Commission File No. 0-23242

WEBCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

                       Oklahoma                                                                                                 73-1097133    
               (State or other jurisdiction                                                                                 (I.R.S. Employer
           of incorporation or organization)                                                                           Identification Number)

9101 West 21^st Street
Sand Springs, Oklahoma 74063
(Address of principal executive offices, including zip code)

Common Stock, par value $.01
(Title of class)

    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 (229.405 of this chapter) 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 September 30, 2001, the aggregate market value of the voting stock held by non-affiliates of the registrant was $5,796,000.

    On September 30, 2001, the number of shares outstanding of the registrant's common stock, $.01 par value, was 7,073,723 shares.

TABLE OF CONTENTS

                                                                                                                                                            Page

Item 1. Business                                                                                                                                         3
Item 2. Properties                                                                                                                                     13
Item 3. Legal Proceedings                                                                                                                         14
Item 4. Submission of Matters to a Vote of Security
            Holders                                                                                                                                        14
 

Item 5. Market for Registrant's Common Stock and Related
            Stockholder Matters                                                                                                                     15
Item 6. Selected Financial Data                                                                                                                 15
Item 7. Management's Discussion and Analysis of Financial
            Condition and Results of Operations                                                                                             17
Item 8. Financial Statements and Supplementary Data                                                                               23
Item 9. Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure                                                                                             41
 

Item 10. Directors and Executive Officers of the Registrant                                                                        41
Item 11. Executive Compensation                                                                                                             41
Item 12. Security Ownership of Certain Beneficial Owners
              and Management                                                                                                                        41
Item 13. Certain Relationships and Related Transactions                                                                           41
 

Item 14. Exhibits, Financial Statement Schedules and
              Reports on Form 8-K                                                                                                               42
 

WEBCO INDUSTRIES, INC. AND SUBSIDIARY

FORM 10-K

Unless the context otherwise requires, the information contained in this report, and the terms "Webco" and the "Company" when used in this report, include Webco Industries, Inc. and its subsidiary, P&J, on a consolidated basis.

Specialty tubing producers occupy a niche between the primary steel producers and customers who utilize precision tubing in the manufacture of products primarily for the capital goods and consumer durable industries. As contrasted with commodity pipe producers, specialty tube mills manufacture products which are engineered and tailored for more specialized and critical end-use applications.

The specialty tubing industry was once dominated by the major integrated steel producers. Over time, these integrated producers lost their competitive advantage and have largely withdrawn from this segment. In addition, the industry continues to undergo consolidation, as well as rationalization of less efficient producers. Despite the consolidation over the past several years, the industry continues to be highly fragmented and is currently comprised of independent producers that occupy relatively focused market niches.

The specialty tubing industry has been affected by several trends that are expected to continue over the next several years. First, customers’ increasing emphasis on just-in-time inventory methods has required tube producers to increase operating efficiencies to accommodate more frequent, but smaller sized orders, and has caused tube producers to place greater emphasis on inventory management and cost control. Second, customers’ desires to cut operating costs through the outsourcing of specific processing functions, such as specialty tube manufacturing, have created the opportunity for third-party tube producers to replace production from captive mills. Finally, the impacts of foreign steel producers on the U.S. markets have caused volatility in the price of finished goods and the cost of steel sheet coil, the principal raw material used in the manufacture of tubing products.

Electric Resistance Carbon Steel Weld Process: The Company maintains inventories of carbon steel sheet coils from which it manufactures tubing using electric resistance welding. This steel is in the form of a continuous sheet, typically 48 to 60 inches wide, between .049 and .500 inches thick, and rolled into 15 to 20 ton coils.

All customer orders for manufactured products are entered into a computerized order entry system, and the appropriate steel coil inventory is then selected and scheduled for processing in accordance with the customer’s delivery date and product specifications. The Company attempts to maximize efficiency by combining orders to optimize size rollings.

The manufacturing cycle begins with the slitting of wide coils into narrower bands. The outside diameter of the tube to be produced determines the width of the slit band. Steel coils over .180 inches thick used at the Sand Springs facility are slit to pre-designated widths by outside vendors. Steel coils less than .180 inches thick in Sand Springs and substantially all coils in Oil City are slit in each facility using Company equipment.

Conversion from slit band to carbon and alloy tubes is accomplished by (i) continuously roll forming into the desired tubular diameter; (ii) continuously welding the edges; and (iii) cutting to approximate finished length or multiples thereof. After the tube has been welded and depending upon product specifications, it may be moved to three further processing stations for annealing (heat treatment through an atmospherically controlled roller hearth furnace), straightening through rotary straighteners, and finishing (i.e., cut-to-length, non-destructive test, stencil, oil coat and package). The Company has stringent quality control standards in place at each stage of the manufacturing process.

This process produces welded heat exchanger tubing, boiler tubing, mechanical tubing and hollows (the raw material for the cold drawing process, which does not go through the finishing process). Hollows are primarily for specific cold draw orders, however, smaller amounts are produced for inventory.

Carbon Steel Cold Drawing Process: The Company maintains inventories of tubing hollows, which is raw material for the cold drawing process. Most of this tubing is manufactured by the Company’s own weld tube mills. The Company currently offers precision, made-to-order cold drawn products from .250 inch to .375 inch in wall thickness for mechanical tubing and a limited amount of heat exchanger and boiler tubing. Cold drawing permits greater flexibility and precision (as compared to the weld process) in meeting customer specifications of tube diameters, wall thickness and other characteristics.

Cold drawing orders are entered into a computerized order entry system. Raw materials are selected to optimize yields and efficiency and meet the customer’s specifications and required delivery schedule. After the proper material has been selected for each specific order, it is cut to the desired length. The tube is then (i) pickled and lubricated through a series of tanks, (ii) pointed to taper the tube end, and (iii) cold drawn (cold reduction of outside diameter and inside diameter and elongation of tube). After the cold drawn tube has been manufactured to finished size, it is moved to three further processing stations for annealing, straightening and finishing.

Welded Stainless Tube Process: The manufacturing cycle for the stainless steel weld mill operations begins with the receipt by the Company of stainless steel coils slit to a pre-designated width by the vendor.

Customer orders are entered into the computerized order entry system. Slit coils are selected and fed into the stainless weld mills to be formed into a tubular shape and welded by an automated gas or laser welding process. After welding, the tube is annealed, cooled, straightened, stenciled, non-destructively tested, cut to length and packaged for shipment. For some special customer requirements, the tubing is coiled to lengths up to 20,000 feet. Most of the processing is performed in a continuous operation.

Stainless processing provides air-cooled heat exchanger tubing, instrumentation tubing and small diameter stainless pipe. The majority of stainless products are also made-to-order.

The Company either outsources the fabrication of its Other Tubing Products or performs value added processing, such as cutting to length and end finishing the product, using owned equipment. Highly specialized and technical applications are generally outsourced. Other Tubing Products consist of tubular goods made of stainless steel, carbon steel, copper, brass, aluminum, and surgical steel purchased from other manufacturers.

QuikWater maintains a sales and engineering office in Sand Springs, Oklahoma and outsources the fabrication of the units to a related party vendor. All units are built to the Company's and its customer’s specifications. The Company supplies all of the required components based upon the specific size and model of the unit. Once completed, the unit is fully tested and then shipped to the customer's site where it is installed by the customer or a Company representative.

The Company has three manufacturing facilities for producing carbon or stainless steel tubing products. The largest facility is located in Sand Springs, Oklahoma, which produces a wide range of carbon steel tubing products. This facility has been in operation since the Company began in 1969. The Company also has a facility in Oil City, Pennsylvania, which produces primarily boiler and as-welded mechanical carbon steel tubing products. The third facility in Mannford, Oklahoma produces stainless steel tubing products. The Company completed its expansion in Oil City during the third quarter of fiscal 2001. The additional 36,000 tons of welded capacity will create company-wide additional capacity for its welded carbon steel heat exchanger and boiler tubing and for its welded and cold drawn mechanical OEM tubing markets.

INDUSTRY SEGMENTS
The Company has two reportable segments: Tubing Products and QuikWater, representing the Company’s two strategic business units offering different products. The Company internally evaluates its business by facility, however, because of the similar economic characteristics of the tubing operations, including the nature of products, production processes and customers, those operations have been aggregated for segment reporting purposes. See Footnote 11 to the financial statements for additional information regarding segments.

Heat Exchanger Tubing: The Company is a full service distributor of heat exchanger tubing, offering a full spectrum of welded, cold drawn or seamless tubing through its distribution facilities in Oklahoma and Texas. Through its manufacturing facilities and sourcing partners, the Company can offer carbon and stainless steel, brass, copper and other metal heat exchanger tubes, which can be cut, bent and/or finned to customer specifications at the distribution warehouses. The Company believes that its manufacturing capabilities, in both carbon and stainless steel, provide a strategic advantage over its distribution competitors. The Company also believes that its distribution capabilities provide an additional advantage over its manufacturing competitors.

Heat exchangers generally fall into two broad categories; shell and tube, and air-cooled. Shell and tube heat exchangers are used to control temperatures or to recover waste heat in, among other things, power stations, petrochemical plants, and refineries. Air-cooled heat exchangers are used to dissipate heat generated by industrial processes in, among other things, gas compressor stations and petrochemical plants. The Company’s products are suitable for both shell and tube and air-cooled heat exchangers.

The heat exchanger industry over the past two years has been impacted by low demand in the petrochemical industry and low cost foreign imports (including both raw coils and finished tubes and pipe), however, the industry did show signs of improvement over the later half of the fiscal year. The Company believes that its current production capacity and product offerings will enable it to better realize the benefits associated with improving demand in the steel heat exchanger market.

Carbon Steel Boiler Tubing: The Company produces welded carbon steel boiler tubing from both the Sand Springs, Oklahoma, and Oil City, Pennsylvania facilities. This capability enables the Company to cost-effectively serve this market throughout the continental United States and eastern Canada. The Company is a market leader in the manufacture of welded carbon steel boiler tubing.

The Company’s products are used for the manufacture and maintenance of boiler systems for utilities, waste-heat recovery units, industrial and commercial facilities, and co-generation plants. While maintenance is an ongoing requirement, new boiler manufacturing generally depends on industrial plant expansion and construction of new energy production facilities.

Stainless Tubing: The Company serves five sub-markets within the small diameter welded stainless tubing category: instrumentation tubing, stainless pipe, mechanical tubing, heat exchanger tubing, and other specialty tubing. The end uses for these products include appliances, industrial plant piping systems, instruments for the petrochemical industry, and a variety of other capital goods applications. The Company is a small, niche producer, due to both product size and capacity constraints, but plans to continue an aggressive growth strategy in the above product lines.

The stainless pipe and tube industry over the last three years has been impacted by high levels of low cost foreign imports (including both raw coils and finished tubes and pipe), which have created historically low pricing and a highly competitive sales environment.

Mechanical Tubing: Mechanical tubing includes both as-welded and cold drawn tubing. Most of the products the Company manufactures from its cold draw processes are for mechanical tube applications. The end-uses for these products are very diverse and include hydraulic cylinders, automotive components, appliances, farm equipment, and a wide variety of consumer durable (such as bicycles and lawnmowers) and capital goods. The Company is a relatively small producer in this market, but continues to pursue opportunities for growth.

In conjunction with the increased capabilities of Mill 3 and the completed expansion in Oil City, the Company has targeted the mechanical tubing market as a growth area over the next several years. This market continues to undergo a major change in which final assembly manufacturers (automotive, appliance, etc.) outsource component parts and emphasize just-in-time inventory management to reduce production costs. Webco believes that this market, which is largely comprised of original equipment manufacturers ("OEMs"), provides an opportunity for the Company to gain market share by utilizing its technological capabilities to offer superior quality, on-time delivery, customer service, and customized products at competitive prices.

Other Tubing Products
The Company sells a variety of other tubing products, primarily through its subsidiary, P&J. Other Tubing Products consist of tubular goods made of stainless and carbon steel, copper, brass, aluminum, and surgical steel purchased from other manufacturers. These products come in a wide range of sizes and are used in a variety of applications. In many cases, the Company provides just-in-time inventory management for its customers.

QuikWater
The Company's QuikWater division sells a patented direct contact water heater. The water heater generates hot water on demand and has significant energy saving benefits coupled with unique environmental advantages. It can be used in a variety of commercial applications such as food processing, manufacturing, health care, construction, and other markets where a high volume of hot water is required.

Quarterly Effects and Seasonality
Order rates generally tend to be lower during mid-summer and December as many of the Company’s customers schedule plant shutdowns for plant maintenance. In addition, the Company experiences some seasonality in stainless during its third fiscal quarter, which may result in reduced net sales and income for that period.

The Company’s major competitors include Vision Metals, Inc. for carbon heat exchanger tubing, Plymouth Tube Company for carbon boiler tubing, Damascus/Bishop Tube, Inc. and Gibson Tube, Inc. for stainless products, and Copperweld LTV, Pittsburgh Tube Company, Metalmatic and Lone Star Steel Company for mechanical tubing. Certain of these competitors are larger and have access to greater financial resources than the Company. Most of these competitors are unionized.

The Company believes that its non-union status, geographic balance, focused niche strategy, product quality, customer service and continued emphasis on technical innovations position it to compete effectively within each of its niche markets.

Fundamental to the Company’s quality system is the control of the product and process, from raw material procurement to the ultimate delivery of finished goods to the Company’s customers. On a test basis, physical and chemical analyses are performed on raw materials to verify that their mechanical and dimensional properties, cleanliness, and surface characteristics meet the Company’s and industry requirements. The Company has also developed stringent process controls, including Statistical Process Control, non-destructive testing methods, and standardized operating and inspection procedures, to provide assurance of quality, and to ensure that the customer’s requirements are met throughout the manufacturing process.

Webco understands that the Company's supplier base for materials is critical to its economic health. Constant effort is directed towards developing long-term partners who can provide acceptable quality, competitive prices and dependable delivery, and are, themselves, economically stable.

The Company’s sales and marketing efforts for its manufactured products are directed by a vice president of sales and marketing, the President of P&J, and Webco's product sales managers. These efforts are supported by its distribution organization, internal sales staff and technical services group. The Company also emphasizes the use of its technical and engineering support staff in its product development and marketing efforts. The Company’s technical services, operating, engineering, quality, sales, product planning and purchasing staffs work closely with its customers and suppliers to develop products that meet specific customer applications. Variables in the product development process include the steel’s microstructure, chemistry, mechanical properties, surface finish, machinability, and product consistency. The Company believes this process is essential to its sales effort and provides the Company with a competitive advantage.

Sales of the Company's Other Tubing Products are directed by the President of P&J, and its sales staff, headquartered in Glen Ellyn, Illinois. The Company’s Other Tubing Products line and P&J's other sales representative accounts constitute over 50% of P&J's sales effort.

While the Company ships product throughout North America, many of its markets and customers are located within a 500-mile radius of its manufacturing and distribution locations. As it concerns these markets and customers, this geographic advantage places the Company in a more cost competitive position relative to many of its competitors. The Company transports product for local delivery via Company-owned or leased vehicles. Longer distance deliveries are generally made via independent trucking firms.

The Company offers its finished product for shipment directly from its three manufacturing locations. In addition, the Company also inventories finished goods and functions as its own distributor in some of its markets. Such markets and customers are served on a just-in-time basis from the Company’s distribution locations in Oklahoma, Texas, Illinois and Michigan. Finished goods inventories for distribution generally are suitable for sale to many customers and generally are not unique to a specific customer’s needs.

The Company believes that its long-term relationships with many of its customers are a significant factor in its business and that pricing, quality, service and the ability to deliver orders on a timely basis are the most critical factors in maintaining these relationships. Company executive officers actively participate in the Company’s marketing efforts and have developed strong business relationships with senior management of many of the Company’s principal customers.

The Company’s operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder which, among other requirements, establish noise and dust standards. Management believes it is in material compliance with these laws and regulations and does not believe that future compliance with such laws and regulations will have a material adverse effect on its results of operations or financial condition.

Certain statements in this Annual Report on Form 10-K, including statements preceded by, or predicated upon the words "believes", "expects", "appears" or "plans", constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied herein. Such risks, uncertainties and factors include, among others:

General Economic and Business Conditions
Many of the Company’s products are sold to industries that experience significant fluctuations in demand based on economic conditions or other matters beyond the control of the Company. No assurance can be given that the Company will be able to increase or maintain its level of sales in periods of economic stagnation or downturn. Through the date of this filing, the Company has not experienced a significant change in its sales levels or order backlog due to the economic impacts of the terrorist attacks of September 11, 2001, although there can be no assurances such stability will continue.

Competition from Imports
The level of imports of tubular products affects the domestic tubular products market, which has varied significantly over time. High levels of imports may reduce the volume sold by domestic producers and depress selling prices. In addition, the strength of the U.S. Dollar and volume motives of some foreign importers may create circumstances where product pricing is at levels that are marginally profitable or even unprofitable. The Company believes that import levels and import pricing are affected by, among other things, overall worldwide demand for tubular products, global economic conditions, the trade practices of and government subsidies to foreign producers, and the weakness or absence of governmentally imposed trade restrictions in the United States. Given the uncertainty in certain economies of Asia, South America and Eastern Europe, competition from foreign imports should be expected to continue.

Changes in Manufacturing Technology
Over the past 10 years, there have been significant advances in the technology relating to the manufacture of carbon and stainless steel tubing. Such advances have impacted the speed at which tubing can be manufactured, the quality of the tubing, and the types and densities of materials that can be welded into tubes for advanced manufacturing processes. In many circumstances, maintaining current manufacturing technologies is necessary to be competitive with other domestic producers and foreign imports or to be able to provide goods for customers’ advancing manufacturing needs and processes. Maintaining current manufacturing technologies and capabilities requires investment of capital. Manufacturers that do not maintain current technologies may be rationalized by the industry as a result of their inability to compete against more efficiently priced products.

Monetary Policy and Banking Environment
In the course of managing the National economy, the Federal Reserve effects policy that impacts the cost and availability of money within the United States banking system. These policy decisions, along with the quality of the economy, have a direct impact upon bank credit policies. Continued tightening of credit availability could negatively impact the Company's ability to refinance its debt upon maturity or to refinance at terms that are not more costly than the current debt structure.

Industry Capacity
The Company and many of its competitors in both the stainless and carbon steel tubing markets have expanded production capacity over the past decade and continue to do so in connection with the growth in product demand and benefits related to current manufacturing technology. Continued significant expansion could result in industry over-capacity. Over capacity could also result from a sudden decrease in demand or a significant increase in foreign imported supply.

Domestic Competition
Specialty steel tube manufacturing is a highly competitive market in which companies compete on the basis of price, quality, service and ability to fill orders on a timely basis. The Company has different competitors within each of its markets served. Certain of these competitors are larger and have greater financial resources than the Company. Sales of some of the Company’s products represent a high percentage of the market demand for these products, and could be targeted by competitors.

Raw Material Costs and Availability
The Company's largest component of cost of sales is raw material costs. These costs can vary over time due to changes in steel pricing which are influenced by numerous factors beyond the control of the Company, including general economic conditions, foreign imports, domestic competition, labor costs, import duties and other trade restrictions. Typically, the Company passes on these changes in cost to customers. However, reductions in the Company's raw material costs may lag behind pressure on the Company's sales prices or increases in raw material costs may precede increases in the Company's sales prices, thus affecting the Company's profit margins.

Loss of Significant Customers and Customer and Vendor Work Stoppages
The Company sells its tubular products to a diverse group of more than 1,100 customers. Although no single customer represents in excess of 7% of the Company’s 2001 net sales, and no one end-use sector represents more than 25% of 2001 net sales, the loss of any significant customer, or a work stoppage at a significant customer or in an important end-use sector, such as automotive, could have an adverse effect on the Company’s operating results.

Technical and Data Processing Capabilities of Customers and Vendors
Failure by the Company’s customers and vendors to find adequate solutions to any technical and data processing issues they may have could result in customers having a significant interruption in their buying patterns and volumes, and vendors being unable to deliver product required for the Company’s manufacturing processes in a timely manner.

The Company’s principal properties presently consist of three manufacturing plants and five distribution facilities. The following sets forth the location, area, and whether the property is owned or leased for each existing facility:

The Company considers all of its properties, both owned and leased, together with the related machinery and equipment contained therein, to be well maintained, in good operating condition, and suitable and adequate to carry on the Company’s business.

In August 1997, the Company filed an action, Webco Industries, Inc. vs. Thermatool Corporation and Alpha Industries, Inc., relating to certain cut-off equipment sold to the Company and installed on Mill 3, which did not perform to specifications. The case, filed in the United States District Court for the Northern District of Oklahoma (Case No. 97-CV-708H (W)), sought recoveries for the cost of the equipment and other incidental and consequential damages, including lost profits, suffered by the Company. On May 27, 1999 a jury awarded the Company $1.1 million on its claims against Thermatool. Prior to the trial, the court had ruled that the Company could not collect lost profits and certain other incidental and consequential damages, and limited the Company's possible recovery to the cost of the equipment and improvements plus interest. The damages awarded by the jury, accordingly, do not include lost profits by the Company. Now that the first trial has been decided in the Company’s favor, the Company has appealed the pre-trial order that prevented the Company from recovering lost profits, and has appealed the trial court’s denial of attorneys’ fees and pre-judgment interest. There can be no assurances that the Company will be successful on appeal or that if successful, lost profits or other damages awarded by the appeals court or in the succeeding trial, if any, will be commensurate with actual lost profits and damages and expenses suffered by the Company. Thermatool has appealed the jury’s verdict and there can be no assurances as to what the outcome of that appeal will be.

The Company is also a party to various other lawsuits and claims arising in the ordinary course of business. Management, after review and consultation with legal counsel, believes that any liability resulting from these matters would not materially affect the results of operations or the financial position of the Company. The Company maintains liability insurance against risks arising out of the normal course of business.

Webco's common stock is traded on the American Stock Exchange ("AMEX") under the symbol "WEB." At the close of business on September 30, 2001, there were 279 holders of record of Webco's common stock. The quarterly prices of Webco's common stock were as follows:

Dividends
The Company currently intends to retain earnings to support its growth strategy and reduce debt and does not anticipate paying dividends in the foreseeable future. The Board of Directors may reconsider or revise this policy from time to time based upon conditions then existing, including the Company's results of operations, financial condition, and capital requirements, as well as other factors the Board of Directors may deem relevant. Under the Company's loan agreement, the Company may not pay dividends without the lenders consent.

The following table presents selected financial information for the Company as of the end of and for each of the five years in the period ended July 31, 2001, which has been derived from the audited Financial Statements of the Company. In fiscal year 1998, Webco merged with Phillips & Johnston, Inc. ("P&J"). Because the merger was accounted for as a pooling of interests, financial results for the 1997 and 1998 periods are presented as though the companies have always been combined.

The selected financial data should be read in conjunction with the Financial Statements of the Company and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K.

WEBCO INDUSTRIES, INC. AND SUBSIDIARY
Selected Financial Data
For the Years Ended July 31,
(Dollars in thousands, except per share data)

Income Statement Data:                                                                            2001                 2000            1999              1998              1997

Net sales (1)                                                                                              $151,760       $ 144,941     $ 138,581      $ 155,751       $132,352
Gross profit                                                                                                   15,906            19,368          21,353           28,486           20,228
Income from operations                                                                                2,139              2,346 (2)      5,564            11,305            7,234 (3)
Income (loss) before
income taxes                                                                                                  (2,592)           (1,646)           3,012              9,009            5,187
Net income (loss) (4)                                                                                    (1,602)           (1,025)           1,876              6,207            3,931

Net income (loss) per share (4):
Basic                                                                                                                (0.23)              (0.14)               .26                  .87                .55
Diluted                                                                                                             (0.23)              (0.14)               .26                  .86                .55

Pro forma net income (5)                                                                                                                                                  5,511            3,179

Pro forma net income per share (5):
Basic                                                                                                                                                                                       .77                .44
Diluted                                                                                                                                                                                    .76               .44

Balance Sheet Data:
Working capital                                                                                       $ 30,219         $ 30,129         $ 32,346         $ 30,861        $ 33,837

Total assets                                                                                               128,347          130,123          120,481          111,758         102,142
Long-term debt (net of
current portion)                                                                                          46,010            43,979            39,746            32,894           34,470

Stockholders' equity                                                                                  47,046            48,648            49,673            48,245           45,220

1. The 1997 thru 2000 periods presented have been adjusted to reflect the Company's change in accounting for freight expense to include it as a cost of sales rather than as a reduction of revenue. The amounts reclassified for the periods 1997 thru 2000 were $3,759,000, $4,320,000, $3,837,000 and $4,021,000, respectively. The reclassification had no effect on gross profit or net income (loss).
2. Includes a $1,400,000 ($868,000, or $.12 per diluted share after tax) charge related to the write-off of certain QuikWater long-term assets and excess tubing equipment.
3. Includes a $884,000 ($548,000, or $0.08 per diluted share after tax) charge related to the replacement and write-off of faulty equipment on the Company’s Mill 3.
4. P&J was an S-Corporation for Federal and state income tax purposes through June 29, 1998, and accordingly did not incur any Federal or state income taxes prior to that date.
5. The 1997 and 1998 periods presented have been adjusted on a pro forma basis for assumed Federal and state income taxes for P&J, which had not previously recognized income taxes due to their S-Corporation status. Pro forma income taxes were based upon the statuary (Federal & state) tax rate of 38 percent.

The following discussion should be read in conjunction with the "Selected Financial Data" and the Financial Statements of the Company and notes thereto appearing elsewhere in this Form 10-K.

Overview
The Company's philosophy is to pursue growth and profitability through the identification of niche markets that preferably involve specialty tubular products that require a high level of value engineering and can be dominated from an industry or customer standpoint. The Company uses its quality standards, customer service and manufacturing technology to achieve such market penetration.

The Company experienced sequential improvement in quarterly income (loss) from operations during the year ended July 31, 2001 as shown in the following table (dollars in thousands):

                                                                                                        Quarters Ended                                
                                                                      October 31,         January 31,          April 30,          July 31,          Total
                                                                            2000                      2001                   2001               2001              Year
Net sales                                                         $37,995                  $38,703              $37,065         $37,997          $151,760
Gross profit                                                        3,156                      3,770                  4,153             4,827              15,906
Income (loss) from operations                         (625)                          73                     653             2,038                2,139
Net income (loss)                                            (1,153)                       (755)                  (300)               606              (1,602)

The first quarter of fiscal 2001 was negatively impacted by a one-week suspension at the Sand Springs facility in August for repair and maintenance projects. The second quarter of fiscal 2001 was further hampered by increased costs during the start-up phase of the plant expansion in Oil City. A fire at the Oil City facility in February 2001 further delayed the start-up, making the fourth quarter of fiscal 2001 the first fully operational quarter for all facilities for the year. Now that the major expansion project in Oil City is complete, the Company is focusing on improving its profitability and debt reduction. Please see Part II, Item 8: "Supplementary Data" of this Form 10-K for complete quarterly financial data.

Results of Operations
The following table sets forth certain income statement data for each of the three years in the period ended July 31, 2001 (certain amounts may not calculate due to rounding):

The following discussions of sales levels, prices and gross profit revolve around the Company's Manufactured Tubing Products (carbon and stainless steel tubing from its three plants in Oklahoma and Pennsylvania), Other Tubing Products (purchased tubular goods made of stainless steel, carbon steel, copper, and brass) and QuikWater. In Fiscal 2001, the Company changed its method of accounting for freight expense to include it as a cost of sale rather than a reduction of revenue, accordingly the 2000 and 1999 periods have been adjusted to reflect this change.

Fiscal 2001 Compared with Fiscal 2000
Manufactured Tubing Product sales increased $4.4 million, or 3.4 percent, to $134.2 million in 2001 from $129.8 million in 2000. The increase in net sales reflects a 5.0 percent increase in the average net sales price per ton realized during 2001, which was partially offset by a 1.6 percent decrease in the tonnage of tubing sold. The overall increase in the average net sales price per ton reflects the growth in sales of the Company’s stainless and heat exchanger products during 2001 combined with a decrease in sales of lower priced carbon mechanical tubing products. The decrease in the tonnage of tubing sold is a combination of a change in sales mix most impacted by the decreased demand for general mechanical tubing products.

Gross profit for Manufactured Tubing Products decreased to $12.4 million, or 9.2 percent of net sales, in 2001 from $16.4 million, or 12.6 percent of net sales, in 2000. This decrease is a function of a 9.1 percent increase in the average manufactured cost per ton of tubing sold, driven mostly by increased raw material prices most notably in stainless material, offset by the 5.0 percent increase in the average net selling price per ton, noted above. A one-week suspension at the Sand Springs facility in August and higher payrolls and operating expenses at the Oil City facility due to the plant expansion negatively impacted margins in the current fiscal year. Margins were further reduced by increased natural gas prices and continued pricing pressure in the carbon mechanical tubing product markets.

Other Tubing Products sales are made primarily by Webco’s subsidiary, P&J. Sales of these products increased 12.7 percent to $14.1 million in 2001 from $12.5 million in 2000. Gross profit from Other Tubing Products decreased to $2.5 million, or 17.7 percent of net sales, in 2001 from $2.7 million, or 21.6 percent of net sales, in 2000. The increase in sales and decline in gross profit is a result of increased volumes at reduced sales prices among most specialty tubing lines. Pricing pressure remains strong throughout the mechanical and specialty stainless tubing markets.

Sales for QuikWater increased 31.5 percent to $3.5 million in 2001 from $2.6 million in 2000. Gross profit for QuikWater was $975,000, or 28 percent of net sales, in 2001 as compared with $263,000, or 10.2 percent of net sales, in 2000. The increase in sales and gross profit is a result of improved market conditions for the QuikWater product due to changes in certain environmental standards, primarily on the West coast of the United States, and further development of marketing strategies along with market diversification. In addition, the gross profit percentage increase is a reflection of improved volumes along with the outsourcing arrangement for the manufacturing of the units, which has greatly reduced the amount of unproductive overhead costs incurred.

During the fourth quarter of fiscal 2000, the Company recorded a $986,000 pre-tax charge related to the write-off of QuikWater intangible, and certain other long-lived, assets. QuikWater continues to operate and the remaining asset values are being depreciated as part of the normal course of business. In addition, during the fourth quarter of fiscal 2000, the Company recorded a $414,000 pre-tax charge related to the write-down of underutilized tubing equipment.

Selling, general and administrative expenses decreased 11.5 percent to $13.8 million in fiscal 2001 from $15.6 million in fiscal 2000. The decrease in the current year is primarily the result of a decrease of $189,000 in legal fees principally related to labor matters, a $516,000 decrease in information technology expenses incurred as a result of cost cutting efforts, a $225,000 decrease in amortization expense principally related to the QuikWater intangibles written off in fiscal year 2000, and a $630,000 decrease in administrative labor and overhead expenses realized as a result of certain cost savings measures implemented during the first and second quarters of fiscal 2001. The Company also realized a $236,000 gain on the sale of real estate that is included as part of selling, general and administrative expenses in 2001.

Interest expense for fiscal 2001 increased to $4.7 million (net of $375,000 capitalized) from $4.0 million (net of $313,000 capitalized) in fiscal 2000. The increase in interest prior to interest capitalization is the result of the average level of debt under the bank Loan and Security Agreement increasing $3.8 million to $48.5 million for 2001 as compared with $44.7 million for 2000. In addition, the related average interest rate increased to 8.9 percent in 2001 from 8.8 percent in 2000. The Company has historically elected for its term debt and a significant portion of its outstanding revolver to bear interest at a floating rate based on LIBOR. Higher borrowing levels have resulted from declines in operating cash flow and the expansion in Oil City, Pennsylvania. LIBOR, much like the prime rate, has experienced decreases during fiscal 2001, however, due to the amortization of loan costs to interest expense and the Company's amended bank agreement with its primary lender, the Company has not yet fully realized the benefit of those decreases. With the additional interest rate reductions since July, the Company anticipates a slightly lower average interest rate in the first quarter of fiscal 2002.

Fiscal 2000 Compared with Fiscal 1999
Manufactured Tubing Product sales increased $6.9 million, or 5.6 percent, to $129.8 million in 2000 from $122.9 million in 1999. The increase in net sales reflects a 7.0 percent increase in the tonnage of tubing sold during 2000, which was partially offset by a 1.4 percent decrease in the average net sales price per ton. The overall increase in the tonnage of tubing sold reflects the growth in the Company’s stainless, boiler and OEM mechanical tubing markets. The decrease in the average net selling price is a combination of a change in sales mix and eroded pricing in the heat exchanger market and general mechanical tubing products.

Gross profit for Manufactured Tubing Products decreased to $16.4 million, or 12.6 percent of net sales, in 2000 from $18.4 million, or 15.0 percent of net sales, in 1999. This decrease is a function of the 1.4 percent decline in average net selling price per ton, noted above. This combined with an increase of 10.9 percent in the average manufactured cost per ton of tubing sold caused by increased raw material prices.

Other Tubing Products sales are made primarily by Webco’s subsidiary, P&J. Sales of these products increased 3.1 percent to $12.5 million in 2000 from $12.1 million in 1999. Gross profit from Other Tubing Products increased to $2.7 million, or 21.6 percent of net sales, in 2000 from $2.6 million, or 21.4 percent of net sales, in 1999. The slight increase in sales and gross profit was the result of volume increases and a change in sales mix from the prior year period.

Sales for QuikWater decreased 23.5 percent to $2.6 million in 2000 from $3.4 million in 1999. Gross profit for QuikWater was $263,000, or 10.2 percent of net sales, in 2000 as compared with $388,000, or 11.4 percent of net sales, in 1999. The decrease in sales is a result of a decline in demand in the food processing industry and pending environmental standards in California. As a result of low volumes, gross profit percentages remained low due to the under-utilization of available manufacturing capacity. Beginning in late 2000, the Company contracted with an entity owned by the majority stockholders to subcontract the production of the QuikWater units. Management believes this will enable the company to achieve improved margins by not having to incur the costs of personnel and overhead.

During the fourth quarter of fiscal 2000, the Company recorded a $986,000 pre-tax charge related to the write-off of QuikWater intangible, and certain other long-lived, assets. QuikWater continues to operate and the remaining asset values are being depreciated as part of the normal course of business. In addition, the Company recorded a $414,000 pre-tax charge related to the write-down of underutilized tubing equipment that the Company anticipates selling.

Selling, general and administrative expenses decreased 1.3 percent to $15.6 million in fiscal 2000 from $15.8 million in fiscal 1999. The decrease in the current year is primarily the result of an approximately $930,000 decrease in legal expenses, primarily related to the Thermatool litigation and labor related matters, and a decrease of $145,000 in profit sharing to employees. These decreases were principally offset by an increase of approximately $435,000 in depreciation related to the ERP system and $465,000 of additional information technology expenses incurred in support of the new ERP system.

Interest expense for fiscal 2000 increased to $4.0 million (net of $313,000 capitalized) from $2.6 million (net of $437,000 capitalized) in fiscal 1999. The increase in interest prior to interest capitalization is the result of the average level of debt under the bank Loan and Security Agreement increasing $9.3 million to $44.7 million for 2000 as compared with $35.4 million for 1999. In addition, the related average interest rate increased to 8.8 percent in 2000 from 7.2 percent in 1999. The Company has historically elected for its term debt and a significant portion of its outstanding revolver to bear interest at a floating rate based on LIBOR. LIBOR, much like the prime rate, experienced increases during fiscal 2000. Higher borrowing levels have resulted from increased inventories, implementation of the ERP system, and the expansions in Oil City, Pennsylvania, and Mannford, Oklahoma.

Liquidity and Capital Resources
Net cash provided by operations was $3.2 million, $4.2 million and $8.6 million in fiscal 2001, 2000 and 1999, respectively. Accounts receivable increased in 2001 and 2000 primarily as a result of the increase in sales from the prior year. Inventories decreased in 2001 and increased in 2000 and 1999. Inventories decreased in 2001 primarily due to management's efforts to reduce raw material inventory levels at the manufacturing facilities, which was partially offset by increases in finished goods levels. The increase in inventory in 2000 and 1999 was partly the result of the Company’s ability to make strategic volume purchases in anticipation of rising prices and the result of an overall increase in raw material prices. Accounts payable increased in 2000 and 1999 primarily as a result of the increase in inventory. Over the past three years, the Company has on average turned its steel tube inventories approximately 4 times per year.

Net cash used in investing activities was $5.4 million, $10.5 million and $12.9 million in fiscal 2001, 2000 and 1999, respectively. During the third quarter of fiscal 2001, the Company completed the expansion of the Oil City facility, which included the installation of a new mill along with other supporting equipment and plant construction. In 2000, the Company added a new mill and upgraded technology on existing mills at the stainless plant, completed the installation of its ERP system, and continued the expansion of facilities and machinery at its Oil City plant. In 1999 the Company added new mills at its stainless plant, continued the development and installation of the ERP system, and began the expansion of facilities and operations at its Oil City plant.

The Company’s capital requirements have historically been to fund equipment purchases and for general working capital needs resulting from the growth that the Company has experienced. The Company has followed an aggressive capital expenditure plan as part of its growth strategy and to enable it to continue to be a leader in tubular manufacturing technologies. With the major expansion project in Oil City now complete, the Company plans to focus on debt reduction and working capital management. The Company currently intends to retain earnings to support this strategy and does not anticipate paying dividends in the foreseeable future.

The Company's senior debt facilities provide for a term loan of $25 million, a line of credit of $25 million and a capital expenditure ("CAPEX") facility in the amount of $5 million to finance equipment at the Oil City, Pennsylvania plant. As of July 31, 2001, the Company had $22.5 million outstanding on the term loan, $20.3 million under the revolving line of credit and $3.8 million outstanding on the CAPEX facility. These loans mature on August 31, 2002, and are collateralized by substantially all of the Company’s assets other than the Sand Springs real estate. The Company may have borrowings and outstanding letters of credit ($1,056,000 at July 31, 2001) under the revolving credit facility up to the lesser of $25 million or an amount determined by a formula based on the amount of eligible inventories and accounts receivable. At July 31, 2001, $3.7 million was available for borrowing under this line of credit. The CAPEX loan was fully funded up to the $5 million cap during the second quarter of fiscal 2001. Principal payments on the term loan and CAPEX facility of $208,000 and $80,000, respectively, plus interest, are due each month until maturity.

Due to the August 31, 2002, maturity date of the Company's senior debt facilities, the Company is currently in discussions to refinance or extend the current debt agreement. If the Company is unable to refinance or extend the agreement, a significant portion of its long-term debt will be classified as a current liability in the financial statements contained in its Form 10-Q for its first fiscal quarter ended October 31, 2001, since the maturity date will be within 12 months of the balance sheet date. The debt will not be due on demand or otherwise callable by the lender at that time, and the Company will have until the maturity date to refinance or extend the agreement. Although the Company believes it will be successful in its efforts to refinance or extend the agreement, there can be no assurances the Company will be successful in its efforts.

The Company's debt agreement, as amended on November 13, 2000, contains covenants regarding debt coverage and the ratio of indebtedness to equity. The covenants also limit capital expenditures and dividends and require the Company to maintain a minimum borrowing base availability without considering the $25 million revolving loan cap. As of July 31, 2001, the Company was in compliance with all such covenants.

The Company has arranged financing with various public agencies related to the Oil City facility, of which, $2.96 million is outstanding and no additional amounts remain available for borrowing as of July 31, 2001. The agency loans are collateralized by the underlying real estate and/or equipmen