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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended August 31, 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 October 12, 2004, there were 8,152,775 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, 2004 is derived from the May 31, 2004 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, 2004.

New Accounting Standards

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

Stock-Based Compensation

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, generally no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 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 Black-Scholes option pricing model with the following weighted-average assumptions for August 31, 2004 and 2003, respectively: risk-free interest rate of 2.7% and 1.9%; volatility factor of the expected market price of the Company’s common stock of 21.9% and 32.4%; 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.

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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 three months ended August 31, 2004. 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 three months ended August 31, 2003, 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.

As of August 31, 2004, the Company is authorized by it Board of Directors and lender to expend up to an additional $1.4 million on open market repurchases.

3. Earnings Per Share

In 1998 the Company 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 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. For the three-months ended August 31, 2004 and 2003, respectively, there were 177,000 and 225,500 shares of Common Stock outstanding that 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.

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4. Inventories

Inventories consist of:

5. Long-term debt

Long-term debt consists of:

See also Note 8 for a discussion of the Company’s new credit facility.

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, technical bolting, field valve repair, field heat treating and NDT-NDE inspection. 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 schedules. Interest is not allocated down to the segments.

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Three months ended August 31, 2004

Three months ended August 31, 2003

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:

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8. Acquisitions

On August 11, 2004, the Company completed a previously announced acquisition of substantially all of the assets of International Industrial Services, Inc., a Delaware corporation (“IISI”), and Cooperheat-MQS, Inc., a Delaware corporation (“Cooperheat”), including the capital stock of certain subsidiaries of IISI and Cooperheat (together, “Cooperheat”).

Cooperheat was operating as debtor-in-possession in a Chapter 11 case pending in the United States Bankruptcy Court for the Southern District of Texas, Houston, Texas (the “Bankruptcy Court”) (Case Nos. 03-48272-H2-11 and 03-48273-H2-11). On August 6, 2004, the Bankruptcy Court entered an order approving the sale of the assets by Cooperheat to the Company pursuant to an Asset Purchase Agreement.

The transaction involved a cash consideration of $35 million, subject to a working capital adjustment, the assumption of certain liabilities including the assumption of $1.7 million in letters of credit and the issuance of warrants to purchase 100,000 shares of the common stock, $.30 par value per share, of Team. The warrants are exercisable at $65 cash per share and expire on August 11, 2007, unless sooner exercised.

The assets purchased from Cooperheat are associated with a non-destructive testing (NDT) inspection and field heat treating services business. The Company intends to integrate the purchased assets and associated business activity with its other industrial service activities.

The transactions contemplated by the Asset Purchase Agreement, as well as a restructuring of the Company’s current indebtedness to Bank of America, N.A. (“Bank of America”), were financed with funds provided under a Credit Agreement dated as of August 11, 2004 (the “Credit Agreement”) by and among the Company, the other lenders party thereto and Bank of America, as Administrative Agent, Swing Line lender and L/C issuer. The Credit Agreement permits borrowing of amounts up to an aggregate $75 million, and includes a letter of credit facility, a revolving credit facility and a term loan. Extensions of credit under the Credit Agreement have a maturity date five years from the date of inception, and the Company may elect an interest rate for each advance under the Credit Agreement at either (i) LIBOR plus a maximum margin of 2.25%, which may be reduced upon the satisfaction of certain financial conditions, or (ii) the higher of Bank of America’s prime rate or the federal funds rate plus 0.50%. The payment and performance of the Company’s obligations under the Credit Agreement are secured by substantially all of the assets and properties of the Company and its subsidiaries.

The acquisition was accounted for using the purchase method of accounting. Accordingly, the consolidated financial statements subsequent to the effective dates of the acquisition reflect the purchase price, including transaction costs. As the acquisition of Cooperheat was effective August 11, 2004, the consolidated results of operations for the Company for the quarter ended August 31, 2004, include the results for Cooperheat for the period August 11, 2004 to August 31, 2004. The purchase price of Cooperheat was allocated to the assets and liabilities of Cooperheat based on its estimated fair value. The goodwill associated with the acquisition is approximately $12.3 million, and is subject to adjustment as an appraisal of assets acquired is completed. Information regarding the preliminary allocation of the purchase price is set forth below:

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The unaudited pro forma consolidated results of operations of the Company are shown below as if the acquisition occurred at the beginning of the period indicated. These results are not necessarily indicative of the results which would actually have occurred if the purchase had taken place at the beginning of the period, nor are they necessarily indicative of future results.

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

Results of Operations

Three Months Ended August 31, 2004 Compared To Three Months Ended August 31, 2003

Revenues for the quarter ended August 31, 2004 were $33.2 million compared to $24.9 million for the corresponding period of the preceding year. Operating margins (shown as “gross margin” in the Consolidated Condensed Statements of Operations) were 34.2% of revenues in the first quarter of fiscal 2005, a significant decrease from 40.6% in the same quarter last year. Net income declined to $269 thousand ($.03 per diluted share) as compared to $1.4 million ($.17 per diluted share) in last year’s quarter.

Industrial Services Segment— The margin and earnings decline experienced in the first quarter of fiscal 2005 is a direct result of two interrelated events: 1) the general deferral of refinery turnaround activities due to the very high refining industry operating margins and 2) the operating results from two recent acquisitions (Thermal Solutions, which was acquired as of April 1, 2004 and the Cooperheat-MQS business, which was acquired August 11, 2004) which are both heavily dependent upon plant turnaround activity.

The following table sets forth the impact of the two recently completed acquisitions on the industrial services segment in the current quarter ( 000’s omitted):

The composite organic revenue growth of only $200 thousand in the quarter reflects the very depressed market for turnaround activity during the quarter. Team’s traditional services (leak repair, hot tapping, and

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fugitive monitoring), which are not dependent on the level of turnaround demand, actually grew about $1.9 million or 13% versus the prior year quarter. This is strong organic growth consistent with our long term plan. However, Team’s newer turnaround services (field machining, bolting, and field valve repair) declined approximately $1.7 million or 50% versus the prior year quarter. We believe this decline is not lost work, but rather work that will be deferred with future periods. The very high refining profit margins caused all refiners to push out turnaround work into later quarters. We expect an increasing level of turnaround activity for the remainder of the year – catching up most of the 1st quarter deferrals during this fiscal year.

We are confident that we have not suffered a decline in our market position within our mechanical service lines, but rather have weathered a very low turnaround environment that is already beginning to improve.

The operating profit, for the industrial services segment was $1.9 million for the quarter. This is approximately half of last year’s results. Reduced turnaround activities in the Caribbean versus the prior year represented about $1.2 million of this decline. Additionally, the two acquired businesses had operating losses totaling about $0.6 million in the current quarter, again reflecting the very low level of turnaround activity. All other profit growth and declines offset one another. The domestic mechanical services units increased their profits by about $0.5 million.

Equipment Sales and Rental Segment— Climax had a good start to this fiscal year. Revenues for the quarter were $3.4 million, up about 30% from a weak prior year first quarter. This growth came primarily from increased equipment sales in both the US and Europe. From an earnings standpoint, Climax reported an operating profit of $156,000 versus a prior year loss of $95,000.

The outlook for the remainder of this fiscal year continues to be attractive. Climax has booked a number of special machine orders for both the power and military marine segments that should lead to attractive sales and profit growth for the year.

Corporate— Total corporate costs were $1,393 thousand in the August 2004 quarter, versus $1,192 thousand in the same quarter last year. The increase of $201 thousand is due primarily to a non cash charge associated with the vesting of performance based stock options covering 67 thousand shares that were granted in 1998 to the Company’s Chief Executive Officer. Interest expense increased by $109 thousand in the current quarter due to the additions to debt associated with the two recent acquisitions.

Liquidity and Capital Resources

At August 31, 2004, our liquid working capital (cash and accounts receivable, less current liabilities) totaled $22.5 million, which is up $6.2 million from May 31, 2004. During the August 2004 quarter, we increased our total outstanding debt by $38.0 million, primarily resulting from the cash borrowed for the acquisition of the business assets of Cooperheat. The Company generally utilizes excess operating funds to reduce the amount outstanding under the revolving credit facility at its discretion.

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.

In connection with the Cooperheat acquisition, The Company replaced its previous credit facility with a new $75 million facility that consists of a $50 million revolving loan and a $25 million term facility, which matures in August 2009. Approximately $55 million was borrowed on August 11, 2004 to finance the Cooperheat acquisition and to refinance amounts outstanding on the previous facilities. The term facility requires amortization of $3 million in the first year, $4 million in year two and $6 million in each of years three through five. Amortization begins in November 2004. Interest on the facility is at LIBOR plus a margin which is variable depending upon the ratio of funded debt to EBITDA. Initially, the margin will be 225 basis points above the LIBOR rate. The new facility is secured by virtually all the Company’s assets, including those acquired in the Cooperheat-MQS transaction. The Company paid an underwriters fee of 1.625% of the aggregate amount of the facility.

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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 August 31, 2004, the Company was in compliance with all credit facility covenants.

At August 31, 2004, the Company was contingently liable for $4.2 million in outstanding stand-by letters of credit and, at that date, approximately $14.2 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 as a charge to earnings 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 2004 and determined that there was no impairment of goodwill as of May 31, 2004. The Company does not believe that any triggering events have occurred during the three months ended August 31, 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.

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 August 31, 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.

Additionally, Through May 31, 2004, a cumulative $395 thousand loss provision has been made with respect to a sales tax matter involving Climax Portable Machine Tools, Inc., a wholly-owned subsidiary, representing management’s estimate of the probable loss that Climax will incur with respect to the matter. However, the ultimate outcome is subject to a great deal of variables and cannot be determined with a certainty. Management believes this issue will be fully resolved over the course of the current fiscal year and that the ultimate outcome, even if different that the amount provided, will not have a significant impact on the future operating results of Climax.

In management’s opinion, an adequate accrual has been made as of August 31, 2004 and May 31, 2004 to provide for any losses that may arise from those contingencies.

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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.

New Accounting Standards

The Company has reviewed the latest accounting standards and does not believe any new standard 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company holds certain floating-rate obligations. The exposure of these obligations to increase in short-term interest rates is limited by interest rate swap agreements entered into by the Company. There were no material quantitative or qualitative changes during the first three months of fiscal 2005 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 August 31, 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 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. The lawsuit seeks contribution for the costs of response for removal and/or remedial action associated with the illegal disposal of hazardous substances during the period 1969-1976. In April and May of 2004, the District Court granted motions for summary judgment filed by the Company and dismissed the Plaintiffs’ claims with prejudice with respect to claims against Team allegedly arising out of its ownership of the stock of French Limited and of Allstate Vacuum and Tanks, Inc., both former subsidiaries of the Company.

In addition to the claims originally put forward by the Plaintiffs, nine of the Defendants filed cross-claims against the Company in which they contended they should not be held liable on Plaintiffs’ claims against them, but that if they were held liable then they seek contribution from the Company and other defendants. In addition, four of those same nine defendants which are related to the El Paso Corporation (the “El Paso Defendants”) sought contribution against the Company and others on a related claim by the United States Government on another location at which hazardous wastes were disposed.

On August 30, 2004, an agreed order was issued dismissing all cross-claims against Team without prejudice.

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 for $40 million in property damages from an explosion and fire originating at a valve which the Company’s personnel were attempting to seal in order to prevent a leak. Liability is being contested and other parties appear to have primary responsibility for the fire and explosion. The Company believes it is insured against this loss with both primary and excess liability insurance, subject to any applicable deductible. However, coverage from the $1 million primary policy is disputed and a defense is being provided by the carrier subject to a reservation of rights.

In June 2004, Ultramar Diamond Shamrock Corporation made demand on Team Industrial Services, Inc. for indemnity from claims asserted against Ultramar Diamond Shamrock Corporation in Linda Alapisco, et al v. Ultramar Diamond Shamrock Corporation, et al, Cause No. L-030085, in the 156th District Court of Live Oak County, Texas. This suit seeks unspecified damages for the 250 individuals identified in the petition for injuries resulting from alleged exposure to toxic chemicals released as a result of the explosion and fire at the Diamond Shamrock facility. This demand has been turned over to the general liability insurance carrier for a response. As of the date of this report, the carrier has not responded to the claim.

The Company’s umbrella policy has limits of coverage of $25,000,000 and should be more than sufficient to provide the Company a defense and indemnity as to all claims asserted.

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.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The Company filed (6) report on Form 8-K during the quarter ended August 31, 2004. Two covering the purchase of Thermal Solutions, Inc., dated June 29, 2004 and July 15, 2004, one covering a press release announcing its earnings for the quarter and year ended May 31, 2004, dated July 15, 2004, and three covering the acquisition of the business assets of Cooperheat-MQS, Inc., dated July 20, July 21, and August 12, 2004.

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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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