TEAM INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED MAY 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-9950
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TEAM, INC.
(Exact name of registrant as specified in its charter)

TEXAS 74-1765729
(State of incorporation) (I.R.S. Employer Identification No.)
200 HERMANN DRIVE,
ALVIN, TEXAS 77511
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (281) 331-6154
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Securities registered pursuant to Section 12(b) of the Act:

Securities registered Pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [X]
As of August 16, 2002, 7,760,242 shares of the registrant's common stock
were outstanding, of which 5,265,883 were held by non-affiliates. The aggregate
market value of common stock held by non-affiliates of the registrant (based
upon the closing sales price of $8.15 per share on the American Stock Exchange,
Inc. on such date) was $42,916,946.

DOCUMENTS INCORPORATED BY REFERENCE

Part III. Portions of the Definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders of Team, Inc. to be held September 26, 2002.
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FORM 10-K INDEX

PART I

i

PART I

ITEM 1. BUSINESS

(a) General Development of Business

Team, Inc. ("Team" or the "Company"), incorporated in 1973, is a full
service provider of specialized industrial services including leak repair, hot
tapping, emissions control monitoring, field machining, technical bolting and
non destructive testing/examination ("NDT-NDE") inspection services. These
services are provided throughout the United States in approximately 40
locations.

The Company licenses its proprietary leak repair and hot tapping techniques
and materials to various companies outside the United States and receives a
royalty based upon revenues earned by the licensee. Additionally, the Company
conducts operations through international locations in Singapore, Trinidad and
Asia. To date, international operations have not been material to the overall
operations of the Company.

Additionally, through its wholly-owned subsidiary, Climax Portable Machine
Tools, Inc. ("Climax") of Newberg, Oregon, the Company is engaged in a separate
business segment -- equipment sales and rental. Climax is a leading
designer-manufacturer of portable, metal cutting machine tools used for on-site
industrial maintenance. The Climax acquisition provided the support for the
Company's offering of on-site field machining services beginning in February of
1999.

(b) Financial Information about Segments

See Note 12 to accompanying financial statements for financial information
about business segments.

(c) Narrative Description of Business

The Company operates in two reportable revenue generating segments -- (1)
industrial services and (2) equipment sales and rental. Industrial services
consist principally of leak repair, hot tapping, emissions control monitoring,
on-site field machining and inspection. The equipment sales and rentals segment
is comprised of the Climax business. The following table sets forth the revenues
(in thousands) from each segment in the three years ended May 31:

INDUSTRIAL SERVICES

The Company provides industrial services for over 2000 customers in the
chemical, petrochemical, refining, pulp and paper, power, steel and other
industries. Services include leak repair, hot tapping, emissions control, and,
more recently, field machining and NDT inspection.

Leak Repair Services. The Company is the leader in the industry in
providing on-stream repairs of leaks in piping systems and related equipment. In
conjunction with its leak repair services, the Company markets a line of
products, which includes both standard and custom-designed clamps and enclosures
for plant systems and pipelines. The Company's leak repair services consist of
on-stream repairs of leaks in pipes, valves, flanges and other parts of piping
systems and related equipment primarily in the chemical, refining and utility
industries. The Company uses specially developed techniques, sealants and
equipment for repairs. Many of the Company's repairs are furnished as interim
measures which allow plant systems to continue operating until more permanent
repairs can be made during scheduled plant shutdowns.

The Company's leak repair services involve inspection of the leak by the
Company's field crew who records pertinent information about the faulty part of
the system and transmits the information to the Company's engineering department
for determination of appropriate repair techniques. Repair materials such

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as clamps and enclosures are custom designed and manufactured at the Company's
facility in Alvin, Texas and delivered to the job site. The Company maintains an
inventory of raw materials and semi-finished clamps and enclosures to reduce the
time required to manufacture the finished product. Installations of the clamps
and enclosures for on-stream repair work are then performed by the field crew
using, in large part, materials and sealants that are developed and produced by
the Company.

The Company's manufacturing center has earned the international ISO-9001
certification for its engineering design and manufacturing operations. ISO-9001
is the most stringent of all ISO-9000 certification programs.

The Company's non-destructive repair methods do not compromise the
integrity of its customer's process system and can be performed in temperatures
ranging from cryogenic to 1,700 degrees Fahrenheit and with pressures from
vacuum to 6,000 pounds per square inch. The Company's proprietary sealants are
specifically formulated to repair leaks involving over 300 different kinds of
chemicals.

Management attributes the success of its leak repair services to be
substantially due to the quality and timely performance of its services by its
highly skilled in-house trained technicians, its proprietary techniques and
materials and its ability to repair leaks without shutting down the customer's
operating system. On-stream repairs can prevent a customer's continued loss of
energy or process materials through leaks, thereby avoiding costly energy and
production losses that accompany equipment shutdowns, and also lessen fugitive
emissions escaping into the atmosphere.

The Company has continued to develop different types of standard and
custom-designed clamps, enclosures and other repair products, which complement
the Company's existing industrial market for leak repair services. The Company's
leak repair services are supported by an in-house Quality Assurance/Quality
Control program that monitors the design and manufacture of each product to
assure material traceability on critical jobs and to ensure compliance with
customers' requirements.

Hot Tapping Services. The Company's hot tapping services consist primarily
of hot tapping and Line-stop(R) services. Hot tapping services involve utilizing
special equipment to cut a hole in an on-stream, pressurized pipeline so that a
new line can be connected onto the existing line without interrupting
operations. Hot tapping is frequently used for making branch connections into
piping systems while the production process is operative. Line-stop(R) services
permit the line to be depressurized downstream so that maintenance work can be
performed on the piping system. The Company typically performs these services by
mechanically drilling and cutting into the pipeline and installing a device to
stop the process flow. The Company also utilizes a line freezing procedure when
applicable to stop the process flow using special equipment and techniques.

Emissions Control Services. The Company also provides leak detection
services that include fugitive emissions identification, monitoring, data
management and reporting services primarily for the chemical, refining and
natural gas processing industries. These services are designed to monitor and
record emissions from specific process equipment components as requested by the
customer, typically to assist the customer in establishing an ongoing
maintenance program and/or complying with present and/or future environmental
regulations. The Company prepares standard reports in conjunction with EPA
requirements or can custom-design these reports to its customers'
specifications.

Field Machining and Technical Bolting Services. The Climax acquisition in
August 1998 provided the platform for the Company's entry into field machining
services in February 1999. This service involves the use of portable machining
equipment (manufactured by Climax, as well as third party vendors) to repair or
modify in-place machinery, equipment, vessels and piping systems not easily
removed from a permanent location. As opposed to the conventional machining
process where the work piece rotates and the cutting tool is fixed, in field
machining, the work piece remains fixed and the cutting tool rotates. Other
common descriptions for this service are on-site or in-place machining. Field
machining services include flange facing, pipe cutting, line boring, journal
turning, drilling, and milling. Technical bolting services are often provided to
our customers as an adjunct to field machining during turnaround or maintenance
activities. These services involve the use of hydraulic or pneumatic equipment
with bolt tightening techniques to achieve reliable and leak-free connections
and also include bolt disassembly using hot bolting or nut splitting techniques.

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Field machining and technical bolting services are offered to the Company's
existing customer base through its extensive branch operations. In contrast to
Team's other traditional industrial services which are performed while plant
units are in operation (i.e., on-stream), field machining is an off-stream
operation performed during piping isolations, shutdowns, or plant turnarounds.

Inspection Services. With the acquisition of XRI, the Company has
incorporated NDT inspection as a core industrial service offering. Inspection
services consist of the testing and evaluation of piping, piping components and
equipment to determine the present condition and predict remaining operability.
The Company's inspection services use all the common methods of non-destructive
testing, including radiography, ultrasound, magnetic particle and dye penetrate,
as well as, higher end robotic and newly developed ultrasonic systems. The
Company provides these services as part of planned construction and maintenance
programs and on demand as the situation dictates, and provides reports based on
interpretation in accordance to industry and national standards. Inspection
services are marketed to the same industrial customer base as other Team
services and to the pipeline industry. There are a large number of companies
offering mechanical inspection services, with no single company having a
significant share of the overall market.

Marketing and Customers. Team's industrial repair services are marketed
principally by personnel based at the Company's approximate 40 locations. Team
has developed a cross-marketing program to utilize its sales personnel in
offering many of the Company's services at its operating locations. Management
believes that these operating and office locations are situated to facilitate
timely response to customer needs, which is an important feature of its
services. No customer accounted for 10% or more of consolidated Company revenues
during any of the last three fiscal years.

Generally, customers are billed on a time and materials basis although some
work may be performed pursuant to a fixed-price bid. Emission control services
may also be billed based on the number of components monitored. Services are
usually performed pursuant to purchase orders issued under written customer
agreements. While some purchase orders provide for the performance of a single
job, others provide for services to be performed for a term of one year or less.
In addition, Team is a party to certain long-term contracts, which are enabling
agreements only. Substantially all such agreements may be terminated by either
party on short notice. The agreements generally specify the range of services to
be performed and the hourly rates for labor. While contracts have traditionally
been entered into for specific plants or locations, the Company has recently
entered into multiple regional or national contracts, which cover multiple
plants or locations.

The Company's industrial services are available 24 hours a day, seven days
a week, 365 days a year. The Company typically provides various limited
warranties for certain of its repair services. To date, there have been no
significant warranty claims filed against the Company.

Business Risks. While the Company's management is optimistic about Team's
future, maintaining and expanding customer relationships and service volumes are
key elements of the Company's strategy. Weakness in the markets served by the
Company could constrain demand. Although the Company has a diversified customer
base, a substantial portion of its business is dependent upon the chemical and
refining industry sectors. Competitive initiatives and/or poor service
performance could also reduce the strength and breadth of current customer
relationships and preference for the Company. Although management believes
sufficient qualified personnel are available in most areas, no assurance can be
made that such personnel will be available when needed

Competition. Competition in the Company's industrial services is primarily
on the basis of service, quality, timeliness, and price. In general, competition
stems from other outside service contractors and customers' in-house maintenance
departments. Management believes Team has a competitive advantage over most
service contractors due to the quality, training and experience of its
technicians, its nationwide service capability, and due to the broad range of
services provided, as well as its technical support and manufacturing
capabilities supporting the service network. Management knows of two service
contractors of a similar size with which the Company generally competes. Other
principal competitors are primarily single-location or single-service companies
that compete within a certain geographical area.

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EQUIPMENT SALES AND RENTALS

In August, 1998 the Company entered a new business segment -- equipment
sales and rentals -- through the acquisition of Climax, a leading
design-manufacturer of portable machine tools located in Newberg, Oregon.
Climax' standard tools offering consists of boring bars, pipe beveling tools,
key mills, portable flange facers, and portable lathes. These tools are sold to
end users in the utilities, refining, and extractive industries, or to other
service providers and contractors, such as Team. In addition, Climax designs and
manufactures customized machining tools for on-site machine repair,
manufacturing, fabrication and construction applications.

Climax's design and manufacturing operations are conducted in a 30,000
square feet facility in Newberg, Oregon that is owned by the company and pledged
to secure Team's bank debt (see Note 6 of Notes to the Consolidated Financial
Statements). Climax uses state of the art equipment in its manufacturing process
and maintains an inventory of raw materials, parts and completed machines as
needed to support the current level of business. Most of the Company's orders
for equipment are filled within 30 days of receipt. The Company believes that
there are a limited number of original equipment manufacturers that compete with
Climax and that it has a market share of approximately 10%. No single customer
accounted for more than 10% of Climax revenues in fiscal 2002, 2001 or 2000.

GENERAL

Employees. As of May 31, 2002, the Company and its subsidiaries had
approximately 850 employees in its operations. The Company's employees are not
unionized. There have been no employee work stoppages to date, and management
believes its relations with its employees are good.

Insurance. The Company carries insurance it believes to be appropriate for
the businesses in which it is engaged. Under its insurance policies, the Company
has per occurrence self-insured retention limits of $25,000 for general
liability, $100,000 for professional liability, $250,000 for automobile
liability and workers' compensation in most states. The Company has obtained
fully insured layers of coverage above such self-retention limits. Since its
inception, the Company has not been the subject of any significant liability
claims not covered by insurance arising from the furnishing of its services or
products to customers. However, because of the nature of the Company's business,
there exists the risk that in the future such liability claims could be asserted
which might not be covered by insurance.

Regulation. Substantially all of the Company's business activities are
subject to federal, state and local laws and regulations. These regulations are
administered by various federal, state and local health and safety and
environmental agencies and authorities, including the Occupational Safety and
Health Administration ("OSHA") of the U.S. Department of Labor and the EPA. The
Company's training programs are required to meet certain OSHA standards.
Expenditures relating to such regulations are made in the normal course of the
Company's business and are neither material nor place the Company at any
competitive disadvantage. The Company does not currently expect to expend
material amounts for compliance with such laws during the ensuing two fiscal
years.

From time-to-time in the operation of its environmental consulting and
engineering services, the assets of which were sold in 1996, the Company handled
small quantities of certain hazardous wastes or other substances generated by
its customers. Under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (the "Superfund Act"), the EPA is authorized to take
administrative and judicial action to either cause parties who are responsible
under the Superfund Act for cleaning up any unauthorized release of hazardous
substances to do so, or to clean up such hazardous substances and to seek
reimbursement of the costs thereof from the responsible parties, who are jointly
and severally liable for such costs under the Superfund Act. The EPA may also
bring suit for treble damages from responsible parties who unreasonably refuse
to voluntarily participate in such a clean up or funding thereof. Responsible
parties include anyone who owns or operates the facility where the release
occurred (either currently and/or at the time such hazardous substances were
disposed of), or who by contract arranges for disposal, treatment, or
transportation for disposal or treatment of a hazardous substance, or who
accepts hazardous substances for transport to disposal or treatment facilities
selected by such person from which there is a release. Management believes that
its risk
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of liability is minimized since its handling consisted solely of maintaining and
storing small samples of materials for laboratory analysis that are classified
as hazardous. The Company does not currently carry insurance to cover
liabilities which the Company may incur under the Superfund Act or similar
environmental statutes due to its prohibitive costs.

Patents. While the Company is the holder of various patents, trademarks,
and licenses, the Company does not consider any individual property to be
material to its consolidated business operations.

ITEM 2. PROPERTIES

Team and its subsidiaries own real estate and office facilities in the
Alvin, Texas area totaling approximately 88,000 square feet of floor space.
These facilities are comprised of a corporate office and training building and a
manufacturing facility for clamps, enclosures and sealants. The Company also
owns real estate and facilities in Newberg, Oregon, which is the manufacturing
facility and corporate office of Climax. All of those facilities are pledged as
security for the Company's credit facility. (See Note 6 of Notes to Consolidated
Financial Statements.) The Company and its subsidiaries also lease 36 office
and/or plant and shop facilities at separate locations in 17 states.

The Company believes that its property and equipment, as well as that of
its subsidiaries, are adequate for its current needs, although additional
investments are expected to be made in additional property and equipment for
expansion, replacement of assets at the end of their useful lives and in
connection with corporate development activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 10 of
Notes to Consolidated Financial Statements for information regarding lease
obligations on these properties.

ITEM 3. LEGAL PROCEEDINGS

In May 2002, a jury verdict was rendered against the Company in an
employment related case brought in the United States District Court for the
Western District of Louisiana. The case involves allegations of misconduct by
personnel in one of the Company's branches during the years 1998 and 1999. In
August 2002, the Court ruled on certain post-trial motions and determined that,
with respect to one of the two plaintiffs, a $300,000 judgment will be entered
against the Company. With respect to the second plaintiff, the Court set aside
the jury verdict on most points and granted the Company's motion for a new trial
on a specific issue. The Company is presently evaluating its legal options with
respect to this case. In management's opinion, an adequate accrual has been made
in the financial statements as of May 31, 2002 to provide for the probable
amount of loss in this case.

In December 2001, the Company was named a defendant in a lawsuit, along
with 18 other parties, alleging that a former subsidiary, French Ltd.
("French"), was involved in the illegal disposal of hazardous substances during
the years 1969 and 1970. The plaintiff's allege that Team is a
successor-in-interest to French and is, therefore, liable for contribution to a
settlement embodied in a consent decree entered into by the plaintiffs with the
EPA in 1998. French was acquired by Team in 1978 and sold back to its prior
owner in 1984. The case is early in the discovery stage and the Company is
unable to estimate a range of potential loss, if any, with respect to this
matter. However, the Company vigorously denies that it is a
successor-in-interest of French and that it has any responsibility in this
matter.

The Company and certain subsidiaries are involved in various other lawsuits
and are subject to various claims and proceedings encountered in the normal
conduct of business. In the opinion of management, any uninsured losses that
might arise from these lawsuits and proceedings will not have a materially
adverse effect on the Company's consolidated financial statements.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.

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PART II

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

(a) Market Information

Team's common stock is traded on the American Stock Exchange, Inc. under
the symbol "TMI". The table below reflects the high and low sales prices of the
Company's common stock on the American Stock Exchange by fiscal quarter for the
fiscal years ended May 31, 2002 and 2001, respectively.

(b) Holders

There were 311 holders of record of Team's common stock as of August 16,
2002, excluding beneficial owners of stock held in street name. Although exact
information is unavailable, the Company estimates there are approximately 1,300
additional beneficial owners based upon information gathered in connection with
proxy solicitation.

(c) Dividends

No dividends were declared or paid in fiscal 2002, 2001 or 2000. Pursuant
to the Company's Credit Agreement, the Company may not pay dividends without the
consent of its primary lender. Additionally, future dividend payments will
continue to depend on Team's financial condition, market conditions and other
matters deemed relevant by the Board of Directors.

(d) Stock Repurchase Plan

In fiscal 2002, the Company repurchased 435,000 shares of its outstanding
common stock at a weighted average price of $4.59 per share, including 235,000
shares repurchased in a self-tender offer completed in June 2001 and 200,000
shares reacquired through open market purchases. As of May 31, 2002, the Company
is authorized by its Board of Directors and lender to expend up to an additional
$1.6 million on open market repurchases.

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ITEM 6. SELECTED FINANCIAL DATA

The following is a summary of certain consolidated financial information
regarding the Company for the five years ended May 31, 2002 (amounts in
thousands, except per share data):

BALANCE SHEET DATA

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

FISCAL 2002 COMPARED TO FISCAL 2001

Revenues in 2002 were $85.1 million compared to $75.6 million in 2001, an
increase of 12.5%. This double-digit revenue growth resulted in significant
operating leverage for the Company with operating profits (earnings before
interest and taxes, or "EBIT") increasing by 24.1% to $7.2 million in 2002 as
compared to $5.8 million in 2001. Operating profits in fiscal 2002 were impacted
by a $368 thousand non-cash charge related to management stock options and by a
severance charge in the Climax business of $173 thousand. In contrast, operating
profits in fiscal 2001 benefited from other income (primarily gains on asset
sales) of $278 thousand. Without regard to those elements of other income and
expense, the operating profit improvement would have been 40.2% year over year.

The improvement in operating results in 2002 was attributable both to the
continued growth in newer services offered by the industrial services segment,
as well as a rebound in profitability of the equipment sales and rental segment.
With respect to industrial services, newer services comprise those services
whose offerings began during fiscal year 1999 -- NDT inspection, field machining
and technical bolting. Traditional services include leak repair, hot tapping and
fugitive emissions monitoring.

The following sets forth the revenue composition of industrial services
between new and traditional services:

As the table illustrates, year over year revenue growth in the industrial
services segment came primarily from the newer service lines, which grew at a
43.5% rate. This growth has come primarily as a result of market share gains
earned by improving the penetration of new service offerings to the Company's
traditional customer base as well as an increase in the demand for our
inspection services to the pipeline industry due to new pipeline construction
and increased regulatory activities in the pipeline industry.

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Management believes that demand for the Company's traditional services is,
generally, a function of the population of high-temperature, high-pressure
piping systems. Demand is also somewhat related, especially for leak repair and
hot tapping, to the operating performance of our customers -- particularly in
the refining, pipeline, and petrochemical industries. Generally, as those
customers' margins improve, more funds are expended for the specialized
industrial services offered by the Company. Through the third quarter which
ended February 28, 2002, traditional service revenues were 1% behind year over
year amounts due to a significant softening in third quarter demand. In the
fourth quarter ended May 31, 2002, revenues from traditional services grew at a
9% rate in comparison to the fourth quarter of fiscal 2001, resulting in the
nearly 2% increase for the year overall. The fourth quarter strengthening was
impacted by two new multi-location, multi-service contracts which came on-stream
during the quarter.

The equipment sales and rental segment also achieved a strong rebound
during the fourth quarter of the year. Through the third quarter, the segment
had operated at a small loss year to date, partially due to the recognition of
$173 thousand of costs associated with a reduction in work force implemented in
December 2001. In the fourth quarter, revenues increased 34.5% compared to the
same quarter of fiscal 2001 due principally to a $700 thousand shipment to the
U.S. Navy. As a result of the strong revenue growth, operating profits for the
segment were nearly $600 thousand in the fourth quarter. This strong performance
in the quarter resulted in an operating profit for the year of $547 thousand, a
$736 thousand improvement over the loss reported last year of $189 thousand.

Overall, gross margins were 41.7% of revenues in fiscal 2002 as compared to
40.4% in fiscal 2001. The improvement reflects better margins in both the
industrial services segment and the equipment sales and rental segment.
Industrial services margins improved primarily in the NDT inspection line due to
better performance in Texas locations. Climax margins improved due to cost
reductions efforts and due to the business rebound experienced in the fourth
quarter.

Selling, general and administrative expenses were 32.5% of revenues in
fiscal 2002 versus 33.1% of revenues in fiscal 2001. This reduction in SG&A
expenses as a percentage of revenues illustrates the operating leverage that
management believes exists in the business -- double-digit revenue growth will
result in a faster rate of increase in profits since revenue growth can be
supported without a proportionate increase in selling, general and
administrative costs.

The non-cash G&A compensation expense of $368 thousand in fiscal 2002 was
related to the vesting of performance stock options previously awarded to the
Company's chief executive officer. When the CEO joined the Company in 1998, he
was awarded 200,000 performance-based stock options at the market price on the
date of award of $3.625 per share. One third of these options vest upon the
sustained achievement of average stock prices of $7.00, $10.50, and $14.00 per
share. The first standard was met near the end of May 2002, when the price of
Team's stock was $9.15 per share. Consequently, at that time, the Company was
required to recognize a non-cash G&A compensation charge associated with one
third of the options (approximately $0.03 per share, net of tax benefit).

Income tax expense as a percent of pre-tax income was 38.4% in fiscal 2002
as compared to 35.0% in fiscal 2001. The 2001 tax rate reflects a $400,000 tax
benefit associated with the liquidation of a small subsidiary in the United
Kingdom in that year.

FISCAL 2001 COMPARED TO FISCAL 2000

Revenues in 2001 were $75.6 million compared to $66.6 million in 2000, an
increase of 13.5%. This double-digit revenue growth resulted in significant
operating leverage for the Company with operating profits (earnings before
interest and taxes, or "EBIT") increasing by 41.5% to $5.8 million in 2001 as
compared to $4.1 million in 2000.

The improvement in operating results in 2001 was attributable to the
industrial services segment whose revenues increased by $10.4 million, or 18.6%,
to $66.5 million. EBIT for the industrial services segment was $9.8 million, an
increase of 35.3% over 2000. The revenue growth occurred in both traditional
service lines --

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leak repair, hot tapping, and emissions control monitoring -- and in the newer
service lines -- inspection, field machining and technical bolting.

Revenue from traditional service lines grew by 15% over fiscal 2000, which
is a result of a combination of factors: (1) fiscal 2001 was a strong year for
refining margins, which results in an increased demand for the Company's
on-stream service offerings to avoid the necessity of our customers having to
shut-down operating units; (2) we obtained significant new contracts for
fugitive emissions monitoring in fiscal 2001 as a result of a trend toward
customers' out-sourcing of these compliance functions to professional service
providers such as Team, coupled with an increase in enforcement actions by
federal and state agencies, and (3) an increase in market penetration for our
traditional services.

Team's newer services grew at an even faster rate -- with revenue from
inspection, field machining and technical bolting growing by 44% over fiscal
2000. The rapid growth in these services is a result of two primary factors: (1)
an increase in the demand for our inspection services to the pipeline industry
due to new pipeline construction and increased regulatory activities in the
pipeline industry; and (2) a continuing penetration of our newer services within
our existing customer base.

In contrast to the services segment, the equipment sales and rental segment
experienced a disappointing fiscal 2001, with sales of $9.2 million being 13.5%
less than the fiscal 2000 amount, with the significant portion of the reduction
coming in the first half of the year. Management believes the sales decline is
due primarily to a softness in capital equipment markets.

Overall, gross margins were 40.4% of revenues in fiscal 2001 as compared to
42.6% in fiscal 2000. The reduction is associated with the severely depressed
margins at Climax during the first half of fiscal 2001 and due to pricing
concessions to sustain the growth in services revenues. The decline in margins
was compensated for by an overall reduction in selling, general and
administrative expenses, which were 33.1% of revenues in fiscal 2001 versus
36.7% of revenues in fiscal 2000. This reduction in SG&A expenses as a
percentage of revenues illustrates the operating leverage that management
believes exists in the business -- double-digit revenue growth will result in a
faster rate of increase in profits since revenue growth can be supported without
a proportionate increase in selling, general and administrative costs.

Income tax expense as a percent of pre-tax income was 35.0% in fiscal 2001
as compared to 41.5% in fiscal 2000 due to the recognition of a $400,000
effective tax benefit associated with the liquidation of a small subsidiary in
the United Kingdom in 2001.

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 2002, the Company's liquid working capital (cash and accounts
receivable, less current liabilities) totaled $8.7 million, an increase of $900
thousand since May 31, 2001. The Company utilizes excess operating funds to
automatically reduce the amount outstanding under the revolving credit facility.
At May 31, 2002, the outstanding balance under the revolving credit facility was
$5.9 million and approximately $5.2 million was available to borrow under the
facility.

During fiscal 2002, the Company reduced its total outstanding debt by $1.6
million as a result of cash flow from operations. In fiscal 2002, the Company
also expended $2.0 million to reacquire an additional 435,000 shares of its
common stock, including 235,000 shares pursuant to a self-tender offer and
200,000 on the open market pursuant to a stock repurchase plan.

In the opinion of management, the Company currently has sufficient funds
and adequate financial sources available to meet its anticipated liquidity
needs. Management believes that cash flows from operations, cash balances and
available borrowings will be sufficient for the foreseeable future to finance
anticipated working capital requirements, capital expenditures and debt service
requirements.

The Company has a $24 million bank credit facility that consists of: (i) a
$12,500,000 revolving loan, which matures September 30, 2003, (ii) $9,500,000 in
term loans for business acquisitions and (iii) a $2,000,000 mortgage loan.
Amounts borrowed against the term loans are due in quarterly installments in the
amount of $339,000 until the loans mature on September 30, 2003. Amounts
borrowed against the mortgage

9

loan are repaid in quarterly installments of $31,000 until its maturity date of
September 30, 2008. Amounts outstanding under the credit facility bear interest
at a marginal rate over either the LIBOR rate or the prime rate. At May 31,
2002, the Company's marginal rate was 1.5% over the LIBOR rate. The weighted
average rate on outstanding borrowings at May 31, 2002 is approximately 4.3%.
The Company also pays a commitment fee of .25% per annum on the average amount
of the unused availability under the revolving loan.

The Company entered into an interest rate swap agreement that expires in
September, 2003 and which qualifies as a cash flow hedge under SFAS No. 133. The
agreement was entered into in 1998 to hedge the exposure of an increase in
interest rates. Pursuant to this agreement, which covers approximately $2.9
million of outstanding debt, the Company exchanged a variable LIBOR rate for a
fixed LIBOR rate of approximately 5.2%. Two other swap agreements, covering
approximately $3.5 million, expired on December 31, 2001.

As the interest rates on the credit facility are based on market rates, the
fair value of amounts outstanding under the facility approximate the carrying
value. The interest rate swap agreements, which have no carrying value, had a
negative mark-to-market value of approximately $92,000 and $56,000 at May 31,
2002 and 2001, respectively. The fair value of interest rate swaps is estimated
by discounting expected cash flows using quoted market interest rates.

Loans under the credit facility are secured by substantially all of the
assets of the Company. The terms of the agreement require the maintenance of
certain financial ratios and limit investments, liens, leases and indebtedness,
and dividends, among other things. At May 31, 2002 and 2001, the Company was in
compliance with all credit facility covenants.

At May 31, 2002, the Company was contingently liable for $1.4 million in
outstanding stand-by letters of credit and, at that date, approximately $5.2
million was available to borrow under the credit facility.

CRITICAL ACCOUNTING POLICIES

Goodwill -- The Company has $10.0 million of recorded goodwill associated
with business acquisitions made in fiscal year 1999. Of that amount,
approximately $6.8 million is associated with the industrial services segment
and $3.2 million is associated with the equipment sales and rental business.
Through May 31, 2002, Goodwill was being amortized over 40 years and its
carrying value was periodically evaluated using management's estimate of future
undiscounted cash flows in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". Under SFAS No. 121, there has been
no impairment of the Company's recorded goodwill. Effective at the beginning of
the Company's next fiscal year, June 1, 2002, we will adopt the provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets", which requires that
goodwill no longer be amortized but that it be reviewed for impairment annually
using a methodology that is different than the methodology required under SFAS
No. 121. Management is presently evaluating the impact of SFAS No. 142 on the
consolidated financial statements. At present, management does not expect there
to be any adjustment to the carrying value of goodwill as a result of the
implementation of SFAS No. 142.

Revenue Recognition -- The Company derives its revenues by providing a
variety of industrial services including leak repair, hot tapping, emissions
control services, field machining and inspection services. In addition, the
Company sells and rents portable machine tools through one of its subsidiaries.
For all of these services, revenues are recognized when services are rendered or
when product is shipped and risk of ownership passes to the customer.

Deferred Income Taxes -- The Company records deferred income tax assets and
liabilities related to temporary differences between the book and tax bases of
assets and liabilities. The Company computes its deferred tax balances by
multiplying these temporary differences by the current tax rates. If deferred
tax assets exceed deferred tax liabilities, the Company must estimate whether
those net deferred asset amounts will be realized in the future. A valuation
allowance is then provided for the net deferred asset amounts that are not
likely to be realized. As of May 31, 2002 management believes that it is more
likely than not that the Company will have sufficient future taxable income to
allow it to realize the benefits of the net deferred tax assets. Accordingly, no
valuation allowance has been recorded.

10

Loss Contingencies -- The Company is involved in various lawsuits and
claims encountered in the normal course of business. When such a matter arises
and periodically thereafter, management consults with its legal counsel and
evaluates the merits of the claim based on the facts available at that time.
Currently, the Company is involved with two significant matters, which are
summarized in Legal Proceedings above. In management's opinion, an adequate
accrual has been made as of May 31, 2002 to provide for any losses that may
arise from these contingencies.

OTHER CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The Company enters into capital leases related to certain computer and
equipment and software, as well as operating leases related to facilities and
transportation and other equipment. These operating leases are over terms
ranging from one to five years with typical renewal options and escalation
clauses.

The Company is occasionally required to post letters of credit generally
issued by a bank as collateral under certain agreements. A letter of credit
commits the issuer to remit specified amounts to the holder, if the holder
demonstrates that the Company has failed to meet its obligations under the
letter of credit. If this were to occur, the Company would be obligated to
reimburse the issuer for any payments the issuer was required to remit to the
holder of the letter of credit. To date, the Company has not had any claims made
against a letter of credit that resulted in a payment made be the issuer or the
Company to the holder. The Company believes that it is unlikely that it will
have to fund claims made under letters of credit in the foreseeable future.

At May 31, 2002, the Company's contractual obligations are summarized as
follows:

NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137
and No. 138, became effective for the Company as of June 1, 2001. Those
statements establish accounting and reporting standards requiring that all
derivative instruments be recorded as either assets or liabilities measured at
fair value. These statements also require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met, which includes an assessment of the effectiveness of the
hedging instrument. The effective portion of the change in the fair value of
derivatives used as cash flow hedges are reported as other comprehensive income,
with all other changes reported in net income.

The Company's only derivative instrument is an interest rate swap agreement
that expires in September, 2003 and which qualifies as a cash flow hedge under
SFAS No. 133. The agreement was entered into in 1998 to hedge the exposure of an
increase in interest rates. Pursuant to this agreement, which covers
approximately $2.9 million of outstanding debt, the Company exchanged a variable
LIBOR rate for a fixed LIBOR rate of approximately 5.2%. Two other swap
agreements, covering approximately $3.5 million, expired on December 31, 2001.

Adoption of this new accounting standard resulted in a before tax charge to
other comprehensive income of $56 thousand on June 1, 2001. During fiscal 2002,
there has been an additional before tax charge to other comprehensive income of
$36 thousand to reflect the increase in the mark-to-market liability associated
with the swaps resulting from the continued reduction in variable rates below
the fixed rate obtained by the

11

Company. In fiscal 2002 interest expense includes approximately $113 thousand
pertaining to settlements under the swap agreements. Approximately $69 thousand
of the amounts in accumulated other comprehensive loss will be reclassified to
interest expense over the course of the next twelve months.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
Accounting for Business Combinations and SFAS No. 142 Accounting for Goodwill
and Other Intangible Assets. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and
prohibits the pooling-of-interest method for business combinations initiated
after June 30, 2001. According to SFAS No. 142, goodwill that arises from
purchases after June 30, 2001 cannot be amortized. In addition, SFAS No. 142
requires the continuation of the amortization of goodwill and all amortizable
intangible assets through the end of the fiscal year preceding the adoption
year, but amortization of existing goodwill will cease on the first day of the
adoption year. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Accordingly, the Company will adopt SFAS No. 142 as of the
beginning of its next fiscal year that commences June 1, 2002.

The Company has six months from the date it initially applies SFAS No. 142
to test goodwill for impairment and any impairment charge resulting from the
initial application of the new standard must be classified as the cumulative
effect of a change in accounting principle. Thereafter, goodwill should be
tested for impairment at least annually and impairment losses will be presented
in the operating section of the income statement. Management is currently
assessing the impact that the adoption of SFAS No. 142 will have on the
Company's consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations associated
with the retirement of long-lived assets, except for certain obligations of
lessees. SFAS 143 is effective for the Company in June 2003. Management is in
the process of evaluating the impact of the adoption of Statement 143.

SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13 and Technical Corrections," was issued in April 2002.
SFAS No. 145 provides guidance for income statement classification of gains and
losses on extinguishment of debt and accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 is effective for the Company in June 2003. The Company is evaluating the
impact of SFAS No. 145.

SFAS No. 146, "Accounting for Exit or Disposal Activities" was issued in
June 2002. SFAS No. 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS No. 146 is effective for the Company in June 2003. The Company
is evaluating the impact of SFAS No. 146.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Any forward-looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in any
forward-looking statements contained herein. Such factors include domestic and
international economic activity, interest rates, market conditions for the
Company's customers, regulatory changes and legal proceedings, and the Company's
successful implementation of its internal operating plans. Accordingly, there
can be no assurance that any forward-looking statements contained herein will
occur or that objectives will be achieved.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has a credit facility and interest rate swap agreements, which
subject the Company to the risk of loss associated with movements in market
interest rates. At May 31, 2002, the Company has floating-rate obligations
totaling $13.5 million outstanding under its credit facility (see Note 6 to the
Company's

12

Consolidated Financial Statements). The exposure of these obligations to
increases in short-term interest rates is limited in part by an interest rate
swap agreement entered into by the Company. This swap agreement effectively
fixes the interest rate on approximately $2.9 million of the Company's variable
rate debt. Under these swap agreements, payments are made based on a fixed rate
of 5.19% and received on a LIBOR based variable rate. Any change in the value of
the swap agreements, real or hypothetical, would be offset by an inverse change
in the value of the underlying hedged item. With respect to the remaining $10.6
million of floating-rate debt not covered by swap agreements, a 1% increase in
interest rates could result in an annual increase in interest expense of $100
thousand.

13

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of Team, Inc.
Alvin, Texas

We have audited the accompanying consolidated balance sheet of Team, Inc.
and subsidiaries as of May 31, 2002, and the related consolidated statements of
operations, comprehensive income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Team, Inc. and subsidiaries as
of May 31, 2002, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2002.

KPMG LLP

Houston, Texas
July 16, 2002, except as to the first paragraph of
Note 10, which is as of August 27, 2002.

14

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of Team, Inc.
Alvin, Texas

We have audited the accompanying consolidated balance sheet of Team, Inc.
and subsidiaries as of May 31, 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended May 31, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Team, Inc. and subsidiaries as
of May 31, 2001, and the results of its operations and its cash flows for each
of the two years in the period ended May 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas
July 12, 2001

15

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

16

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

17

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See notes to consolidated financial statements.

18

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See notes to consolidated financial statements.

19

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During 2000, the Company received a $365,000 note as partial consideration
for the sale of real estate.

See notes to consolidated financial statements.

20

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of Team, Inc. (the "Company") include
the financial statements of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated.

Use of Estimates in Financial Statement Preparation

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The Company's financial statements include amounts that are based on
management's best estimates and judgments. Actual results could differ from
those estimates.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization of assets are
computed by the straight-line method over the following estimated useful lives:

Machinery and equipment includes rental and demonstration machining tools
used in the equipment sales and rental business segment totaling $1,859,000 and
$1,608,000 (before accumulated depreciation of $208,000 and $176,000) at May 31,
2002 and 2001, respectively. These self-constructed assets are periodically
transferred to inventory and sold as used equipment.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight line basis over the
estimated economic lives of the acquired companies of forty years. Amortization
expense for the years ended May 31, 2002, 2001 and 2000 was approximately
$275,000 in each year.

Revenue Recognition

Revenue is recognized when services are rendered or when product is shipped
and risk of ownership passes to the customer.

Income Taxes

The Company accounts for taxes on income using the asset and liability
method wherein deferred tax assets and liabilities are recognized for the future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities using enacted rates.

21

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concentration of Credit Risk

The Company provides services to the chemical, petrochemical, refining,
pulp and paper, power and steel industries throughout the United States. No
single customer accounts for more than 10% of consolidated revenues.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2002
presentation.

Earnings Per Share

The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS"). There is no difference,
for any of the years presented, in the amount of net income (numerator) used in
the computation of basic and diluted earnings per share. With respect to the
number of weighted average shares outstanding (denominator), diluted shares
reflects only the pro forma exercise of options to acquire common stock to the
extent that the options' exercise prices are less than the average market price
of common shares during the period.

All outstanding options were "in the money" in 2002 and therefore, no
options were excluded from the computation of diluted EPS in the current year.
Options to purchase 655,000, and 747,000 shares of common stock were outstanding
during the years ended May 31, 2001 and 2000, respectively, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of common shares during the period.

Statement of Cash Flows

For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.

Dividends

No dividends were paid during the current or prior two fiscal years.
Pursuant to the Company's Credit Agreement, the Company may not pay quarterly
dividends without the consent of its senior lender. Future dividend payments
will depend upon the Company's financial condition and other relevant matters.

Interest Rate Swap Agreements

The differential to be paid or received on interest rate swap agreements is
accrued as interest rates change and is recognized over the life of the
agreements as an increase or decrease in interest expense. The Company does not
use these instruments for trading purposes. Instead, it uses them to hedge the
impact of interest rate fluctuations on floating rate debt. See Note 6 regarding
the fair value of the Company's interest rate swap agreements.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash, cash
equivalents, accounts receivable, accounts payable and debt obligations. The
carrying amount of cash, cash equivalents, trade accounts receivable and trade
accounts payable are representative of their respective fair values due to the
short-term maturity of these instruments. The fair values of the Company's
credit facility are representative of their carrying values based upon the
variable rate terms and management's opinion that the current rates offered to
the Company with the same maturity and security structure are equivalent to that
of the credit facility.

22

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

New Accounting Standards

Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137
and No. 138, became effective for the Company as of June 1, 2001. Those
statements establish accounting and reporting standards requiring that all
derivative instruments be recorded as either assets or liabilities measured at
fair value. These statements also require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met, which includes an assessment of the effectiveness of the
hedging instrument. The effective portion of the change in the fair value of
derivatives used as cash flow hedges are reported as other comprehensive income,
with all other changes reported in net income.

The Company's only derivative instrument is an interest rate swap agreement
that expires in September, 2003 and which qualifies as a cash flow hedge under
SFAS No. 133. The agreement was entered into in 1998 to hedge the exposure of an
increase in interest rates. Pursuant to this agreement, which covers
approximately $2.9 million of outstanding debt, the Company exchanged a variable
LIBOR rate for a fixed LIBOR rate of approximately 5.2%. Two other swap
agreements, covering approximately $3.5 million, expired on December 31, 2001.

Adoption of this new accounting standard resulted in a before tax charge to
other comprehensive income of $56 thousand on June 1, 2001. During fiscal 2002,
there has been an additional before tax charge to other comprehensive income of
$36 thousand to reflect the increase in the mark-to-market liability associated
with the swaps resulting from the continued reduction in variable rates below
the fixed rate obtained by the Company. In fiscal 2002 interest expense includes
approximately $113 thousand pertaining to settlements under the swap agreements.
Approximately $69 thousand of the amounts in accumulated other comprehensive
loss will be reclassified to interest expense over the course of the next twelve
months.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
Accounting for Business Combinations and SFAS No. 142 Accounting for Goodwill
and Other Intangible Assets. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and
prohibits the pooling-of-interest method for business combinations initiated
after June 30, 2001. According to SFAS No. 142, goodwill that arises from
purchases after June 30, 2001 cannot be amortized. In addition, SFAS No. 142
requires the continuation of the amortization of goodwill and all amortizable
intangible assets through the end of the fiscal year preceding the adoption
year, but amortization of existing goodwill will cease on the first day of the
adoption year. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Accordingly, the Company will adopt SFAS No. 142 as of the
beginning of its next fiscal year that commences June 1, 2002.

The Company has six months from the date it initially applies SFAS No. 142
to test goodwill for impairment and any impairment charge resulting from the
initial application of the new standard must be classified as the cumulative
effect of a change in accounting principle. Thereafter, goodwill should be
tested for impairment at least annually and impairment losses will be presented
in the operating section of the income statement. Management is currently
assessing the impact that the adoption of SFAS No. 142 will have on the
Company's consolidated financial statements. In June 2001, the FASB issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." The statement applies to
legal obligations associated with the retirement of long-lived assets, except
for certain obligations of lessees. SFAS 143 is effective for the Company in
June 2003. Management is in the process of evaluating the impact of the adoption
of Statement 143.

SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13 and Technical Corrections," was issued in April 2002.
SFAS No. 145 provides guidance for income statement classification of gains and
losses on extinguishment of debt and accounting for certain lease

23

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 is effective for the Company in June 2003. The
Company is evaluating the impact of SFAS No. 145.

SFAS No. 146, "Accounting for Exit or Disposal Activities" was issued in
June 2002. SFAS No. 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS No. 146 is effective for the Company in June 2003. The Company
is evaluating the impact of SFAS No. 146.

2. RECEIVABLES

Receivables consist of:

See note 10 for discussion of trade receivables subject to foreign currency
risk.

The following summarizes the activity in the allowance for doubtful
accounts:

3. INVENTORIES

Inventories consist of:

24

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of:

5. INCOME TAXES

The provision for income taxes attributable to pre-tax earnings are as
follows:

A reconciliation between income taxes related to earnings before income
taxes and income taxes computed by applying the statutory federal income tax
rate to such earnings follows:

During fiscal 2001, a United Kingdom subsidiary was liquidated (see note
8). The subsidiary had incurred operating losses since the early 1990's;
however, no tax benefit had been recognized or realized since the utilization of
such benefits could not be assured prior to the liquidation of the subsidiary.
With the liquidation of the subsidiary, the Company will recognize the tax
benefit of the losses in its fiscal year 2001 Federal income tax return.

25

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the significant components of the Company's deferred tax
assets and liabilities follows:

No valuation account is required for the deferred tax assets as the Company
is projecting profitable fiscal years in the future that will allow it to
realize the benefits of the net deferred tax assets. Most of the assets
represent temporary differences on certain accruals that will reverse over a
period of less than 10 years.

6. LONG-TERM DEBT

Long-term debt consists of:

Maturities of long-term debt are as follows:

FY2003................................................. $ 1,512,000
2004................................................ 10,794,000
2005................................................ 125,000
2006................................................ 125,000
2007................................................ 125,000
Thereafter............................................. 809,000
-----------
$13,490,000
===========

The Company has a $24 million bank credit facility that consists of: (i) a
$12,500,000 revolving loan, which matures September 30, 2003, (ii) $9,500,000 in
term loans for business acquisitions and (iii) a $2,000,000 mortgage loan.
Amounts borrowed against the term loans are due in quarterly installments in the
amount of $339,000 until the loans mature on September 30, 2003. Amounts
borrowed against the mortgage loan are repaid in quarterly installments of
$31,000 until its maturity date of September 30, 2008. Amounts outstanding under
the credit facility bear interest at a marginal rate over either the LIBOR rate
or the prime rate. At May 31, 2002, the Company's marginal rate was 1.5% over
the LIBOR rate. The weighted average rate on outstanding borrowings at May 31,
2002 is approximately 4.3%. The Company also pays a commitment fee of .25% per
annum on the average amount of the unused availability under the revolving loan.

26

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company entered into an interest rate swap agreement that expires in
September, 2003 and which qualifies as a cash flow hedge under SFAS No. 133. The
agreement was entered into in 1998 to hedge the exposure of an increase in
interest rates. Pursuant to this agreement, which covers approximately $2.9
million of outstanding debt, the Company exchanged a variable LIBOR rate for a
fixed LIBOR rate of approximately 5.2%. Two other swap agreements, covering
approximately $3.5 million, expired on December 31, 2001.

As the interest rates on the credit facility are based on market rates, the
fair value of amounts outstanding under the facility approximate the carrying
value. The interest rate swap agreements, which have no carrying value, had a
negative mark-to-market value of approximately $92,000 and $56,000 at May 31,
2002 and 2001, respectively. The fair value of interest rate swaps is estimated
by discounting expected cash flows using quoted market interest rates.

Loans under the credit facility are secured by substantially all of the
assets of the Company. The terms of the agreement require the maintenance of
certain financial ratios and limit investments, liens, leases and indebtedness,
and dividends, among other things. At May 31, 2002 and 2001, the Company was in
compliance with all credit facility covenants.

At May 31, 2002, the Company was contingently liable for $1.4 million in
outstanding stand-by letters of credit and, at that date, approximately $5.2
million was available to borrow under the credit facility.

7. OTHER LONG-TERM LIABILITIES

Other liabilities consisted of:

Amounts due within one year of $264,000 and $301,000, respectively, are
included in other accrued liabilities in the accompanying consolidated balance
sheet.

Post Retirement Benefits:

The Company is obligated for post-retirement benefits to three former
officers with payments due through 2007. Future maturities of amounts due under
post retirement benefit agreements are as follows:

2003..................................................... $264,000
2004..................................................... 238,000
2005..................................................... 245,000
2006..................................................... 100,000
2007..................................................... 39,000
--------
$886,000
========

Deferred Compensation Arrangement:

Under a nonqualified deferred compensation agreement, a former officer of
the Company (the "Participant") elected to defer a portion of his compensation
into a trust established by the Company. The trust assets, consisting of cash
and cash equivalents, are subject to the claims of the Company's creditors in
the event of the Company's insolvency, until paid to the Participant and his
beneficiaries. In accordance with EITF 97-14, "Accounting for Deferred
Compensation Arrangements where amounts earned are held in a

27

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rabbi Trust and Invested," the accounts of the trust have been consolidated into
the Company's financial statements for fiscal 2002 and 2001. The principal of
the trust and any earnings thereon are to be used exclusively for the uses and
purposes of the Participant and general creditors of the Company in the event of
the Company's insolvency, and therefore the trust assets of $418,000 and
$428,000 at May 31, 2002 and 2001, respectively, have been classified as
restricted cash in the balance sheet.

8. OTHER EXPENSE (INCOME)

In 2002, other expense of $173,000 consists of severance and related costs
associated with a reduction in work force at Climax. All such amounts were paid
during the year ended May 31, 2002. In fiscal 2001, the Company sold rental
property for $1.575 million in cash (net). The property was carried as a
corporate asset unrelated to either of the Company's operating segments. The
transaction, net of other charges, resulted in a gain of $360,000. Also in 2001,
the Company completed the sale of substantially all of the assets and operations
of a small operating subsidiary located in the United Kingdom resulting in a
loss on disposal of the business of $82 thousand. The operations of the UK
subsidiary were not material to the Company's business. In fiscal 2000, other
income consisted of the gain on the sale of real estate.

9. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

Stock Options:

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is, generally, recognized. Pursuant to various option plans, the Company
has granted options to purchase common stock to officers, directors and
employees at prices equal to or greater than the market value of the common
stock on the date of grant. The exercise price, terms and other conditions
applicable to each option granted under the Company's plans are generally
determined by the Compensation Committee at the time of grant of each option and
may vary.

In addition to the options granted under the option plans discussed above,
the Company's chief executive officer was granted options to purchase 200,000
shares of common stock at a price of $3.625 per share upon joining the Company
in 1998. Such grant was subject to a vesting schedule based on stock performance
measures which provided that one third of the options vest upon the sustained
achievement of average stock prices of $7.00, $10.50, and $14.00 per share. The
first standard was met near the end of May 2002, when the price of Team's stock
was $9.15 per share. Consequently, at that time, the Company was required to
recognize a non-cash G&A compensation charge associated with one third of the
options totaling $368,000 (approximately $0.03 effect on earnings per share, net
of tax).

In July 2002, the Board of Directors modified the vesting requirements of
the remaining 133,333 performance based options held by the chief executive
officer as well as 20,000 performance based options held by an officer of one of
the Company's subsidiaries. The modification causes the remaining options to
vest on May 31, 2008 unless earlier vesting occurs, in the case of the chief
executive officer, as a result of the achievement of the $10.50 and $14.00
stock-price hurdles described above. The modification allows the Company to fix
the amount of the future non-cash G&A compensation expense associated with the
remaining options ($750,000) and to recognize the charge against earnings
ratably over a six-year period of time ($125,000 per year), unless otherwise
accelerated by the achievement of the performance hurdles.

28

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transactions under all plans are summarized below: (For purposes of the
summary, the chief executive officer's 66,667 performance options that vested in
fiscal 2002 are included as fiscal 2002 grants.

For options outstanding at May 31, 2002, the range of exercise prices and
remaining contractual lives are as follows:

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for the options granted after this date was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2002, 2001, and 2000, respectively: risk-free
interest rate of 3.8%, 4.5%, and 6.6%; volatility factor of the expected market
price of the Company's common stock of 42.8%, 73.8%, and 47.6%; expected
dividend yield percentage of 0.0% for each period; and a weighted average
expected life of the option of three years for each period.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

29

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's pro forma information, as if the fair value method described
above had been adopted, is as follows:

EMPLOYEE BENEFIT PLANS:

Under the Team, Inc. Salary Deferral Plan, contributions are made by
qualified employees at their election and matching Company contributions are
made at specified rates. Company contributions in fiscal 2002, 2001 and 2000,
were $319,000, $302,000, and $259,000, respectively.

10. COMMITMENTS AND CONTINGENCIES

Loss Contingencies

In May 2002, a jury verdict was rendered against the Company in an
employment related case brought in the United States District Court for the
Western District of Louisiana. The case involves allegations of misconduct by
personnel in one of the Company's branches during the years 1998 and 1999. In
August 2002, the Court ruled on certain post-trial motions and determined that,
with respect to one of the two plaintiffs, a $300,000 judgment will be entered
against the Company. With respect to the second plaintiff, the Court set aside
the jury verdict on most points and granted the Company's motion for a new trial
on a specific issue. The Company is presently evaluating its legal options with
respect to this case. In management's opinion, an adequate accrual has been made
in the financial statements as of May 31, 2002 to provide for the probable
amount of loss in this case.

In December 2001, the Company was named a defendant in a lawsuit, along
with 18 other parties, alleging that a former subsidiary, French Ltd.
("French"), was involved in the illegal disposal of hazardous substances during
the years 1969 and 1970. The plaintiff's allege that Team is a
successor-in-interest to French and is, therefore, liable for contribution to a
settlement embodied in a consent decree entered into by the plaintiffs with the
EPA in 1998. French was acquired by Team in 1978 and sold back to its prior
owner in 1984. The case is early in the discovery stage and the Company is
unable to estimate a range of potential loss, if any, with respect to this
matter. However, the Company vigorously denies that it is a
successor-in-interest of French and that it has any responsibility in this
matter.

The Company has a U.S. dollar receivable ($250,000, net) from a Venezuelan
contractor to the national oil company of Venezuela ("PDVSA"), pertaining to
services performed by the Company in fiscal 2002. While the contractor has
committed to honor its US dollar obligation to Team, its arrangement with PDVSA
is in the local Venezuelan currency, the Bolivar, which has depreciated
significantly against the dollar. The Company believes it has adequately
provided for any losses associated with this receivable.

The Company and certain subsidiaries are involved in various other lawsuits
and are subject to various claims and proceedings encountered in the normal
conduct of business. In the opinion of management, any uninsured losses that
might arise from these lawsuits and proceedings will not have a materially
adverse effect on the Company's consolidated financial statements.

30

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Lease Commitments

The Company's capital leases relate to certain computer equipment and
software, whose capitalized balances are not significant to property, plant and
equipment. The Company also has operating leases which relate to facilities and
transportation and other equipment which are leased over terms ranging from one
to five years with typical renewal options and escalation clauses. Rental
payments on operating leases charged against earnings were $2,848,000,
$2,151,000, and $1,991,000 in 2002, 2001, and 2000, respectively. Minimum rental
commitments for future periods are as follows:

11. COMMON STOCK

In June 2001, the Company completed the reacquisition of 235,647 shares of
its common stock for $812,000, including expenses, pursuant to a self-tender
offer announced in April 2001. These shares were retired and, accordingly, the
cost was charged to Common Stock (at par value of $.30 per share) and to
Additional Paid-in Capital. Additionally, during fiscal 2002, the Company
reacquired approximately 200,000 shares pursuant to an approved, open market
repurchase plan at a average price of $5.93 per share. In fiscal 2001, the
Company repurchased 449,720 shares of its outstanding common stock at a weighted
average price of $2.83 per share. The shares acquired through open market
purchases have not been formally retired and, accordingly, are carried as
treasury stock.

The following summarizes the activity of shares outstanding for the years
2002 and 2001:

31

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of May 31, 2002, the Company is authorized by its Board of Directors and
lender to expend up to an additional $1.6 million on open market repurchases.

12. INDUSTRY SEGMENT INFORMATION

The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," in fiscal 1999. SFAS No. 131 requires that
the Company disclose certain information about its operating segments where
operating segments are defined as "components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance." Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment performance
and deciding how to allocate resources to segments.

Pursuant to SFAS No. 131, the Company has two reportable segments:
industrial services and equipment sales and rentals. The industrial services
segment includes services consisting of leak repair, hot tapping, emissions
control monitoring, field machining, and mechanical inspection. The equipment
sales and rental segment consists of the Climax business.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on earnings before interest and income taxes. Inter-segment
sales are eliminated in the operating measure used by the Company to evaluate
segment performance, and this has been eliminated in the following schedule.
Interest is not allocated to the segments.

Information about business segments for the fiscal years 2002, 2001 and
2000 is set forth below:

FISCAL YEAR ENDED MAY 31, 2002

FISCAL YEAR ENDED MAY 31, 2001

32

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FISCAL YEAR ENDED MAY 31, 2000

13. ACQUISITIONS

In July 2001, the Company entered into an exchange agreement with the
former owners of X-Ray Inspection, Inc. which was acquired by the Company in
April 1999. Pursuant to the agreement, the Company's obligation for contingent
future consideration (up to $2.5 million depending on future earnings of X-Ray)
was cancelled in exchange for the issuance of options to acquire 100,000 of the
Company's common stock (at $3.50 per share) and the nomination of the principal
former owner of X-Ray to the Company's Board of Directors. The value of the
options issued in exchange for the cancellation of the contingent future
consideration ($283,000) was recorded as additional goodwill with an offsetting
credit to additional paid-in capital.

14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The Company's consolidated results of operations by quarter for the fiscal
years ended May 31, 2002, and 2001 are shown below.

33

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

There have been no disagreements concerning accounting and financial
disclosures with the Company's independent accountants within the past two
years.

PART III

THE INFORMATION CONTAINED IN ITEMS 10, 11, 12 AND 13 OF PART III HAS BEEN
OMITTED FROM THIS REPORT ON FORM 10-K SINCE THE COMPANY WILL FILE, NOT LATER
THAN 120 DAYS FOLLOWING THE CLOSE OF ITS FISCAL YEAR ENDED MAY 31, 2002, ITS
DEFINITIVE PROXY STATEMENT. THE INFORMATION REQUIRED BY PART III WILL BE
INCLUDED IN THAT PROXY STATEMENT AND SUCH INFORMATION IS HEREBY INCORPORATED BY
REFERENCE, WITH THE EXCEPTION OF THE INFORMATION UNDER THE HEADINGS
"COMPENSATION COMMITTEE REPORT" AND "COMPARISON OF TOTAL SHAREHOLDERS' RETURN."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The following consolidated financial statements of Team, Inc. and its
subsidiaries are included in Part II, Item 8.

2. Financial Statement Schedules

All other schedules are omitted because they are not applicable or because
the required information is included in the Consolidated Financial Statements or
Notes thereto.

3. Exhibits

- ---------------

* Incorporated herein by reference to the respective filing identified above.

# Management contracts and/or compensation plans required to be filed as an
exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K.

(b) Reports on Form 8-K.

The Company filed two (2) reports on form 8-K during the fourth quarter,
both covering Item 4, Changes in Registrants Certified Accountant. The dates of
the reports were April 23, 2002 and May 2, 2002.

36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized August 28, 2002.

TEAM, INC.

By: /s/ PHILIP J. HAWK
----------------------------------
Philip J. Hawk
Chief Executive Officer
(Principal 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 capacity and on the dates indicated.

/s/ PHILIP J. HAWK Chief Executive Officer and August 28, 2002
- ----------------------------------------------------- Director
(Philip J. Hawk)

/s/ GEORGE W. HARRISON Director August 28, 2002
- -----------------------------------------------------
(George W. Harrison)

/s/ JACK M. JOHNSON, JR. Director August 28, 2002
- -----------------------------------------------------
(Jack M. Johnson, Jr.)

/s/ E. THEODORE LABORDE Director August 28, 2002
- -----------------------------------------------------
(E. Theodore Laborde)

/s/ E. PATRICK MANUEL Director August 28, 2002
- -----------------------------------------------------
(E. Patrick Manuel)

/s/ LOUIS A. WATERS Director August 28, 2002
- -----------------------------------------------------
(Louis A. Waters)

/s/ SIDNEY B. WILLIAMS Director August 28, 2002
- -----------------------------------------------------
(Sidney B. Williams)

/s/ TED W. OWEN Vice President Chief Financial August 28, 2002
- ----------------------------------------------------- Officer (Principal Financial
(Ted W. Owen) Officer and Principal Accounting
Officer)

37

EXHIBIT INDEX