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U.S. 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
  OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File No. 0-23242 WEBCO INDUSTRIES, INC.  Oklahoma
    
    73-1097133(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 9101 West 21st Street
Sand Springs, Oklahoma 74063
(Address of principal executive offices, including zip code) Registrants telephone number, including area code  (918) 241-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 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 ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [  ] Yes [ X ] No As of October 1, 2004, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $13,700,000. On October 1, 2004, the number of shares outstanding of the registrants
common stock, $.01 par value, was 7,081,723 shares. DOCUMENTS INCORPORATED BY REFERENCE:None 1




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS PagePART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    15Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    16Item 6. Selected Financial Data
    
    
    17Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 7A.Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 8. Financial Statements and Supplementary Data
    
    
    28Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    47Item 9A.Controls and Procedures
    
    
    47Item 9B.Other Information
    
    
    47PART IIIItem 10.Directors and Executive Officers of the Registrant
    
    
    48Item 11.Executive Compensation
    
    
    51Item 12.Security Ownership of Certain Beneficial Owners
and Management
    
    
    57Item 13.Certain Relationships and Related Transactions
    
    
    58Item 14.Principal Accounting Fees and Services
    
    
    59PART IVItem 15.Exhibits, Financial Statement Schedules
    
    
    60Code of EthicsConsent of PricewaterhouseCoopers LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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WEBCO INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-K 
 PART I 
 ITEM 1. BUSINESS General Webco Industries, Inc., an Oklahoma corporation, was founded in 1969 by F.
William Weber, Chairman of the Board and Chief Executive Officer. Webco is a
manufacturer and value-added distributor of high-quality carbon steel,
stainless steel and other metal tubular products designed to industry and
customer specifications. Webcos tubing products consist primarily of pressure
tubing and specialty tubing for use in durable and capital goods including heat
exchangers, boilers, autos and trucks, and home appliances. The Company has
three production facilities in Oklahoma and Pennsylvania and five distribution
facilities in Oklahoma, Texas, Illinois and Michigan, serving more than 1,000
customers throughout North America. The Companys philosophy is to pursue growth and profitability through the
identification of niche markets for tubular products where the Company can use
its leading-edge manufacturing and information technology to provide a high
level of value-added engineering and customer service in an effort to become
the market leader. 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 subsidiaries, Webco Tube, Inc. and
Phillips & Johnston, Inc. (P&J), on a consolidated basis. Recent Events On June 1, 2004, Webco announced that a Special Committee of its Board of
Directors, comprised of three independent directors, had been formed to
evaluate a proposed reverse stock split of the Companys common stock that
would result in Webco having fewer than 300 common stockholders of record and
thereby permit Webco to deregister its common stock under the Securities
Exchange Act of 1934 (the 1934 Act). This announcement was made after months
of evaluating alternatives by the full board of directors, including the input
from legal and financial advisors, of the benefits and detriments to the
Company and its stockholders of remaining a public reporting company, which
lead to the choice of going private. On June 25, 2004, the Company announced that the Special Committee and the
full Board of Directors had unanimously approved an amendment to the Companys
Certificate of Incorporation which, if approved by the Companys stockholders,
would allow the Board of Directors in its discretion to select one of five
alternative reverse/forward common stock splits. If the reverse/forward split
is effected, Webco would likely have fewer than 300 shareholders of record. If
that is the case, Webco would deregister its common stock under the 1934 Act
and its stock would cease to be quoted on the American Stock Exchange. The proposed amendment to the Companys Certificate of Incorporation for
the reverse/forward common stock split will be submitted to the stockholders of
the Company for their approval at a Special Meeting to be held on a date yet to
be determined. A Notice of the Special Meeting and a related Proxy Statement
that describes, among other things, the reasons for and the effect of the
reverse/forward stock split, will be sent to Webco common stockholders of
record entitled to vote at the Special Meeting. The Board of Directors has not
yet determined the record date. 3




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Industry Overview Over the past several years, the steel industry in the U.S. has been
characterized by changing customer demand, foreign competition, domestic
manufacturing overcapacity, and government influence on raw material and
finished good import prices. During the last twelve months, a significant
demand for steel in China as well as disruptions in the supply of steel making
inputs has caused a lack of domestic availability for certain types of steel,
primarily carbon steel. The declining value of the U.S. dollar to foreign
currencies has contributed to this market condition, primarily by reducing
foreign imports and increasing domestic exports. A lack of availability and
high-cost of steel-making inputs such as coke, scrap metal and energy has
created an environment where steel sheet coil, primarily carbon, is
dramatically increasing in cost. Over the past several quarters, carbon steel
coil producers have raised their prices and placed surcharges on their products
that have greatly increased the replacement cost of carbon steel. The lack of
availability of steel and the related mitigation of the excess manufacturing
capacity in the tubing industry has also created an enhanced pricing
environment for steel tubular products as customers are not able to source
products at more competitive prices from alternative suppliers. In dealing with the current environment, management has passed along to
customers as many raw material price increases as possible, including
surcharges. The Company has agreed-upon pricing with some customers on certain
products and as the Companys supplier arrangements for these products are
modified for surcharges or base price increases, management attempts to pass on
price increases to the extent possible. The increased sales prices for the
Companys products, which are reflected in the Companys financial statements
for the last two quarters of fiscal 2004, were matched against lower
average-cost carbon steel coil inventories resulting in a significant gross
profit increase in the third and fourth quarters of fiscal 2004. The Company
does not believe that the earnings attributable to selling from lower average
cost inventories is sustainable, since the average cost of inventories will
increase as inventory is replenished with steel purchased at the current
replacement cost. An increase in the availability of steel could act to
decrease selling prices and depress margins since the Company would have
high-cost inventory. Over the years, Webco has forged solid and loyal relationships with its
steel suppliers. These relationships have, in most circumstances, secured the
availability of carbon and stainless steel in sufficient quantities to satisfy
customer requirements during this recent period of reduced supply. There can
be no assurances, however, that the Companys carbon and stainless steel
requirements will continue to be met, which, if not met, would negatively
impact sales and income from operations and cash flows. Tubing producers occupy a manufacturing niche between the primary steel
producers and customers who utilize precision tubing in the manufacture of
products primarily for the durable and capital goods industries. As contrasted
with commodity pipe producers, tube mills manufacture products which are
engineered and tailored for more specialized and critical end-use applications
such as automotive components and petrochemical applications. The tubing industry was once dominated by the major integrated steel
producers. Over time, these integrated producers lost their competitive
advantage due to higher cost structures and lagging technology and have largely
withdrawn from this segment. During the late 1990s, many tubing manufacturers
added significant capacity. While the industry has experienced some
consolidation over the last several years as less efficient producers were
rationalized, the industry continues to be subject to significant competition
and pricing pressure in the absence of a shortage of steel coils in the market.
The tubing industry is highly fragmented and is comprised of independent
producers that occupy relatively focused market niches. While the Company does not expect the current favorable pricing
environment to continue indefinitely, the tubing industry has been affected by
several trends that are expected to continue for the foreseeable future.
First, customers increasing emphasis on just-in-time inventory methods has
required tubing producers to increase operating efficiencies to accommodate
more frequent, smaller sized orders, and has placed greater 4




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emphasis on technology advances, inventory management and cost controls.
Second, customers desires to cut operating costs through the outsourcing of
specific processing functions, such as tube manufacturing, has created the
opportunity for third-party tubing producers to replace production from captive
mills. TUBING MANUFACTURING PROCESSES Manufactured Products Electric Resistance Carbon Steel Weld Process:The Company maintains
inventories of carbon steel sheet coils weighing approximately 15 to 25 tons
from which it manufactures tubing using electric resistance welding. All
customer orders for manufactured products are entered into a computerized order
entry system, and the appropriate steel coil is selected from inventory 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 mill production and by ordering the size changes
in a manner that reduces the amount of setup time necessary to move from one
order to the next. The manufacturing cycle begins with the slitting of wide steel sheet coils
into narrower bands. As the steel coil is unwound during the manufacturing
process it is in the form of a continuous sheet, typically 48 to 60 inches wide
and between .049 and .500 inches thick. The outside diameter of the tube to be
produced determines the width of the slit band. Steel coils up to .180 and
        .250 inches thick are slit to pre-designated widths at the Sand Springs and Oil
City facilities, respectively, using Company equipment. Steel coils over those
limits are slit by outside vendors. Conversion from slit band to 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 additional processing
stations such as annealing (heat treatment through an atmospherically
controlled roller hearth furnace), rotary straightening, and finishing (i.e.,
cut-to-length, non-destructive test, stencil, oil coat and package). The
Company also utilizes outside vendors for certain value-added processing. The
Company has stringent quality control standards in place at each stage of the
manufacturing process. This process produces welded tubing and cold draw hollows (the raw
material for the cold drawing process, which does not go through the finishing
process). Hollows are primarily used for specific cold draw orders; however,
smaller amounts are produced for inventory. Carbon Steel Cold Drawing Process:The Company uses manufactured cold draw
hollows and seamless tube hollows purchased from outside vendors as the raw
material for the cold drawing process, which produces various tubing products.
Most of the welded hollows are manufactured by the Companys own weld mills,
while seamless hollows are all purchased from other manufacturers. The Company
currently offers precision, made-to-order cold drawn products from
approximately .05 inch to .50 inch in wall thickness and from .50 inch to 5.0
inch in outside diameter for various tubing applications. Cold drawing permits
greater flexibility and precision (as compared to the welding process) in
meeting customer specifications of tube diameters, wall thickness and other
characteristics. Cold drawing orders are entered into a computerized order entry system.
Tube hollows are selected to optimize yields and efficiency and to 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, (ii) pointed to taper the
tube end, and (iii) cold drawn through a die and over a mandrel (cold reduction
of outside diameter, inside diameter and elongation of tube). After the cold
drawn tube has been manufactured to finished size, it is moved to additional
processing stations such as annealing, straightening and finishing. The
Company also utilizes outside vendors for certain value-added processing. 5




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Welded Stainless Tube Process:The manufacturing cycle for the stainless steel
and high alloy weld mill operations begins with customer orders being entered
into the computerized order entry system. After receipt of steel coils slit to
a pre-designated width by the vendor, 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. Tubes are then 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 40,000 feet. Much of the processing is performed in a continuous
operation. The Company also utilizes outside vendors for certain value-added
processing. Stainless processing produces welded tubing for a variety of
applications and small diameter stainless pipe. The majority of stainless
products are made-to-order. Tubing Facilities 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 carbon
steel tubing products. The third facility in Mannford, Oklahoma, produces
stainless steel and high alloy tubing products. The following table sets forth the processing and other techniques
performed at Webcos facilities: Manufacturing
    
    DistributionSand
    
    Oil
    
    
    
    
    
    Sand
    
    
    
    
    
    
    
    
    
    Grand
    
    GlenSprings,
    
    City,
    
    Mannford,
    
    Springs,
    
    Nederland,
    
    Lyndon,
    
    Rapids,
    
    Ellyn,OK
    
    PA
    
    OK
    
    OK
    
    TX
    
    IL
    
    MI
    
    ILCold Drawing
    
    
    X
    
    
    
    XSlitting
    
    
    X
    
    
    
    XWelding
    
    
    X
    
    
    
    X
    
    
    
    XAnnealing
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    XStraightening
    
    
    X
    
    
    
    X
    
    
    
    XCut-to-Length
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    XIntegral Finning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    XElectronic
Non-Destructive
Testing:Eddy Current
    
    
    X
    
    
    
    X
    
    
    
    XUltra-Sonic
    
    
    X
    
    
    
    X
    
    
    
    XHydro-Static Testing
    
    
    X
    
    
    
    
    
    
    
    X
    
    
    
    XStenciling
    
    
    X
    
    
    
    X
    
    
    
    XBending
    
    
    
    
    
    
    
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    
    
    
    
    XBar Coding
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    XComputerized Shop
Floor Control
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    X
    
    
    
    XMetallurgical Lab
    
    
    X
    
    
    
    X
    
    
    
    XSpectrometer
    
    
    XStatistical Process Control
    
    
    X
    
    
    
    X
    
    
    
    X
 INDUSTRY SEGMENTS The Company applies the provisions of Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information"(FAS 131). The Company internally evaluates its business by
facility; however, because of the similar economic characteristics of the
tubing operations, including the nature of products, processes and customers,
those operations have been aggregated for segment determination purposes. The
Companys continuing operations only include activities related to the
manufacturing and distribution of tubular products principally made of carbon,
stainless and high alloy steels. 6




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PRODUCTS Tubing Products The Company produces tubing for a wide variety of markets and end-use
applications. The Company seeks to identify niche markets and customers that
have been serviced by higher cost and lower service competitors. The
percentage breakdown of net sales for the Companys main products was as
follows for the last three fiscal years: 2004
    
    2003
    
    2002Specialty tubing
    
    
    65
    %
    
    
    64
    %
    
    
    59
    %Pressure tubing and pipe
    
    
    31
    
    
    
    32
    
    
    
    38Freight, scrap and other
    
    
    4
    
    
    
    4
    
    
    
    3Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Following is a detailed description of the Companys tubing products by
the major end-use markets: Specialty Tubing:Specialty tubing consists of tubular goods made of
carbon and stainless steel, copper, brass, aluminum and surgical steel. Most
of the products the Company manufactures from its cold draw processes are for
specialty tube applications. Through its manufacturing capabilities and its
sourcing partners, the Company provides tubing to a variety of end use
applications. These end-uses include, but are not limited to the following
durable and capital goods: instruments for the petrochemical industry,
hydraulic cylinders, automotive components, appliances, oil & gas applications,
heating and ventilation and farm equipment. In many cases, the Company
provides just-in-time inventory management for its customers using its combined
manufacturing and distribution capabilities and through strategic relationships
with distribution customers and partners. The Company is a relatively small
producer in the overall specialty tubing market, but continues to pursue niche
opportunities for growth. With enhanced stainless manufacturing technology and investments in Oil
City, the Company has targeted the specialty tubing market as a growth area
over the next several years. While the Company continues to identify niche
growth opportunities with improved product offerings, available manufacturing
capacity is limited and would require significant capital investment to
increase substantially. 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. Pressure Tubing and Pipe:The Company is a full service manufacturer and
value-added distributor of pressure tubing and pipe, which includes tubing
utilized in heat exchanger, boiler and piping applications. The Company
supplies a variety of pressure tubing and pipe products to the refining,
petrochemical, chemical, pulp and paper, pharmaceutical, gas transmission and
electric power industries. These industries are serviced by the Companys
three manufacturing and two distribution facilities in Oklahoma, Pennsylvania,
and Texas. Through its manufacturing facilities and sourcing partners, the
Company offers carbon steel, alloy steel, stainless steel, copper, brass,
nickel alloy and various other tubular products to these industries. Such
products may be welded or seamless and may be cut, bent and/or finned to
customer specifications at the distribution warehouses. The Company believes
that its combination of manufacturing and distribution capabilities for carbon
steel, alloy steel and stainless steel provides a strategic advantage over its
competitors. 7




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The pressure tubing and pipe industry has been impacted by the world-wide
demand for steel and the related lack of availability of carbon steel in
particular. This has caused a dramatic increase in the price of domestic
carbon steel coils in the last twelve months, the raw material for the
Companys carbon steel tubes. Other types of steel have been similarly
affected, although not to the extent of carbon. The raw material environment
has caused pressure tubing margins to increase as current selling prices are
based on the replacement cost of steel matched against lower average cost
inventories. During this period, the Company has continued to develop and
expand its distribution capabilities and expects to relocate from its 58,000
square foot Nederland, Texas, facilities in November 2004 to a leased 125,000
square foot, value-added pressure tube distribution facility in Orange, Texas.
The Company is also working to expand its product offerings to the pressure
tubing markets, not only in welding of carbon and stainless pressure tubing,
but in pressure tubing acquired from outside sourcing partners. The Company
believes that these development activities have positioned it to take advantage
of growth opportunities that might be caused by our customers compliance with
Federal regulations regarding refinery emissions and a possible resurgence of
power plant construction should such events occur. 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 products
during its third fiscal quarter, which may result in reduced net sales and
income for those periods. Backlog The Companys firm backlog of orders at July 31, 2004 and 2003 were
approximately $53 million and $34.5 million, respectively. Orders, including a
portion of the orders considered firm, are generally cancelable by the customer
until work has commenced and the Company has committed resources; thereafter,
orders are generally cancelable by the customer only upon payment of a
cancellation penalty, which may include costs for raw materials, tooling,
engineering, etc. The Companys backlog is not necessarily indicative of the
expected level of future revenues and can be affected by product mix, since the
different markets served by the Company have differing lead times and order
flow processes. Competition Tubing manufacturing and distribution is a highly competitive market.
Foreign imports and the ability of tubing customers to move facilities to
foreign countries can decrease demand for domestically manufactured tubing.
Companies compete on the basis of price, quality, service and ability to
deliver orders on a timely basis. Public data concerning the size of the
markets in which the Company participates is not readily available since almost
all of the large competitors are privately held or do not provide detailed
segment disclosures of their tubing activities. The Company believes that it
is a domestic leader in the manufacture and distribution of pressure tubing and
certain stainless steel and high alloy tubing products. The Company believes
that its manufacturing and distribution capabilities provide a strategic
advantage over its competitors. Although the Company has a small share of the
overall specialty tubing market, management believes that it is well positioned
to increase its market share over the next several years by continuing to focus
on niche applications. The Companys major competitors include Associated Tube of Canada,
Copperweld, Dofasco, Lone Star Technologies, Metalmatic, Plymouth Tube,
PTCAlliance, Rath/Gibson Tube and Tubes, Inc. for specialty and pressure tubing
products. Some of these competitors are larger and have access to greater
financial resources than the Company. Most of these competitors are unionized.
Most of these competitors are privately held corporations and are not required
to disseminate information to the public about financial results. While competition is always present, the current lack of availability of
steel in the domestic marketplace has largely mitigated excess industry
capacity and made it a difficult environment for tubing manufacturers to 8




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add new customers with competitively priced products. Until steel
availability improves, enhanced selling prices are expected to continue and
producers with the ability to obtain steel will have a competitive advantage. The Company believes that its non-union status, geographic balance,
focused niche strategy, product quality, information technology, customer
service and continued emphasis on technological innovations position it to
compete effectively within each of its niche markets. Quality Control The supply of quality products and service is critical to the Companys
success. To help foster continuous improvements in quality and service, the
Company adheres to a total quality management system based upon ISO 9000
quality system standards. In support of the total quality management system,
the Company has created an environment that emphasizes and utilizes teamwork to
support continuous improvement of quality and service. The following table
summarizes the Companys quality certifications for each of its facilities: Location
    
    Certification
    
    Year AchievedSand Springs, Oklahoma manufacturing facility
    
    ISO 9002
    
    
    1994QS 9000: 3rd ed.
    
    
    1998Oil City, Pennsylvania manufacturing facility
    
    ISO 9002
    
    
    1994QS 9000: 3rd ed.
    
    
    1998Mannford, Oklahoma manufacturing facility
    
    ISO 9001:2000
    
    
    2003Phillips & Johnston facilities
    
    ISO 9001:2000
    
    
    2003
 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 Company
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. Suppliers The Company purchases steel sheet coil from a number of primary steel
producers including, but not limited to, Nucor, Wheeling-Pittsburgh Steel
Corp., ISG, Duferco, Steel Technologies and Gallatin Steel for carbon steel,
and Allegheny, North American Stainless and Outokumpu for stainless steel.
Webco monitors and purchases some raw material from foreign sources as economic
conditions dictate. However, the greatest percentage of Company purchases is
from domestically located plants and suppliers. The Company orders steel to
specified physical characteristics and chemistry. By purchasing in large
quantities at consistent predetermined intervals, Webco is able to obtain
quality raw materials at competitive prices. All increments of the cost of
purchasing and landing steel are continuously monitored, reviewed and acted
upon. Interruptions in supply from its main suppliers could impact the landed
cost of new purchases and/or cause production and delivery delays. The Company also purchases finished welded and seamless tubing made from
carbon and stainless steel, copper, brass, aluminum and surgical steel from
foreign and domestic sources as economic conditions and customer demand
dictate. The Company orders the tubing to specified physical characteristics
and chemistry based on industry and customer specifications. Webco believes
that it is not dependent on any one of its 9




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suppliers for finished goods, however, interruptions in supply could
impact customer deliveries and the cost of new purchases. Webco understands that the Companys supplier base for materials is
critical to meeting its customers needs. Constant effort is directed towards
developing long-term supplier partners who can provide acceptable quality,
competitive prices and dependable delivery. Marketing and Customer Service The Companys sales and marketing efforts for its products are directed by
the Senior Vice President of Tubing Operations, the President of P&J, and
Webcos product sales managers. These efforts are supported by its
distribution organization, internal and external 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 customers and
suppliers to develop products that meet specific customer needs. 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. Customers and Distribution The Company manufactures and distributes tubular products for sale to a
diverse group of more than 1,000 customers. No single customer represents in
excess of 6% of the Companys net sales. The Companys ten largest customers
represent approximately 24% of net sales. The majority of the Companys sales
are made directly to industrial customers, including manufacturers of heat
exchangers, HVAC equipment, appliances, automotive components, power generation
equipment, waste heat recovery systems, industrial and commercial boilers, and
other durable goods. 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 value-added distributor for 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. Government Regulation The Companys manufacturing and distribution facilities are subject to
many federal, state, and local requirements relating to the protection of the
environment. The Company continually examines ways to reduce emissions and
waste and reduce costs related to environmental compliance. The Company has an
in-house environmental team leading the Companys environmental program. The
Companys Sand Springs manufacturing facility is ISO 14001 certified for its
environmental processes and procedures. Managements philosophy is to
implement environmental controls that meet or exceed current and foreseeable
legal 10




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##### Table of Contents



requirements. Management believes the Company is in material compliance
with all environmental laws, does not anticipate any material expenditure to
meet environmental requirements, and generally believes that its processes and
products do not present any unusual environmental concerns. 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 there under which, among other
requirements, establish lifting, 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. The Company is subject to the regulatory and reporting requirements of the
Sarbanes-Oxley Act of 2002. Management believes it is in material compliance
with the provisions of this Act at this time. Management does anticipate,
however, that current and future compliance with such provisions, including the
Section 404 certification of internal controls by management and attestation by
the Companys independent auditors, will result in significant increases in
consulting, audit and legal fees and overhead expenses related to software,
hiring new personnel and administrative time. The total cost of the Companys
compliance with the requirements of the Sarbanes-Oxley Act is uncertain,
although the most costly provisions will be related to the Companys first
Section 404 compliance year ending July 31, 2005. However, management believes
such compliance costs could exceed $735,000 during the twelve months leading up
to July 31, 2005 and could exceed $570,000 for each succeeding year thereafter.
These costs are in addition to the approximately $330,000 in costs
historically incurred being a public company. Such compliance cost estimates
are incremental to current general and administrative expenses and do not
include the opportunity costs associated with the time and effort of current
employees and management, which is expected to be significant. These estimates
are consistent with a survey conducted by Financial Executives International
(FEI) in January 2004. A recent update to that survey by FEI found that
actual costs are running 40% above the amounts estimated in January by surveyed
companies. Employees As of September 30, 2004, the Company employed approximately 860 people.
None of the Companys employees are covered by collective bargaining
agreements. The Company has never experienced a significant work stoppage and
considers its employee relations to be good. Key-Man Insurance At July 31, 2004, the Company does not have any outstanding key-man life
insurance policies on any of its executives or directors. FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report, including statements preceded
by, or predicated upon the words anticipates, appears, believes,
expects, hopeful, plans, should, would or similar words 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 their control. 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, government regulation, war, terrorist attack or other
potential disruptions. Furthermore, no assurance can be 11




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given that the Company will not incur significant losses on accounts
receivable or inventory as a result of unanticipated events or an economic
downturn. Competition from Imports The volume and pricing of imported tubular products significantly impacts
the domestic tubular products market. The relative strength of the U.S. Dollar
to foreign currencies, lower labor costs in other countries and volume motives
of some foreign importers could create circumstances where domestic product
pricing at competitive levels is marginally profitable or even unprofitable.
The Company believes that import levels and import pricing are affected by,
among other things, the strength of the U.S. Dollar, overall world-wide demand
for tubular products and raw materials, global economic conditions, the trade
practices of and government subsidies to foreign producers, lower labor costs
in other countries and the weakness or absence of governmentally imposed trade
restrictions or tariffs in the United States. Given the uncertainty in the
U.S. economy and certain economies of Asia, South America and Eastern Europe,
competition from foreign imports is expected to increase in the future.
Decreases in the strength of the U.S. Dollar will need to be sustained for more
than a short period of time in order to meaningfully affect the advantages most
foreign importers have over domestic manufacturers. Changes in Manufacturing Technology Over the past several 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 thickness of materials that can be
welded into tubes. Staying current with advances in manufacturing technologies
is necessary to survive as a competitor with other domestic producers and
foreign imports and to be able to meet the increased demand by customers for
products having greater technical requirements. Staying current with advances
in manufacturing technologies and capabilities requires investment of capital.
Manufacturers that do not keep pace with current manufacturing technologies may
be unable to compete against more efficiently priced products. Due to the
volatility of the domestic steel industry in recent years, there can be no
assurances that Company operations, capital availability and economic
conditions will continue to allow the Company to maintain current technologies
or to meet the demand for products that require improved technologies. Banking Environment In the course of managing the United States economy, the Federal Reserve
affects policy that impacts the cost and availability of money within the U.S.
banking system. These policy decisions, along with the quality of the economy,
have a direct impact upon bank credit policies and the cost of funds to the
Company. Continued tightening of credit availability or increases in interest
rates could negatively impact the Companys ability to refinance its debt upon
maturity or to refinance at terms that are equal to or more favorable than the
current debt structure. Increases in interest rates could materially impact
results of operations and cash flows at current debt levels. Relocation of Domestic Demand and Capacity The relative strength of the U.S. Dollar to foreign currencies has caused,
in many industries, a flight of manufacturing capacity to countries where there
exists an economic advantage over U.S. manufacturers. As a result, certain
competitors may have an economic advantage over the Company due to the
Companys U.S. domicile. Further, the relative strength of the U.S. Dollar has
caused many companies that consume tubular products to relocate to other
countries or to pursue the economic advantage of using suppliers located in
foreign countries, potentially causing a reduction in domestic demand for
products manufactured by the Company. 12




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##### Table of Contents



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, world-wide demand for carbon steel sheet coil and
scrap, foreign imports, domestic competition, labor costs, labor and
environmental laws, import duties and tariffs and other trade restrictions.
Tubing companies in the past twelve months have been forced to pass along price
increases to customers in order to sustain their economic viability. There is
a relatively small correlation between the short-term factors driving the
finished goods pricing of the Companys products and the cost of its raw
materials. Unsustainable increases in raw material pricing in some
circumstances will affect margins due to the inability to pass such price
increases on to customers. There is believed to be a fairly high long-term
correlation between the price of raw materials in the tubing industry and the
price to the market for finished tubing which the industry has experienced over
the past twelve months with sustained raw material price increases. However,
reductions in the Companys raw material costs often lag behind pressure on the
Companys sales prices or increases in raw material costs may precede increases
in the Companys sales prices, if increases are obtainable, thus decreasing the
Companys profit margins. Although the Company has long-term relationships
with steel coil vendors to hopefully ensure a continued supply of raw material,
further price increases could have a significant impact on profitability and
operating cash flows if the Company is unable to increase sales prices
proportionately. Increasing raw material prices during a period of soft demand
for tubular products can have a significant negative impact on margins due to
an inability to raise sales prices accordingly. A significant increase in
steel availability would likely have the effect of driving down steel costs and
could have a similar impact on the selling prices for the Companys products.
If such circumstances were to occur, the Company would have higher cost
inventory in a decreasing selling price environment, which would have a
negative impact on margins and profitability. High demand for the products of the domestic steel producers, a weakening
of the U.S. Dollar or a shut down of a producer that is significant to the
market can cause a supply and demand imbalance in the market. In such
situations it is possible for suppliers to implement quotas for the allocation
of steel to their customers or otherwise affect the Companys ability to
procure raw material. Given the current level of domestic supply, there can be
no assurances that raw material supplies will not be interrupted. Supplier
work stoppages due to labor related issues could also have a significant impact
on the available supply and cost of raw materials. Industry Capacity The Company and many of its competitors, in both the stainless and carbon
steel tubing markets, expanded production capacity over the past decade to the
point of over-capacity in many markets, putting downward pressure on pricing.
The influx of foreign goods into the U.S. market further pressured prices and
margins and forced some in the industry to exit the business. Excess capacity
in the domestic tubing industry has been largely mitigated by the lack of
availability of carbon steel during the last six months of fiscal 2004,
creating an enhanced pricing environment as purchasers of tubing products find
it more difficult to source products with alternative vendors that cannot
obtain steel coil at cost that will enable them to be price competitive. Domestic Competition Tube manufacturing is a highly competitive market in which companies
compete on the basis of price, quality, service and ability to deliver orders
on a timely basis. The Company has different competitors within each of its
markets served, some of which 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. 13




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##### Table of Contents



Loss of Significant Customers and Customer Work Stoppages The Company sells its tubular products to a diverse group of more than
1,000 customers, the largest of which represents just less than 6% of the
Companys 2004 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.
In addition, an increase in strength of the U.S. Dollar, lower labor costs in
other countries, foreign government subsidies and volume motives of some
foreign importers could create circumstances where customers are lost as a
result of their inability to remain competitive causing them to relocate to a
foreign country or discontinue operations altogether. Customer Claims The Company manufactures tubular products to customer specifications.
Company products are used in highly technical applications that require
stringent controls over quality and the supply chain. From time to time,
customers can, and do, make claims against the Company for quality issues,
delivery penalties and repair and replacement costs. There can be no
assurances that such claims will not deviate from historical experience and
have a material impact on the results of operations and cash flows of the
Company. Technical and Data Processing Capabilities The Company operates all of its facilities on an integrated computer
system, which handles all sales, production, accounting and procurement
functions. A failure by the Companys system for an extended period of time,
or the Companys failure to find adequate solutions to any technical and data
processing issues that may arise, could result in a significant interruption to
the Companys operations. The Company expects to increasingly utilize the
Internet in its business functions and an interruption in service could result
in disruptions to the Companys operations. While employing redundant systems
is cost prohibitive, the Company continually evaluates its disaster recovery
procedures in an attempt to mitigate such risks and exposures. On an on-going
basis, the Company must continue to invest in its information technology
capabilities to satisfy increasing customer demands for communication and
interfacing requirements. There can be no assurances that the Company will
have the capital availability to make all necessary investments. Insurance costs and availability The Company maintains property and casualty and liability insurance
policies, along with other policies, deemed appropriate for the Companys
business environment. The Companys insurance program is evaluated each year
by management and an outside insurance broker. Subsequent to September 11,
2001, the Company incurred substantial increases in its insurance premiums, as
did most industries, which has forced management to look at coverage options,
including, but not limited to, higher deductibles, different coverage levels
and new carriers, to try and mitigate the rising premium costs. Management
believes its current insurance program is appropriate for its business purpose.
There can be no assurances that a significant claim against, or loss by, the
Company will not exceed insurance coverage levels, or fall outside coverage
limitations, and have a material adverse impact on the Companys operations or
financial condition. 14




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##### Table of Contents



ITEM 2. PROPERTIES The Companys principal properties presently consist of three
manufacturing plants and five value-added distribution facilities. The
following sets forth the location, area, and whether the property is owned or
leased for all existing facilities: Location
    
    Area
    
    Owned or LeasedSand Springs, Oklahoma
    
    281,000 square feet
    
    OwnedManufacturing Facility
    
    26 acresSand Springs, Oklahoma
    
    50,000 square feet
    
    OwnedDistribution Facility
    
    18 acresMannford, Oklahoma
    
    195,000 square feet
    
    OwnedManufacturing Facility
    
    13 acresNederland, Texas
    
    25,500 square feet
    
    Long-term lease with a purchaseDistribution Facility
    
    
    
    Option of the greater of 93% ofFMV or $475,000Nederland, Texas
    
    32,750 square feet
    
    Month to month leasesWarehousesOil City, Pennsylvania
    
    205,000 square feet
    
    OwnedManufacturing Facility
    
    8 acresTitusville, Pennsylvania
    
    46,700 square feet
    
    Month to month leaseCutting FacilityTitusville, Pennsylvania
    
    18,500 square feet
    
    Month to month leaseWarehouseSand Springs, Oklahoma
    
    24,400 square feet
    
    Long-term lease with aCorporate Offices
    
    
    
    Purchase option of $750,000Sand Springs, Oklahoma
    
    13,500 square feet
    
    Long-term leaseWarehouseTulsa, Oklahoma
    
    28,000 square feet
    
    Long-term leaseFinning FacilityGlen Ellyn, Illinois
    
    12,700 square feet
    
    Long-term leaseP&J Corporate OfficesAnd Distribution FacilityLyndon, Illinois
    
    33,700 square feet
    
    Long-term leaseDistribution FacilityGrand Rapids, Michigan
    
    38,000 square feet
    
    Long-term leaseDistribution Facility
 The Company expects to relocate from its Nederland, Texas distribution and
warehouse facilities in November 2004 to a 125,000 square foot facility in
Orange, Texas, that is being leased on a long-term basis. 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. 15




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##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS The Company is a party to various 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. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to Webco security holders during the
fourth quarter of fiscal year 2004. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES Price Range of Common Stock Webcos common stock is traded on the American Stock Exchange (AMEX)
under the symbol WEB. At the close of business on October 1, 2004, there were
266 holders of record of Webcos common stock. The quarterly prices of Webcos
common stock were as follows: High
    
    LowFiscal Year 2004:Fourth Quarter
    
    $
    5.22
    
    
    $
    3.60Third Quarter
    
    
    5.24
    
    
    
    3.54Second Quarter
    
    
    4.10
    
    
    
    3.10First Quarter
    
    
    3.76
    
    
    
    2.61Fiscal Year 2003:Fourth Quarter
    
    
    3.25
    
    
    
    2.64Third Quarter
    
    
    3.50
    
    
    
    2.65Second Quarter
    
    
    3.75
    
    
    
    2.67First Quarter
    
    
    3.80
    
    
    
    3.00
 Dividend Policy 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 current loan agreement, the Company may not pay dividends without the
lending groups consent. Issuer Purchases of Equity Securities The Company did not purchase any of its own equity securities during
fiscal years 2004, 2003 or 2002 and currently does not have a buyback program
in place, which would require authorization by the Board of Directors. See
Item 1.  Business  Recent Events for information with respect to the
Companys proposed reverse stock split and related matters. 16




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ITEM 6. SELECTED FINANCIAL DATA 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, 2004, which has been derived from the audited Financial Statements of
the Company. 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 SUBSIDIARIES
Selected Financial Data
For the Years Ended July 31,
(Dollars in thousands, except per share data) 2004
    
    2003
    
    2002
    
    2001
    
    2000Income Statement Data:Net sales
    
    $
    212,527
    
    
    $
    175,769
    
    
    $
    156,294
    
    
    $
    148,279
    
    
    $
    142,293Gross profit
    
    
    31,380
    
    
    
    17,794
    
    
    
    18,815
    
    
    
    14,932
    
    
    
    19,105Income from operations (2)
    
    
    14,344
    
    
    
    5,468
    
    
    
    7,849
    
    
    
    2,314
    
    
    
    4,822Income (loss) from continuing operations
    
    
    7,218
    
    
    
    1,918
    
    
    
    2,996
    
    
    
    (1,494
    )
    
    
    536Loss from discontinued operation (1)
    
    
    
    
    
    
    
    
    
    
    (908
    )
    
    
    (108
    )
    
    
    (1,561
    )Net income (loss)
    
    
    7,218
    
    
    
    1,918
    
    
    
    2,088
    
    
    
    (1,602
    )
    
    
    (1,025
    )Net income (loss) per common share  basic:Continuing operations
    
    
    1.02
    
    
    
    .27
    
    
    
    .42
    
    
    
    (0.21
    )
    
    
    .08Discontinued operation (1)
    
    
    
    
    
    
    
    
    
    
    (.13
    )
    
    
    (0.02
    )
    
    
    (0.22
    )Net income (loss)
    
    
    1.02
    
    
    
    .27
    
    
    
    .29
    
    
    
    (0.23
    )
    
    
    (0.14
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    
    1.01
    
    
    
    .27
    
    
    
    .42
    
    
    
    (0.21
    )
    
    
    .08Loss from discontinued operation (1)
    
    
    
    
    
    
    
    
    
    
    (.13
    )
    
    
    (0.02
    )
    
    
    (0.22
    )Net income (loss)
    
    
    1.01
    
    
    
    .27
    
    
    
    .29
    
    
    
    (0.23
    )
    
    
    (0.14
    )Balance Sheet Data:Working capital
    
    $
    16,835
    
    
    $
    11,650
    
    
    $
    7,218
    
    
    $
    9,949
    
    
    $
    12,456Total assets
    
    
    145,431
    
    
    
    130,527
    
    
    
    123,928
    
    
    
    128,347
    
    
    
    130,123Long term debt (net of current portion)
    
    
    8,310
    
    
    
    12,100
    
    
    
    15,222
    
    
    
    25,740
    
    
    
    26,306Stockholders equity
    
    
    58,456
    
    
    
    51,064
    
    
    
    49,146
    
    
    
    47,046
    
    
    
    48,648
 (1) The loss from the discontinued operation for all years relates to
the operations of QuikWater and the sale of that separate business segment in
2002. See Note 4 to the consolidated financial statements of this Form 10-K. (2) Fiscal year 2002 includes a $1.58 million litigation award from
an equipment vendor. 17




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 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. Executive Overview The Company benefited from two separate business conditions during fiscal
2004. First, the lack of availability of steel, and the related mitigation of
the over-supply condition in the industry, created an enhanced pricing
environment for steel tubular products. Second, these enhanced selling prices
were matched with lower average-cost inventories. These two conditions are
largely responsible for the substantial increases in the Companys sales and
income. To a lesser extent, part of the earnings increase was attributable to
improved operations and higher demand due to a stronger industrial economy.
The Company does not believe that the industry-wide pricing environment is
sustainable as steel availability improves. The Company expects the cost of
steel will stabilize or decline in the future while the current average cost of
inventories is increasing as inventory is replenished with steel purchased at
higher costs. The Company does expect to continue to benefit from the
improvements in operations. The Companys philosophy is to pursue growth and profitability through the
identification of niche markets for tubular products where the Company can
provide a high level of value-added engineering and customer service in order
to become the market leader. The Company uses its quality standards,
information technology, customer service and manufacturing technology to
achieve such market penetration. Current Industry Conditions Over the past several years, the steel industry in the U.S. has been
characterized by changing customer demand and foreign competition, domestic
manufacturing overcapacity, and government influence on raw material and
finished good import prices. During the last twelve months, a significant
demand for steel in China as well as disruptions in the supply of steel making
inputs has caused a lack of domestic availability for certain types of steel,
primarily carbon steel. The declining value of the U.S. dollar to foreign
currencies has contributed to this market condition. A lack of availability
and high-cost of steel-making inputs such as coke, scrap metal and energy has
created an environment where steel sheet coil, primarily carbon, is
dramatically increasing in cost. Over the past several quarters, carbon steel
coil producers have raised their prices and placed surcharges on their products
that have greatly increased the replacement cost of carbon steel. The lack of
availability of steel and the related mitigation of the excess capacity in the
tubing industry has created an enhanced pricing environment for steel tubular
products. In dealing with the current environment, management has passed along
to customers as many raw material price increases as possible, including
surcharges. The Company has agreed-upon pricing with some customers on certain
products and as the Companys supplier arrangements for these products are
modified for surcharges or base price increases, management attempts to pass on
raw material price increases to the extent possible. The increased sales
prices for the Companys products, which are reflected in the Companys
financial statements for the last two quarters of fiscal 2004, were matched
against lower average-cost carbon steel coil inventories, resulting in a
significant gross profit increase in the third and fourth quarters of fiscal
2004. The Company does not believe that the earnings attributable to selling
from lower average cost inventories is sustainable, since the average cost of
inventories will increase as inventory is replenished with steel purchased at
the current replacement cost. An increase in the availability of steel could
act to decrease selling prices and depress margins since the Company would have
high-cost inventory. Over the years, Webco has forged solid and loyal relationships with its
steel suppliers. These relationships have, in most circumstances, secured the
availability of carbon and stainless steel in sufficient quantities to satisfy
customer requirements during this recent period of reduced supply. There can
be no 18




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assurances, however, that the Companys carbon and stainless steel
requirements will continue to be met, which, if not met, would negatively
impact sales and income from operations and cash flows. Overview of Financial Results For Fiscal 2004 ended July 31, 2004, the Company reported net income of
$7,218,000, or $1.01 per diluted share. Fiscal 2003 earnings were $1,918,000,
or $0.27 per diluted share. Net sales for fiscal 2004 were $212.5 million, a
20.9 percent increase over the $175.8 million for fiscal 2003. Gross profit
was 19 percent of net sales for the last six months of fiscal 2004 compared to
9.5 percent in the first six months of fiscal 2004. The Companys business during the third and fourth quarters of fiscal 2004
was largely impacted by two separate business conditions. First, selling
prices for finished product were based on the higher replacement costs of
coiled steel and were matched against the Companys lower average-cost
inventories. Second, the lack of availability of steel limited the ability of
customers to purchase products from the Companys competitors resulting in
tubing industry excess capacity being largely mitigated by the lack of
availability of carbon steel coils in the domestic marketplace. The conditions driving the steel industry during the last six months of
fiscal 2004 have resulted in substantial increases in sales and income. The
Company does not believe these results are sustainable. The level of operating
profitability achieved during the third and fourth quarters enabled the Company
to afford the higher working capital requirements caused by increasing steel
costs, despite borrowing limitations in the Companys revolving line of credit.
At such time when steel costs begin to decline, the Company believes it may
have the opposite challenge of matching decreasing sales prices with higher
average-cost inventories. Results of Operations The following table sets forth certain income statement data for each of
the three years in the period ended July 31, 2004 (certain amounts may not
calculate due to rounding, dollars in millions): 2004
    
    2003
    
    2002Dollar
    
    % of
    
    Dollar
    
    % of
    
    Dollar
    
    % ofAmount
    
    Net Sales
    
    Amount
    
    Net Sales
    
    Amount
    
    Net SalesNet sales
    
    $
    212.5
    
    
    
    100.0
    %
    
    $
    175.8
    
    
    
    100.0
    %
    
    $
    156.3
    
    
    
    100.0
    %Gross profit
    
    
    31.4
    
    
    
    14.8
    
    
    
    17.8
    
    
    
    10.1
    
    
    
    18.8
    
    
    
    12.0Selling, general and
administrative expenses
    
    
    17.0
    
    
    
    8.0
    
    
    
    12.3
    
    
    
    7.0
    
    
    
    12.5
    
    
    
    8.0Income from operations (1)
    
    
    14.3
    
    
    
    6.7
    
    
    
    5.5
    
    
    
    3.1
    
    
    
    7.9
    
    
    
    5.1
 (1) - Fiscal 2002 income from operations was positively impacted by a
litigation award of $1,580,000. Fiscal 2004 Compared with Fiscal 2003 Tubing product sales increased $36.7 million, or 20.9 percent, to $212.5
million in 2004 from $175.8 million in 2003. The increase in net sales is
primarily the result of increased sales prices to pass along large price
increases and surcharges imposed by steel producers on the supply of carbon
steel coils to the market. The lack of availability of steel, which has
largely mitigated excess capacity in the industry, has created an enhanced
pricing environment for the Companys products. Shipped tonnages improved 9.3
percent over the same period in fiscal 2003, primarily due to the development
of certain high alloy and OEM markets and the Companys ability to obtain raw
materials, which accounted for approximately 6.2 percent of the increase in
sales. Although the tubing industry continues to deal with excess capacity,
the limited availability of carbon steel coils has largely mitigated this
condition. The overall price per ton for the Companys products increased
during the year, which is reflected in the Companys gross profit margin
percentages for fiscal 2004. 19




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Gross profit for Tubing products increased to $31.4 million, or 14.8
percent of net sales, in 2004 from $17.8 million, or 10.1 percent of net sales,
in 2003. Gross profit margins in fiscal 2004 were positively impacted by
increased sales prices, which followed higher raw material pricing, being
matched against lower average-cost raw materials. As the Companys
average-cost of raw materials increases towards current replacement cost, gross
profit margins are expected to decrease, assuming selling prices do not
increase proportionately. Excess tubing industry capacity, which still exists,
is currently being mitigated by the limited availability of carbon steel coils. Selling, general and administrative expenses were $17.0 million in fiscal
2004 compared with $12.3 million in fiscal 2003. The fiscal 2003 period
includes a pre-tax insurance recovery to the Company of $299,000 from a fire at
the Oil City facility in 2001. Without the insurance recovery in the prior
year period, S,G&A costs increased $4,411,000 primarily due to a $3,000,000
increase in employee and executive bonus accruals resulting from improved
operating performance. Legal expenses and certain financial advisory costs
related to the reverse/forward stock split increased expenses by approximately
$770,000 while expanded selling activities also increased expenses by
approximately $520,000. Interest expense for fiscal 2004 increased to $2,318,000 from $2,216,000
in fiscal 2003. The slight increase in interest is primarily the result of the
increase in the average level of debt under the bank Loan and Security
Agreement to $46.0 million for 2004 from $41.7 million for 2003. The average
interest rate decreased to 4.1 percent in 2004 from 4.56 percent in 2003. The
Company has historically elected for its term debt and a significant portion of
its outstanding revolving loan to bear interest at a floating rate based on
LIBOR. Borrowing levels under the revolver increased to finance higher
inventory and accounts receivable levels due to the increase in raw material
prices and sales for the year. A significant increase in interest rates could
have a material impact on the Companys results of operations and cash flows.
The reader should refer to Part II, Item 7A: Quantitative and Qualitative
Disclosures about Market Risk of this Form 10-K for additional information
regarding this matter. The recorded income tax provision is based upon the estimated annual
combined effective federal and state income tax rates. The effective income
tax rate for fiscal 2004 was 40 percent compared to 41.0 percent in the prior
fiscal year. Fiscal 2003 Compared with Fiscal 2002 Tubing product sales increased $19.5 million, or 12.5 percent, to $175.8
million in 2003 from $156.3 million in 2002. The increase in net sales was
primarily the result of improved specialty tubing volumes across all facilities
driven by new market opportunities and the development of the Oil City,
Pennsylvania, expansion capacity. Shipped tonnages improved 2.8% over fiscal
2002 mostly due to new market opportunities in the specialty tubing markets.

Tonnage improvements over the prior year were primarily driven by the specialty
OEM market. Although the overall price per ton for the Companys products
increased during the year, the change in sales-mix towards lower margin
products resulted in a reduction in gross profit margin for the year as seen
below. Pricing pressure continued to depress the specialty tubing markets,
which was reflected in the Companys gross profit margin percentages for fiscal
2003. Gross profit for Tubing products decreased to $17.8 million, or 10.1
percent of net sales, in 2003 from $18.8 million, or 12.0 percent of net sales,
in 2002. The decrease was primarily a function of the increase in volume in
the specialty OEM market, which historically has significant competition and
pricing pressure. Excess capacity and over-supply conditions continued to
exist among most of the Companys product lines. Although increased production
at the Oil City facility helped drive the increase in sales for the year,
production problems and related operating inefficiencies depressed margins at
that location during the last half of the year. Shutdowns for repair and
maintenance projects at the Companys Sand Springs, Oklahoma, facility during
the third quarter further reduced gross profit for the year. Margins were also
adversely impacted by higher carbon steel raw material prices during fiscal
2003. 20




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Selling, general and administrative expenses were $12.3 million in fiscal
2003 compared with $12.5 million in fiscal 2002. The second quarter of fiscal
2003 included an insurance recovery to the Company of $299,000 from a January
2001 fire at the Companys Oil City facility. The Company had a reduction of
$489,000 in employee incentive payments and executive bonus accruals in fiscal
2003 as a result of failing to achieve budgeted profitability levels. These
decreases were offset by an increase of $259,000 in enterprise resource
planning expenses primarily due to a computer hardware migration project and a
$311,000 increase in sales and marketing expenses driven by new market
opportunities and increased sales volumes. In January 2002, the Company recorded a litigation award from a previously
disclosed lawsuit against an equipment vendor. The total judgment of $1.58
million has been collected, and the Company does not anticipate any further
action by either party in the case. Interest expense for fiscal 2003 decreased to $2,216,000 from $2,998,000
in fiscal 2002. The decrease in interest was primarily the result of the
average interest rate decreasing to 4.56 percent in 2003 from 5.96 percent in
2002. The average level of debt under the bank Loan and Security Agreement
decreased only slightly to $41.7 million for 2003 from $41.8 million for 2002.
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. Borrowing levels remained relatively flat as operating cash flow was
used to fund higher inventory levels and capital expenditures during 2003. The recorded income tax provision was based upon the estimated annual
combined effective federal and state income tax rates. The effective income
tax rate for fiscal 2003 was 41.0 percent compared to 38.4 percent in the prior
fiscal year. The higher effective tax rate resulted from the Company cashing
in two key-man, whole-life insurance policies during the second quarter of
fiscal 2003 and realizing a taxable gain on the transaction. On March 31, 2002, the Board of Directors approved a plan of divestiture
for the Companys QuikWater Division and on May 10, 2002, the Company sold
substantially all of the assets of this segment to a group of independent
investors and members of management of QuikWater, which included Ashley Weber,
daughter of F. William Weber, Chairman and Chief Executive Officer of the
Company. The purchase price for the assets was $100,000 paid in cash at
closing, the assumption of approximately $70,000 in liabilities and an
additional $300,000 that could be realized based on future earnings of the new
entity over a three year period. None of the additional $300,000 has been
recorded on the sale due to managements assessment of the contingent nature of
the amount. The sale of the QuikWater Division represents a disposal of a
business segment under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144).
Accordingly, prior period results of the QuikWater segment have been classified
as discontinued. A loss of $914,000 was recorded on the disposal of the
business segment, net of realized proceeds, which includes $80,000 of related
disposal costs. The reader should refer to Part II, Item 8: Note 4 -
Discontinued Operation, in the footnotes to the consolidated financial
statements of this Form 10-K for additional information regarding this matter. Liquidity and Capital Resources Net cash provided by (used in) operations was $3.4 million, $(1.3)
million, and $12.0 million in fiscal 2004, 2003 and 2002, respectively.
Inventories increased year-over-year in 2004, 2003 and 2002. The $8.8 million
inventory increase in 2004 is primarily the result of higher carbon steel raw
material prices and increased business levels in the specialty tubing markets.
The $6.5 million inventory increase in 2003 is largely the result of increased
business levels in the specialty tubing markets and higher carbon steel raw
material prices. The increase in inventory in 2002 was the result of overall
increases in raw material prices and the Companys decision to make strategic
volume purchases in anticipation of rising prices. Accounts receivable
increased $6.1 million in 2004 as a result of increased sales primarily driven
by higher selling prices. Accounts receivable increased $3.0 million in 2003
primarily as a result of increased sales volumes. 21




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Accounts payable and accrued liabilities increased in 2004 due to higher
inventory costs and accrued profit sharing and bonuses. Accounts payable
decreased in 2003, but was largely offset by an increase in book overdrafts
included in financing activities. Accounts Payable increased in 2002 primarily
as a result of the increase in inventory. Over the past two years, the Company
has on average turned its steel inventories approximately 4.5 times per year. Net cash used in investing activities was $6.2 million, $2.6 million and
$2.7 million in fiscal 2004, 2003 and 2002, respectively. Fiscal 2004 capital
spending was primarily related to the building expansion along with related
weld mill technology upgrades at the Companys stainless facility. Fiscal 2003
is net of cash value proceeds of $822,000 from cashing in two key man, whole
life insurance policies on F. William Weber, Chairman of the Board and Chief
Executive Officer. Capital spending in 2003 was primarily focused on
information technology and the continued investment in stainless tube making
capabilities. Capital spending in 2002 was limited to upgrading existing
equipment with improved technology and mill additions at the Companys
stainless 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. In
the past, the Company has funded its capital growth expenditures with a
combination of cash flow from operations and debt. Capital spending in 2005
will focus on the continued expansion and deployment of technology investments
and the development of value-added capabilities for our increased carbon
capacity, and normal facility maintenance spending. Capital spending for 2005
is expected to be in the range of $5.0 to $6.0 million for the year. The
Company currently intends to retain earnings to support this strategy and does
not anticipate paying dividends in the foreseeable future. On October 15, 2004, the Company entered into a new senior credit facility
(the Credit Facility) to refinance its then existing senior debt with the
Companys primary lender. The Credit Facility provides for a term loan of $18
million, and a revolving line of credit of $50 million. The maturity date of
the Credit Facility is October 15, 2009 and it is collateralized by
substantially all of the Companys assets. The Company may have borrowings and
outstanding letters of credit ($1,025,000 of letters of credit were outstanding
at October 15, 2004) under the revolving credit facility of up to the lesser of
$50 million or an amount determined by a formula based on the amount of
eligible inventories and accounts receivable. Principal payments on the term
loan of $214,300, plus interest, are due each month until maturity. In
addition to the scheduled principal payments, the Company is required to make
additional principal payments on the term loan based on 50 percent of the
Companys excess cash flow per quarter not to exceed $257,100 per quarter, or
$1,800,000 on a cumulative basis over the term of the debt facility, beginning
with the quarter ending October 31, 2004. Like the Companys prior facility,
the new Credit Facility contains covenants regarding debt coverage, capital
expenditures and dividends and requires the Company to maintain a minimum
excess borrowing base availability. The increased borrowing capacity of the
revolving credit facility is intended to enable Webco to fund the higher levels
of working capital required in the current high-cost steel environment. Webco
anticipates using a portion of the term loan to fund the Companys previously
announced reverse stock split transaction and related matters. The accompanying consolidated balance sheet has been adjusted to show a
long-term portion of debt for the amount not expected to be paid during fiscal
2005 under the new term loan. As of July 31, 2004, the Company had $9.1
million outstanding on the senior debt facility term loan and $37 million on
the related revolving line of credit, which were subsequently refinanced as
noted above. At July 31, 2004, only $4,000 ($2,900,000 at September 30, 2004)
was available for borrowing on the refinanced line of credit. Under the terms
of the new agreement an additional $4,500,000 would have been available at July
31, 2004. Future minimum payments under the senior debt facility term loan are
$2,734,000 in fiscal 2005, $2,572,000 in fiscal 2006, $2,572,000 in fiscal 2007
and $1,259,000 in fiscal 2008. 22




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Accounting principles require current classification of revolving lines of
credit that permit borrowings on a long-term basis when the line of credit
contains both a lock-box arrangement, whereby remittances to the lockbox
automatically pay down the outstanding line of credit, and loan terms that
allow the lender to declare the loan in default on a subjective basis. This
accounting treatment is required regardless of the legal maturity date of the
revolving credit arrangement. The Companys line of credit, which matures
October 15, 2009, contains such features and accordingly, the accompanying
financial statements classify outstanding borrowings under the line of credit
as Current portion of long-term debt. Similar to the prior facility, the Companys new debt facility contains
covenants regarding debt coverage and the ratio of liabilities to equity. The
covenants also limit capital expenditures and dividends and require the Company
to maintain a minimum excess availability on its revolving loan. As of July
31, 2004, the Company was in compliance with all such covenants under the
existing facility, and would have been in compliance with all such covenants in
the new debt facility had it been in place. The new debit facility also contains restrictions related to the Companys
proposed reverse stock-split transaction. In order to proceed with the reverse
stock-split, the Company must have a minimum excess availability of $7.0
million on its revolving loan after giving effect to the transaction and is
limited to $2.0 million of new advances to management shareholders for purposes
of settling loans with third parties secured by Company stock. Total cash
required to complete the transaction is estimated to be in the range of $3.5 to
$5.0 million. P&J also has a separate line of credit agreement for $1,500,000, which
matures on November 30, 2004. As of July 31, 2004, there was $500,000
outstanding on the line of credit and $1,000,000 was available for borrowing. The Company has arranged financing with various public agencies related to
the Oil City facility, of which, $1.9 million is outstanding at July 31, 2004.
The agency loans are collateralized by the underlying real estate and certain
equipment. The loans mature over a 1 to 7 year period and bear interest at
rates ranging from 3 to 5 percent. The Company has various equipment loans with other financing companies, of
which, $505,000 is outstanding at July 31, 2004. The loans are collateralized
by the underlying equipment and mature over a 1 to 5 year period and bear
interest at rates ranging up to 6 percent. In addition to the above debt arrangements, the Company leases certain
buildings and machinery and equipment under non-cancelable operating leases.
Under certain of these leases the Company is obligated to pay property taxes,
insurance, repairs and other costs related to the leased property. 23




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The following table sets forth the future minimum payments required under
the above debt and lease agreements at July 31, 2004: Payments Due by Fiscal YearContractual Obligations
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalSenior Long-Term Debt (1)
    
    $
    2,734
    
    
    $
    2,572
    
    
    $
    2,572
    
    
    $
    1,259
    
    
    $
    
    
    
    $
    
    
    
    $
    9,137Senior Line of Credit (2)
    
    
    36,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,972Public Agency Long-Term Debt
    
    
    301
    
    
    
    299
    
    
    
    307
    
    
    
    308
    
    
    
    240
    
    
    
    429
    
    
    
    1,884P&J Line of Credit
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Purchase Commitments (3)
    
    
    51,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,380Operating Leases (4)
    
    
    2,062
    
    
    
    1,881
    
    
    
    1,646
    
    
    
    1,398
    
    
    
    1,023
    
    
    
    860
    
    
    
    8,870Other
    
    
    181
    
    
    
    147
    
    
    
    87
    
    
    
    85
    
    
    
    5
    
    
    
    
    
    
    
    505Total Cash Obligations
    
    $
    94,130
    
    
    $
    4,899
    
    
    $
    4,612
    
    
    $
    3,050
    
    
    $
    1,268
    
    
    $
    1,289
    
    
    $
    109,248
  (1) -
    
    Future minimum payments under the Companys Senior Long-Term Debt
agreement have been adjusted to conform to the new arrangement which
matures on October 15, 2009 as described above.  (2) -
    
    Accounting principles require current classification of revolving lines
of credit that permit borrowings on a long-term basis when the line of
credit contains both a lock-box arrangement, whereby remittances to the
lockbox automatically pay down the outstanding line of credit, and loan
terms that allow the lender to declare the loan in default on a subjective
basis. This accounting treatment is required regardless of the legal
maturity date of the revolving credit arrangement. The Companys line of
credit, which matures October 15, 2009, contains such features and
accordingly, the accompanying financial statements have presented the
outstanding borrowings under the line of credit to Current portion of
long-term debt.  (3) -
    
    The Company enters into purchase commitments with steel vendors as part
of the ordinary course of business and is currently committed on
outstanding purchase orders for inventory.  (4) -
    
    The Company expects to relocate from its Nederland, Texas distribution
and warehouse facilities in November 2004 to a 125,000 square foot
facility in Orange, Texas, that is being leased on a long-term basis.
Future minimum payments under the new 15 year lease, not included in the
table, are expected to be approximately $290,000 in 2005; $386,000 in each
of years 2006 through 2009; and $3,961,000 thereafter. Future minimum
payments for the facilities being replaced, which are included in the
table, amount to $66,000 in 2005 and $39,000 in 2006. Management believes its current capital structure is adequate for current
operations and to allow for planned capital additions and improvements.
Interest rate increases or lack of capital availability could limit capital
spending or the working capital necessary to take advantage of growth
opportunities. Related Party Transactions The reader should refer to Part II, Item 8: Note 12  Related Party
Transactions, in the footnotes to the consolidated financial statements of this
Form 10-K for information regarding such transactions during 2004 and 2003. 24




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Critical Accounting Policies The Companys consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America.
Critical accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates that are believed to be reasonable based on the information
available. By their nature, these judgments are subject to an inherent degree
of uncertainty and financial estimates, and related assumptions, do affect the
reported amounts of assets, liabilities, revenues and expenses for the periods
presented. There can be no assurances that actual results will not differ from
those estimates. These judgments are based on historical experience, terms of
existing purchase arrangements, observance of trends in the industry,
information provided by customers and information provided from outside
sources, as appropriate. The Company believes its most critical accounting
policies are as follows: Revenue Recognition The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements
(SAB 104). SAB 104 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. Company product is
made to customer or industry specifications at an agreed upon price that is
typically specified in the customers purchase order. Title to the product
passes to the customer at the time of shipment along with all the risks and
rewards of ownership. Customer orders are not released for shipment unless the
customer is in good credit standing with the Company, which is internally
evaluated by the Companys credit manager on an on-going basis. Should changes
in conditions cause management to determine these criteria are not met for
certain future transactions, revenue recognition would be delayed until such
time as the transactions become realizable and fully earned. Inventories The Company values inventory at the lower of the actual cost to
purchase and/or manufacture or the current estimated market value of the
inventory. Cost for raw materials, work-in-process, finished goods and
maintenance parts and supplies are determined on the weighted average cost
method. The Company regularly reviews inventory quantities on hand and reduces
the carrying value of such inventories if circumstances dictate by recording a
provision for excess and obsolete inventory based primarily on inventory aging
and forecasts of product demand and pricing. The steel industry is
characterized by changing customer demands, government influence on raw
material and finished good import prices, as evidenced by steel tariffs, and
lack of, or excess, steel availability that could result in significant
increases or decreases in inventory pricing or increases in excess or obsolete
inventory quantities on hand. The Companys estimates of future product demand
may prove to be inaccurate or raw material prices may decrease to levels below
average inventory cost, in which case the provision required for excess and
obsolete inventory may have to be increased or decreased accordingly. Although
every effort is made to ensure the accuracy of internal forecasting, any
significant changes in demand or finished good and raw material prices could
have a significant impact on the carrying value of the Companys inventory and
reported operating results. Self-Insurance Reserves The Company self-insures both a medical coverage
program and an Oklahoma workers compensation program for its employees. The
determination of reserves and expenses for these benefits is dependent on
claims experience and the selection of certain assumptions used by actuaries in
evaluating incurred, but not yet reported, amounts. Reserves for claims under
both programs are accrued based upon the Companys estimate of the aggregate
liability for claims (including claims incurred, but not yet reported).
Significant changes in actual experience under either program or significant
changes in assumptions may materially affect self-insured medical or workers
compensation reserves and future expense. Accounting for Certain Long-Lived Assets The Company evaluates its long-lived
assets for impairment in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144). When recoverability is in question, the Company reviews its
long-lived assets for impairment based on estimated future non-discounted cash
flows attributable to the assets. In the event such cash flows are not
expected to be sufficient to recover the recorded value of the assets, the 25




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assets are written down to their estimated fair values. While the Company
believes its estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect the evaluations. Deferred Taxes The Company recognizes deferred tax assets and liabilities
based on the differences between the financial statement carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets are regularly
reviewed for recoverability and, if deemed necessary, an appropriate valuation
allowance is established based on historical taxable income, projected future
taxable income, and the expected timing of the reversals of existing temporary
differences. If the Company were unable to generate sufficient future taxable
income, or if there is a material change in the actual effective tax rates or
time period within which the underlying temporary differences become taxable or
deductible, the Company could be required to establish a valuation allowance
against all or a significant portion of the deferred tax assets, thus resulting
in a substantial increase in the effective tax rate and a material adverse
impact on net income. New Accounting Pronouncements In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (FAS 149). FAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement is effective for the fiscal year
ending July 31, 2003. The Company has adopted the provisions of FAS 149 to
account for its natural gas hedging activities in its consolidated financial
statements. In December 2003, the FASB issued a revised FASB Interpretation No. 46
(FIN 46R), Consolidation of Variable Interest Entities, An Interpretation of
Accounting Research Bulletin No. 51 (FIN 46), which was originally issued in
January 2003 and provided guidance on identifying entities controlled by means
other than through voting rights and how to determine when and which business
entity should consolidate the variable interest entities (VIE). FIN 46R
requires an investor who absorbs the majority of the expected losses and
receives a majority of the expected returns, or both, of a VIE to consolidate
the assets, liabilities and results of operations of the VIE. A VIE is an
entity in which the equity investors do not have a controlling interest or the
equity investment at risk is insufficient to finance the entitys activities
without receiving additional subordinated financial support from other parties.
FIN 46R, as amended, was applicable for public companies that have an interest
in a VIE or a potential variable entity, which is commonly referred to as a
special-purpose entity (SPE), for periods ending after December 15, 2003.
The adoption of FIN 46R did not have a significant impact on the Companys
consolidated financial statements. Outstanding Litigation The Company is party to various 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. 26




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys primary risk relates to changes in interest
rates on its long-term debt under its senior debt facility. At July 31, 2004,
the senior debt facility represented $46.1 million of the total debt
outstanding of $49.0 million. A significant amount of the remaining debt of
$2.9 million bears interest at fixed rates between 3 and 6 percent. The
Companys senior term and revolving debt bear interest at a floating rate based
on the London Interbank Offered Rate (LIBOR) or the Prime Rate. Accordingly,
the Company believes the carrying value of its variable rate, long-term debt
approximates fair value. The Company has not entered into derivative contracts
or other financial instruments for speculative or trading purposes.
Furthermore, the Company has not used financial instruments in the past, such
as interest rate swaps or hedges, to minimize the impact of interest rate
fluctuations on earnings and cash flow, however, management may use such
instruments if warranted based on estimates of future interest rates. Using
the average outstanding long-term debt under the senior debt facility for
fiscal 2004 of $46 million, a one percent change in the floating rates would
change annual cash flow and earnings before income taxes by approximately
$460,000. Inventory Risk Due to the lack of availability of carbon steel coils and the
increase in world-wide demand for steel and scrap, the Companys cost of carbon
steel coils increased dramatically in fiscal 2004. The Companys short-term
ability to raise prices to its customers is often not as related to the change
in the cost of its steel coil raw materials as it is to the availability of
steel and competition that exists in the markets into which the tubing is being
sold. The Companys ability to keep prices at levels to sustain profitability
when the cost of carbon steel coils begins to decline may prove to be
difficult, which could result in unrealizable inventory values and a decline in
profit margins. Although every effort is made to ensure the accuracy of
internal forecasting, any significant changes in demand or finished good and
raw material prices could have a significant impact on the value of the
Companys inventory and reported operating results. Significant increases in
the availability of steel could cause a decrease in the selling prices of the
Companys products as well as declines in the cost of steel. Such conditions
could result in decreased margins or cause carrying value of inventory to be in
excess of realizable sales values. Natural Gas Price Risk The Company uses natural gas in significant quantities
as part of its manufacturing processes. From time to time, the Company
experiences significant increases and decreases in the price of natural gas.
The Companys ability to raise prices to offset increasing gas costs may prove
to be difficult, which could result in declines in profit margins. During the
first quarter of fiscal 2004, the Company entered into various fixed price and
NYMEX swap contracts in order to manage natural gas risk. Contract terms range
from 6 months to 3 years at prices ranging from $5.03 per mcf to $6.20 per mcf.
Contracts will essentially lock in prices for 5,000 mcf per month from October
2004 through April 2005 and 10,000 mcf per month from November 2004 through
September 2006. Management believes such contracts are warranted based on
estimates of future prices and the amount of natural gas used by the Company.
The average amount of natural gas used per month in fiscal 2004 was 34,000 mcf
at an average price of $5.35 per mcf. 27




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Webco Industries, Inc. In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders equity and cash flows
present fairly, in all material respects, the financial position of Webco
Industries, Inc. and subsidiaries at July 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under item 15(a)(2),
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Tulsa, Oklahoma
October 28, 2004 28




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##### Table of Contents



WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2004 and 2003
(Dollars in thousands, except share amounts and par value) 2004
    
    2003ASSETSCurrent assets:Cash
    
    $
    1,203
    
    
    $
    189Accounts receivable, net
    
    
    27,911
    
    
    
    21,781Inventories, net
    
    
    49,639
    
    
    
    40,794Prepaid expenses
    
    
    358
    
    
    
    328Deferred income tax asset
    
    
    2,664
    
    
    
    3,318Total current assets
    
    
    81,775
    
    
    
    66,410Property, plant and equipment, net
    
    
    59,621
    
    
    
    60,018Notes receivable from related parties
    
    
    2,613
    
    
    
    2,560Other assets, net
    
    
    1,422
    
    
    
    1,539Total assets
    
    $
    145,431
    
    
    $
    130,527LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,666
    
    
    $
    17,216Accrued liabilities
    
    
    9,586
    
    
    
    5,676Current portion of long-term debt  Note 5
    
    
    40,688
    
    
    
    31,868Total current liabilities
    
    
    64,940
    
    
    
    54,760Long-term debt  Note 5
    
    
    8,310
    
    
    
    12,100Deferred income tax liability
    
    
    13,725
    
    
    
    12,603Commitments
and contingencies - Note 7Stockholders equity:Common stock, $.01 par value, 12,000,000 shares
authorized, 7,081,723 outstanding
    
    
    71
    
    
    
    71Additional paid-in capital
    
    
    35,744
    
    
    
    35,744Accumulated other comprehensive income, net of tax
    
    
    174
    
    
    
    Retained earnings
    
    
    22,467
    
    
    
    15,249Total stockholders equity
    
    
    58,456
    
    
    
    51,064Total liabilities and stockholders equity
    
    $
    145,431
    
    
    $
    130,527
 The accompanying notes are an integral part of the consolidated financial statements. 29




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 2004, 2003 and 2002
(Dollars and shares in thousands, except per share amounts) 2004
    
    2003
    
    2002Net Sales
    
    $
    212,527
    
    
    $
    175,769
    
    
    $
    156,294Cost of Sales
    
    
    181,147
    
    
    
    157,975
    
    
    
    137,479Gross Profit
    
    
    31,380
    
    
    
    17,794
    
    
    
    18,815Selling, general and administrative expenses
    
    
    17,036
    
    
    
    12,326
    
    
    
    12,546Litigation award
    
    
    
    
    
    
    
    
    
    
    1,580Income from operations
    
    
    14,344
    
    
    
    5,468
    
    
    
    7,849Interest expense
    
    
    2,318
    
    
    
    2,216
    
    
    
    2,988Income before income taxes
    
    
    12,026
    
    
    
    3,252
    
    
    
    4,861Provision for income taxes
    
    
    4,808
    
    
    
    1,334
    
    
    
    1,865Income from continuing operations
    
    
    7,218
    
    
    
    1,918
    
    
    
    2,996Loss on discontinued operation, net of tax
    
    
    
    
    
    
    
    
    
    
    (908
    )Net income
    
    $
    7,218
    
    
    $
    1,918
    
    
    $
    2,088Net income (loss) per common share - basic:Continuing operations
    
    $
    1.02
    
    
    $
    .27
    
    
    $
    .42Discontinued operation
    
    
    
    
    
    
    
    
    
    
    (.13
    )Net income
    
    $
    1.02
    
    
    $
    .27
    
    
    $
    .29Net income (loss) per common share - diluted:Continuing operations
    
    $
    1.01
    
    
    $
    .27
    
    
    $
    .42Discontinued operation
    
    
    
    
    
    
    
    
    
    
    (.13
    )Net income
    
    $
    1.01
    
    
    $
    .27
    
    
    $
    .29Weighted average common shares outstanding:Basic
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,077Diluted
    
    
    7,162
    
    
    
    7,147
    
    
    
    7,151
 The accompanying notes are an integral part of the consolidated financial statements. 30




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended July 31, 2004, 2003 and 2002
(Dollars in thousands) Additional
    
    Accumulated Other
    
    
    
    
    
    TotalCommon
    
    Paid-In
    
    Comprehensive
    
    Retained
    
    StockholdersStock
    
    Capital
    
    Income
    
    Earnings
    
    EquityBalances, July 31, 2001
    
    $
    71
    
    
    $
    35,732
    
    
    $
    
    
    
    $
    11,243
    
    
    $
    47,046Proceeds from stock options exercised
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,088
    
    
    
    2,088Balances, July 31, 2002
    
    
    71
    
    
    
    35,744
    
    
    
    
    
    
    
    13,331
    
    
    
    49,146Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,918
    
    
    
    1,918Balances, July 31, 2003
    
    
    71
    
    
    
    35,744
    
    
    
    
    
    
    
    15,249
    
    
    
    51,064Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,218
    
    
    
    7,218Other Comprehensive Income:Increase in value of derivative
hedging instruments, net of taxes of
$142
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    205Reclassification of derivative
hedging settlements to income, net
of taxes of $21
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,392Balances, July 31, 2004
    
    $
    71
    
    
    $
    35,744
    
    
    $
    174
    
    
    $
    22,467
    
    
    $
    58,456
 The accompanying notes are an integral part of the consolidated financial statements. 31




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##### Table of Contents



WEBCO
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    7,218
    
    
    $
    1,918
    
    
    $
    2,088Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:Loss on disposal of discontinued operation
    
    
    
    
    
    
    
    
    
    
    914Depreciation and amortization
    
    
    7,370
    
    
    
    6,991
    
    
    
    7,250(Gain) loss on disposition of
Property, plant and equipment
    
    
    
    
    
    
    (6
    )
    
    
    7Deferred tax expense
    
    
    1,655
    
    
    
    977
    
    
    
    1,252(Increase) decrease in:Accounts receivable
    
    
    (6,130
    )
    
    
    (3,010
    )
    
    
    501Inventories
    
    
    (8,845
    )
    
    
    (6,487
    )
    
    
    (1,728
    )Prepaid expenses
    
    
    (83
    )
    
    
    (99
    )
    
    
    (1
    )Increase (decrease) in:Accounts payable
    
    
    (1,725
    )
    
    
    (1,287
    )
    
    
    1,053Accrued liabilities
    
    
    4,013
    
    
    
    (149
    )
    
    
    636Net change from discontinued operation
    
    
    (103
    )
    
    
    (118
    )
    
    
    35Net cash provided by (used in) operating activities
    
    
    3,370
    
    
    
    (1,270
    )
    
    
    12,007Cash flows from investing activities:Capital expenditures
    
    
    (6,263
    )
    
    
    (3,455
    )
    
    
    (3,210
    )Proceeds from sale of property, plant and equipment
    
    
    12
    
    
    
    13
    
    
    
    8Repayment of stockholder advances
    
    
    
    
    
    
    
    
    
    
    50Other
    
    
    24
    
    
    
    810
    
    
    
    434Net change from discontinued operation
    
    
    
    
    
    
    
    
    
    
    (11
    )Net cash used in investing activities
    
    
    (6,227
    )
    
    
    (2,632
    )
    
    
    (2,729
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    199,319
    
    
    
    166,650
    
    
    
    147,508Principal payments on long-term debt
    
    
    (194,289
    )
    
    
    (163,357
    )
    
    
    (157,000
    )Proceeds from stock options exercised
    
    
    
    
    
    
    
    
    
    
    12Debt issue costs
    
    
    (87
    )
    
    
    (82
    )
    
    
    (690
    )Increase (decrease) in book overdrafts
    
    
    (1,072
    )
    
    
    668
    
    
    
    115Net cash provided by (used in) financing activities
    
    
    3,871
    
    
    
    3,879
    
    
    
    (10,055
    )Net increase (decrease) in cash
    
    
    1,014
    
    
    
    (23
    )
    
    
    (777
    )Cash, beginning of period
    
    
    189
    
    
    
    212
    
    
    
    989Cash, end of period
    
    $
    1,203
    
    
    $
    189
    
    
    $
    212Supplemental disclosure of cash flow information:Interest paid, net of amount capitalized of $48, $33, and $35
in 2004, 2003 and 2002, respectively
    
    $
    2,299
    
    
    $
    2,236
    
    
    $
    3,240Income taxes paid
    
    $
    2,112
    
    
    $
    68
    
    
    $
    10
 The accompanying notes are an integral part of the consolidated financial statements. 32




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##### Table of Contents



WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS- Webco is a full service manufacturer of high-quality
carbon steel and stainless steel tubing products designed to industry and
customer specifications. Webco is also a value-added distributor of these and
other metal tubular products. Webcos tubing products consist primarily of
pressure tubing, including heat exchanger tubing, boiler tubing and pipe, and
specialty tubing for use in durable and capital goods markets. The Companys
subsidiaries include: Webco Tube, Inc. which provides employee services to
Webco, and Phillips & Johnston, Inc. (P&J), which represents several
manufacturers who produce various specialty tubular products made from copper,
brass, aluminum, stainless and carbon steel, among others. This access to
additional tubing products allows the Company to better serve its customers by
offering a full range of tubular products. The Company, headquartered in Sand
Springs, Oklahoma, has three production facilities in Oklahoma and Pennsylvania
and five distribution facilities in Oklahoma, Texas, Illinois and Michigan,
serving more than 1,000 customers throughout North America. BASIS OF PRESENTATION  -The consolidated financial statements include the
accounts of Webco Industries, Inc. (Webco or together with its subsidiaries,
the Company), and its wholly owned subsidiaries Webco Tube, Inc. and P&J, a
Chicago based sales organization and value-added processor of tubular products.
All significant inter-company accounts and transactions have been eliminated
in the accompanying financial statements. In May, 2002, the Company sold
substantially all of the assets of its QuikWater Division and the disposal was
treated as a discontinued operation. The reader should refer to Note 4 -
Discontinued Operation for additional information regarding this matter. USE OF ACCOUNTING ESTIMATES -The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. CONCENTRATIONS -The Company maintains its cash in bank deposit accounts, which
at times may exceed the federal insurance limits. As of July 31, 2004 and
2003, the Company had cash in banks totaling $3,181,000 and $1,530,000,
respectively, in excess of federal depository insurance limits. The Company
has not experienced any losses on such accounts in the past. BOOK OVERDRAFTS- Included in accounts payable at July 31, 2003 are
outstanding checks in excess of bank deposits totaling $1,072,000. There were
no outstanding checks in excess of bank deposits at July 31, 2004. ACCOUNTS RECEIVABLE- Accounts receivable represent short term credit granted
to the Companys customers for which collateral is generally not required. The
allowance for doubtful accounts represents probable credit losses and is based
on specific review of customer accounts and customer credit analysis. Accounts
receivable at July 31, 2004 and 2003, are net of an allowance for uncollectible
amounts of $242,000 and $636,000, respectively. INVENTORIES- The Company values inventory at the lower of the actual cost to
purchase and/or manufacture or the current estimated market value of the
inventory. Cost for raw materials, work-in-process, finished goods and
maintenance parts and supplies are determined on the weighted average cost
method. The Company regularly reviews inventory quantities on hand and records
a provision for excess and obsolete inventory based primarily on inventory
aging and forecasts of product demand and pricing. Inventories at July 31,
2004 and 2003 are net of reserves for obsolescence of $1,795,000 and
$1,665,000, respectively. 33




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##### Table of Contents



WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) PROPERTY, PLANT AND EQUIPMENT- Property, plant and equipment is stated at
historical cost and includes interest capitalized on major construction
projects. Gains or losses on sales and retirements of property are reflected
in operations. Depreciation is computed using the straight line method over
the following estimated useful lives: buildings and improvements - 10 to 40
years, machinery and equipment - 3 to 25 years, computer equipment and software
 3 to 7 years, and furniture and fixtures - 3 to 10 years. Repair and
maintenance costs are expensed as incurred. Depreciation expense for the years ended July 31, 2004, 2003 and 2002,
amounted to $6,895,000, $6,729,000 and $6,998,000, respectively. Fully
depreciated assets still in use at July 31, 2004 and 2003, amounted to
$17,429,000 and $11,469,000, respectively. ACCOUNTING FOR CERTAIN LONG-LIVED ASSETS -The Company evaluates its long-lived
assets for impairment in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets"(SFAS 144). The Company reviews its long-lived assets for impairment
based on estimated future undiscounted cash flows attributable to the assets.
In the event such cash flows are not expected to be sufficient to recover the
recorded value of the assets, the assets are written down to their estimated
fair values. SELF-INSURANCE RESERVES -The Company self-insures both a medical coverage
program and an Oklahoma workers compensation program for its employees. The
determination of reserves and expenses for these benefits is dependent on
claims experience and the selection of certain assumptions used by actuaries in
evaluating incurred, but not yet reported, amounts. Reserves for claims under
both programs are accrued based upon the Companys estimate of the aggregate
liability for claims (including claims incurred, but not yet reported).
Significant changes in actual experience under either program or significant
changes in assumptions may materially affect self-insured medical or workers
compensation reserves and future expense. The reader should refer to Note 8 in
these financial statements for additional information on this matter. REVENUE RECOGNITION -The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements
(SAB 104). SAB 104 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. Company product is
made to customer or industry specifications at an agreed upon price as
typically specified in the customer purchase order. Title passes to the
customer at the point of shipment along with all the risks and rewards of
ownership. Customer orders are not released for shipment unless the customer
is in good credit standing with the Company, which is internally evaluated by
the Companys credit manager on an on-going basis. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognition would be delayed until such time the
transactions become realizable and fully earned. In addition, the Company
recognizes outbound freight expense and shipping and handling costs as a
component of cost of sales, while amounts charged to customers for such costs
are included in revenue. EARNINGS PER SHARE- Earnings per share are calculated based on the number of
weighted average common shares outstanding, including the effect of dilutive
options when applicable, in accordance with the computation, presentation and
disclosure requirements of Financial Accounting Standards Board Statement No.
128, Earnings Per Share (SFAS No. 128). 34




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 DERIVATIVE FINANCIAL INSTRUMENTS -The Company accounts for its natural gas
hedge instruments according to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137,
138 and 149. These statements require that every derivative or hedge
instrument be recorded on the balance sheet as either an asset or a liability
measured at fair value. If a derivative is designated as a cash flow hedge,
the Company is required to measure the effectiveness of the hedge, or the
degree that the gain (loss) for the hedging instrument offsets the loss (gain)
on the hedged item, at each reporting period. The effective portion of the
gain (loss) on the derivative instrument is recognized in other comprehensive
income as a component of equity and subsequently reclassified into earnings
when the forecasted transaction affects earnings. The ineffective portion of a
derivatives change in fair value is required to be recognized in earnings
immediately. Derivatives that do not qualify for hedge treatment must be
recorded at fair value with gains (losses) recognized in earnings in the period
of change. The
Company enters into natural gas swap instruments which qualify as
cash flow hedges of the
specific underlying exposure (natural gas prices), with a risk management
objective and strategy of protecting the Company against dramatic rises in
natural gas prices. The Company records monthly contract settlements as either
an increase or decrease to natural gas expense which is included as part of
cost of sales. At July 31, 2004, the Companys natural gas hedges had a
positive net fair value of $295,000. This amount is included in other assets
on the Companys balance sheet with a corresponding credit balance of $174,000,
net of a deferred tax liability of $121,000, reported in stockholders equity
as accumulated other comprehensive income, net of tax. STOCK-BASED COMPENSATION- The Company has elected to follow APB Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for its employee
stock options rather than the alternative fair value accounting provided for
under SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No.
25, because the exercise price of the Companys stock options is at least equal
to the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Companys financial statements. Pro
forma information regarding net income and earnings per share is required by
SFAS No. 123. This information is required to be determined as if the Company
had accounted for its employee stock options granted subsequent to July 31,
1995, under the fair value method of that statement. The fair value of options granted in fiscal years 2004, 2003 and 2002
reported below has been estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: 2004
    
    2003
    
    2002Weighted average life
    
    6.0 years
    
    4.3 years
    
    6.0 yearsRisk-free interest rate
    
    3.55%
    
    3.12-3.56%
    
    5.34%Expected volatility
    
    63%
    
    61%
    
    63%Expected dividend yield
    
    None
    
    None
    
    None
 The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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 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 the opinion
of management, the existing models do not necessarily provide a reliable single
measure of fair value of its options. 35




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##### Table of Contents



WEBCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 The weighted average estimated fair value of employee stock options, whose
exercise price equals the market value on the grant date, granted during 2004,
2003 and 2002 was $2.49, $1.68 and $1.75 per share, respectively. There were
no options granted in 2004, 2003 or 2002 with an exercise price exceeding
market value on the grant date. For purposes of pro forma disclosures, the estimated fair value of the
options calculated using the Black-Scholes option valuation model is amortized
to expense over the vesting period (See Note 9 for additional information).
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation and FASB Statement
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure,
an amendment of FASB Statement No. 123, to stock-based employee compensation: For Years Ended July 31,(Dollars in thousands, except per share amounts)2004
    
    2003
    
    2002Net income, as reported
    
    $
    7,218
    
    
    $
    1,918
    
    
    $
    2,088Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (98
    )
    
    
    (144
    )
    
    
    (160
    )Pro forma net income
    
    $
    7,120
    
    
    $
    1,774
    
    
    $
    1,928Earnings per share:Basic - as reported
    
    $
    1.02
    
    
    $
    .27
    
    
    $
    .30Basic - pro forma
    
    $
    1.01
    
    
    $
    .25
    
    
    $
    .27Diluted - as reported
    
    $
    1.01
    
    
    $
    .27
    
    
    $
    .29Diluted - pro forma
    
    $
    1.00
    
    
    $
    .25
    
    
    $
    .27
 INCOME TAXES- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS No. 109). The provisions of SFAS No. 109 require the recording
of deferred tax assets and liabilities to reflect the expected tax consequences
in future years of differences between the tax basis of assets and liabilities
and their financial statement carrying amounts. Deferred tax assets are
regularly reviewed for recoverability and, if deemed necessary, an appropriate
valuation allowance is established based on historical taxable income,
projected future taxable income, and the expected timing of the reversals of
existing temporary differences. If the Company were unable to generate
sufficient future taxable income, or if there is a material change in the
actual effective tax rates or time period within which the underlying temporary
differences become taxable or deductible, the Company could be required to
establish a valuation allowance against all or a significant portion of the
deferred tax assets, thus resulting in a substantial increase in the effective
tax rate and a material adverse impact on operating results. The reader should
refer to Note 6 in these financial statements for additional information on
this matter. NEW ACCOUNTING PRONOUNCEMENTS -In April 2003, the FASB issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (FAS 149). FAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement is effective for the fiscal year ending July 31, 2003. The Company
has adopted the provisions of FAS 149 to account for its natural gas hedging
activities in its consolidated financial statements. 36




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 In December 2003, the FASB issued a revised FASB Interpretation No. 46
(FIN 46R), Consolidation of Variable Interest Entities, An Interpretation of
Accounting Research Bulletin No. 51 (FIN 46), which was originally issued in
January 2003 and provided guidance on identifying entities controlled by means
other than through voting rights and how to determine when and which business
entity should consolidate the variable interest entities (VIE). FIN 46R
requires an investor who absorbs the majority of the expected losses and
receives a majority of the expected returns, or both, of a VIE to consolidate
the assets, liabilities and results of operations of the VIE. A VIE is an
entity in which the equity investors do not have a controlling interest or the
equity investment at risk is insufficient to finance the entitys activities
without receiving additional subordinated financial support from other parties.
FIN 46R, as amended, was applicable for public companies that have an interest
in a VIE or a potential variable entity, which is commonly referred to as a
special-purpose entity (SPE), for periods ending after December 15, 2003.
The adoption of FIN 46R did not have a significant impact on the Companys
consolidated financial statements. 2. INVENTORIES Inventories, net of reserves, at July 31, 2004 and 2003, consisted of the
following: 2004
    
    2003(Dollars in thousands)Raw materials
    
    $
    22,131
    
    
    $
    16,412Work-in-process
    
    
    3,972
    
    
    
    2,977Finished goods
    
    
    20,044
    
    
    
    18,285Maintenance parts and supplies
    
    
    3,492
    
    
    
    3,120Total inventories
    
    $
    49,639
    
    
    $
    40,794
 3. PROPERTY, PLANT AND EQUIPMENT Net property, plant and equipment at July 31, 2004 and 2003, consisted of
the following: 2004
    
    2003(Dollars in thousands)Land
    
    $
    1,250
    
    
    $
    1,247Buildings and improvements
    
    
    21,025
    
    
    
    18,233Machinery and equipment
    
    
    85,048
    
    
    
    82,003Computer equipment and software
    
    
    8,108
    
    
    
    7,863Furniture and fixtures
    
    
    1,240
    
    
    
    1,252Construction in progress
    
    
    1,205
    
    
    
    1,089117,876
    
    
    
    111,687Less accumulated depreciation and amortization
    
    
    58,255
    
    
    
    51,669Net property, plant and equipment
    
    $
    59,621
    
    
    $
    60,018
 37




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 4. DISCONTINUED OPERATION On March 31, 2002, the Board of Directors approved a plan of divestiture
for the Companys QuikWater Division and on May 10, 2002, the Company sold
substantially all of the assets of this segment to a group of independent
investors and members of management of QuikWater, which included Ashley Weber,
daughter of F. William Weber, Chairman and Chief Executive Officer of the
Company. The purchase price for the assets was $100,000 paid in cash at
closing, the assumption of approximately $70,000 in liabilities and an
additional $300,000 that could be realized based on future earnings of the new
entity over a three year period. None of the additional $300,000 has been
recorded on the sale due the new entity not meeting earnings levels to-date and
management does not expect such levels to be met by May of 2005. The sale of
the QuikWater Division represents a disposal of a business segment under
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS 144). Accordingly, prior
years results of the QuikWater segment have been classified as discontinued.
In fiscal year 2002, a pre-tax loss of $914,000 was recorded on the disposal of
the business segment, net of realized proceeds, which includes $80,000 of
related disposal costs. Net sales and loss from the discontinued operation was as follows for fiscal
year 2002 (dollars in thousands): 2002Net Sales
    
    $
    1,912Pre-tax loss from operations of discontinued
Segment
    
    
    (550
    )Pre-tax loss on disposal of business segment
    
    
    (914
    )Income tax benefit
    
    
    556Loss on discontinued operation, net of tax
    
    $
    (908
    )
 Liabilities of the discontinued operation at July 31, 2004 and 2003 were
$22,000 and $125,000, respectively. 38




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 5. LONG-TERM DEBT On October 15, 2004, the Companys senior debt facilities were refinanced
with the Companys primary lender to provide for a term loan of $18 million,
and a line of credit of $50 million, both maturing on October 15, 2009. The
accompanying consolidated balance sheet has been presented to conform to the
new debt arrangement. The Current Portion of Long-Term Debt and Long-Term Debt
balances in the accompanying balance sheet have been presented to include the
note payments due under the new term loan for the remainder of 2005 and beyond.
As of July 31, 2004, the Company had $9.1 million outstanding on the senior
debt facility term loan and $37 million on the related revolving line of
credit, which were subsequently refinanced as noted above. Long-term debt at July 31, 2004 and 2003, consisted of the following: 2004
    
    2003(Dollars in thousands)Term loans (A)
    
    $
    9,137
    
    
    $
    12,215Revolving loan (A)
    
    
    36,972
    
    
    
    28,848Revolving loan (B)
    
    
    500
    
    
    
    Real estate and equipment term loans (C)
    
    
    1,884
    
    
    
    2,226Other (D)
    
    
    505
    
    
    
    67948,998
    
    
    
    43,968Less current maturities
    
    
    40,688
    
    
    
    31,868Long-term debt
    
    $
    8,310
    
    
    $
    12,100
 Based upon the borrowing rates currently available to the Company for
borrowings with similar terms and average maturities, the Company believes that
the carrying amount of its long-term debt approximates fair value. (A) The Company has an $18 million term loan and a $50 million ($15.5 million
and $38 million prior to refinancing on October 15, 2004) revolving line of
credit with its primary lender group which matures on October 15, 2009. The
term loan and revolving line of credit bear interest at the prime rate (4.25%
at July 31, 2004) plus .25% to .75% in the case of the term loan or plus 0% to
..5% in the case of revolving loan advances. At the Companys option,
borrowings under any facility can bear interest at LIBOR (1.47% at July 31,
2004) plus 2.0% to 2.5% in the case of the term loan or plus 1.75% to 2.25% in
the case of revolving loan advances. Interest rate margin percentages are
currently at the lowest level and (percentage paid over prime or LIBOR) may
change depending on Company performance and the achievement of certain covenant
ratio levels and borrowing base availability. These loans mature on October
15, 2009, and are collateralized by substantially all of the Companys assets.
Principal payments on the term loan of $214,300, plus interest, are due each
month until maturity. Along with the scheduled principal payments, the Company
is required to make additional principal payments on the term loan based on 50
percent of excess cash flow not to exceed $257,100 per quarter, or $1,800,000
on a cumulative basis over the term of the debt facility. The Company may have
borrowings and outstanding letters of credit ($1,025,000 at July 31, 2004)
under the revolving credit facility up to the lesser of $50 million or an
amount determined by a formula based on the amount of eligible inventories and
accounts receivable. The Company pays a commitment fee of 0.25% per annum on
any unused and available line of credit and a fee of 1.75 to 2.25%, depending
on Company performance, on the outstanding amount of letters of credit. At
July 31, 2004, $4,000 was available for borrowing under the refinanced line of
credit. Under the terms of the new agreement an additional $4,500,000
would have been 39




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) available at July 31, 2004. Pursuant to the terms of the loan agreement, the
Company is subject to various restrictive covenants, including requirements to
maintain a minimum debt coverage ratio. The covenants also limit capital
expenditures and dividends and require the Company to maintain a minimum
borrowing base availability. In addition, the loan agreement provides for
acceleration of the loans, at the option of the lender, if F. William Weber and
Dana S. Weber fail to possess the power to direct or cause the direction of
management and policies of the Company or that they, together with other
members of the Weber family, cease to own at least 40% of the combined voting
power of all classes of securities of the Company having the power to vote for
the election of directors, or upon the occurrence of a material adverse change
in the operations or financial condition of the business among others. All
financial covenants are measured on the basis of the Company without
consolidating its wholly owned subsidiary, P&J. Accounting principles require current classification of revolving lines of
credit that permit borrowings on a long-term basis when the line of credit
contains both a lock-box arrangement, whereby remittances to the lockbox
automatically pay down the outstanding line of credit, and loan terms that
allow the lender to declare the loan in default on a subjective basis. This
accounting treatment is required regardless of the legal maturity date of the
revolving credit arrangement. The Companys line of credit, which matures
October 15, 2009, contains such features and accordingly, the accompanying
financial statements classify outstanding borrowings under the line of credit
as Current portion of long-term debt. (B) P&J has a line-of-credit agreement for $1,500,000. The line of credit
matures on November 30, 2004, bears interest at the lesser of prime rate (4.25%
at July 31, 2004) or LIBOR (1.47% at July 31, 2004) plus 2%, and is
collateralized by P&Js assets and guaranteed by Webco. (C) These loans were entered into with various public agencies payable in
monthly installments aggregating approximately $32,000, including interest, at
rates ranging from 3 to 5 percent. The notes are collateralized by the
underlying real estate and/or equipment and mature over a 1 to 7 year period. (D) The Company has various equipment loans with other financing companies
payable in monthly installments of approximately $20,000, including interest,
at rates ranging up to 6 percent. The notes are collateralized by the
underlying equipment and mature over a 1 to 5 year period. At July 31, 2004, the aggregate future maturities of long term debt are as
follows: 2005 $40,688,000; 2006 $3,018,000; 2007 $2,966,000; 2008  $1,652,000;
2009  $245,000; and thereafter  $429,000. 40




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 6. INCOME TAXES The provision for income taxes for fiscal 2004, 2003 and 2002 consists of
the following: 2004
    
    2003
    
    2002(Dollars in thousands)Current:Federal
    
    $
    2,846
    
    
    $
    
    
    
    $
    State
    
    
    307
    
    
    
    357
    
    
    
    57Deferred:Federal
    
    
    1,481
    
    
    
    874
    
    
    
    1,618State
    
    
    174
    
    
    
    103
    
    
    
    190Total income tax expense
    
    $
    4,808
    
    
    $
    1,334
    
    
    $
    1,865
 The actual income tax expense for fiscal 2004, 2003 and 2002 differs from
income tax based on the federal statutory rate (34%) due to the following: 2004
    
    2003
    
    2002(Dollars in thousands)Expected tax expense
    
    $
    4,090
    
    
    $
    1,106
    
    
    $
    1,653State income taxes, net of federal benefit
    
    
    481
    
    
    
    304
    
    
    
    194Other
    
    
    237
    
    
    
    (76
    )
    
    
    18Total income tax expense
    
    $
    4,808
    
    
    $
    1,334
    
    
    $
    1,865
 At July 31, 2004 and 2003, deferred tax assets and deferred tax
liabilities consisted of the following: 2004
    
    2003(Dollars in thousands)Net current deferred tax assets:Accounts receivable
    
    $
    93
    
    
    $
    242Inventories
    
    
    585
    
    
    
    405Accrued liabilities
    
    
    1,750
    
    
    
    1,555State tax credits
    
    
    236
    
    
    
    Operating loss carry forwards
    
    
    
    
    
    
    1,116Net current deferred tax asset
    
    $
    2,664
    
    
    $
    3,318Net non-current deferred tax assets (liabilities):Property plant and equipment
    
    $
    (13,838
    )
    
    $
    (13,881
    )General business credit carry forward
    
    
    
    
    
    
    62Natural gas
hedging
    
    
    (121
    )
    
    
    Alternative minimum tax credit carry forward
    
    
    
    
    
    
    452State operating loss carry forwards
    
    
    
    
    
    
    492State tax credits
    
    
    234
    
    
    
    272Net non-current deferred tax liability
    
    $
    (13,725
    )
    
    $
    (12,603
    )
 41




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 7. COMMITMENTS AND CONTINGENCIES LITIGATION In August 1997, the Company filed an action against a vendor
relating to certain cut-off equipment sold to the Company, which did not
perform to specifications. The case 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. Both the Company and the vendor appealed the
verdict. In January 2002, The Tenth Circuit Court of Appeals entered a
decision in the case. The Companys award was affirmed and increased to add
prejudgment interest, but the Companys petition to re-consider the exclusion
of other incidental and consequential damages was denied. The total judgment
of $1.58 million was collected, and neither party is expected to appeal the
decision. The Company is party to various lawsuits and claims arising in the
ordinary course of business. Management, after review and consultation with
legal counsel, considers that any liability resulting from these matters would
not materially affect the results of operations or the financial position of
the Company. LEASES- The Company leases certain buildings and machinery and equipment under
non-cancelable operating leases. Under certain of these leases the Company is
required to pay property taxes, insurance, repairs and other costs related to
the leased property. At July 31, 2004, future minimum payments under
non-cancelable leases accounted for as operating leases are $2,062,000 in 2005;
$1,881,000 in 2006; $1,646,000 in 2007; $1,398,000 in 2008; and $1,023,000 in
2009. Total rent expense for all operating leases was $3,237,000, $3,322,000
and $3,109,000 in 2004, 2003 and 2002, respectively. SELF INSURANCE- The Company maintains a hospitalization and medical coverage
program for its employees. Claims under this program are limited to annual
losses of $75,000 per participant plus an additional aggregating deductible of
$85,000 for losses in excess of the per participant limit, and aggregate annual
claims of up to $2,000,000 through the use of a stop loss insurance policy.
Additionally, the Company self insures Oklahoma workers compensation claims up
to $300,000 per occurrence and retains a maximum aggregate liability of
$1,000,000 per one year policy term with respect to all occurrences. The
Company has a performance bond in the amount of $550,000 on file with the State
of Oklahoma Workers Compensation Court, as required by self-insurance
regulations. Provisions for claims under both programs are accrued based upon
the Companys estimate of the aggregate liability for claims (including claims
incurred, but not yet reported). The total reserve for self-insurance medical
and workers compensation was $1,270,000 and $1,026,000 at July 31, 2004 and
2003, respectively. PURCHASE COMMITMENTS- At July 31, 2004 the Company was committed on
outstanding purchase orders for inventory approximating $51.4 million. 8. EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) benefit plan covering all employees meeting
certain service requirements. The plan includes a cash, or deferred
compensation, arrangement permitting elective contributions to be made by the
participants. Company contributions are made at the discretion of the Board of
Directors and are made in cash to the participants accounts. Company
contributions were $409,000, $411,000 and $308,000 in fiscal 2004, 2003 and
2002, respectively. 42




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 9. STOCKHOLDERS EQUITY AND STOCK OPTIONS In January 1994, the Companys stockholders approved the 1994 Stock
Incentive Plan (the Plan), in which directors, employees and consultants are
eligible to participate. Four types of benefits may be granted in any
combination under the Plan: incentive stock options, non qualified stock
options, restricted stock and stock appreciation rights. The Plan also
provides for certain automatic grants to outside directors. All options expire
ten years from the date of grant (except in the case of 10 percent
shareholders, which expire five years from the date of grant) and are
exercisable at a price which is at least equal to fair market value on the date
of grant (110% of fair market value in the case of 10 percent shareholders).
The employee options vest evenly over a period of two to five years from the
date of grant. The maximum number of shares of common stock with respect to
which incentive stock options, non qualified stock options, restricted stock,
and stock appreciation rights that may be issued under the Plan is 1,050,000.
Activity under the Plan for the last three fiscal years was as follows: Number of
    
    Weighted AverageShares
    
    Exercise PriceBalance, July 31, 2001
    
    
    808,000
    
    
    $
    5.12Granted
    
    
    15,000
    
    
    $
    2.80Exercised
    
    
    (8,000
    )
    
    $
    1.50Forfeited
    
    
    (71,500
    )
    
    $
    5.61Balance, July 31, 2002
    
    
    743,500
    
    
    $
    5.07Granted
    
    
    92,000
    
    
    $
    3.34Forfeited
    
    
    (5,400
    )
    
    $
    5.16Balance, July 31, 2003
    
    
    830,100
    
    
    $
    4.87Granted
    
    
    15,000
    
    
    $
    4.10Forfeited
    
    
    (46,400
    )
    
    $
    3.97Balance, July 31, 2004
    
    
    798,700
    
    
    $
    4.91
 Outstanding options and exercisable options at July 31, 2004 were as
follows: Number
    
    Weighted Average
    
    WeightedOf
    
    Remaining Contractual
    
    AverageExercise Prices
    
    Shares
    
    Life
    
    Exercise PriceOutstanding:$1.44 - $2.80
    
    
    137,000
    
    
    6.5 years
    
    $
    1.80$3.31 - $5.75
    
    
    297,600
    
    
    5.9 years
    
    $
    4.08$6.13 - $8.75
    
    
    364,100
    
    
    2.4 years
    
    $
    6.77$1.44 - $8.75
    
    
    798,700
    
    
    4.4 years
    
    $
    4.91Exercisable:$1.44 - $2.80
    
    
    124,700
    
    
    6.5 years
    
    $
    1.70$3.31 - $5.75
    
    
    174,480
    
    
    5.3 years
    
    $
    4.31$6.13 - $8.75
    
    
    362,520
    
    
    2.4 years
    
    $
    6.77$1.44 - $8.75
    
    
    661,700
    
    
    3.9 years
    
    $
    5.16
 As of July 31, 2004, 2003 and 2002, exercisable options were 661,700,
682,740 and 604,220, respectively, with weighted average exercise prices of
$5.16, $5.13 and $5.14, respectively. 43




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 10. EARNINGS PER SHARE Presented below is a reconciliation of the differences between actual
weighted average shares outstanding, which are used in computing basic earnings
per share, and diluted weighted average shares, which are used in computing
diluted earnings per share. 2004
    
    2003
    
    2002(Shares in thousands)Basic EPS:Weighted average shares outstanding
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,077Effect of dilutive securities: Options
    
    
    80
    
    
    
    65
    
    
    
    74Diluted EPS:Diluted weighted average shares outstanding
    
    
    7,162
    
    
    
    7,147
    
    
    
    7,151Anti-dilutive options outstanding (1):Number of options
    
    
    579
    
    
    
    679
    
    
    
    596Weighted average exercise price
    
    $
    5.87
    
    
    $
    5.56
    
    
    $
    5.89
  (1)
    Anti-dilutive options and their average exercise prices are not included
in the computation of diluted earnings per share due to the option
exercise prices being greater than the average market price of the common shares. 11. SEGMENT INFORMATION The Company applies the provisions of Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information"(FAS 131). Prior to the quarter ended April 30, 2002, the Company
had two reportable segments: Tubing Products and QuikWater, representing the
Companys two strategic business units offering different products. However,
as discussed in Note 4, the QuikWater segment was disposed of on May 10, 2002
leaving one remaining segment. The Company internally evaluates its business
by facility, however, because of the similar economic characteristics of the
tubing operations, including the nature of products, processes and customers,
those operations have been aggregated for segment determination purposes. As a
result of the QuikWater disposal, the Companys continuing operations only
include activities related to the manufacturing and distribution of tubular
products principally made of carbon and stainless steel. The Company produces tubing for a wide variety of markets and end-use
applications. The percentage breakdown of net sales of the Companys main
products was as follows for the last three fiscal years: 2004
    
    2003
    
    2002Specialty tubing
    
    
    65
    %
    
    
    64
    %
    
    
    59
    %Pressure tubing and pipe
    
    
    31
    
    
    
    32
    
    
    
    38Freight, scrap and other
    
    
    4
    
    
    
    4
    
    
    
    3Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 44




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 12. RELATED PARTY TRANSACTIONS In October 1995, the Company entered into an agreement with an entity
owned by the majority stockholders to subcontract certain manufacturing
services. Beginning in late 2000, the Company contracted with the same entity
to subcontract the production of QuikWater units, which ceased with the
disposal of QuikWater in May 2002. No payments were made by the Company in
2004 or 2003. During fiscal year 2004, the Company received payments of
$4,000. The outstanding receivable balance was $881,000 and $885,000 at July
31, 2004 and 2003, respectively. As of the end of fiscal year 2003, the
Company had discontinued all sharing of services with this entity. The Company purchases certain specialty packaging and shipping materials
from an entity sold by the principal stockholder during the first quarter of
fiscal 2003. Payments of $167,200 and $113,500 were made by the Company in
fiscal 2004 and 2003, respectively. In addition, the Company charges this
entity for certain shared benefits and services, including telephone and
technical assistance. During fiscal year 2004, the Company had billed charges
of $2,000 and received payments of $2,000. There was no outstanding receivable
balance at July 31, 2004 or 2003. The principal stockholder continues to serve
on the entitys board of directors and holds a note receivable, with full
recourse, from the new owners. The Company leases its distribution facility in Nederland, Texas from an
entity owned by certain Company executives. The amount of the monthly lease
payments was determined at the beginning of the lease by an independent
evaluation. During 2004, 2003 and 2002, lease expense under the agreement
totaled approximately $65,000 in each year. Phillips & Johnston, Inc., leases a warehouse in Lyndon, Illinois, from an
entity in which the President of P&J is a thirty-four percent owner. During
2004, 2003 and 2002, lease expense under the agreement totaled approximately
$96,000, $99,000 and $95,000, respectively. Advances were made from time to time during fiscal 1998 and prior years
(none during 1999-2004) to the principal stockholder with the highest amount
outstanding being $1,200,000 in 2004 and 2003. The balance outstanding at July
31, 2004 and 2003, was $1,200,000. The advance is evidenced by a five-year
promissory note from the principal stockholder and is collateralized by Company
stock and is also a personal obligation. The note bears interest at 3.97
percent and is payable at maturity of the note on June 30, 2007. Accrued
interest on the note receivable was $760,000 and $711,000 at July 31, 2004 and
2003, respectively, and is included in notes receivable from related parties in
the accompanying balance sheet. Other advances on various terms were made to certain executives prior to
fiscal 2000, with the highest amounts outstanding being $518,000 in 2004 and
2003. The balance outstanding at July 31, 2004 and 2003 was $518,000. Certain
of the advances are collateralized by shares of the Companys common stock and
are also personal obligations of the respective officers. The advances are
evidenced by five-year promissory notes bearing interest at 3.97 percent and
maturing on December 31, 2006. Accrued interest on the notes receivable from
related parties totaled $32,000 and $28,000 at July 31, 2004 and 2003,
respectively, and is included in notes receivable from related parties in the
accompanying balance sheet. 45




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WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(Dollars and shares in thousands, except per share data) Quarters EndedOctober 31,
    
    January 31,
    
    April 30,
    
    July 31,
    
    Total2003
    
    2004
    
    2004
    
    2004
    
    Year2004Net sales
    
    $
    49,090
    
    
    $
    46,154
    
    
    $
    55,883
    
    
    $
    61,400
    
    
    $
    212,527Gross profit
    
    
    4,594
    
    
    
    4,462
    
    
    
    9,831
    
    
    
    12,493
    
    
    
    31,380Income from operations
    
    
    1,260
    
    
    
    1,166
    
    
    
    4,658
    
    
    
    7,260
    
    
    
    14,344Net income
    
    
    414
    
    
    
    349
    
    
    
    2,386
    
    
    
    4,069
    
    
    
    7,218Net income per basic share
    
    $
    .06
    
    
    $
    .05
    
    
    $
    .34
    
    
    $
    .58
    
    
    $
    1.02Net income per diluted share
    
    $
    .06
    
    
    $
    .05
    
    
    $
    .33
    
    
    $
    .57
    
    
    $
    1.01Weighted average common
shares outstanding:Basic
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,082Diluted
    
    
    7,147
    
    
    
    7,163
    
    
    
    7,185
    
    
    
    7,189
    
    
    
    7,162
 Quarters EndedOctober 31,
    
    January 31,
    
    April 30,
    
    July 31,
    
    Total2002
    
    2003
    
    2003
    
    2003
    
    Year2003Net sales
    
    $
    44,313
    
    
    $
    43,138
    
    
    $
    44,704
    
    
    $
    43,614
    
    
    $
    175,769Gross profit
    
    
    5,804
    
    
    
    5,205
    
    
    
    3,324
    
    
    
    3,461
    
    
    
    17,794Income from operations
    
    
    2,195
    
    
    
    2,097
    
    
    
    648
    
    
    
    528
    
    
    
    5,468Net income
    
    
    963
    
    
    
    871
    
    
    
    67
    
    
    
    17
    
    
    
    1,918Net income per basic share
    
    $
    .13
    
    
    $
    .12
    
    
    $
    .01
    
    
    $
    
    
    
    $
    .27Net income per diluted share
    
    $
    .13
    
    
    $
    .12
    
    
    $
    .01
    
    
    $
    
    
    
    $
    .27Weighted average common
shares outstanding:Basic
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,082
    
    
    
    7,082Diluted
    
    
    7,153
    
    
    
    7,148
    
    
    
    7,146
    
    
    
    7,141
    
    
    
    7,147
 The sum of earnings per share for the four quarters may not equal the
total earnings per share for the year due to changes in the average number of
common shares outstanding and rounding. 46




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements between the Company and its
independent registered public accounting firm. 
 ITEM 9A. CONTROLS AND PROCEDURES Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within time periods specified in the Securities and Exchange Commissions rules
and forms. The Company does not expect that its disclosure controls and
procedures or other internal controls can prevent all error and all fraud or
that its evaluation of these controls and procedures can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected. The benefits of controls and procedures must be considered relative
to their costs, and the design of any system of controls is based in part upon
assumptions about the likelihood of future events. The Companys disclosure
controls and procedures and other internal controls can only provide reasonable
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of these and other inherent limitations
in controls and procedures, misstatements or omissions due to error or fraud
may occur and not be detected. As of the end of the period covered by the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective at the reasonable assurance
level. There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of evaluation. 
 ITEM 9B. OTHER INFORMATION None. 47




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information about the directors and executive officers of
Webco: Directors Name
    
    Age
    
    Positions with Webco
    
    Officer SinceF. William Weber
    
    78
    
    Chairman of the Board and Chief Executive Officer
    
    
    1969Dana S. Weber
    
    47
    
    Vice Chairman of the Board, President and Chief
    
    
    1990Operating OfficerDr. Kenneth E. Case
    
    60
    
    Director
    
    
    1995Christopher L. Kowalski
    
    51
    
    Director and President of Phillips & Johnston, Inc.
    
    
    1998Jack D. McCarthy
    
    61
    
    Director
    
    
    2001Bradley S. Vetal
    
    48
    
    Director
    
    
    2000
 Executive Officers who are not Directors Name
    
    Age
    
    Positions with Webco
    
    Officer SinceDavid E. Boyer
    
    44
    
    Senior Vice President  Tubing
    
    
    1992Operations, and SecretaryMichael P. Howard
    
    40
    
    Chief Financial Officer, Senior Vice
    
    
    1997President  Finance andAdministration, Treasurer andAssistant SecretaryStuart D. Keeton
    
    46
    
    Vice President, General Manager 
    
    
    1995Stainless Products DivisionYong J. Kim
    
    52
    
    Vice President  Strategic Business
    
    
    2003Development and ImprovementWilliam F. Obermark
    
    63
    
    Senior Vice President  Corporate
    
    
    1984Development and ManufacturingTechnologyP. David Reed
    
    40
    
    Vice President  Information
    
    
    2004Technology and Chief InformationOfficerRandyl D. Watson
    
    38
    
    Vice President, General Manager 
    
    
    2000Carbon OperationsThomas M. Willey
    
    61
    
    Vice President  Materials Management
    
    
    1995Jeffrey W. Williams
    
    47
    
    Commercial Vice President  OEM Sales
    
    
    2003
 F. William Weber is Chairman of the Board and Chief Executive Officer of
Webco, positions he has held with Webco, or its predecessors, since founding
the company in 1969. Mr. Webers term as a Director of Webco expires in
December 2005 or until a successor is duly elected and qualified. Mr. Weber is
Chairman of the Board and owner of Custom Containers of America, Inc.
(C-CAM), which manufactures inter-modal tank containers and fabricates other
metal products. Mr. Weber also serves on the Board of Directors of Diversified
Plastics, Inc. (Diversified), a company owned by Mr. Weber until its sale in
September 2002. Diversified primarily manufactures plastic access panels and
performs some packaging services. Mr. Weber is not actively involved in the
day-to-day operations of C-CAM or Diversified. Mr. Weber is the father of Dana
S. Weber. Dana S. Weber became President of Webco in June 1995, and is also its Vice
Chairman of the Board and Chief Operating Officer, positions she has held since
June 1990. Ms. Webers term as a Director of Webco expires in December 2005 or
until a successor is duly elected and qualified. Ms. Weber was the acting
Chief Financial Officer of Webco from August 1994 to July 1995. Ms. Weber
served as Chief Financial Officer and Treasurer of Webco from 1986 to June
1990. Ms. Weber has been with Webco, or its predecessors, in various positions
since 1977. Ms. Weber served on the Board of C-CAM prior to October 2002.
Since October 2002, 48




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Ms. Weber is no longer involved with C-CAM in any official capacity. Ms.
Weber is the daughter of F. William Weber. Christopher L. Kowalski has been a Director of Webco since June 1998. Mr.
Kowalskis term as a Director of Webco expires in December 2006 or until a
successor is duly elected and qualified. Mr. Kowalski is president of Phillips
& Johnston, Inc. (P&J), a wholly owned subsidiary of Webco. Mr. Kowalski
joined P&J in 1979 and has served as its President since 1987. Prior to his
employment with P&J, Mr. Kowalski worked for Central Steel & Wire, Inc. Bradley S. Vetal has been a Director of Webco since December 2000. Mr.
Vetals term as a Director of Webco expires in December 2006 or until a
successor is duly elected and qualified. Mr. Vetal has served as Chairman and
Chief Executive Officer, President, and Director of Matrix Service Company
since March 1999. Mr. Vetal has been with Matrix Service Company since January
1987 and has served as President of Matrix Service, Inc. since June 1, 1992.
From June 1996 to March 1999 Mr. Vetal was Vice President  Tank Division of
Matrix Service Company and from June 1991 through May 1992, Mr. Vetal served as
Vice President of Eastern Operations of Matrix Service Mid-Continent, Inc. Mr.
Vetal graduated Cum Laude from the University of Michigan with a degree in
Mechanical Engineering. Matrix is publicly traded on the Nasdaq National
Market System. Dr. Kenneth E. Case has been a Director of Webco since July 1995. Dr.
Cases term as a Director of Webco expires in December 2004 or until a
successor is duly elected and qualified. Dr. Case is a Regents Professor of
Industrial Engineering and Management and has been at Oklahoma State University
since August 1975. He is a licensed professional engineer and was named the
Outstanding Engineer in Oklahoma in 1987. His primary specialties are in the
fields of quality and reliability. Dr. Case was a Senior Examiner on the
Malcolm Baldrige National Quality Award from 1988 to 1990, and on the Panel of
Judges from 1991 to 1993. He is a member of the National Academy of
Engineering and the International Academy for Quality. He is a Fellow and
currently Chairman of the Board of the 100,000-member American Society for
Quality. He is a Fellow and 1986-7 president of the Institute of Industrial
Engineers. In 2002, Dr. Case became the 29th recipient of the Frank and Lillian
Gilbreth Industrial Engineering Award, the IIEs highest honor. Jack D. McCarthy has been a Director of Webco since December 2001. Mr.
McCarthys term as a Director of Webco expires in December 2004 or until a
successor is duly elected and qualified. From 1992 and until his retirement in
2003, Mr. McCarthy served as Senior Vice President and Chief Financial Officer
of The Williams Companies, Inc. Mr. McCarthy joined The Williams Companies in
1986, serving as Executive Director of Taxation and Vice President and
Treasurer. Mr. McCarthy also held various executive and director positions in
taxation and finance for Tenneco, Inc., El Paso Natural Gas, Inc., and Phillips
Petroleum Company. Prior to those employments, Mr. McCarthy worked for the
independent accounting firm, Ernst & Young, and a law firm. Mr. McCarthy holds
a Juris Doctorate from Wayne State University, and a MBA and BBA from the
University of Michigan. The Williams Companies, Inc. is publicly traded on the
New York Stock Exchange. David E. Boyer is Senior Vice President  Tubing Operations of Webco since
May 2001. Mr. Boyer has been the Secretary of Webco since November 1993. Mr.
Boyer previously served as Webcos Vice President of Sales and Marketing from
July 1992 to May 2001; General Manager-Stainless Products Division from June
1991 to July 1992; Product Manager, Stainless Products, from February 1989 to
June 1991; and in various other positions with Webco since 1984. Michael P. Howard is Chief Financial Officer, Senior Vice President 
Finance and Administration, Treasurer and Assistant Secretary, responsibilities
he assumed when joining Webco in January 1997. Mr. Howard was Vice President of
Finance and Administration and Chief Financial Officer for Multimedia Games,
Inc. from January 1996 to January 1997. From May 1985 to January 1996 Mr.
Howard was with the 49




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##### Table of Contents



international accounting firm of Coopers & Lybrand LLP, where he worked in
the Business Assurance Group and served as the audit manager on Webcos audit
during five years of that period. Mr. Howard is a Certified Public Accountant. Stuart D. Keeton has been Vice President and General Manager  Stainless
Products Division of Webco in Mannford, Oklahoma, since November 1995. Mr.
Keeton was previously the General Manager of Stainless Operations of Webco from
July 1992 to November 1995, and has been with Webco in various positions since
December 1980. Yong J. Kim is Vice President  Strategic Business Development and
Improvement of Webco since July 2003. Mr. Kim previously served as Director of
OEM Products from January 2000 to July 2003, Director of Technical Services
from November 1996 to January 2000, and Director of Corporate Quality
Management from June 1992 to November 1996, and in various other positions with
Webco since 1983. William F. Obermark is Senior Vice President  Corporate Development and
Manufacturing Technology of Webco since December 1998. From November 1995 until
1998, he was the Vice President and General Manager  Southwest Tube Division.
Mr. Obermark previously was Vice President of Engineering, a position he had
held with Webco since June 1984. Mr. Obermark has been with Webco in various
positions since 1980, and has been in the specialty tubing industry since 1969.
Mr. Obermark is a licensed professional engineer. P. David Reed has been Vice President  Information Technology since
January 2004. Mr. Reed has been Chief Information Officer since October 2000.
Mr. Reed was the Director of Information Technology from October 2000 to
December 2003. Mr. Reed was Director of Applications Development from 1994
through October 2000, including eighteen months as the head of the SAP Project
Implementation Team. Mr. Reed has been with Webco in various positions since
1988. Prior to joining Webco, Mr. Reed spent seven years with National Crane
Corporation. Randyl D. Watson has been Vice President and General Manager  Carbon
Operations since August 2004. From January 2000 to August 2004, Mr. Watson was
the Vice President and General ManagerSouthwest Tube Division of Webco in Sand
Springs, Oklahoma, since January 2000. From 1998 to January 2000, Mr. Watson
was the General Business Manager of Weld Mill Operations and then all
Operations at Southwest Tube. From 1993 to 1997, Mr. Watson was the Chief
Engineer and Plant Manager for Southwestern Pipe in Houston Texas. In addition
to his current tenure, Mr. Watson was employed by Webco as its Production
Engineering Manager in Sand Springs from 1989 to 1993 when he left to join
Southwestern Pipe. Thomas M. Willey has been Vice President  Materials Management of Webco
since March 1995. Mr. Willey has been with Webco in various purchasing and
materials acquisition and management positions since May 1980. Jeffrey W. Williams is Commercial Vice President  OEM Sales of Webco
since August, 2003. A twenty-four year industry veteran, Mr. Williams
previously served as Vice President  Strategic Sales for P&J from August 1999
to July 2003; Vice President of Sales for P&J from January 1997 to August 1999;
and Regional Sales Manager for P&J from August 1992 to December 1996. Prior to
joining Webco and P&J, Mr. Williams had a 13-year career with LTV Steel Tubular
Products Company holding various sales and marketing positions. Except as set forth above, there are no family relationships among any of
the directors or principal officers. The business address and telephone number
of each director and executive officer is c/o Webco Industries, Inc., 9101 West
21st Street, Sand Springs, Oklahoma 74063, (918) 241-1000. 50




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Code of Ethics The Company has adopted a Code of Ethics for Financial Professionals of
Webco Industries, Inc. and Subsidiaries, a copy of which is filed as Exhibit 14
to this Form 10-K, which applies to the principal executive officer, the
principal financial officer, the principal accounting officer and the
comptroller of Webco and to persons performing similar functions for Webco.
Webco expects all of its employees to act in accordance with the highest
standards of personal and professional integrity in all aspects of their
activities, to comply with all applicable laws, rules and regulations, to deter
wrongdoing and abide by policies and procedures adopted by Webco that govern
the conduct of its employees, including the category of employees to which this
Code of Ethics relates. Audit Committee The three independent members of the Board of Directors are also members
of the Companys Audit Committee whose members are; Jack D. McCarthy
(Chairman), Dr. Kenneth E. Case and Bradley S. Vetal. Pursuant to Section 407
of the Sarbanes-Oxley Act of 2002, Mr. McCarthy has been determined to be the
audit committee financial expert as required by the terms of the Act and to be
independent of the Companys management. 
 ITEM 11. EXECUTIVE COMPENSATION Compensation Committee The Board of Directors has a Compensation Committee whose members are: F.
William Weber, Dr. Kenneth E. Case, Jack D. McCarthy and Bradley S. Vetal
(Chairman). The Compensation Committees functions include reviewing executive salary
and bonus structure, approving salary and bonus awards to key executives and
administering the Companys 1994 Stock Incentive Plan and making grants there
under. (See Report of Compensation Committee). Directors Compensation Pursuant to the Companys 1994 Stock Incentive Plan (the Plan), each
Director who is not an employee of the Company receives an initial grant of
options to purchase 5,000 shares of Common Stock, if they join the Board prior
to June 30 of any year. Thereafter, on January 1 of each year, each
non-employee director receives options to purchase 5,000 shares of Common
Stock. All such options will be exercisable at a price equal to the fair
market value at the date of grant, commencing six months after the date of
grant. On January 1, 2004, each of Messrs. Case, McCarthy and Vetal received
options to purchase 5,000 shares of Common Stock at a price of $4.10 per share.
Non-employee Directors who are not members of the Compensation Committee are
also eligible for discretionary grants under the Plan, none of which were made
during fiscal year 2004. In addition, non-employee Directors of the Company
receive a quarterly retainer of $2,500 as well as quarterly retainers of $500
and $1,000 for being members of the Compensation Committee and Audit Committee,
respectively. Chairmen of each of the Compensation Committee and Audit
Committee also receive a quarterly retainer of $500 and $1,000, respectively.
Directors are paid $1,500 for each meeting of the Board of Directors attended
in person or $1,000 for telephonic participation. There are no separate
payments for participation in any ordinary committee meetings. Members of the
Audit Committee also receive $1,000 for each special meeting of the Audit
Committee, or $500 for telephonic participation. There were no special
meetings of the Audit Committee during fiscal year 2004. Directors are
reimbursed for out-of-pocket expenses related to meetings attended. Officers of
the Company who serve as Directors do not receive compensation for their
services as Directors other than the compensation they receive as officers of
the Company. In addition to these customary fees, amounts were paid to the members of
the Special Committee formed for the purpose of evaluating the proposed reverse
split transaction. See Item 1.  Business  Recent Events for information
with respect to the Companys proposed reverse stock split and related matters.
In connection 51




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with their participation in the Special Committee, Messrs McCarthy, Vetal
and Case received $30,000, $9,000 and $9,000, respectively during fiscal year
2004. Executive Compensation The following table sets forth the cash compensation paid by the Company
for services rendered during fiscal 2004 to the Companys Chief Executive
Officer and the other four most highly compensated executive officers of the
Company, whose compensation exceeded $100,000 (the Named Executive Officers). Summary Compensation Table
Annual Compensation Other AnnualName and Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Compensation (6)F. William Weber
    
    
    2004
    
    
    $
    422,700
    
    
    $
    22,000
    (5)
    
    $
    Chairman of the Board and Chief
    
    
    2003
    
    
    
    422,700
    
    
    
    64,000
    (5)
    
    
    Executive Officer
    
    
    2002
    
    
    
    406,100
    
    
    
    63,000
    (1)
    
    
    Dana S. Weber
    
    
    2004
    
    
    
    278,200
    
    
    
    13,000
    (5)
    
    
    8,200
    (2)Vice Chairman of the Board,
President
    
    
    2003
    
    
    
    266,400
    
    
    
    39,000
    (5)
    
    
    10,000
    (2)And Chief Operating Officer
    
    
    2002
    
    
    
    250,000
    
    
    
    28,000
    (1)
    
    
    10,000
    (2)Christopher L. Kowalski
    
    
    2004
    
    
    
    220,600
    
    
    
    30,000
    (5)
    
    
    15,800
    (3)Director, President of Phillips &
    
    
    2003
    
    
    
    215,000
    
    
    
    34,000
    (5)
    
    
    15,800
    (3)Johnston, Inc.
    
    
    2002
    
    
    
    208,800
    
    
    
    36,000
    (5)
    
    
    15,800
    (3)David E. Boyer
    
    
    2004
    
    
    
    171,500
    
    
    
    7,000
    (5)
    
    
    Senior Vice-President  Tubing
    
    
    2003
    
    
    
    160,000
    
    
    
    25,000
    (5)
    
    
    Operations, Secretary
    
    
    2002
    
    
    
    143,700
    
    
    
    11,500
    (1)
    
    
    Michael P. Howard
    
    
    2004
    
    
    
    171,500
    (4)
    
    
    7,000
    (5)
    
    
    Senior Vice President  Finance
    
    
    2003
    
    
    
    160,000
    (4)
    
    
    25,000
    (5)
    
    
    & Admin., Treasurer and Chief
    
    
    2002
    
    
    
    135,700
    (4)
    
    
    11,500
    (1)
    
    
    Financial Officer
  (1)
    
    In November 2000, each of Mr. Weber, Ms. Weber, Mr. Boyer and Mr. Howard,
and certain other Company officers, elected as a group to receive
compensation at 85% of their current compensation for one year to enable
the employment of a consultant to assist the Company with its strategy for
the enhancement of the Companys profitability. As a result of the
improvement in the Companys operations, a portion of this salary
reduction was repaid to these individuals and is reflected as a bonus in
fiscal year 2002.(2)
    
    Represents amounts paid by the Company for the persons benefit into a
deferred compensation plan maintained for certain of the Companys
executives.(3)
    
    Represents $5,800 paid by the Company for life insurance policies and
$10,000 paid for directors fees for the Companys subsidiary, Phillips &
Johnston, Inc.(4)
    
    Each of fiscal years 2004, 2003 and 2002 respectively include $7,000,
$7,100 and $8,400 subsequently repaid to the Company as interest on
outstanding advances totaling $175,000 at July 31, 2004, 2003 and 2002,
respectively. (See Certain Transactions.)(5)
    
    Bonus awards are paid in the year following the performance for which the
bonus was awarded.(6)
    
    During each of the three years in the period ended July 31, 2004,
perquisites for each individual named in the Summary Compensation Table
aggregated less than 10% of the total annual salary and bonus reported for
such individual in the Summary Compensation Table, or $50,000, if lower.
Accordingly, no such amounts are included in the Summary Compensation
Table. 52




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Employment Agreements and Termination of Employment Arrangements Each of F. William Weber, Dana S. Weber, David E. Boyer and Michael P.
Howard is employed pursuant to agreements that expire September 30, 2006. It
is anticipated that Mr. Kowalskis employment will also be documented by an
agreement with substantially identical terms to the above named officers. The
agreements provide for a base compensation as recommended by the Compensation
Committee and approved by the Board of Directors and the use of an automobile.
Mr. Webers agreement provides for the Company to pay premiums for health
insurance benefits that are comparable to Medicare Plan J for so long as Mr.
Weber or his spouse is alive. Upon the occurrence of a change in control,
each of the above named officers will be entitled to receive an amount equal to
three times such officers annual cash compensation plus the highest bonus paid
to such officer in the prior three years (plus such amount as is necessary so
that such payment is received net of any special or excise taxes), payable at
such officers option in either a lump-sum or over three years with interest. A
change in control is generally defined in the agreements to have occurred if
(i) the Company consummates a consolidation, merger or sale in which the
holders of the Companys stock prior to the transaction own less than 80% of
the combined voting power of the surviving entity after the transaction, (ii)
the Companys stockholders approve a liquidation or dissolution of the Company,
(iii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended), other than the Company, the Weber
Family or any employee benefit plan sponsored by the Company, becomes the
beneficial owner of either (A) 51% of the Common Stock or (B) a greater
percentage of the Common Stock than is held by the Weber Family, or (iv) at any
time during two consecutive years, individuals who, at the beginning of such
period, constituted the Board of Directors cease to constitute at least a
majority of the then Board of Directors, unless the election or nomination of
each new director during such two-year period was approved by at least
two-thirds of the directors then in office who were directors at the beginning
of such two-year period. Equity Compensation Plan Information The following table provides information concerning Webcos common stock
that may be issued upon the exercise of options, warrants and rights under
Webcos existing approved equity compensation plans as of July 31, 2004. Number of SecuritiesNumber of Securities to
    
    Weighted-average
    
    remaining available forbe issued upon exercise
    
    exercise price of
    
    future issuance underof outstanding options,
    
    outstanding options,
    
    equity compensationPlan Category
    
    warrants and rights
    
    warrants and rights
    
    plansEquity compensation plans approved by
Shareholders
    
    
    1,050,000
    
    
    $
    4.91
    
    
    
    251,300Equity compensation plans for which
approval is sought at this meeting
    
    
    
    
    
    
    
    
    
    
    Equity compensation plans not
approved by shareholders
    
    
    
    
    
    
    
    
    
    
    
 Individual Option Grants in Fiscal Year 2004 There were no individual grants of options made during fiscal year 2004 to
any of the Named Executive Officers. 53




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Aggregated Option Exercises in 2004
and Fiscal Year-End Option Values The following table shows the number of shares of Common Stock represented
by outstanding stock options held by the Named Executive Officers as of July
31, 2004. Also reported are the values for in the money options which
represent the positive spread, if any, between the exercise price of any such
existing stock options and the fiscal year-end price of the underlying Common
Stock, which was $4.45. No options were exercised by any Named Executive
Officer during fiscal year 2004. Number of Securities Underlying
    
    Value of Unexercised In-the-Number of Securities
    
    Unexercised Options at Fiscal
    
    Money Options at Fiscal Year-Underlying Options
    
    Year End (#)
    
    End ($)Exercised
    
    ValueName
    
    (#)
    
    Realized ($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableF. William Weber
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Dana S. Weber
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chris L. Kowalski
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    6,000
    
    
    
    4,000
    
    
    
    6,000David E. Boyer
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    6,000
    
    
    
    66,000
    
    
    
    6,000Michael P. Howard
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    6,000
    
    
    
    66,000
    
    
    
    6,000
 Report of the Compensation Committee The Compensation Committee (the Committee) of the Board of Directors is
comprised of the three independent directors of the Board and the Chief
Executive Officer. The Compensation Committees role is generally one of
approval and oversight. The Committee endeavors to remain flexible to react to
changing conditions and to ensure that 1) the achievement of the overall goals
and objectives of the Company are supported by an appropriate executive
compensation policy and an effective total compensation program, and 2) the
total compensation program and practices of the Company are designed in full
consideration of all accounting, tax, securities law and regulatory
requirements. There are no Compensation Committee interlocks. The Committee is responsible for evaluating each Company executives
performance relative to the Companys established goals, objectives and
performance targets and for making recommendations to the Board with respect to
the compensation of the executives, including base compensation, incentive
payments, long-term incentive awards, executive perquisites and employment
agreements. In determining the level and composition of compensation for each Company
executive, the Committee takes into account the recommendations of the Chief
Executive Officer and Chief Operating Officer (except with respect to the
compensation of such individuals) and various qualitative and quantitative
indicators of each officers performance. The Committees objectives in
determining compensation are to allow the Company to attract, motivate and
retain the executive personnel necessary for the Companys success and to
provide an executive compensation program comparable to that offered by the
companies with which we compete for such management personnel. The Committee
periodically engages third party consultants to review salary levels of
comparable officers in a peer group of companies in businesses similar in
nature and size to that of the Company. The peer group does not necessarily
reflect the companies included in the performance graph in this Form 10-K. The Chief Executive Officers compensation is the responsibility of the
Compensation Committee. The Chief Executive Officer does not participate in
the deliberations of the Compensation Committee when it considers the
compensation of the Chief Executive Officer. Based on the Compensation
Committees assessment of Mr. Webers ability to effectively lead the Company
into the future as determined by his past performance and experience with the
Companys business and markets, the Compensation Committee determined that Mr.
Webers compensation package would consist of an annual base salary of $423,000
and an 54




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annual bonus target of 60% of annual salary based upon the Company
achieving specific predetermined income targets. The Chief Operating Officers compensation is the responsibility of the
Compensation Committee. Based on the Compensation Committees assessment of
Ms. Webers ability to effectively lead the Company into the future as
determined by her past performance and experience with the Companys business
and markets, the Compensation Committee determined that Ms. Webers
compensation package would consist of an annual base salary of $295,000 and an
annual bonus target of 50% of annual salary based upon the Company achieving
specific predetermined income targets. The remaining executive officers compensation is reviewed by and is the
responsibility of the Chief Executive Officer and Chief Operating Officer, with
the Compensation Committee ratifying related recommendations. Based on the
assessment of the remaining executive officers ability to effectively lead the
Company into the future as determined by their past performance and experience
with the Companys business and markets, the base compensation is established
and an annual bonus target based on a percentage of annual salary is set based
upon the Company achieving specific predetermined income targets. The Committee has approved a bonus compensation plan for all executive
officers, including the CEO and COO, which is intended to reward participants
for attaining budgetary goals that are established by the Company and approved
by the Committee. The 2004 plan is designed to pay a target bonus if such
budgetary goals are attained and increases the bonus amount at an accelerated
rate if such budgetary goals are exceeded. In certain circumstances, the
Company will deposit all or part of any such bonus into a deferred compensation
plan maintained by the Company for the benefit of certain of the Companys
executives. Based on the performance of the Company during fiscal year 2004,
bonuses for fiscal year 2004 (paid during fiscal year 2005) were approximately
$950,000 compared to $120,000 in fiscal 2003. In addition to each Company executives base compensation, the Committee
may grant awards under the Companys 1994 Stock Incentive Plan to the Companys
executive officers based on their assessment of the performance of the
executive. No grants of stock options were made under the Plan in 2004. Equity incentives are not limited to executive officers. Grants of stock
options are made to management and staff of the Company in amounts determined
by the Compensation Committee. The amounts of such grants are determined based
on the individual employees position within the Company and his or her
potential ability to beneficially impact the performance of the Company. By
giving management and staff a stake in the financial performance of the
Company, the Compensation Committees goal is to provide incentives to these
employees to enhance the financial performance of the Company, and thus,
shareholder value. MEMBERS OF COMPENSATION COMMITTEE Bradley S. Vetal (Chairman)
F. William Weber
Dr. Kenneth E. Case
Jack D. McCarthy This report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this Form 10-K
into any filing under the Securities Act of 1933, as amended, or under the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference in such filing,
and shall not otherwise be deemed filed under such Acts. 55




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Stock Price Performance Graph The following graph compares on a cumulative basis the percentage change
since July 31, 1999, in the total shareholder return on the Companys Common
Stock, with (a) the total return on the AMEX Market Value Index, which is being
used as the required broad equity market index, and (b) the total return for a
selected peer group index (the Peer Group). The Peer Group consists of
Maverick Tube Corporation, Steel Technologies, Inc. Lone Star Technologies, and
Synalloy Corporation. The graph assumes (i) investment of $100 on July 31,
1999, in the Companys Common Stock, the AMEX Market Value Index and the common
stock of the Peer Group, and (ii) the reinvestment of all dividends. (PERFORMANCE GRAPH) 56




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth the beneficial ownership of the Common Stock as
of October 1, 2004, by (i) each person known by Webco to own beneficially more
than five percent of the outstanding shares of Common Stock, (ii) each
director, (iii) each of the executive officers of Webco, and (iv) all directors
and executive officers of Webco as a group. Amount and Natureof BeneficialName
    
    Position
    
    Ownership
    
    Percent of ClassF. William Weber
    
    Chairman of the Board
and Chief Executive
Officer
    
    
    3,365,466
    (1)
    
    
    47.5
    %Dana S. Weber
    
    Vice Chairman of the
Board, President and
Chief Operating
Officer
    
    
    3,365,466
    (1)
    
    
    47.5Kimberly A.W. Frank
    
    Stockholder
    
    
    3,365,466
    (1)(3)
    
    
    47.5Christopher L. Kowalski
    
    Director and
President of Phillips
& Johnston, Inc.
    
    
    419,000
    (2)(3)
    
    
    5.9Dr. Kenneth E. Case
    
    Director
    
    
    28,700
    (3)
    
    
    *Jack D. McCarthy
    
    Director
    
    
    15,000
    (3)
    
    
    *Bradley S. Vetal
    
    Director
    
    
    19,500
    (3)
    
    
    *David E. Boyer
    
    Vice President 
Tubing Operations and
Secretary
    
    
    154,371
    (3)
    
    
    2.2Michael P. Howard
    
    Chief Financial
Officer, Senior Vice
President  Finance
and Administration,
Treasurer and
Assistant Secretary
    
    
    108,268
    (3)
    
    
    1.5Stuart D. Keeton
    
    Vice President,
General Manager -
Stainless Products
Division
    
    
    63,867
    (3)
    
    
    *Yong J. Kim
    
    Vice President 
Strategic Business
Development and
Improvement
    
    
    10,677
    (3)
    
    
    *William F. Obermark
    
    Senior Vice President
 Corporate
Development and
Manufacturing
Technology
    
    
    84,801
    (3)
    
    
    1.2P. David Reed
    
    Vice President 
Information
Technology
    
    
    19,000
    (3)
    
    
    *Strong Capital Management, Inc.
    
    Institutional Investor
    
    
    737,783
    (4)
    
    
    10.4Randy D. Watson
    
    Vice President,
General Manager 
Carbon Operations
    
    
    31,400
    (3)
    
    
    *Thomas M. Willey
    
    Vice President 
Materials Management
    
    
    60,072
    (3)
    
    
    *Jeffrey W. Williams
    
    Commercial Vice
President  OEM Sales
    
    
    12,800
    (3)
    
    
    *All directors and executive
officers of Webco as a group
(15 persons)
    
    
    
    
    4,389,453
    
    
    
    59.2
    %
 * - Less than 1%  (1)
    
    F. William Weber, Martha A. Weber, Dana S. Weber and Kimberly A.W. Frank
(the Weber Family) each hold his or her shares in a revocable living
trust. F. William Weber and Martha A. Weber are husband and wife and are
co-trustees of the trusts established by each other. Certain members of
the Weber Family (F. William Weber, Martha A. Weber, Dana S. Weber, Ashley
R. Weber and Kimberly A.W. Frank) may be deemed to be a group, as such
term is used in Section 13(d) of the 1934 Act, and the rules promulgated
thereunder, and to share beneficial ownership of the shares owned by each
other member of the Weber Family. Each member of the Weber Family
disclaims beneficial ownership of the shares owned by each other member of
the Weber Family, except Mr. and Mrs. F. William Weber as to the shares
owned by the other (shares shown in the table for each member of the Weber
Family include shares as to which beneficial ownership is disclaimed as
aforesaid). Members of the Weber Family disclaim beneficial ownership of 57




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certain shares included in the table as being owned by them, as follows: (a)
Mr. and Mrs. F. William Weber disclaim beneficial ownership of 271,641 shares
held in trust for the benefit of Ashley R. Weber, 812,146 shares held in
trust for the benefit of Dana S. Weber, 398,186 shares held in trust for the
benefit of Kimberly A. W. Frank, 12,000 shares held in trust for the benefit
of their minor grandchildren and 2,000 shares that Kimberly A. W. Frank had
the right to acquire as of October 1, 2004; (b) Dana S. Weber disclaims
beneficial ownership of 1,869,493 shares held in trust for the benefit of Mr.
and Mrs. F. William Weber, 398,186 shares held in trust for the benefit of
Kimberly A. W. Frank, 271,641 shares held in trust for the benefit of Ashley
R. Weber, 4,600 shares held in trust for the benefit of her daughter, 7,400
shares held in trust for the benefit of the children of Kimberly A.W. Frank
and 2,000 shares that Kimberly A. W. Frank had the right to acquire as of
October 1, 2004; and (c) Kimberly A.W. Frank disclaims beneficial ownership
of 1,869,493 shares held in trust for the benefit of Mr. and Mrs. F. William
Weber, 812,146 shares held in trust for the benefit of Dana S. Weber, 271,641
shares held in trust for the benefit of Ashley R. Weber, 7,400 shares held in
trust for the benefit of her children, and 4,600 shares held in trust for the
benefit of the child of Dana S. Weber. The address of each such stockholder
is c/o Webco Industries, Inc., 9101 West 21st Street, Sand Springs, Oklahoma
74063.(2)
    
    The address of Christopher L. Kowalski is c/o Webco Industries, Inc.,
9101 West 21st Street, Sand Springs, Oklahoma 74063. See also Footnote (3)
below.(3)
    
    Includes shares of Common Stock that directors and executive officers had
the right to acquire within 60 days after July 31, 2004 as follows:
Christopher L. Kowalski, 4,000; Dr. Kenneth E. Case, 27,000; Jack D.
McCarthy, 15,000; Bradley S. Vetal, 19,500; Kimberly A.W. Frank, 2,000;
David E. Boyer, 56,000; Michael P. Howard, 56,000; Stuart D. Keeton,
48,400; Yong J. Kim, 10,500; Randyl D. Watson, 31,400; Thomas M. Willey,
41,100; Jeffrey W. Williams, 11,000 and P. David Reed, 19,000.(4)
    
    According to a Schedule 13G dated April 7, 2004. The address of Strong
Capital Management, Inc. is 100 Heritage Reserve, Menomonee Falls,
Wisconsin 53051. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS C-Cam International, LLC Webco charged C-CAM, an entity owned by F. William Weber, for certain
shared benefits and services, including telephones and technical assistance
prior to fiscal 2004. The outstanding receivable balance was $881,000 at July
31, 2004. As of the end of fiscal year 2003, Webco had discontinued all
sharing of such benefits and services with C-CAM. Diversified Plastics, Inc. Webco purchases certain specialty packaging and shipping material from
Diversified, an entity formerly owned by F. William Weber. Payments made by
Webco totaled $167,200 during the year ended July 31, 2004. In addition, Webco
charges Diversified for certain shared benefits and services, including
telephone and technical assistance. During the year ended July 31, 2004, Webco
charged Diversified $2,000 for such shared services and received payments of
$2,000. There was no outstanding receivable from Diversified at July 31, 2004.
Mr. Weber sold Diversified in September 2002; however he continues to serve on
the board of directors and holds a note receivable for the purchase price, with
full recourse, from the new owners. Advances to Affiliates F. William Weber had an outstanding advance from Webco during fiscal 2004
of $1,200,000. The advance is evidenced by a promissory note from Mr. Weber
and is collateralized by Common Stock and is also a personal obligation. The
note bears interest at 3.97%, which is payable upon the notes maturity, June
30, 2007. Accrued interest on this note was $760,000 at July 31, 2004, of
which, $48,000 accrued during the year ended July 31, 2004. Webco received no
payments on the note during fiscal 2004. Under terms of the proposed
reverse/forward split transaction, F. William Weber would be advanced
$1,495,000 and Dana S. Weber advanced $105,000 in order to repay loans to third
parties secured by Company stock. 58




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Loans to Officers Webco has made advances to certain other executives. As of July 31, 2004,
such advances included $168,000 to William F. Obermark, $175,000 to David E.
Boyer and $175,000 to Michael P. Howard. The advances are evidenced by
promissory notes and are collateralized by company stock and are also personal
obligations of the respective officers. Interest on the advances is charged at
the rate of 3.97%. At July 31, 2004, accrued interest on Mr. Boyers note was
$32,000. The notes are due on December 31, 2006. Under terms of the proposed
reverse/forward split transaction, David E. Boyer would be advanced $280,000 in
order to repay loans to third parties secured by Company stock. Lease of Facility Webco leases a warehouse in Nederland, Texas, that is owned by a
partnership, the principals of which include Messrs. Howard, Keeton, Boyer and
Obermark, each a vice president of Webco and H. Lee Beard, an employee of
Webco. During the year ended July 31, 2004, Webco paid $66,000 to the
partnership in rentals. The rental payments were established based on an
independent evaluation. Webcos subsidiary, Phillips & Johnston, Inc., leases a warehouse in
Lyndon, Illinois, from an entity in which Mr. Kowalski is a thirty-four percent
owner. During the year ended July 31, 2004, P&J paid $96,000 to the entity in
rentals. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Prior to the July 30, 2002, adoption of the Sarbanes-Oxley Act, the
functions of the Audit Committee included making recommendations concerning the
engagement of independent auditors, reviewing with the independent auditors the
plan and results of the auditing engagement, reviewing professional services
provided by the independent auditors, reviewing the independence of the
independent auditors, and considering the range of audit and non-audit fees.
Effective upon the adoption of the Sarbanes-Oxley Act, the Audit Committee was
granted sole power and authority to engage and retain the Companys outside
auditor, to determine and pre-approve the type and scope of all audit and
non-audit services provided by the outside auditor and to approve the
compensation of the auditor. The Sarbanes-Oxley Act also requires the outside
auditor to report directly to the Audit Committee and granted the Audit
Committee full oversight over all services performed by the auditor, which, if
in excess of de minimis amounts, now require pre-approval by the Audit
Committee. The Audit Committee held four full committee meetings during fiscal
year 2003. The Audit Committee also had four additional meetings involving the
independent auditors and the Audit Committee Chairman acting on behalf of the
Audit Committee, such meetings to review the Companys earnings releases prior
to their issuance each quarter. The following table presents aggregate fees billed for professional
services for the audit of the Companys annual financial statements for each of
the years ended July 31, 2004 and 2003, and fees billed for other professional
services rendered by PricewaterhouseCoopers LLP during those periods were as
follows: 2004
    
    2003Audit Fees (1)
    
    $
    178,000
    
    
    $
    170,000Audit-Related Fees (2)
    
    
    
    
    
    
    3,000Tax Fees (3)
    
    
    22,000
    
    
    
    4,000Total
    
    $
    200,000
    
    
    $
    177,000
  (1)
    
    Audit fees were for the professional services rendered for the audit and
quarterly reviews of the consolidated financial statements of the Company
and issuance of consents in conjunction with documents filed with the
SEC.  (2)
    
    Audit-related fees were for services related to the research and review
of the Companys accounting for certain transactions.  (3)
    
    Tax fees were for services related to research of state tax laws in 2004
and 2003. 59




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES  (a)
    
    The following documents are filed as part of this report:  (1)
    
    Financial Statements of Webco Industries, Inc. which are included
in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets  July 31, 2004 and 2003
Consolidated Statements of Operations  Years ended July 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders Equity  Years ended July 31,
2004, 2003 and 2002
Consolidated Statements of Cash Flows  Years ended July 31, 2004, 2003
and 2002
Notes to Consolidated Financial Statements
Supplemental Consolidated Quarterly Financial Data (Unaudited)  (2)
    
    Financial Statement Schedule: WEBCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS   AdditionsBalance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    Other
    
    (1)
    
    End ofDescription
    
    Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodAllowance for bad debts:2002
    
    $
    620
    
    
    $
    410
    
    
    
    
    
    
    $
    (367
    )
    
    $
    6632003
    
    
    663
    
    
    
    287
    
    
    
    
    
    
    
    (314
    )
    
    
    6362004
    
    
    636
    
    
    
    142
    
    
    
    
    
    
    
    (536
    )
    
    
    242Reserve for inventory
obsolescence:2002
    
    $
    853
    
    
    $
    2,477
    
    
    
    
    
    
    $
    (1,750
    )
    
    $
    1,5802003
    
    
    1,580
    
    
    
    1,558
    
    
    
    
    
    
    
    (1,473
    )
    
    
    1,6652004
    
    
    1,665
    
    
    
    1,549
    
    
    
    
    
    
    
    (1,419
    )
    
    
    1,795
  (1)
    
    Amounts represent accounts receivable write-offs, net of
recoveries, or inventory disposals. 60




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Continued  (3)
    
    Exhibits: ExhibitNumber
    
    Exhibit Description3(i)
    
    Form of Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3(i) to the Companys Registration
Statement on Form S-1, No. 33-72994).3(ii)
    
    By-Laws (incorporated by reference to Exhibit 3(ii) to the Companys
Registration Statement on Form S-1, No. 33-72994).10.1
    
    1994 Stock Incentive Plan, as amended (incorporated by reference to the
Companys Registration Statement on Form S-8, No. 333-91754).10.2
    
    Lease, dated October 22, 1996, between the Company and Baker Performance
Chemicals Incorporated (incorporated by reference to Exhibit 10.3 to the
Companys Form 10-K dated July 31, 1997, File No. 0-23242).10.3
    
    Employment Agreement expiring December 31, 2002, between the Company and
Christopher L. Kowalski (incorporated by reference to Exhibit 10.7 to the
Companys Form 10-K dated July 31, 1998, File No. 0-23242).10.4
    
    Lease, dated March 16, 1998, between the Company and Tubular Properties,
Ltd. (incorporated by reference to Exhibit 10.8 to the Companys Form 10-K
dated July 31, 1998, File No. 0-23242).10.5
    
    Agreement and Plan of Reorganization dated as of June 29, 1998 by and
among Webco Industries, Inc., P&J Acquisition Corp., Phillips & Johnston,
Inc., Christopher L Kowalski and Robert N. Pressly (incorporated by
reference to Exhibit 99.1 to the Companys Form 8-K dated June 29, 1998,
File No. 0-23242).10.6
    
    Loan Agreement, dated December 1, 1998, between the Pennsylvania Economic
Development Financing Authority and Webco Industries, Inc. (incorporated
by reference to Exhibit 10.11 to the Companys Form 10-Q dated January 31,
1999, File No. 0-23242).10.7
    
    Sale of assets of QuikWater Division dated as of May 10, 2002 by and
among Webco Industries, Inc. and Quik Water Systems, Inc.(Acquisition
Corp.) (incorporated by reference to the Companys Form 8-K dated May 10,
2002, File No. 0-23242).10.8
    
    Loan and Security Agreement, dated as of October 15, 2004, between Bank
One, N.A., as agent, certain financial institutions as lender, and the
Company (incorporated by reference to Exhibit 99.2 to the Companys Form
8-K dated October 15, 2004, File No. 0-23242).10.9
    
    Employment Agreement expiring September 30, 2006 for F. William Weber.10.10
    
    Employment Agreement expiring September 30, 2006 for Dana S. Weber.
 61




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Continued ExhibitNumber
    
    Exhibit Description10.11
    
    Employment Agreement expiring September 30, 2006 for David E. Boyer.10.12
    
    Employment Agreement expiring September 30, 2006 for Michael P. Howard.14 *
    
    Code of Ethics23.1 *
    
    Consent of PricewaterhouseCoopers LLP.31.1 *
    
    Certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 *
    
    Certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1 *
    
    Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 *
    
    Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    - Filed herewith. 62




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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. WEBCO INDUSTRIES, INC.October 29, 2004
    By:
    /s/ F. William WeberF. William WeberChairman, Chief Executive
Officer and Director 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 capacities and on the dates indicated. October 29, 2004
    By:
    /s/ F. William WeberF. William WeberChairman, Chief Executive
Officer and Director October 29, 2004
    By:
    /s/ Dana S. WeberDana S. WeberPresident, Chief Operating Officer
and Director October 29, 2004
    By:
    /s/ Michael P. HowardMichael P. HowardChief Financial Officer October 29, 2004
    By:
    /s/ Christopher L. KowalskiChristopher L. KowalskiPresident-Phillips & Johnston, Inc.
and Director October 29, 2004
    By:
    /s/ Jack D. McCarthyJack D. McCarthyDirector October 29, 2004
    By:
    /s/ Kenneth E. CaseKenneth E. CaseDirector October 29, 2004
    By:
    /s/ Bradley S. VetalBradley S. VetalDirector 63