** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

**FORM 10-KSB/A**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Year Ended December 31, 2002**

 

**Commission File No. 000-31267**

 

**IWT TESORO CORPORATION**

(Name of Small Business Issuer in Its Charter)

| **NEVADA**                                                        |   | **91-2048019**                          |
|-------------------------------------------------------------------|--------|-----------------------------------------|
| (State  of Other Jurisdiction of Incorporation or   Organization) |   | (I.R.S.  Employer Identification Number |
|                                                              |   |                                    |
| **191 Post Road West, Suite 10, Westport,  Connecticut 06880**    |
| (Address  of Principal Executive Offices and Zip Code)            |
|                                                              |   |                                    |
| **(203) 271-2770**                                                |
| (Issuer’s Telephone Number, Including Area Code)             |

 

Securities registered underSection 12(b) of the Exchange Act: ** None**

 

| **Title of  Each Class** |   | **Name of  Each Exchange on Which Registered** |
|--------------------------|--------|------------------------------------------------|
| NONE                     |   | NONE                                           |

 

Securities registered under Section 12(g) of the Exchange Act:

**Common Stock, $.001 par value**

(Titleof Class)

 

Check whether the issuer (1)has filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theissuer was required to file such reports, and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý   No  o

 

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B contained inthis form, and no disclosure will be contained, to the best of issuer’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

 

Portions of the Proxy Statementfor the 2003 Annual Meeting of Shareholders are incorporated by reference inPart III, Items 10, 11, and 12.

 

State issuer’s revenues for itsmost recent fiscal year:  **$25,387,708.00**

 

State the aggregate marketvalue of the voting stock held by non-affiliates computed by reference to theprice at which the stock was sold, or the average bid and asked prices of suchstock, as of a date specified within the past 60 days:  $6,836,511.00

 

**APPLICABLE ONLY TO CORPORATE REGISTRANTS**

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date.  11,205,502 shares asof June 13, 2003.

 

Transitional Small BusinessDisclosure Format (check one)     Yes  o   No  ý

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**None**

 

 

----

 

**PART I**

 

**ITEM1.****     DESCRIPTIONOF BUSINESS**

 

***Background***

 

IWT Tesoro Corporation(Tesoro) was organized in Nevada on May 3rd, 2000 originally under thename “Ponca Acquisition Corporation” but changed its name to IWT TesoroCorporation on September 23, 2002. It was originally organized to attemptto locate and negotiate with a business entity for the combination of thattarget company with it. On October 1, 2002, it acquired all ofInternational Wholesale Tile, Inc.’s (IWT) common stock from threeshareholders. IWT is a wholesale distributor of imported ceramic, porcelain andstone floor, wall and decorative tiles organized in 1994. In exchange for theIWT stock, the IWT shareholders each received 3.0 million Tesoro shares,representing 87% of Tesoro’s then outstanding common stock.

 

In January 2003, Tesoroorganized a Bermuda company, IWT Tesoro International, Ltd.(International), that will own any international subsidiaries. Tesoro alsoorganized IWT Tesoro Transport, Inc. (Transport). Transport is a federallylicensed freight broker that manages both inbound and outbound freight for IWT.

 

Tesoro’s executive officesare located at 191 Post Road West, Westport, CT 06880 and our telephone numberis (203) 221-2770 and our web site can be found at *http://www.iwttesoro.com*.

 

Anytime we refer to “we”,“our” or “us” in this Description of Business, we mean International WholesaleTile, Inc.

 

***Business and Growth Strategy***

 

We believe that we havebuilt our reputation by supplying quality products with outstanding customerservice at competitive prices. We strive to stay up-to-date with the neweststyles and trends in the ceramic tile and marble industry. We also aim tointroduce high quality new products to the marketplace as soon as practicable.We further believe that we have built confidence and loyalty among ourcustomers by distributing our products only on a wholesale level and notselling direct to the consumer. Other keys to our success include

 

•                  activemerchandising programs that assist our dealer/customers to meet the consumer’sdemand with products presented in attractive easy to visualize environments;

 

•                  acting as theextension of our dealer networks’ stock availability by warehousing levelsconsistent with the dealers’ delivery requirements;

 

•                  selling only at the wholesale level; never tothe consumer.

 

We hope to increase ourbusiness in these channels by expanding geographic penetration and by extendingthe lines of product we offer and support.

 

In April 2003, we movedto our new 147,000 square foot facility that will enable us to stock moreinventory for future growth.

 

During 2002, we createdTesoroTM—The Collection, a branded collection of high quality porcelain floorand wall tiles complemented by coordinated decorative borders and listellos. Weplan to expand the TesoroTM line of products by building our proprietary TesoroTMbrand awareness. We further intend to further grow by acquiring or merging withexisting regional distributors.

 

Our short-term objectivesare to:

 

•                  Raise equity capital for our internal growth,to

 

•                  Augment our client base and marketpenetration by expanding nationally in three to five additional markets, mostlikely in the West, Southwest, and Midwest, by duplicating our Palm City,Florida model. Southern California is our highest priority.

 

•                  Expand our position as a preferred vendor fornational buying groups who work directly with some of the nation’s largest homebuilders and provide purchasing contracts for independently owned, brandedfloor covering stores such as Carpet One and Abby Carpet,

 

2

----

 

•                  Expand further into the home center business,

 

•                  Increase our product lines,

 

•                  Increase investment in merchandise samplingand displays within our customer base.

 

•                  Strengthen our consolidated balance sheet byreducing our debt to equity ratio. We hope to accomplish this by using newequity to fund growth and eventually reduce debt, and

 

•                  Provide capital for expansion throughcompatible business combinations.

 

On a short-term basis, weintend to look to acquire assets of businesses with products and services thatcomplement our business. We also intend to establish subsidiaries based inSpain and Italy to handle our relationships with manufacturers located in thosecountries.

 

***The Ceramic, Porcelain and Natural Stone Flooring and Wall CoveringMarket***

 

We operate in the floorcovering industry, which has grown from $12.4 billion in sales in 1992 to$21.3 billion in 2001, but was down 1% in the first ten months of 2002. In2000, the United States floor covering industries’ primary categories werecarpet and rugs (63%), ceramic tile (11%), vinyl and rubber (14%), hardwood(8%), and laminate (4%). Each of these categories has been positively impactedby:

 

•                  U.S. population growth, requiring new andrenovated housing and commercial space;

 

•                  Increasing average house size (upapproximately 30% since 1980); and

 

•                  Growth in vacation homes.

 

Compound average growthrates for units sold (measured by square yards) for each of the floor coveringcategories above for the period from 1996 through 2002 have exceeded the growthrate of the United States’ gross domestic product over the same period. Duringthis time, based on square footage, the compound average growth rate was 9.7%for ceramic tile.

 

According to MarketStudies, Inc., a recognized industry market research firm, the estimated2002 market for ceramic tile in the United States was approximately$2.3 billion, with approximately 2.6 billion square feet sold,representing a 10.9% and 14.2% growth rate over 2001, respectively. Thecompound average growth rate of square footage shipments was 9.7% from 1996through 2002 for ceramic tile.

 

Imported ceramic tile makesup 76% of the United States consumption, or 1.5 billion dollars and2.1 billion square feet, as estimated by Market Studies. 48% of importedceramic tile comes from Italy, 18% from Spain and 8% from Brazil. The balanceoriginates from a large number of countries including Turkey, China andPortugal. The United States’ market is the fourth largest consumer of tile inthe global market representing about 20% of global consumption. Our productsare primarily imported and our purchases distribution among internationalsuppliers approximates these national statistics.

 

The average price of ceramictile continued to fall during 2002, albeit at a slower pace. This price declinelimited the increase in the value of shipped product from 2001 to 2002 to10.9%. The strong demand for new and remodeled housing in the United States,coupled with the continuing shift by the consumer away from carpet and towardhard surfaces, has resulted in a forecast by Market Studies that the demandwill remain robust and that prices will stabilize. Market Studies predicts thatsales of imported ceramic tile will reach $2.09 billion in 2007 andfurther states:

 

The high growth rate ofceramic tile relative to other flooring options has led to more full servicedistributorships, manufacturers, and retailers adding ceramic tile to theirlines. With more floor space being devoted to ceramic tile at retail, effortsat product differentiation have intensified. Licensing, a relatively newstrategy in the ceramic tile marketplace, is heating up, including thefollowing partnerships: Shaw Industries with Martha Stewart and Kathy Ireland;Witex with Laura Ashley, Armstrong’s Liz Claiborne line in partnership withCarpet One, and Marrazzi Group with Benetton.

 

Sales in the ceramic tileindustry are influenced by economic and market factors including:

 

•                  consumer confidence;

•                  spending for durable goods;

•                  interest rates;

•                  turnover in housing, the condition of theresidential and commercial construction industries; and

•                  the overall strength of the economy.

 

3

----

 

“US Ceramic Tile Market-2002Edition”, published by Market Studies, pointed to a market growth rate ofapproximately 5% to 7% per year. This growth rate is higher in the Sun Beltareas, including the Southeastern part of the United States, where we currentlyoperate.

 

Glazed floor and wall tilerepresented 86% of the total industry dollars shipped in 2000. Unglazed mosaicand porcelain, 11% of the total, and quarry title, 3% of the total, representthe balance of the industry’s 2002 dollars shipped. The ceramic titleindustry’s two primary markets, residential applications and commercial applications,represents 67.6% and 32.0% of the industry total, respectively. Of the totalresidential market, 62% of the dollar shipments are for new construction.

 

***IWT’s Products***

 

We purchase our products onthe world market. Approximately 50% of our products are imported from Italy,35% from Spain and 5% each from Brazil, Turkey and China. Each foreignmanufacturer has registered agents in the United States that work with us, aswell as with other distributors. We believe that we maintain close personal contactwith our suppliers, visiting the plants regularly and working with suppliers toinfluence design, quality and reliability. We do not purchase any rawmaterials, but only finished goods. Our principal suppliers and the countriesin which each is located include

 

•                  Gruppo CBS, division of Kis Ceramiche, Italy;

•                  Imolagres, Italy;

•                  Ceramica Gomez, Spain;

•                  Ceramica Colli, Italy;

•                  Ceramica Fondavalle, Italy; and

•                  Ceramica Gaya, S.A., Brazil

 

Our product types includeceramic tile, porcelain tile, tumbled marble, mosaic listellos and medallions,honed and filled marble, unfilled marble, resin travertine listellos, andpolished medallions. Each year, new products are added to our product line. Forexample, we have recently added granite counter and backsplash tiles to ourproduct mix. Items are removed when they become obsolete, which we define ashaving minimal sales in any consecutive 12-month period.

 

We maintain a widedistribution of price points for our product. Our lowest priced productsinclude red body ceramic tiles to mid priced solid body porcelain to higherpriced natural stone tiles. Pricing strategies are also designed to provideincentives to customers for purchasing product in larger quantities. We shipproduct to our customers in quantities ranging from “cut order” specific to aconsumer’s project to full pallets of a single product to full container andtruckload packages. These larger quantities allow our customers to stock theirown product to service cash and carry consumers.

 

The market for ceramictiles, once characterized by little or no brand recognition, is beginning toenter into branding agreements with well-known designer names such as MarthaStewart and Laura Ashley. In May 2002, we introduced our proprietary brandTesoroTM. Tesoro is a collection of porcelain tiles and decorative inserts,borders, and accents that will be marketed throughout the United States. Wehave invested in specifically designed display racks that communicate thequality and value of our new brand.

 

We import our products intothe Port of Miami. All our customers are approved by sales territory managersand must qualify as IWT customers. Material is shipped to the customer base viaour trucks or by common carrier. We generally ship same day on orders placedbefore 2:00 p.m. Most delivery points are one to two day services for thesoutheastern United States. Local trucks deliver between Daytona Beach, Floridaand Miami, Florida. Each day, common carriers pick up materials near the end ofthe business day to deliver to other parts of the country.

 

***Inventory***

 

We are committed tomaintaining inventory levels that support the sales of our dealer network. Ournew 147,000 square foot warehouse contains over 6 million square feet ofproduct, representing over 2500 SKU’s (individually numbered product items). Wetarget an inventory turn over rate of 2.5 to 3.0. This turn over rate isestablished to minimize out of stock situations and to attain our goal of sameday shipping for qualified orders received by 2 PM.

 

Industry trends towardproduct packages, i.e. floor and wall tile combinations and the pre-organizedtile, borders, decorative listellos, bull nose and end caps, increases thenumber of parts we must carry in stock to ensure that our customer can meet thedemand of their consumer.

 

4

----

 

***Freight and Transportation Costs***

 

We base our distributioncosts on a number of factors including, among others,

 

•                  factory cost,

•                  freight (international and domestic), and

•                  duties, tariffs, taxes and other regulatorycosts.

 

Because ocean freightcharges differ from country to country, our selling price is based on factorsspecific to each international manufacturer. We pay all our internationalmanufacturers in U.S. dollars. The strength of U.S. dollar relative to aspecific country’s currency will have an impact on the price we pay forproduct. There is now a new security port charge of $150.00 per shipment thatwe must pay. Additionally, we also take into account that title to our productstransfers at the port of the originating country. We generally ship between tenand twenty containers at any one time. We currently estimate that our maximumexposure for loss would be approximately $150,000. Based on maritime losshistory, cost of ocean marine insurance and our ultimate ability to subrogateagainst the freight carrier, we self-insure in the event of loss after title istaken.

 

However, we often placespecial orders on behalf of our customers. If any shipments were lost ordamaged, our clients would not be able to receive their product in a timelyfashion, which, in turn, could adversely affect our relationship with thosecustomers. To date, we have only incurred minimal losses with respect toproducts that have been lost after it acquired title. Likewise, the outboundtransportation costs differ depending on how far our products are to beshipped.

 

Because of the increase ingasoline and fuel prices and other surcharges, our shipping costs haveincreased. However, we have not yet passed any surcharges to all customers. Assuch, our gross margins may be lower because we are currently absorbing theseincreased costs.

 

As a result of theseincreased shipping costs, Tesoro recently organized IWT Tesoro Transportation, Inc.,a federally licensed freight carrier. By working with this affiliate company tosupply a portion of our shipping needs, we hope to decrease these costs.

 

***IWT’s Customer Base and Distribution Channels***

 

We distribute our productsthrough three separate distribution channels.

 

•                  The retail floor-covering dealer market isour largest channel. This channel currently accounts for about 80% of the salesrevenue. These customers, who sell direct to the public, can be either “cut toorder” or “stocking” dealers/regional distributors. We currently serveapproximately 2,000 customers in this channel through our sales personnel. Inaddition, we have sub-distributors that handle specific market territories forlimited numbers of our Tesoro product packages.

 

•                  The home center“buy-it-yourself/do-it-yourself” store market makes up our second distributionchannel. These customers typically operate under blanket purchase orders. Thehome center market offers us the opportunity to ship truck and container loadvolumes to central distribution hubs for final distribution by the customer.There are two basic programs for home center stores. The first is a specialorder program. Consumers place orders from sample boards provided by us to thestore. The store representatives forward these orders to us and we ship theproduct either directly to the consumer or to the store for pick-up by theconsumer. The second program is a stocking program, which provides for a homecenter store to maintain specific product inventories for their cash and carrytrade. The home center store channel currently accounts for about 10% of ourrevenue.

 

•                  Our third channel, accounting for theremaining 10% of our revenues, is made up of national buying groups. Thesegroups support independently owned, branded floor covering outlets withcoordinated buying agreements that require us to market directly to eachindividual retail outlet. This channel also includes large builders who staffand maintain captive design centers specifically for their own customers.

 

We maintain separate andcoordinated sales forces for each of the channels of distribution. We also selldifferent product series to each channel to avoid market saturation or channelconflict. Currently, we do not depend on any single customer for more than 2%of our sales.

 

***Merchandising***

 

We believe that a strong andfocused merchandising program is a key component to our success. A mainstay ofthis program is our branding of our TesoroTM collection of coordinated and highend products. We have created a series of product display units that assist ourdealers with the communication of product combinations to their consumer. Weare 

 

5

----

 

continuallyupdating these displays with new products. We have a fifteen-year warrantyprogram for TesoroTM products that we believe elevate the quality position ofour products.

 

***Credit and Collection Procedures***

 

We maintain strict criteriafor credit approval:

 

•                  Potential customers must complete our creditapplication;

•                  Credit must be approved by our creditdepartment; and

•                  We may require a personal guaranty.

 

Once approved, typically ourcustomers receive 30-day terms.

 

Additionally, to be an IWTcustomer, a business must, at the least:

 

•                  Have a store front,

•                  Sell retail, and

•                  Have a forklift.

 

When sales orders areentered, our computer system notes if a customer is on credit hold. If so,those orders are given to our credit department to determine whether theproducts can be shipped. Customers are generally given a 15 day graceperiod and orders are held and not shipped once an invoice is 60 days orolder.

 

***Marketing, Promotion and Sales***

 

Our public relations andmarketing activities focus on creating demand for our products. We have anin-house advertising and marketing staff that develops and coordinates oursales materials. We use trade magazines articles, specifically designed mailerprograms and trade shows as our primary communication devices.

 

Our commission based salesforce work with dealers to place the products in show rooms, educate thedealers regarding the quality and variety of product available to them and workwith our internal customer service staff to facilitate delivery. We employ aseventeen-person full time sales force most of whom have been with us for fiveyears after spending manyyears in various facets of the tile business.

 

***Competition***

 

We compete in the flooringindustry with both large national companies that supply both soft and hardmaterials and with smaller regional distributors that focus specifically onceramic, porcelain and stone. Vertically integrated companies such as Shaw Industries andMohawk, while maintaining their dominant positions in the carpet market, aremoving aggressively into the hard flooring sector. Dal-tile, a subsidiary ofMohawk, manufactures, wholesales and retails tile on a national basis.

 

Regional competitors such asMaster Tile, Florida Tile and Arizona Tile act as both wholesalers andretailers. In their markets, each supplies smaller dealers and distributors andalso operates branded retail outlets. We currently only distribute on aregional basis at a wholesale level.

 

We believe that ourcompetitive strengths include:

 

•                  *Focusing solely on thewholesale segment of the distribution process.* We do not own or operate direct to consumerlocations. We work exclusively through dealers and stocking distributors whoservice the buying public. As a result, we do not compete with our customers.Our customers can buy from us specific materials to meet a consumer’s need,i.e. “cut orders” or can stock limited amounts of product for cash and carrybusiness by purchasing larger quantities.

 

•                  *Getting involved indesigning products.* Weactively participate in designing and selecting new color, texture and formatsfor emerging style tends. Our field sales force is constantly working with ourcustomers to identify trends in the market. Feedback from these sources iscontinuously shared with the manufacturers. Manufacturer’s representativesfrequently meet with us and our management travels to the manufacturing sitesto communicate the markets needs.

 

•                  *Building our TesoroTM BrandEquity.* We are branding allour designs and many of our products with our Tesoro Brand. We incorporateproducts from different manufacturers and different countries into programsthat leverage the best of each source to create Tesoro collections. Unlike mostother tile and ceramic products, Tesoro products include a 15-year warrantyagainst wear.

 

6

----

 

•                  *Providing superiormerchandising and customer support programs.* We maintain an active sampling program to ensure that customers havethe latest materials in their showrooms. Our field sales force continuallyupdates, refreshes and replaces sales materials. We distribute literature toconsumers referencing our dealer network participants. Our field personnel workwith the customer and train them on the appropriate use and care of theproduct. Our goal is to make the dealers’ job as easy as possible.

 

•                  *Implementing ourDistribution Philosophy.* Wesee ourselves as an extension of the dealer warehouse. We aim to be responsiveto our customers’ needs by shipping most orders the same day they are received.We also carry stock to back-up our customers in the cash and carry market.

 

By maintaining thesecompetitive strengths, we believe that we can profitably challenge ourcompetitors for a greater share of our targeted market.

 

***Government Regulations***

 

The Federal trade commissionregulates IWT’s wholesale operations. The Federal Motor Carriers Administrationregulates Transport’s freight brokerage. International is an exempt companysubject to Bermudian commercial law. We do not expect to import product intoBermuda and will therefore maintain our exempt status. Both federal and stateauthorities regulate the distribution and sale of imported products. We haveobtained all required federal and state permits, licenses and bonds to operateour businesses. We make no assurances that our operations and profitabilitywill not be subject to more restrictive regulations, oversight or increasedtaxation by foreign, federal, state or local agencies.

 

***Acquisitions and other Interests***

 

Tesoro intends to expand itsoperating activities globally. We have had preliminary discussions with manufacturers,product aggregators and agencies in Spain, Italy and Brazil. We expect to takean interest position in several operations during 2003. In the United States,we hope to expand ourgeographical position by acquiring the assets of similar, but smaller,distributors and are in preliminary discussions with a distributor on the westcoast. We cannot assure anyone, however, that any of these discussions willresult in the intended acquisitions or that any acquisitions, if made, willgenerate the planned revenue or profits.

 

***Intellectual Property***

 

We incorporate our proprietary brand TesoroTM in connectionwith a collection of porcelain tiles and decorative inserts, borders, andaccents. We are in the process of applying for federal trademark protection forour trademark, but unless and until our registration is granted, we must relyon common law to protect our brand. We make no assurances that this protectionwill be meaningful. We are not aware of any claims of infringement against usand we have not been involved in any related court proceedings.

 

***Employees***

 

IWT currently employs 70non-union warehouse and administrative staff and 15 inside salespeople. IWTbelieves that its relationships with its employees are good. Tesoro currentlyhas two employees. Neither Transport nor International currently has anyemployees.

 

7

----

 

**ITEM2.****     DESCRIPTIONOF PROPERTY**

 

Tesoro currently subleasesoffice space in Westport, Connecticut. We pay a monthly base services fee of $2,400.00and our lease expires September 30, 2003. Tesoro anticipates that it willbe obtaining more permanent space in the near future.

 

IWT currently leasesapproximately 147,000 square feet in Palm City, Florida, of which 5,000 squarefeet is for office space and the remaining 142,000 square feet is for warehousespace. The term of the lease is for 10 years as follows: 

 

| 2003                 |   | $                                         | 568,207       |       |
|----------------------|--------|-------------------------------------------|---------------|------------|
| 2004                 |   | $                                         | 634,550       |       |
| 2005                 |   | $                                         | 649,250       |       |
| 2006                 |   | $                                         | 663,950       |       |
| 2007                 |   | $                                         | 678,650       |       |
| 2008  and thereafter |   | An aggregate of $3,866,100 |          |
| **TOTAL**            |   | **$**                                     | **7,060,707** | ** ** |

 

**ITEM3.****     LEGALPROCEEDINGS**

 

We are not a party to anymaterial pending legal proceedings and, to the best of our knowledge; no suchaction by or against us is contemplated, threatened or expected.

 

**ITEM4.****     SUBMISSIONSOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On March 27, 2003, amajority of Tesoro’s stockholders elected nine Directors to its Board andratified the firm of Sewell and Company as its independent accountants.

 

8

----

 

**IWT TESORO CORPORATION AND SUBSIDIARYCONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2002 AND 2001**

 

** **

**TABLE OF CONTENTS**

 
| Independent Auditors’  Report                                     |
|------------------------------------------------------------------------|
|                                                                   |
|  Consolidated Balance Sheets                                      |
|                                                                   |
|  Consolidated Statements of Operations                            |
|                                                                   |
|  Consolidated Statements of Changes in  Stockholders’ Equity |
|                                                                   |
|  Consolidated Statements of Cash Flows                            |
|                                                                   |
|  Notes to Consolidated Financial Statements                       |

 

9

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Board of DirectorsIWT Tesoro Corporation and SubsidiaryWestport, CT

 

We have audited the accompanying consolidatedbalance sheets of IWT Tesoro Corporation and Subsidiary as of December 31,2002 and 2001, and the related consolidated statements of operations, changesin stockholders’ equity, and cash flows for the years ended December 31,2002 and 2001. These consolidated financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of IWT Tesoro Corporation and Subsidiary as ofDecember 31, 2002 and 2001, and the results of its operations, and itscash flows for the years ended December 31, 2002 and 2001, in conformitywith accounting principles generally accepted in the United States of America.

 

SEWELL AND COMPANY, PA

 

Hollywood, FloridaRevised June 2, 2003

 

 

10

----

 

**IWT TESORO CORPORATION AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2002 AND 2001**

** **
|                                                                                                            |   | **2002**  |       | **2001**  |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|--------|
|                                                                                                            |   |      |       |      |   |
| **Assets**                                                                                                      |   |      |       |      |   |
| Current assets                                                                                                  |   |      |       |      |   |
| Cash                                                                                                            |   | $         | 574,046    |      | $      | 402,500 |   |
| Accounts receivable, net                                                                                        |   | 2,875,532 |       | 2,068,556 |   |
| Inventory                                                                                                       |   | 6,047,876 |       | 4,985,427 |   |
| Prepaid expenses                                                                                                |   | 286,820   |       | 23,022    |   |
| Deferred tax asset                                                                                              |   | 34,348    |       | —    |   |
| Total current assets                                                                                            |   | 9,818,622 |       | 7,479,505 |   |
|                                                                                                            |   |      |       |      |   |
| Property and equipment, net                                                                                     |   | 2,712,422 |       | 2,116,571 |   |
|                                                                                                            |   |      |       |      |   |
| Other assets                                                                                                    |   |      |       |      |   |
| Deposits                                                                                                        |   | 9,173     |       | 2,915     |   |
| Other receivables                                                                                               |   | 64,205    |       | 40,452    |   |
| Other receivables-related parties                                                                               |   | 5,500     |       | 26,913    |   |
| Other assets                                                                                                    |   | 112,835   |       | 104,794   |   |
|                                                                                                            |   | 191,713   |       | 175,074   |   |
|                                                                                                            |   | $         | 12,722,757 |      | $      | 9,771,150 |   |
|                                                                                                            |   |      |       |      |   |
| **Liabilities and Stockholders’ Equity**                                                                   |   |      |       |      |   |
|                                                                                                            |   |      |       |      |   |
| Current liabilities                                                                                             |   |      |       |      |   |
| Accounts payable                                                                                                |   | $         | 5,403,816  |      | $      | 4,043,787 |   |
| Accrued expenses                                                                                                |   | 126,340   |       | 109,091   |   |
| Other current liabilities                                                                                       |   | 24,723    |       | 19,562    |   |
| Current portion of leases payable                                                                               |   | 47,222    |       | 34,509    |   |
| Current portion of notes payable-unrelated parties                                                              |   | 48,780    |       | 52,215    |   |
| Total current liabilities                                                                                       |   | 5,650,881 |       | 4,259,164 |   |
|                                                                                                            |   |      |       |      |   |
| Long term leases payable                                                                                        |   | 108,438   |       | 83,632    |   |
| Long term notes payable-related parties                                                                         |   | 448,712   |       | 463,072   |   |
| Long term notes payable-unrelated parties                                                                       |   | 64,872    |       | 134,722   |   |
| Long term loan payable                                                                                          |   | 4,864,778 |       | 3,958,578 |   |
|                                                                                                            |   |      |       |      |   |
|                                                                                                            |   | 5,486,800 |       | 4,640,004 |   |
|                                                                                                            |   |      |       |      |   |
| Redeemable common stock (450,000 shares issued and outstanding)                                                 |   | 1,073,160 |       | —    |   |
|                                                                                                            |   |      |       |      |   |
| Stockholders’ equity                                                                                       |   |      |       |      |   |
| Preferred stock, $0.001 par value, 25,000,000 authorized; none issued                                           |   | —    |       | —    |   |
| Common stock, $0.001 par value, 100 million shares authorized,  10,587,834 and 9,000,000 issued and outstanding |   | 10,588    |       | 9,000     |   |
| Additional paid in capital                                                                                      |   | 686,068   |       | 116,400   |   |
| Less: subscription receivable                                                                                   |   | —    |       | (84,000   | )      |
| Retained earnings (deficit)                                                                                     |   | (184,740  | )          | 830,582   |   |
|                                                                                                            |   | 511,916   |       | 871,982   |   |
|                                                                                                            |   | $         | 12,722,757 |      | $      | 9,771,150 |   |

 

Seenotes to financial statements.

 

11

----

 

**IWT TESORO CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OFOPERATIONSYEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                        |   | **2002**   |       | **2001**   |   |
|---------------------------------------------|--------|------------|------------|------------|--------|
| Revenue                                     |   |       |       |       |   |
| Sales, net of discounts and returns         |   | $          | 25,387,708 |       | $      | 19,626,819 |   |
| Cost of goods sold                          |   | 15,268,535 |       | 12,629,138 |   |
|                                        |   |       |       |       |   |
| Gross profit                                |   | 10,119,173 |       | 6,997,681  |   |
|                                        |   |       |       |       |   |
| Expenses                                    |   |       |       |       |   |
| Payroll expense                             |   | 3,841,761  |       | 2,479,814  |   |
| Delivery expense                            |   | 1,245,174  |       | 979,701    |   |
| General and administrative                  |   | 637,202    |       | 271,440    |   |
| Lease expense                               |   | 479,905    |       | 426,229    |   |
| Depreciation                                |   | 422,435    |       | 317,852    |   |
| Insurance                                   |   | 324,699    |       | 232,520    |   |
| Repairs and maintenance                     |   | 250,378    |       | 120,336    |   |
| Sales expenses                              |   | 211,396    |       | 129,474    |   |
| Advertising                                 |   | 203,838    |       | 74,680     |   |
| Professional fees                           |   | 150,085    |       | 78,952     |   |
| Travel and entertainment                    |   | 104,831    |       | 64,471     |   |
| Bad debt                                    |   | 3,082      |       | 120,356    |   |
|                                        |   | 7,874,786  |       | 5,295,825  |   |
|                                        |   |       |       |       |   |
| Income from operations                      |   | 2,244,387  |       | 1,701,856  |   |
|                                        |   |       |       |       |   |
| Other income/(expenses)                     |   |       |       |       |   |
| Interest expense                            |   | (328,920   | )          | (424,527   | )      |
| Other income                                |   | 9,526      |       | 10,069     |   |
| Loss on settlement                          |   | (35,700    | )          | —     |   |
| Gain (loss) on disposal of equipment        |   | 5,979      |       | (511       | )      |
| Interest income                             |   | 4,407      |       | 231        |   |
|                                        |   | (344,708   | )          | (414,738   | )      |
|                                        |   |       |       |       |   |
| Net income before taxes                     |   | 1,899,679  |       | 1,287,118  |   |
| Income tax benefit—deferred            |   | 34,348     |       | —     |   |
| Net income                                  |   | $          | 1,934,027  |       | $      | 1,287,118 |   |
|                                        |   |       |       |       |   |
| Earnings per common share-basic and diluted |   | $          | 0.18       |       | $      | 0.14 |   |

 

Seenotes to financial statements.

 

12

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGESIN STOCKHOLDERS’ EQUITYYEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                                        |   | **Common Stock** |   | **Additional  Paid in  Capital** |   | **Subscription  Receivable** |   | **Retained  Earnings (Deficit)** |   | **TOTAL**  |    |
|-------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------------|--------|----------------------------------|--------|------------|---------|
|                                                        |   | **Shares**       |   | **Amount**                       |   |                         |   |                             |   |
| Balance, December 31, 2001                             |   | 9,000,000        |   | $                                | 9,000  |                         | $      | 116,400                          |   | $          | (84,000 | ) | $ | 830,582 |   | $ | 871,982 |   |
| Distributions, September 30, 2002                      |   | —           |   | —                           |   | —                       |   | —                           |   | (1,864,020 | )       | (1,864,020 | ) |
| Payment of subscription receivable                          |   | —           |   | —                           |   | —                       |   | 84,000                           |   | —     |    | 84,000 |   |
| Net income, nine months ended September 30, 2002       |   |             |   |                             |   |                         |   |                             |   | 2,118,767  |    | 2,118,767 |   |
|                                                        |   |             |   |                             |   |                         |   |                             |   |       |    |   |   |
| Balance September 30, 2002-before recapitalization     |   | 9,000,000        |   | 9,000                            |   | 116,400                      |   | —                           |   | 1,085,329  |    | 1,210,729 |   |
| Recapitalization on October 1, 2002                    |   | 1,800,000        |   | 1,800                            |   | 972,471                      |   |                             |   | (1,085,325 | )       | (111,058 | ) |
|                                                        |   |             |   |                             |   |                         |   |                             |   |       |    |   |   |
| Balance after recapitalization on October 1, 2002      |   | 10,800,000       |   | 10,800                           |   | 1,088,871                    |   | —                           |   | —     |    | 1,099,671 |   |
| Reclassification of redeemable stock                        |   | (450,000         | )      | (450                             | )      | (60,086                      | )      |                             |   |       |    | (60,536 | ) |
| Issuance of shares in exchange for legal services           |   | 15,000           |   | 15                               |   | 40,635                       |   | —                           |   | —     |    | 40,650 |   |
| Issuance of shares to employees for services rendered (SIP) |   | 75,900           |   | 76                               |   | 205,613                      |   | —                           |   | —     |    | 205,689 |   |
| Issuance of shares to directors (SIP)                       |   | 40,000           |   | 40                               |   | 108,360                      |   | —                           |   | —     |    | 108,400 |   |
| Issuance of shares to consultants (SIP)                     |   | 8,600            |   | 9                                |   | 23,297                       |   | —                           |   | —     |    | 23,306 |   |
|                                                        |   |             |   |                             |   |                         |   |                             |   |       |    |   |   |
| Sub-total                                                   |   | 10,489,500       |   | $                                | 10,490 |                         | $      | 1,406,690                        |   | $          | —  |   | $ | — |   | $ | 1,417,180 |   |
| Issuance of shares in exchange for consulting services      |   | 10,000           |   | 10                               |   | 27,090                       |   | —                           |   | —     |    | 27,100 |   |
| Issuance of shares-private offering                         |   | 83,334           |   | 83                               |   | 249,917                      |   | —                           |   | —     |    | 250,000 |   |
| Exercise of warrants                                        |   | 5,000            |   | 5                                |   | 14,995                       |   | —                           |   | —     |    | 15,000 |   |
| Accretion of redeemable stock                               |   |             |   |                             |   | (1,012,624                   | )      |                             |   |       |    | (1,012,624 | ) |
| Net loss, three months ended December 31, 2002         |   |             |   |                             |   |                         |   | —                           |   | (184,740   | )       | (184,740 | ) |
|                                                        |   |             |   |                             |   |                         |   |                             |   |       |    |   |   |
| Balance, December 31, 2002                             |   | 10,587,834       |   | $                                | 10,588 |                         | $      | 686,068                          |   | $          | —  |   | $ | (184,740 | ) | $ | 511,916 |   |
|                                                             |        |                  |        |                                  |        |                              |        |                                  |        |            |         |  |  |  |  |  |  |  |  |

 

Seenotes to financial statements.

 

13

----

 

**IWT TESORO CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASHFLOWSYEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                                                               |   | **2002**    |      | **2001**** ** |   |
|------------------------------------------------------------------------------------|--------|-------------|-----------|--------------------|--------|
| Cash flows from operating activities:                                              |   |        |      |               |   |
| Net Income                                                                         |   | $           | 1,934,027 |               | $      | 1,287,118 |   |
|                                                                               |   |        |      |               |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |        |      |               |   |
| Depreciation                                                                       |   | 422,435     |      | 317,852            |   |
| Loan amortization cost                                                             |   | 26,575      |      | 51,659             |   |
| Loss (gain) on sales of assets                                                     |   | (5,979      | )         | 511                |   |
| Bad debt                                                                           |   | 3,085       |      | 99,000             |   |
| Compensation in exchange for stock and options                                     |   | 405,145     |      | —             |   |
| (Increase) decrease in accounts receivable                                         |   | (786,221    | )         | (293,040           | )      |
| (Increase) decrease in inventory                                                   |   | (1,062,449  | )         | 263,783            |   |
| (Increase) decrease in prepaid expenses                                            |   | (263,798    | )         | (5,612             | )      |
| (Increase) decrease in other assets                                                |   | (50,988     | )         | (130,857           | )      |
| Increase (decrease) in accounts payable and accrued expenses                       |   | 1,237,335   |      | (752,232           | )      |
| Increase (decrease) in other liabilities                                           |   | 5,160       |      | 3,815              |   |
| Total adjustments                                                                  |   | (69,700     | )         | (445,121           | )      |
| Net cash provided by operating activities                                          |   | 1,864,327   |      | 841,997            |   |
|                                                                               |   |        |      |               |   |
| Cash flows from investing activities:                                              |   |        |      |               |   |
| Proceeds from sale of property                                                     |   | 11,000      |      | —             |   |
| Cash payments for the purchase of property                                         |   | (966,287    | )         | (679,027           | )      |
| Net cash used in investing activities                                              |   | (955,287    | )         | (679,027           | )      |
|                                                                               |   |        |      |               |   |
| Cash flows from financing activities:                                              |   |        |      |               |   |
| Proceeds from issuance of stocks                                                   |   | 349,000     |      | —             |   |
| Proceeds from loans                                                                |   | 26,010,639  |      | 19,682,105         |   |
| Proceeds from loans from related party                                             |   | 10,640      |      | 205,000            |   |
| Distributions to stockholders                                                      |   | (1,864,020  | )         | (521,458           | )      |
| Principal payments of stockholder loan                                             |   | (25,000     | )         | —             |   |
| Principal payments on notes payable                                                |   | (25,177,606 | )         | (19,236,612        | )      |
| Principal payment on capital leases                                                |   | (41,147     | )         | (28,969            | )      |
| Net cash provided by (used in) financing activities                                |   | (737,494    | )         | 100,066            |   |
|                                                                               |   |        |      |               |   |
| Net increase in cash and cash equivalents                                          |   | 171,546     |      | 263,036            |   |
|                                                                               |   |        |      |               |   |
| Cash and cash equivalents, beginning of period                                     |   | 402,500     |      | 139,464            |   |
|                                                                               |   |        |      |               |   |
| Cash and cash equivalents, end of period                                           |   | $           | 574,046   |               | $      | 402,500 |   |
|                                                                               |   |        |      |               |   |
| Supplemental disclosures of cash flow information:                                 |   |        |      |               |   |
|                                                                               |   |        |      |               |   |
| Cash paid during the period for:                                                   |   |        |      |               |   |
| Interest expense                                                                   |   | $           | 302,345   |               | $      | 400,187 |   |

 

Seenotes to financial statements.

 

14

----

 

Stockholders’ equity note:

 

As a result of therecapitalization on October 1, 2002, the Company is deemed to have issued1,800,000 common shares to the stockholders of IWT Tesoro Corporation (f/k/aPonca Acquisition Corp.).

 

On October 4, 2002, theCompany issued 15,000 shares of common stock valued at $2.71 per share, or a totalof $40,650 in exchange for legal services rendered in the amount of $4,950. Asa result, the Company recognized a loss on settlement of $35,700. The value ofthe stock was based on the private offering price of $3.00 per unit; each unitconsisting of one share of common stock and 11⁄2 warrants to purchase 11⁄2 sharesof common stock. The warrants were priced using the Black-Scholesoption-pricing model at the date of sale. Accordingly, the average value of thewarrants using the pricing model was $.29, and the value of each share was$2.71.

 

On October 4, 2002, theCompany issued 10,000 shares of common stock valued at $2.71 per share, or atotal of $27,100, to a director under the Stock Incentive Plan for pastservices rendered resulting in an immediate charge to operations.

 

On October 14, 2002,the Company issued 75,900 shares of common stock valued at $2.71 per share, ora total of $205,689, to employees under the Stock Incentive Plan for servicesrendered resulting in an immediate charge to operations.

 

On October 14, 2002,the Company issued 8,600 shares of common stock valued at $2.71 per share, or atotal of $23,306, to four individuals under the Stock Incentive Plan inexchange for consulting services rendered resulting in an immediate charge tooperations.

 

On October 14, 2002,the Company issued 30,000 shares of common stock valued at $2.71 per share, ora total of $81,300, to directors under the Stock Incentive Plan for pastservices rendered resulting in an immediate charge to operations.

 

On October 15, 2002,the Company issued 10,000 shares of common stock valued at $2.71 per share, ora total of $27,100, in exchange for consulting services rendered resulting inan immediate charge to operations.

 

Seenotes to financial statements.

 

15

----

 

**IWT TESORO CORPORATION AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIALSTATEMENTSYEARS ENDED DECEMBER 31, 2002 AND 2001**

 

**NOTE1     NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*BusinessDescription*

 

IWT Tesoro Corporation wasincorporated in the state of Nevada on May 3, 2000 as Ponca AcquisitionCorporation. On September 23, 2002, the Company changed the name of PoncaAcquisition Corporation to IWT Tesoro Corporation.

 

On October 1, 2002, IWTTesoro Corporation (an inactive publicly held company) acquired 100% of theoutstanding stock of International Wholesale Tile, Inc. (IWT) in exchange for 83% of itsoutstanding common stock in a transaction accounted for as a recapitalizationof IWT. IWT Tesoro Corporation and Subsidiary are hereinafter referred to as“the Company”.

 

The subsidiary (IWT) is awholesale distributor of imported ceramic, porcelain, and stone tile, dealingmainly in imported floor tiles.

 

*AccountingEstimates*

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

*Cash andCash Equivalents*

 

The Company considers allhighly liquid debt instruments purchased with an original maturity of threemonths or less to be cash equivalents.

 

*AccountsReceivable*

 

Accountsreceivable are stated at the face amount net of allowance for doubtfulaccounts. Generally accepted accounting principles require that the allowance methodbe used to reflect bad debts. A provision for doubtful accounts has beenestablished to reflect an allowance for uncollectible amounts.

 

*Inventories*

 

Inventoriesconsisting of tiles are valued at the lower of cost or market. Cost isdetermined by the first-in, first-out method (FIFO). The Company includesinventory in transit as an asset of the company because merchandise overseas ispurchased FOB shipping point. Title passes to the Company when merchandiseleaves the factory.

 

*Propertyand Equipment*

 

Propertyand equipment are stated at cost. Depreciation is computed using thestraight-line method based on the estimated useful lives of the assets, whichrange from 3-10 years. Major expenditures for property acquisitions and thoseexpenditures, which substantially increase the estimated useful lives of theproperty, are capitalized. Expenditures for maintenance, repairs, and minorreplacements are charged to expense as incurred.

 

Income Taxes

 

Prior to the acquisition,the Company’s subsidiary had elected to be taxed as an S corporation accordingto the provisions of the Internal Revenue Service, and distributed profitstotaling $521,458 for the year ended December 31, 2001. A total of$1,864,020 was distributed through September 30, 2002. Upon acquisition bythe Company on October 1, 2002, International Wholesale Tile, Inc. ceasedto qualify as an S corporation. On October 1, 2002, the Company beganaccounting for income taxes under Financial Accounting Standards Board (FASB)Statement No. 109, *Accounting for IncomeTaxes*. SFAS No. 109 is an asset and liability approach that requiresthe recognition of deferred tax assets and liabilities for the expected futuretax consequences of events that have been recognized in the financialstatements or tax returns. (See Note 9)

 

16

----

 

*RevenueRecognition*

 

Revenues are recognized whenproducts are shipped through third party providers (FOB shipping point withfreight allowed in most orders), or when products are received and accepted bycustomer if delivered by company (FOB destination). Title passes to thecustomer at the FOB point (shipping or destination). Customers have the rightto return merchandise within 30 days of the date of shipment. The Company didnot establish an allowance for return because they are infrequent, represent asmall dollar amount and occur over a fairly short time period following thesale.

 

*Long LivedAssets*

 

The Company continuallyevaluates the carrying value of property and equipment, goodwill and otherintangible assets to determine whether there are any impairment losses. Ifindicators of impairment are present, and future undiscounted cash flows arenot expected to be sufficient to recover the assets’ carrying amount, animpairment loss would be charged to operations in the period identified basedon the difference between the carrying value and the fair value of the asset.

 

No reduction for impairment of long-lived assets wasnecessary at December 31, 2002.

 

*StockOptions*

 

The Company elected toaccount for stock options issued to employees in accordance with AccountingPrinciples Board Opinion No. 25 (APB Opinion No. 25) *Accounting ForStock Issued to Employees* and related interpretations, whichestablished financial accounting and reporting for compensation cost of stockissued to employees through non-variable plans, variable plans, andnon-compensatory plans, and accounts for stock options and warrants issued tonon-employees in accordance with SFAS 123, *Accountingfor Stock-Based Compensation*, which established a fair value methodof accounting for stock compensation plans with employees and others.

 

*StockOptions*

 

In accordance with SFAS No.123, for options issued to employees, the Company has elected to account forthese stock options under APB No. 25 and related interpretations in accountingfor its plan. Accordingly, no compensation costs have been recognized foroptions issued under theplan as of December 31, 2002.

 

Had compensation costs forthe Company’s stock option been determined on the fair market value at thegrant dates for the options, consistent with Statement of Accounting StandardsNo. 123, *Accounting for Stock BasedCompensation* (Statement No. 123), the Company’s results of operations for the year endedDecember 31, 2002 would have changed to the pro-forma amounts indicated.

 
|                                                                                                                               |   | **2002**** ** |      | **2001**** ** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|--------------------|--------|
| Net income as reported                                                                                                             |   | $                  | 1,934,027 |               | $      | 1,287,118 |   |
| Add: Stock based employee compensation cost, net of related tax  effects, included in the determination of net income as reported  |   | 234,355            |      | 0                  |   |
| Less: Stock based employee compensation cost, net of related tax  effects, determined under fair value based method for all awards |   | (295,656           | )         | 0                  |   |
| Pro-forma net income                                                                                                               |   | $                  | 1,872,726 |               | $      | 1,287,118 |   |
| Net income per share basic – diluted                                                                                          |   |               |      |               |   |
| As reported                                                                                                                        |   | $                  | 0.18      |               | $      | 0.14 |   |
| Pro-forma                                                                                                                          |   | $                  | 0.17      |               | $      | 0.14 |   |

 

17

----

 

*Advertising*

 

Advertising costs arecharged to operations as incurred. Advertising expense totaled $203,838 and$74,680 for the years ended December 31, 2002 and 2001, respectively.

 

*Shippingand Handling Cost*

 

The Company offers freedelivery on sales over 100 sq. ft. which is the bulk of the sales, thereforemost invoices billed to customers do not include shipping and handling charges.When shipping and handling charges are billed to customers, then they areincluded in revenue. The cost incurred to ship the products to customers isincluded in the Statement of Operations under Delivery Expense. AtDecember 31, 2002 and 2001 the total amount of Delivery Expense was$1,245,174 and $979,701.

 

Shipping and handlingexpenses not included in the line item “Delivery Expense” at December 31,2002 and 2001 consisted of the following: 

 
| **Costs**                 |   | **2002**** ** |    | **2001**** ** |   | **Statement of  Operations  Line Item**** ** |   |
|---------------------------|--------|--------------------|---------|--------------------|--------|---------------------------------------------------|--------|
| Drivers’ wages       |   | $                  | 192,387 |               | $      | 73,269                                            |   | Payroll expense |   |
| Shipping department wages |   | 249,080            |    | 122,097            |   | Payroll expense                                   |   |
| Gas and tolls             |   | 46,853             |    | 31,984             |   | Auto expense                                      |   |
| Repairs and maintenance   |   | 28,377             |    | 13,041             |   | Repairs & maint.                              |   |
| Truck lease expense       |   | 23,188             |    | 0                  |   | Lease expense                                     |   |
| Interest expense          |   | 7,483              |    | 9,633              |   | Interest expense                                  |   |
| Depreciation              |   | 29,211             |    | 29,211             |   | Depreciation exp.                                 |   |
|                      |   | $                  | 576,579 |               | $      | 279,235                                           |   |   |   |

* *

*Cost ofGoods Sold*

 

The Company includes in costof goods sold the following expenses: cost of merchandise sold, inventoryadjustments, in-bound freight, duty and fees and discounts taken. AtDecember 31, 2002 and 2001 the total amount of cost of goods sold was$15,268,535 and $12,629,138.

 

General and AdministrativeExpenses

 

The Company includes thefollowing in general and administrative expenses: bank service charges, bankaudit fees, convention expense, dues and subscriptions, employee benefits,utilities, office supplies, outside services, consulting fees, postage,telephone and miscellaneous expenses. At December 31, 2002 and 2001 thetotal amount of general and administrative expenses was $637,202 and $271,440.

 

*AccountingPronouncements*

 

StatementNo. 141, *Business Combinations*(SFAS 141) establishes revised standards for accounting for businesscombinations. Specifically, the statement eliminates the pooling method,provides new guidance for recognizing intangible assets arising in a businesscombination, and calls for disclosure of considerably more information about abusiness combination. This statement is effective for business combinationsinitiated on or after July 1, 2001. The adoption of this pronouncement onJuly 1, 2001 did not have a material effect on the Company’s financialposition, results of operations or liquidity.

 

Statement No. 142, *Goodwill and Other Intangible Assets* (SFAS142) provides new guidance concerning the accounting for the acquisition ofintangibles, except those acquired in a business combination, which is subjectto SFAS No. 141, and the manner in which intangibles and goodwill should beaccounting for subsequent to their initial recognition. Generally, intangibleassets with indefinite lives, and goodwill, are no longer amortized; they arecarried at lower of cost or market and subject to annual impairment evaluation,or interim impairment evaluation if an interim triggering event occurs, using anew fair market value method. Intangible assets with finite lives are amortizedover those lives, with no stipulated maximum, and an impairment test is performedonly when a triggering event occurs. This statement is effective for all fiscalyears beginning after December 15, 2001. The Company believes that the 

 

18

----

 

implementation of SFAS No.142 on January 1, 2002 did not have a material effect on the Company’sfinancial position, results of operations or liquidity.

 

In August 2001, theFASB issued SFAS No. 143, *Accounting forAsset Retirement Obligations.* The standard requires entities torecord the fair value of a liability for an asset retirement obligation in theperiod in which it is incurred. When the liability is initially recorded, theentity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liabilityis accreted to its present value each period, and the capitalized cost isdepreciated over the useful life of the related asset. Upon settlement of theliability, an entity either settles the obligation for its recorded amount orincurs a gain or loss upon settlement. The standard is effective for fiscalyears beginning after June 15, 2002. The adoption of SFAS No. 143 will nothave a material impact on the Company’s financial statements.

 

*AccountingPronouncements*

 

Statement No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* supersedes Statement No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed of* (SFAS No. 121). Thoughit retains the basic requirements of SFAS No. 121 regarding when and how tomeasure an impairment loss, SFAS No. 144 provides additional implementationguidance. SFAS No. 144 excludes goodwill and intangibles not being amortizedamong other exclusions. SFAS No. 144 also supersedes the provisions of APB No.30, *Reporting the Results of Operations*,pertaining to discontinued operations. Separate reporting of a discontinuedoperation is still required, but SFAS No. 144 expands the presentation toinclude a component of an entity, rather than strictly a business segment asdefined in SFAS No. 131, *Disclosures aboutSegments of an Enterprise and Related Information*. SFAS No. 144 alsoeliminates the current exemption to consolidation when control over asubsidiary is likely to be temporary. This statement is effective for allfiscal years beginning after December 15, 2001. The Company believes thatthe implementation of SFAS No. 144 did not have a material effect on theCompany’s financial position, results of operations or liquidity.

 

InApril 2002, the FASB issued SFAS No. 145, Rescission of FASB StatementsNo. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections,that, among other things, rescinded SFAS No. 4, Reporting Gains and Losses fromExtinguishment of Debt. With the rescission of SFAS No. 4, the early extinguishmentof debt generally will no longer be classified as an extraordinary item forfinancial statement presentation purposes. The provision is effective forfiscal years beginning after May 15, 2002. The Company does not anticipatethat the adoption of SFAS No. 145 will have a material effect on its financialposition or results of operations.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities,* which replaces EmergingIssues Task Force Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).*The new standard required companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. The statement is to be applied prospectively to exit or disposal activitiesinitiated after December 31, 2002. The Company does not anticipate thatthe adoption of SFAS No. 145 will have a material effect on its financialposition or results of operations.

 

In December 2002, theFASB issued SFAS No. 148, *Accounting forStock-Based Compensation—Transition and Disclosure,* which amendedSFAS No. 123, *Accounting for Stock-BasedCompensation.* The new standard provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. Additionally, the statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures in theannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used in reportedresults. This statement is effective for financial statements for fiscal yearsending after December 15, 2002. In compliance with SFAS No. 148, theCompany has elected to continue to follow the intrinsic value method inaccounting for its stock-based employee compensation arrangement as defined byAPB No. 25.

 

*Earningsper Share*

 

Basicearnings per share for each year is computed by dividing income for the year bythe weighted average number of common shares outstanding during the year.Diluted earnings per share include the effects of common stock equivalents tothe extent they are dilutive. At December 31, 2002 all common stockequivalents were antidilutive and therefore diluted earnings per share equaledbasic earnings per share.

 

Basicand diluted weighted average number of shares outstanding is as follows: 

 
|                                                            |   | **2002**** ** |   | **2001**** ** |   |
|-----------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
| Basic and diluted weighted average number of shares outstanding |   | 10,845,775         |   | 9,000,000          |   |

 

19

----

 

At December 31, 2002,the total number of additional shares that could potentially dilute basic EPS in the future,but were not included in the computation of diluted EPS because of theirantidilutive effect, was 565,000. At December 31, 2001, there were nocommon stock equivalents that could potentially dilute basic EPS in the future.

 

**NOTE2     CONCENTRATION OF CREDIT RISK**

 

Financial instruments thatpotentially subject the Company to credit risk include cash on deposit with twofinancial institutions amounting to $572,846 at December 31, 2002, whichwas insured for up to $100,000 per financial institution by the U.S. FederalDeposit Insurance Corporation.

 

The Companyobtains detailed credit evaluations of customers and establishes credit limitsas required and routinely assesses the financial strength of its customers. TheCompany competes primarily in the sale of ceramic tile and marble markets andsells its products to a multitude of customers. There is no disproportionateconcentration of credit risk.

 

**NOTE3     ACCOUNTS RECEIVABLE**

 

Accountsreceivable at December 31, 2002 and 2001 consisted of the following: 

 
|                                 |   | **2002** |      | **2001** |   |
|--------------------------------------|--------|----------|-----------|----------|--------|
| Accounts receivable                  |   | $        | 2,958,777 |     | $      | 2,172,556 |   |
| Less allowance for doubtful accounts |   | (83,245  | )         | (104,000 | )      |
|                                 |   | $        | 2,875,532 |     | $      | 2,068,556 |   |

 

Bad debt expense for theyears ended December 31, 2002 and 2001 was $3,082 and $120,356,respectively.

 

**NOTE4     INVENTORY**

 

At December 31, 2002and 2001, inventory consisted of the following: 

 
|                 |   | **2002**** ** |      | **2001**** ** |   |
|----------------------|--------|--------------------|-----------|--------------------|--------|
| Tiles                |   | $                  | 4,692,974 |               | $      | 4,304,102 |   |
| Inventory in transit |   | 1,354,902          |      | 681,325            |   |
|                 |   | $                  | 6,047,876 |               | $      | 4,985,427 |   |

 

Inventory in transitconsists of merchandise purchased overseas which is not yet received in thewarehouse. The Company obtains legal title at the shipping point. Inventorycost includes the purchase price and in-bound freight.

 

**NOTE5     PROPERTY AND EQUIPMENT**

 

Property and equipment atDecember 31, 2002 and 2001 consisted of the following: 

 
|                          |   | **2002**   |      | **2001**  |   | **Depreciation  Period in Years**** ** |   |
|-------------------------------|--------|------------|-----------|-----------|--------|--------------------------------------------------|--------|
| Furniture and fixtures        |   | $          | 89,227    |      | $      | 77,832                                           |   | 5-10 |   |
| Machinery and equipment       |   | 326,165    |      | 219,852   |   | 7-10                                             |   |
| Vehicles                      |   | 207,071    |      | 273,967   |   | 5                                                |   |
| Display boards                |   | 607,978    |      | 364,079   |   | 5                                                |   |
| Sample boards                 |   | 2,379,533  |      | 1,715,190 |   | 10                                               |   |
| Computer equipment            |   | 131,407    |      | 110,099   |   | 3-5                                              |   |
| Leasehold improvements        |   | 108,220    |      | 108,219   |   | 7                                                |   |
|                          |   | 3,849,601  |      | 2,869,238 |   |                                             |   |
| Less accumulated depreciation |   | (1,137,179 | )         | (752,667  | )      |                                             |   |
|                          |   | $          | 2,712,422 |      | $      | 2,116,571                                        |   |   |   |

 

20

----

 

Depreciation expense for theyears ended December 31, 2002 and 2001 was $422,435 and $317,852, respectively.(See Note 8)

 

Sample Boards

 

The samples in the fieldwith customers and salespersons have two characteristics that distinguish them as fixed assets:

 

•                  They are produced for use in operations andentered into the revenue-generating stream indirectly as marketing tools. Theyare held primarily for use and not for sale.

•                  They have relatively long lives.

 

The carrying values of thesesamples are adjusted through systematic depreciation to reflect wear and tear.

 

Capitalized samples in thefield at December 31, were as follows: 

 
|                           |   | **2002** |      | **2001** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
| Sample boards                  |   | $        | 2,379,533 |     | $      | 1,715,190 |   |
| Less: accumulated depreciation |   | (586,507 | )         | (388,549 | )      |
|                           |   | $        | 1,793,026 |     | $      | 1,326,641 |   |

 

Depreciation expense relatedto the sample boards for the years ended December 31, 2002 and 2001 was $197,958and $146,286, respectively.

 

**NOTE6     NOTES PAYABLE**

 

The Company has outstandingnotes payable at December 31, 2002 and 2001 as follows: 

 
|                                                                                                                                              |   | **2002** |    | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| *Notes Payable—Related Parties*                                                                                                              |   |     |    |     |   |
|                                                                                                                                              |   |     |    |     |   |
| Note payable to stockholder; interest rate 10% per year; due  December 31, 2025; no prepayment penalty; subject to Subordination  Agreement. |   | $        | 88,712  |     | $      | 88,712 |   |
|                                                                                                                                              |   |     |    |     |   |
| Note payable to stockholder; interest rate 10% per year; due  December 31, 2025 no prepayment penalty; subject to Subordination Agreement.   |   | 240,000  |    | 254,360  |   |
|                                                                                                                                              |   |     |    |     |   |
| Note payable to stockholder; interest rate 10% per year; due  December 31, 2025 no prepayment penalty; subject to Subordination  Agreement.  |   | 120,000  |    | 120,000  |   |
|                                                                                                                                              |   | $        | 448,712 |     | $      | 463,072 |   |

* *

*NotesPayable—Related Parties*

 

These notes may be paid downto a minimum balance of $85,000 in accordance with a Subordination Agreementdated November 13, 2002.

 

The totalinterest expense related to these loans was $56,532 and $45,785 atDecember 31, 2002 and 2001, respectively. 

 

21

----

 
|                                                                                                                                                                                  |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| *Notes Payable—Unrelated Parties*                                                                                                                                                |   |     |   |     |   |
|                                                                                                                                                                                  |   |     |   |     |   |
| Note payable to a company; 4.9% interest per year; monthly payments  of $632 including interest; secured by a vehicle, due February 26, 2002.  Loan paid off February 2002. |   | $        | 0      |     | $      | 1,190 |   |
|                                                                                                                                                                                  |   |     |   |     |   |
| Note payable to a bank; 8.25% interest per year; monthly payments of  $1,341 including interest; secured by a vehicle; due September 17, 2004.                                   |   | 26,143   |   | 39,440   |   |
|                                                                                                                                                                                  |   |     |   |     |   |
| Note payable to a bank; 8.9% interest per year; monthly payments of  $1,457 including interest; secured by a vehicle; due December 29, 2005.                                     |   | 45,807   |   | 58,528   |   |
|                                                                                                                                                                                  |   |     |   |     |   |
| Note payable to a bank; 8.95% interest per year; monthly payments of  $948 including interest; secured by computer software; due February 28,  2005.                             |   | 22,291   |   | 31,195   |   |
|                                                                                                                                                                                  |   |     |   |     |   |
| Note payable to a bank; 8.9% interest per year; monthly payments of  $640 including interest; secured by a vehicle; due February 27, 2006.  Loan paid off February 2002.    |   | 0        |   | 26,586   |   |
|                                                                                                                                                                                  |   |     |   |     |   |
| Note payable to a company; 0% interest per year; monthly payments of  $882; secured by a vehicle; due October 18, 2004.                                                          |   | 19,411   |   | 29,998   |   |
|                                                                                                                                                                                  |   | 113,652  |   | 186,937  |   |
| Less current portion                                                                                                                                                                  |   | (48,780  | )      | (52,215  | )      |
|                                                                                                                                                                                  |   | $        | 64,872 |     | $      | 134,722 |   |

 

The total interest expenserelated to these loans was $9,361 and $15,328 at December 31, 2002 and2001, respectively.

 

Long-term debt maturitiesfor all notes payable for each of the next five years and thereafter are asfollows: 

 
| 2003                  |   | $       | 48,780  |   |
|-----------------------|--------|---------|---------|--------|
| 2004                  |   | 46,456  |    |
| 2005                  |   | 18,416  |    |
| 2006                  |   | 0       |    |
| 2007                  |   | 0       |    |
| 2008 & thereafter |   | 448,712 |    |
|                  |   | $       | 562,364 |   |

** **

**NOTE7     LOAN PAYABLE**

 

On November 21, 2000,the subsidiary (IWT) entered into a new loan and security agreement with afinancial institution totaling $5,000,000 as a revolving loan, for a period ofthree years with an option to renew for one additional year. This was amendedand restated effective November 13, 2002, whereas the amount of themaximum credit was increased from $5,000,000 to $7,500,000. The averageinterest rate was 5% and 6% for the years ended December 31, 2002 and2001, respectively. The subsidiary (IWT) owed $4,864,778 and $3,958,578 againstthese revolving loans atDecember 31, 2002 and 2001, respectively.

 

The subsidiary (IWT) issubject to a number of restricted covenants under the debt agreement. Thesubsidiary (IWT) is in compliance with all covenants during the years ended December 31, 2002 and 2001.

 

The total interest expense related to these loans was $227,022 and $298,556 atDecember 31, 2002 and 2001, respectively.

 

22

----

**NOTE8     LEASES**

 

*CapitalLeases*

 

The Company’s property undercapital leases is included in property and equipment (See Note 5) and issummarized as follows: 

 
|                            |   | **2002** |    | **2001****** | ** ** |
|---------------------------------|--------|----------|---------|--------------|------------|
| Equipment                       |   | $        | 266,672 |         | $          | 185,706 |   |
| Less: Accumulated depreciation  |   | (58,724  | )       | (36,861      | )          |
|                            |   |     |    |         |       |
| Net assets under capital leases |   | $        | 207,948 |         | $          | 148,845 |   |

* *

*OperatingLeases*

 

The Company leases officeand warehouse space under a non-cancelable operating lease, which has aninitial term in excess of one year. During 2001, the Company negotiated a newten-year lease agreement for a 147,000 square foot warehouse and officefacility. The Company does not begin paying rent until 30 days after thelandlord completes construction, obtains a certificate of occupancy andnotifies the Company that it can occupy the premises. It is anticipated thatthe Company will obtain access to the new facility on or about April 1,2003 and begin paying rent on or about May 1, 2003.

 

At December 31, 2002,future minimum annual lease payments under operating and capital leases are asfollows: 

 
|                |   | **Operating  Lease** |      | **Capital  Leases****** | ** ** |
|---------------------|--------|----------------------|-----------|-------------------------|------------|
| 2003                |   | $                    | 568,207   |                    | $          | 47,222 |   |
| 2004                |   | 634,550              |      | 42,256                  |       |
| 2005                |   | 649,250              |      | 36,838                  |       |
| 2006                |   | 663,950              |      | 24,483                  |       |
| 2007                |   | 678,650              |      | 4,861                   |       |
| 2008 and thereafter |   | 3,866,100            |      | 0                       |       |
|                |   |                 |      |                    |       |
|                |   | $                    | 7,060,707 |                    | $          | 155,660 |   |

 

Total lease expense underoperating leases was $479,905 and $426,229 for the years endedDecember 31, 2002 and 2001, respectively.

 

Total interest expense undercapital leases was $9,429 and $13,199 for the years ended December 31,2002 and 2001, respectively.

 

**NOTE9     INCOME TAXES**

 

During the first nine monthsof 2002, the subsidiary, International Wholesale Tile Inc. was taxed as an Scorporation according to the provisions of the Internal Revenue Code.Accordingly, no provision or liability for Federal income taxes is reflected inthe accompanying statements for that period of time.

 

Instead, the stockholdersare liable for individual Federal income taxes on their respective share of theCompany’s taxable income. S corporations pay distribution of profits in lieu ofdividends.

 

For the three months endedDecember 31 2002, the Company had a tax loss due to temporary differences.The Company has a federal net operating loss carryforward at December 31,2002 of $335,005, subject to annual limitations prescribed by the InternalRevenue Code, that are available to offset future taxable income through 2022.No valuation allowance has been recorded to offset the net deferred taxes dueto the certainty of the Company’s ability to generate future taxable income.

 

23

----

 

The provision for incometaxes at December 31, 2002 consisted of the following:

 
| Current taxes          |   | $      | 0      |   |
|------------------------|--------|--------|--------|--------|
| Deferred taxes         |   | 34,347 |   |
|                   |   |   |   |
| Net deferred tax asset |   | $      | 34,347 |   |

 

The tax effects of temporarydifferences that give rise to significant portions of deferred tax assets andliabilities at December 31, 2002 are as follows: 

 
| Deferred tax assets:     |   |    |   |
|--------------------------|--------|---------|--------|
| Loss carryforward        |   | $       | 76,546 |   |
| Bad debt reserve         |   | 2,934   |   |
| Less valuation allowance |   | 0       |   |
|                     |   |    |   |
|                     |   | 79,480  |   |
| Deferred tax liability:  |   |    |   |
| Depreciation             |   | (45,133 | )      |
|                     |   |    |   |
| Net deferred tax asset   |   | $       | 34,347 |   |

 

The Company’s tax expensediffers from the “expected” tax expense for the period ended December 31,2002 (computed by applying the Federal Corporate tax rate of 32% before taxes),as follows: 

 
| Statutory rate applied before income taxes           |   | $      | 29,496 |   |
|------------------------------------------------------|--------|--------|--------|--------|
| State income taxes, net of federal income tax effect |   | 4,851  |   |
| Changes in valuation allowance                       |   | 0      |   |
|                                                 |   |   |   |
| Income Tax Benefit                                   |   | $      | 34,347 |   |

 

Proforma taxand EPS data as if the Company had been a taxable entity in 2001: 

 
|                    |   | **Historical** |       | **Pro forma**** ** | ** ** |
|-------------------------|--------|----------------|------------|-------------------------|------------|
| Revenues                |   |           |       |                    |       |
| Sales, net              |   | $              | 19,626,819 |                    | $          | 19,626,819 |   |
| Cost of goods sold      |   | 12,629,138     |       | 12,629,138              |       |
|                    |   |           |       |                    |       |
|                    |   | 6,997,681      |       | 6,997,681               |       |
| Operating expense       |   | 5,295,825      |       | 5,295,825               |       |
| Other income/(expense)  |   | (414,738       | )          | (414,738                | )          |
|                    |   |           |       |                    |       |
| Net income before taxes |   | 1,287,118      |       | 1,278,118               |       |
| Income tax expense      |   | 0              |       | (384,460                | )          |
|                    |   |           |       |                    |       |
| Net income              |   | $              | 1,287,118  |                    | $          | 902,658 |   |
|                    |   |           |       |                    |       |
| Earnings per share      |   | $              | 0.14       |                    | $          | 0.10 |   |

** **

**NOTE10     STOCKHOLDERS’ EQUITY**

 

The Articles ofIncorporation provide for the authorization of 25,000,000 shares of convertiblepreferred stock at $0.001, and 100,000,000 shares of common stock at $0.001 parvalue. Each share of preferred stock is convertible into 1 share of commonstock. At December 31, 2002 11,037,834 shares of common stock were issuedand outstanding. Of

 

24

----

 

those shares, 450,000 were reclassified toRedeemable Common Stock to address the repurchase agreement by which threeshareholders could redeem up to 450,000 shares of common stock (See Note 13)

 

*CommonStock*

 

On May 12, 1994,6,000,000 shares of common stock (as restated for the recapitalization) wereissued for $0.0069 per share or a total of $41,400. (See Note 13)

 

On January 1, 2001,3,000,000 shares of common stock (as restated for the recapitalization) wereissued for $0.028 per share or a total of $84,000. (See Note 13)

 

As a result of therecapitalization (See Note 13) on October 1, 2002, the Company is deemedto have issued 1,800,000 common shares to the stockholders of IWT TesoroCorporation (f/k/a Ponca Acquisition Corp.).

 

On October 4, 2002, theCompany issued 15,000 shares of common stock valued at $2.71 per share or atotal of $40,650 in exchange for legal services rendered in the amount of$4,950. As a result, the Company recognized a loss on settlement of $35,700.The value of the stock was based on the private offering price of $3.00 perunit; each unit consisting of one share of common stock and 11⁄2 warrants topurchase 11⁄2 shares of common stock. The warrants were priced using theBlack-Scholes option pricing model at the date of sale. Accordingly, theaverage value of the warrants using the pricing model was $.29, and the valueof each share was $2.71.

 

On October 4, 2002, theCompany issued 10,000 shares of common stock valued at $2.71 per share, basedon the contemporaneous offering price, or a total of $27,100 to a directorunder the Stock Incentive Plan for past services rendered resulting in animmediate charge to operations.

 

On October 14, 2002,the Company issued 75,900 shares of common stock valued at $2.71 per share,based on the contemporaneous offering price, or a total of $205,689 toemployees under the Stock Incentive Plan for services rendered resulting in animmediate charge to operations.

 

On October 14, 2002,the Company issued 8,600 shares of common stock valued at $2.71 per share,based on the contemporaneous offering price, or a total of $23,306 to fourindividuals under the Stock Incentive Plan in exchange for consulting servicesrendered resulting in an immediate charge to operations.

 

*CommonStock*

 

On October 14, 2002,the Company issued 30,000 shares of common stock valued at $2.71 per share,based on the contemporaneous offering price, or a total of $81,300 to directorsunder the Stock Incentive Plan for past services rendered resulting in animmediate charge to operations.

 

On October 15, 2002,the Company issued 10,000 shares of common stock valued at $2.71 per share,based on the contemporaneous offering price, or a total of $27,100 in exchangefor consulting services rendered resulting in an immediate charge tooperations.

 

On October 21, 2002, theCompany issued 53,334 shares of common stock and 80,000 warrants for $3.00 perunit, or a total of $160,000, to accredited investors pursuant to the privateoffering. (See Note 17)

 

On November 28, 2002,the Company issued 20,000 shares of common stock and 30,000 warrants for $3.00per unit, or a total of $60,000, to an accredited investor pursuant to theprivate offering. (See Note 17)

 

On December 2, 2002,5,000 warrants were exercised for 5,000 shares of common stock at $3.00 pershare, or a total of $15,000.

 

On December 26, 2002,the Company issued 10,000 shares of common stock and 15,000 warrants for $3.00per unit, or a total of $30,000, to an accredited investor pursuant to theprivate offering. (See Note 17)

 

*Fair Valueof Shares Issued*

 

In absence of recent marketdetermined prices of the common shares, the company valued the shares after theprivate offering (See Note 17) of $3.00 per unit, with an unit consisting of 1share of common stock and 11⁄2 warrants to purchase 11⁄2 shares of common stock. Thewarrants were valued at $.29 by using the Black-Scholes pricing model at thedate of sale. Consequently, the fair value of the shares of common stockincluded in the unit was determined to be $2.71.

 

25

----

 

**NOTE11     STOCK OPTIONS AND COMPENSATION PLAN**

 

*StockCompensation Plan*

 

On December 27, 2001,IWT Tesoro Corporation adopted the “Stock Incentive Plan.” The Company’s StockIncentive Plan provides that eligible employees, consultants, and affiliatesmay be granted shares of common stock. Under the plan, the options granted arenon-qualified stock options, incentive stock options, and restricted stock. Theaggregate total common stock that may be issued is 4,000,000 shares. For theyear ended December 31 2002, 124,500 restricted shares were issued toemployees, directors and consultants for services rendered under the “StockIncentive Plan.” For the year ended December 31 2001, no restricted shareswere issued to employees, directors and consultants for services rendered underthe “Stock Incentive Plan.” All restricted shares issued under the plan arecurrently not registered and are subject to Rule 144 without any additionalrestrictions imposed by the Compensation Committee at the present time. Therestricted shares issued to employees were recorded at the fair value on thegrant date. (See Note 10 *Fair Value ofShares Issued*).

 

On November 23, 2002,the Company granted 40,000 options to directors at an exercise price of $3.00per share, expiring in ten years. The options vest as follows: (a) 50% vestedimmediately; and (b) 50% to vest on November 23, 2003.

 

On November 23, 2002,the Company granted 400,000 options to directors at an exercise price of $3.00per share, expiring in ten years. The options vest as follows: (a) 33% at suchtime as the Company’s common stock commences trading on the Over-The Counter(OTC) Bulletin Board (equivalent); (b) 33% at such time as the Company attainsno less than a $50 million market cap for ten consecutive trading days; and (c)34% when the Company achieves its 2003 revenue and profit targets.

 

All options were granted toemployees, and accounted for according to APB 25; therefore no compensationexpense was recognized.

 

For financial statementdisclosure purposes, the fair market value of each stock option granted toofficers and employees during 2002 was established at the date of grant usingthe Black-Scholes option pricing model in accordance with Statement No. 123,with the following assumptions: 

 
| Expected dividend yield   |   | 0%       |
|---------------------------|--------|----------|
| Risk free interest rate   |   | 2.32%    |
| Expected time of exercise |   | 3  years |
| Expected volatility       |   | 0%       |

 

 
|     |   | **Number of  Securities  Underlying  Options** |   | **Percent of  Total Authorized  Options Available  Under the Plan  in Fiscal Year** |   | **Exercise or  Base Price** |   | **Expiration  Date** |       | **Value of Options  at Grant Date  Using an Option Pricing Model** |   |
|----------|--------|------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|-----------------------------|--------|----------------------|------------|-------------------------------------------------------------------------|--------|
|     |   |                                           |   |                                                                                |   |                        |   |                 |       |                                                                    |   |
| Officers |   | 440,000                                        |   | 11                                                                                  | %      | $                           | 3.00   |                 | 11/23/2012 |                                                                    | $      | 0.20 |   |
|          |        |                                                |        |                                                                                     |        |                             |        |                      |            |                                                                         |        |  |  |

 

No options were exercised atDecember 31, 2002. Changes during the year are presented as follows: 

 
| **Stock Options**              |   | **Number of Options** |   | **Weighted  Average  Exercise Price** |   |
|--------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
|                           |   |                  |   |                                  |   |
| Balance at beginning of period |   | 0                     |   | $                                     | 0.00   |   |
| Granted                        |   | 440,000               |   | 3.00                                  |   |
| Exercised                      |   | 0                     |   | 0.00                                  |   |
| Forfeited                      |   | 0                     |   | 0.00                                  |   |
|                           |   |                  |   |                                  |   |
| Balance at end of period       |   | 440,000               |   |                                  |   |
|                                |        |                       |        |                                       |        |  |

 

The following table summarizesinformation about stock options outstanding at December 31, 2002: 

 
|                                    |   | **OPTIONS OUTSTANDING**** **              |       | **OPTIONS EXERCISABLE**** **                           | ** ** |
|-----------------------------------------|--------|------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Range of  Exercise  Price**** ** |   | **Number  Outstanding  at 12/31/02**** ** | ** ** | **Weighted  Average  Remaining  Contracted Life**** ** | ** ** | **Weighted  Average  Exercise  Price**** ** | ** ** | **Number  Exercisable at  12/31/02**** ** | ** ** | **Weighted  Average  Exercise  Price**** ** | ** ** |
| $ 3.00                                  |   | 440,000                                        |       | 9.9                                                         |       | $ | 3.00 |   | 20,000 |   | $ | 3.00 |   |
|                                         |        |                                                |            |                                                             |            |  |  |  |  |  |  |  |  |

 

26

----

 

**NOTE12     WARRANTS**

 

The Company sold 125,000warrants as part of the private offering held at the end of the year 2002, atan initial exercise price of $3.00 per share, expiring five years from the dateof sale, exchangeable for 125,000 shares of outstanding stock. AtDecember 31, 2002, 5,000 warrants were exercised.

 

For purpose ofvaluing warrants, the Company used the Black-Scholes option pricing model withthe following assumptions for the year ended December 31, 2002:

 
| Expected dividend yield   |   | 0%       |
|---------------------------|--------|----------|
| Risk free interest rate   |   | 2.27%    |
| Expected time of exercise |   | 3  years |
| Expected volatility       |   | 0%       |

 

The average value of thewarrants at the sale date using the Black-Scholes option pricing model was$0.29.

 

Changes during the year arepresented as follows: 

 
|                           |   | **Number of Warrants** |   | **Common  Stock** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------|--------|------------------------|--------|-------------------|--------|----------------------------------------|--------|
|                           |   |                   |   |              |   |                                   |   |
| Balance at beginning of period |   |                   |   | 0                 |   | $                                      | 0      |   |
| Granted                        |   | 125,000                |   | 125,000           |   | 3.00                                   |   |
| Exercised                      |   | 5,000                  |   | 5,000             |   | 3.00                                   |   |
| Forfeited                      |   | 0                      |   | 0                 |   | 0                                      |   |
|                           |   |                   |   |              |   |                                   |   |
| Balance at end of period       |   | 120,000                |   | 120,000           |   |                                   |   |
|                                |        |                        |        |                   |        |                                        |        |  |

 

The following tablesummarizes information about warrants outstanding at December 31, 2002: 

 
|                          |   | **WARRANTS OUTSTANDING**             |   | **WARRANTS EXERCISABLE**                          |   |
|-------------------------------|--------|--------------------------------------|--------|---------------------------------------------------|--------|
| **Range of  Exercise  Price** |   | **Number  Outstanding at  12/31/02** |   | **Weighted  Average  Remaining  Contracted Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable at  12/31/02** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                                 |   |                                              |   |   |   |   |   |   |   |   |   |
| $ 3.00                        |   | 120,000                              |   | 4.9                                               |   | $ | 3.00 |   | 120,000 |   | $ | 3.00 |   |

 

The exercise price willincrease by $.25 per share at the beginning of each calendar quarter followingthe first public sale of the Company’s common stock, pursuant to its effectiveForm 221 to be filed with the National Association of Securities Dealers.

 

**NOTE13     ACQUISITION**

 

On October 1, 2002, theCompany acquired International Wholesale Tile, Inc. In connection with thelegal form of this transaction, International Wholesale Tile, Inc. became awholly owned subsidiary of IWT Tesoro Corporation. A total of 9,000,000 sharesof common stock were issued for the acquisition. For accounting purposes, theacquisition has been treated as a capital transaction and as a recapitalizationof International Wholesale Tile, Inc. The financial statements became those ofInternational Wholesale Tile, Inc., with adjustments to reflect the changes inequity structure. The operations are those of International Wholesale Tile,Inc. for all periods presented, and those of IWT Tesoro Corporation from therecapitalization date. The accompanying consolidated balance sheets reflect theassets and liabilities at historical cost of IWT Tesoro Corporation and InternationalWholesale Tile, Inc. at December 31, 2002; and the assets and liabilitiesat historical cost of International Wholesale Tile, Inc. at December 31,2001.

 

27

----

 

As part of the transaction,the Company and each of the three shareholders of International Wholesale Tile,Inc. entered into a repurchase agreement, to commence on January 1, 2003for three years, by which the three shareholders may sell a certain amount ofthe Company’s common stock back to the Company for a price based on an amountequal to 88% of the average trading price of the Company’s common stock so longas the stock is trading. The amount of stock is generally up to 25,000 sharesfor the first year, up to 50,000 shares for the second year, and up to 75,000shares for the third year. The repurchase agreement is contingent upon tradingof the Company’s stock on the NYSE, the ASE, the NASDAQ, the Over the CounterBulletin Board, or the “Pink Sheets”. The maximum number of redeemable shares underthe repurchase agreement is 450,000.

 

On October 1, 2002, thedate of the repurchase agreement, the Company reclassified 450,000 redeemableshares to temporary equity at their redeemable value for a total of $60,536. AtDecember 31, 2002, the Company adjusted the carrying value of theredeemable shares to reflect the change in the redeemable value at the end ofthe year. This adjustment resulted in a charge to Additional Paid in Capital inthe amount of $1,012,624. At December 31, 2002, the maximum possible cashobligation related to redeemable common stock under the repurchase agreementwas $1,073,160, based on the repurchase price of 88% of the fair value of thecommon stock at December 31, 2002 for a maximum of 450,000 shares.

 

**NOTE14     RELATED PARTY TRANSACTIONS**

 

The Company had a receivableat December 31, 2001 from a shareholder, who is also an officer, totaling$26,913. At December 31, 2002, the balance of this loan was zero. AtDecember 31, 2002 and 2001, amounts due to the same related party totaled$88,712 each year. (See Note 6)

 

The Company had a receivableat December 31, 2002 from a related company totaling $5,500. This loanoccurred during the ordinary course of business, bearing no interest, and isdue on demand. In the opinion of management, this loan bears no more thannormal credit risk.

 

**NOTE15     EMPLOYMENT AGREEMENTS**

 

*IWT TesoroCorporation*

 

On December 29, 2001,the board of directors of IWT Tesoro (Company) elected Henry J. Boucher, Jr. toserve as its president for an annual salary of $120,000. Mr. Boucher had signeda Salary Deferral Agreement with the Company, which was terminated by the boardof directors. All deferred compensation for the year 2002 was paid to Mr.Boucher. Mr. Boucher’s employment may be terminated for cause at any time andwithin 30 days without cause.

 

*InternationalWholesale Tile, Inc.*

 

At December 31, 2001,the subsidiary, IWT, had employment agreements with its officers for a term ofone year. On October 2, 2002, new agreements were entered into.

 

**NOTE 16     PRIORPERIOD ADJUSTMENT**

 

For the yearended December 31, 2001, an adjustment was made to the retained earningsof the Company to correct the amounts reported for bad debt, depreciation,payroll, and interest expense during 2000 and 1999. The 2000 and 1999 financialstatements were restated to reflect this adjustment. Subsequently, for the yearended December 31, 2000, depreciation expense increased by $30,606, baddebt increased by $61,500, interest expense increased by $27,318, and payrollexpense increased by $25,938. For the year ended December 31, 1999,depreciation expense increased by $19,948, and there hasas no adjustment forbad debt, interest expense, or payroll expense. Accumulated retained earningsdecreased by a total of $145,362 and $19,949 for the years 2000 and 1999,respectively. 

 
|                                                          |   | **2002**** ** |     | **2001**** ** |   |
|---------------------------------------------------------------|--------|--------------------|----------|--------------------|--------|
| Retained earnings at beginning of year                        |   |               |     |               |   |
| As previously reported                                        |   | $                  | (830,583 | )                  | $      | (210,285 | ) |
| Adjustment                                                    |   | 0                  |     | 145,362            |   |
|                                                          |   |               |     |               |   |
| As restated                                                   |   | (830,582           | )        | (64,923            | )      |
|                                                          |   |               |     |               |   |
| Distributions                                                 |   | 1,864,020          |     | 521,459            |   |
| S-Corp undistributed earnings reclassified to paid in capital |   | 1,085,329          |     | 0                  |   |
| Net income                                                    |   | (1,934,027         | )        | (1,287,118         | )      |
|                                                          |   |               |     |               |   |
| Retained (earnings) deficit at end of year                    |   | $                  | 184,740  |               | $      | (830,582 | ) |

 

28

----

 

**NOTE17     PRIVATE OFFERING**

 

The Company adopted asubscription agreement on October 1, 2002 to commence a private offeringof its common stock to accredited investors only for up to 1.0 million units at$3.00 per unit; each consisting of one (1) share of common stock and warrantsto purchase 11⁄2 shares initially at $3.00 per share. The price of the warrantswill increase by $.25 per share at the beginning of each calendar quarterfollowing the first public sale of the common stock of IWT Tesoro Corporationpursuant to the Company’s form 211 to be filed with the National Association ofSecurities Dealers (NASD).

 

At December 31, 2002,the Company had raised $265,000 in units and warrants exercised.

 

**NOTE18     SEGMENT INFORMATION**

 

The Company manages itsoperations as one segment and all revenue is derived from customers in theUnited States.

 

**NOTE19     SUBSEQUENT EVENTS**

 

On January 8, 2003, theCompany incorporated a subsidiary, IWT Tesoro International, Ltd. (ITIL). Thissubsidiary was set up as a foreign subsidiary, to be based in Bermuda to handlefuture operations of foreign subsidiaries.

 

On January 24, 2003,the Company set up IWT Tesoro Transport, Inc. (ITTI). Initially, thiscorporation will be a transport broker, but future plans include overlandtransport of tile from Florida to destinations within the United States andreturn shipments of other freight back to Florida.

 

29

----

 

**PART II**

 

**ITEM 5.        MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

(a)           *Market Information*.  Tesoro’s common stock has not yet commencedtrading on any quotation system or exchange.

 

The Securities and ExchangeCommission has adopted Rule 15g-9 which establishes the definition of a “pennystock”, for purposes relevant to Tesoro, as any equity security that has amarket price of less than $5.00 per share or with an exercise price of lessthan $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, the rulesrequire:

 

(i)       that a broker or dealerapprove a person’s account for transactions in penny stocks and

 

(ii)       the broker or dealerreceive from the investor a written agreement to the transaction, setting forththe identity and quantity of the penny stock to be purchased.

 

In order to approve a person’saccount for transactions in penny stocks, they must

 

(i)       obtain financialinformation and investment experience and objectives of the person; and

 

(ii)      makea reasonable determination that the transactions in penny stocks are suitablefor that person and that person has sufficient knowledge and experience infinancial matters to be capable of evaluating the risks of transactions inpenny stocks.

 

The broker or dealer must alsodeliver, prior to any transaction in a penny stock a disclosure scheduleprepared by the Commission relating to the penny stock market, which, inhighlight form,

 

(i)       sets forth the basis onwhich the broker or dealer made the suitability determination and

 

(ii)      that the broker or dealerreceived a signed, written agreement from the investor prior to thetransaction.  Disclosure also has to bemade about the risks of investing in penny stocks in both public offerings andin secondary trading, and about commissions payable to both the broker-dealerand the registered representative, current quotations for the securities andthe rights and remedies available to an investor in cases of fraud in pennystock transactions.

 

Finally,monthly statements have to be sent disclosing recent price information for thepenny stock held in the account and information on the limited market in pennystocks.

 

Determination of our Share Price

 

An arbitrary process basedupon a subjective evaluation by us determined the price of the common sharesstated in this prospectus of $5.50 and the exercise price of the warrant of$7.00. Among the factors considered in determining the initial estimated priceof the common shares are:

 

•      Ourhistory and our prospects;

•      Theindustry in which we operate;

•      Thestatus and development prospects for our products;

•      Ourpast and present operating results;

•      Ourexecutive officers experience; and

•      Thegeneral condition of the securities markets at the time of this offering.

 

Our offering price and thewarrant exercise price should not be considered an indication of the actualvalue of our securities offered in this prospectus. These prices are subject tochange as a result of market conditions and other factors and we cannot assureanyone that these securities can be resold at or above the initial publicoffering price.

 

Our Stockholders

 

At June 13, 2003,11,205,502 shares of common stock were outstanding, which were held byapproximately 149 stockholders of record.

 

30

----

 

Our Dividend Policy

 

We have never paid, and donot intend to pay, any cash dividends on our common stock in the current year.Therefore in all likelihood, an investor in this offering will only realize aprofit on his investment, in the short term, if the market price of our commonstock increases in value.

 

Securities Authorized to be Issued upon ourEquity Compensation Plans 

 
|                                                       |   | **Equity Compensation Plan Information**                                                               |       |
|------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|------------|
|                                                       |   | **Number of Securities  to be issued  upon Exercise of  Outstanding options,  warrants and rights(a)** |       | **Weighted-average  Exercise price of  outstanding options,  warrants and rights** |   | **Number of securities  remaining available  for  future issuance under  equity compensation  plans  (excluding securities  in  column (a))** |   |
| Equity compensation plans approved by security holders     |   | 440,000                                                                                                |       | $ | 3.00 |   | 3,435,500 |   |
| Equity compensation plans not approved by security holders |   | 0                                                                                                      |       | 0 |   | 0 |   |
|                                                       |   |                                                                                                   |       |   |   |   |   |
| **Total**                                                  |   | **440,000**                                                                                            | ** ** | **$** | 3.00 | ** ** | **3,435,500** | **(1)** |

 

----

(1)                                  Tesoro’s Stock Incentive Plan includes theright to grant options and to issue restricted stock and the Plan was approvedby Tesoro’s then sole stockholder in December 2001. This number reflects124,500 restricted shares that have been issued all pursuant to the Plan.

 

**ITEM 6.        MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.**

 

The following discussionshould be read along with our financial statements, which are included inanother section of this prospectus. This discussion contains forward-lookingstatements about our expectations for our business and financial needs. Theseexpectations are subject to a variety of uncertainties and risks that may causeactual results to vary significantly from our expectations. The cautionarystatements made in this prospectus should be read as applying to allforward-looking statements in any part of this prospectus.

 

We were incorporated onMay 5, 2000 as a Nevada corporation. Our principal office is located at191 Post Road West, Suite 10, Westport, CT 06880. Any reference in this“Management’s Discussion and Analysis or Plan of Operations” discussion to “thecompany,” “our,” “we” or “us” refers to Tesoro.

 

Effective October 1,2002, we acquired International Wholesale Tile, Inc. (IWT) through a shareexchange and IWT became our wholly owned subsidiary. We issued a total of9 million shares of our common stock in exchange for all of the IWTshares. As part of the transaction, Tesoro and each of the three IWTstockholders entered into a repurchase agreement by which the threestockholders may each sell a total of 150,000 shares of Tesoro’s common stockover a three-year period back to us for a price based on an amount equal to 88%of its then weighted average trading price. This agreement was terminated on June 26, 2003.  At that time, the common stock was nottrading on any exchange or quotation system.

 

Through IWT,we provide hard floor and wall covering materials primarily ceramic, porcelainand granite tiles to the new construction and remodeling industries for thecommercial and residential marketplaces. We distribute our products through anetwork of independently owned dealers and distributors, buying groups and homecenter retailers. We currently purchase our products predominately from foreignmanufacturers.

 

Our primary source ofrevenue is the sale of hard flooring and wall covering materials and ourprimary costs relate to the acquisition, warehousing and delivery of thoseproducts. While sales are made throughout the United States, the majority ofour sales are in the southeastern quadrant of the country. The primary sources ofworking capital are a $7.5 million (US) revolving line of credit from adivision of a large US commercial bank, stockholders’ equity and our supplierswho have extended us terms. Specifically, the terms we have negotiated with ourinternational suppliers are more advantageous than those we extend to ourcustomers. This allows us, in some instances, to collect our receivables priorto paying our suppliers. During 2003, we expect to begin trading our stock onthe OTC-BB and to raise equity 

 

31

----

 

through the public market. Any new equityraised will be used to strengthen our balance sheet and to provide capital forcontinued growth.

 

In the first quarter of2003, we have created two new wholly owned subsidiary companies. The first isIWT Tesoro International Ltd, a Bermuda based exempt company. A Bermudaexempt company is a company domiciled in Bermuda that is not actively involvedin trade or business on the island and is therefore exempt from certain licensingrequirements. International will serve as the holding company for anyinternational based ventures we need to support expanding our sales effort. Theother subsidiary is IWT Tesoro Transport, Inc., a Florida corporation, anda licensed freight broker that will handle our in and out bound freightoperations.

 

Resultsof Operations for the year ending December 31, 2002

 

The following discussion andanalysis should be read in conjunction with the financial statements and notesthereto that appear elsewhere in this document. The table below sets forthcertain operating data as a percentage of total revenue for the periodsindicated. 

 
|               |   | **Fiscal Year Ending  December 31** |   |
|--------------------|--------|------------------------------------------|--------|
|               |   | **2000**                                 |   | **2001** |   | **2002** |   |
| Revenues           |   | 100                                      | %      | 100 | % | 100 | % |
| Cost of Goods Sold |   | 68                                       | %      | 64 | % | 60 | % |
| Gross Margin       |   | 32                                       | %      | 36 | % | 40 | % |
| Operating Expenses |   | 32                                       | %      | 29 | % | 31 | % |

* *

*December 31,2002 compared to December 31, 2001*

 

Sales for the year endedDecember 31, 2002 were $25,387,707 a 29% increase over sales for the yearended December 31, 2001. This growth follows a 40% growth from 1999 to2000 and a 31% growth from 2000 to 2001. We are a relatively small player in agrowing market. We are entering new markets and adding new products; therefore,we expect to be able to grow faster than the market as a whole for the nextseveral years. Our share of this market is approximately 1%. The tile market inthe United States is approximately $2.1 billion and is growing at a fiveto seven percent rate.

 

As we grow, we have beenable to purchase product at lower prices and have consequently lowered our costof goods to 60% in 2002 from 64% in 2001 and 68% in 2000. While there arecertainly finite limits to improving our gross margin percentage, it isimperative that we maintain these ratios as we grow.

 

Our earnings beforeinterest, taxes, depreciation and amortization (EBITDA) grew from$2 million in 2001 to $2.65 million in 2002, a 31% growth rate.  EBITDA is a concept used by financialmanagers to compare businesses that operate in different industries withdifferent capital needs, tax circumstances and debt structure. It is not a GAAPconcept and should not be used as the only measure of a company’s financialperformance. Investors should refer to the financial statements included inthis document before making any investment decisions.

 

We have included a reconciliation from our net income to EBITDA:

 
|                    |   | **2002** |      | **2001** |   |
|-------------------------|--------|----------|-----------|----------|--------|
|                    |   |     |      |     |   |
| Net income              |   | $        | 1,934,027 |     | $      | 1,287,118 |   |
| Interest expense        |   | 328,920  |      | 424,527  |   |
| Income taxes (deferred) |   | (34,384  | )         | 0        |   |
| Depreciation            |   | 422,435  |      | 317,852  |   |
| Amortization            |   | 0        |      | 0        |   |
| EBIDTA                  |   | $        | 2,650,998 |     | $      | 2,029,497 |   |

 

•                                          Themajor causes of the increased EBITDA were (a) an increase of 29% in salesand (b) an increase of 4% on the gross margin.

 

•                                          EBIDTAis not a GAAP concept and should not be used as the only measure of a company’sfinancial performance. Investors should refer to our financial statementsbefore making any investment decisions.

 

32

----

 

•                                          Ourearnings before interest, taxes, depreciation and amortization (EBITDA) grewfrom $2 million in 2001 to $2.65 million in 2002, a 31% growth rate.EBITDA is a concept used by financial managers to compare businesses thatoperate in different industries with different capital needs, tax circumstancesand debt structure.

 

In early April 2003, wemoved into a new warehouse facility of nearly 147,000 square feet, an increaseof nearly 50% over the previous facility. 5,000 square feet of the new facilityis for office space. This new facility will allow us to increase our inventoryand better serve our customers who rely upon us to meet the short lead timesand limited inventory capacity that exist in their markets. We hope to improvethe efficiency of our warehouse operations by simplifying the receiving andshipping functions. We currently maintain between four and five millionsquare feet of product in our facility and expect that this will increase tobetween six and seven million square feet. Our inventory turns, in 2002,were approximately 3.8 times. We expect to lower those turns to about 3.2during 2003 and to 3.0 in 2004, however we cannot assure anyone that we will besuccessful in attaining these expectations. Availability of product is a keysuccess factor for us and is a good use of our capital.

 

Making it easy for ourcustomers to sell product is a key success factor for us. We have an extensivesampling and display program that augments the training and marketing supportwe provide our customers. As of December 31, 2002, our inventory ofsamples in the field with our customers represents a significant investment($2,553,378 before accumulated depreciation) that is capitalized on our balancesheet.

 

*Liquidityand Capital Resources*

 

We had cash balances of$664,358 and $574,046 at the end of March 31, 2003 and December 31,2002, respectively. We have generated positive cash flow from operations forthe last three years.

 

In October 2002, wecommenced a private offering of our common stock to accredited investors for upto one million units at $3.00 per unit. Each unit consists of one share ofcommon stock and warrants to purchase 11⁄2 shares initially at $3.00 per sharefor five years from the date the warrant was issued. The price of the warrantswill increase by $.25 per share at the beginning of each calendar quarter followingthe first public sale of Tesoro’s common stock and continuing until the warrantexpires.

 

Through its closing as ofMarch 31, 2003, we raised $530,000 from units sales. We also raised anadditional $45,000 from 15,000 warrants that were exercised. All of theinvestors were provided with, or otherwise had access to, information about theCompany and its subsidiaries, including financial information. The proceedsfrom the offering and the warrant exercises were used for general corporatepurposes, including paying fees to outside professionals and working capital.

 

On November 21, 2000,our subsidiary, IWT, entered into a new loan and security agreement with afinancial institution totaling $5 million as a revolving loan, for aperiod of three years, with an option to renew for one additional year. Thiswas amended and restated effective November 13, 2002 and the amount of themaximum credit was increased from $5 million to $7.5 million. Theinterest rate on this loan is the Wachovia announced prime rate plus .75% peryear. Additionally, at the lender’s option, we also pay prime plus 2.75% withrespect to any non-contingent obligations

 

•                  on all outstanding obligations followingtermination or non-renewal of the credit facility;

•                  form and after the date of an event ofdefault occurs and for so long as such event is continuing, as determined bylender;

•                  during any time the amounts available to usare made or arise without our lender’s knowledge or consent.

 

**ITEM 7.****                       FINANCIALSTATEMENTS**

 

The financialstatements and supplemental data required by this Item 7 follow the index offinancial statements that appears at the end of Part I of this Form 10-KSB/A.

 

**ITEM 8.****                       CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On September 13, 2002,Tesoro notified the accounting firm of Magee, Rausch & Shelton, LLP ofTulsa, OK (“MRS”) that MRS had been replaced as Tesoro’s principal accountant.MRS reported on and audited the financial statements prepared by Tesoro sinceour inception on May 3, 200 and ending July 15, 2000. It has notprepared any financial statements subsequent to the July 15, 2000,reports.

 

33

----

 

On August 23, 2002,Tesoro engaged the accounting firm of Sewell and Company, PA of Hollywood,Florida, as its principal accountant to audit the financial statements preparedby Tesoro for the fiscal year ended December 31, 2002 and for its pastfinancial filings. The decision to change accountants was approved by Tesoro’sBoard of Directors and was based on its belief that Tesoro’s operations wouldbe more accessible and economically undertaken by a Florida SEC qualifiedaccounting firm since its wholly-owned subsidiary, International WholesaleTile, Inc. is a Florida corporation located in Palm City, Florida.

 

MRS did not prepare theaudited financial statements for the last two fiscal years. However, for thepreviously prepared audited report prepared by MRS, the MRS report on Tesoro’sfinancial statements and audits contained no adverse opinion or disclaimer ofopinion and were not qualified as to uncertainty audit scope or accountingprinciple. For those reports and documents prepared by MRS, there have been nodisagreements with MRS on any matter of accounting principles or practices,financial statement disclosures, or auditing scope or procedures.

 

**ITEM 9.****                       DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH 16(a).**

 

**Directorsand Executive Officers**

 

The following table includesthe names, positions with Tesoro and ages of our Executive Officers andDirectors. 

 
| **Name**** **    |   | **Age**** ** |   | **Position**** **                                                                                                                                                                                                                                                                                                                |
|-----------------------|--------|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Henry J. Boucher, Jr. |   | 55                |   | •     Tesoro:  Chairman, President, Chief Executive Officer, Director•     IWT Tesoro International Ltd.: Director •                  IWT Tesoro Transport, Inc.: President and  Director |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| Forrest Jordan        |   | 55                |   | •     Tesoro:  Chief Financial Officer, Senior Vice President; Director•     IWT: Senior Vice President, Treasurer, Secretary, Director•     IWT Tesoro International Ltd.: Director•     IWT Tesoro Transport: Director          |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| Paul F. Boucher       |   | 44                |   | •     Tesoro:  Director, Senior Vice President•     IWT: President, Director •     IWT Tesoro International Ltd.: Director                                                                                                                                 |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| Grey Perna            |   | 46                |   | •     Tesoro:  Director, Senior Vice President •     IWT: Senior Vice President, Director •     IWT Tesoro International Ltd.: President, Director                                                                                                         |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| James R. Edwards      |   | 51                |   | •     Tesoro:  Secretary, Director                                                                                                                                                                                                                                                                           |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| Carl G. Anderson, Jr. |   | 58                |   | •     Tesoro:  Director                                                                                                                                                                                                                                                                                      |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| James Lafond          |   | 60                |   | •     Tesoro:  Director                                                                                                                                                                                                                                                                                      |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| Robert B. Rogers      |   | 67                |   | •     Tesoro:  Director                                                                                                                                                                                                                                                                                      |
|                  |   |              |   |                                                                                                                                                                                                                                                                                                                                  |
| Allen G. Rosenberg    |   | 55                |   | •     Tesoro:  Director                                                                                                                                                                                                                                                                                      |

** **

**Henry J. Boucher, Jr.**    Henry has served asour President and a Director since December 29, 2001 and as our Chairmanand Chief Executive Officer since November 2002. He is also a Director ofInternational and President and a Director of Transport. Henry is the Presidentand a Director of Borough Corporation, an inactive company. He received hisM.S. in economics from South Dakota State University in 1972. From 1992 toJune 1999, Henry was a Vice President of Mercer Management Consulting, asubsidiary of Marsh McLennan, an insurance brokerage firm. Prior to joiningMercer, he was a partner with the accounting firm of Coopers and Lybrand (nowPriceWaterhouse Coopers). From June 1999 to July 2000, Henry was apartner with Arthur Andersen. He joined Business Edge Solutions, a technologyconsulting firm serving the financial services industry with e-commercepackaged solutions, where he was a Vice President until December 2000.Since January 2001, Henry has been a principal of Mentus Consulting LLC,consulting firm providing process improvement support services to a wide rangeof companies and industries.

 

34

----

 

**Forrest Jordan.**    Forrest has served as a Senior Vice Presidentof Tesoro since November 2002, a Director since October 1, 2002, andas our Chief Financial Officer since March 28, 2003. Forrest has served asa Vice President, Secretary and Treasurer of IWT since April of 1994. Healso serves as IWT’s sales manager. Forrest is also a Director of IWT, ofInternational and of Transport. He received his M.B.A. from Anna Maria Collegein Paxton, MA.

 

**Paul F. Boucher.**    Paul has served as a Senior Vice President ofTesoro since November 2002 and as one of our Directors since October 1,2002. Paul has been the President of IWT since April 1994 and inparticular, focuses on IWT’s operations. He is also a Director of IWT andInternational.

 

**Grey Perna.**    Grey has served as a Senior Vice President ofTesoro since November 2002 and as one of our Directors sinceOctober 1, 2002. He has served as a Vice President of IWT sinceJanuary 1997. He also serves as IWT’s marketing manager. He is also thePresident and a Director of International.

 

**James R. Edwards.**    Jim has served as one of our Secretaries sinceNovember 2002 and as a Tesoro Director since April 20, 2002. He hasbeen the Vice President, General Counsel and Secretary of WirelessKnowledge, Inc., a telecommunications company since March 2002. FromApril 2000 to March 2002, Jim served as the Vice President, GeneralCounsel and Secretary and Vice President of Finance & Administrativefor Vapotronics, Inc., a medical device company. From March 1987 toApril 2000, he was the Vice President, General Counsel and Secretary ofGeneral Atomics, a high-technology research and development company.

 

**Carl G. Anderson, Jr.**    Carl has served as aDirector of Tesoro since October 28, 2002. He is Vice Chairman of theBoard and General Manager of Arrow International Inc., a $300 millioncritical care medical device business located in Reading, Pennsylvania since2002. Between May 1997 and 2002, Carl was the President and ChiefExecutive Officer of ABC School Supply, a $50 million supplier ofmaterials and equipment for public and private schools. Prior to joining ABCSchool Supply, he served as Vice President and General Manager of the RetailConsumer Products Division of James River Corporation since August 1994.He also served as Vice President of Marketing for James River Corporation fromMay 1992 to August 1994. He was a marketing executive atProcter & Gamble from 1972 to 1984 and Vice President and GeneralManager at Nestle Foods Corporation in Purchase, New York from 1984 to 1992.Carl also served as a Director of the J.B. Williams Company, Inc., amanufacturer of consumer products, until the company was sold inOctober 2002, and as a Director of ABC School Supply until the company wassold in August 2002. He also serves as a trustee of Lafayette College.Carl graduated from Lehigh University Graduate School of BusinessAdministration in 1972 and Lafayette College in 1967.

 

**James Lafond.**    Jim has served as a Director of Tesoro sinceOctober 24, 2002. Through September 30, 2002, he served asPricewaterhouseCooper’s Area Managing Partner for the Greater Washington Area,which encompasses client service offices in Washington, D.C., Maryland andVirginia. In this role, Jim had oversight responsibility for all of the Firm’slines of service, marketing and operations in metropolitan Washington, D.C.Over the course of his career, Jim has led PWC’s National Business Developmentand Industry Specialization functions, served as U.S. leader of the Marketingand Sales functions, and as Director of National Emerging Business Services,providing financial and tax advice to entrepreneurs and growing companies. Jimwas admitted as a General Practice Partner in 1974 in Massachusetts, moved toNew York in 1984, Florida in 1992 and to the Greater Washington area in late1994.

 

**Robert B. Rogers.**    Bob has served as a Director of Tesoro sinceJanuary 2003, Since March 1999, he has served as the ChairmanEmeritus of the Ewing Marion Kauffman Foundation. Bob became president of theFoundation in April 1990 and in September 1993 was named chairman ofthe Board of its Directors. He remained as president of the Foundation untilJuly 1997, when he assumed chairman duties full time. Between 1967 and1971, Bob served in a variety of middle management positions for Trans WorldAirlines (TWA) in New York and in Kansas City. After leaving TWA, he joined theKansas City financial services firm of Waddell and Reed, where he was corporatecontroller until 1974. From there, Bob became chief financial officer ofGateway Sporting Goods until he joined Marion Laboratories in 1975 as corporatecontroller. A wide range of positions, including vice president of informationsystems and controls, vice president of financial controls, vice president ofcommunity affairs and finally president of the Marion Foundation, markedRoger’s tenure at Marion. Bob is also a Certified Public Accountant.

 

**Allen G. Rosenberg.**    Allen has served as a Director of Tesoro sinceNovember 7, 2002. He co-founded Marke Communications Inc. in 1979.Marke Communications is a direct response agency specializing in marketing andgraphic arts productions.

 

Paul and Henry Boucher arebrothers.

 

**Nomineesfor Directors**

 

A majority of the members ofTesoro’s Board of Directors are independent.

 

35

----

 

Directors are elected at ourannual meeting of stockholders and serve for one year or until their successorsare elected. Our bylaws permit the Board of Directors to fill any vacancy andsuch Director may serve until our next Annual Meeting of Stockholders or untilhis successor is elected and qualified. Officers are elected by the Board ofDirectors and their terms of office are, except to the extent governed byemployment contracts, at the discretion of the Board. The officers of theCompany devote full time to our business.

 

**Board ofDirectors Committees**

 

On November 22, 2002our Board of Directors formed an Audit Committee, a Compensation Committee anda Nominating and Governance Committee. On January 23, 2003, upon therecommendation of each of the committees, our Board adopted charters for eachof these committees.

 

Audit Committee

 

The members of our AuditCommittee include Jim Lafond, Chairman, Carl Anderson and Bob Rogers. Eachmember possesses the required level of financial literacy and at least onemember, Jim Lafond, meets the current standards of the “audit committeefinancial expert” required by applicable rules and regulations. No member ofthe Audit Committee has any relationship to Tesoro or to any of itssubsidiaries or affiliates that may interfere with the exercise of theirindependence from management and Tesoro.

 

Our Audit Committee

 

•                  reviews the planned scope and results ofaudits,

•                  considers any recommendations the auditorsmay make with respect to Tesoro’s internal controls and procedures,

•                  oversees any responses made to suchrecommendations, and

•                  reviews certain reports, including ourquarterly and annual reports that are filed with the SEC.

 

Our auditors report directlyto the Audit Committee.

 

Our Audit Committee meetswith management and our auditors to receive information concerning, among otherthings, significant deficiencies in the design or operation of internalcontrols. This information is received and reviewed prior to the filing of therequired officers’ certification with our quarterly and annual reports filedwith the SEC.

 

The Audit Committee’s formalwritten charter specifies:

 

•                  Its membership requirements;

•                  Its rules and procedures;

•                  Its authority and responsibilities;

•                  The outside auditor’s accountability to theBoard and Audit Committee, and

•                  Its responsibility to oversee theindependence of the outside auditor.

 

Compensation Committee

 

The members of theCompensation Committee include Jim Edwards, Chairman and Allen Rosenberg. Eachof the members of this Committee meets the appropriate tests for independenceand no member has any relationship to Tesoro or any of its subsidiaries oraffiliates that may interfere with the exercise of their independence frommanagement and Tesoro.

 

The purpose of thisCommittee is to discharge the Board’s responsibilities relating to

 

•                  our Executive Officers’ compensation;

•                  our equity-based compensation plans,including, without limitation, stock option and restricted stock plans, inwhich officers or employees may participate, and

•                  arrangements with executive officers relatingto their employment relationships with Tesoro, including employment agreements,severance agreements, supplemental pension or savings arrangements, change incontrol agreements and restrictive covenants.

 

This Committee has overallresponsibility for approving and evaluating our executive officer compensationplans, policies and programs. It is also responsible for producing an annualreport on executive compensation to be included in our proxy statement andassisting in preparing certain information to be included in other periodicreports filed with the SEC.

 

The Compensation Committee’sformal written charter specifies its

 

•                  Membership requirements;

 

36

----

 

•                  Rules and procedures; and

•                  Authority and responsibilities.

 

Nominating and GovernanceCommittee

 

The members of ourNominating and Governance Committee are Carl Anderson, Chairman, and JimEdwards. Each member meets the appropriate tests for independence. No member ofthis Committee has any relationship to Tesoro or any of its subsidiaries oraffiliates that may interfere with the exercise of their independence frommanagement and Tesoro.

 

The Nominating andGovernance Committee is responsible for selecting those individuals who standfor election to our Board of Directors and to consider all reasonable commentsfrom Stockholders regarding proposed nominees for Directors, as well asnominations for Board members recommended by Stockholders.

 

The Committee also overseesthe evaluation of the Board and management and develops and recommends to theBoard a set of Corporate Governance guidelines. In addition, the CompensationCommittee oversees, reviews and approves all of Tesoro’s ERISA and otheremployee benefit plans.

 

Like the CompensationCommittee, the Nominating and Governance’s formal written charter specifiesits:

 

•                  Membership requirements;

•                  Rules and procedures; and

•                  Authority andresponsibilities.

 

**AUDITCOMMITTEE REPORT**

 

The purpose ofthe Audit Committee is to monitor (i) the integrity of the financialstatements, (ii) the compliance with legal and regulatory requirements, (ii)the independent auditor’s qualifications and independence, and (4) theperformance of the Company’s internal audit function and independent auditors.  The Board of Directors, in itsbusiness judgment, has determined that each current member of the Committee is“independent”, as required by applicable listing standards of theSarbanes-Oxley Act of 2002 and applicable SEC rules. Management of the Companyis responsible for the preparation, presentation and integrity of the Company’sfinancial statements. Management is also responsible for the Company’saccounting and financial reporting principles and internal controls andprocedures designed to assure compliance with accounting standards andapplicable laws and regulations. The independent auditors are responsible forauditing the Company’s financial statements and expressing an opinion as totheir conformity with accounting principles generally accepted in the UnitedStates of America. The Audit Committee acts in accordance with a writtencharter adopted by the Board of Directors. The Committee reviews this charterannually.

 

In the performance of itsoversight function, the Audit Committee has considered and discussed theaudited financial statements and unaudited quarterly financial statements withmanagement and the independent auditors including a discussion of the quality,not just the acceptability, of accounting principles, the reasonableness of significantjudgments and the clarity of disclosures in the financial statements. The AuditCommittee has also discussed with the independent auditors the matters requiredto be discussed by Statement on Auditing Standards No. 61, Communication withAudit Committees as currently in effect. Finally, the Committee has receivedthe written disclosures and the letter from the independent auditors requiredby Independence Standard No. 1, *IndependenceDiscussions with Audit Committees*, currently in effect, and hasdiscussed with the auditors the auditors’ independence from the Company and itsmanagement, and reviewed and approved the compatibility of non-audit servicesprovided by Sewell and Company and approved the fees paid to them for the 2002fiscal year.

 

The Audit Committee meetswith the independent auditors, with and without management present, to discussthe results of their examinations, their evaluations of the Company’s systemsof internal control, and the overall quality of the Company’s financial reporting**.**The Audit Committee reviewed theCompany’s internal controls with the Company’s independent auditors and,consistent with Section 302 of the Sarbanes-Oxley Act of 2002 and the rulesadopted thereunder, met with management and the auditors prior to the filing ofofficers’ certifications required by that statute to receive any informationconcerning (a) significant deficiencies in the design or operation of internalcontrols which could adversely affect the Company’s ability to record, process,summarize and report financial data and (b) any fraud, whether or not material,that involves management or other employees who have a significant role in theCompany’s internal controls.

 

It is not the AuditCommittee’s duty or responsibility to conduct auditing or accounting reviews orprocedures. Audit Committee members are not employees of the Company and maynot be, and may not represent themselves to be, or to serve as, accountants orauditors by profession. Members of the Audit Committee rely, without independent

 

37

----

 

verification, on the information provided tothem and on the representations made by management and the independentaccountants.

 

Based upon the reports anddiscussions described in this report, and subject to the limitations on therole and responsibilities of the Audit Committee referred to above, the AuditCommittee recommended to the Board that the audited financial statements beincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002 to be filed with the Securities and Exchange Commission.The Committee has also recommended to the Company’s shareholders there-appointment of Sewell and Company as Tesoro’s independent auditors for the2003 fiscal year.

 

**James Lafond, Chairman**

**Carl G. Anderson Jr.**

**Robert Rogers**

 

## **Corporate Governance.**

##  

Our Boardhas also adopted “Principles of Corporate Governance,” a copy of which isattached as Appendix “D”.  Theseprinciples include the standards for our Board and management, which, includeother things,

 

•                  requires anethical Board, Chief Executive Officer and management;

•                  sets forth ourDirectors’ and committee members’ qualification standards and responsibilities;

•                  describes ourmanagement’s responsibilities to new Board members;

•                  enumerates theguidelines for our Board’s compensation;

•                  provide foraccess to our management and independent advisors; and

•                  addresssuccession planning for senior management.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934, as amended,requires our Executive Officers, Directors and 10% Shareholders to file reportsregarding initial ownership and changes in ownership with the SEC. ExecutiveOfficers, Directors, and 10% shareholders are required by SEC regulations tofurnish us with copies of all Section 16(a) forms they file. Our informationregarding compliance with Section 16 is based solely on a review of the copiesof such reports furnished to us by our Executive Officers, Directors and 10%shareholders. These forms include (i) Form 3, which is the Initial Statement ofBeneficial Ownership of Securities, (ii) Form 4, which is a Statement ofChanges in Beneficial Ownership, and (iii) Form 5, which is an Annual Statementof Changes in Beneficial Ownership.

 

Based on information provided to the Company, through June 13,2003, all required filings have been made with the following exceptions: (1)161 and River Road, LLC, a former controlling shareholder, was delinquent infiling its initial Form 3, which was due in February 2002, but which wasfiled in September 2002; (2) Baseball Cathedral, LLC, a former controllingshareholder, was delinquent in filing its initial Form 3, which was due inFebruary 2002, but which was filed in September 2002; (3) Henry J.Boucher, Jr., the Company’s President, Interim Chief Financial Officer andChairman, was delinquent in filing his initial Form 3 due in January 2002and a Form 4 due in February 2002 and a Form 4 due in June 2002, butall of which were filed in September 2002; (4) James Edwards, a Directorof the Company, was delinquent in filing his initial Form 3 due inMay 2002 but which was filed in September 2002; and Mentus ConsultingLLC, a former controlling shareholder, was delinquent in filing its initialForm 3 due in April 2002 and a Form 4 due in June 2002, both of whichwere filed in September 2002.

 

**ITEM 10.****                EXECUTIVECOMPENSATION**

 

The information described inour discussion concerning “Executive Officers” includes Henry Boucher, PaulBoucher, Forrest Jordan and Grey Perna. Prior to November 2002, noindividual held the title of Chief Executive Officer, however Henry Boucher hasacted in that capacity since December 2001.

 

38

----

 

**Summary Compensation Table**

 
|                                                                         |   |         |   |                        |          |               |   |                                    |   | **Long-Term Compensation******         |   |
|------------------------------------------------------------------------------|--------|--------------|--------|-----------------------------|---------------|--------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                                                         |   |         |   | **Annual Compensation****** |          | **Awards******     |   | **Payouts******                         |   |
| **Name and Principal  Position******                                         |   | **Year****** |   | **Salary******              |          | **Bonus  ($)****** |   | **Other Annual  Compensation  ($)****** |   | **Restricted  Stock  Awards  ($)****** |   | **Options/  SARs****** |   | **LTP  Payouts  ($)****** |   | **All Other  Compensation****** |   |
| Henry J. Boucher, Jr.,                                                  |   | 2002         |   | $                           | 120,000       |               | -0     | -                                       | -0     | -                                      | — |   | 100,000 | (2) | -0 | - | -0 | - |
| Chairman, Director,                                                          |   | 2001         |   | —                      |          | —             |   | —                                  |   | —                                 |   | — |   | — |   | — |   |
| President,  Chief Executive Officer(1)                                       |   | 2000         |   | —                      |          | —             |   | —                                  |   | —                                 |   | — |   | — |   | — |   |
|                                                                         |   |         |   |                        |          |               |   |                                    |   |                                   |   |   |   |   |   |   |   |
| Paul F. Boucher,                                                        |   | 2002         |   | $                           | 237,067  | (3)                | -0     | -                                       | $      | 57,653                            | (4)    | — |   | 100,000 | (2) | -0 | - | $ | 621,340 | (7) |
| Director, Senior Vice                                                        |   | 2001         |   | 193,783                     |          | —             |   | 23,090                                  | (5)    | —                                 |   | — |   | — |   | 173,819 | (7) |
| President,  President, International Wholesale Tile, Inc.                    |   | 2000         |   | 98,636                      |          | —             |   | 6,767                                   | (6)    | —                                 |   | — |   | — |   | 87,000 | (7) |
|                                                                         |   |         |   |                        |          |               |   |                                    |   |                                   |   |   |   |   |   |   |   |
| Forrest Jordan, Director,                                                    |   | 2002         |   | $                           | 237,067  | (3)                | -0     | -                                       | $      | 49,000                                 | (7)    | — |   | 100,000 | (2) | -0 | -  | $ | 621,340 | (7) |
| Senior Vice President,                                                       |   | 2001         |   | 193,783                     |          | —             |   | 19,871                                  | (8)    | —                                 |   | — |   | — |   | 173,819 | (7) |
| Vice  President, Treasurer and Secretary, International Wholesale Tile, Inc. |   | 2000         |   | 98,636                      |          | —             |   | 2,308                                   | (9)    | —                                 |   | — |   | — |   | 87,000 | (7) |
|                                                                         |   |         |   |                        |          |               |   |                                    |   |                                   |   |   |   |   |   |   |   |
| Grey Perna, Director,                                                        |   | 2002         |   | $                           | 237,067  | (3)                | -0-    |                                    | $      | 51,883                                 | (10)   | — |   | 100,000 | (2) | -0 | - | $ | 621,340 | (7) |
| Senior Vice President,                                                       |   | 2001         |   | 193,783                     |          | —             |   | 22,688                                  | (11)   | —                                 |   | — |   | — |   | 173,819 | (7) |
| Vice  President, International Wholesale Tile, Inc.                          |   | 2000         |   | 98,636                      |          | —             |   | -0                                      | -      | —                                 |   | — |   | — |   | 87,000 | (7) |

 

----

(1)                                  Henry signed a Salary Deferral Agreement withTesoro, which was terminated by our Board, with Henry abstaining from the vote

 

(2)                                  These represent incentive stock options weregranted as of November 23, 2002 pursuant to our Stock Incentive Plan. Theoptions are for ten years and have an exercise price is $3.00 per share. Theoptions vest as follows: (a) 33% at such time as our Common Stock begins tradingon the OTCBB (or equivalent), (b) 33% at such time as Tesoro attains noless than a $50.0 million market cap for ten consecutive trading days, and(c) 34% when Tesoro achieves its 2003 revenue and profit targets, asapproved by Tesoro’s Board of Directors. To date, none of these options havevested.

 

(3)                                  Of the annual salary, $63,250 representssalary for the last quarter of 2002 following our acquisition of IWT effectiveOctober 1, 2002.

 

(4)                                  Includes an automobile allowance of $10,500(of which $4,500 was paid in last quarter of 2002 following the IWTacquisition), $2,055 for automobile fringe benefits (paid prior to the IWTacquisition), $2,885 for additional health benefits (paid prior to the IWTacquisition), and payment of $42,213 for an Executive Life Insurance policywith his spouse as beneficiary (of which $6,329 was paid following the IWTacquisition).

 

(5)                                  Includes automobile fringe benefit of $2,137,health fringe benefits of $6,185 and payment of $14,768 for an Executive LifeInsurance policy with his spouse as beneficiary.

 

(6)                                  Includes automobile fringe benefit of $1,675and health fringe benefits of $5,092.

 

(7)                                  Includes an automobile allowance of $6,785(of which $4,500 was paid in last quarter of 2002 following the IWTacquisition) and payment of $42,215 for an Executive Life Insurance policy withhis spouse as beneficiary (of which $8,402 was paid following the IWTacquisition).

 

(8)                                  Includes automobile fringe benefit of $265and payment of $19,606 for an Executive Life Insurance policy with his spouseas beneficiary.

 

(9)                                  Includes automobile fringe benefit of $2,308.

 

(10)                            Includes an automobile allowance of $7,739(of which $4,500 was paid in last quarter of 2002 following the IWTacquisition), $1,936 for additional health benefits and payment of $42,208 ofan Executive Life Insurance policy with his spouse as beneficiary (of which$7,514 was paid following the IWT acquisition).

 

(11)                            Includes automobile fringe benefit of $1,113,health fringe benefits of $4,042 and payment of $17,533 for an Executive LifeInsurance policy with his spouse as beneficiary.

 

39

----

 

**Our 2001Tesoro Stock Incentive Plan.**

 

On December 27, 2001,our then sole Director recommended approving the 2001 Tesoro Stock IncentivePlan (the “Plan”) to our then sole stockholder, who, on December 27, 2001,approved the Plan. Below is a summary of the Plan:

 

We believe that our Plansatisfies our objective of enhancing our profitability and value for thebenefit of our stockholders by enabling us to offer our eligible employees,consultants and our affiliates, stock-based incentives. We believe that thiswill help to create a means to raise the level of stock ownership by theseindividuals in order to attract, retain and reward such individuals andstrengthen the mutuality of interests between such individuals and ourstockholders.

 

Under the Plan, we may grant“non-qualified” and incentive stock options to purchase, and restricted stock(Awards). The aggregate maximum number of shares for which Awards may be issuedunder the Plan will be 4 million shares of our common stock. The Plan doesprovide for equitable adjustment of the number of shares and the number ofshares of each subsequent Award and of the unexercised portion of the stockoption award described below in the event of a change in our capitalization dueto a stock split, stock dividend recapitalization, merger, or similar event.Other than with regard to incentive stock options, the number of shares thatmay be delivered under the Plan will be determined after giving effect to theuse by a participant of the right, if granted, to cause Tesoro to withhold fromthe shares of common stock otherwise deliverable to a recipient upon exercisingan Award in payment of all or a portion of his or her withholding obligationarising from such exercise.

 

Our Compensation Committeecurrently controls and manages the Plan’s operation and administration. TheCommittee has discretion to

 

•                  determine the types, terms and conditions ofall Awards, including exercise price or purchase price (if any), performancegoals, and other earn-out and/or vesting contingencies and accelerationprovisions,

•                  adopt, alter or repeal administrative rules,guidelines and practices (including special guidelines for non-U.S. employees),

•                  delegate administrative responsibilities,

•                  construe and interpret the Plan’s terms andany agreements evidencing Awards granted.

 

The Committee, in its solediscretion, may grant stock options and restricted stock to our employees andconsultants, our subsidiary corporations, or parent corporation. Participantswill be selected on the basis of demonstrated ability to contributesubstantially to us. Our Board has authority to grant stock options toNon-Employee Directors according to the Plan. All awards are subject to theterms of a written agreement between the participant and us.

 

The awards granted under thePlan may be either incentive stock options or non-qualified stock options orrestricted stock awards. The maximum number of shares subject to any award ofstock options or shares of Restricted Stock is 100,000.

 

The vesting schedule for anyoption granted under the Plan will be determined by the Committee and will beset forth in a specific option agreement. To the extent not exercised,installments will accumulate and be exercisable, in whole or in part, at anytime after becoming exercisable, but not later than the date the optionexpires. The Committee has the right to accelerate the exercisability of anyoption.

 

Incentive Stock Options

 

Stock options qualify as“incentive stock options” (ISOs) if they meet the requirements ofSection 422 of the Internal Revenue Code (Code). ISOs may only be grantedto our employees and our affiliates and any person holding our capital stock orany affiliate possessing more than 10% of the total combined voting power ofall classes of our capital stock. Affiliates will not be eligible to receiveISOs unless the exercise price per share is at least 110% of the fair marketvalue of the stock on the date the option is granted. Each ISO granted pursuantto the Plan is exercisable, during the optionee’s lifetime, only by theoptionee or the optionee’s guardian or legal representative.

 

Non-Qualified Stock Options

 

Non-qualified stock optionsmay be granted to employees or to Directors who are not our officers noremployees, as well as to consultants and other persons who provide services toour affiliates and us. Stock options are non-qualified stock options if they donot meet the requirements for ISOs.

 

40

----

 

Restricted Stock

 

The Committee may grantshares of restricted stock, which is an award of shares of common stock that issubject to the attainment of pre-established performance goals and otherconditions, restrictions and contingencies as the Committee determines. Awardsof restricted stock may be granted solely to participants who are our employeesor consultants, or of any of its subsidiaries or parent corporation. Unlessotherwise determined by the Committee at the time of the grant, each award ofrestricted Stock will provide that if the participant engages in detrimentalactivities (as defined in the Plan) prior to, or during the one year periodafter, any vesting of restricted Stock, the Committee may direct (at any timewithin two years thereafter) that all unvested Restricted Stock be immediatelyforfeited to us and that the participant will pay us an amount equal to thefair market value at the time of vesting of any restricted stock that hasvested in the period referred to above. (This does not apply upon a Change ofControl). The Committee will fix the purchase price of the Restricted Stock.

 

Awards of restricted stockmust be accepted within 90 days (or such shorter period as the Committeemay specify at grant) after the award date by executing a Restricted StockAward agreement and paying whatever price (if any) the Committee designates.Additionally, recipients of restricted stock are required to enter into arestricted stock agreement, which states the restrictions to which the sharesare subject and the criteria or date or dates on which such restrictions willlapse. Within these limits, based on service, attainment of objectiveperformance goals, and such other factors as the Committee may determine in itssole discretion, the Committee may provide for the lapse of such restrictionsor may accelerate or waive such restrictions at any time. A participant whoreceives an Award of restricted stock shall not have any rights with respect tosuch award of restricted stock, unless and until such participant has delivereda fully executed copy of a restricted stock award agreement and has otherwisecomplied with the applicable terms and conditions of such award.

 

Awards of restricted stockmay be intended to satisfy Section 162(m) of the Code. Under the Plan, anaward of restricted stock may be conditioned upon or subject to the attainmentof performance goals. These performance goals will be based on one or more ofthe objective criteria with regard to us (or any subsidiary corporation, parentcorporation, division, or other operational unit of ours) as described in thePlan.

 

All options will lapse onthe expiration of the option terms specified by the Committee in a certificateevidencing such option, but in no event will non-qualified or incentive stockoptions be exercisable after the expiration of 10 years from the date suchoption is granted (five years for participants who own more than 10% of thetotal combined voting power of all classes of the stock of ours, ourcorporations or our parent corporation).

 

The exercise price per shareof Common Stock subject to an Incentive Stock Option or a Stock Option intendedto be “performance-based” for purposes of Section 162(m) of the Code shallbe determined by the Committee at the time of grant but shall not be less than100% of the fair market value of the shares of Common Stock at the time ofgrant. However, if an Incentive Stock Option is granted to a 10% Stockholder,the exercise price shall be no less than 110% of the fair market value of theCommon Stock. The Committee will determine the exercise price per share ofCommon Stock subject to a non-qualified stock option.

 

To the extent that theaggregate fair market value (determined as of the time of grant) of the CommonStock with respect to which Incentive Stock Options are exercisable for thefirst time by an employee during any calendar year under this Plan and/or anyother stock option plan of ours or any of our subsidiaries or parent corporationexceeds $100,000, such options shall be treated as non-qualified stock options.In addition, if an employee does not remain employed by us or any of oursubsidiaries or parent corporation at all times from the time an ISO is granteduntil three months prior to the date of exercise (or such other period asrequired by applicable law), such option shall be treated as a non-qualifiedstock option. Should any provision of this Plan not be necessary in order forthe Stock Options to qualify as Incentive Stock Options, or should anyadditional provisions be required, the Committee may amend this Planaccordingly, without the necessity of obtaining the approval of ourstockholders.

 

Payment of the purchaseprice is by (i) cash, (ii) check, or (iii) such otherconsideration as the Plan Administrators, in their sole discretion, determineand is consistent with the Plan’s purpose and applicable law, or (iv) anycombination of the foregoing.

 

Upon the award of RestrictedStock, the recipient has all rights of a stockholder with respect to theshares, including, without limitation, the right to receive dividends, theright to vote those shares and, subject to and conditioned upon the fullvesting of the shares of restricted stock, the right to tender those shares.

 

Optionees do not havestockholder rights (e.g., right to vote and receive dividends) until theyexercise their option and receive shares of Common Stock.

 

41

----

 

Each stock option expiresand is no longer exercisable on the dates that the Plan administratorsdetermine at the time when the options are granted. Stock options can also beterminated under certain circumstances following a “Change of Control.”

 

According to our Plan, a“Change of Control” occurs if we

 

•                  are dissolved or liquidated,

•                  are reorganized, merged or consolidated withone or more corporations where we are not the surviving entity, or

•                  transfer substantially all of our property ormore than 80% of our then outstanding shares to another corporation notcontrolled by our stockholders.

 

Upon a Change of Control,the Plan and any outstanding options will terminate unless we provide for thePlan to be assumed and continued with our options either assumed or replacedwith substitute options covering the shares of a successor corporation. If noprovision is made for Plan continuation, we will give all option holdersadvance written notice of the Change of Control, all options will become fullyexercisable and the option holders will then have 30 days to exercisetheir options.

 

If our corporate structurechanges or if our shares change (i.e. if we recapitalize, our stock splits, weconsolidate, we undertake a rights offering, or we issue a stock dividend), thePlan administrators will make appropriate adjustments to the number or class ofshares which may be distributed under the Plan and the option price or otherprice of shares subject to the outstanding awards under the Plan in order tomaintain the purpose of the original grant.

 

The following discussion ofthe federal income tax consequences of granting and exercise of stock optionsand restricted stock awards under the Plan and the sale of common stockacquired as a result of any exercises of options is based on an analysis of theCode, existing laws, judicial decisions, and administrative rulings andregulations, all of which are subject to change. In addition to being subjectto the federal income tax consequences described below, a participant may alsobe subject to state, local, estate and gift tax consequences, none of which isdescribed below. This discussion is limited to the U.S. federal income taxconsequences to individuals, who are citizens or residents of the UnitedStates, other than those individuals who are taxed on a residence basis in aforeign country.

 

*IncentiveStock Options.*

 

Neither the grant nor(provided the holding periods described below are satisfied) the exercise of anincentive stock option will result in taxable income to a participant or a taxdeduction for us. However, for purposes of the alternative minimum tax, theexcess of the fair market value of the shares acquired upon exercise of anincentive stock option (determined at the time the option is exercised) and theexercise price for such shares will be considered part of the participant’sincome.

 

If the applicable holdingperiods described below are satisfied, the sale of shares of common stockpurchased upon the exercise of an incentive stock option will result in capitalgain or loss to the participant and will not result in a tax deduction to us.To receive the foregoing incentive stock option tax treatment as to the sharesacquired upon exercise of an incentive stock option, a participant must holdsuch shares for at least two years following the date the incentive stockoption is granted and for one year following the date of the exercise of theincentive stock option. In addition, a participant generally must be anemployee of ours (or a subsidiary corporation or parent corporation of ours) atall times between the date of grant and the date three months before exerciseof the option.

 

If the holding period rulesare not satisfied, the portion of any gain recognized on the disposition of theshares acquired upon the exercise of an incentive stock option that is equal tothe lesser of the fair market value of the shares on the date of exercise minusthe exercise price, or the amount realized on the disposition minus theexercise price, will be treated as ordinary compensation income in the taxableyear of the disposition of the shares, with any remaining gain being treated ascapital gain. If the holding periods are not satisfied, we will generally beentitled to a tax deduction equal to the amount of such ordinary incomeincluded in the participant’s taxable income, subject to Section 162(m) ofthe Code.

 

*Non-QualifiedStock Options.*

 

A participant will recognizeno taxable income at the time a non-qualified stock option is granted to arecipient.

 

A participant will recognizeordinary compensation income at the time a non-qualified stock option isexercised, and the amount of such income will be equal to the excess of thefair market value on the exercise date of the shares purchased by the optioneeover the exercise price for such shares. Other than with regard to Non-EmployeeDirectors, this ordinary compensation income will also constitute wages subjectto income tax withholding under the Code and we 

 

42

----

 

will require the participant to make suitablearrangements to ensure that the participant remits to us an amount sufficientto satisfy all tax withholding requirements.

 

We will generally beentitled to a deduction for federal income tax purposes at such time and in thesame amount as the amount includable in the participant’s ordinary income inconnection with his or her exercise of a non-qualified stock option, subject toSection 162(m) described herein.

 

Upon a participant’ssubsequent sale or other disposition of shares purchased on exercise of anon-qualified stock option, the participant will recognize capital gain or loss(which may be short-term or long-term depending upon the participant’s holdingperiod) on the difference between the amount realized on such sale or otherdisposition and the participant’s tax basis in the shares sold. The tax basisof the shares acquired upon the exercise of the option will be equal to the sumof the exercise price for such shares and the amount includable in theparticipant’s income with respect to such exercise and acquisition of theshares.

 

*All StockOptions.*

 

The following considerationsmay also apply to grants of non-qualified stock options and/or incentive stockoptions:

 

•                  Any of our officers and directors subject toSection 16(b) of the Exchange Act may be subject to special tax rulesregarding the income tax consequences concerning their stock options,

•                  Any entitlement to a tax deduction on thepart of us is subject to the applicable tax rules (including, withoutlimitation, Section 162(m) of the Code regarding a $1,000,000 limitationon deductible compensation), and

•                  In the event that the exercisability orvesting of any stock option is accelerated because of a change in control,payments relating to the stock option (or a portion thereof), either alone or togetherwith certain other payments, may constitute parachute payments underSection 280G of the Code, which excess amounts may be subject to excisetaxes.

 

In general,Section 162(m) of the Code does not allow a publicly held corporation, forfederal income tax purposes, to deduct compensation in excess of$1 million per year per person to its chief executive officer and the fourother officers whose compensation is disclosed in its proxy statement, subjectto specific exceptions. Our Plan does not currently qualify for the exceptionsand is therefore subject to the limitations of Section 162(m).

 

Options may not be sold,assigned, transferred, pledged or encumbered, except by will or by the laws ofdescent and distribution. The optionee may only exercise an option during hisor her lifetime or his or her estate, for a period of time after the optionee’sdeath.

 

Generally, our Board ofDirectors or the Committee have the power to amend, terminate or suspend all orany portion of the Plan without stockholder approval. However, no amendment mayimpair an existing award or alter the rights of a recipient of options alreadygranted under the Plan without the recipient’s consent. Additionally, the Boardof Directors may not, without further approval of our stockholders andaccording to Nevada law, solely to the extent required by the applicableprovisions of Rule 16b-3, Section 162(m) or 422 of the Code, or therules of any applicable exchange:

 

•                  Increase the aggregate number of shares ofCommon Stock that may be issued under this Plan,

•                  Increase the maximum individual Participantlimitations for a fiscal year,

•                  Change the classification of employees,Consultants or Non-Employee Directors eligible to receive Awards under thisPlan,

•                  Decrease the minimum option price of anyStock Option,

•                  Extend the maximum Stock Option period,

•                  Materially alter the Performance Criteria forthe Award of Restricted Stock, or

•                  Make any other amendment that would requirestockholder approval under the rules of any exchange or system on which oursecurities are listed or traded.

 

Unless previously terminatedby the Board of Directors, the Plan shall terminate on the earlier ofDecember 31, 2012 or ten years after the date the Plan is effective.Through December 31, 2002, 440,000 options were granted and 124,500restricted shares were issued under the Plan.

 

**StockOption Grants in Last Fiscal Year**

 

During the fiscal year endedDecember 31, 2002, 440,000 options were granted to Tesoro’s ExecutiveOfficers and Directors pursuant to the Plan. As part of these grants, HenryBoucher, Jr., Paul Boucher, Forrest Jordan and Grey Perna each received 100,000options on November 23, 2002. These options are exercisable for ten yearsfrom the grant date and their exercise price is $3.00 per share. The optionsvest as follows: (a) 33% at such time as our shares commence

 

43

----

 

trading on the OTCBB (or equivalent),(b) 33% at such time as Tesoro attains no less than a $50 millionmarket cap for ten consecutive trading days, and (c) 34% when Tesoroachieves its 2003 revenue and profit targets, as approved by Tesoro’s Board ofDirectors. As of March 31, 2003, none of these options have vested.

 

We also granted options topurchase 10,000 shares to Jim Edwards, Jim Lafond, Carl Anderson, Jr. and AllenRosenberg. The exercise price of these options is $3.00 per share throughNovember 22, 2012, 50% of which vested immediately and 50% of which willvest on November 23, 2003.

 

**OptionExercises and Year End Values**

 

No options were exercisedduring fiscal year ended December 31, 2002 by the persons named in the“Summary Compensation Table” above.

 

**Directors’Compensation**

 

Under the Plan, the Board ofDirectors has the authority to grant to Non-Employee Directors, subject to theterms of the Plan, options to purchase

 

•                  options to purchase up to a maximum of150,000 shares of Common Stock as of the date the non-employee Director beginsservice as a non-employee Director and

•                  options to purchase up to a maximum of 75,000shares of Common Stock in any calendar year, provided the non-employee Directorhas not ceased to be a Director or if he ceased to be a Director he has notbecome an employee or consultant of Tesoro or its affiliates.

 

The per share exercise pricewill be determined by the Board of Directors but will not be less than 100% ofthe fair market value of the share of Common Stock at the time of grant and maybe subject to stockholder approval. The term of each option granted to aDirector pursuant to the Plan shall be 10 years, and such option shall be50% vested and exercisable on the date such option is granted, and 50% vestedand exercisable on the first anniversary of the grant date.

 

On November 22, 2002,our Board approved the compensation of the outside Directors as follows:

 

•                  Issuing 10,000 shares upon accepting theBoard appointment;

•                  A stipend of $500 per Director per meetingattended;

•                  A stipend of $500 per Director per committeemeeting attended (with the exception of the Chair of the Audit Committee, whowill receive a stipend of $1,000 per meeting);

•                  Reimbursement of out of pocket expensesincurred by each Director in order to attend a meeting (spouse costs includedfor annual stockholder/ Board meeting only); and

•                  10,000 options to acquire shares of commonstock at the fair market value per each full calendar year of service.

 

**Employmentand Consulting Agreements**

 

**Henry J. Boucher, Jr.**    On December 29,2001, Tesoro entered into an employment agreement with Henry to serve asTesoro’s President. In consideration for his services, and under the terms ofhis employment agreement, Henry receives an annual salary of $120,000. He hadsigned a Salary Deferral Agreement that was later terminated by Tesoro’s Board,with Henry abstaining. All his deferred salary was paid to Henry Boucher inDecember 2002. He also receives a monthly car allowance of $1,500. HenryBoucher’s employment may be terminated for cause at any time and within30 days without cause. He is subject to non-disclosure and non-compete provisions.

 

On March 27, 2003, theBoard of Directors voted to increase the term of Henry Boucher’s employmentagreement from one year to three years and to increase his salary to $240,000per year at such time as the registration statement of which this prospectus isa part is effective. At that time, the salary will be retroactive as ofJanuary 1, 2003. At the same time, the Board also voted to issueMr. Boucher a $25,000 bonus for 2002.

 

**Forrest Jordan.**    Effective October 2, 2002, IWT enteredinto an employment agreement with Forrest for one year, renewed automaticallyunless terminated by IWT not less than ninety days prior to the expiration ofthe term. In consideration for his services, Forrest Jordan receives a salaryof $253,000 per year. He also receives a monthly car allowance of $1,500.Forrest Jordan also receives a life insurance policy whose beneficiary is hisfamily and such other compensation as determined by the Compensation Committee.He is subject to non-disclosure and non-compete provisions. On March 27,2003, the Board of Directors voted to increase the term of his employmentagreement from one year to three years and to issue Forrest Jordan a $25,000bonus for 2002.

 

44

----

 

**Paul F. Boucher.**    Paul Boucher’s employment agreement issubstantially the same as that of Forrest Jordan’s, with the exception that hereceives an annual salary of $263,000. On March 27, 2003, the Board ofDirectors voted to increase the term of his employment agreement from one yearto three years and to issue Paul Boucher a $25,000 bonus for 2002.

 

**Grey Perna.**    Grey Perna’s employment agreement issubstantially the same as that of Forrest Jordan’s. On March 27, 2003, theBoard of Directors voted to increase the term of his employment agreement fromone year to three years and to issue Grey Perna a $25,000 bonus for 2002.

 

**ITEM 11.****                SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following table setsforth, as of June 13, 2003, the shares of Common Stock owned beneficiallyby (i) each of our Executive Officers, (ii) each of our currentDirectors, (iii) all Executive Officers and Directors as a group,(iv) each person known by us to be the beneficial owner of more than fivepercent of our Common Stock. “Beneficial Ownership” is a technical term broadlydefined by the Securities and Exchange Commission to mean more than ownershipin the usual sense. For example, Common Stock is “beneficially” owned not onlyif it is held directly, but also if it is held indirectly (though arelationship, a position as a director or trustee, or a contract orunderstanding), or has (or share the power to vote the stock or sell it) theright to acquire it within 60 days. Except as disclosed in the footnotesbelow, each of the Executive Officers, Directors and Nominees for Directorslisted have sole voting and investment power over his or its shares. As ofJune 13, 2003, 11,205,502 shares of our common stock were issued andoutstanding, held by approximately 149 holders of record. 

 
| **Name(1)**                                                                             |   | **Current Title**                                                                                                                                                                                                 |   | **Shares  Beneficially  Owned** |    | **Percent of  Class** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|-----------------------|--------|
| Henry J. Boucher, Jr.                                                                   |   | •Tesoro: Chairman, President, Chief  Executive Officer, Interim Chief Financial Officer, Director•IWT Tesoro International Ltd.: Director •IWT Tesoro Transport, Inc.: President and Director |   | 785,500                         |    | 7.0                   | %      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| James R. Edwards(1)(2)(3)                                                               |   | Tesoro: Director                                                                                                                                                                                                  |   | 40,000                          | (4)     |                  | *      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| James Lafond(1)(5)                                                                      |   | Tesoro: Director                                                                                                                                                                                                  |   | 15,000                          | (6)     |                  | *      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| Carl G. Anderson,  Jr.(1)(3)(5)                                                         |   | Tesoro: Director                                                                                                                                                                                                  |   | 65,000                          | (7)     |                  | *      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| Robert B. Rogers(5)                                                                     |   | Tesoro: Director                                                                                                                                                                                                  |   | 10,000                          |    |                  | *      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| Allen G. Rosenberg(1)(2)                                                                |   | Tesoro: Director                                                                                                                                                                                                  |   | 15,000                          | (6)     |                  | *      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| Paul F. Boucher(1)                                                                      |   | •Tesoro: Director, Senior Vice President•IWT: President, Director•IWT Tesoro International Ltd.: Director                                                                                          |   | 3,030,000                       | (8)(9)  | 27.1                  | %      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| Forrest Jordan(1)                                                                       |   | •Tesoro: Senior Vice President, Director•IWT: Senior Vice President, Treasurer,  Secretary, Director•IWT Tesoro International Ltd.: Director                                                       |   | 3,000,000                       | (8)     | 26.8                  | %      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| Grey Perna(1)                                                                           |   | •Tesoro: Director, Senior Vice President•IWT: Senior Vice President, Director•IWT Tesoro International Ltd.: Director                                                                              |   | 3,012,000                       | (8)(10) | 26.9                  | %      |
|                                                                                    |   |                                                                                                                                                                                                              |   |                            |    |                  |   |
| All Current Officers,  Directors and Nominees for  Director; as a Group (nine  persons) |   |                                                                                                                                                                                                              |   | 9,972,500                       |    | 81.7                  | %      |

 

45

----

 

----

*Less than 1%.

 

(1)                                  The address for each of Tesoro’s Directors,Nominees for Directors and Executive Officers is 191 Post Road West, Suite 10,Westport, CT 06880.

 

(2)                                  Member of the Compensation Committee.

 

(3)                                  Member of the Nominating and GoverningCommittee.

 

(4)                                  Includes 5,000 incentive stock options, whichare currently vested and which are exercisable at $3.00 per share throughNovember 22, 2012. Also includes warrants to purchase up to 15,000 sharesat $3.00 per share through January 7, 2008.

 

(5)                                  Member of the Audit Committee.

 

(6)                                  Includes 5,000 incentive stock options thatare currently vested and are exercisable at $3.00 per share throughNovember 22, 2012.

 

(7)                                  Includes 5,000 incentive stock options thatare currently vested and are exercisable at $3.00 per share throughNovember 22, 2012. Also includes warrants to purchase up to 30,000 sharesat $3.00 per shares through March 10, 2008.

 

(8)                                  IWT’s institutional lender requires thatduring the term of its loan, Paul Boucher, Grey Perna and Forrest Jordan willnot allow their aggregate beneficially ownership interest in Tesoro to be lessthan 51%.

 

(9)                                  Includes 30,000 shares held byMr. Boucher’s minor children.

 

(10)                            Includes 12,000 shares held byMr. Perna’s wife.

 

**ITEM 12.****                CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The following are briefdescriptions of transactions between us (or any of our affiliates) and any ofour Directors, Executive Officers or Stockholders beneficially owning more than5% of our shares, or any member of the immediate family of any of thosepersons, or other entities in which such persons beneficially own more than 5%.

 

In May 2002, Tesorosold 100,000 shares of our common stock for an aggregate of $20,000 to MentusConsulting LLC, a limited liability company, controlled by Henry J. Boucher,our President and Chief Executive Officer.

 

Forrest Jordan, Grey Pernaand Paul F. Boucher as payees, hold promissory notes from IWT in the principalamounts of $88,711.93, $120,000 and $240,000, respectively. The notes bearinterest at 10% per year and are due on or before December 31, 2025. Inconnection with our credit facility for $7.5 million, Forrest, Grey andPaul have each entered into a subordination agreement with the lender thatprovides that each of these obligations are subordinated to that of the lenderand these obligations have also been assigned to the lender as security for ourobligations to the lender.

 

As part of our acquiringIWT, we issued nine million shares to Forrest Jordan, Grey Perna and Paul F.Boucher. Each of these stockholders entered into a repurchase agreement bywhich each may sell a total of 150,000 shares of Tesoro common stock over athree-year period back to us for a price per share based on 88% of Tesoro’sthen weighted average price.  OnJune 26, 2003, each of these repurchase agreements were terminated and areno longer of any force or effect.

 

**ITEM 13.****                EXHIBITS, LIST ANDREPORTS ON FORM 10-KSB/A**

 
| **EXHIBIT NUMBER** |   | **DESCRIPTION**                                                                                                                                                                                                               |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1                |   | Selected Dealers Agreement  (filed as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on June 4, 2003)                                                       |
| 3.1                |   | Articles of Incorporation  (filed as an Exhibit to the Company’s Form 10-SB, filed with the Securities  and Exchange Commission on August 7, 2000)                                                                  |
| 3.1.1              |   | Articles of Amendment to  Articles of Incorporation dated September 23, 2002 (filed as an Exhibit  to the Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on October 1, 2002) |

 

46

----

 
| 3.2.1 |   | Bylaws (filed as an  Exhibit to the Company’s Form 10-SB, filed with the Securities and Exchange  Commission on August 7, 2000)                                                                                                                                                        |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2.2 |   | Amended and Restated  Bylaws (filed as an Exhibit to the Company’s Report on Form 8-K, filed with  the Securities and Exchange Commission on February 4, 2003)                                                                                                                         |
| 3.3.1 |   | Specimen Stock Certificate  (filed as an Exhibit to the Company’s Form 10-SB, filed with the Securities  and Exchange Commission on August 7, 2000)                                                                                                                                    |
| 3.3.2 |   | Audit Committee Charter  (filed as an Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                                             |
| 3.3.3 |   | Compensation Committee  Charter (filed as an Exhibit to the Company’s Report on Form 8-K, filed with  the Securities and Exchange Commission on February 4, 2003)                                                                                                                      |
| 3.3.4 |   | Nominating And Governing  Committee Charter (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on February 4, 2003)                                                                                                          |
| 3.4.1 |   | Code of Ethics for Senior  Financial Officers (filed as an Exhibit to the Company’s Registration  Statement, filed with the Securities and Exchange Commission on  April 11, 2003)                                                                                                     |
| 4.1.1 |   | Form of Warrant Agreement  (filed as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                         |
| 4.1.2 |   | Form of Stock Certificate  (filed as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                         |
| 4.1.3 |   | Form of Lock-Up Agreement  (filed as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                         |
| 10.1  |   | Agreement With Peter Goss  (filed as an Exhibit to the Company’s Form 10-SB, filed with the Securities  and Exchange Commission on August 7, 2000)                                                                                                                                     |
| 10.2  |   | Stockholders Agreement  (filed as an Exhibit to the Company’s Form 10-SB, filed with the Securities  and Exchange Commission on August 7, 2000)                                                                                                                                        |
| 10.3  |   | 2001 Ponca Acquisition  Corporation Stock Incentive Plan. (filed as an Exhibit to the Company’s  Report on Form 8-K, filed with the Securities and Exchange Commission on  September 11, 2002)                                                                                         |
| 10.4  |   | Employment Agreement  Between Ponca Acquisition Corporation And Henry Jr. Boucher, Jr. Dated As Of  December 29, 2002 (filed as an Exhibit to the Company’s Report on Form  8-K, filed with the Securities and Exchange Commission on September 11,  2002)                        |
| 10.5  |   | Memorandum Of  Understanding Between Ponca Acquisition Corporation And The Stockholders Of  International Wholesale Tile, Inc. (filed as an Exhibit to the Company’s  Report on Form 8-K, filed with the Securities and Exchange Commission on  September 11, 2002)                    |
| 10.6  |   | Stock Purchase Agreement  Among The Stockholders Of International Wholesale Tile, Inc., And IWT Tesoro  Corporation, Effective October 1, 2002. (filed as an Exhibit to the  Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on October 1, 2002) |
| 10.7  |   | Termination Of  Stockholders Agreement (filed as an Exhibit to the Company’s Report on Form  8-K/A, filed with the Securities and Exchange Commission on February 4,  2003)                                                                                                            |
| 10.8  |   | Repurchase Agreement  (filed as an Exhibit to the Company’s Report on Form 8-K/A, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                                              |
| 10.9  |   | Form of Indemnity  Agreement (filed as an Exhibit to the Company’s Registration Statement, filed  with the Securities and Exchange Commission on April 11, 2003)                                                                                                                       |
| 10.00 |   | Employment Agreement  between International Wholesale Tile, Inc. and Forrest Jordan (exhibits  omitted) (filed as an Exhibit to the Company’s Registration Statement, filed  with the Securities and Exchange Commission on May 21, 2003)                                              |
| 10.11 |   | Employment Agreement  between International Wholesale Tile, Inc. and Paul F. Boucher (this document  is omitted as it is substantially similar to Forrest Jordan’s Employment  Agreement with the exception of the employee’s name and address)                                        |
| 10.12 |   | Employment Agreement  between International Wholesale Tile, Inc. and Grey Perna (this document is  omitted as it is substantially similar to Forrest Jordan’s Employment  Agreement with the exception of the employee’s name and address)                                             |
| 10.13 |   | Subordination Agreement  between Congress Financial Corporation (Florida). and Forrest Jordan (filed  as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on May 21, 2003)                                                       |
| 10.14 |   | Subordination Agreement  between Congress Financial Corporation (Florida). and Paul F. Boucher (this  document is omitted as it is substantially similar to Forrest Jordan’s  Subordination Agreement with the exception of the employee’s name and  address)                          |

 

47

----

 
| 10.15 |   | Subordination Agreement  between Congress Financial Corporation (Florida). and Grey Perna (this  document is omitted as it is substantially similar to Forrest Jordan’s  Subordination Agreement with the exception of the employee’s name and  address)                                                                                                                                                    |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16 |   | Termination of Repurchase  Agreement dated June 26, 2003 between IWT Tesoro Corporation and Forrest  Jordan (filed as an Exhibit to the Company’s Form 8-K, filed with the  Securities and Exchange Commission on June 26, 2003).                                                                                                                                                                      |
| 10.17 |   | Termination of Repurchase  Agreement dated June 26, 2003 between IWT Tesoro Corporation and Paul F.  Boucher (this document is omitted as it is substantially similar to Forrest  Jordan’s Termination of Repurchase Agreement with the exception of the name  and address) (filed as an Exhibit to the Company’s Form 8-K, filed with the  Securities and Exchange Commission on June 26, 2003). |
| 10.18 |   | Termination of Repurchase  Agreement dated June 26, 2003 between IWT Tesoro Corporation and Grey  Perna (this document is omitted as it is substantially similar to Forrest  Jordan’s Termination of Repurchase Agreement with the exception of the name  and address) (filed as an Exhibit to the Company’s Form 8-K, filed with the  Securities and Exchange Commission on June 26, 2003).      |
| 21.   |   | Subsidiaries of Registrant  (filed as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)*                                                                                                                                                                                                                                            |
| 99.1  |   | MRS’ Letter To The  Securities And Exchange Commission. (filed as an Exhibit to the Company’s  Report on Form 8-K/A, filed with the Securities and Exchange Commission on  October 8, 2002)                                                                                                                                                                                                            |
| 99.2  |   | Letter from Peter Goss  regarding fiscal year end (filed as an Exhibit to the Company’s Report on  Form 8-K, filed with the Securities and Exchange Commission on  October 15, 2002)                                                                                                                                                                                                                        |

 

 

**Item 14.****                      Control andProcedures.**

 

(a)                                  Withinthe 90 days prior to the date of this report, we carried out an evaluation,under the supervision and with the participation of management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14.  Based upon this evaluation, our principal executive officer andprincipal financial officer concluded that our disclosure controls andprocedures are effective in timely alerting them to material informationrelating to us (including our consolidated subsidiaries) that is required to beincluded in our periodic SEC reports. There have been no significant changes in our internal controls or inother factors that could significantly affect those controls subsequent to thedate we carried out this evaluation.

 

(b)                                 Therehave been no significant changes in our internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theevaluation described in the preceding paragraph.

 

48

----

 

SIGNATURES

 

In accordance with Section 13or 15(d) of the Exchange Act of 1934, the Company caused this RegistrationStatement to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

IWT TESORO CORPORATION

 

 
| By:                       | /s/ Henry J.  Boucher, Jr.              |   |
|---------------------------|-----------------------------------------|--------|
|                      | Henry  J.  Boucher, Jr., President |
|                      |                                    |
| Date:  June 30, 2003 |

 

In accordance with the ExchangeAct, this report has been signed below by the following persons on behalf ofthe Company and in the capacities and on the dates indicated.

 

 
| /s/ Henry J.  Boucher, Jr.                                         |   |
|--------------------------------------------------------------------|--------|
| Henry  J.  Boucher, Jr., Principal Executive  Officer         |
|                                                               |   |
| /s/ Henry J.  Boucher, Jr.                                         |   |
| Henry  J.  Boucher, Jr., Interim Principal  Financial Officer |
|                                                               |   |
| /s/ Henry J.  Boucher, Jr.                                         |   |
| Henry  J.  Boucher, Jr., Director                             |
|                                                               |   |
| /s/ James R.  Edwards, Director                                    |   |
| James  Edwards, Director                                           |
|                                                               |   |
| /s/ Paul F.  Boucher                                               |   |
| Paul F.  Boucher, Director                                    |
|                                                               |   |
| /s/ Forrest  Jordan                                                |   |
| Forrest  Jordan, Director                                          |
|                                                               |   |
| /s/ Grey  Perna                                                    |   |
| Grey Perna,  Director                                              |
|                                                               |   |
| /s/ James  Lafond                                                  |   |
| James  Lafond, Director                                            |
|                                                               |   |
| /s/ Allen  Rosenberg                                               |   |
| Allen  Rosenberg, Director                                         |
|                                                               |   |
| /s/ Carl G.  Anderson, Jr.                                         |   |
| Carl G.  Anderson, Jr., Director                              |
|                                                               |   |
| /s/ Robert  Rogers                                                 |   |
| Robert  Rogers, Director                                           |
|                                                                    |        |  |  |  |

 

49

----

 

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**AND**

**INTERIM CHIEF FINANCIAL OFFICER**

 
| I, Henry J. Boucher, Jr.,  President, Chief Executive Officer and Acting Chief Financial Officer of IWT  Tesoro Corporation, certify that: |
|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                       |   |   |
| 1.                                                                                                                                         | I have reviewed this  annual report on Form 10-KSB/A of IWT Tesoro Corporation for year ended  December 31, 2002; |
|                                                                                                                                       |
| 2.                                                                                                                                         | Based on my knowledge,  this annual report does not contain any untrue statement of a material fact  or omit to state a material fact necessary to make the statements made, in  light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this annual report; |
|                                                                                                                                       |
| 3.                                                                                                                                         | Based on my knowledge, the  financial statements, and other financial information included in this annual  report, fairly present in all material respects the financial condition,  results of operations and cash flows of the registrant as of, and for, the  periods presented in this annual report; |
|                                                                                                                                       |
| 4.                                                                                                                                         | The registrant’s other  certifying officer and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act  Rules 13a-14 and 15d-14) for the registrant and we have: |
|                                                                                                                                       |
|                                                                                                                                       | a)  designed such disclosure controls and procedures to ensure that material  information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this annual report is being prepared; |
|                                                                                                                                       |   |   |
|                                                                                                                                       | b)  evaluated the effectiveness of the registrant’s disclosure controls and  procedures as of a date within 90 days prior to the filing date of this  annual report (the “Evaluation Date”); and |
|                                                                                                                                       |   |   |
|                                                                                                                                       | c) presented in  this annual report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date |
|                                                                                                                                       |   |   |
| 5.                                                                                                                                         | The registrant’s other  certifying officer and I have disclosed, based on our most recent evaluation,  to the registrant’s auditors and the audit committee of registrant’s board of  directors (or persons performing the equivalent function): |
|                                                                                                                                       |   |   |
|                                                                                                                                       | a)  all significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and |
|                                                                                                                                       |   |   |
|                                                                                                                                       | b)  any fraud, whether or not material, that involves management or other  employees who have a significant role in the registrant’s internal controls;  and |
|                                                                                                                                       |   |
| 6.                                                                                                                                         | I have indicated in this  annual report whether or not there were significant changes in internal  controls or in other factors that could significantly affect internal  controls subsequent to the date of our most recent evaluation, including any  corrective actions with regard to significant deficiencies and material  weaknesses. |

 

 
| Date: June 30, 2003 | By: /s/ Henry J. Boucher, Jr.                                           |   |
|--------------------------|-------------------------------------------------------------------------|--------|
|                     | Henry J. Boucher, Jr.,                                                  |
|                     | President, Chief Executive  Officer and Acting Chief Financial  Officer |

 

50

----