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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended February 29, 2004

OR

For the transition period              to             

Commission file number 0-9950

TEAM, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (281) 331-6154

Indicate by checkmark 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On April 12, 2004, there were 7,758,654 shares of the Registrant’s common stock outstanding.

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TEAM, INC.

INDEX

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

See notes to unaudited consolidated condensed financial statements.

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TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to unaudited consolidated condensed financial statements.

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TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to unaudited consolidated condensed financial statements.

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TEAM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED

FINANCIAL STATEMENTS

1. Method of Presentation

General

The interim financial statements are unaudited, but in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for such periods. The consolidated condensed balance sheet at May 31, 2003 is derived from the May 31, 2003 audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in Team, Inc.’s (“the Company”) annual report on Form 10-K for the fiscal year ended May 31, 2003.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 became effective for the Company in June 2003. The adoption of Statement 143 has not impacted the Company’s financial statements.

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 these notes to the consolidated financial statements.

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.

Stock-Based Compensation

Pro forma information regarding net income and earnings per share is required by SFAS Nos. 123 and 148, 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

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Black-Scholes option pricing model with the following weighted-average assumptions for the three months and nine months ended February 29, 2004 and February 28, 2003:

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:

2. Dividends and Stock Repurchases

No dividends were paid during the nine months ended February 29, 2004 or February 28, 2003. 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.

In the nine months ended February 29, 2004, the Company reacquired 50,000 shares pursuant to an open-market repurchase plan at a weighted average price of $7.89 per share. These shares have not been formally retired and, accordingly, these shares are carried as treasury stock.

The Company is authorized by its Board of Directors and lender to expend up to an additional $1.5 million on open market repurchases.

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3. Earnings Per Share

In 1998 the Company adopted SFAS No. 128, “Earnings per Share,” which specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”). There is no difference, for either of the periods 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. There were 7,000 shares of Common Stock outstanding for the three-months and nine-months ended February 29, 2004, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the Common Stock. For the three-months and nine-months ended February 28, 2003, 113,250 shares of common stock were excluded from the computation of diluted EPS for both periods.

4. Inventories

Inventories consist of:

5. Long-Term Debt

Long-term debt consists of:

6. Industry Segment Information

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, bolting, NDT inspection, and field valve repair. The equipment sales and rental segment is comprised solely of the operations of a wholly-owned subsidiary, Climax Portable Machine Tools, Inc.

The Company evaluates performance based on earnings before interest and income taxes. Inter-segment sales are eliminated in the operating measures used by the company to evaluate segment performance and have, therefore, been eliminated in the following schedule. Interest is not allocated down to the segments.

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Three months ended February 29, 2004

Three months ended February 28, 2003

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6. Industry Segment Information (continued)

Nine Months Ended February 29, 2004

Nine Months Ended February 28, 2003

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7. Comprehensive income

Comprehensive income represents the change in the Company’s equity from transactions and other events and circumstances from non-owner sources and includes all changes in equity except those resulting from investments by owners and distributions to owners.

Comprehensive income is as follows:

8. Subsequent Events

On April 2, 2004 the Company announced that it has signed an agreement to purchase the outstanding capital stock of Thermal Solutions, Inc. (TSI), a privately held provider of field heat treating services based in Denver, Colorado. The transaction, which will involve consideration of approximately $10.5 million is subject to customary due diligence and various approvals and is expected to close during the fourth quarter of Team’s fiscal year ending May 31, 2004. In calendar 2003, TSI had revenues of about $15 million. The purchase consideration will be approximately 70% cash and 30% Team, Inc common stock.

In April of 2004 the second stock-price hurdle relating to 133,333 previously unvested performance based options held by the Company’s chief executive officer was achieved, resulting in the accelerated vesting of 66,667 options. The options were scheduled to vest on May 31, 2008, unless otherwise accelerated by the achievement of sustained average stock price-hurdles of $10.50 and $14.00. As a result of the accelerated vesting, the non-cash G&A compensation expense associated with these options will total approximately $200,000 in the fourth quarter of fiscal year 04.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended February 29, 2004 Compared

To Three Months Ended February 28, 2003

Revenues for the quarter ended February 29, 2004 were $25.1 million compared to $21.8 million for the corresponding period of the preceding year. Operating margins (shown as “gross margin” in the Consolidated Condensed Statements of Operations) were 39.6% of revenues in the third quarter of fiscal 2004, a slight improvement from 38.8% in the same quarter last year. Net income increased to $980 thousand ($.12 per diluted share) as compared to $538 thousand ($.06 per diluted share) in last year’s quarter.

The industrial services segment revenues were $20.9 million in the February 2004 quarter, an increase of $1.8 million (9%) over the prior year. Operating profits for the segment (earnings before interest and taxes) were up 4%, increasing to $2.2 million in the February 2004 quarter versus $2.1 million in the same quarter last year. With the exception of NDT inspection services, virtually all of the segment’s service offerings experienced double-digit revenue growth in the quarter. Notably, fugitive emissions revenues were up nearly $1 million due to significant new or expanded monitoring contracts in the West Coast region of the United States. The segment continued to benefit from the recent addition of field valve repair services to its offerings. NDT inspection services continued to be soft in the quarter. Revenues for this service line declined by $461 thousand versus the same quarter last year and operating margins were down by more than $250 thousand. Nearly all of this decline was associated with a softness in demand in the pipeline industry.

The equipment sales and rental segment (the “Climax” business) had its most profitable quarter in the history of Climax. Sales were $4.2 million, up 59% from the prior year third quarter. Operating profit was $875 thousand, more than four times the amount earned in last year’s third quarter. The results for the current year quarter reflect the shipment of over $1 million in special tool orders to a customer in connection with a military contract.

Nine Months Ended February 29, 2004 Compared

To Nine Months Ended February 28, 2003

Revenues for the nine months ended February 29, 2004 were $75.9 million compared to $66.9 million for the corresponding period of the preceding year, an increase of 13%. Operating margins declined slightly to 39.9% of revenues in the nine months of fiscal 2004 versus 40.5% in the same period last year. Net income increased to $3.9 million ($0.47 per diluted share) as compared to $3.1 million ($0.36 per diluted share) in fiscal 2003—an improvement of 28%.

For the first nine months of fiscal 2004, industrial service revenues were $66.5 million, an increase of $7.6 million, or 13%, over the same period of last year. Operating profits for the industrial segment (earnings before interest and taxes) were up 17%, increasing to $9.8 million in the first nine months of fiscal 2004 versus $8.4 million in the corresponding period of last year. The first nine months of fiscal 2004 was positively impacted by the completion of two major turnaround projects, primarily related to the new field valve repair service, with more than $4 million of year to date revenue. With the exception of the NDT inspection service which experienced a year-to-date decline in revenues of $1 million, all other service lines experienced strong revenue growth—aggregating more than 18%— in the year-to-date period.

With respect to the Equipment Sales and Rental segment, revenues were up year over year to $9.3 million from $8.1 million in the first nine months of fiscal 2004, an increase of 16%. The increased sales are largely a result of the special tool orders shipped in the third quarter as discussed above. The outstanding profitability for the third quarter has resulted in year to date operating results being nearly flat with last year—$581 thousand versus $598 thousand. The year-to-date results for the segment were negatively impacted by the $175 thousand loss provision for the sales tax matter discussed in Form 10-Q for the second quarter ended November 30, 2003, and $150 thousand of associated professional fees incurred during the first half of the year.

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Liquidity and Capital Resources

At February 29, 2004, our liquid working capital (cash and accounts receivable, less current liabilities) totaled $11.2 million, which is up $2.3 million from May 31, 2003. We generally utilize excess operating funds to automatically reduce the amount outstanding under the revolving credit facility.

In the opinion of management, we currently have sufficient funds and adequate financial sources available to meet our 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 February 29, 2004, our marginal rate was 1.5% over the LIBOR rate. The weighted average rate on outstanding borrowings at February 29, 2004 is approximately 3.33%. The Company also pays a commitment fee of .25% per annum on the average amount of the unused availability under the revolving loan. At February 29, 2004, the balance outstanding for all interest bearing debt was $10,997,000.

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. 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 February 29, 2004, the Company was in compliance with all credit facility covenants.

At February 29, 2004, the Company was contingently liable for $2.2 million in outstanding stand-by letters of credit and, at that date, approximately $4.9 million was available to borrow under the credit facility.

Critical Accounting Policies

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 effective as of the beginning of fiscal 2003.

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 completed the required annual impairment test for fiscal 2003 and determined that there was no impairment of goodwill as of May 31, 2003. The Company does not believe that any triggering events have occurred during the nine months ended February 29, 2004 that would require a re-assessment of the recoverability of its goodwill balances. The impairment test for the current fiscal year will not be performed until the end of the fiscal year.

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.

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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. A valuation allowance is provided for the net deferred tax asset amounts that are not likely to be realized. As of February 29, 2004 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 legal matters, which are summarized in Legal Proceedings in Part II.

The Company has provided $325,000 for expected losses with respect to a sales tax matter involving Climax Portable Machine Tools, Inc., (Climax) a wholly-owned subsidiary, including $150,000 in fiscal 2003 and $175,000 in the second quarter of fiscal 2004. The ultimate outcome is subject to a great deal of variables and cannot be determined with a certainty. However, management believes 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.

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 by 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.

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 became effective for the Company in June 2003. The adoption of Statement 143 has not impacted the Company’s financial statements.

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

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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 those objectives will be achieved.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company holds certain floating-rate obligations. There were no material quantitative or qualitative changes during the first nine months of fiscal 2004 in the Company’s market risk sensitive instruments.

ITEM 4. 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-15(e) and 15d-15(e)) as of February 29, 2004, 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.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In April 2003, Team and three other parties were named as defendants in a lawsuit styled Diamond Shamrock Refining Company, L.P. v. Cecorp, Inc. et al in the 148^th Judicial District Court of Nueces County, Texas. The suit seeks recovery of more than $38 million in damages for property and production losses arising from a July 2001 fire and explosion at a facility where the Company was providing leak repair services. Team believes that it has no responsibility for the plaintiff’s damages with respect to this matter. Until recently, the Company had believed that its exposure, if any, would be covered by its general liability and excess liability insurance policies. However, on March 22, 2004, the general liability insurance carrier notified Team that the $1 million primary insurance policy was not available for the damages alleged in the lawsuit. Team vehemently disagrees with the position of the insurance carrier and has instituted legal actions against the insurance carrier and the Company’s casualty insurance broker to provide the full indemnity up to the $1 million policy limit. The Company’s excess liability coverage is unaffected by the actions taken by the general liability carrier and would provide coverage beginning at the $1 million limit of the general liability policy. With respect to the underlying property damage lawsuit, the case is in the discovery stage and no trial date has been set.

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 plaintiffs 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 the Company’s Form 10-Q for the fiscal quarter ended November 30, 2003 for a description of developments during that quarter with respect to other litigation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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(b) Reports on Form 8-K

The Company filed (1) report on Form 8-K during the quarter ended February 29, 2004, covering a press release announcing its earnings for the quarter ended November 30, 2003. The date of the report was December 17, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

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