1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2001 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) <Table> <S> <C> 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) </Table> Registrant's telephone number, including area code: (281) 331-6154 --------------------- Securities registered pursuant to Section 12(b) of the Act: <Table> <Caption> TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- <S> <C> Common Stock, $.30 par value American Stock Exchange, Inc. </Table> 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 17, 2001, 7,712,037 shares of the registrant's common stock were outstanding, of which 5,593,387 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 $5.45 per share on the American Stock Exchange, Inc. on such date) was $30,483,959. DOCUMENTS INCORPORATED BY REFERENCE Part III. Portions of the Definitive Proxy Statement for the 2001 Annual Meeting of Shareholders of Team, Inc. to be held September 27, 2001. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 FORM 10-K INDEX PART 1 <Table> <Caption> PAGE ---- <S> <C> <C> Item 1. Business.................................................... 1 Item 2. Properties.................................................. 5 Item 3. Legal Proceedings........................................... 5 Item 4. Submission of Matters to a Vote of Security Holders......... 5 PART II Item 5. Market for Team's Common Equity and Related Stockholder Matters................................................... 6 Item 6. Selected Financial Data..................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 9 Item 8. Consolidated Financial Statements and Supplementary Data.... 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 29 PART III Item 10. Directors and Executive and Other Officers of Team.......... 29 Item 11. Executive Compensation...................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 29 Item 13. Certain Relationships and Related Transactions.............. 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 29 </Table> i
3 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 industrial repair services including leak repair, hot tapping, field machining, emissions control monitoring, concrete repair, energy management and technical bolting. These services are provided throughout the United States in approximately 40 locations. In April of 1999, the Company added mechanical inspection services to its industrial service offerings through the acquisition of X Ray Inspection, Inc. ("XRI"). The Company licenses its proprietary leak repair and hot tapping techniques and materials to various companies outside the United States and receives a royalty based upon revenues earned by the licensee. Additionally, the Company conducts operations through international subsidiaries in Singapore and Trinidad. To date, international operations have not been material to the overall operations of the Company. In August of 1998, the Company entered a new business segment -- equipment sales and rental -- through the acquisition of Climax Portable Machine Tools, Inc. ("Climax") of Newberg, Oregon. Climax is a leading designer-manufacturer of portable, metal cutting machine tools used for on-site industrial maintenance. The Climax acquisition provided the support for the Company's offering of on-site field machining services beginning in February of 1999. (b) Financial Information about Segments See Note 12 to accompanying financial statements for financial information about business segments. (c) Narrative Description of Business The Company operates in two reportable revenue generating segments -- (1) industrial services and (2) equipment sales and rental. Industrial services consist principally of leak repair, hot tapping, emissions control monitoring, on-site field machining and inspection. The equipment sales and rentals segment is comprised of the Climax business. The following table sets forth the revenues from each segment in the three years ended May 31: <Table> <Caption> SEGMENT 2001 2000 1999 - ------- ------- ------- ------- <S> <C> <C> <C> Industrial Services..................................... $66,492 $56,053 $47,282 Equipment Sales and Rentals............................. 9,151 10,583 7,350 ------- ------- ------- Total......................................... $75,643 $66,636 $54,632 ======= ======= ======= </Table> INDUSTRIAL SERVICES The Company provides industrial services for over 2000 customers in the chemical, petrochemical, refining, pulp and paper, power, steel and other industries. Services include leak repair, hot tapping, emissions control, and, more recently, field machining and 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
4 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 be substantially due to the quality and timely performance of its services by its highly skilled in-house trained technicians, its proprietary techniques and materials and its ability to repair leaks without shutting down the customer's operating system. On-stream repairs can prevent a customer's continued loss of energy or process materials through leaks, thereby avoiding costly energy and production losses that accompany equipment shutdowns, and also lessen fugitive emissions escaping into the atmosphere. The Company has continued to develop different types of standard and custom-designed clamps, enclosures and other repair products, which complement the Company's existing industrial market for leak repair services. The Company's leak repair services are supported by an in-house Quality Assurance/Quality Control program that monitors the design and manufacture of each product to assure material traceability on critical jobs and to ensure compliance with customers' requirements. Hot Tapping Services. The Company's hot tapping services consist primarily of hot tapping and Line-stop(R) services. Hot tapping services involve utilizing special equipment to cut a hole in an on-stream, pressurized pipeline so that a new line can be connected onto the existing line without interrupting operations. Hot tapping is frequently used for making branch connections into piping systems while the production process is operative. Line-stop(R) services permit the line to be depressurized downstream so that maintenance work can be performed on the piping system. The Company typically performs these services by mechanically drilling and cutting into the pipeline and installing a device to stop the process flow. The Company also utilizes a line freezing procedure when applicable to stop the process flow using special equipment and techniques. Emissions Control Services. The Company also provides leak detection services that include fugitive emissions identification, monitoring, data management and reporting services primarily for the chemical, refining and natural gas processing industries. These services are designed to monitor and record emissions from specific process equipment components as requested by the customer, typically to assist the customer in establishing an ongoing maintenance program and/or complying with present and/or future environmental regulations. The Company prepares standard reports in conjunction with EPA requirements or can custom-design these reports to its customers' specifications. Field Machining and Technical Bolting Services. The Climax acquisition in August 1998 provided the platform for the Company's entry into field machining services in February 1999. This service involves the use of portable machining equipment (manufactured by Climax, as well as third party vendors) to repair or modify in-place machinery, equipment, vessels and piping systems not easily removed from a permanent location. As opposed to the conventional machining process where the work piece rotates and the cutting tool is fixed, in field machining, the work piece remains fixed and the cutting tool rotates. Other common descriptions for this service are on-site or in-place machining. Field machining services include flange facing, pipe cutting, line boring, journal turning, drilling, and milling. Technical bolting services are often provided to our customers as an adjunct to field machining during turnaround or maintenance activities. These services 2
5 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. 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 mechanical inspection as a core industrial service offering. Inspection services consist of the testing and evaluation of piping, piping components and equipment to determine the present condition and predict remaining operability. The Company's inspection services use all the common methods of non-destructive testing, including radiography, ultrasound, magnetic particle and dye penetrate, as well as, higher end robotic and newly developed ultrasonic systems. The Company provides these services as part of planned construction and maintenance programs and on demand as the situation dictates, and provides reports based on interpretation in accordance to industry and national standards. Inspection services are marketed to the same industrial customer base as other Team services and to the pipeline industry. There are a large number of companies offering mechanical inspection services, with no single company having a significant share of the overall market. Marketing and Customers. Team's industrial repair services are marketed principally by personnel based at the Company's approximate 40 locations. Team has developed a cross-marketing program to utilize its sales personnel in offering many of the Company's services at its operating locations. Management believes that these operating and office locations are situated to facilitate timely response to customer needs, which is an important feature of its services. No customer accounted for 10% or more of consolidated Company revenues during any of the last three fiscal years. Generally, customers are billed on a time and materials basis although some work may be performed pursuant to a fixed-price bid. Emission control services may also be billed based on the number of components monitored. Services are usually performed pursuant to purchase orders issued under written customer agreements. While some purchase orders provide for the performance of a single job, others provide for services to be performed for a term of one year or less. In addition, Team is a party to certain long-term contracts, which are enabling agreements only. Substantially all such agreements may be terminated by either party on short notice. The agreements generally specify the range of services to be performed and the hourly rates for labor. While contracts have traditionally been entered into for specific plants or locations over the past few years, the Company has entered into several 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 belies sufficient qualified personnel are available in most areas, no assurance can be made that such personnel will be available when needed. Competition. Competition in the Company's industrial services is primarily on the basis of service, quality, timeliness, and price. In general, competition stems from other outside service contractors and customers' in-house maintenance departments. Management believes Team has a competitive advantage over most service contractors due to the quality, training and experience of its technicians, its nationwide service capability, and due to the broad range of services provided, as well as its technical support and manufacturing capabilities supporting the service network. Management knows of two service contractors of a similar size 3
6 with which the Company generally competes. Other principal competitors are primarily regionally-based companies that compete within a certain geographical area. EQUIPMENT SALES AND RENTALS In August, 1998 the Company entered a new business segment -- equipment sales and rentals -- through the acquisition of Climax, a leading design-manufacturer of portable machine tools located in Newberg, Oregon. Climax' standard tools offering consists of boring bars, pipe beveling tools, key mills, portable flange facers, and portable lathes. These tools are sold to end users in the utilities, refining, and extractive industries, or to other service providers and contractors, such as Team. In addition, Climax designs and manufactures customized machining tools for on-site machine repair, manufacturing, fabrication and construction applications. Climax' design and manufacturing operations are conducted in a 30,000 square feet facility in Newberg, Oregon that is owned by the company and pledged to secure Team's bank debt (see Note 6 of Notes to the Consolidated Financial Statements). Climax uses state of the art equipment in its manufacturing process and maintains an inventory of raw materials, parts and completed machines as needed to support the current level of business. Most of the Company's orders for equipment are filled within 30 days of receipt. The Company believes that there are a limited number of original equipment manufacturers that compete with Climax and that it has a market share of approximately 10%. No single customer accounted for more than 10% of Climax revenues in fiscal 2001 or fiscal 2000. GENERAL Employees. As of May 31, 2001, the Company and its subsidiaries had approximately 800 employees in its operations. The Company's employees are not unionized. There have been no employee work stoppages to date, and management believes its relations with its employees are good. Insurance. The Company carries insurance it believes to be appropriate for the businesses in which it is engaged. Under its insurance policies, the Company has per occurrence self-insured retention limits of $25,000 for general liability, $100,000 for professional liability, $250,000 for automobile liability and workers' compensation in most states. The Company has obtained fully insured layers of coverage above such self-retention limits. Since its inception, the Company has not been the subject of any significant liability claims not covered by insurance arising from the furnishing of its services or products to customers. However, because of the nature of the Company's business, there exists the risk that in the future such liability claims could be asserted which might not be covered by insurance. Regulation. Substantially all of the Company's business activities are subject to federal, state and local laws and regulations. These regulations are administered by various federal, state and local health and safety and environmental agencies and authorities, including the Occupational Safety and Health Administration ("OSHA") of the U.S. Department of Labor and the EPA. The Company's training programs are required to meet certain OSHA standards. Expenditures relating to such regulations are made in the normal course of the Company's business and are neither material nor place the Company at any competitive disadvantage. The Company does not currently expect to expend material amounts for compliance with such laws during the ensuing two fiscal years. From time-to-time in the operation of its environmental consulting and engineering services, the assets of which were sold in 1996, the Company handled small quantities of certain hazardous wastes or other substances generated by its customers. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (the "Superfund Act"), the EPA is authorized to take administrative and judicial action to either cause parties who are responsible under the Superfund Act for cleaning up any unauthorized release of hazardous substances to do so, or to clean up such hazardous substances and to seek reimbursement of the costs thereof from the responsible parties, who are jointly and severally liable for such costs under the Superfund Act. The EPA may also bring suit for treble damages from responsible parties who unreasonably refuse to voluntarily participate in such a clean up or funding thereof. Responsible parties include anyone who owns or operates the facility where the release occurred (either currently and/or at the time such hazardous 4
7 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 Newberg, Oregon, which is the manufacturing facility and corporate office of Climax. All of those facilities are pledged as security for the $24 million bank credit agreement. (See Note 6 of Notes to Consolidated Financial Statements). The Company and its subsidiaries also lease 36 office and/or plant and shop facilities at separate locations in 18 states. The Company believes that its property and equipment, as well as that of its subsidiaries, are adequate for its current needs, although additional investments are expected to be made in additional property and equipment for expansion, replacement of assets at the end of their useful lives and in connection with corporate development activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 of Notes to Consolidated Financial Statements for information regarding lease obligations on these properties. ITEM 3. LEGAL PROCEEDINGS The Company and certain subsidiaries are involved in various 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 2001. 5
8 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, 2001 and 2000, respectively. <Table> <Caption> SALES PRICE ------------- HIGH LOW ----- ----- <S> <C> <C> FISCAL 2001 Quarter Ended: August 31................................................. $3.06 $1.75 November 30............................................... 3.00 1.63 February 29............................................... 4.13 2.75 May 31.................................................... 3.25 2.05 FISCAL 2000 Quarter Ended: August 31................................................. $3.88 $2.50 November 30............................................... 3.00 2.00 February 28............................................... 3.19 1.50 May 31.................................................... 2.94 2.00 </Table> (b) Holders There were approximately 400 holders of record of Team's common stock as of August 14, 2001, 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 2001 or fiscal 2000. Pursuant to the Company's Credit Agreement, the Company may not pay dividends without the consent of its primary lender. Additionally, future dividend payments will continue to depend on Team's financial condition, market conditions and other matters deemed relevant by the Board of Directors. (d) Stock Repurchase Plan In fiscal 2001, pursuant to an approved open-market plan, the Company repurchased 449,000 shares of its outstanding common stock at a weighted average price of $2.83 per share. The stock repurchase program was suspended in April 2001 as a result of an announcement of a self-tender offer at $3.00 per share. The self-tender offer was completed in June 2001, resulting in the reacquisition of another 235,000 shares. The Company's Board of Director's has approved the resumption of the open market repurchase program for acquisitions up to an additional 1,000,000 shares. 6
9 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, 2001 (amounts in thousands, except per share data): <Table> <Caption> FISCAL YEARS ENDED MAY 31, ----------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Revenues..................................... $75,643 $66,636 $54,632 $45,457 $43,655 Net income................................... $ 2,740 $ 1,471 $ 505 $ 1,423 $ 778 Net income per share: basic.................. $ 0.34 $ 0.18 $ 0.07 $ 0.24 $ 0.15 Net Income per share: diluted................ $ 0.34 $ 0.18 $ 0.07 $ 0.23 $ 0.15 Weighted average shares outstanding: basic... 8,015 8,238 7,547 5,947 5,162 Weighted average shares outstanding: diluted.................................... 8,122 8,283 7,741 6,112 5,162 Cash dividend declared, per common share..... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 </Table> BALANCE SHEET DATA <Table> <Caption> MAY 31, ----------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Total assets................................. $47,996 $48,384 $47,765 $27,109 $24,115 Long-term debt and other liabilities......... $14,845 $17,409 $20,224 $ 6,042 $ 7,725 Stockholders' equity......................... $24,812 $23,137 $21,526 $15,534 $11,886 Working capital.............................. $16,584 $14,909 $15,736 $13,078 $11,556 </Table> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Earnings before income taxes were $4.2 million for the year ended May 31, 2001 compared to $2.5 million in 2000 and $1.3 million in 1999. The following table identifies certain percentage relationships of costs with consolidated revenues: <Table> <Caption> FISCAL YEARS --------------------- 2001 2000 1999 ----- ----- ----- <S> <C> <C> <C> Revenue..................................................... 100.0% 100.0% 100.0% Operating expenses.......................................... (59.6) (57.4) (58.3) ----- ----- ----- Gross margin...................................... 40.4 42.6 41.7 Selling, general and administrative expenses................ (33.1) (36.7) (36.0) Severance and other charges................................. -- (1.7) Other income................................................ 0.4 0.3 -- ----- ----- ----- Earnings before interest and taxes................ 7.7 6.2 4.0 Interest expense............................................ (2.1) (2.4) (1.7) ----- ----- ----- Earnings before income taxes...................... 5.6 3.8 2.3 Income taxes................................................ (2.0) (1.6) (1.4) ----- ----- ----- Net income........................................ 3.6% 2.2% 0.9% ===== ===== ===== </Table> FISCAL 2001 COMPARED TO FISCAL 2000 Revenues in 2001 were $75.6 million compared to $66.6 million in 2000, an increase of 13.5%. This double-digit revenue growth resulted in significant operating leverage for the Company with operating profits (earnings before interest and taxes, or "EBIT") increasing by 41.5% to $5.8 million in 2001 as compared to $4.1 million in 2000. The improvement in operating results in 2001 was attributable to the industrial services segment whose revenues increased by $10.4 million, or 18.6%, to $66.5 million. EBIT for the industrial services segment was 7
10 $9.8 million, an increase of 35.3% over 2000. The revenue growth occurred in both traditional service lines -- leak repair, hot tapping, and emissions control monitoring -- and in the newer service lines -- inspection, field machining and technical bolting. Revenue from traditional service lines grew by 15% over FY2000, which is a result of a combination of factors: (1) FY2001 was a strong year for refining margins, which results in an increased demand for the Company's on-stream service offerings to avoid the necessity of our customers having to shut-down operating units; (2) we obtained significant new contracts for fugitive emissions monitoring in FY2001 as a result of a trend toward customers' out-sourcing of these compliance functions to professional service providers such as Team, coupled with an increase in enforcement actions by federal and state agencies, and (3) an increase in market penetration for our traditional services. Team's newer services grew at an even faster rate -- with revenue from inspection, field machining and technical bolting growing by 44% over FY2000. The rapid growth in these services is a result of two primary factors: (1) an increase in the demand for our inspection services to the pipeline industry due to new pipeline construction and increased regulatory activities in the pipeline industry; and (2) a continuing penetration of our newer services within our existing customer base. In contrast to the services segment, the equipment sales and rental segment experienced a disappointing FY2001, with sales of $9.2 million being 13.5% less than the FY2000 amount, with the significant portion of the reduction coming in the first half of the year. Management believes the sales decline is due primarily to a softness in capital equipment markets. Overall, gross margins were 40.4% of revenues in FY2001 as compared to 42.6% in FY2000. The reduction is associated with the severely depressed margins at Climax during the first half of FY2001 and due to pricing concessions to sustain the growth in services revenues. The decline in margins was compensated for by an overall reduction in selling, general and administrative expenses, which were 33.1% of revenues in FY2001 versus 36.7% of revenues in FY2000. This reduction in SG&A expenses as a percentage of revenues illustrates the operating leverage that management believes exists in the business -- double-digit revenue growth will result in a faster rate of increase in profits since revenue growth can be supported without a proportionate increase in selling, general and administrative costs. Income tax expense as a percent of pre-tax income was 35% in FY2001 as compared to 41.5% in FY2000 due to the recognition of a $400,000 effective tax benefit associated with the liquidation of a small subsidiary in the United Kingdom. FISCAL 2000 COMPARED TO FISCAL 1999 Revenues in 2000 were $66.6 million compared to $54.6 million in 1999, an increase of 22%. $6.6 million of the increase, or 12%, is a result of the inclusion of the results of X Ray Inspection, Inc. for the full fiscal year 2000. XRI was only included for two months of 1999. Additionally, 2000 includes a full year of operations of Climax, which accounts for $3.2 million of the increased revenues, or 5.9%. Climax results are included for nine months in 1999. The industrial services segment of the business (excluding XRI) grew by $2.5 million in 2000, with virtually all of the increase occurring in the fourth quarter. In the aggregate, most of the year over year increase in industrial service revenue (excluding XRI) is attributable to the substantial growth in the new service offerings first undertaken in FY1999 -- field machining and technical bolting. Revenues from these new offerings were $2.4 million more than during the inception year of 1999. While FY2000 revenues from traditional service offerings (leak repair, hot tapping, emission control monitoring, etc.) were relatively flat in comparison to FY1999, fourth quarter revenues from these lines were $1.7 million higher than earned in the fourth quarter of FY 1999 as a result of improved demand for such services -- particularly in the refining and petrochemical industries -- in the fourth quarter of 2000 versus 1999, which is believed to have resulted from improved customer operating margins. Management believes that the Company's revenues and operating margins are related, in part, to the operating margins experienced by its customers -- particularly in the refining and petrochemical industries. Generally, 8
11 as those customer margins improve, more funds are expended for the specialized industrial services offered by the Company. Operating margins improved to 42.6% of revenues in 2000, compared to 41.7% in 1999. The improvement reflects the strong operating leverage occurring in the fourth quarter as a result of significantly increased industrial service revenues in that quarter. As discussed below, 1999 margins were negatively impacted by a softening in the market for the Company's industrial services that began in the last half of Fiscal 1999 and continued through the first quarter of Fiscal 2000. With respect to Climax, operating margins improved slightly in comparison to 1999 (46.2% versus 45.2%) -- primarily as a result of improved plant utilization associated with an overall sales increase of 11% over the comparable period of 1999. Selling, general and administrative expense were 36.7% of revenues in Fiscal 2000, up slightly from 36.0% in Fiscal 1999. Headquarters support costs were significantly reduced in fiscal 2000 as a result of staffing reductions implemented in January and August of 1999. These support cost reductions were offset, however, by increased selling and promotion costs associated with increased industrial service revenues, including the introduction of new service offerings -- field machining and inspection. As a result of additional borrowings associated with business acquisitions in August 1998 and April 1999, as well as general increases in interest rates, interest expense increased to $1.6 million (2.4% of revenues) as compared to $912 thousand (1.7%) in 1999. See the discussion of liquidity and capital resources below. LIQUIDITY AND CAPITAL RESOURCES At May 31, 2001, the Company's liquid working capital (cash and accounts receivable, less current liabilities) totaled $7.6 million, an increase of $1.4 million since May 31, 2000. The Company utilizes excess operating funds to automatically reduce the amount outstanding under the revolving credit facility. At May 31, 2001, the outstanding balance under the revolving credit facility was $6.0 million and approximately $5.5 million was available to borrow under the facility. During FY2001, the Company reduced its total outstanding debt by $2.3 million as a result of cash flow from operations and from proceeds from the sale of real estate. In FY2001, the Company also expended $1.3 million to reacquire 450,000 shares of its common stock on the open market pursuant to a stock repurchase plan. Additionally, in June 2001, another 235,000 shares were reacquired for a total consideration of approximately $760,000, including expenses. 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. 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, 2001, the Company has floating-rate obligations totaling $15.1 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 9
12 is limited in part by interest rate swap agreements entered into by the Company. These swap agreements effectively fix the interest rate on $8.3 million of the Company's variable rate debt. Under these swap agreements, payments are made based on a fixed rate ($6.5 million at 5.19% and $1.8 million at 5.24%) 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 $6.8 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 $68 thousand. 10
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, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended May 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Team, Inc. and subsidiaries as of May 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2001 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Houston, Texas July 12, 2001 11
14 TEAM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> MAY 31, ------------------------- 2001 2000 ----------- ----------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................. $ 968,000 $ 327,000 Receivables............................................... 14,608,000 13,580,000 Inventories............................................... 8,245,000 7,821,000 Deferred income taxes..................................... 511,000 412,000 Prepaid expenses and other current assets................. 248,000 501,000 ----------- ----------- Total Current Assets.............................. 24,580,000 22,641,000 Property, Plant and Equipment: Land and buildings........................................ 7,109,000 9,649,000 Machinery and equipment................................... 18,816,000 18,676,000 ----------- ----------- 25,925,000 28,325,000 Less accumulated depreciation and amortization.... 14,139,000 15,076,000 ----------- ----------- 11,786,000 13,249,000 Goodwill, net of accumulated amortization of $648,000 and $373,000.................................................. 10,341,000 10,616,000 Other assets, net........................................... 861,000 1,408,000 Restricted cash............................................. 428,000 470,000 ----------- ----------- Total Assets...................................... $47,996,000 $48,384,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt......................... $ 1,536,000 $ 1,611,000 Accounts payable.......................................... 1,957,000 1,979,000 Other accrued liabilities................................. 3,493,000 3,040,000 Current income taxes payable.............................. 1,010,000 1,102,000 ----------- ----------- Total Current Liabilities......................... 7,996,000 7,732,000 Deferred income taxes....................................... 343,000 106,000 Long-term debt.............................................. 13,531,000 15,728,000 Other long term liabilities................................. 1,314,000 1,681,000 Commitments and Contingencies Stockholders' Equity: Preferred stock, 500,000 shares authorized, none issued Common stock, par value $.30 per share, 30,000,000 shares authorized; 8,342,654 and 8,256,954 shares issued at May 31, 2001 and 2000, respectively.................... 2,503,000 2,477,000 Additional paid-in capital................................ 32,257,000 32,103,000 Accumulated deficit....................................... (8,579,000) (11,319,000) Unearned stock compensation............................... -- (27,000) Treasury stock at cost, 459,420 and 9,700 shares.......... (1,369,000) (97,000) ----------- ----------- Total Stockholders' Equity........................ 24,812,000 23,137,000 ----------- ----------- Total Liabilities and Stockholders' Equity........ $47,996,000 $48,384,000 =========== =========== </Table> See notes to consolidated financial statements. 12
15 TEAM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <Table> <Caption> FISCAL YEARS ENDED MAY 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- <S> <C> <C> <C> Revenues.............................................. $75,643,000 $66,636,000 $54,632,000 Operating expenses.................................... 45,053,000 38,270,000 31,872,000 ----------- ----------- ----------- Gross margin................................ 30,590,000 28,366,000 22,760,000 Selling, general and administrative expenses.......... 25,035,000 24,461,000 19,662,000 Other expense (income): Severance and other charges......................... -- 919,000 Other income, net................................... (278,000) (218,000) -- ----------- ----------- ----------- Earnings before interest and taxes.................... 5,833,000 4,123,000 2,179,000 Interest.............................................. 1,616,000 1,610,000 912,000 ----------- ----------- ----------- Earnings before income taxes.......................... 4,217,000 2,513,000 1,267,000 Provision for income taxes............................ 1,477,000 1,042,000 762,000 ----------- ----------- ----------- Net income............................................ $ 2,740,000 $ 1,471,000 $ 505,000 =========== =========== =========== Net income per common share -- Basic and diluted................................ $ 0.34 $ 0.18 $ 0.07 Weighted average number of shares outstanding -- Basic............................................ 8,015,000 8,238,000 7,547,000 -- Diluted.......................................... 8,122,000 8,283,000 7,741,000 </Table> See notes to consolidated financial statements. 13
16 TEAM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <Table> <Caption> MAY 31, ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ <S> <C> <C> <C> COMMON STOCK: Balance at beginning of year..................... $ 2,477,000 $ 2,464,000 $ 1,828,000 Shares issued.................................... 8,000 4,800 625,000 Exercise of stock options........................ 18,000 8,200 11,000 ------------ ------------ ------------ Balance at end of year................... $ 2,503,000 $ 2,477,000 $ 2,464,000 ============ ============ ============ ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year..................... $ 32,103,000 $ 32,000,000 $ 27,098,000 Shares issued.................................... 43,000 55,000 4,838,000 Exercise of stock options........................ 111,000 48,000 64,000 ------------ ------------ ------------ Balance at end of year................... $ 32,257,000 $ 32,103,000 $ 32,000,000 ============ ============ ============ ACCUMULATED DEFICIT: Balance at beginning of year..................... $(11,319,000) $(12,790,000) $(13,295,000) Net income....................................... 2,740,000 1,471,000 505,000 ------------ ------------ ------------ Balance at end of year................... $ (8,579,000) $(11,319,000) $(12,790,000) ============ ============ ============ UNEARNED STOCK COMPENSATION: Balance at beginning of year..................... $ (27,000) $ (51,000) $ -- Restricted stock grant........................... (67,000) Compensation expense............................. 27,000 24,000 16,000 ------------ ------------ ------------ Balance at end of year................... $ -- $ (27,000) $ (51,000) ============ ============ ============ TREASURY STOCK: Balance at beginning of year..................... $ (97,000) $ (97,000) $ (97,000) Repurchase of common stock....................... (1,272,000) ------------ ------------ ------------ Balance at end of year................... $ (1,369,000) $ (97,000) $ (97,000) ============ ============ ============ TOTAL STOCKHOLDERS' EQUITY......................... $ 24,812,000 $ 23,137,000 $ 21,526,000 ============ ============ ============ </Table> See notes to consolidated financial statements 14
17 TEAM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <Table> <Caption> FISCAL YEARS ENDED MAY 31, ---------------------------------------- 2001 2000 1999 ----------- ----------- ------------ <S> <C> <C> <C> Cash Flows From Operating Activities: Net income................................................ $ 2,740,000 $ 1,471,000 $ 505,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 2,773,000 2,957,000 2,230,000 Provision for doubtful accounts......................... 141,000 (46,000) 50,000 Other income............................................ (278,000) (218,000) (101,000) Equity in losses of unconsolidated subsidiary and other................................................. 73,000 Provision for termination benefit due to former officer............................................... -- 348,000 Deferred income taxes................................... 138,000 63,000 472,000 Changes in assets and liabilities, net of effects from business acquisitions: (Increase) decrease: Accounts receivable................................... (1,169,000) (2,443,000) 1,153,000 Inventories........................................... (424,000) 745,000 359,000 Prepaid expenses and other current assets............. 253,000 11,000 159,000 Income tax receivable................................. 87,000 (87,000) Increase (decrease): Accounts payable...................................... (22,000) 875,000 (597,000) Other accrued liabilities............................. 453,000 (695,000) (1,032,000) Income taxes payable.................................. (92,000) 1,102,000 (348,000) ----------- ----------- ------------ Net cash provided by operating activities.......... $ 4,586,000 $ 3,909,000 $ 3,111,000 ----------- ----------- ------------ Cash Flows From Investing Activities: Capital expenditures...................................... (1,563,000) (1,525,000) (2,454,000) Rental and demonstration equipment, net................... (524,000) (787,000) -- Proceeds from disposal of property and equipment.......... 1,571,000 478,000 202,000 Additions to goodwill..................................... (120,000) -- Business acquisitions, net of cash acquired............... -- (15,468,000) Payment of Climax notes payable at acquisition date....... (2,893,000) Other..................................................... 260,000 (651,000) (451,000) ----------- ----------- ------------ Net cash used in investing activities.............. $ (256,000) $(2,605,000) $(21,064,000) ----------- ----------- ------------ Cash Flows From Financing Activities: Payments under debt agreements and other long-term obligations............................................. $(2,597,000) $(2,152,000) $ (4,512,000) Proceeds from issuance of debt............................ 18,141,000 Issuance of common stock.................................. 180,000 140,000 3,536,000 Repurchase of common stock................................ (1,272,000) ----------- ----------- ------------ Net cash (used in) provided by financing activities....................................... (3,689,000) (2,012,000) 17,165,000 ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents........ 641,000 (708,000) (320,000) Cash and cash equivalents at beginning of year.............. 327,000 1,035,000 1,355,000 ----------- ----------- ------------ Cash and cash equivalents at end of year.................... $ 968,000 $ 327,000 $ 1,035,000 =========== =========== ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest........................................... $ 1,641,000 $ 1,555,000 $ 632,000 =========== =========== ============ Income taxes....................................... $ 1,426,000 $ 327,000 $ 806,000 =========== =========== ============ </Table> SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During 2000, the Company received a $365,000 note as partial consideration for the sale of real estate. During 1999, the Company issued 795,000 shares of the Company's common stock valued at $1,951,000 in connection with business acquisitions. See notes to consolidated financial statements 15
18 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 United States generally accepted accounting principles 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: <Table> <Caption> CLASSIFICATION LIFE - -------------- ---- <S> <C> Buildings............................................... 20-30 years Machinery and equipment................................. 2-10 years </Table> Machinery and equipment includes rental and demonstration machining tools used in the equipment sales and rental business segment totaling $1,608,000 and $1,160,000 (before accumulated depreciation of $176,000 and $127,000) at May 31, 2001 and 2000, respectively. These self-constructed assets are periodically transferred to inventory and sold as used equipment Goodwill Goodwill represents the excess of the purchase price over the fair value of acquired companies and is being amortized on a straight line basis over the estimated economic lives of the acquired companies of forty years. Amortization expense for the years ended May 31, 2001 and 2000 was approximately $275,000 in each year. Revenue Recognition Revenue is recognized when services are rendered or when product is shipped and risk of ownership passes to the customer. Income Taxes The Company accounts for taxes on income using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. 16
19 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk The Company provides services to the chemical, petrochemical, refining, pulp and paper, power and steel industries throughout the United States. No single customer accounts for more than 10% of consolidated revenues. Reclassifications Certain 2000 amounts have been reclassified to conform to the 2001 presentation. Earnings Per Share The Company has adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). There is no difference, for any of the years presented, in the amount of net income (numerator) used in the computation of basic and diluted earnings per share. With respect to the number of weighted average shares outstanding (denominator), diluted shares reflects only the pro forma exercise of options to acquire common stock to the extent that the options' exercise prices are less than the average market price of common shares during the period. Options to purchase 655,000, 747,000, and 80,000 shares of common stock were outstanding during the years ended May 31, 2001, 2000, and 1999, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of common shares during the period. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Dividends No dividends were paid during the current or prior two fiscal years. Pursuant to the Company's Credit Agreement, the Company may not pay quarterly dividends without the consent of its senior lender. Future dividend payments will depend upon the Company's financial condition and other relevant matters. Interest Rate Swap Agreements The differential to be paid or received on interest rate swap agreements is accrued as interest rates change and is recognized over the life of the agreements as an increase or decrease in interest expense. The Company does not use these instruments for trading purposes. Instead, it uses them to hedge the impact of interest rate fluctuations on floating rate debt. See Note 6 regarding the fair value of the Company's interest rate swap agreements. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and trade accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The fair values of the Company's credit facility are representative of their carrying values based upon the variable rate terms and management's opinion that the current rates offered to the Company with the same maturity and security structure are equivalent to that of the credit facility. 17
20 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) New Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, is effective for the Company as of June 1, 2001. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. The effective portion of the change in the fair value of derivatives used as hedges are reported as other comprehensive income, with all other changes reported in net income. The Company only uses derivatives as an interest rate hedge. Adoption of this new accounting standard will result in an after tax charge to other comprehensive income of approximately $20 thousand in the first quarter of FY 2002. SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by the Financial Accounting Standards Board in July 2001. SFAS 142 replaces the requirement to amortize goodwill with a requirement for an annual impairment test. The SFAS is effective for fiscal years beginning after December 15, 2001 but may be implemented early -- at the beginning of a fiscal year beginning after March 15, 2001. The Company is evaluating whether to adopt SFAS early, at the beginning of fiscal 2002 but has not yet made a determination. 2. RECEIVABLES Receivables consists of: <Table> <Caption> MAY 31, ------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Trade accounts receivable.................................. $14,918,000 $12,994,000 Real estate note (see below)............................... 365,000 Other receivables.......................................... 82,000 472,000 Allowance for doubtful accounts............................ (392,000) (251,000) ----------- ----------- Total............................................ $14,608,000 $13,580,000 =========== =========== </Table> In May 2000, the Company sold a building previously utilized in the Climax operations for $765,000, consisting of $400,000 in cash and a one year note for $365,000, which was paid in FY 2001. A gain of $218,000 was recognized in the transaction. 3. INVENTORIES Inventories consist of: <Table> <Caption> MAY 31, ----------------------- 2001 2000 ---------- ---------- <S> <C> <C> Raw materials............................................... $ 935,000 $ 947,000 Finished goods and work in progress......................... 7,310,000 6,874,000 ---------- ---------- Total............................................. $8,245,000 $7,821,000 ========== ========== </Table> 18
21 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of: <Table> <Caption> MAY 31, ----------------------- 2001 2000 ---------- ---------- <S> <C> <C> Payroll and other compensation expenses..................... $1,537,000 $1,224,000 Insurance accruals.......................................... 1,000,000 833,000 Accrued interest............................................ 222,000 246,000 Current payments due to former officers..................... 301,000 341,000 Other....................................................... 433,000 396,000 ---------- ---------- Total............................................. $3,493,000 $3,040,000 ========== ========== </Table> 5. INCOME TAXES The provision for income taxes attributable to pre-tax earnings are as follows: <Table> <Caption> FISCAL YEARS ENDED MAY 31, ---------------------------------- 2001 2000 1999 ---------- ---------- -------- <S> <C> <C> <C> Federal income taxes: Current......................................... $1,179,000 $ 843,000 $282,000 Deferred........................................ 177,000 31,000 403,000 State income taxes: Current......................................... 159,000 136,000 8,000 Deferred........................................ (38,000) 32,000 69,000 ---------- ---------- -------- Total................................... $1,477,000 $1,042,000 $762,000 ========== ========== ======== </Table> 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: <Table> <Caption> FISCAL YEARS ENDED MAY 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- <S> <C> <C> <C> Earnings before federal income taxes............. $4,217,000 $2,513,000 $1,267,000 ========== ========== ========== Computed income taxes at statutory rate.......... $1,434,000 $ 854,000 $ 431,000 Liquidation of foreign subsidiary................ (400,000) Goodwill amortization............................ 93,000 93,000 32,000 State income taxes............................... 160,000 111,000 41,000 Foreign losses................................... 104,000 Other............................................ 86,000 (16,000) 258,000 ---------- ---------- ---------- Total.................................. $1,477,000 $1,042,000 $ 762,000 ========== ========== ========== </Table> During fiscal 2001, a United Kingdom subsidiary was liquidated (see note 8). The subsidiary had incurred operating losses since the early 1990's; however, no tax benefit had been recognized or realized since the utilization of such benefits could not be assured prior to the liquidation of the subsidiary. With the liquidation of the subsidiary, the Company will recognize the tax benefit of the losses in its fiscal year 2001 Federal income tax return. 19
22 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the significant components of the Company's deferred tax assets and liabilities follows: <Table> <Caption> MAY 31, --------------------- 2001 2000 --------- --------- <S> <C> <C> Property, plant and equipment............................... $(752,000) $(755,000) Other....................................................... (209,000) (83,000) --------- --------- Gross deferred liabilities........................ (961,000) (838,000) --------- --------- Receivables................................................. 175,000 40,000 Accrued expenses and other liabilities...................... 855,000 868,000 Inventory................................................... 99,000 236,000 --------- --------- Gross deferred assets............................. 1,129,000 1,144,000 --------- --------- Net deferred taxes................................ $ 168,000 $ 306,000 ========= ========= </Table> No valuation account is required for the deferred tax assets as the Company is projecting profitable fiscal years in the future. 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: <Table> <Caption> MAY 31, ------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Revolving loan............................................. $ 5,960,000 $ 6,620,000 Term and mortgage notes.................................... 9,022,000 10,504,000 Capital lease obligations.................................. 85,000 215,000 ----------- ----------- 15,067,000 17,339,000 Less current portion....................................... 1,536,000 1,611,000 ----------- ----------- Total............................................ $13,531,000 $15,728,000 =========== =========== </Table> Maturities of long-term debt are as follows: <Table> <S> <C> FY2002................................................. $ 1,536,000 2003................................................ 7,472,000 2004................................................ 4,874,000 2005................................................ 125,000 2006................................................ 125,000 Thereafter............................................. 935,000 ----------- $15,067,000 =========== </Table> In FY1999, the Company entered into a $24 million bank credit facility that consists of: (i) a $12,500,000 revolving loan, which matures September 30, 2002, (ii) $9,500,000 in term loans for business acquisitions and (iii) a $2,000,000 mortgage loan to refinance previously existing real estate indebtedness. Amounts borrowed against the term loans are due in quarterly installments in the amount of $339,000 until the loans mature on September 30, 2003. Amounts borrowed against the mortgage loan are repaid in quarterly installments of $31,000 until its maturity date of September 30, 2008. Amounts outstanding under the credit facility bear interest at a marginal rate over either the LIBOR rate or the prime rate. The marginal rate is based on the Company's level of funded debt to cash flow, and ranges from 1.50% to 2.50% over the LIBOR rate and from 0.00% to 0.50% over the prime rate. The weighted average rate on outstanding borrowings at 20
23 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) May 31, 2001 is approximately 6.6%. The Company also pays a commitment fee of .25% per annum on the average amount of the unused availability under the revolving loan. In October and December of 1998, the Company entered into interest rate swap transactions covering $8.3 million of outstanding term loans, exchanging a floating LIBOR rate (5.3% at the time of the swaps) for fixed rates ranging from 5.19% to 5.24%. $3.8 million of the swap agreements mature on December 31, 2001 and $4.5 million mature September 30, 2003. As the interest rates on the credit facility are based on market rates, the fair value of amounts outstanding under the facility approximate the carrying value. The interest rate swap agreements, which have no carrying value, had a negative mark-to-market value of approximately $56,000 at May 31, 2001 and a positive mark-to-market value of $333,000 at May 31, 2000. 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, 2001 and 2000, the Company was in compliance with all credit facility covenants. At May 31, 2001, the Company was contingently liable for $1,052,000 in outstanding stand-by letters of credit and, at that date, approximately $5.5 million was available to borrow under the credit facility. 7. OTHER LONG TERM LIABILITIES Other liabilities consisted of: <Table> <Caption> MAY 31, ----------------------- 2001 2000 ---------- ---------- <S> <C> <C> Post retirement benefits.................................... $1,187,000 $1,419,000 Deferred compensation due former officer.................... 428,000 470,000 Other....................................................... 168,000 Less amounts due in one year................................ (301,000) (376,000) ---------- ---------- $1,314,000 $1,681,000 ========== ========== </Table> Amounts due within one year of $301,000 and $376,000, respectively, are included in 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: <Table> <S> <C> 2002.................................................... $ 301,000 2003.................................................... 264,000 2004.................................................... 238,000 2005.................................................... 245,000 2006.................................................... 100,000 2007.................................................... 39,000 ---------- $1,187,000 ========== </Table> 21
24 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Compensation Arrangement: Under a nonqualified deferred compensation agreement, a former officer of the Company (the "Participant") elected to defer a portion of his compensation into a trust established by the Company. The trust assets, consisting of cash and cash equivalents, are subject to the claims of the Company's creditors in the event of the Company's insolvency, until paid to the Participant and his beneficiaries. In accordance with EITF 97-14, "Accounting for Deferred Compensation Arrangements where amounts earned are held in a Rabbi Trust and Invested," the accounts of the trust have been consolidated into the Company's financial statements for fiscal 2001 and 2000. The principal of the trust and any earnings thereon are to be used exclusively for the uses and purposes of the Participant and general creditors of the Company in the event of the Company's insolvency, and therefore the trust assets of $428,000 and $470,000 at May 31, 2001 and 2000, respectively, have been classified as restricted cash in the balance sheet. 8. OTHER INCOME In fiscal 2001, the Company sold rental property for $1.575 million in cash (net). The property was carried as a corporate asset unrelated to either of the Company's operating segments. The transaction, net of other charges, resulted in a gain of $360,000. Also in 2001, the Company completed the sale of substantially all of the assets and operations of a small operating subsidiary located in the United Kingdom resulting in a loss on disposal of the business of $82 thousand. The operations of the UK subsidiary were not material to the Company's business. In fiscal 2000, other income consisted of the gain on the sale of real estate discussed in note 2. 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 recognized. Pursuant to 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. 22
25 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Transactions under all plans are summarized below: <Table> <Caption> FISCAL YEARS ENDED MAY 31, --------------------------------------------------------------------- 2001 2000 1999 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> Shares under option, beginning of year......... 1,111,000 $3.11 1,029,200 $3.03 692,600 $2.76 Changes during the year: Granted................... 142,000 $2.04 226,000 $3.29 394,000 $3.40 Exercised................. (60,700) $2.13 (27,300) $2.13 (36,400) $2.06 Canceled.................. (77,500) $3.43 (116,900) $2.97 (21,000) $3.21 ---------- ----- ---------- ----- ---------- ----- Shares under option, end of year............ 1,114,800 $3.00 1,111,000 $3.11 1,029,200 $3.03 Exercisable at end of year...................... 824,000 $3.06 705,000 $2.97 655,900 $2.72 ========== ===== ========== ===== ========== ===== Available for future grant..................... 410,000 413,000 30,300 ========== ========== ========== Weighted average grant-date fair value of options granted during year....... $ 290,000 $ 743,540 $1,339,600 ========== ========== ========== </Table> For options outstanding at May 31, 2001, the range of exercise prices and remaining contractual lives are as follows: <Table> <Caption> WEIGHTED WEIGHTED NUMBER OF AVERAGE AVERAGE LIFE RANGE OF PRICES OPTIONS PRICE (IN YEARS) - --------------- --------- -------- --------------- <S> <C> <C> <C> $1.94 to $2.75..................................... 466,300 $2.25 6.0 $3.06 to $3.50..................................... 433,500 $3.45 7.3 $3.56 to $4.13..................................... 215,000 $3.73 7.3 --------- ----- --- 1,114,800 $3.00 6.7 ========= ===== === </Table> 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 2001, 2000, and 1999, respectively: risk-free interest rate of 4.5%, 6.6%,and 6.5%; volatility factor of the expected market price of the Company's common stock of 73.8%, 47.6%, and 62.3% 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. 23
26 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's pro forma information, as if the fair value method described above had been adopted, is as follows: <Table> <Caption> FISCAL YEARS ENDED MAY 31, ---------------------------------- 2001 2000 1999 ---------- ---------- -------- <S> <C> <C> <C> Pro forma net income.............................. $2,536,000 $1,184,000 $253,000 ========== ========== ======== Pro forma earnings per share -- diluted........... $ 0.31 $ 0.14 $ 0.03 ========== ========== ======== </Table> In addition to the options granted under the option plans as discussed above, an officer of the Company has been granted options to purchase 200,000 shares of common stock at a price of $3.625 per share, subject to a vesting schedule based on stock performance measures. As of May 31, 2001, none of these options had vested as the target share prices detailed in the vesting schedule had not been obtained. 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 2001, 2000, 1999, were $302,000, $259,000, and $242,000, respectively. 10. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company's capital leases relate to certain computer equipment and software, whose capitalized balances are not significant to property, plant and equipment. The Company also has operating leases which relate to facilities and transportation and other equipment which are leased over terms ranging from one to five years with typical renewal options and escalation clauses. Rental payments on operating leases charged against earnings were $2,151,000, $1,991,000, and $1,936,000 in 2001, 2000, and 1999, respectively. Minimum rental commitments for future periods are as follows: <Table> <Caption> YEAR ENDING CAPITAL OPERATING MAY 31, LEASES LEASES TOTAL - ----------- ------- ---------- ---------- <S> <C> <C> <C> 2002............................................... 58,000 2,157,000 2,215,000 2003............................................... 32,000 1,769,000 1,801,000 2004............................................... -- 1,118,000 1,118,000 2005............................................... -- 417,000 417,000 2006............................................... 58,000 58,000 ------- ---------- ---------- Total minimum payments................... $90,000 $5,519,000 $5,609,000 ========== ========== Less: amount representing interest....... (5,000) ------- Present value of lease payments.......... $85,000 ======= </Table> Legal Proceedings The Company and certain subsidiaries are involved in various 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. 24
27 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMON STOCK On June 19, 1998, the Company completed the sale of 1,200,000 shares of Team's Common Stock for $2.75 per share to Houston Post Oak Partners, Ltd. ("Houston Partners") for a total consideration of $3,300,000. Houston Partners now owns approximately 15% of the Company's outstanding common shares. On November 2, 1998 the Company issued 45,000 common shares to Philip J. Hawk ("Hawk") in exchange for cash in the amount of $3.625 per share, for a total of $163,125. This sale was in accordance with the terms and conditions of an employment agreement wherein Hawk became Chief Executive Officer of the Company. Substantially all of the net proceeds of each of the private placement transactions were used to repay long term debt or to repay the Company's revolving credit facility. Additionally, during fiscal 1999, 795,000 shares of Common Stock were issued in connection with business acquisitions. See note 13. During fiscal 1999, 18,000 shares of restricted common stock were granted to certain officers of the Company. Vesting of the shares occurred over a three-year period. Accordingly, at the grant date, the value of the shares ($3.75 per share) was recorded as unearned compensation and reflected as a contra-equity account in the balance sheet. Compensation expense was recognized as the officers provided services to the Company and became vested in the shares. In fiscal 2001, pursuant to an approved open-market plan, the Company repurchased 449,000 shares of its outstanding common stock at a weighted average price of $2.83 per share. The stock repurchase program was suspended in April 2001 as a result of an announcement of a self-tender offer at $3.00 per share. The self-tender offer was completed in June, 2001, resulting in the reacquisition of another 235,000 shares. The Company's Board of Director's has approved the resumption of the open market repurchase program for acquisitions up to an additional 1,000,000 shares. 12. INDUSTRY SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," in fiscal 1999. SFAS No. 131 requires that the Company disclose certain information about its operating segments where operating segments are defined as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance." Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Pursuant to SFAS No. 131, the Company has two reportable segments: industrial services and equipment sales and rentals. The industrial services segment includes services consisting of leak repair, hot tapping, emissions control monitoring, field machining, and mechanical inspection. The equipment sales and rental segment consists of the Climax business. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on earnings before interest and income taxes. Inter-segment sales are eliminated in the operating measure used by the Company to evaluate segment performance, and this has been eliminated in the following schedule. Interest is not allocated to the segments. 25
28 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information about business segments for the fiscal years 2001, 2000 and 1999 is set forth below: FISCAL YEAR ENDED MAY 31, 2001 <Table> <Caption> INDUSTRIAL EQUIPMENT CORPORATE SERVICES SALES AND RENTALS AND OTHER TOTAL ----------- ----------------- ----------- ----------- <S> <C> <C> <C> <C> Revenues.............................. $66,492,000 $ 9,151,000 $ $75,643,000 ----------- ----------- ----------- ----------- Earnings before interest and taxes.... 9,831,000 (189,000) (3,809,000) 5,833,000 Interest.............................. -- 1,616,000 1,616,000 ----------- ----------- ----------- ----------- Earnings before income taxes.......... $ 9,831,000 $ (189,000) $(5,425,000) $ 4,217,000 =========== =========== =========== =========== Depreciation and amortization......... $ 1,635,000 $ 716,000 $ 422,000 $ 2,773,000 =========== =========== =========== =========== Capital expenditures.................. $ 1,351,000 $ 153,000 $ 59,000 $ 1,563,000 =========== =========== =========== =========== Identifiable assets................... $32,563,000 $12,011,000 $ 3,422,000 $47,996,000 =========== =========== =========== =========== </Table> FISCAL YEAR ENDED MAY 31, 2000 <Table> <Caption> INDUSTRIAL EQUIPMENT CORPORATE SERVICES SALES AND RENTALS AND OTHER TOTAL ----------- ----------------- ----------- ----------- <S> <C> <C> <C> <C> Revenues.............................. $56,053,000 $10,583,000 $ -- $66,636,000 ----------- ----------- ----------- ----------- Earnings before interest and taxes.... 7,267,000 777,000 (3,921,000) 4,123,000 Interest.............................. -- -- 1,610,000 1,610,000 ----------- ----------- ----------- ----------- Earnings before income taxes.......... $ 7,267,000 $ 777,000 $(5,531,000) $ 2,513,000 =========== =========== =========== =========== Depreciation and amortization......... $ 1,669,000 $ 855,000 $ 433,000 $ 2,957,000 =========== =========== =========== =========== Capital expenditures.................. $ 1,190,000 $ 304,000 $ 31,000 $ 1,525,000 =========== =========== =========== =========== Identifiable assets................... $31,381,000 $12,616,000 $ 4,387,000 $48,384,000 =========== =========== =========== =========== </Table> FISCAL YEAR ENDED MAY 31, 1999 <Table> <Caption> INDUSTRIAL EQUIPMENT CORPORATE SERVICES SALES AND RENTALS AND OTHER TOTAL ----------- ----------------- ----------- ----------- <S> <C> <C> <C> <C> Revenues.............................. $47,282,000 $ 7,350,000 $ -- $54,632,000 ----------- ----------- ----------- ----------- Earnings before interest and taxes.... 5,374,000 470,000 (3,665,000) 2,179,000 Interest.............................. -- -- 912,000 912,000 ----------- ----------- ----------- ----------- Earnings before income taxes.......... $ 5,374,000 $ 470,000 $(4,577,000) $ 1,267,000 =========== =========== =========== =========== Depreciation and amortization......... $ 1,284,000 $ 457,000 $ 489,000 $ 2,230,000 =========== =========== =========== =========== Capital expenditures.................. $ 1,232,000 $ 130,000 $ 1,092,000 $ 2,454,000 =========== =========== =========== =========== Identifiable assets................... $30,722,000 $12,378,000 $ 4,665,000 $47,765,000 =========== =========== =========== =========== </Table> 13. ACQUISITIONS Effective August 31, 1998, the Company acquired all of the outstanding capital stock of Climax Portable Machine Tools, Inc., an Oregon corporation ("Climax"), in exchange for cash in the amount of $6.4 million and 200,000 newly-issued shares of the Company's common stock, $0.30 par value per share (the "Common Stock"). Additionally, at the acquisition date, the Company refinanced the majority of Climax's notes payable in the amount of $2.9 million. A value of $3.696 per share was assigned to the Common Stock issued to the 26
29 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) former shareholders of Climax, based on the market value of the Common Stock, discounted to reflect certain restrictions placed on the Common Stock. In order to finance the acquisition of the Climax shares, the Company borrowed $8.5 million under a new credit facility (See note 7). Climax designs and manufactures portable, metal cutting machine tools for on-site maintenance and repair purposes. Effective March 31, 1999, the Company acquired 100% of the outstanding capital stock of X-Ray Inspection, Inc., ("X-Ray"), a Louisiana corporation, in consideration for the payment to the sellers of an aggregate of $8.4 million in cash and 595,000 shares of newly issued Company Common Stock, valued at $2.037 per share based on the market value discounted to reflect certain restrictions placed on the common stock. The cash component included $7.7 million paid at closing and an additional $700,000 paid subsequent to closing for excess working capital conveyed in the transaction. Additional consideration of up to $2.5 million in cash could be payable to the sellers over the four years after the acquisition if certain high growth operating results are achieved by X-Ray. (No additional consideration was earned in the first twenty six months after acquisition. See note 15 for termination of earn-out arrangement subsequent to May 31, 2001). In order to finance the purchase, the Company borrowed $8.4 million under its existing credit facilities. X-Ray is in the business of providing mechanical inspection services consisting primarily of non-destructive inspections of pipelines and piping systems in industrial plants, using radiographic testing, ultrasonic testing, magnetic particle testing, and visual inspection. The acquisitions were accounted for using the purchase method of accounting. Accordingly, the consolidated financial statements subsequent to the effective dates of the acquisitions reflect the purchase price, including transaction costs. As the acquisition of Climax was effective August 31, 1998, the consolidated results of operations for the Company for the year ended May 31, 1999, include the results for Climax for the period from September 1, 1998, to May 31, 1999. As the acquisition of X-Ray was effective March 31, 1999, the consolidated results of operations for the Company include the results of X-Ray for the period April 1, 1999, to May 31, 1999. The purchase price of Climax and X-Ray was allocated to the assets and liabilities of the respective companies based on their estimated fair values. The goodwill associated with the Climax acquisition approximated $3.6 million, which is being amortized on a straight-line basis over forty years. The goodwill associated with the X-Ray acquisition approximated $7.3 million, which is also being amortized on a straight-line basis over forty years. The unaudited pro forma consolidated results of operations of the Company are shown below as if the acquisitions had occurred at the beginning of the fiscal period indicated. These results are not necessarily indicative of the results which would actually have occurred if the purchases had taken place at the beginning of the periods, nor are they necessarily indicative of future results. <Table> <Caption> 1999 ----------- <S> <C> Net sales.............................................. $64,799,000 Net income............................................. $ 882,000 Earnings per share Basic................................................ $ 0.12 Diluted.............................................. $ 0.11 </Table> 14. SEVERANCE AND OTHER CHARGES In fiscal 1999, the Company reduced headquarters support staff by approximately 20% (19 individuals), which resulted in a charge of $436,000. Additionally, a charge of $483,000 was made during fiscal 1999 to fully provide for the future payments due to a former officer under a special termination arrangement. 27
30 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. SUBSEQUENT EVENTS On June 6, 2001, the Company completed the reacquisition of 235,000 shares of its common stock at $3.00 per share pursuant to a self-tender offer announced in April 2001. On July 5, 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. (see note 13). Pursuant to the agreement, the Company's obligation for contingent future consideration (up to $2.5 million depending on future earnings of X-Ray) was cancelled in exchange for the issuance of options to acquire 100,000 of the Company's common stock (at $3.50 per share) and the nomination of the principal former owner of X-Ray to the Company's Board of Directors. 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The Company's consolidated results of operations by quarter for the fiscal years ended May 31, 2001, and 2000 are shown below. <Table> <Caption> FISCAL 2001 ----------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Revenues................................. $16,776,000 $19,545,000 $18,656,000 $20,666,000 =========== =========== =========== =========== Gross margin............................. $ 6,592,000 $ 7,915,000 $ 7,313,000 $ 8,770,000 =========== =========== =========== =========== Net income............................... 211,000 879,000 619,000 1,031,000 =========== =========== =========== =========== Net income per share -- basic and diluted................................ $ 0.03 $ 0.11 $ 0.08 $ 0.13 =========== =========== =========== =========== </Table> <Table> <Caption> FISCAL 2000 ----------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Revenues................................. $15,410,000 $16,337,000 $16,503,000 $18,386,000 =========== =========== =========== =========== Gross margin............................. $ 6,495,000 $ 7,251,000 $ 6,738,000 $ 7,882,000 =========== =========== =========== =========== Net income............................... 42,000 353,000 358,000 718,000 =========== =========== =========== =========== Net income per share -- basic and diluted................................ $ 0.01 $ 0.04 $ 0.04 $ 0.09 =========== =========== =========== =========== </Table> 28
31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements concerning accounting and financial disclosures with the Company's independent accountants within the past two years. PART III THE INFORMATION CONTAINED IN ITEMS 10, 11, 12 AND 13 OF PART III HAS BEEN OMITTED FROM THIS REPORT ON FORM 10-K SINCE THE COMPANY WILL FILE, NOT LATER THAN 120 DAYS FOLLOWING THE CLOSE OF ITS FISCAL YEAR ENDED MAY 31, 2001, ITS DEFINITIVE PROXY STATEMENT. THE INFORMATION REQUIRED BY PART III WILL BE INCLUDED IN THAT PROXY STATEMENT AND SUCH INFORMATION IS HEREBY INCORPORATED BY REFERENCE, WITH THE EXCEPTION OF THE INFORMATION UNDER THE HEADINGS "COMPENSATION COMMITTEE REPORT" AND "COMPARISON OF TOTAL SHAREHOLDERS' RETURN." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements of Team, Inc. and its subsidiaries are included in Part II, Item 8. <Table> <Caption> PAGE ---- <S> <C> Independent Auditors' Report................................ 11 Consolidated Balance Sheets -- May 31, 2001 and 2000........ 12 Consolidated Statements of Operations -- Years ended May 31, 2001, 2000 and 1999....................................... 13 Consolidated Statements of Stockholders' Equity -- Years ended May 31, 2001, 2000 and 1999......................... 14 Consolidated Statements of Cash Flows -- Years ended May 31, 2001, 2000 and 1999....................................... 15 Notes to Consolidated Financial Statements.................. 16 </Table> 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 <Table> <Caption> EXHIBIT NUMBER ------- <C> <S> 3(a)* -- Second Restated Articles of Incorporation of the Company, as amended through August 31, 1999, (filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1999). 3(b)* -- Bylaws of the Company (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-2, File No. 33-31663). 4(a)* -- Certificate representing shares of common stock of Company (filed as Exhibit 4(1) to the Company's Registration Statement on Form S-1, File No. 2-68928). 4(b)* -- Statement of Relative Rights and Preferences of Series A Participatory Preferred Stock of Team, Inc. (filed as Exhibit 2.2 to the Company's Form 8-A with the Securities and Exchange Commission on October 26, 1990). </Table> 29
32 <Table> <Caption> EXHIBIT NUMBER ------- <C> <S> 10(a)*# -- Employment Agreements and Consulting and Salary Continuation Agreements between the Company and certain of its executive officers (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1988, as Exhibit 10 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1989, as amended by Form 8 dated October 19, 1989, and Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1990). 10(b)* -- Ninth Amendment and Restatement of the Team, Inc. Salary Deferral Plan (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 1996). 10(c)*# -- Sixth Amendment and Restatement of the Team, Inc. Employee Stock Ownership Plan (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 1996). 10(d)*# -- Team, Inc. Restated Non-Employee Directors' Stock Option Plan as amended through March 28, 1996 (filed as Exhibit 10(z) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10(e)*# -- Amendment dated January 9, 1997, to the Team, Inc. Restated Non-Employee Directors Stock Option Plan (filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997). 10(f)*# -- Amendment dated January 29, 1998, to the Team, Inc. Restated Non-Employee Directors Stock Option Plan (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997). 10(g)*# -- Team, Inc. Officers' Restricted Stock Option Plan dated December 14, 1995 (filed as Exhibit 10(dd) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10(h)*# -- First Amendment to the Consulting and Salary Continuation Agreement by and between Team, Inc. and George W. Harrison dated December 24, 1990 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1996). 10(i)*# -- Employment Agreement by and between Philip J. Hawk and Team, Inc. dated November 2, 1998 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10(j)*# -- Incentive Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated November 2, 1998 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10(k)*# -- Standard Restricted Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated November 2, 1998 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10(l)*# -- Price Vested Restricted Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated November 2, 1998 (filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10(m)*# -- Stock Purchase Agreement by and between Philip J. Hawk and Team, Inc. dated November 2, 1998 (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). </Table> 30
33 <Table> <Caption> EXHIBIT NUMBER ------- <C> <S> 10(n)*# -- Employment Termination and Consulting Agreement, by and between Team, Inc. and William A. Ryan, dated effective as of November 1, 1998 (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10(o)*# -- Restricted Stock Award, in the amount of 6,000 shares of the Company's common stock to Kenneth M. Tholan, and 3,000 shares of common stock to each of Ted W. Owen, Clark A. Ingram, and John P. Kearns, effective as October 26, 1998 (only the form of such Restricted Stock Award is made an exhibit, as there are no particular provisions of each such individual's Restricted Stock Award that vary from the form, other than the amounts indicated above -- filed as Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1999) 10(p)* -- Stock Purchase Agreement by and between Team, Inc. and Houston Post Oak Partners, Ltd. Dated June 9, 1998 (filed as a exhibit to the Company's Current Report on Form 8-K filed June 8, 1998). 10(q)* -- 1998 Incentive Stock Option Plan dated January 29, 1998 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998). 10(r)* -- Credit Agreement dated August 28, 1998 among Team, NationsBank, N.A. and various Financial Institutions named in the Credit Agreement (filed as Exhibit 2.5 to the Company's Current Report on Form 8-K filed September 9, 1998). 21* -- Subsidiaries of the Company (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1999). </Table> - --------------- * 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 has filed no reports on Form 8-K since the beginning of the fourth quarter of fiscal 2001. 31
34 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 29, 2001. 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. <Table> <C> <S> <C> /s/ PHILIP J. HAWK Chief Executive Officer and August 29, 2001 - ----------------------------------------------------- Director (Philip J. Hawk) /s/ GEORGE W. HARRISON Director August 29, 2001 - ----------------------------------------------------- (George W. Harrison) /s/ JACK M. JOHNSON, JR. Director August 29, 2001 - ----------------------------------------------------- (Jack M. Johnson, Jr.) /s/ E. THEODORE LABORDE Director August 29, 2001 - ----------------------------------------------------- (E. Theodore Laborde) /s/ LOUIS A. WATERS Director August 29, 2001 - ----------------------------------------------------- (Louis A. Waters) /s/ SIDNEY B. WILLIAMS Director August 29, 2001 - ----------------------------------------------------- (Sidney B. Williams) /s/ TED W. OWEN Vice President Chief Financial August 29, 2001 - ----------------------------------------------------- Officer (Principal Financial (Ted W. Owen) Officer and Principal Accounting Officer) </Table> 32