***********************************
Total Other Expense (Income) ****************************
Income Before Income Taxes *******************************
Beneﬁt for Income Taxes **********************************

Income Before Cumulative Effect of a Change  in Accounting

Principle **********************************************
Cumulative Effect of a Change in Accounting Principle *********
Net Income (Loss)****************************************

67.1%
32.9%

66.4%
33.6%

67.1%
32.9%

100.0% 100.0% 100.0%

14.4%
9.1%

23.5%

1.6%
0.6%
—%
0.5%

1.1%

0.5%
—%

0.5%
—%

0.5%

16.0%
8.5%

24.5%

0.6%
0.8%
—%
(0.5)%

0.3%

0.3%
(0.4)%

14.5%
7.9%

22.4%

0.8%
1.1%
(2.8)%
0.1%

(1.6)%

2.4%
(0.7)%

0.7%
3.1%
—% (11.3)%

0.7%

(8.2)%

17

FISCAL YEAR ENDED MARCH 26, 2005  COMPARED TO FISCAL YEAR ENDED MARCH 27,  2004
(DOLLARS IN MILLIONS):

Sales:

Net Sales:

For the Years Ended
March 26, March 27,

2005

2004

Product *******************************************************
Service *******************************************************
Total *******************************************************

$37.1
18.2

$55.3

$35.4
17.9

$53.3

Net sales increased $2.0 million, or 3.8%  from ﬁscal  year 2004  to 2005.

Our product sales results, which accounted for 67.1% of our sales in ﬁscal year 2005 and 66.4% of our sales
in  ﬁscal  year  2004,  have  positively  reﬂected  the  impact  of  what  we  believe  is  an  improved  year  over  year
economy, and customer response to our marketing programs. Our ﬁscal years 2005 and 2004 product sales trend
in relation to prior ﬁscal year quarter comparisons,  is as  follows (calculated on dollars in millions):

Q3
Product Growth (Decline) ************ (2.9)% 6.5% 9.2% 11.3% 15.6% (7.0)% (22.4)% (15.8)%

Q1

Q2

Q4

Q4

Q1

Q3

FY 2005
Q2

FY  2004

The following table provides the percent of net sales and approximate gross proﬁt percentage for signiﬁcant

product  distribution channels (calculated  on  dollars  in thousands):

FY 2005

FY 2004

Percent of
Net Sales

Gross
Proﬁt %(1)

Percent of
Net Sales

Gross
Proﬁt %(1)

Core *************************************
Government *******************************
Other ************************************
Total*************************************

94.2%
2.3%
3.5%

100.0%

23.6%
2.4%
12.4%

22.7%

94.5%
2.6%
2.9%

100.0%

23.7%
0.0%
9.9%

22.7%

(1) Calculated at net sales less purchase costs.

Customer  product  orders  include  orders  for  products  that  we  routinely  stock  in  our  inventory,  as  well  as
customized  products  and  other  products  ordered  less  frequently,  which  we  do  not  stock.  Unshippable  product
orders  are  primarily  backorders,  but  also  include  products  that  are  requested  to  be  calibrated  in  our  calibration
laboratories prior to shipment, orders required to be shipped complete, orders required to be shipped at a future
date,  and  orders  on  credit  hold  and/or  awaiting  letters  of  credit.  Our  total  unshippable  orders  decreased  by
approximately  $0.4  million,  or  23.5%  from  ﬁscal  year  2004  to  2005.  We  believe  that  the  decrease  is  primarily
attributed to our suppliers shipping inventory to us on a more timely basis and improvement in inventory demand
planning. The following table reﬂects our historical trend of product orders that are unshippable at the end of each
ﬁscal quarter and the percentage of these  orders  that are  backorders (calculated on  dollars  in millions):

Total Unshippable Orders***********
% of Unshippable Orders that are

Backorders*********************

FY 2005

FY  2004

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

$1.3

$1.3

$1.5

$1.5

$1.7

$1.6

$1.4

$1.0

76.9% 76.9% 80.0% 80.2% 85.7% 82.5% 83.6% 83.8%

Calibration services sales increased $0.3 million, or 1.7%, from ﬁscal year 2004 to 2005. This increase, and
in  particular,  our  year  over  year  fourth  quarter  growth,  is  attributable  to  both  new  customer  acquisition  and
concerted customer service efforts to retain existing customers. Within any quarter, there is typically a netting of

18

new customers against existing customers whose calibrations may not repeat for any number of factors. Among
those factors are the timing of customer periodic calibrations on equipment as well as repair services, customer
capital  expenditure  budgets,  and  customer  outsourcing  decisions.  The  rate  of  change  in  our  2005  and  2004
calibration  services  sales  in  relation  to  the  prior  ﬁscal  year  quarter  is  as  follows  (calculated  on  dollars  in
millions):

Calibration Service Growth (Decline) ****

14.6% 0.0% (2.3)% (4.3)% (2.0)% (7.3)% (7.3)% (3.2)%

FY 2005

FY  2004

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Gross Proﬁt:

Product *********************************************************
Service *********************************************************
Total *********************************************************

For the Years Ended
March 26, March 27,

2005

$ 8.8
5.1

$13.9

2004

$ 8.5
4.9

$13.4

Gross proﬁt, as a percent of net sales, remained constant at 25.1% in ﬁscal year 2005 in comparison to ﬁscal
year 2004. Product gross proﬁt increased $0.3 million from the prior ﬁscal year to the current ﬁscal year, however
decreasing by 0.3 points. As is evidenced by the chart below, gross proﬁt ratios were impacted mid-ﬁscal year
2004  as  a  result  of  our  aggressive  targeting  of  new  channels  of  distribution  that  typically  do  not  support  the
margins of our core customer base and an increased level of allowances to stimulate product sales. In ﬁscal year
2005,  as  the  business  climate  improved,  we  targeted  a  reduction  in  those  allowances.  In  addition,  our  product
gross  proﬁt  ratio  to  sales  can  be  impacted  by  a  number  of  factors  that  can  impact  quarterly  and  annual
comparisons.  Among  those  factors  are  sales  to  certain  channels  that  do  not  support  the  margins  of  our  core
customer base, periodic rebates on purchases and cooperative advertising received from suppliers and reported as
a reduction of cost of sales in accordance with Emerging Issues Task Force (‘‘EITF’’) 02-16 (see Note 1 to our
Consolidated  Financial  Statements).  The  following  table  reﬂects  the  quarterly  historical  trend  of  our  product
gross proﬁt as a percent of net sales (calculated on  dollars in millions):

FY 2005

FY  2004

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Product GM %(1) *****************
Other Income (Cost) %(2) **********
Gross Proﬁt %********************

22.7% 23.7% 22.0% 21.8% 20.6% 20.7% 24.0% 25.3%
3.5% (0.5)% (0.3)% 0.7% 0.6% 0.8% 4.9% 1.0%
25.7% 23.2% 21.7% 22.5% 21.2% 21.5% 28.9% 26.3%

(1) Calculated at net sales less purchase costs.

(2) Includes  vendor  rebates,  cooperative  advertising  income,  freight  billed  to  customers,  freight  expenses,  and

direct shipping costs.

Calibration  service  gross  proﬁt  increased  $0.2  million,  or  0.6  points.  This  increase  is  a  result  of  a  modest
increase in service sales and improving laboratory efﬁciency. The following table reﬂects the quarterly historical
trend of our calibration service gross proﬁt as a percent of net sales (calculated on  dollars  in millions):

Calibration Service Gross Proﬁt *****

32.7% 28.6% 26.2% 25.0% 29.2% 26.2% 30.2% 23.9%

FY 2005

FY  2004

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

19

Operating Expenses:

Operating Expenses:

For the Years Ended
March 26, March 27,

2005

2004

Selling, Marketing, and Warehouse*********************************
Administrative**************************************************
Total *******************************************************

$ 7.9
5.0

$12.9

$ 8.5
4.6

$13.1

Operating  expenses  decreased  $0.2  million,  or  1.5%,  from  ﬁscal  year  2004  to  2005.  In  the  current  ﬁscal
year,  selling,  marketing,  and  warehouse  expenses  decreased  $0.6  million  attributed  to  a  reduction  in  selling
payroll  expenses  and  related  costs  and  more  efﬁcient  product  marketing  initiatives.  Administrative  expenses
increased $0.4 primarily resulting from  the  issuance of  stock  to certain ofﬁcers  and other  compensation costs.

Other Expense:

Other Expense:

For the Years Ended
March 26, March 27,

2005

2004

Interest Expense ************************************************
Other Expense (Income) *****************************************
Total *******************************************************

$0.4
0.3

$0.7

$ 0.4
(0.3)

$ 0.1

Interest expense remained constant with the prior year as debt levels and interest rates remained relatively
unchanged.  The  other  expense  increase  in  ﬁscal  year  2005  was  primarily  attributable  to  a  net  loss  in  Canadian
currency transactions in comparison to net  gains  in ﬁscal  year 2004.

Taxes:

Beneﬁt for Income Taxes *******************************************

For the Years Ended
March 26, March 27,

2005

$—

2004

$(0.2)

We have not recognized any provision for income taxes in ﬁscal year 2005 as pretax income was offset by a
reduction  in  our  deferred  tax  asset  valuation  reserve.  When  calculating  income  tax  expense  or  beneﬁt,  we
recognize valuation allowances for deferred tax assets, which may not be realized using a ‘‘more likely than not’’
approach, which is more fully described in Note  5 to  our  Consolidated  Financial Statements.

The  beneﬁt  for  income  taxes  in  ﬁscal  year  2004  recognizes  the  beneﬁt  derived  from  the  utilization  of  net

operating loss and foreign tax credit carry  backs.

20

FISCAL YEAR ENDED MARCH 27, 2004  COMPARED TO FISCAL YEAR ENDED MARCH 31,  2003
(DOLLARS IN MILLIONS):

Sales:

Net Sales:

For the Years Ended
March 27, March 31,

2004

2003

Product *******************************************************
Service *******************************************************
Total *******************************************************

$35.4
17.9

$53.3

$38.4
18.8

$57.2

Net sales decreased $3.9 million, or 6.8%,  from ﬁscal  year 2003  to 2004.

Our product sales results, which accounted for 66.4% of our sales in ﬁscal year 2004 and 67.1% of our sales
in  ﬁscal  year  2003,  have  positively  reﬂected  the  impact  of  what  we  believe  is  an  improved  economic  outlook,
targeted  sales  efforts  in  new  distribution  channels,  and  customer  response  to  our  marketing  programs.  Our
product sales have improved (declined) in relation to prior ﬁscal year quarter comparisons, as follows (calculated
on dollars in millions):

FY 2004

Q4

Q3

Q2

Q1

Product Growth (Decline) ***********************************

15.6% (7.0)% (22.4)% (15.8)%

The following table provides the percent of net sales and approximate gross proﬁt percentage for signiﬁcant

product  distribution channels (calculated  on  dollars in thousands):

FY 2004

FY 2003

Percent of
Net Sales

Gross
Proﬁt %(1)

Percent of
Net Sales

Gross
Proﬁt %(1)

Core **************************************
Government ********************************
Other *************************************
Total**************************************

94.5%
2.6%
2.9%

100.0%

23.7%
0.0%
9.9%

22.7%

98.9%
0.0%
1.1%

100.0%

27.4%
0.0%
14.8%

27.2%

(1) Calculated at net sales less purchase costs.

Customer  product  orders  include  orders  for  products  that  we  routinely  stock  in  our  inventory,  as  well  as,
customized  products  and  other  products  ordered  less  frequently,  which  we  do  not  stock.  Unshippable  product
orders  are  primarily  backorders,  but  also  include  products  that  are  requested  to  be  calibrated  in  our  calibration
laboratories prior to shipment, orders required to be shipped complete, orders required to be shipped at a future
date,  and  orders  on  credit  hold  and/or  awaiting  letters  of  credit.  Our  total  unshippable  orders  increased  by
approximately  $0.3  million,  or  21.4%  from  ﬁscal  year  2003  to  2004.  We  believe  that  the  increase  is  primarily
attributed to the increase in sales order volume in the ﬁscal fourth quarter and product order mix. The following
table reﬂects our historical trend of product orders that are unshippable at the end of each ﬁscal quarter and the
percentage of these orders that are backorders (calculated on  dollars  in millions):

Total Unshippable Orders***********
% of Unshippable Orders that are

Backorders*********************

FY 2004

FY  2003

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

$1.7

$1.6

$1.4

$1.0

$1.4

$1.0

$1.5

$1.0

85.7% 82.5% 83.6% 83.8% 76.9% 82.0% 76.7% 78.0%

Calibration  services  sales  declined  $0.9  million,  or  4.8%,  from  ﬁscal  year  2003  to  2004.  The  decline  in
calibration  service  sales  is  primarily  attributable  to  calibrations  previously  conducted  at  three  customer  on  site

21

(‘‘on-sites’’)  locations  that  were  not  renewed  by  these  customers.  We  believe  that  such  non-renewals  resulted
from, among other things, factors, such as the adverse economic circumstances in one such customers’ respective
industry (telecommunications) and corporate sourcing decisions. As reported, our calibration service sales have
declined in relation to the prior ﬁscal year quarter as follows  (calculated on dollars  in millions):

FY 2004

Q4

Q3

Q2

Q1

Calibration Service Growth (Decline) ****************************

(2.0)% (7.3)% (7.3)% (3.2)%

Excluding  these  on-sites,  and  inclusive  of  the  consolidation  of  four  calibration  laboratories  into  existing
facilities in ﬁscal year 2003, our calibration service sales increased 3.6% from ﬁscal year 2003 to 2004 and have
improved in relation to the prior ﬁscal year quarter as follows  (calculated on dollars in millions):

Calibration Service Growth ***************************************

3.7% 3.3% 1.5% 2.8%

FY 2004

Q4

Q3

Q2

Q1

Gross Proﬁt:

Gross Proﬁt:

For the Years Ended
March 27, March 31,

2004

2003

Product *******************************************************
Service *******************************************************
Total *******************************************************

$ 8.5
4.9

$13.4

$10.3
3.0

$13.3

Gross proﬁt increased as a percent of net sales from 23.3% in ﬁscal year 2003 to 25.1% in ﬁscal year 2004.
This  increase  is  solely  attributable  to  the  signiﬁcant  improvement  in  calibration  service  gross  proﬁt,  and  was
constrained by the reduction in product gross proﬁt.

Product gross proﬁt decreased $1.8 million from the prior ﬁscal year to the current ﬁscal year, or 2.8 points.
Contributing factors to this 2.8 point decrease included our aggressive targeting of new channels of distribution
that  typically  do  not  support  the  margins  of  our  core  customer  base  and  an  increased  level  of  allowances  to
stimulate product sales. Our product gross proﬁt ratio to sales can be impacted by a number of factors that can
impact quarterly and annual comparisons. Among those factors are sales to certain channels that do not support
the margins of our core customer base, periodic rebates on purchases and cooperative advertising received from
suppliers  and  reported  as  a  reduction  of  cost  of  sales  in  accordance  with  EITF  02-16  (see  Note  1  to  our
Consolidated  Financial  Statements).  The  following  table  reﬂects  the  quarterly  historical  trend  of  our  product
gross proﬁt as a percent of net sales (calculated on  dollars in millions):

FY 2004

FY  2003

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Product Gross Proﬁt ***************

21.2% 21.5% 28.9% 26.3% 27.8% 27.0% 26.5% 26.3%

Calibration service gross proﬁt increased $1.9 million, or 11.4 points. This increase is a direct result of the
laboratory  consolidation  implemented  in  ﬁscal  year  2003  and  improving  laboratory  efﬁciency.  The  following
table  reﬂects  the  quarterly  historical  trend  of  our  calibration  service  gross  proﬁt  as  a  percent  of  net  sales
(calculated on dollars in millions):

Calibration Service Gross Proﬁt *****

29.2% 26.2% 30.2% 23.9% 18.4% 15.6% 15.2% 14.9%

FY 2004

FY  2003

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

22

Operating Expenses:

Operating Expenses:

For the Years Ended
March 27, March 31,

2004

2003

Selling, Marketing, and Warehouse *********************************
Administrative **************************************************
Total ********************************************************

$ 8.5
4.6

$13.1

$ 8.3
4.5

$12.8

Operating expenses increased $0.3 million, or 2.3%, from ﬁscal year 2003 to 2004. Included in the current
ﬁscal year’s operating expenses are $0.1 million of severance costs and a charge of $0.2 million to settle, rather
than  further  litigate,  a  lawsuit  brought  against  us  by  our  former  chief  ﬁnancial  ofﬁcer.  In  the  prior  ﬁscal  year,
operating expenses included $0.3 million in severance costs incurred as a result of certain employee terminations.

Other Expense (Income):

For the Years Ended
March 27, March 31,

2004

2003

Other Expense (Income):

Interest Expense *************************************************
Gain on Extinguishment of Debt ***********************************
Other (Income) Expense ******************************************
Total ********************************************************

$ 0.4
—
(0.3)

$ 0.1

$ 0.6
(1.6)
0.1

$(0.9)

Other  income  recorded  in  the  prior  ﬁscal  year  was  primarily  the  net  gain  recognized  as  a  result  of  the
restructuring  of  our  senior  debt  and  execution  of  our  Revolving  Credit  and  Loan  Agreement  (the  ‘‘Credit
Agreement’’) in November 2002.

Interest expense in ﬁscal year 2004 was reduced 33.3% from the prior ﬁscal year as a result of lower debt

levels.

Taxes:

Beneﬁt for Income Taxes*******************************************

For the Years Ended
March 27, March 31,

2004

$(0.2)

2003

$(0.4)

The  beneﬁt  for  income  taxes  recognizes  the  beneﬁt  derived  from  the  utilization  of  net  operating  loss  and
foreign  tax  credit  carry  backs.  We  have  not  recognized  any  tax  expense  on  income,  net  of  certain  small  state
payments. When calculating income tax expense or beneﬁt, we recognize valuation allowances for deferred tax
assets,  which  may  not  be  realized  using  a  ‘‘more  likely  than  not’’  approach,  which  is  more  fully  described  in
Note 5 to our Consolidated Financial Statements.

Cumulative  Effect  of  a  Change  in  Accounting  Principle:

In  ﬁscal  year  2003  we  recorded  a  goodwill

impairment charge of $6.5 million upon  the adoption of SFAS No. 142.

23

LIQUIDITY AND CAPITAL RESOURCES

Cash  Flows. The  following  table  is  a  summary  of  our  Consolidated  Statements  of  Cash  Flows  (in

thousands):

Cash Provided by (Used in):

FY 2005

FY 2004

Operating Activities************************************************
Investing Activities ************************************************
Financing Activities************************************************

$

(6)
(866)
268

$ 208
(459)
516

Operating  Activities. Cash  used  in  operating  activities  was  neutral  for  ﬁscal  year  2005  and  decreased
$0.2 million when compared to the $0.2 million of cash provided by operating activities in ﬁscal year 2004. This
change was primarily comprised of a $0.6 million decrease in cash provided by working capital, an increase of
$0.5  million  in  non-cash  charges  and  a  decrease  in  net  income  of  $0.1  million.  Signiﬁcant  working  capital
ﬂuctuations were as follows:

) Inventories/Accounts Payable: Our inventories increased $1.3 million more in ﬁscal year 2005 than in
ﬁscal year 2004 as our fourth quarter product sales were somewhat below our expectations. A relatively
modest increase in accounts payable when compared to the prior year resulted in a signiﬁcant decline in
our payables to inventory ratio, as the following  table illustrates (dollars in  millions):

Inventory, net *************************************
Accounts Payable**********************************
Payables/Inventory Ratio****************************

$ 5.9
$ 4.5
0.76

$ 3.7
$ 4.1
1.11

$ 2.8
$ 3.7
1.32

$ 3.8
$ 6.3
1.66

FY 2005

FY 2004

FY 2003

FY 2002

) Receivables: Our accounts receivable increased less from ﬁscal year end 2004 to 2005 when compared
to  the  increase  from  ﬁscal  year  end  2003  to  2004,  contributing  $0.6  million  to  working  capital.  Our
collections  of  outstanding  accounts  receivable,  reﬂected  in  our  days  sales  outstanding,  as  the  following
table illustrates (dollars in millions) is excellent.

Net Sales, for the last two ﬁscal months ************************
Accounts Receivable, net ************************************
Days Sales Outstanding (based on 60 days) *********************

$11.9
$ 8.1
41

$11.9
$ 8.0
40

$9.2
$6.9
45

FY 2005

FY 2004

FY 2003

) A reduction in income tax refunds receivable as refunds were received.

) An increase in accrued compensation costs.

Investing Activities. The $0.9 million and $0.5 million of cash used in investing activities in ﬁscal years

2005 and 2004, respectively, resulted from  capital expenditures,  primarily for  our calibration laboratories.

Financing Activities. Our debt has remained relatively constant from March 27, 2004 to March 26, 2005,
as  the  table  below  illustrates  (in  millions).  However,  in  conjunction  with  our  third  amendment  to  our  Credit
Agreement, we entered into a new term loan agreement, resulting in a reduction in our line of credit. See Note 4
to our Consolidated Financial Statements for  further information regarding  our debt.

March 26, March 27, March 31,
2004

2005

2003

Term Debt ********************************************
Revolving Line of Credit*********************************
Capital Lease Obligations ********************************

$1.8
$5.5
$0.1

$7.4

$0.7
$6.4
$0.2

$7.3

$1.3
$5.2
$ —

$6.5

24

Reﬁnancing of Debt.

Description. On November 13, 2002, we entered into a Credit Agreement with GMAC Business Credit,
LCC  (‘‘GMAC’’).  The  Credit  Agreement  consisted  of  a  term  loan,  a  revolving  line  of  credit  (‘‘LOC’’),  and
certain material terms of which are as set  forth below.

The  Credit  Agreement  was  amended  on  April  11,  2003  to  address  certain  non-material  post  closing

conditions.

The Credit Agreement was further amended on July 22, 2004 (‘‘Second Amendment’’) to waive compliance
with our EBITDA covenant for the ﬁrst quarter of ﬁscal year 2005, permanently waive a requirement relating to
an  inactive  subsidiary  that  we  had  committed  to  dissolve  by  a  speciﬁc  date  (that  has  been  subsequently
dissolved), and increase the Credit Agreement restriction  on our Master Catalog spending.

We  amended  the  Credit  Agreement  again  on  November  1,  2004  (‘‘Third  Amendment’’).  The  Third
Amendment  consists  of  two  term  notes,  a  LOC,  a  capital  expenditure  loan  if  certain  conditions  are  met,  and
certain material terms of which are as set forth below. The Third Amendment also waived compliance with our
EBITDA (earnings before interest, income taxes, depreciation and amortization) covenant for the second quarter
of ﬁscal year 2005 and extended the Credit Agreement expiration from November 13, 2005 to October 31, 2007.

LOC. The Credit Agreement requires both a subjective acceleration clause and a requirement to maintain
a lock-box arrangement. These requirements resulted in a short-term classiﬁcation of the LOC in accordance with
EITF No. 95-22, ‘‘Balance Sheet Classiﬁcation of Borrowings Outstanding under Revolving Credit Agreements
that include both a Subjective Acceleration Clause and  a  Lock-Box Arrangement.’’

Covenants. The table below indicates our excess (shortage) EBITDA percentage for the periods indicated.
The Second and Third Amendment to the Credit Agreement waived compliance with the EBITDA covenant for
the ﬁrst and second quarters of ﬁscal year 2005, respectively. The Third Amendment also reduced the EBITDA
requirement for the third and fourth quarters of ﬁscal year 2005. We met our EBITDA covenant for the fourth
quarter of ﬁscal year 2005 and expect to  meet the covenant on an on-going basis.

FY 2005
Q2

Q3

Q4

Q1

Q4

FY 2004
Q2
Q3

Q1

% Excess (Shortage) EBITDA *****************

22% 17% (20)% (16)% 3% 12% 12% 23%

Other  Terms. We  have  pledged  certain  property  and  ﬁxtures  in  favor  of  GMAC,  including  inventory,

equipment, and accounts receivable as collateral security for the loans  made under the Credit Agreement.

See Note 4 of our Consolidated Financial Statements for more information on our debt. See Item 7a for our

discussion of interest rates on our debt.

25

Contractual  Obligations  and  Commercial  Commitments. The  schedule  below  contains  aggregated
information  about  contractual  obligations  and  commercial  commitments  that  we  must  make  future  payments
under  for  contracts  such  as  debt  and  lease  agreements,  purchase  arrangements,  and  various  operating  require-
ments (in millions):

Payments Due By Period

Less Than
1 Year

1-3 Years

3-5 Years

More Than
5 Years

Term Loan ***************************
Revolving Line of Credit ***************
Operating Leases **********************
Capital Leases ************************
Unconditional Purchase Obligations (1)****
Total Contractual Cash Obligations *****

$ 0.8
5.5
0.8
0.1
12.9

$20.1

$ 1.0
—
1.1
0.1
10.3

$12.5

$ —
—
0.3
—

$0.3

$—
—
—
—
—

$—

Total

$ 1.8
5.5
2.2
0.2
23.2

$32.9

(1) Relates  to  minimum  inventory  purchase  commitment.  Commitments  are  an  annual  dollar  amount  based  on
calendar years. This table estimates the commitment amount per ﬁscal year. See ‘‘Distribution Agreement’’
above  in Item 1 for further information.

NEW ACCOUNTING PRONOUNCEMENTS

FSP 109-2:

In October 2004, the Financial Accounting Standards Board (the ‘‘FASB’’) issued FSP 109-2,
‘‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation  Act  of  2004’’.  FSP  No.  109-2  provides  guidance  under  SFAS  109,  with  respect  to  recording  the
potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the ‘‘Jobs Act’’) on
enterprises’  income  tax  expense  and  deferred  tax  liability.  FSP  109-2  states  that  an  enterprise  is  allowed  time
beyond  the  ﬁnancial  reporting  period  of  enactment  to  evaluate  the  effect  of  the  Jobs  Act  on  its  plan  for
reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. FSP 109-2 has no effect on
the Company’s consolidated ﬁnancial statements.

SFAS 151:

In November 2004, FASB issued SFAS No. 151, ‘‘Inventory Costs — an amendment of ARB
No.  43’’.  This  Statement  amends  the  guidance  in  ARB  No.  43,  Chapter  4,  ‘‘Inventory  Pricing,’’  to  clarify  the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph  5  of  ARB  43,  Chapter  4,  previously  stated  that  ‘‘...  under  some  circumstances,  items  such  as  idle
facility  expense,  excessive  spoilage,  double  freight,  and  rehandling  costs  may  be  so  abnormal  as  to  require
treatment as current period charges... .’’ This Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of ‘‘so abnormal.’’ This Statement is the result of a broader
effort  by  the  FASB  to  improve  the  comparability  of  cross-border  ﬁnancial  reporting  by  working  with  the
International  Accounting  Standards  Board  toward  development  of  a  single  set  of  high-quality  accounting
standards. This clariﬁcation has no effect on the Company’s  consolidated ﬁnancial  statements.

SFAS  123R: On  December  16,  2004,  the  FASB  issued  SFAS  No.  123  (revised  2004),  ‘‘Share-Based
Payment’’. SFAS 123R replaces SFAS 123 and supersedes APB No. 25. SFAS 123, as originally issued in 1995,
established  as  preferable  a  fair-value-based  method  of  accounting  for  share-based  payment  transactions  with
employees. However, SFAS 123 permitted entities the option of continuing to apply the guidance in APB No. 25,
as  long  as  the  footnotes  to  ﬁnancial  statements  disclosed  what  net  income  would  have  been  had  the  preferable
fair-value-based method been used. SFAS 123R covers a wide range of share-based compensation arrangements
including  share  options,  restricted  share  plans,  performance-based  awards,  share  appreciation  rights,  and
employee  share  purchase  plans.  SFAS  123R  requires  the  cost  of  all  share-based  payment  transactions  be
recognized in the ﬁnancial statements, establishes fair value as the measurement objective and requires entities to
apply a fair-value-based measurement method in accounting for share-based payment transactions. SFAS 123R
applies  to  all  awards  granted,  modiﬁed,  repurchased  or  cancelled  after  July  1,  2005,  and  unvested  portions  of
previously issued and outstanding awards.

26

The SEC amended the effective date of SFAS 123R with a new rule issued on April 14, 2005 to amend the
compliance date for SFAS 123R that allows companies to implement SFAS 123R at the beginning of their next
ﬁscal  year,  instead  of  the  next  reporting  period,  that  begins  after  June  15,  2005,  although  early  adoption  is
allowed. SFAS 123R permits companies to adopt its requirements using either a ‘‘modiﬁed prospective’’ method,
or  a  ‘‘modiﬁed  retrospective’’  method.  Under  the  ‘‘modiﬁed  prospective’’  method,  compensation  cost  is
recognized in the ﬁnancial statements beginning with the effective date, based on the requirements of SFAS 123R
for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested
awards  granted  prior  to  the  effective  date  of  SFAS  123R.  Under  the  ‘‘modiﬁed  retrospective’’  method,  the
requirements  are  the  same  as  under  the  ‘‘modiﬁed  prospective’’  method,  but  also  permits  entities  to  restate
ﬁnancial statements of previous periods based on proforma  disclosures  made in accordance with  SFAS 123.

The Company currently expects to adopt SFAS 123R effective March 26, 2006; however, the Company has
not yet determined which of the aforementioned adoption methods it will use. The Company has not changed any
of the stock compensation plans as a result of the impending adoption of SFAS 123R but maintains the right to
amend, suspend or terminate any plan at  any time.

SFAS 153: On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an  amendment  of  APB  Opinion  No.  29,  Accounting  for  Nonmonetary  Transactions.  The  amendments  made  by
SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair
value  of  the  assets  exchanged.  Further,  the  amendments  eliminate  the  narrow  exception  for  nonmonetary
exchanges  of  similar  productive  assets  and  replace  it  with  a  broader  exception  for  exchanges  of  nonmonetary
assets  that  do  not  have  commercial  substance.  Previously,  Opinion  29  required  that  the  accounting  for  an
exchange  of  a  productive  asset  for  a  similar  productive  asset  or  an  equivalent  interest  in  the  same  or  similar
productive asset should be based on the recorded amount of the asset relinquished. The Statement is effective for
nonmonetary asset exchanges occurring in ﬁscal periods beginning after June 15, 2005. The Company currently
expects to adopt SFAS 153 effective on July 1, 2005 and does not expect that the adoption will have an effect on
its consolidated ﬁnancial statements.

EMPLOYEE STOCK OPTIONS

We  have  a  stock  option  program  that  is  a  broad  based,  long-term  retention  program  intended  to  attract,
incent, and retain key employees, thereby aligning stockholder and employee interests. In granting options, we
are cognizant of balancing the plan’s objectives with potential incremental dilution. Stock options are currently
outstanding  under  two  plans.  Under  these  plans,  participants  may  be  granted  options  to  purchase  shares  of  our
Common Stock at the fair market value at  the  time  of the  grant.

The  ﬁrst  plan,  the  Transcat,  Inc.  Amended  and  Restated  Stock  Option  Plan,  had  been  approved  by
shareholders and terminated in the ﬁrst quarter of ﬁscal year 2004. Options granted under that plan expired no
later than ﬁve years from the date of the grant and vest within four years, in equal increments. For the ﬁrst four
years  after  the  grant  date,  options  are  exercisable  only  if  our  stock  price  attains  a  speciﬁc  market  value  for  a
minimum speciﬁed number of trading days and certain stock ownership requirements are met. After four years,
the stock price and duration requirements  cease. No options were granted in  ﬁscal year 2004 under this  plan.

The second plan, the Transcat, Inc. 2003 Incentive Plan, was approved by shareholders in August 2003 and
will terminate in June 2013. Options granted under this plan expire no later than ten years from the date of the
grant  and  vest  equally  over  a  three-year  period.  This  plan  also  provides  for  the  granting  of  stock  awards  and
performance awards.

Options granted to employees, including ofﬁcers are summarized for the ﬁscal years 2001 to 2005 as follows

(shares in thousands):

Total Options Granted *********************
Less: Options Forfeited ********************
Net Options Granted ********************

86
(59)

27

147
(189)

(42)

502
(473)

29

55
(587)

(532)

317
(354)

(37)

FY 2005

FY 2004

FY 2003

FY 2002

FY 2001

27

The following table provides additional information regarding stock options, and options granted and/or held

by our  Corporate Ofﬁcers:

FY 2005

FY 2004

FY 2003

FY 2002

FY 2001

Total Options Granted as a % of Total  Shares

Outstanding ***************************

Total Options Outstanding as a % of Total

Shares Outstanding *********************

Options Granted to Corporate Ofﬁcers as a %

of Total Options Granted*****************

Options Granted to Corporate Ofﬁcers as a %

of Total Shares Outstanding **************
Cumulative Options Held by Corporate  Ofﬁcers
as a % of Total Options Outstanding *******
Cumulative Options Held by Corporate  Ofﬁcers
as a % of Total Shares Outstanding ********

1.3%

2.4%

8.0%

0.9%

5.1%

10.8%

14.1%

14.6%

14.2%

23.0%

34.9%

34.0%

63.7%

0.0%

6.3%

0.5%

0.8%

5.1%

0.0%

0.3%

55.2%

44.5%

42.7%

62.4%

74.5%

5.9%

6.3%

6.2%

8.9%

17.1%

In-the-money  and  out-of-the-money  (have  an  exercise  price  equal  to  or  above  $3.80  per  share,  the  market
price  of  Transcat  Common  Stock  at  March  26,  2005)  option  information  as  of  March  26,  2005  is  as  follows
(shares in thousands):

Exercisable
Weighted
Average Weighted
Remaining
Average
Exercise Number Contractual
Price Per
Share

Unexercisable
Weighted
Average Weighted
Remaining
Average
Exercise Number Contractual
Price  Per
Share

Total
Weighted
Average Weighted
Average
Exercise
Price  Per
Share

Life (in
Years)

Life (in
Years)

Life (in
Years)

of
Shares

of
Shares

Remaining
Number Contractual

of
Shares

In-the-Money *****
315
Out-of-the-Money** —

Total **********

315

2.6
—

2.6

$1.51
$ —

$1.51

373
—

373

5.2
—

5.2

$1.77
$ —

$1.77

688
—

688

4.0
—

4.0

$1.65
$ —

$1.65

Options granted to our Corporate Ofﬁcers as a group during ﬁscal year 2005 are as follows (in thousands,

except per share amounts):

Number of Securities
Underlying Option
Grants

% of Total
Options Granted
to Employees

Range of
Exercise  Price
Per Share

Expiration
Date

Potential Realization
Value at Assumed
Rate of Stock
Price Appreciation
For Option Term(1)
25%

10%

30

34.9%

$2.89

2014

$97

$261

(1) Represents  gains  that  could  accrue  for  these  options,  assuming  that  the  market  price  of  Transcat  stock
appreciates  over  a  5  year  period  at  annualized  rates  of  10%  and  25%.  If  the  stock  price  does  not  increase
above  the exercise price, the realized value of these options  would be zero.

Our  Corporate  Ofﬁcers  did  not  exercise  any  options  during  ﬁscal  year  2005.  The  options  held  by  these

ofﬁcers as a group as of March 26, 2005 are as  follows (in  thousands):

Number of Shares
Underlying
Unexercised Options

Exercisable

Unexercisable

197

223

Values  of Unexercised
In-the-Money Options(2)

Exercisable

Unexercisable

$501

$532

(2) These  amounts  represent  the  difference  between  the  exercise  price  and  $3.80,  the  market  price  of  our

Common Stock at March 26, 2005 for all in-the-money  options held  by the listed ofﬁcers.

28

All  stock  option  grants  are  reviewed  and  approved  by  the  Compensation  Committee  of  the  Board  of
Directors. All members of the Compensation Committee are independent directors, as deﬁned in the applicable
rules for  issuers traded on The NASDAQ Stock Market.

For additional information regarding stock option plan activity for ﬁscal years 2005, 2004, and 2003, see the

reconciliation of options outstanding in  Note  7 of our Consolidated  Financial Statements.

For  purposes  of  the  reporting  requirements  of  Section  16  of  the  Securities  Exchange  Act  of  1934,  as

amended, our CEO and CFO are considered our only  reporting persons.

EMPLOYEE STOCK PURCHASE PLAN

The  Transcat,  Inc.  Employees’  Stock  Purchase  Plan  (‘‘Plan’’)  has  up  to  200,000  shares  of  our  Common
Stock for issuance. Under the Plan, eligible employees may purchase stock at 85% of the fair market value of our
Common  Stock  on  the  Investment  Date,  which  is  the  second  to  last  business  day  of  each  calendar  month.
Purchases  are  limited  under  certain  circumstances  to  maintain  Plan  conformance  to  various  regulations.  Plan
participation was approximately 18% of total employees, including those ineligible, during ﬁscal year 2005 and
19% and 22% during ﬁscal years 2004 and  2003, respectively. Shares purchased  under  the  Plan were:

Shares Purchased *******************

12,108

12,392

25,425

FY 2005

FY 2004

FY 2003

OUTLOOK

Fiscal  year  2006  should  continue  the  positive  growth  experienced  in  the  last  half  of  ﬁscal  year  2005.
Revenue growth should be in the high single digits, with gross margin improvement driven by increased volume.
Operating  expenses  are  targeted  to  grow  in  line  with  sales.  Increases  are  planned  in  the  following  areas:
marketing for prospecting and promotion; employee training on new products; customer satisfaction surveys; and
infrastructure investments, mainly information technology.

Operating earnings are targeted to increase as a result of gross margin improvement and should increase as a
percentage  of  sales.  Manpower  increases  and  capital  expenditures  are  devoted  primarily  to  calibration  services
and are tied to increased volume or replacement/improvement of  equipment.

Distribution products should grow in the low single digits in a stable economy. Our growth in any quarter
could be higher as a result of our sales of new product lines added in late ﬁscal year 2005 and early ﬁscal year
2006.

Calibration services revenues should grow in the high single digits as more companies outsource their total
calibration management to Transcat. Growth in any quarter could be higher or lower based on the timing and size
of the new business.

As  previously  disclosed,  we  have  had  a  valuation  allowance  on  our  net  deferred  tax  assets  providing  for
items for which it is more likely than not that the beneﬁt of such items will not be realized, in accordance with the
provisions of SFAS No. 109. SFAS No. 109 requires an assessment of both positive and negative evidence when
measuring the need for a deferred tax valuation allowance. The existence of cumulative losses in the most recent
three-year ﬁscal period ending March 26, 2005 is sufﬁcient negative evidence to maintain the valuation allowance
under the provisions of SFAS No. 109. Our results over the most recent three-year period were heavily affected
by  such  charges  as:  severance,  restructuring,  litigation,  and  directors’  compensation  expenses.  Although  we
believe that the Company today is much stronger, more proﬁtable, and focused on operating a sound, proﬁtable
business  model,  we  must  maintain  a  valuation  allowance  until  sufﬁcient  positive  evidence  exists  to  support  its
reduction or reversal.

29

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK

INTEREST RATES

Our exposure to changes in interest rates results from borrowing activities. In the event interest rates were to
move by 1%, our yearly interest expense would increase or decrease by approximately $0.1 million assuming our
average-borrowing  levels  remained  constant.  On  March  26,  2005  and  March  27,  2004,  we  had  no  hedging
arrangements in place to limit our exposure  to upward movements in interest rates.

Under the Third Amendment described in Note 4 of our Consolidated Financial Statements, interest on the
term  loans  and  LOC  were  ﬁxed  at  Tier  2  (see  chart  below)  as  of  March  2005.  The  prime  rate  and  the  30-day
London Interbank Offered Rate (‘‘LIBOR’’) as of March 26, 2005 were 5.75% and 2.72%, respectively. Interest
on the term loans and LOC after March 2005, is adjusted on a quarterly basis based upon our calculated Fixed
Charge Coverage Ratio, as deﬁned in the Third Amendment,  as follows:

Tier

Fixed Charge
Coverage Ratio

Term Loan A

Term Loan B

LOC

1

2

3

1.249 or less

(a) Prime Rate  plus  .50% or
(b) LIBOR plus 3.25%

Prime Rate  plus .75% (a) Prime Rate  plus 0% or

(b) LIBOR plus  2.75%

1.25 to 1.49

(a) Prime Rate plus  .25% or
(b) LIBOR plus 3.00%

Prime Rate  plus .50% (a) Prime Rate  plus 0% or

(b) LIBOR plus  2.50%

1.50 or greater

(a) Prime Rate  plus 0% or
(b) LIBOR plus 2.75%

Prime Rate plus .25% (a) Prime Rate  plus 0% or

(b) LIBOR plus  2.25%

Our interest rate for the ﬁrst quarter of ﬁscal year 2006  will be at Tier 3.

FOREIGN CURRENCY

Approximately 91% of our sales were denominated in United States dollars with the remainder denominated
in Canadian dollars for the three months and twelve months ended March 26, 2005. A 10% change in the value of
the Canadian dollar to the United States dollar would impact our revenues by approximately 1%. We monitor the
relationship between the United States and Canadian currencies on a continuous basis and adjust sales prices for
products and services sold in Canadian dollars as we believe to be appropriate. On March 26, 2005 and March 27,
2004, we had  no hedging arrangements in place to limit our exposure to  foreign currency ﬂuctuations.

RISK FACTORS

You should consider carefully the following risks and all other information included in this Form 10-K. The
risks  and  uncertainties  described  below  and  elsewhere  in  this  Form  10-K  are  not  the  only  ones  facing  our
business.  If  any  of  the  following  risks  actually  occur,  our  business,  ﬁnancial  condition  or  results  of  operations
would likely suffer. In that case, the trading price of our common stock could fall and you could lose all or part of
your investment.

General Economic Conditions. The electronic instrumentation distribution industry is affected by changes
in economic conditions, which are outside our control. We cannot assure you that economic slowdowns, adverse
economic conditions or cyclical trends in certain customer markets will not have a material adverse effect on our
operating results, ﬁnancial condition, or  our ability to meet our commitments.

Dependence  on  Manufacturers. A  signiﬁcant  amount  of  our  inventory  purchases  are  made  from  one
vendor group. Our reliance on this vendor group leaves us vulnerable to having an inadequate supply of required
products,  price  increases,  late  deliveries,  and  poor  product  quality.  Like  other  distributors  in  our  industry,  we
occasionally experience supply shortages and are unable to purchase our desired volume of products. If we are
unable  to  enter  into  and  maintain  satisfactory  distribution  arrangements  with  leading  manufacturers,  if  we  are
unable to maintain an adequate supply of products, or if manufacturers do not regularly invest in, introduce to us,
and/or make available to us for distribution new products, our sales could suffer considerably. Finally, we cannot
provide any assurance that particular products, or product lines, will be available to us, or available in quantities

30

sufﬁcient to meet customer demand. This is of particular signiﬁcance to our business because the products we sell
are often only available from one source. Any limits to product access could materially and adversely affect our
business.

Indebtedness.

In  November  2004,  we  entered  a  third  amendment  to  our  existing  agreement  with  our
secured credit facility. This amendment resulted in two additional term loans, in addition to our revolving line of
credit. As of March 26, 2005, we owed $7.3 million to our secured creditor. We are required to meet ﬁnancial
tests on a quarterly basis and comply with other covenants customary in secured ﬁnancings. Although we believe
that  we  will  continue  to  be  in  compliance  with  such  covenants,  if  we  do  not  remain  in  compliance  with  such
covenants, our lenders may demand immediate repayment of amounts outstanding. Changes in interest rates may
have  a  signiﬁcant  effect  on  our  monthly  payment  obligations  and  operating  results.  Furthermore,  we  are
dependent  on  credit  from  manufacturers  of  our  products  to  fund  our  inventory  purchases.  If  our  debt  burden
increases  to  high  levels,  such  manufacturers  may  restrict  our  credit.  Our  cash  requirements  will  depend  on
numerous factors, including the rate of growth of our sales, the timing and levels of products purchased, payment
terms, and credit limits from manufacturers, the timing and level of our accounts receivable collections and our
ability to manage our business proﬁtably. Our ability to satisfy our existing obligations, whether or not under our
secured credit facility, will depend upon our future operating performance, which may be impacted by prevailing
economic conditions and ﬁnancial, business, and other factors described in this Form 10-K, many of which are
beyond  our control.

If Existing Shareholders Sell Large Numbers Of Shares Of Our Common Stock, Our Stock Price Could
Decline. The market price of our Common Stock could decline as a result of sales by our existing shareholders
or  holders  of  stock  options  of  a  large  number  of  shares  of  our  Common  Stock  in  the  public  market  or  the
perception that these sales could occur.

Our Stock Price Has Been, And May Continue To Be, Volatile. The stock market from time to time, has
experienced  signiﬁcant  price  and  volume  ﬂuctuations  that  are  both  related  and  unrelated  to  the  operating
performance  of  companies.  As  our  stock  may  be  affected  by  market  volatility,  as  well  as  by  our  own
performance,  the  following  factors,  among  others,  may  have  a  signiﬁcant  effect  on  the  market  price  of  our
Common Stock:

) Developments in our relationships with current or future manufacturers of products  we distribute;
) Announcements by us or our competitors of signiﬁcant acquisitions, strategic partnerships, joint ventures

or capital commitments;

) Litigation or governmental proceedings or  announcements involving  us or our industry;
) Economic and other external factors, such as disasters  or  other crises;
) Sales of our Common Stock or other securities in the open market;
) Period-to-period ﬂuctuations in our operating results;  and
) Our ability to satisfy our debt obligations.

We Expect That Our Quarterly Results Of Operations Will Fluctuate. Such Fluctuation Could Cause Our
Stock  Price  To  Decline. A  large  portion  of  our  expenses  for  calibration  services,  including  expenses  for
facilities,  equipment  and  personnel,  are  relatively  ﬁxed,  as  is  our  commitment  to  purchase  a  predetermined
amount  of  inventory.  Accordingly,  if  revenues  decline  or  do  not  grow  as  we  anticipate,  we  may  not  be  able  to
correspondingly  reduce  our  operating  expenses  in  any  particular  quarter.  Our  quarterly  revenue  and  operating
results have ﬂuctuated in the past and are likely to do so in the future. If our operating results in some quarters fail
to meet the expectations of stock market analysts and investors, our stock price would likely decline. Some of the
factors that could cause our revenue and  operating results  to  ﬂuctuate include:

) Fluctuations in industrial demand for products  we sell  and/or services we provide; and
) Fluctuations in geographic conditions, including currency  and other economic conditions.

If  We  Fail  To  Attract  And  Retain  Qualiﬁed  Personnel,  We  May  Not  Be  Able  To  Achieve  Our  Stated
Corporate  Objectives. Our  ability  to  manage  our  anticipated  growth,  if  realized,  effectively  depends  on  our
ability  to  attract  and  retain  highly  qualiﬁed  executive  ofﬁcers  and  technical  personnel.  If  we  fail  to  attract  and
retain qualiﬁed individuals, we will not be able  to achieve our stated corporate  objectives.

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

Reports of Independent Registered Public Accounting Firms *********************************
Consolidated Financial Statements

Consolidated Statements of Operations  and Comprehensive Income (Loss)  for  the  Years Ended

March 26, 2005, March 27, 2004, and  March 31, 2003 *********************************
Consolidated Balance Sheets as of March  26, 2005  and March  27, 2004 *********************
Consolidated Statements of Cash Flows for  the Years Ended March 26,  2005, March 27,  2004,

and March 31, 2003 **************************************************************
Consolidated Statements of Stockholders’  Equity ****************************************
Notes to  Consolidated Financial Statements *********************************************
Schedule II — Valuation and Qualifying  Accounts, for  the Years Ended March 26, 2005, March 27,
2004, and March 31, 2003 ***********************************************************

Page(s)

33-34

35
36

37
38
39-56

57

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Transcat, Inc.
Rochester, New York

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Transcat,  Inc  and  its  subsidiaries  as  of
March 26, 2005 and the related consolidated statements of operations, stockholders’ equity, and cash ﬂows for
the ﬁscal year then ended. We have also audited the schedule listed in the accompanying index for the ﬁscal year
ended  March  26,  2005.  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
audit.

We  conducted  our  audit  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  and  schedule  are  free  of  material  misstatement.  The  Company  is  not
required to have, nor were we engaged to perform, an audit of its internal control over ﬁnancial reporting. Our
audit included consideration of internal control over ﬁnancial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over ﬁnancial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements
and schedule, assessing the accounting principles used and signiﬁcant estimates made by management, as well as
evaluating the overall presentation of the ﬁnancial statements and schedule. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects,
the ﬁnancial position of Transcat, Inc. and its subsidiaries at March 26, 2005, and the results of their operations
and their cash ﬂows for the ﬁscal year then ended, in conformity with accounting principles generally accepted in
the United States of America.

Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein

for the ﬁscal year ended March 26, 2005.

/s / BDO Seidman, LLP

BDO Seidman, LLP

New York, New York
May 17, 2005

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of Transcat, Inc.

In our opinion, the consolidated balance sheet as of March 27, 2004 and the related consolidated statements of
operations and comprehensive income (loss), of cash ﬂows and of changes in stockholders’ equity for each of the
two years in the period ended March 27, 2004 present fairly, in all material respects, the ﬁnancial position, results
of operations and cash ﬂows of Transcat, Inc. and its subsidiaries at March 27, 2004 and for each of the two years
in the period ended March 27, 2004, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the ﬁnancial statement schedule listed in the accompanying index
for  each  of  the  two  years  in  the  period  ended  March  27,  2004  presents  fairly,  in  all  material  respects,  the
information set forth therein when read in conjunction with the related consolidated ﬁnancial statements. These
ﬁnancial statements and ﬁnancial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these ﬁnancial statements and ﬁnancial statement schedule based on our
audits.  We  conducted  our  audits  of  these  statements  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,
assessing  the  accounting  principles  used  and  signiﬁcant  estimates  made  by  management,  and  evaluating  the
overall ﬁnancial statement presentation.  We  believe that our audits  provide a reasonable basis  for our opinion.

As  discussed  in  Note  3  to  the  consolidated  ﬁnancial  statements,  the  Company  adopted  Statement  of  Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, on April 1, 2002.

/s/ PricewaterhouseCoopers LLP

Rochester, New York
June 17, 2004

34

CONSOLIDATED STATEMENTS OF  OPERATIONS  AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Per Share Amounts)

TRANSCAT, INC.

For the Years Ended
March 26, March 27, March  31,
2004

2003

2005

Product Sales **************************************************
Service Sales **************************************************
Net Sales ***************************************************
Cost of Products Sold *******************************************
Cost of Services Sold *******************************************
Total Cost of Products and Services Sold *************************
Gross Proﬁt ***************************************************
Selling, Marketing, and Warehouse Expenses ************************
Administrative Expenses *****************************************
Total Operating Expenses **************************************
Operating Income***********************************************
Interest Expense ************************************************
Gain on Extinguishment of Debt **********************************
Other Expense (Income) *****************************************
Total Other Expense (Income) **********************************

Income Before Income Taxes and Cumulative  Effect of a Change in

Accounting Principle ******************************************
Beneﬁt for Income Taxes ****************************************
Income Before Cumulative Effect of a  Change  in Accounting Principle***
Cumulative Effect of a Change in Accounting Principle****************
Net Income (Loss) **********************************************
Other Comprehensive Income:

Currency  Translation Adjustment ********************************
Comprehensive Income (Loss) ************************************
Basic Earnings (Loss) Per Share:

Before Cumulative Effect of a Change  in Accounting Principle *******
From Cumulative Effect of a Change in Accounting Principle ********
Total Basic Earnings (Loss) Per Share **************************
Average Shares Outstanding (in thousands) **********************

Diluted Earnings (Loss) Per Share:

Before Cumulative Effect of a Change  in Accounting Principle *******
From Cumulative Effect of a Change in Accounting Principle ********
Total Diluted Earnings (Loss) Per Share ************************
Average Shares Outstanding (in thousands) **********************

$37,086
18,221
55,307
28,307
13,108
41,415
13,892
7,948
5,045

$35,423
17,894
53,317
26,948
12,971
39,919
13,398
8,540
4,551

$38,359
18,813
57,172
28,033
15,820
43,853
13,319
8,311
4,539

12,993

13,091

12,850

899
350
—
293
643

256
—
256
—
256

163
419

0.04
—
0.04

6,396

0.04
—
0.04

$

$

$

$

$

307
434
—
(288)
146

161
(192)
353
—
353

168
521

0.06
—
0.06

469
657
(1,593)
56
(880)

1,349
(408)
1,757
(6,472)
(4,715)

91
$ (4,624)

$

0.29
(1.05)
$ (0.76)

6,252

6,147

0.05
—
0.05

$

0.29
(1.05)
$ (0.76)

$

$

$

$

$

6,966

6,808

6,147

See accompanying notes to consolidated  ﬁnancial statements.

35

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)

ASSETS

Current  Assets:

Cash *****************************************************************
Accounts Receivable, less allowance for  doubtful  accounts  of $56 and $51  as of

March 26, 2005 and March 27, 2004, respectively **************************
Other Receivables*******************************************************
Finished Goods Inventory, net*********************************************
Income Taxes Receivable*************************************************
Prepaid  Expenses and Deferred Charges ************************************
Total Current Assets***************************************************
Property, Plant and Equipment, net ******************************************
Capital Leases, net ********************************************************
Goodwill ****************************************************************
Prepaid  Expenses and Deferred Charges **************************************
Other Assets *************************************************************
Total Assets ***********************************************************

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current  Liabilities:

Accounts Payable *******************************************************
Accrued Payrolls, Commissions and Other **********************************
Income Taxes Payable ***************************************************
Deposits **************************************************************
Current  Portion of Term Loan*********************************************
Current  Portion of Capital Lease Obligations ********************************
Revolving Line of Credit *************************************************
Total Current Liabilities ************************************************
Term Loan, less current portion *********************************************
Long-Term Capital Lease Obligations, less  current portion ***********************
Deferred Compensation ****************************************************
Deferred Gain on TPG Divestiture *******************************************
Total Liabilities*********************************************************

Stockholders’ Equity:

Common Stock, par value $0.50 per share,  30,000,000 shares authorized; 6,700,505

and 6,352,968 shares issued as of March 26,  2005 and  March 27, 2004,
respectively; 6,453,241 and 6,233,610 shares outstanding as of March  26, 2005
and March 27, 2004, respectively ****************************************
Capital in Excess of Par Value ********************************************
Warrants **************************************************************
Unearned Compensation *************************************************
Accumulated Other Comprehensive Gain (Loss) ******************************
Accumulated Deﬁcit*****************************************************
Less: Treasury Stock, at cost, 247,264 shares  and 119,358  shares as of March 26,

2005 and March 27, 2004, respectively ***********************************
Total Stockholders’ Equity**********************************************
Total Liabilities and Stockholders’ Equity *********************************

See accompanying notes to consolidated  ﬁnancial  statements.

36

March 26, March  27,

2005

2004

$

106

$

547

8,089
313
5,902
—
630
15,040
1,984
115
2,524
188
261
$20,112

$ 4,544
1,993
100
38
758
66
5,498
12,997
1,020
56
181
1,544
15,798

8,044
64
3,736
144
696
13,231
2,025
181
2,524
171
253
$18,385

$ 4,139
1,620
100
57
668
49
6,441
13,074
—
134
205
1,544
14,957

3,350
3,995
430
(17)
96
(2,702)

3,176
3,235
518
(23)
(67)
(2,958)

(838)
4,314
$20,112

(453)
3,428
$18,385

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF  CASH FLOWS
(In Thousands)

Cash Flows from  Operating Activities:

Net Income (Loss)************************************************
Cumulative Effect of a Change in  Accounting  Principle *****************
Net Income Before  Cumulative Effect of  a  Change in Accounting Principle
Adjustments to Reconcile  Net  Income  Before Cumulative  Effect  of a
Change in  Accounting Principle to Net Cash (Used in) Provided  by
Operating Activities:

Loss on  Disposal of Assets ************************************
Gain on Extinguishment  of  Debt ********************************
Depreciation and Amortization**********************************
Provision for Doubtful Accounts Receivable***********************
Provision for Returns *****************************************
Provision for Slow Moving or  Obsolete  Inventory ******************
Deferred Revenue — MAC *************************************
Common  Stock Expense ***************************************
Amortization of  Unearned Compensation *************************
Other ******************************************************

Changes  in Assets and  Liabilities:

Accounts Receivable and Other Receivables *************************
MAC Escrow and Holdback **************************************
Inventories ****************************************************
Income Taxes Receivable/Payable *********************************
Prepaid Expenses,  Deferred  Charges, and  Other **********************
Accounts Payable **********************************************
Accrued Payrolls,  Commissions, and Other**************************
Deposits ******************************************************
Deferred Compensation******************************************
Net Cash (Used in) Provided by Operating Activities ***************

Cash Flows from  Investing Activities:

Purchase of Property, Plant and Equipment ***************************
Net Cash Used in  Investing Activities ****************************

Cash Flows from  Financing Activities:

Revolving Line  of Credit,  net***************************************
Payments on Term Loan *******************************************
Proceeds from  Term Loan Borrowings *******************************
Payments on Capital Leases ****************************************
Issuance of Common Stock ****************************************
Net Cash Provided by (Used  in) Financing Activities ***************
Effect  of Exchange Rate Changes  on Cash ******************************
Net (Decrease) Increase  in Cash **************************************
Cash at Beginning of Period******************************************
Cash at End of  Period***********************************************
Cash Paid (Received) from Interest and  Taxes:

Interest Paid *****************************************************
Taxes Refunded **************************************************

Supplemental Disclosure of Non-Cash  Financing  Activity:

Issuance of Warrants for  Debt  Retirement*****************************
Capital Lease  Obligations ******************************************
Expiration of Warrant from Debt Retirement **************************
Treasury  Stock Acquired in Cashless Exercise of  Stock  Options **********

For the Years Ended
March 26, March 27, March  31,
2004

2005

2003

$

256
—
256

$ 353
—
353

$(4,715)
6,472
1,757

16
—
1,486
69
(32)
13
—
170
135
—

(331)
—
(2,179)
144
(488)
405
373
(19)
(24)
(6)

(866)
(866)

(943)
(890)
2,000
(61)
162
268
163
(441)
547
106

$

—
—
1,299
(63)
(80)
20
—
110
99
(19)

(927)
—
(914)
655
(512)
401
(242)
(7)
35
208

(459)
(459)

1,193
(666)
—
(11)
—
516
168
433
114
$ 547

63
(1,593)
2,047
(117)
(93)
—
(179)
40
—
(10)

1,320
225
1,027
(91)
(225)
(2,602)
(186)
(384)
(62)
937

(291)
(291)

89
(8,333)
7,113
—
—
(1,131)
91
(394)
508
114

$

$
316
$ (144)

$ 293
$ (872)

$
645
$ (319)

$ —
$ —
88
$
385
$

$ —
$ 194
$ —
$ —

518
$
$ —
$ —
$ —

See accompanying notes to consolidated  ﬁnancial statements.

37

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF  STOCKHOLDERS’  EQUITY
(In Thousands)

Common Stock
Outstanding
$0.50 Par Value
Shares Amount

Capital
In
Excess
of Par War-
rants
Value

Un-
earned
Comp-
ensation

Accum-
ulated
Other
Compre-
hensive
Gain
(Loss)

Accum-
ulated
Deﬁcit

Treasury Stock
Outstanding
at Cost
Shares Amount

6,122
55

$3,120
28

$3,019
12

$ — $ — $(326)

$ 1,404

119

$(453)

518

6,177
57

$3,148
28

$3,031
82

$518

$ — $(235)

$(3,311)

119

$(453)

91

(4,715)

122

(122)

99

168

353

Total

$ 6,764
40
518

91
(4,715)

$ 2,698
110

—

99

168
353

$518

$ (23)

$ (67)

$(2,958)

119
128

$(453)
(385)

$ 3,428
318

6,234
124

$3,176
126

$3,235
577

95

48

95

(129)

135

88

(88)

163

256

14

135
—

163
256

6,453

$3,350

$3,995

$430

$ (17)

$ 96

$(2,702)

247

$(838)

$ 4,314

Balance as  of March  31, 2002 ****
Issuance of Common Stock *******
Issuance of Warrants ************
Comprehensive  Income:

Currency Translation Adjustment
Net Loss ********************
Balance as  of March  31, 2003 ****
Issuance of Common Stock *******
Restricted Stock:

Issuance of Restricted Stock ****
Amortization of Unearned

Compensation **************

Comprehensive  Income:

Currency Translation Adjustment
Net Income ******************
Balance as  of March  27, 2004 ****
Issuance of Common Stock *******
Restricted Stock:

Issuance of Restricted Stock ****
Amortization of Unearned

Compensation **************
Expired Warrants ***************
Comprehensive  Income:

Currency Translation Adjustment
Net Income ******************
Balance as  of March  26, 2005 ****

See accompanying notes to consolidated  ﬁnancial statements.

38

TRANSCAT, INC.

NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS
(In Thousands, Except Share and Per Share Amounts)

Note 1 — Nature of Business and Summary of Signiﬁcant Accounting Policies

Description  of  Business: Transcat,  Inc.  (‘‘Transcat’’  or  ‘‘the  Company’’)  is  a  leading  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.

Principles  of  Consolidation: The  consolidated  ﬁnancial  statements  of  Transcat  include  the  accounts  of
Transcat,  Inc.  and  all  of  the  Company’s  wholly  owned  subsidiaries.  All  signiﬁcant  intercompany  balances  and
transactions are eliminated in consolidation.

Use  of  Estimates: The  preparation  of  Transcat’s  Consolidated  Financial  Statements  in  accordance  with
accounting  principles  generally  accepted  in  the  United  States  (‘‘GAAP’’)  requires  that  the  Company  make
estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of
contingent assets and liabilities at the date of the ﬁnancial statements, and the reported amounts of revenues and
expenses  during  the  reporting  period.  Signiﬁcant  estimates  and  assumptions  are  used  for,  but  not  limited  to,
allowance  for  doubtful  accounts  and  returns,  depreciable  lives  of  assets,  estimated  lives  of  major  catalogs
(‘‘Master  Catalog’’),  and  tax  valuation  allowances.  Future  events  and  their  effects  cannot  be  predicted  with
certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in
the preparation of the Consolidated Financial Statements will change as new events occur, as more experience is
acquired, as additional information is obtained and as operating environment changes. Actual results could differ
from those estimates.

The following table summarizes the more signiﬁcant charges in the Consolidated Statements of Operations

that require management estimates, which are described below (in  millions):

For the Years Ended
March 26, March 27, March 31,
2004

2005

2003

Provision for doubtful accounts receivables and returns ********
Depreciation of property, plant, and equipment***************
Amortization of Master Catalog costs **********************
Deferred tax valuation allowance provisions *****************

$ —
$1.0
$0.5
$ —

$(0.1)
$ 1.0
$ 0.3
$ 0.1

$(0.2)
$ 1.6
$ 0.4
$ 1.1

Changes  in  Estimates:

In  the  ordinary  course  of  accounting  for  items  discussed  above,  Transcat  makes
changes  in  estimates  as  appropriate,  and  as  the  Company  becomes  aware  of  circumstances  surrounding  those
estimates.  Such  changes  and  reﬁnements  in  estimation  methodologies  are  reﬂected  in  reported  results  of
operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to
the Consolidated Financial Statements.

Fiscal Year: Until April 1, 2003, Transcat operated within a conventional 52-week accounting ﬁscal year
ending on March 31 of each year. As of April 1, 2003, the Company changed the 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 the Company’s four quarters is a 13-week period, and the ﬁnal month of each quarter is a 5-week
period. This is not deemed a change in the Company’s ﬁscal year for purposes of reporting subject to Rule 13a-10
or 15d-10, as promulgated by the SEC, since the new ﬁscal year commenced with the end of the old ﬁscal year.
Transcat estimated the ﬁscal year end change from March 31, 2004 to March 27, 2004 had an immaterial effect
on  the  Consolidated  Financial  Statements  when  compared  to  the  Consolidated  Financial  Statements  for  ﬁscal
year 2003.

Revenue  Recognition: Sales  are  recorded  when  products  are  shipped  or  services  are  rendered  to
customers,  as  the  Company  generally  has  no  signiﬁcant  post  delivery  obligations.  Prices  are  ﬁxed  and
determinable, collection of the resulting receivable is probable, and returns are reasonably estimated. Provisions

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

for customer returns are provided for in the period the related sales are recorded based upon historical data. The
Company  recognizes  the  majority  of  service  revenue  based  upon  when  the  calibration  or  repair  activity  is
performed  then  shipped  and/or  delivered  to  the  customer.  Some  of  the  service  revenue  is  generated  from
managing customers’ calibration programs in which the Company recognizes revenue in equal amounts at ﬁxed
intervals. Shipments are generally free on board shipping point and customers are generally invoiced for freight,
shipping, and handling charges.

Shipping  and  Handling  Costs: Freight  expense  and  direct  shipping  costs  are  included  in  cost  of  sales.
These  costs  were  approximately  $1.3  million,  $1.2  million,  and  $1.7  million  for  ﬁscal  years  2005,  2004,  and
2003, respectively. Direct handling costs, which primarily represent direct compensation of employees who pick,
pack,  and  otherwise  prepare,  if  necessary,  merchandise  for  shipment  to  customers  are  reﬂected  in  selling,
marketing, and warehouse expenses. These costs were approximately $0.3 million for ﬁscal years 2005 and 2004
and $0.2 million for ﬁscal year 2003.

Rebates: Rebates are based on a speciﬁed cumulative level of purchases and are recorded as a reduction of

cost of sales as the milestone is achieved.

Cooperative  Advertising  Income: Effective  in  ﬁscal  year  2004,  Transcat  applied  the  provisions  of  the
Emerging  Issues  Task  Force  (‘‘EITF’’)  Issue  No.  02-16,  ‘‘Accounting  by  a  Reseller  for  Cash  Consideration
Received from a Vendor’’ which provides that cash consideration received from a vendor by a reseller be reported
as a reduction of cost of sales as the related inventory is sold. Prior to the Company’s adoption of EITF No. 02-16
and consistent with the Company’s historical accounting practices, the Company reported cooperating advertising
income as a reduction of advertising expense. The Company reclassiﬁed cooperative advertising income in ﬁscal
year 2003 to conform with ﬁscal years  2004 and 2005.

Comprehensive Income: Transcat reports comprehensive income under Statement of Financial Account-
ing  Standards  (‘‘SFAS’’)  No.  130,  ‘‘Reporting  Comprehensive  Income’’.  Other  comprehensive  income  is
comprised of net income (loss) and currency  translation adjustments.

Currency  Translation  Adjustment: The  accounts  of  Transcat’s  Canadian  subsidiary  are  maintained  in
the local currency and have been translated to United States dollars in accordance with SFAS No. 52, ‘‘Foreign
Currency  Translation’’.  Accordingly,  the  amounts  representing  assets  and  liabilities,  except  for  long-term
intercompany  and  equity,  have  been  translated  at  the  period-end  rates  of  exchange  and  related  revenue  and
expense accounts have been translated at average rates of exchange during the period. Gains and losses arising
from translation of the Company’s subsidiary balance sheets into United States dollars are recorded directly to the
accumulated comprehensive income component of stockholders’ equity.

Currency  gains  and  losses  on  business  transactions  are  included  in  other  expense  (income)  on  the
Consolidated Statements of Operations. The net loss in ﬁscal year 2005 was $0.1 million. The net gain in ﬁscal
year 2004 was $0.2 million. The currency gains  and losses in ﬁscal year  2003 were not signiﬁcant.

Earnings  per  Share: Basic  earnings  per  share  of  Common  Stock  are  computed  based  on  the  weighted
average  number  of  shares  of  Common  Stock  outstanding  during  the  period.  Diluted  earnings  per  share  of
Common Stock reﬂect the assumed conversion of dilutive stock options, warrants, and non-vested restricted stock
awards. In computing the per share effect of assumed conversion, funds which would have been received from the
exercise of options, warrants, and non-vested restricted stock are considered to have been used to purchase shares
of  Common  Stock  at  the  average  market  prices  during  the  period,  and  the  resulting  net  additional  shares  of
Common Stock are included in the calculation of average  shares of Common Stock outstanding.

For  ﬁscal  year  2005,  the  net  additional  Common  Stock  equivalents  had  no  effect  on  the  calculation  of
dilutive earnings per share. For ﬁscal year 2004, the net additional Common Stock equivalents had a $0.01 per
share  effect  on  the  calculation  of  dilutive  earnings  per  share.  For  ﬁscal  year  2003,  the  net  additional  Common
Stock equivalents had no effect on the calculation of dilutive earnings per share. The total number of dilutive and

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

anti-dilutive Common Stock equivalents resulting from stock options, warrants, and non-vested restricted stock
are summarized as follows (shares in thousands, except per share amounts):

March 26,
2005

For the Years Ended
March 27,
2004

March 31,
2003

Shares Outstanding:

Dilutive *************************************
Anti-dilutive *********************************
Total**************************************

570
683

1,253

556
978

1,534

—
1,522

1,522

Range of Exercise Prices per Share:

Options *************************************
Warrants*************************************

$0.80-$2.92
$0.97-$2.91

$0.80-$3.00
$0.97-$3.06

$0.80-$8.50
$0.97-$3.75

Accounts Receivable: Accounts receivable represent receivables from customers in the ordinary course of
business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated
Balance  Sheets.  The  allowance  for  doubtful  accounts  is  based  upon  the  expected  collectibility  of  accounts
receivable. Transcat applies a speciﬁc formula to accounts receivable aging, which may be adjusted on a speciﬁc
account basis where the speciﬁc formula may not appropriately reserve for loss exposure. After all attempts to
collect  a  receivable  have  failed,  the  receivable  is  written-off  against  the  allowance  for  doubtful  accounts.  The
returns reserve is calculated based upon the historical rate of returns applied to sales over a speciﬁc timeframe.
The returns reserve will increase or decrease as a result of changes in the level of sales and/or the historical rate
of returns.

Inventories:

Inventories consist of ﬁnished goods and are valued at the lower of cost or market. Costs are
determined using the average cost method of inventory valuation. Inventories are reduced by a reserve for items
not saleable at or above standard cost. Transcat reserves speciﬁcally for certain items of inventory and, for other
items,  the  Company  applies  a  speciﬁc  loss  factor,  based  on  historical  experience,  to  speciﬁc  categories  of
inventory. The Company evaluates the adequacy of the  reserve on a regular basis.

Properties, Depreciation, and Amortization: Properties are stated at cost. Depreciation and amortization
is computed primarily under the straight-line method with useful lives of 3 to 10 years for the following major
classiﬁcations:  machinery,  equipment,  software,  and  furniture  and  ﬁxtures.  Properties  determined  to  have  no
value are written off at their then remaining net book value. Transcat accounts for software costs in accordance
with Statement of Position (‘‘FSP’’) No. 98-1, ‘‘Accounting for the Costs of Computer Software Developed or
Obtained  for  Internal  Use’’.  Leasehold  improvements  are  amortized  under  the  straight-line  method  over  the
estimated useful life or the lease term, whichever is shorter. Maintenance and repairs are expensed as incurred.
See Note 2 of the Consolidated Financial Statements for  further  disclosure.

Goodwill: Transcat  estimates  the  fair  value  of  the  Company’s  reporting  units  in  accordance  with
SFAS  No.  142,  ‘‘Goodwill  and  Other  Tangible  Assets’’,  using  the  fair  market  value  measurement  requirement,
rather  than  the  undiscounted  cash  ﬂows  approach.  See  Note  3  of  the  Consolidated  Financial  Statements  for
further disclosure.

Deferred Catalog Costs: Transcat amortizes the cost of each Master Catalog mailed over such catalog’s
estimated  productive  life.  The  Company  reviews  response  results  from  catalog  mailings  on  a  continuous  basis;
and if warranted, modify the period over which costs are recognized. The Company amortizes the cost of each
Master  Catalog  over  an  eighteen  month  period  and  amortizes  the  cost  of  each  catalog  supplement  over  a  three
month period. Total deferred catalog costs in prepaid expenses and deferred charges on the Consolidated Balance
Sheets were $0.4 million at March 26,  2005  and March  27, 2004.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Deferred  Compensation: Previously,  some  of  Transcat’s  directors  had  elected  to  defer  receipt  of  their
non-discretionary  awards  of  shares  of  Common  Stock  under  the  Amended  and  Restated  Directors’  Stock  Plan.
Deferred  shares  were  expensed  at  the  market  value  of  Common  Stock  at  the  date  of  award,  and  the  associated
liability  is  adjusted  quarterly  based  on  the  quarter  end  market  price  of  Common  Stock.  Directors  voluntarily
elected to cease deferring shares effective as of April 1, 2003. The fair market value of those deferred shares was
$0.1 million at March 26, 2005 and March 27,  2004.

In  addition,  the  Company  provides  an  annual  beneﬁt  to  a  former  president’s  spouse  and  former  executive
under the terms of a deferred compensation agreement. The deferred compensation was less than $0.1 million at
March 26, 2005 and $0.1 million at March 27, 2004.

Deferred  Gain  on  TPG: As  a  result  of  certain  post  divestiture  commitments,  Transcat  was  unable  to
recognize the gain of $1.5 million on the divestiture of Transmation Products Group (‘‘TPG’’), which took place
in ﬁscal year 2002, until those commitments expire in ﬁscal year 2007. See Note 9 of the Consolidated Financial
Statements for further disclosure.

Deferred Taxes: Transcat accounts for certain income and expense items differently for ﬁnancial reporting
purposes than for income tax reporting purposes. Deferred taxes are provided in recognition of these temporary
differences. A valuation allowance on deferred tax assets is provided for items for which it is more likely than not
that  the  beneﬁt  of  such  items  will  not  be  realized,  in  accordance  with  the  provisions  of  SFAS  No.  109,
‘‘Accounting for Income Taxes’’. SFAS No. 109 requires an assessment of both positive and negative evidence
when  measuring  the  need  for  a  deferred  tax  valuation  allowance.  See  Note  5  of  the  Consolidated  Financial
Statements for further disclosure.

Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other ﬁnancial

instruments using available market information and appropriate valuation methodologies as follows:

) Cash, Accounts Receivables, and Accounts Payables: The carrying amounts reported on the Consolidated
Balance Sheets for cash, accounts receivables, and accounts payables approximate fair value, due to their
short-term nature.

) Debt: The carrying amount of debt under the Credit Agreement approximates fair value due to variable

interest rate pricing.

Stock  Options: Transcat  follows  the  provisions  of  Accounting  Practice  Board  (‘‘APB’’)  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.

To  calculate  the  fair  value  of  the  options  awarded,  the  Company  elected  to  use  the  Black-Scholes  option-

pricing model (‘‘Pricing Model’’), which  produced a weighted average fair  value of options granted of:

Weighted average fair value of options awarded ******************

$2.38

$1.92

$0.61

FY 2005

FY 2004

FY 2003

The following assumptions were used in the Pricing  Model:

Weighted average fair value of value of options life ************
Annualized volatility rate **********************************
Weighted average risk-free rate of return *********************
Dividend Rate *******************************************

FY 2005

FY 2004

FY 2003

10 years

10 years

5 years

76.9%
4.2%
0.0%

77.2%
4.2%
0.0%

92.7%
4.4%
0.0%

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

The Company elected to account for terminations when they occur rather than include an attrition factor into

the model.

Pro forma amounts are as follows (in thousands,  except per share amounts):

For the Years Ended
March 26, March 27, March 31,
2004

2005

2003

Net Income (Loss), as reported****************************
Add: Stock-based employee compensation expense included in

reported net income, net of related tax effects**************

Deduct: Total stock-based employee compensation expense

determined under fair value based method for all awards, net
of related tax effects **********************************
Pro Forma Net Income (Loss)*****************************

$ 256

$ 353

$(4,715)

232

99

—

(456)

(341)

(205)

$

32

$ 111

$(4,920)

Earnings  (Loss) Per Share:

Basic — as reported ***********************************
Basic — pro forma************************************
Average Shares Outstanding (in thousands) **************
Diluted — as reported *********************************
Diluted — pro forma **********************************
Average Shares Outstanding (in thousands) **************

$ 0.04
$ 0.01
6,396
$ 0.04
$ —
6,966

$ 0.06
$ 0.02
6,252
$ 0.05
$ 0.02
6,808

$ (0.76)
$ (0.80)
6,147
$ (0.76)
$ (0.80)
6,147

The  effect  of  applying  the  SFAS  No.  123,  ‘‘Accounting  for  Stock-Based  Compensation’’  pro  forma
disclosure provisions in the current year is not representative of the effect on income for future years since each
subsequent  year  will  reﬂect  expense  for  additional  vesting,  additional  stock  option  grants,  and  updated
assumptions.

See Note 7 of the Consolidated Financial Statements for further  disclosure.

Reclassiﬁcation  of  Amounts: Certain  reclassiﬁcations  of  prior  ﬁscal  years’  ﬁnancial  information  have

been made to conform with current ﬁscal years’ presentation.

New Accounting Pronouncements:

FSP  109-2:

In  October  2004,  the  Financial  Accounting  Standards  Board  (the  ‘‘FASB’’)  issued  FSP
No.  109-2,  ‘‘Accounting  and  Disclosure  Guidance  for  the  Foreign  Earnings  Repatriation  Provision  within  the
American  Jobs  Creation  Act  of  2004’’.  FSP  No.  109-2  provides  guidance  under  SFAS  109,  with  respect  to
recording  the  potential  impact  of  the  repatriation  provisions  of  the  American  Jobs  Creation  Act  of  2004  (the
‘‘Jobs Act’’) on enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is
allowed time beyond the ﬁnancial reporting period of enactment to evaluate the effect of the Jobs Act on its plan
for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. FSP 109-2 has no effect
on the Company’s consolidated ﬁnancial statements.

SFAS  151:

In  November  2004,  the  FASB  issued  SFAS  No.  151,  ‘‘Inventory  Costs — an  amendment  of
ARB No. 43’’. This Statement amends the guidance in ARB No. 43, Chapter 4, ‘‘Inventory Pricing,’’ to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph  5  of  ARB  43,  Chapter  4,  previously  stated  that  ‘‘. . .  under  some  circumstances,  items  such  as  idle
facility  expense,  excessive  spoilage,  double  freight,  and  rehandling  costs  may  be  so  abnormal  as  to  require
treatment as current period charges. . . .’’ This Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of ‘‘so abnormal.’’ This Statement is the result of a broader

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

effort  by  the  FASB  to  improve  the  comparability  of  cross-border  ﬁnancial  reporting  by  working  with  the
International  Accounting  Standards  Board  toward  development  of  a  single  set  of  high-quality  accounting
standards. This clariﬁcation has no effect on the Company’s consolidated ﬁnancial  statements.

SFAS  123R: On  December  16,  2004,  the  FASB  issued  SFAS  No.  123  (revised  2004),  ‘‘Share-Based
Payment’’. SFAS 123R replaces SFAS 123 and supersedes APB No. 25. SFAS 123, as originally issued in 1995,
established  as  preferable  a  fair-value-based  method  of  accounting  for  share-based  payment  transactions  with
employees. However, SFAS 123 permitted entities the option of continuing to apply the guidance in APB No. 25,
as  long  as  the  footnotes  to  ﬁnancial  statements  disclosed  what  net  income  would  have  been  had  the  preferable
fair-value-based method been used. SFAS 123R covers a wide range of share-based compensation arrangements
including  share  options,  restricted  share  plans,  performance-based  awards,  share  appreciation  rights,  and
employee  share  purchase  plans.  SFAS  123R  requires  the  cost  of  all  share-based  payment  transactions  be
recognized in the ﬁnancial statements, establishes fair value as the measurement objective and requires entities to
apply a  fair-value-based measurement method in accounting for share-based payment transactions.

The Securities and Exchange Commission amended the effective date of SFAS 123R with a new rule issued
on April 14, 2005 to amend the compliance date for SFAS 123R that allows companies to implement SFAS 123R
at  the  beginning  of  their  next  ﬁscal  year,  instead  of  the  next  reporting  period,  that  begins  after  June  15,  2005,
although  early  adoption  is  allowed.  SFAS  123R  permits  companies  to  adopt  its  requirements  using  either  a
‘‘modiﬁed  prospective’’  method,  or  a  ‘‘modiﬁed  retrospective’’  method.  Under  the  ‘‘modiﬁed  prospective’’
method, compensation cost is recognized in the ﬁnancial statements beginning with the effective date, based on
the  requirements  of  SFAS  123R  for  all  share-based  payments  granted  after  that  date,  and  based  on  the
requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the
‘‘modiﬁed  retrospective’’  method,  the  requirements  are  the  same  as  under  the  ‘‘modiﬁed  prospective’’  method,
but also permits entities to restate ﬁnancial statements of previous periods based on proforma disclosures made in
accordance with SFAS 123.

The Company currently expects to adopt SFAS 123R effective March 26, 2006; however, the Company has
not yet determined which of the aforementioned adoption methods it will use. The Company has not changed any
of the stock compensation plans as a result of the impending adoption of SFAS 123R but maintains the right to
amend, suspend or terminate any plan at  any  time.

SFAS 153: On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an  amendment  of  APB  Opinion  No.  29,  Accounting  for  Nonmonetary  Transactions  (‘‘SFAS  153’’).  The
amendments  made  by  SFAS  153  are  based  on  the  principle  that  exchanges  of  nonmonetary  assets  should  be
measured  based  on  the  fair  value  of  the  assets  exchanged.  Further,  the  amendments  eliminate  the  narrow
exception  for  nonmonetary  exchanges  of  similar  productive  assets  and  replace  it  with  a  broader  exception  for
exchanges  of  nonmonetary  assets  that  do  not  have  commercial  substance.  Previously,  Opinion  29  required  that
the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the
same or similar productive asset should be based on the recorded amount of the asset relinquished. The Statement
is  effective  for  nonmonetary  asset  exchanges  occurring  in  ﬁscal  periods  beginning  after  June  15,  2005.  The
Company currently expects to adopt SFAS 153 effective on July 1, 2005 and does not expect that the adoption
will have an effect on its consolidated ﬁnancial statements.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Note 2 — Properties

Properties consist of (in thousands):

Machinery, Equipment, and Software *********************************
Furniture and Fixtures *********************************************
Leasehold Improvements *******************************************
Total Properties*************************************************
Less: Accumulated Depreciation and Amortization **********************
Total Properties, net *********************************************

Capital Leases consist of (in thousands):

Capital Leases ****************************************************
Less: Accumulated Amortization *************************************
Total Capital Leases, net *****************************************

March 26, March 27,

2005

2004

$10,158
1,172
326

$ 9,256
1,170
325

$11,656
(9,672)

$10,751
(8,726)

$ 1,984

$ 2,025

March 26, March 27,

2005

$195
(80)

$115

2004

$195
(14)

$181

Total  depreciation  and  amortization  expense  amounted  to  $1.0  million,  $1.0  million,  and  $1.6  million  in

ﬁscal years 2005, 2004, and 2003, respectively.

Note 3 — Goodwill

The Company tests goodwill for impairment on an annual basis, or immediately if conditions indicate that
such impairment could exist. In the ﬁrst quarter of ﬁscal year 2003, the Company recorded an impairment from
the implementation of SFAS No. 142 as a $6.5 million change in accounting principle based upon the Company’s
determination of the fair market value of the reporting units. The evaluation of the Company’s reporting units on
a  fair  value  basis  indicated  that  no  additional  impairment  existed  as  of  March  26,  2005,  March  27,  2004,  and
March 31, 2003.

Note 4 — Debt

Description. On November 13, 2002, Transcat entered into a Revolving Credit and Loan Agreement (the
‘‘Credit Agreement’’) with GMAC Business Credit, LCC (‘‘GMAC’’). The Credit Agreement consisted of a term
loan, a revolving line of credit (‘‘LOC’’),  and  certain material terms of which are as set forth below.

The  Credit  Agreement  was  amended  on  April  11,  2003  to  address  certain  non-material  post  closing

conditions.

The Credit Agreement was further amended on July 22, 2004 (‘‘Second Amendment’’) to waive compliance
with  an  EBITDA  (earnings  before  interest,  income  taxes,  depreciation  and  amortization)  covenant  for  the  ﬁrst
quarter of ﬁscal year 2005, permanently waive a requirement relating to an inactive subsidiary that the Company
had  committed  to  dissolve  by  a  speciﬁc  date  (that  has  been  subsequently  dissolved),  and  increase  the  Credit
Agreement restriction on Master Catalog spending.

Transcat  amended  the  Credit  Agreement  again  on  November  1,  2004  (‘‘Third  Amendment’’).  The  Third
Amendment  consists  of  two  term  notes,  a  LOC,  a  capital  expenditure  loan  if  certain  conditions  are  met,  and
certain material terms of which are as set forth below. The Third Amendment also waived compliance with the
Company’s  EBITDA  (earnings  before  interest,  income  taxes,  depreciation  and  amortization)  covenant  for  the

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

second  quarter  of  ﬁscal  year  2005  and  extended  the  Credit  Agreement  expiration  from  November  13,  2005  to
October 31, 2007.

Term  Loans. As  of  March  27,  2004,  Transcat  had  a  term  loan  balance  in  the  amount  of  $0.7  million  in
favor  of  GMAC.  This  term  loan  required  annual  payments  totaling  $0.5  million,  payable  in  equal  monthly
installments, commencing on December 1,  2002, and  was repaid in full on November  1, 2004.

Under the Third Amendment, the Company made two term loans, Term Loan A and Term Loan B, in the
amounts of $1.5 million and $0.5 million, respectively. These term notes require annual payments of $0.5 million
and  $0.2  million,  respectively,  payable  over  three  years  in  equal  monthly  installments,  commencing  on
December 1, 2004. As of March 26, 2005, the Third Amendment requires the Company to make the following
principal payments on combined term loans, before giving effect to any excess cash ﬂow payments to be made (in
thousands):

Before Giving Effect to Excess
Cash Flow Payments
Term Loan B

Term Loan A

Total

Fiscal Year 2006 ************************************
Fiscal Year 2007 ************************************
Fiscal Year 2008 ************************************
Total ********************************************

$ 500
500
333

$1,333

$167
167
111

$445

$ 667
667
444

$1,778

The Company is further required to reduce the term loans on an annual basis by a percentage of excess cash
ﬂow,  as  deﬁned  in  the  Third  Amendment.  Term  Loan  B  will  be  reduced  by  the  lesser  of  the  balance  owed  on
Term  Loan  B  or  50%  of  the  Company’s  excess  cash  ﬂow  payable  in  three  monthly  installments.  Once  Term
Loan B has been repaid, the excess cash ﬂow payment required against Term Loan A is 20% of the Company’s
excess cash ﬂow, not to exceed $0.2 million, annually. After giving effect to the excess cash ﬂow payments to be
made attributable to excess cash ﬂow for ﬁscal year 2005 as required under the Third Amendment, the following
are the future combined term loan payments as of March 26, 2005  (in thousands):

After Giving Effect to Excess
Cash Flow Payments
Term Loan B

Term Loan A

Total

Fiscal Year 2006 ************************************
Fiscal Year 2007 ************************************
Fiscal Year 2008 ************************************
Total ********************************************

$ 500
500
333

$1,333

$258
167
20

$445

$ 758
667
353

$1,778

LOC. Under the Third Amendment, the maximum amount  available under the LOC  portion is $9.0 mil-
lion. As of March 26, 2005, the Company was eligible to borrow up to $9.0 million based on assets and borrowed
$5.5 million. Availability under the LOC is determined by a formula based on eligible accounts receivable (85%)
and inventory  (50%).

The Credit Agreement requires both a subjective acceleration clause and a requirement to maintain a lock-
box arrangement. These requirements resulted in a short-term classiﬁcation of the LOC in accordance with EITF
No.  95-22,  ‘‘Balance  Sheet  Classiﬁcation  of  Borrowings  Outstanding  under  Revolving  Credit  Agreements  that
include both a Subjective Acceleration  Clause and  a Lock-Box Arrangement.’’

Interest. Under  the  Third  Amendment,  interest  on  the  term  loans  and  LOC  is  ﬁxed  at  Tier  2  (see  chart
below)  through  March  2005.  The  prime  rate  and  the  30-day  London  Interbank  Offered  Rate  (‘‘LIBOR’’)  as  of
March 26, 2005 were 5.75% and 2.86%, respectively. Interest on the term loans and LOC after March 2005, is

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

adjusted on a quarterly basis based upon the Company’s calculated Fixed Charge Coverage Ratio, as deﬁned in
the Third Amendment, as follows:

Tier

Fixed Charge
Coverage Ratio

1

2

3

1.249 or less

1.25 to 1.49

1.50 or greater

Term Loan A

Term Loan B

LOC

(a) Prime Rate  plus .50%  or
(b) LIBOR plus 3.25%
(a) Prime Rate  plus .25%  or
(b) LIBOR plus 3.00%
(a) Prime Rate  plus 0%  or
(b) LIBOR plus 2.75%

Prime Rate plus .75% (a) Prime  Rate plus 0% or

(b)  LIBOR plus 2.75%

Prime Rate plus .50% (a) Prime  Rate plus 0% or

(b)  LIBOR plus 2.50%

Prime Rate plus .25% (a) Prime  Rate plus 0% or

(b)  LIBOR plus 2.25%

Covenants. The  Credit  Agreement  has  certain  covenants  with  which  the  Company  has  to  comply,
including  a  minimum  EBITDA  covenant,  as  well  as  restrictions  on  capital  expenditures  and  Master  Catalog
spending. The Third Amendment includes a revised EBITDA covenant, a ﬁxed charge coverage ratio covenant, as
well  as,  revised  restrictions  on  capital  expenditures  and  Master  Catalog  spending.  As  previously  indicated,  the
Third  Amendment  waived  compliance  with  the  Company’s  EBITDA  covenant  for  the  second  quarter  of  ﬁscal
year 2005. The Company was in compliance with all loan covenants and requirements for the fourth quarter of
ﬁscal year 2005.

Loan  Costs.

In  accordance  with  EITF  98-14,  ‘‘Debtor’s  Accounting  for  Changes  in  Line-of-Credit  or
Revolving-Debt Arrangements,’’ any fees paid to GMAC, third party costs associated with the LOC of the Third
Amendment, and unamortized costs remaining under the Credit Agreement, are amortized over the term of the
Third Amendment.

Other  Terms. The  Credit  Agreement  requires  an  increase  in  the  Company’s  borrowing  rate  of  two
percentage points should an event of default occur and a termination premium of 1% of the maximum available
borrowing under the revolving line of credit plus the then outstanding balance owed under the term note if the
Credit  Agreement  was  terminated  after  November  13,  2003  and  prior  to  November  13,  2005.  Under  the  Third
Amendment,  if  the  agreement  is  terminated  prior  to  its  expiration  date  of  October  31,  2007,  a  termination
premium of 2% in year one, 1% in year two, and 0.5% in the third year of the advance limit, as deﬁned in the
agreement, will be incurred. The Third  Amendment  also  reduced  other certain  recurring loan costs  and fees.

Additionally,  the  Company  has  pledged  certain  property  and  ﬁxtures  in  favor  of  GMAC,  including
inventory,  equipment,  and  accounts  receivable  as  collateral  security  for  the  loans  made  under  the  Credit
Agreement.

The  Third  Amendment  also  provides  for  a  capital  expenditure  loan  (‘‘Cap-x  Loan’’).  If  prior  to  Septem-
ber 30, 2005, the Company has achieved an EBITDA, as deﬁned in the agreement, of $2.4 million on a trailing
twelve  months  basis,  the  Company  may  make  a  Cap-x  Loan  of  up  to  $1.0  million  for  qualifying  capital
expenditures. As of March 26, 2005, the Company has made this milestone, but has not borrowed any additional
monies. The Cap-x Loan would be payable in equal monthly payments over a 36 month period with any residual
balance resulting in a balloon payment at October 31, 2007. Interest is adjusted on a quarterly basis based upon
the Company’s calculated Fixed Charge Coverage Ratio with the same terms as Term Loan A (see chart above).

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Note 5 — Income Taxes

Transcat’s net income (loss) before income taxes and cumulative effect of a change in accounting principle

on the Consolidated Statement of Operations is as  follows (in  thousands):

United States **********************************************
Foreign ***************************************************
Total ***************************************************

$272
(16)

$256

$ 292
(131)

$1,524
(175)

$ 161

$1,349

FY 2005

FY 2004

FY 2003

The provisions for income taxes determined in accordance with SFAS No. 109 for ﬁscal years 2004, 2003,

and 2002 are comprised of (in thousands):

Federal ***************************************************
State *****************************************************
Total ***************************************************

$—
—

$—

$(205)
13

$(418)
10

$(192)

$(408)

FY 2005

FY 2004

FY 2003

The  following  table  is  a  reconciliation  of  the  ‘‘expected’’  federal  income  tax  provision  computed  by
applying  the  statutory  United  States  federal  income  tax  rate  and  the  income  tax  provision  reﬂected  in  the
Consolidated Statements of Operations. The reconciliation does not include the $6.5 million goodwill impairment
charge from the implementation of SFAS No. 142 in ﬁscal year 2003. The $6.5 million charge created a deferred
tax asset of $2.2 million, which is fully  reserved  for in the net deferred tax assets  valuation allowance.

Computed ‘‘Expected’’ Federal Income Tax *********************
State Income Taxes *****************************************
Book Expenses Not Deductible for Taxes***********************
Valuation Allowance ****************************************
Foreign Credits, Deductions, and Dividends *********************
Other, net*************************************************
Total***************************************************

FY 2005

FY 2004

FY 2003

$ 92
11
14
9
—
(126)

$ 55
19
35
65
(213)
(153)

$

459
54
24
(1,320)
274
101

$ —

$(192)

$ (408)

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

The components of the net deferred tax assets are as  follows:

Deferred Tax Assets:

Net Operating Loss Carryforward (1)************************
Reserves for Inventory Obsolescence ************************
Gain on Sale of Business *********************************
Goodwill***********************************************
Foreign Tax Credit (expires March 2008) ********************
Other**************************************************
Valuation Allowance(2) ***********************************
Total Deferred Tax Assets *******************************

Deferred Tax Liabilities:

Depreciation ********************************************
Accelerated Catalog and Postage Write-offs ******************
Other**************************************************
Total Deferred Tax Liabilities ****************************
Net Deferred Tax Assets ********************************

FY 2005

FY 2004

FY 2003

$

714
32
587
1,561
757
537
(3,802)

$

$

$

386

363
19
4

386

$

484
67
587
1,921
810
477
(3,793)

$

$

$

553

514
39
—

553

$ —
150
587
2,282
724
426
(3,728)

$

$

$

441

409
32
—

441

$ — $ — $ —

(1) As of March 26, 2005, Transcat has net operating loss carryforwards of $1.8 million, which is available to

offset future federal taxable income through March 2025.

(2) Deferred taxes recognize the impact of temporary differences between the amounts of assets and liabilities
recorded  for  ﬁnancial  statement  purposes  and  such  amounts  measured  in  accordance  with  tax  laws.  In
general, each deferred tax asset is reviewed for expected utilization, using a ‘‘more likely than not’’ approach,
based on the character of the item (credit, loss, etc.), the relevant history for the particular item, the applicable
expiration dates, operating projects that would impact utilization, and identiﬁed actions under the control of
the Company in realizing the associated beneﬁts. Additionally, the Company’s utilization of U.S. foreign tax
credit  carryforwards  is  dependent  on  related  statutory  limitations  that  involve  numerous  factors  beyond
overall  positive  income,  all  of  which  have  been  taken  into  account  by  the  company  in  its  evaluation.  The
Company assesses the available positive and negative evidence surrounding the recoverability of the deferred
tax  assets  and  applies  its  judgment  in  estimating  the  amount  of  valuation  allowance  necessary  under  the
circumstances. For the years ended March 26, 2005, March 27, 2004, and March 31, 2003 the Company has
determined that it is more likely than not that the beneﬁts associated with the net deferred tax assets will not
be  realized.  Accordingly,  the  Company  has  booked  a  full  valuation  allowance  against  its  net  deferred  tax
assets. The Company will continue to assess all available evidence, both positive and negative, to determine
whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

Deferred  U.S.  income  taxes  have  not  been  recorded  for  basis  differences  related  to  the  investments  in  the
Company’s foreign subsidiary. These basis differences were approximately $1.7 million at March 26, 2005 and
consisted  primarily  of  undistributed  earnings.  These  earnings  are  considered  permanently  invested  in  the
businesses.  Determination  of  the  deferred  income  tax  liability  on  these  unremitted  earnings  is  not  practicable
because such liability, if any, is dependent  on circumstances  existing if and when remittance  occurs.

Note 6 — Deﬁned Contribution Plan

All of Transcat’s United States employees are eligible to participate in a plan providing certain qualiﬁcations
are met. Effective April 1, 1981, the Deferred Proﬁt Sharing Plan was adopted. Effective April 1, 1987, this plan

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

was  amended  from  a  non-contributory  to  a  contributory  deﬁned  contribution  plan  and  renamed  the  Long-Term
Savings  and Deferred Proﬁt Sharing Plan (‘‘Plan’’).

In the Long-Term Savings portion of the Plan (‘‘401K’’), payments of beneﬁts accrued for plan participants
are  made  upon  retirement  or  upon  termination  of  employment  prior  to  retirement  providing  certain  conditions
have been met by the employee prior to termination. The Company’s matching contributions to the 401K were
$0.2 million in each of the ﬁscal years 2005,  2004, and 2003.

In the Deferred Proﬁt Sharing portion of the Plan, employer contributions are made at the discretion of the

Board of Directors. The Company made  no proﬁt  sharing contributions in  ﬁscal  years 2005, 2004, and 2003.

Note 7 — Stock-Based Compensation

Stock Options:

In June 2003, the Company adopted the Transcat, Inc. 2003 Incentive Plan (‘‘2003 Plan’’)
which  replaced  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  (‘‘1993  Plan’’).  The
approximately 918,000 shares that were outstanding as of the termination of the 1993 Plan were reserved under
the 2003 Plan. The 2003 Plan grants options to ofﬁcers and key employees to purchase Common Stock at no less
than the fair market value at the date of grant. Options generally vest over a period up to four years and expire up
to ten years from the date of grant. The following table summarizes the Company’s options for ﬁscal years 2005,
2004, and 2003 (shares in thousands):

Beginning of Year **************
Add (Deduct):

Granted *********************
Exercised *******************
Cancelled *******************
End of Year *******************
Exercisable, End of Year *********
Available for Grant, End of Year **

FY 2005
Number Weighted
Average
Price

of
Shares

FY 2004
Number Weighted
Average
Price

of
Shares

FY  2003
Number Weighted
Average
Price

of
Shares

875

$1.73

918

$1.87

889

$2.85

86
(214)
(59)
688

315
867

2.89
2.40
1.97
1.65

$1.51

147
(11)
(179)
875

114
943

2.32
1.05
2.95
1.73

$1.24

502
—
(473)
918

106
699

1.03
—
3.85
1.87

$3.85

In the third quarter of ﬁscal year 2005, the Company acquired treasury stock from a cashless stock option
exercise, in which, a Board of Director immediately used shares acquired, by exercising a portion of an option, to
exercise  the  remaining  shares  under  the  same  option.  As  a  result,  the  Company  recognized  $0.1  million  in
compensation  expense  from  the  difference  in  the  market  value  and  exercise  value  of  the  immature  shares  in
accordance with APB No. 25. This transaction resulted in an increase to Common Stock of 0.1 million shares,
$0.1 million, an increase to Capital in Excess of Par Value of $0.5 million, and an increase in Treasury Stock of
0.1 million shares, and $0.4 million.

The following table presents options outstanding or exercisable as of March 26, 2005 (shares in thousands,

except per share amounts):

Range of Exercise Prices:

$0.80-$1.94 **********************
$2.00-$3.00 **********************
Total *************************

Options Outstanding
Weighted
Average
Remaining
Contractual
Life (in Years)

Weighted
Average
Exercise
Price per
Share

Options Exercisable
Weighted
Average
Exercise
Price per
Share

Number
of
Shares

2.1
6.7
4.0

$1.04
$2.49
$1.65

203
112
315

$1.06
$2.33
$1.51

Number
of
Shares

399
289
688

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Warrants: Under  the  Directors’  Warrant  Plan,  as  amended,  warrants  may  be  granted  to  non-employee
directors to purchase Common Stock at the fair market value at the date of grant. Warrants generally vest over a
period of four years and expire in ﬁve years from the date of grant. The following table summarizes warrants for
ﬁscal years 2005, 2004, and 2003:

Balance, March 31, 2002*****************************************
Granted *******************************************************
Cancelled and Expired *******************************************
Balance, March 31, 2003*****************************************
Granted *******************************************************
Cancelled and Expired *******************************************
Balance, March 27, 2004*****************************************
Granted *******************************************************
Cancelled and Expired *******************************************
Balance, March 26, 2005*****************************************

Number
of Shares

Exercise Price
Per Share

88,000
28,000
(12,000)

104,000
32,000
(12,000)

124,000
32,000
(16,000)

$2.00-$7.89
$0.97
$2.00-$3.06

$0.97-$3.75
$2.31
$3.75

$0.97-$3.06
$2.83
$3.06

140,000

$0.97-$2.91

The Company granted warrants to purchase 500,000 shares of Common Stock on November 13, 2002 to the
Company’s previous lenders, Key Bank, N.A. and Citizens Bank, in accordance with a Termination Agreement
for  reﬁnancing  the  debt  with  GMAC.  See  Note  4  above  for  further  disclosure  regarding  debt.  100,000  shares
expired in the third quarter of ﬁscal year 2005. The following table summarizes warrants from the Termination
Agreement  that  were  originally  granted  and  are  outstanding  as  of  March  26,  2005  (shares  and  dollars  in
thousands):

As of 11/13/02

Number of
Shares
Outstanding

Pricing
Model
Valuation

100
100
300

500

$ 88
101
329

$518

Expiration
Date

11/13/2004
11/13/2005
11/13/2007

As  of 3/26/05

Number of
Shares
Outstanding

Pricing
Model
Valuation

—
100
300

400

$ —
101
329

$430

Restricted  Stock: The  2003  Plan  also  allows  the  Company  to  grant  stock  awards.  The  stock  awards
granted vest over a period of one year. The following table summarizes stock awards for ﬁscal years 2005, 2004,
and 2003:

Awards Granted ********************************************
Administrative Expenses, based on fair  market value **************

50
$278

70
$109

—
$—

Unearned compensation was less than $0.1 million  at  March 26, 2005 and  March 27, 2004.

FY 2005

FY 2004

FY 2003

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Note 8 — Segment and Geographic Data

Transcat  has  two  reportable  segments:  Distribution  Products  (‘‘Product’’)  and  Calibration  Services
(‘‘Service’’). The accounting policies of the reportable segments are the same as those described above in Note 1
of the Consolidated Financial Statements. The Company has no inter-segment sales. The following table presents
segment and geographic data for ﬁscal years 2005,  2004, and 2003:

FY 2005

FY 2004

FY 2003

Net Sales:

Product ***********************************************
Service ***********************************************
Total ***********************************************

$37,086
18,221

$35,423
17,894

$38,359
18,813

55,307

53,317

57,172

Gross Proﬁt:

Product ***********************************************
Service ***********************************************
Total ***********************************************

8,779
5,113

8,475
4,923

13,892

13,398

10,326
2,993

13,319

Operating Expenses:

Product (1) ********************************************
Service (1) ********************************************
Total ***********************************************
Operating Income*****************************************

Unallocated Amounts:

Other Expense (Income) *********************************
Beneﬁt for Income Taxes ********************************
Cumulative Effect of a Change in Accounting Principle *******
Total ***********************************************
Net Income (Loss) ****************************************

$

8,090
4,903

7,326
5,765

7,378
5,472

12,993

13,091

12,850

899

643
—
—

643

256

307

469

146
(192)
—

(46)

(880)
(408)
6,472

5,184

$

353

$ (4,715)

Total Assets (2):

Product ***********************************************
Service ***********************************************
Unallocated********************************************
Total ***********************************************

$12,690
6,223
1,199

$10,441
6,084
1,860

$ 9,753
5,356
1,650

$20,112

$18,385

$16,759

Depreciation and Amortization:

Product ***********************************************
Service ***********************************************
Unallocated********************************************
Total ***********************************************

$

634
636
216

$

$

296
691
312

$

633
1,414
—

$ 1,486

$ 1,299

$ 2,047

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Capital Expenditures:

Product ***********************************************
Service ***********************************************
Unallocated********************************************
Total ***********************************************

$ — $ — $

728
138

866

258
201

459

$

$

$

22
269
—

291

FY 2005

FY 2004

FY 2003

Geographic Data:

Net Sales to Unafﬁliated Customers (3):

United States ****************************************
Canada *********************************************
Total *********************************************

$50,170
5,137

$48,309
5,008

$52,035
5,146

$55,307

$53,317

$57,181

Long-Lived Assets(4):

United States ****************************************
Canada *********************************************
Total *********************************************

$ 1,759
340

$ 1,784
422

$ 2,075
481

$ 2,099

$ 2,206

$ 2,556

(1) Operating  expense  allocations  between  segments  were  based  on  actual  amounts,  a  percentage  of  sales,

headcount, and management’s estimates.

(2) Goodwill  of  $2.5  million  for  ﬁscal  years  2005,  2004,  and  2003  was  allocated  based  on  the  percentage  of

segment revenue acquired, 60% product  and 40% service.

(3) Net sales are attributed to the countries  based on  the location of the  subsidiary making the sale.

(4) Long-lived assets consist of property, plant, and equipment and capital leases and are entirely allocated to the

United States with the exception of Canadian  ﬁxed  assets.

Certain reclassiﬁcations of prior ﬁscal years’ ﬁnancial information have been made to conform with current

ﬁscal years’ presentation.

Note 9 — Commitments

Leases: Transcat  leases  facilities,  equipment,  and  vehicles  under  non-cancelable  operating  leases.  Total
rental  expense  for  ﬁscal  years  2005,  2004,  and  2003  was  approximately  $0.9  million,  $0.9  million,  and
$1.0 million, respectively. The Company leases certain computer equipment under non-cancelable capital leases.
Capital lease expenses for ﬁscal years 2005 and 2004 were less than $0.1 million in each year. The Company has

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

no  capital  lease  obligations  for  ﬁscal  year  2003.  The  minimum  future  annual  rental  payments  under  the  non-
cancelable leases at March 26, 2005 are  as follows (in millions):

Fiscal Year
2006**************************************************************
2007**************************************************************
2008**************************************************************
2009**************************************************************
2010**************************************************************
Thereafter *********************************************************
Total minimum lease payments ****************************************

Less: Amount representing interest *************************************

Capital
Leases

Operating
Leases

$0.8
0.6
0.4
0.3
—
—

$2.1

$0.1
0.1
—
—
—
—

0.2

—

Present value of net minimum lease payments ****************************

$0.2

Unconditional  Purchase  Obligation:

In  ﬁscal  year  2002,  the  Company  entered  into  a  distribution
agreement  (the  ‘‘Distribution  Agreement’’)  with  Fluke  Electronics  Corporation  (‘‘Fluke’’)  to  be  the  exclusive
worldwide  distributor  of  TPG  products  until  December  31,  2006.  Under  the  Distribution  Agreement,  the
Company also agreed to purchase a pre-determined amount of inventory from Fluke.

On  October  31,  2002,  with  an  effective  date  of  September  1,  2002,  the  Company  entered  into  a  new
distribution  agreement  (the  ‘‘New  Agreement’’)  with  Fluke,  which  replaced  the  Distribution  Agreement.  The
New Agreement ends on December 31, 2006. Under the terms of the New Agreement, among other items, the
Company agreed to purchase a larger, pre-determined amount of inventory across a broader array of products and
brands  during  each  calendar  year.  The  Company’s  purchases  for  calendar  years  2004  and  2003  exceeded  the
commitment  under  the  New  Agreement.  The  Company  believes  that  this  commitment  to  future  purchases  is
consistent with Transcat’s business needs and plans.

Note 10 — Litigation

In May 2002, Transcat’s former Vice President of Finance sued the Company in New York State Supreme
Court,  Monroe  County,  alleging,  among  other  items,  that  the  Company  breached  the  terms  of  his  employment
agreement with the Company when his employment was terminated. In November 2003, the Company settled the
lawsuit for $0.2 million in order to avoid ongoing litigation expenses. The $0.2 million was reﬂected in the ﬁscal
year 2004 Consolidated Statement of Operations as an administrative expense.

Note 11 — MAC Escrow and Holdback

On January 18, 2002, Transcat completed the sale of the Company’s Measurement and Controls (‘‘MAC’’)
unit to Hughes Corporation for $2.9 million and reported a lost of $4.5 million on the sale. In accordance with the
MAC  divestiture,  $0.2  million  was  received  upon  completion  of  certain  post-divestiture  services  that  the
Company substantially completed by March  31, 2003.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Note 12 — Employee Termination Costs

In  accordance  with  the  provisions  of  SFAS  No.  146,  ‘‘Accounting  for  Costs  Associated  with  Exit  or
Disposal Activities’’, the following table shows the amounts expensed and paid in ﬁscal years 2005, 2004, and
2003 for severance costs that were initially  incurred and accrued in  these years (in millions):

Balance
at the
Beginning
of the Year

Accrued
Costs

Actual
Payments

Balance  at
the End of
the Year

Severance:

FY 2005 **********************************
FY 2004 **********************************
FY 2003 **********************************

$0.1
$0.3
$ —

$0.1
$0.1
$0.4

$(0.2)
$(0.3)
$(0.1)

$ —
$0.1
$0.3

Note 13 — Vendor Concentration

Approximately  30%  of  Transcat’s  product  purchases  on  an  annual  basis  are  from  Fluke,  which  is  not

believed to be inconsistent with Fluke’s share  of the  markets the  Company services.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRANSCAT, INC.

Note 14 — Quarterly Data (Unaudited)

The  following  table  presents  certain  unaudited  quarterly  ﬁnancial  data  for  ﬁscal  years  2005  and  2004  (in

thousands, except per share amounts):

Income (Loss)
Before Cumu-
lative Effect of
a Change in
Accounting
Principle

Net
Income
(Loss)

Basic
Earnings
(Loss)
Per Share

Diluted
Earnings
(Loss)
Per Share

Net Sales

Gross
Proﬁt

FY 2005:

Fourth Quarter ********
Third Quarter *********
Second Quarter ********
First Quarter **********
Total **************

$15,557
14,040
12,488
13,222

$ 4,339
3,518
2,909
3,126

$55,307

$13,892

FY 2004:

Fourth Quarter ********
Third Quarter *********
Second Quarter ********
First Quarter **********
Total **************

$15,275
13,551
11,896
12,595

$ 3,633
3,083
3,483
3,199

$ 504
272
(93)
(427)

$ 256

$

43
(220)
355
175

$

504
272
(93)
(427)

$ 0.08
0.04
(0.01)
(0.07)

$ 0.07
0.04
(0.01)
(0.07)

$

256

$ 0.04

$ 0.04

$

43
(220)
355
175

$ 0.01
(0.03)
0.06
0.03

$ 0.01
(0.03)
0.05
0.03

$53,317

$13,398

$ 353

$

353

$ 0.06

$ 0.05

Certain  reclassiﬁcations  of  prior  ﬁscal  quarters’  ﬁnancial  information  have  been  made  to  conform  with
current ﬁscal quarters’ presentation.

56

TRANSCAT, INC.

SCHEDULE II: VALUATION AND QUALIFYING  ACCOUNTS
(In Thousands)

Balance
at the
Beginning
of the Year

Additions
(Reductions) to
Consolidated
Statements
of Operations

Additions
(Reductions) to
Consolidated
Balance Sheets

Reductions
due  to
Products
Sold

Balance
at the
End  of
the Year

Allowance for Doubtful Accounts:

FY 2005 *************************
FY 2004 *************************
FY 2003 *************************

Reserve  for Inventory Loss:

FY 2005 *************************
FY 2004 *************************
FY 2003 *************************

Deferred Asset Valuation Allowance:

FY 2005 *************************
FY 2004 *************************
FY 2003 *************************

51
$
$ 114
$ 231

$ 177
$ 395
$1,030

$3,793
$3,728
$2,589

$ (64)
$ —
$ —

13
$
$
20
$ —

9
$
$
65
$1,139

$ 69
$ (63)
$(117)

$ —
$ —
$ —

$ —
$ —
$ —

$ —
$ —
$ —

$ —
$(238)
$(635)

$ —
$ —
$ —

56
$
$
51
$ 114

$ 190
$ 177
$ 395

$3,802
$3,793
$3,728

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

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation  of  Disclosure  Controls  and  Procedures.  Our  Chairman,  President  and  Chief  Executive
Ofﬁcer  (our  principal  executive  ofﬁcer)  and  our  Chief  Operating  Ofﬁcer,  Vice  President  of  Finance  and  Chief
Financial Ofﬁcer (our principal ﬁnancial ofﬁcer) evaluated our disclosure controls and procedures (as deﬁned in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report. Based on
this  evaluation,  our  Chairman,  President  and  Chief  Executive  Ofﬁcer  and  our  Chief  Operating  Ofﬁcer,  Vice
President  of  Finance  and  Chief  Financial  Ofﬁcer  concluded  that  our  disclosure  controls  and  procedures  were
effective as of such date.

(b) Changes  in  Internal  Controls  over  Financial  Reporting.  There  has  been  no  change  in  our  internal
control  over  ﬁnancial  reporting  that  occurred  during  the  last  ﬁscal  quarter  covered  by  this  annual  report  (our
fourth ﬁscal quarter) that has materially affected, or is reasonably likely to materially affect, our internal control
over ﬁnancial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

57

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS  OF  THE REGISTRANT

The information required by this Item is hereby incorporated by reference to the information set forth under
the caption ‘‘Executive Ofﬁcers of the Registrant’’ in Part I of this Form 10-K and the information set forth under
the  captions  ‘‘Election  of  Directors,’’  ‘‘Executive  Ofﬁcers,’’  ‘‘Section  16(a)  Beneﬁcial  Ownership  Reporting
Compliance’’  and  ‘‘Corporate  Governance-Code  of  Ethics’’  in  our  deﬁnitive  2005  Proxy  Statement  to  be  ﬁled
pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is hereby incorporated by reference to the information set forth under
the  caption  ‘‘Executive  Compensation’’  in  our  deﬁnitive  2005  Proxy  Statement  to  be  ﬁled  pursuant  to
Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information required by this Item, with the exception of (d) below, is hereby incorporated by reference
to the information set forth under the captions ‘‘Security Ownership of Certain Beneﬁcial Owners’’ and ‘‘Security
Ownership of Management’’ in our deﬁnitive 2005 Proxy Statement to be ﬁled pursuant to Regulation 14A.

(d) Securities Authorized for Issuance  Under Equity Compensation Plans as of  March 26, 2005:

Equity Compensation Plan Information
(In Thousands, Except Per Share Amounts)

Number of securities
to be issued
upon exercise of
outstanding options,
warrants, and non-vested
restricted stock
(a)

Weighted-average
exercise price of
outstanding options,
warrants, and non-vested
restricted stock
(b)

Number of securities
remaining available for  future
issuance under equity
compensation  plans (excluding
securities reﬂected in column (a))
(c)

1,253

—

1,253

$1.63

$ —

$1.63

867

—

867

Plan category

Equity compensation plans
approved by security
holders ****************

Equity compensation plans
not approved by security
holders ****************
Total ****************

58

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is hereby incorporated by reference to the information set forth under
the caption ‘‘Certain Relationships and Related Transactions’’ in our deﬁnitive 2005 Proxy Statement to be ﬁled
pursuant to Regulation 14A.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is hereby incorporated by reference to the information set forth under
the caption ‘‘Ratiﬁcation of Appointment of Independent Registered Public Accounting Firm’’ in our deﬁnitive
2005 Proxy Statement to be ﬁled pursuant  to Regulation 14A.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) See Index to Financial Statements included as  Item  8 of this Form 10-K.

(b) Exhibits.

See Index to Exhibits beginning on page  62 of  this Form 10-K.

59

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.

SIGNATURES

TRANSCAT, INC.

Date: June 22, 2005

By:

/s/ CARL E. SASSANO
Carl E. Sassano
Director, Chairman, President &
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.

Date

Signature

Title

June 22, 2005

/s/ CARL E. SASSANO
Carl E. Sassano

Director, Chairman, President &
Chief Executive Ofﬁcer
(Principal Executive Ofﬁcer)

June 22, 2005

/s/ CHARLES P. HADEED
Charles P. Hadeed

COO, Vice President-Finance & CFO
(Principal Financial Ofﬁcer and
Principal Accounting Ofﬁcer)

June 22, 2005

/s/ FRANCIS R.  BRADLEY

Francis R. Bradley

June 22, 2005

/s/ E. LEE GARELICK
E.  Lee Garelick

June 22, 2005

/s/ RICHARD J. HARRISON

Richard J. Harrison

June 22, 2005

/s/ NANCY D. HESSLER
Nancy D. Hessler

June 22, 2005

/s/ ROBERT G. KLIMASEWSKI
Robert G. Klimasewski

June 22, 2005

/s/ PAUL D. MOORE
Paul  D. Moore

60

Director

Director

Director

Director

Director

Director

Date

Signature

June 22, 2005

/s/ CORNELIUS J. MURPHY
Cornelius J. Murphy

June 22, 2005

/s/ HARVEY J. PALMER
Harvey J. Palmer

June 22, 2005

/s/ ALAN H. RESNICK
Alan H. Resnick

June 22, 2005

/s/

JOHN T. SMITH
John T. Smith

Title

Director

Director

Director

Director

61

(2) Plan of acquisition, reorganization,  arrangement, liquidation or  succession

INDEX TO EXHIBITS

Not applicable

(3) Articles of Incorporation and By-Laws

3.1 The  Articles  of  Incorporation,  as  amended,  are  incorporated  herein  by  reference  to  Exhibit  4(a)  to  the
Company’s Registration Statement on Form S-8 (Registration No. 33-61665) ﬁled on August 8, 1995 and to Exhibit 3(i)
to the Company’s Form 10-Q for the quarter ended September 30, 1999.

3.2 By-Laws,  as  amended  through  August  18,  1987,  are  incorporated  herein  by  reference  to  Exhibit  (3) to  the

Company’s Form 10-K for the year ended  March 31,  1988. (SEC File No. 000-03905).

(4) Instruments deﬁning the rights of security holders, including indentures

The documents listed under (3) are incorporated  herein  by reference.

(9) Voting trust agreement

Not Applicable.

(10) Material Contracts

#10.1 Transcat, Inc. Directors’ Stock Plan is incorporated herein by reference to Exhibit 10(i) to the Company’s

Form 10-K for the ﬁscal year ended March 31, 1995.

#10.2 Transcat,  Inc.  Amended  and  Restated  Directors’  Warrant  Plan  is  incorporated  herein  by  reference  to
Exhibit  99(b)  to  the  Company’s  Registration  Statement  on  Form  S-8  (Registration  No.  33-61665)  ﬁled  on  August  8,
1995.

#10.3 Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  is  incorporated  herein  by  reference  to
Exhibit  99(c)  to  the  Company’s  Registration  Statement  on  Form  S-8  (Registration  Statement  No.  33-61665)  ﬁled  on
August 8, 1995.

#10.4 Transcat,  Inc.  Employees’  Stock  Purchase  Plan  is  incorporated  herein  to  Exhibit  99(e)  to  the  Company’s

Registration Statement on Form S-8 (Registration No. 33-61665) ﬁled on August  8, 1995.

#10.5 Amendment  No.  1  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to

Exhibit 10(i) to the Company’s Form 10-Q  for the  quarter ended  September 30,  1995.

#10.6 Amendment  No.  2  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to

Exhibit 10(a) to the Company’s Form 10-K  for the ﬁscal year  ended March 31, 1996.

#10.7 Amendment No. 1 to the Transcat, Inc. Employees’ Stock Purchase Plan is incorporated herein by reference

to Exhibit 10(b) to the Company’s Form 10-K for the ﬁscal year ended March 31, 1996.

#10.8 Amendment No. 1 to Transcat, Inc. Amended and Restated Directors’ Warrant Plan is incorporated herein by

reference to Exhibit II to the Company’s  Form 10-Q for  the  quarter ended September 30,  1996.

#10.9 Amendments  No.  1  and  No.  2  to  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  are
incorporated  herein  by  reference  to  Exhibits  III  and  IV  to  the  Company’s  Form  10-Q  for  the  quarter  ended
September 30, 1996.

#10.10 Amendment  No.  2  to  the  Transcat,  Inc.  Employees’  Stock  Purchase  Plan  is  incorporated  herein  by

reference to Exhibit V to the Company’s  Form  10-Q for the quarter ended September 30, 1996.

#10.11 Amendment  No.  3  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to

Exhibit 10(a) of the Company’s Form 10-K  for the year ended March 31,  1997.

#10.12 Amendment  No.  2  to  the  Transcat,  Inc.  Amended  and  Restated  Directors’  Warrant  Plan  is  incorporated

herein by reference to Exhibit 10(i) to the Company’s  Form 10-Q for the  quarter ended June 30, 1997.

62

#10.13 Amendments  No.  3  and  4  to  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  are
incorporated  herein  by  reference  to  Exhibit  10(j)  to  the  Company’s  Form  10-Q  for  the  quarter  ended  September  30,
1997.

#10.14 Amendment  No.  3  to  the  Transcat,  Inc.  Employees’  Stock  Purchase  Plan  is  incorporated  herein  by

reference to Exhibit 10(K) to the Company’s  Form  10-Q for the quarter ended September 30, 1997.

#10.15 Amendment  No.  5  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to

Exhibit 10(a) to the Company’s Form 10-K  for the year  ended March 31,  1998.

#10.16 Amendments  No.  3  and  4  to  the  Transcat,  Inc.  Amended  and  Restated  Directors’  Warrant  Plan  are
incorporated herein by reference to the Company’s deﬁnitive proxy statement ﬁled on July 7, 1998 in connection with
the 1998 Annual Meeting of Shareholders.

#10.17 Amendment  No.  4  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to
Exhibit 10(a) to the Company’s Form 10-Q for the quarter ended December 31, 1998 and supercedes Exhibit 10(b) to
the Company’s Form 10-Q for the quarter  ended June 30, 1997.

#10.18 Amendment  No.  5  to  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  is  incorporated

herein by reference to Exhibit 10(a) to the Company’s Form 10-K  for the ﬁscal year ended March  31, 1999.

#10.19 Amendment  No.  6  to  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  is  incorporated
herein by reference to Appendix A to the Company’s preliminary proxy statement ﬁled on June 21, 1999 in connection
with the 1999 Annual Meeting of Shareholders.

#10.20 Amendment  No.  5  to  the  Transcat,  Inc.  Amended  and  Restated  Directors’  Warrant  Plan  is  incorporated
herein  by  reference  to  Appendix  B  to  the  Company’s  1999  preliminary  proxy  statement  ﬁled  on  June  21,  1999  in
connection with the 1999 Annual Meeting  of  Shareholders.

#10.21 Amendment  No.  7  to  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  is  incorporated

herein by reference to Exhibit 10(b) to the Company’s Form 10-K for the  ﬁscal  year ended March 31, 2000.

#10.22 Amendment  No.  6  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to

Exhibit 10(a) to the Company’s Form 10-Q  for the quarter ended  September 30, 2000.

#10.23 Amendment  No.  8  to  the  Transcat,  inc.  Amended  and  Restated  1993  Stock  Option  Plan  is  incorporated

herein by reference to Exhibit 10(a) to the Company’s Form 10-K  for the ﬁscal year ended March  31, 2001.

#10.24 Amendment  No.  4  to  the  Transcat,  Inc.  Employees’  Stock  Purchase  Plan  is  incorporated  herein  by

reference to Exhibit 10(a) to the Company’s Form 10-Q for the quarter ended September  30, 2001.

#10.25 Amendment No. 8 to the Transcat, Inc. Amended and Restated Directors’ Stock Plan is incorporated herein

by reference to Exhibit 10(b) to the Company’s Form 10-Q  for the quarter  ended  September  30, 2001.

#10.26 Amendment  No.  7  to  the  Transcat,  Inc.  Directors’  Stock  Plan  is  incorporated  herein  by  reference  to

Exhibit 10(a) to the Company’s Form 10-Q  for the quarter ended  December 31, 2001.

10.27 Stock  Purchase  Agreement  dated  as  of  December  26,  2001  by  and  among  the  Company,  Altek  Industries
Corp. and Fluke Electronics Corp. is incorporated herein by reference to Exhibit 2(a) to the Company’s Current Report
on Form 8-K dated January 10, 2002.

+10.28 Distributor  Agreement  dated  December  26,  2001  by  and  between  the  Company  and  Fluke  Electronics
Corporation is incorporated herein by reference to Exhibit 99(a) to the Company’s Current Report on Form 8-K dated
January 10, 2002 and Exhibit 99(a) to  the  Company’s  Current Report on Form 8-K/A dated June 5, 2002.

10.29 Asset  Purchase  Agreement  dated  as  of  January  18,  2002  by  and  between  the  Company  and  Hughes
Corporation  is  incorporated  herein  by  reference  to  Exhibit  2(a)  to  the  Company’s  Current  Report  on  Form  8-K  dated
January 22, 2002.

#10.30 Amendment  No.  9  to  the  Transcat,  Inc.  Amended  and  Restated  1993  Stock  Option  Plan  is  incorporated

herein by reference to Exhibit 10(a) to the Company’s Form 10-K  for the year ended March  31, 2002.

63

+10.31 Fluke  Distribution  Agreement,  as  amended,  is  incorporated  herein  by  reference  to  Exhibit  10(a)  to  the

Company’s Form 10-Q for the quarter  ended September  30, 2002.

10.32 Loan  and  Security  Agreement  dated  November  12,  2002  by  and  among  GMAC  Business  Credit,  LLC,
Transcat,  Inc.  and  Transmation  (Canada)  Inc.  is  incorporated  herein  by  reference  to  Exhibit  4(a)  to  the  Company’s
Form 10-Q for the quarter ended December 31, 2002.

10.33 First  Amendment  to  Loan  and  Security  Agreement  dated  April  11,  2003  by  GMAC  Commercial  Finance
LLC  (successor  by  merger  to  GMAC  Business  Credit,  LLC),  Transcat,  Inc.  and  Transmation  (Canada)  Inc.  is
incorporated herein by reference to Exhibit 4(a)  to the Company’s Form  10-K for the year ended March  31, 2003.

#10.34 Amendment No. 10 to the Transcat, Inc. Amended and Restated 1993 Stock Option Plan is incorporated

herein by reference to Exhibit 10(a) to the Company’s Form 10-K  for the year ended March  31, 2003.

#10.35 Transcat,  Inc.  2003  Incentive  Plan  is  incorporated  herein  by  reference  to  Appendix  A  to  the  Company’s
2003  deﬁnitive  proxy  statement  ﬁled  on  July  18,  2003  in  connection  with  the  2003  Annual  Meeting  of  Shareholders.

#10.36 Form of Agreement for Severance Upon Change in Control for Carl E. Sassano and Charles P. Hadeed is
incorporated herein by reference Exhibit 10(a) to the Company’s Form 10-K for the ﬁscal year ended March 27, 2004.

10.37 Second Amendment to Loan and Security Agreement dated July 22, 2004 by GMAC Commercial Finance
LLC  (successor  by  merger  to  GMAC  Business  Credit,  LLC),  Transcat,  Inc.  and  Transmation  (Canada)  Inc.  is
incorporated herein by reference to Exhibit 4.4 to the Company’s Form  10-Q for the quarter  ended  June 26,  2004.

10.38 Third Amendment to Loan and Security Agreement between Transcat, Inc., Transmation (Canada) Inc. and
GMAC Commercial Finance LLC dated November 1, 2004 is incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K  dated  November 1, 2004.

#10.39 Form of Award Notice for Incentive Stock Options granted under the Transcat, Inc. 2003 Incentive Plan is
incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended December 25, 2004.

#10.40 Form  of  Award  Notice  for  Restricted  Stock  granted  under  the  Transcat,  Inc.  2003  Incentive  Plan  is
incorporated herein by reference to Exhibit 10.2 the Company’s Form 10-Q for the quarter ended December 25, 2004.

#10.41 Performance  Incentive  Plan  is  incorporated  herein  by  reference  to  the  Company’s  Current  Report  on

Form 8-K dated April 27, 2005.

*#10.42 Form  of  Warrant  Certiﬁcate  representing  warrants  granted  under  the  Amended  and  Restated  Directors’

Warrant Plan.

(11) Statement re computation of per share  earnings

Computation can be clearly determined from the Consolidated Statements of Operations and Comprehensive

Income (Loss) included herein as Item 8.

(12) Statement re computation of ratios

Not applicable.

(13) Annual report to security holders, Form  10-Q  or  quarterly report  to security  holders

Not applicable.

(16) Letter re change in certifying accountant

Not applicable.

(18) Letter re change in accounting principles

Not applicable.

(21) Subsidiaries of the registrant

*21.1 Subsidiaries of the Registrant

64

(22) Published report regarding matters  submitted to  vote of security holders

Not applicable.

(23) Consents of Experts and Counsel

*23.1 Consent of BDO Seidman, LLP

*23.2 Consent of PricewaterhouseCoopers  LLP

(24) Power of Attorney

Not applicable.

(31) Rule 13a-14(a)/15d-14(a) Certiﬁcations

*31.1 Certiﬁcation of Chief Executive Ofﬁcer

*31.2 Certiﬁcation of Chief Financial Ofﬁcer

(32) Section 1350 Certiﬁcations

*32.1 Section 1350 Certiﬁcations

(99) Additional Exhibits

Not applicable.

* Exhibits ﬁled with this report.

# Management contract or compensatory plan.

+ The Company has requested conﬁdential treatment of certain information contained in this Exhibit. Such information has
been ﬁled separately with the Securities and Exchange Commission pursuant to the Company’s application for conﬁdential
treatment under 17 C.F.R. § 200.80(b)(4) and § 240.24b-2.

65

Corporate Ofﬁcers

Board of Directors

Carl E.  Sassano
Chairman, President and Chief Executive Ofﬁcer

Charles  P. Hadeed
Chief Operating Ofﬁcer, Vice President  of Finance
and Chief Financial Ofﬁcer, Secretary/Treasurer

John A. DeVoldre
Vice President of Human Resources
and Assistant Secretary

Robert C. Maddamma
Vice President of Customer Satisfaction

Jay F. Woychick
Vice President of Marketing

Michael Mercurio
Vice President of Sales

Joanne B. Hand
Corporate Controller

Independent  Registered Public
Accounting Firm

BDO Seidman, LLP
New York, New York

General  Counsel

Harter, Secrest & Emery LLP
Rochester, New York

Investor Relations

Van Negris & Company, Inc.
New York, New York
Telephone: (212) 626-6730

Registrar & Transfer Agent

National City Bank
Cleveland, Ohio
Shareholder Services: (800) 622-6757

2005 Annual Meeting Information

Tuesday, August 16, 2005, 12:00 Noon EST
Corporate Ofﬁces
35 Vantage Point Drive
Rochester, New York 14624

Francis R. Bradley
Retired, E.I. DuPont de Nemours & Co., Inc.
Executive Associate, Sullivan Engineering Company

E. Lee Garelick
Retired, Altek Industries Corp.

Richard J. Harrison
Senior Retail Banking and Lending Ofﬁcer
National Bank of Geneva

Nancy D. Hessler
Vice President, Integrated People Solutions

Robert G. Klimasewski
Retired, Transcat, Inc.

Paul D. Moore
Senior Vice President, Senior Credit Ofﬁcer
M&T Bank Corporation

Cornelius J. Murphy
Principal, CJM & Associates

Dr. Harvey J. Palmer
Dean, Kate Gleason College of Engineering
Rochester Institute of Technology

Alan H. Resnick
President, Janal Capital Management LLC

Carl E. Sassano
Chairman, President and Chief Executive Ofﬁcer,
Transcat, Inc.

John T. Smith
Lead Director
Chairman and Chief Executive Ofﬁcer
Brite Computers, Inc.

Corporate Ofﬁces

35 Vantage Point Drive
Rochester, New York 14624
Telephone (585) 352-7777
Fax (585) 352-7788
www.transcat.com