TEAM INC - 10-K Annual Report

Back to GetFilings.com

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

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

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED MAY 31, 2003

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

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

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

Securities registered pursuant to Section 12(g) of the Act: NONE
---------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 15, 2003, 7,584,954 shares of the registrant's common stock
were outstanding, of which 5,065,670 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 $7.80 per share on the American Stock Exchange,
Inc. on such date) was $39,512,226.

DOCUMENTS INCORPORATED BY REFERENCE

Part III. Portions of the Definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders of Team, Inc. to be held September 25, 2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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 conducts operations through international locations in
Singapore, Aruba, Canada, Trinidad and Singapore Additionally, 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. 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, technical bolting and NDT 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
petrochemical, refining, power, pipeline, pulp and paper, steel and other
industries. Services include leak repair, hot tapping, emissions control, and,
more recently, field machining, technical bolting , field valve repair, 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

1

Company's engineering department for determination of appropriate repair
techniques. Repair materials such 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 the
quality and timely performance of its services by its highly skilled
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 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. 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.

2

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.

Field Valve Repair Services. In the Spring of 2003, the Company launched
Field Valve Repair Services as an adjunct to its field machining services.
Through this offering, the Company performs on-site repairs to process and
control valves, as well as providing preventive maintenance programs and valve
data management programs. The targeted customers for these services are
generally the same as for our field machining and technical bolting services.

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

3

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. There are two other service
contractors who provide a similar range of service and broad geographical
coverage as the Company. Other principal competitors are primarily
single-location or single-service companies that compete within a certain
geographical area.

EQUIPMENT SALES AND RENTALS

The Equipment Sales and Rentals business is comprised solely of the Climax
subsidiary, a leading design-manufacturer of portable machine tools located in
Newburg, Oregon. Climax's 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, marine, heavy
construction, and extractive industries, or to other service providers and
contractors. 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. 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 during any of the last three fiscal years.

GENERAL

Employees. As of May 31, 2003, the Company and its subsidiaries had
approximately 900 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 $50,000 for general
liability, and $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
4

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 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 Newburg, 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 38 office
and/or plant and shop facilities at separate locations in 19 states and in
Singapore, Aruba, Trinidad and Canada.

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 was entered
against the Company. In December 2002, the Company settled the lawsuit with
respect to that plaintiff for an amount less than the judgment entered. 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
second plaintiff has appealed the District Court's decision, which is currently
pending in the United States Court of Appeals for the Fifth Circuit. The Company
is presently evaluating its legal options with respect to this case. In
management's opinion, an adequate accrual was made in the financial statements
as of May 31, 2003 and 2002 to provide for the probable amount of loss in this
case.

In December 2001, the Company and 18 other defendants were sued in a
lawsuit styled Lyondell Chemical Company and Atlantic Richfield Company v. Ethyl
Corporation et al in the United States District Court for the Eastern District
of Texas, Beaumont Division. Other defendants have subsequently been added. The
suit seeks contribution for clean-up costs expended by the plaintiffs in
cleaning up an EPA Superfund site at which hazardous wastes were disposed. A
former subsidiary of the Company acquired in 1978 and sold back to the prior
owner in 1984, had allegedly disposed of hazardous wastes at the site during the
period 1969-1976, years before the Company owned it. The plaintiff's allege that
the Company is a legal successor-in-interest to the former subsidiary and liable
for its prior liabilities. The case is in the discovery stage and it is not
possible at this time to estimate reasonably or accurately the likelihood or
amount of any potential liability in this matter, if any. The Company vigorously
denies that it is a successor-in-interest to the former subsidiary and that it
has any liability in the matter.

5

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 2003.

6

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, 2003 and 2002, respectively.

(b) Holders

There were 285 holders of record of Team's common stock as of August 15,
2003, excluding beneficial owners of stock held in street name. Although exact
information is unavailable, the Company estimates there are approximately 1,000
additional beneficial owners based upon information gathered in connection with
proxy solicitation.

(c) Dividends

No dividends were declared or paid in fiscal 2003, 2002 or 2001. 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 2003, the Company repurchased 310,000 shares of its outstanding
common stock on the open market at a weighted average price of $6.73 per share.
As of May 31, 2003, the Company is authorized by its Board of Directors and
lender to expend up to an additional $1.4 million on open market repurchases.

7

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, 2003 (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 2003 COMPARED TO FISCAL 2002

Revenues in 2003 were $91.9 million compared to $85.1 million in 2002, an
increase of 8.0%. Operating profits (earnings before interest and taxes, or
"EBIT") were $7.7 million in 2003 versus $7.2 million in 2002, an increase of
7%. With respect to industrial services, newer services comprise those services
whose offerings began since fiscal year 1999 -- NDT inspection, field machining
and technical bolting, and more recently, field valve repair. Traditional
services include leak repair, hot tapping and fugitive emissions monitoring.

The following sets forth the components of revenue and operating profits
for fiscal 2003 and 2002:

For the year, the Industrial Services Business Segment revenues increased
8.9% to $81.1 million. Segment operating profit increased 4.7% to $12.0 million.
All major service lines except NDT inspection services experienced growth during
the year. NDT inspection revenues were down slightly due to significantly
reduced pipeline and pulp & paper projects, which were nearly offset by
continued growth in plant inspection

8

services. A significant contributor to the growth in traditional service lines
came from new multi-service, multi-location contracts that commenced in the
fourth quarter of fiscal 2002.

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.

The Equipment Sales and Rental Business segment (encompassing Climax
Portable Machine Tool Company) grew revenues about 2% for the year to $10.8
million. The market for capital equipment continues to be depressed in most of
the world markets. Revenue growth in Asia offset flat to slightly depressed
sales in the U.S. and Europe. Operating profit increased 10% to $603,000 versus
$547,000 in 2002. In 2003, Climax provided a $150,000 charge to other expense
for estimated losses pertaining to a sales tax matter. Climax is domiciled in
the state of Oregon, which is a state that imposes no tax on sales originating
there. In fiscal 2003, management determined that Climax does have an obligation
to collect and remit sales taxes in certain other jurisdictions, which it has
not previously done. Climax is in the process of entering into agreements with
several states with respect to sales tax obligations and is in the process of
collecting amounts due from its customers. The $150,000 charge represents
management's estimate of the probable loss that Climax will incur with respect
to this matter. The ultimate outcome is subject to a great deal of variables and
cannot be determined with a certainty. Management expects that this issue will
be fully resolved over the course of the next year and that the ultimate
outcome, even if different than the amount provided, will not have a significant
impact on the future operating results of Climax.

With regard to consolidated operating results, overall gross margins were
40.5% of revenues in fiscal 2003 as compared to 41.7% in fiscal 2002. The
decline primarily reflects the downturn in NDT Inspection revenues associated
with pipeline and pulp & paper customer segments as well as lower product
margins at Climax due to an increase in lower margin international sales coupled
with a strong margin comparison in fiscal 2002 due to a $700 thousand special
order in the fourth quarter of fiscal 2002.

Selling, general and administrative expenses ("SG&A") increased $1.8
million in 2003 versus 2002, an increase of 6.5%. The overall increase in SGA
reflects a ramp-up of business development personnel in the industrial service
segment ahead of related revenue growth and an increasing level of insurance and
legal costs in fiscal 2003. In spite of these elements of cost increase, as a
percentage of revenue, SG&A was down -- 31.8% of revenues in fiscal 2003 versus
32.5% of revenues in fiscal 2002.

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.

9

The following sets forth the components of revenue and operating profits
for fiscal 2002 and 2001:

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.

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 that 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

10

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 effect on earnings
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.

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 2003, the Company's liquid working capital (cash and accounts
receivable, less current liabilities) totaled $8.9 million, an increase of $200
thousand since May 31, 2002. The Company utilizes excess operating funds to
automatically reduce the amount outstanding under the revolving credit facility.
At May 31, 2003, the outstanding balance under the revolving credit facility was
$5.0 million and approximately $5.4 million was available to borrow under the
facility.

During fiscal 2003, the Company reduced its total outstanding debt by $2.4
million as a result of cash flow from operations. In fiscal 2003, the Company
also expended $2.1 million to reacquire an additional 310,000 shares of its
common stock 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, 2005, (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, 2005. 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, 2003, the Company's marginal rate was 1.5% over
the LIBOR rate. The weighted average rate on outstanding borrowings at May 31,
2003 is approximately 4.4%. 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 $2.3
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 had a negative mark-to-market value of
approximately $43,000 and $92,000 at May 31, 2003 and 2002, 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, 2003 and 2002, the Company was in
compliance with all credit facility covenants.

At May 31, 2003, the Company was contingently liable for $2.1 million in
outstanding stand-by letters of credit and, at that date, approximately $5.4
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 $7.1 million is associated with the industrial services
11

segment and $2.9 million is associated with the equipment sales and rental
business. Effective June 1, 2002, we have adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets", which requires that goodwill no
longer be amortized but be reviewed for impairment at least annually. The
Company has evaluated the carrying value of Goodwill using a cash-flow multiple
calculation methodology and has determined that no adjustment is needed to the
carrying value of goodwill as a result of the implementation adoption 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, 2003 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.

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, 2003 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, 2003, the Company's contractual obligations are summarized as
follows:

12

NEW ACCOUNTING STANDARDS

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. 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 disposal activities occurring after
December 31, 2002. The adoption of SFAS No. 146 has not impacted the Company's
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an Amendment of FASB Statement No.
123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
consolidated financial statements.

The company has reviewed other new accounting standards not identified
above and does not believe any other new standards will have a material impact
on the Company's financial position or operating results.

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, 2003, the Company has floating-rate obligations
totaling $11.1 million outstanding under its credit facility (see Note 6 to the
Company's 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 $2.3 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 $8.8
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 $90
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 sheets of Team, Inc.
and subsidiaries as of May 31, 2003 and 2002, and the related consolidated
statements of operations, comprehensive income, stockholders' equity, and cash
flows for the years 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 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, 2003 and 2002, and the results of their operations and their cash
flows for the years 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 goodwill and other intangible
assets in 2003.

KPMG LLP

Houston, Texas
July 16, 2003

14

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholders' equity, and cash flows of Team, Inc. and
subsidiaries for the year 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 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 results of operations and cash flows of Team, Inc.
and subsidiaries for the year 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

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 $2,324,000 and
$1,859,000 (before accumulated depreciation of $283,000 and $208,000) at May 31,
2003 and 2002, respectively. These self-constructed assets are periodically
transferred to inventory and sold as used equipment.

Goodwill

SFAS No. 142 Accounting for Goodwill and Other Intangible Assets became
effective for the Company as of June 1, 2002. According to SFAS No. 142,
goodwill that arises from purchases after June 30, 2001 cannot be amortized. In
addition, SFAS No. 142 requires that amortization of existing goodwill will
cease on the first day of the adoption year. Accordingly, the Company stopped
recording the amortization of goodwill as a charge to earnings effective as of
the beginning of fiscal 2003.

21

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the pro-forma impact on the prior years had
the provisions of the new standard been applied as of June 1, 2000:

The Company had six months from the date it initially applied SFAS No. 142
to test goodwill for impairment. Thereafter, goodwill must be tested for
impairment at least annually and impairment losses, if any, will be presented in
the operating section of the income statement. The Company has completed the
required annual impairment test and has determined that there is no impairment
of goodwill as of May 31, 2003.

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.

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 2003
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

22

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Options to purchase 112,000 and 655,000 shares of common stock were
outstanding during the years ended May 31, 2003 and 2001, 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. In 2002, all outstanding options were "in the money" and therefore, no
options were excluded from the computation of diluted EPS in that year.

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.

New Accounting Standards

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. 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 disposal activities occurring after
December 31, 2002. The adoption of SFAS No. 146 has not impacted the Company's
financial statements.

23

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an Amendment of FASB Statement No.
123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in these notes to
the consolidated financial statements.

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 2003, 2002, and 2001, respectively: risk-free
interest rate of 1.8%, 3.8%, and 4.5%; volatility factor of the expected market
price of the Company's common stock of 35.6%, 42.8%, and 73.8%; 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.

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

The Company has reviewed other new accounting standards not identified
above and does not believe any other new standard will have a material impact on
the Company's financial position or operating results.

24

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. RECEIVABLES

Receivables consist of:

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

3. INVENTORIES

Inventories consist of:

4. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of:

25

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 recognized the tax benefit
of the losses in its fiscal year 2001 Federal income tax return.

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 management
believes it is more likely than not that the Company will have sufficient
taxable income in the future that will allow it to realize the benefits

26

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

FY2004.................................................. $ 1,482,000
2005................................................. 8,517,000
2006................................................. 125,000
2007................................................. 125,000
2008................................................. 125,000
Thereafter.............................................. 685,000
-----------
$11,059,000
===========

The Company has a $24 million bank credit facility that consists of: (i) a
$12,500,000 revolving loan, which matures September 30, 2005, (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, 2005. 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, 2003, the Company's marginal rate was 1.5% over
the LIBOR rate. The weighted average rate on outstanding borrowings at May 31,
2003 is approximately 4.4%. 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 $2.3
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 had a negative mark-to-market value of
approximately $43,000 and $92,000 at May 31, 2003 and 2002, 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, 2003 and 2002, the Company was in
compliance with all credit facility covenants.

27

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At May 31, 2003, the Company was contingently liable for $2.1 million in
outstanding stand-by letters of credit and, at that date, approximately $5.4
million was available to borrow under the credit facility.

7. OTHER LONG-TERM LIABILITIES

Other liabilities consisted of:

Amounts due within one year of $238,000 and $264,000, 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:

2004...................................................... $238,000
2005...................................................... 245,000
2006...................................................... 100,000
2007...................................................... 39,000
--------
$622,000
========

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, were 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 Rabbi Trust and
Invested," the accounts of the trust were consolidated into the Company's
financial statements until liquidated and paid out to the Participant in fiscal
2003.

8. OTHER EXPENSE (INCOME)

In 2003, other expense consists of a $150,000 charge for estimated losses
pertaining to a sales tax matter involving the wholly owned subsidiary, Climax
Portable Machine Tools, Inc., which is domiciled in the state of Oregon, a state
that imposes no tax on sales originating there. In fiscal 2003, management
determined that Climax does have an obligation to collect and remit sales taxes
in certain other jurisdictions, which it has not previously done. Climax is in
the process of entering into agreements with several states with respect to
sales tax obligations and is in the process of collecting amounts due from its
customers. The $150,000 charge represents management's estimate of the probable
loss that Climax will incur with respect to this matter. The ultimate outcome is
subject to a great deal of variables and cannot be determined with a certainty.
Management expects that this issue will be fully resolved over the course of the
next year and that the ultimate outcome, even if different than the amount
provided, will not have a significant impact on the future operating results of
Climax.

28

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $82,000. The
operations of the UK subsidiary were not material to the Company's business.

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 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.

29

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 performance options that vested in fiscal
2002 (67,000) and that were modified in 2003 (133,000) are included as fiscal
2002 and 2003 grants, respectively).

For options outstanding at May 31, 2003, the range of exercise prices and
remaining contractual lives are 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 2003, 2002 and 2001,
were $363,000, $319,000, and $302,000, 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 was entered
against the Company. In December 2002, the Company settled the lawsuit with
respect to that plaintiff for an amount less than the judgment entered. With
respect to the second
30

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 second plaintiff has
appealed the District Court's decision, which is currently pending in the United
States Court of Appeals for the Fifth Circuit. The Company is presently
evaluating its legal options with respect to this case. In management's opinion,
an adequate accrual was made in the financial statements as of May 31, 2003 and
2002 to provide for the probable amount of loss in this case.

In December 2001, the Company and 18 other defendants were sued in a
lawsuit styled Lyondell Chemical Company and Atlantic Richfield Company v. Ethyl
Corporation et al in the United States District Court for the Eastern District
of Texas, Beaumont Division. Other defendants have subsequently been added. The
suit seeks contribution for clean-up costs expended by the plaintiffs in
cleaning up an EPA Superfund site at which hazardous wastes were disposed. A
former subsidiary of the Company acquired in 1978 and sold back to the prior
owner in 1984, had allegedly disposed of hazardous wastes at the site during the
period 1969-1976, years before the Company owned it. The plaintiff's allege that
the Company is a legal successor-in-interest to the former subsidiary and liable
for its prior liabilities. The case is in the discovery stage and it is not
possible at this time to estimate reasonably or accurately the likelihood or
amount of any potential liability in this matter, if any. The Company vigorously
denies that it is a successor-in-interest to the former subsidiary and that it
has any liability in the 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.

See also Note 8 for a discussion of sales tax contingencies.

Lease Commitments

The Company's operating leases 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 $3,294,000, $2,848,000 and $2,151,000 in
2003, 2002 and 2001, respectively. Minimum rental commitments for future periods
are as follows:

11. COMMON STOCK

During fiscal 2003, 2002, and 2001, the Company reacquired 309,788,
200,000, and 449,720 shares, respectively, pursuant to an approved, open market
repurchase plan at an average price of $6.73, $5.93, and $2.83 per share, in
2003, 2002, and 2001, respectively. The shares acquired through open market
purchases have not been formally retired and, accordingly, are carried as
treasury stock. Additionally, 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

31

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was charged to Common Stock (at par value of $.30 per share) and to Additional
Paid-in Capital The Following summarizes the activity of shares outstanding for
the years 2003, 2002 and 2001:

As of May 31, 2003, the Company is authorized by its Board of Directors and
lender to expend up to an additional $1.4 million on open market repurchases.

12. INDUSTRY SEGMENT INFORMATION

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," 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.

32

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Information about business segments for the fiscal years 2003, 2002 and
2001 is set forth below:

FISCAL YEAR ENDED MAY 31, 2003

FISCAL YEAR ENDED MAY 31, 2002

FISCAL YEAR ENDED MAY 31, 2001

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 shares
of the Company's common stock (at $3.50 per share) and the nomination of the
principal former owner of X-Ray to the

33

TEAM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, and 2002 are shown below.

34

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.

ITEM 9A. CONTROLS AND PROCEDURES

The Company's chief executive officer and its chief financial officer have
evaluated the Company's disclosure controls and procedures (as defined in
Exchange Act rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the
filing date of this annual report and have concluded that such controls are
effective.

There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their evaluation.

PART III

THE INFORMATION CONTAINED IN ITEMS 10, 11, 12, 13 AND 14 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, 2003,
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 15. 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 one (1) report on form 8-K during the fourth quarter
covering a press release announcing its earnings for the quarter ended February
28, 2003. The date of the report was March 26, 2003.

37

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 26, 2003.

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 26, 2003
- ----------------------------------------------------- Director
(Philip J. Hawk)

/s/ GEORGE W. HARRISON Director August 26, 2003
- -----------------------------------------------------
(George W. Harrison)

/s/ JACK M. JOHNSON, JR. Director August 26, 2003
- -----------------------------------------------------
(Jack M. Johnson, Jr.)

/s/ E. THEODORE LABORDE Director August 26, 2003
- -----------------------------------------------------
(E. Theodore Laborde)

/s/ E. PATRICK MANUEL Director August 26, 2003
- -----------------------------------------------------
(E. Patrick Manuel)

/s/ LOUIS A. WATERS Director August 26, 2003
- -----------------------------------------------------
(Louis A. Waters)

/s/ SIDNEY B. WILLIAMS Director August 26, 2003
- -----------------------------------------------------
(Sidney B. Williams)

/s/ TED W. OWEN Senior Vice President Chief August 26, 2003
- ----------------------------------------------------- Financial Officer (Principal
(Ted W. Owen) Financial Officer and Principal
Accounting Officer)

38

EXHIBIT INDEX