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

** **

**Washington,D.C.  20549**

** **

**FORM10-KSB/A**

** **

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

** **

**(AmendmentNo. 2)**

** **

**Forthe Year Ended December 31, 2003**

** **

**CommissionFile No. 000-31267**

** **

**IWTTESORO CORPORATION**

(Name of SmallBusiness Issuer in Its Charter)

 
| **NEVADA**                                                       | ** ** | **91-2048019**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State of Other  Jurisdiction of Incorporation or  Organization) |       | (I.R.S. Employer  Identification Number) |

 

**191Post Road West, Suite 10, Westport, Connecticut 06880**

(Address ofPrincipal Executive Offices and Zip Code)

 

**(203)271-2770**

(Issuer’sTelephone Number, Including Area Code)

 

Securities registeredunder Section 12(b) of the Exchange Act:** None**

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

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**CommonStock, $.001 par value**

(Title of Class)

 

Check whether the issuer (1) hasfiled 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 nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofissuer’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-KSB or any amendment to thisForm 10-KSB. o

 

Check whether theregistrant is an accelerated filer       o Yes ý No

 

State issuer’s revenuesfor its most recent fiscal year:  **$ 32,659,546**

 

State the aggregatemarket value of the voting stock held by non-affiliates computed by referenceto the price at which the stock was sold, or the average bid and asked pricesof such stock, as of a date specified within the past 60 days:  **$ 9,143,935.50**

 

**APPLICABLEONLY TO CORPORATE REGISTRANTS**

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date.  11,696,102 shares as of August 31, 2004

 

Transitional SmallBusiness Disclosure Format (check one)     Yes o   No ý

 

**DOCUMENTSINCORPORATED BY REFERENCE**

None

 

 

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EXPLANATORY NOTE

 

Tesoro has restated theconsolidated balance sheets as of December 31, 2003 and 2002, and theconsolidated statements of operations, stockholders’ equity and cash flows forthe year then ended.  In particular,Management determined that Tesoro had been incorrectly calculating the accrualsfor sales commissions. Management revised this calculation and determined thataccrued expenses were understated by approximately $400,000 and $204,000 forthe years ended December 31, 2003 and 2002, respectively. Management also determined that the Companyhad been incorrectly calculating the allowances for product returns.  Management revised this calculation anddetermined that accounts receivable and net sales were overstated byapproximately $55,000 as of and for the year ended December 31, 2003.  Additionally, management reassessed itsmethodology for accounting for sample and display boards and determined thatthis promotional merchandise should have been expensed when distributed ratherthan capitalized and depreciated. The adjustments resulting from therestatement increased the net loss for2003 by approximately $758,000 and decreased net income for 2002 byapproximately $616,000. This change also reduced property and equipment as of December 31,2003 and 2002 by approximately $2,980,000 and $2,223,000, respectively. Inconnection with the restatements for accrued expenses and sample and displayboards described above, the related tax effect was recorded resulting in agross deferred tax asset for the year ended December 31, 2002 of approximately$597,000.  At December 31, 2003 avaluation allowance was recorded, as needed, to reduce net deferred tax assetto an amount considered by management more likely than not to be realized forthe year then ended.  Finally, as part ofthe recapitalization transaction of IWT effective October 1, 2002 (seeNote 1), the Company and each of the three stockholders of InternationalWholesale Tile, Inc. entered into a repurchase agreement to commence on January 1,2003. The maximum number of redeemable shares under the repurchase agreementwas 450,000. The transaction was accounted for by reducing additional paid incapital to the extent a balance existed with the remaining portion of thetransaction applied to accumulated deficit as of December 31, 2002. Duringthe year ended December 31, 2003 the repurchase agreement was cancelled.The transaction was accounted for by increasing additional paid in capital tothe extent it was reduced in the prior year with the remaining portiondecreasing the accumulated deficit. Other than the financial statements andrelated notes, and Management’s Discussion and Analysis set forth in Item 6 ofthis periodic report, which takes into account the effect of the restatement,all other information is as described in Amendment No. 1 to the 10-KSB/Afor the year ended December 31, 2003, filed with the Securities andExchange Commission on September 23, 2004.

 

**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 toattempt to locate and negotiate with a business entity for the combination ofthat target 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 and stone floor, wall and decorative tiles organized in 1994. In exchange for the IWT stock, the IWT shareholders each received3.0 million Tesoro shares, representing 87% of Tesoro’s then outstandingcommon stock.

 

In January 2003,Tesoro organized a Bermuda company, IWT Tesoro International, Ltd.(International), that will own any internationalsubsidiaries.  Tesoro also organized IWT Tesoro Transport, Inc.(Transport).  Transport is a federally licensed freight carrier thatmanages both inbound and outbound freight for IWT.

 

Tesoro’s executiveoffices are located at 191 Post Road West, Westport, CT 06880 and our telephonenumber is (203) 221-2770.  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 thenewest styles and trends in the ceramic tile and stone industry.  We alsoaim to introduce high quality new products to the marketplace as soon aspracticable.  We further believe that we have built confidence and loyaltyamong our customers by distributing our products only on a wholesale level andnot selling direct to the consumer.  Other keys to our success include:

 

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

•      Actingas the extension of our dealer networks’ stock availability by warehousinglevels consistent with the dealers’ delivery requirements;

•      Sellingonly at the wholesale level; never direct to the end user or consumer.

 

We hope to increase ourbusiness by expanding geographic penetration and by extending the lines ofproduct we offer and support.

 

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In April 2003, wemoved to our new 147,000 square foot facility that will enable us to stock moreinventory for future growth.  During the thirdquarter of fiscal 2003, we acquired an additional 75,000 square feet ofadjacent warehouse space.

 

During 2002, we createdTesoroTM The Collection, a branded collection of high quality porcelain floorand wall tiles complemented by coordinated decorative borders andlistellos.  We plan to expand the TesoroTM line of products by building ourproprietary TesoroTM brand awareness.  We prominently display the Tesoroline at all of the national and regional flooring exhibitions in which weparticipate.  We have also placed institutional print media and televisionadvertising to educate consumers and to support our dealer network.

 

Tesoro further intends togrow by acquiring or merging with existing regional distributors.

 

Tesoro’s short-termobjectives are to:

 

•      Raiseequity capital for our internal growth, to

 

•      Augmentour client base and market penetration by expanding nationally in three to fiveadditional markets, most likely in the West, Southwest, and Midwest, byduplicating our Palm City, Florida model.  Southern California is ourhighest priority.

 

•      Expandour position as a preferred vendor for national buying groups who work directlywith some of the nation’s largest home builders and provide purchasingcontracts for independently owned, branded floor covering stores such as CarpetOne and Abby Carpet,

 

•      Expandfurther into the home center business,

 

•      Increaseour product lines,

 

•      Increaseinvestment in merchandise sampling and displays within our customer base.

 

•      Strengthenour consolidated balance sheet by reducing our debt to equity ratio.  Wehope to accomplish this by using new equity to fund growth and eventuallyreduce debt, and

 

•      Providecapital for expansion through compatible business combinations.

 

On a short-term basis,Tesoro intends to look to acquire assets of businesses with products andservices that complement our business.  Tesoro also intends to establishsubsidiaries based in Spain and Italy to handle our relationships withmanufacturers located in those countries.

 

***The Ceramic, Porcelain and Natural Stone Flooring and WallCovering Market***

*** ***

We operate in the floorcovering industry which has grown from $12.4 billion in sales (inwholesale dollars) in 1992 to $20.3 billion in 2002, according to the July 21,2003 Floor Covering Weekly.  Additionally, according to that same issue,the United States floor covering industries’ primary categories were carpet andrugs (65%), ceramic tile (12%), vinyl and rubber (10%), hardwood (9%), andlaminate (4%).

 

According to MarketStudies, Inc., a recognized industry market research firm, the estimated2003 market for ceramic tile in the United States was approximately$2.53 billion, up 7.4% from year-earlier levels.  Additionally,according to The Ceramic Tile Market, 2004 edition published by Market Studies, Inc.,during the five-year period from 1997 to 2002, the U.S. ceramic tile marketadvanced at a 10.6% annual rate on a square footage basis.  Importedproduct satisfied most of this demand, climbing at an annual rate of 14.7%,expanding its market share to 77% in 2002 from 64% in 1996.  This trendcontinued in 2003 as imports posted a 9.6% gain in volume and garnered anadditional 1% share of the market despite a 2.6% price increase.

 

The U.S. Ceramic markethas been positively impacted by:

 

1.     U.S.population growth, requiring new and renovated housing and commercial space

 

a.     Housingstarts reached 1.85 million units in 2003, surging by 8.4%, which was the bestperformance in twenty-six years;

 

b.     In2003, the new construction market rebound was driven by a 10.3% surge in theresidential sector which included

 

i.      2003issuance of building permits was up 6.6%  and

 

ii.     new, one-family home sales rose 13.8% in the south, ourprimary market;

 

2.     Mortgagerates at a forty-year low made homes affordable for anexpanding number of households while the refinancing of

 

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existing mortgages improvedconsumers’ financial positions and provided increased funds for spending forremodeling;

 

3.     Increasingaverage house size (up approximately 30% since 1980); and

 

4.     Growthin vacation (second) home ownership.

 

Ceramic tile usage in theUnited States doubled in the past seven years, from 1.42 billion square feet in1996 to 2.86 billion square feet in 2003.  The compound average growthrates for units sold (measured by square yards) for each of the floor covering categoriesabove for the period from 1998 through 2002 have exceeded the growth rate ofthe United States’ gross domestic product over the same period.  Duringthis time, based on square footage, as cited by July 21, 2003 FloorCovering Weekly, the compound average growth rate was 8.7% for ceramic tile.

 

Forty-nine percent ofimported ceramic tile comes from Italy, 17% from Spain and 10% fromMexico.  The balance originates from a large number of countries includingBrazil, Turkey, China and Portugal.  The United States’ market is thefourth largest consumer of tile in the global market representing about 20% ofglobal consumption.  Our products are primarily imported and our purchasesdistribution among international suppliers approximates these national statistics.

 

The average wholesaleprice of ceramic tile edged lower in 2003, falling to $.88 per squarefoot.  This decline was due primarily to a 4.7% reduction in the pricesfor domestic product.  Imported ceramic tile prices rose two cents asquare foot to $.79 in 2003, largely on price increases for Italian tile. The rising Euro coupled with energy cost inflation is expected to boost overallceramic tile prices in 2004.  This will be the first increase after tenyears of deflation.  The strong demand for new and remodeled housing inthe United States, coupled with the continuing shift by the consumer away fromcarpet and toward hard surfaces, has resulted in a forecast by Market Studiesthat the demand will remain robust and that prices will stabilize.

 

Market Studies, Inc.projects “that the U.S. ceramic tile market will reach 3.76 billion square feetby 2008, posting and annual growth rate of 5.6%.  Imports will continue tooutpace domestic production, garnering an additional 4% market share.  Thevalue of this market is expected to reach $3.4 billion by 2008, expanding at a6% annual pace as prices for ceramic tile firm”.

 

Long acknowledged for itsdurability and functionality, ceramic tile now means fashion.  Consumerscan chose from soft hues or primary colors, finishes that resemble stone orfabric, and can incorporate metal and glass accents for flexible design. The high growth rate of ceramic tile relative to other flooring options has ledto more full service distributorships, manufacturers, and retailers addingceramic tile to their lines.  With more floor space being devoted toceramic tile at retail, efforts at product differentiation haveintensified.  Licensing, a relatively new strategy in the ceramic tilemarketplace, is heating up, including the following partnerships: ShawIndustries with Martha Stewart and Kathy Ireland; Witex with Laura Ashley,Armstrong’s Liz Claiborne line in partnership with Carpet One, and MarrazziGroup with Benetton.

 

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

 

•      consumer confidence;

•      spending fordurable goods;

•      interest rates;

•      turnover in housing, the condition of the residential andcommercial construction industries; and

•      the overall strength of the economy.

 

“US Ceramic Tile Market-2004 Edition”, published by Market Studies, pointed to a market growth rate forceramic tile of approximately 5% to 7% per year.  This growth rate ishigher in the Sun Belt areas, including the Southeastern part of the UnitedStates, where we currently operate.

 

Glazed floor and walltile represented 86% of the total industry dollars shipped in 2002. Unglazed mosaic and porcelain, 11% of the total, and quarry title, 3% of thetotal, represent the balance of the industry’s 2002 dollars shipped.  Theceramic title industry’s two primary markets, residential applications andcommercial applications, represents 72.3% and 27.7% of the industry total,respectively.  Of the total residential market, 67% of the dollarshipments are for new construction.

 

***IWT’s Products***

*** ***

We purchase our productson the world market.  Approximately 50% of our products are imported fromItaly, 35% from Spain and 5% each from Brazil, Turkey and China.  Eachforeign manufacturer has registered agents in the United States that work withus, as well as with other distributors.  We believe that we maintain closepersonal contact with our suppliers, visiting the plants regularly and workingwith suppliers to influence design, quality and reliability.  We do notpurchase any raw materials, but only finished goods.  Our principalsuppliers and the countries in which each is located include

 

•      GruppoCBS, division of Kis Ceramiche, Italy;

•      Imolagres,Italy;

•      CeramicaGomez, Spain;

 

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•      CeramicaColli, Italy;

•      CeramicaFondavalle, Italy; and

•      Ceramica Gaya,S.A., Spain.

 

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 productline.  For example, we have recently added granite counter and backsplashtiles to our product mix.  Items are removed when they become obsolete,which we define as having 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 toprovide incentives to customers for purchasing product in largerquantities.  We ship product to our customers in quantities ranging from “cutorder” specific to a consumer’s project to full pallets of a single product tofull container and truckload packages.  These larger quantities allow ourcustomers to stock their own 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 proprietarybrand TesoroTM.  Tesoro is a collection of porcelain tiles and decorativeinserts, borders, and accents that will be marketed throughout the UnitedStates.  We have invested in specifically designed display racks thatcommunicate the quality and value of our new brand.

 

We import our productsinto the Port of Miami.  All our customers are approved by sales territorymanagers and must qualify as IWT customers.  Material is shipped to thecustomer base via our trucks or by common carrier.  We generally ship sameday on orders placed before 2:00 p.m.  Most delivery points are oneto two day services for the southeastern United States.  Local trucksdeliver between Daytona Beach, Florida and Miami, Florida.  Each day,common carriers pick up materials near the end of the business day to deliverto other parts of the country.

 

***Inventory***

*** ***

We are committed tomaintaining inventory levels that support the sales of our dealernetwork.  Our new 147,000 square foot warehouse contains over nine millionsquare feet of product, representing over 2500 SKU’s(individually numbered product items).  We target an inventory turn overrate of 2.5 to 3.0.  This turn over rate is established to minimize out ofstock situations and to attain our goal of same day shipping for qualifiedorders 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 dealers can meet thedemand of their consumer.

 

***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 regulatory costs.

 

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 the U.S. dollar relativeto a specific 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 shipmentthat we must pay.  Additionally, we also take into account that title toour products transfers at the port of the originating country.  Wegenerally ship between ten and twenty containers at any one time.  Wecurrently estimate that our maximum exposure for loss would be approximately$150,000.  Based on maritime loss history, cost of ocean marine insuranceand our ultimate ability to subrogate against the freight carrier, we self-insurein the event of loss after title is taken.

 

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, theoutbound transportation costs differ depending on how far our products are tobe shipped.

 

Because of the increasein gasoline and fuel prices and other surcharges, our shipping costs haveincreased.  However, we have not yet passed any surcharges to allcustomers.  As such, our gross margins may be lower because we arecurrently absorbing these increased costs.

 

As a result of theseincreased shipping costs, Tesoro recently organized IWT Tesoro Transportation, Inc.,a federally licensed freight

 

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carrier. By working with this affiliate company to supply a portion of our shippingneeds, we hope to decrease these costs.

 

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

*** ***

We distribute ourproducts through three separate distribution channels.

 

•      Theretail floor-covering dealer market is our largest channel.  This channelcurrently accounts for about 75% of the sales revenue.  These customers,who sell direct to the public, can be either “cut to order” or “stocking”dealers/regional distributors.  We currently serve approximately 2,000customers in this channel through our sales personnel.  In addition, wehave sub-distributors that handle specific market territories for limitednumbers of our Tesoro product packages.

 

•      Thehome center “buy-it-yourself/do-it-yourself” store market makes up our seconddistribution channel.  These customers typically operate under blanketpurchase orders.  The home center market offers us the opportunity to shiptruck and container load volumes to central distribution hubs for finaldistribution by the customer.  There are two basic programs for homecenter stores.  The first is a special order program.  Consumersplace orders from sample boards provided by us to the store.  The storerepresentatives forward these orders to us and we ship the product either directlyto the consumer or to the store for pick-up by the consumer.  The secondprogram is a stocking program, which provides for a home center store tomaintain specific product inventories for their cash and carry trade.  Thehome center store channel currently accounts for about 5% of our revenue.

 

•      Ourthird channel, accounting for 5% of our revenues, is made up of national buyinggroups.  These groups support independently owned, branded floor coveringoutlets with coordinated buying agreements that require us to market directlyto each individual retail outlet.  This channel also includes largebuilders who staff and maintain captive design centers specifically for theirown customers.

 

•      Ourforth channel is the bulk sale channel.  In this channel we service largerbuyers that purchase full truckloads or containers of specific product that ismanufactured for us specifically for this program.  These products can bedrop-shipped from our manufacturer directly to the customer.  The customerbase for this channel is the United States and Canada.  This channel makesup the remaining 15% of our sales.

 

We maintain separate andcoordinated sales forces for each of the channels of distribution.  Wealso sell different product series to each channel to avoid market saturationor channel conflict.  Currently, we do not depend on any single customerfor more than 2% of our sales.

 

***Merchandising***

*** ***

We believe that a strongand focused merchandising program is a key component to our success.  Amainstay of this program is our branding of our TesoroTM collection ofcoordinated and high end products.  We have created a series of productdisplay units that assist our dealers with the communication of productcombinations to their consumer.  We are continually updating these displayswith new products.  We have a fifteen-year warranty program for TesoroTMproducts that we believe elevate the quality position of our products.

 

In addition to thedisplay units, we provide our customers with display boards that are smallerand show a single line of product with its accent pieces.  These boardsare portable so as to allow the dealer to easily show our product or take it tothe installation site.  Our sales force distributes lose sample packs,usually an assortment of colors for a single product line, whenever a line ordealer needs restocking.  We carry the display units and sample boards asassets on our books and depreciate over their useful lives.  The samplepacks are charged as marketing expenses when they are distributed.

 

***Credit and Collection Procedures***

 

We maintain strictcriteria for credit approval:

 

•              Potentialcustomers must complete our credit application;

•              Creditmust be approved by our credit department; and

•              Wemay require a personal guaranty.

 

Once approved, typicallyour customers receive 30-day terms.  Our bulk truckload customers may beoffered extended terms of payment.  We have purchased credit insurance forthese extended term customers to offset some of the risk inherent in theextending of longer credit terms.

 

Additionally, to be anIWT customer, a business must, at the least:

 

•              Havea storefront,

 

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•              Sellretail, and

•              Havea forklift.

 

When sales orders areentered, our computer system notes if a customer is on credit hold.  Ifso, those orders are given to our credit department to determine whether theproducts can be shipped.  Customers are generally given a 15 daygrace period and orders are held and not shipped once an invoice is 60 daysor older.

 

***Marketing, Promotion and Sales***

*** ***

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

 

Our commission basedsales force 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.  Weemploy a twenty-person full time sales force most of whom have been with us forfive years after spending many years in various facets of the tile business.

 

***Competition***

*** ***

We compete in theflooring industry with both large national companies that supply both soft andhard materials and with smaller regional distributors that focus specificallyon ceramic, porcelain and stone.  Vertically integrated companies such as ShawIndustries and Mohawk, while maintaining their dominant positions in the carpetmarket, are moving aggressively into the hard flooring sector.  Dal-tile,a subsidiary of Mohawk, manufactures, wholesales andretails tile on a national basis.

 

Regional competitors suchas Master Tile, Florida Tile and Arizona Tile act as both wholesalers andretailers.  In their markets, each supplies smaller dealers anddistributors and also operates branded retail outlets.  We currently onlydistribute on a regional basis at a wholesale level.

 

We believe that ourcompetitive strengths include:

 

•      *Focusing solely on thewholesale segment of the distribution process.*  We do not ownor operate direct to consumer locations.  We work exclusively throughdealers and stocking distributors who service the buying public.  As aresult, we do not compete with our customers.  Our customers can buy fromus specific materials to meet a consumer’s need, i.e. “cut orders” or can stocklimited amounts of product for cash and carry business by purchasing largerquantities.

 

•      *Getting involved in designing products.* We actively participate in designing and selecting new color, texture andformats for emerging style tends.  Our field sales force is constantlyworking with our customers to identify trends in the market.  Feedbackfrom these sources is continuously shared with the manufacturers. Manufacturer’s representatives frequently meet with us and our managementtravels to the manufacturing sites to communicate the markets needs.

 

•      *Building our TesoroTM Brand Equity.* We are branding all our designs and many of our products with our TesoroBrand.  We incorporate products from different manufacturers and differentcountries into programs that leverage the best of each source to create Tesorocollections.  Unlike most other tile and ceramic products, Tesoro productsinclude a 15-year warranty against wear.

 

•      *Providing superior merchandising and customer supportprograms.*  We maintain an active sampling program to ensurethat customers have the latest materials in their showrooms.  Our fieldsales force continually updates, refreshes and replaces sales materials. We distribute literature to consumers referencing our dealer networkparticipants.  Our field personnel work with the customer and train themon the appropriate use and care of the product.  Our goal is to make thedealers’ job as easy as possible.

 

•      *Implementing our Distribution Philosophy.* We see ourselves as an extension of the dealer warehouse.  We aim tobe responsive to our customers’ needs by shipping most orders the same day theyare received.  We also carry stock to back-up our customers in the cashand 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 tradecommission regulates IWT’s wholesale operations.  The Federal MotorCarriers Administration regulates Transport’s freight brokerage. International is an exempt company subject to Bermudian commercial law. We do not expect to import product into Bermuda and will therefore maintain ourexempt status.  Both federal and state authorities regulate thedistribution and sale of imported products.  We have obtained all requiredfederal and state permits, licenses and bonds to operate our businesses. 

 

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We make no assurancesthat our operations and profitability will not be subject to more restrictiveregulations, oversight or increased taxation by foreign, federal, state orlocal agencies.

 

We currently purchase ourproducts from foreign manufacturers in U.S. dollars.  Our fund transfersare relatively large.  The Office of the Comptroller of the Currency(USOCC) monitors these activities.  Should the EURO continue to strengthenagainst the US dollar, we could see an increase in our cost of product thatcould, in time, to pass on to our customers and therefore have a detrimentalimpact on our profitability.  Our competitors rely as heavily on importedproduct as we do.  Therefore, we do not see any change in the competitivelandscape for ceramic tile as a result of the strength of the EURO.

 

***Acquisitions and other Interests***

*** ***

Tesoro intends to expandits operating activities globally.  We have had preliminary discussionswith manufacturers, product aggregators and agencies in Spain, Italy andBrazil.  We expect to take an interest position in several operationsduring 2004.  In the United States, we hope to expand our geographicalposition by acquiring the assets of similar, but smaller, distributors and arein preliminary discussions with a distributor in the southwest.  We cannotassure anyone, however, that any of these discussions will result in theintended acquisitions or that any acquisitions, if made, will generate theplanned revenue or profits.

 

***Intellectual Property***

*** ***

We incorporate ourproprietary brand TesoroTM in connection with a collection of porcelain tilesand decorative inserts, borders, and accents.  We are in the process of applyingfor federal trademark protection for our trademark, but unless and until ourregistration is granted, we must rely on common law to protect our brand. We make no assurances that this protection will be meaningful.  We are notaware of any claims of infringement against us and we have not been involved inany related court proceedings.

 

***Employees***

*** ***

IWT currently employs 80non-union warehouse and administrative staff and 20 salespeople.  IWTbelieves that its relationships with its employees are good.  Tesorocurrently has two employees.  Neither Transport nor Internationalcurrently has any employees.

 

**IMPORTANTRISK FACTORS**

** **

Investing in our commonstock involves high risk.  You should carefully consider the followingimportant risk factors and the other information contained in this prospectusbefore investing in our common stock.  The price of our common stock coulddecline because of any of these risks, and you could lose all or part of yourinvestment.  You also should read and consider the other informationincluded in this prospectus, including the financial statements and relatednotes.  If any of the events described here occur, our business prospects,financial condition and operating results could be materially affected in anegative manner.

 

Company Risks

 

*As toTesoro:*

* *

WE WILL LIKELY NEED TORAISE ADDITIONAL FUNDS IN THE FUTURE FOR ACQUISITIONS AND GROWTH.  IF WECANNOT SECURE ADDITIONAL FUNDS, WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS.

 

Future events, includingthe problems, delays, expenses and difficulties frequently encountered bywholesale tile and ceramics distributors like us, may lead to increased coststhat could make it difficult for us to succeed with our business plan.  Toraise additional capital, we may sell additional equity securities, accept debtfinancing, or obtaining financing through a bank or other entity.  Thereis no limit as to the amount of debt we may incur nor have we adopted a ratioof our equity to debt.  If we need to obtain additional financing, it maynot be available or it may not be available on terms acceptable to us. Likewise, an offering of our securities may not be successful.  Ifadditional funds are raised through issuing additional stock, the value of ouroutstanding stock may be significantly diluted.

 

Our future capitalrequirements will depend upon many factors, including the following:

 

•              Themagnitude of the inventory we must carry to adequately support our customers;

•              Thevolume of sample material and product we must have in place with our customersto help merchandise our products;

•              Thenumber of different product variations demanded by our customers

•              Currencyfluctuations, particularly with respect to the Euro Dollar against the U.S.Dollar;

•              Therate at which we expand our operations; and

•              Theoccurrence, timing, size and success of acquisitions.

 

OUR QUARTERLY OPERATINGRESULTS FLUCTUATE, WHICH COULD RESULT IN A LOWER PRICE FOR OUR COMMON STOCK.

 

8

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Our quarterly results maybe affected by a variety of factors, some of which are beyond our control,including, for example, the following:

 

•              Introducingnew products or pricing programs by our competitors;

•              Increasedtransportation costs;

•              Increasesin selling and marketing expenses, as well as other operating expenses;

•              Economicconditions specific to building materials industry; and

•              Costsand risks associated with potential acquisitions.

 

Of these conditions, the1st, 2nd and 4th factors are largely beyond our control.

 

GENERALLY, WE MUST PAYALL COSTS AND EXPENSES INCURRED WITH DEFENDING ANY ACTIONS ALLEGED AGAINST ANYOF OUR DIRECTORS.

 

Our articles ofincorporation and bylaws provide that we may indemnify our officers anddirectors against losses sustained or liabilities incurred arising from anytransaction in that officer’s or director’s respective managerial capacityunless that officer or director:

 

•              violatesa duty of loyalty,

•              didnot act in good faith,

•              engagesin intentional misconduct or knowingly violated the law, or

•              derivesan improper benefit from the transaction.

 

Additionally, we havealso entered into separate indemnity agreements with each of our executiveofficers and directors to provide added protection unless that person committedany of the prohibited acts described above.  We carry standard directorsand officers liability insurance and employmentpractices liability insurance.  Any obligations we incur defending anysuch actions could adversely affect our cash flow and profitability.

 

OUR ARTICLES OFINCORPORATION AND BYLAWS CONTAIN CERTAIN PROVISIONS THAT COULD HINDER A CHANGEIN OUR CORPORATE CONTROL.

 

Certain provisions of ourcertificate of incorporation and bylaws may discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable.  Only ourdirectors may call annual stockholder meetings and only our directors, officersor stockholders holding not less than a majority of all shares entitled to votemay call a special stockholder meeting, Likewise, our bylaws require noticeprocedures with regard to stockholder proposals and nominations of candidatesfor electing directors are required.  Furthermore, vacancies on our Board,including newly created directorships, may be filled by a majority of ourdirectors then in office and not by our stockholders.

 

FAILING TO IDENTIFYSUITABLE ACQUISITION CANDIDATES, TO COMPLETE ACQUISITIONS AND TO INTEGRATE THEACQUIRED OPERATIONS SUCCESSFULLY COULD ADVERSELY AFFECT OUR BUSINESS STRATEGYAND OPERATIONS.

 

As part of our businessstrategy, we intend to acquire complementary businesses.  Although weregularly evaluate acquisition opportunities, we may not be able to:

 

•              Successfullyidentify suitable acquisition candidates;

•              Obtainsufficient financing on acceptable terms to fund acquisitions;

•              Completeacquisitions; or

•              Profitablymanage acquired businesses.

 

Additionally, acquiredoperations may not achieve levels of sales, operating income or productivitycomparable to those of our existing operations, or perform as expected. Acquisitions may also involve a number of special risks, some or all of whichcould have a material and adverse effect on our business, operating results andfinancial condition.  Among these risks are:

 

•              Ourinability to integrate operations, systems and procedures and to eliminateredundancies and excess costs effectively;

•              Divertingmanagement’s attention and resources; and

•              Difficultyretaining and training acquired key personnel.

 

WE MAY BE UNABLE TOOBTAIN PRODUCTS ON A TIMELY BASIS, WHICH COULD MATERIALLY HAVE AN ADVERSEEFFECT ON OUR BUSINESS.

 

We do not manufacture anyof the products we distribute.  Our business depends upon a continuoussupply of material from third

 

9

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partysuppliers.  We currently import a majority of our products from 40 foreignmanufacturers.  While we believe this large group of suppliers insulatesus from the effect of any one supplier, international supply relationships aresensitive to geo-political situations beyond our control.  In particular,we depend heavily on Italy and Spain and any disruption in this supply chaincould put us in a difficult position.  However, any extended interruptionin product supply would disrupt our operations, which could adversely affectour business, financial condition and operating results.

 

BECAUSE WE DO NOT CARRYANY INSURANCE ON OUR PRODUCTS THAT ARE IN TRANSIT, WE RISK LOSING ENTIRESHIPMENTS.

 

Title to our productstransfers at the port of the originating country.  We self-insure in theevent of loss after title is taken.  We only ship between ten and twentycontainers at any one time.  We currently estimate that our currentmaximum exposure for loss would be approximately $150,000.  Because weoften place special orders on behalf of our customers, if any shipments werelost or damaged, our clients would not be able to receive their product in atimely fashion, which, in turn, could adversely affect our relationship withthose customers.  To date, we have only incurred minimal losses withrespect to products that have been lost after it acquired title.

 

IF THE CONFLICT IN THEMIDDLE EAST ESCALATES, WE MAY HAVE DIFFICULTY OBTAINING PRODUCTS FROMCERTAIN FOREIGN MANUFACTURERS.

 

To date, we have not beenadversely affected in any material way by conflicts in the Middle East. We have not had problems obtaining product from Turkey, although minor problemswith product from Dubai have occurred.  However, we purchase only limitedproduct from Dubai manufacturers and can obtain substitute products, if necessary. Protest strikes in the European Union countries such as Spain and Italy mayslightly delay shipping of products, but to date, these delays have been veryminor.

 

WE MAY BE UNABLE TOPASS ON TO OUR CUSTOMERS INCREASES IN TRANSPORTATION COSTS, WHICH COULD HAVE AMATERIAL EFFECT ON OUR PROFITABILITY.

 

Significant increases intransportation costs could adversely effect on our operating margins and ourbusiness, financial condition and operating results.  Although wegenerally attempt to pass on increases in the costs to our customers, ourability to do so is, to a large extent, depends on the rate and magnitude ofany increase, as well as competitive pressures and market conditions for ourproducts.  There have been, in the past and may be in the future, periodsof time during which increases in this cost cannot be recovered.  Duringthese periods, our profitability could be adversely affected.

 

IF WE GROW TOO QUICKLY,WE COULD ENCOUNTER PROBLEMS RELATED TO INCREASED CUSTOMER DEMANDS ON OURLIMITED RESOURCES.

 

Rapid growth would placea significant strain on our managerial, operational, financial and otherresources.  Our systems, procedures, controls and management resources maynot be adequate to support our future operations.  Future growth will requireus to

 

•              implementadditional management information systems,

•              developfurther our operating, administrative, financial and accounting systems, and

•              maintainclose coordination between departments.

 

If we cannot manage ourgrowth, we could limit our ability to capitalize on new business opportunitiesthat may arise or to implement our business strategy.  Additionally, wecannot assure anyone that our personnel, systems and controls will be adequateto support future growth.  Our inability to manage growth or to maintainthe quality of our products and services could cause us to lose customers andcould significantly increase our operating expenses.

 

WE DEPEND ON OUTSIDEDISTRIBUTORS FOR PRODUCT SALES.

 

We sell our productsprimarily through a network of dealers and sub-distributors.  Thesedistributors do not have a minimum sales requirement.  Our distributorsare independent contractors.  If we do not competitively price ourproducts or if the quality of the products is low our distributors may fail toaggressively market our products for us.  If our distributors do notsuccessfully sell our products, then our revenue and profits may notmaterialize.

 

IF WE ARE UNABLE TORETAIN OUR MANAGEMENT TEAM, OUR BUSINESS OPERATIONS AND OUR GROWTH OBJECTIVES MAY BEADVERSELY AFFECTED.

 

Our success in achievingour growth objectives depends upon the efforts of our top management teamincluding the efforts of Henry J. Boucher, Jr., our Chief ExecutiveOfficer, Forrest Jordan, our Chief Financial Officer and Senior Vice President,and Paul F. Boucher and Grey Perna who also are Senior Vice Presidents, as wellas other of our management members.  While we do have written employmentagreements with each of these individuals, we currently do not have employmentagreements with all our employees.  The loss of the services of any ofthese individuals may have a material adverse effect on our business, financialcondition and operating results.  We may not be able to maintain andachieve our growth objectives should we lose any or all of these individuals’services.

 

10

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FUTURE EXCHANGE RATEFLUCTUATIONS OR INFLATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATINGRESULTS.

 

We import most of theproduct we sell from countries whose currency is the Euro Dollar.  Wecurrently write purchase contracts and pay for materials in U.S. dollars. However, the manufacturing facilities pay all their expenses in their country’scurrency.  This means that IWT realizes a benefit when a country’s currencydevalues against the U.S. dollar, although that country’s inflation rate orinternal expenses may offset this benefit.  Any future increases in acountry’s inflation rate, which are not offset by devaluation of theircurrency, may negatively impact our operating results.  To the extent thata foreign country’s currency appreciates against the U.S. dollar, there couldbe a material adverse effect on our business, financial condition and operatingresults.

 

Industry Risks

 

OUR INDUSTRY IS CYCLICALAND PROLONGED DECLINES IN RESIDENTIAL OR COMMERCIAL CONSTRUCTION ACTIVITY COULDADVERSELY AFFECT OUR BUSINESS.

 

The ceramic and tilefloor covering industry depends on residential and commercial constructionactivity, including both new construction, as well as remodeling.  Newconstruction activity, and remodeling to a lesser degree, is cyclical in natureand a prolonged decline in residential or commercial construction activitycould have a material adverse effect on our business, financial condition andoperating results.  Construction activity is significantly affected bynumerous factors, all of which are beyond our control, including:, among others,

 

•              Nationaland local economic conditions;

•              Interestrates;

•              Housingdemands;

•              Employmentlevels;

•              Changesin disposable income;

•              Financingavailability;

•              Commercialrental vacancy rates;

•              Federaland state income tax policies; and

•              Consumerconfidence.

 

The U.S. constructionindustry has experienced significant downturns in the past, which have adverselyaffected suppliers to the industry, including suppliers of ceramic and tilefloor coverings.  The industry could experience similar downturns in thefuture, which could have a negative impact on our business, financial conditionand operating results.

 

WE FACE INTENSECOMPETITION IN THE FLOORCOVERING INDUSTRY, WHICH COULD DECREASE DEMAND FOR OURPRODUCTS AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY.

 

The industry is highlycompetitive.  We face competition from a large number of domestic andforeign importers and independent distributors of floor coveringproducts.  Some of our existing and potential competitors may be largerand have greater resources and access to capital than we do.  Maintainingour competitive position may require us to make substantial investments in ourproduct design efforts, distribution network and sales and marketingactivities.  Competitive pressures may also result in decreased demand forour products and in the loss of market share.  In addition, we face, and willcontinue to face, pressure on sales prices of our products from competitors, aswell as from large customers.  As a result of any of these factors, therecould be a material adverse effect on our sales and profitability.  Hardflooring products also face competition from alternative products such ascarpet, hardwood and vinyl.  Changes in customer attitudes toward hardflooring and wall covering materials could also adversely affect our ability tomarket and sell our products profitably.

 

Investment Risks

 

IN ADDITION TO THE SHARESELIBIBLE FOR SALE IN THE FUTURE, WE MAY ISSUE MORE SHARES OF OUR COMMONSTOCK IN THE FUTURE.  THIS WOULD REDUCE INVESTORS PERCENTAGE OF OWNERSHIPAND MAY REDUCE OUR SHARE VALUE.

 

Sales of substantialamounts of this common stock in the public market could adversely affect themarket price of the common stock.  Furthermore, all of the remainingshares of common stock presently outstanding are restricted or affiliatesecurities that are not presently, but may in the future be sold, pursuant to Rule 144,into any public market that may exist for the common stock.  Future salesby current shareholders could depress the market prices of the common stock inany such market.

 

Our Articles ofIncorporation authorizes our issuing up to 100.0 million shares of commonstock and 25 million shares of preferred stock.  If we issue all orpart of our remaining authorized common stock or preferred stock, depending onits terms, the percentage of common stock held by existing stockholders would bediluted. We may value any stock issued in the future on an arbitrary basis.Issuing common or preferred stock for future services or acquisitions or othercorporate actions may have the effect of diluting the

 

11

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valueof the shares held by our investors, and might have an adverse effect on thevalue of our shares.

 

SINCE WE HAVE NOT PAIDANY DIVIDENDS ON OUR STOCK AND DO NOT INTEND TO IN THE NEAR FUTURE, A PURCHASEROF OUR STOCK WILL ONLY REALIZE A GAIN ON HIS OR HER INVESTMENT IF THE MARKETPRICE OF OUR COMMON STOCK INCREASES.

 

We have never paid, anddo not intend to pay, any cash dividends on our common stock in the currentyear. Therefore, an investor in this offering, in all likelihood, will onlyrealize a profit on his investment, in the short term, if the market price ofour common stock increases in value.

 

WE CANNOT ASSURE ANYONETHAT THERE WILL EVER BE A LIQUID PUBLIC MARKET FOR OUR SECURITIES.

 

Although our common stockare eligible for quotation on the OTCBB maintained by the NASD, there has beenonly limited and sporadic trading in the stock since it commenced trading on December 17,2003.  No regular or established public trading market for our commonstock has been established prior to this offering, and we cannot assure anyonethat a regular and established market will develop or if developed, that itwill continue.  Additionally, we make no assurances as to the depth orliquidity of any market for our stock or the prices as which our stockholdersmay be able to sell their securities.  As a result, an investment in ourcommon stock may be illiquid and investors may not be able to readily liquidatetheir investment or at all when they need or desire to sell.

 

OUR COMMON STOCK’SCURRENT TRADING MAY NOT ACCURATELY REFLECT ITS FUTURE MARKET PERFORMANCE.

 

The trading price of ourcommon stock may be highly volatile and could be subject to wide fluctuationsin response to factors such as the active float of our securities could besmall, meaning that relatively small trades of our securities could materiallyeffect the share price and other general economic or stock market conditions,many of which are beyond our control.

 

In addition, the stockmarket in general, and the market for shares in tile and ceramic floor coveringcompanies in particular, have experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performanceof such companies. We make no assurance that these trading prices and priceearnings predictions will be sustained.

 

In addition, asubstantial portion of our future expenses, including most product design andselling and marketing expenses, must be incurred inadvance of revenue generation. If our actual revenue does not meet ourexpectations, then our operating profit, if any, may fall short of ourexpectations, or our operating loss may be greater than our expectations. Wemay need to change our pricing strategy for and these changes may affect ourquarterly results. Any one or more of these factors could affect our business,financial condition and operating results, and this makes the prediction ofoperating results on a quarterly basis unreliable. As a result,period-to-period comparisons of our historical operating results may not bemeaningful and you should not rely on them as an indication of our futureperformance. This could adversely affect the price of our common stock.

 

OUR SHARES CURRENTLY DONOT QUALIFY FOR LISTING ON NASDAQ. OUR COMMON STOCK MAY ONLY TRADE ON THE OVER-THE-COUNTERBULLETIN BOARD.

 

Under the current rules relatingto the listing of shares on NASDAQ SmallCap, we must have:

 

•              Threeregistered and active market makers;

•              Stockholders’equity of at least $5 million, or market capitalization of at least $50 million,or net income of at least $750,000 in the most recently completed fiscal yearor in two of the last three most recently completed fiscal years;

•              Operatinghistory of at least one year or market capitalization of $50 million;

•              Publicfloat of at least 1,000,000 shares;

•              Marketvalue of public float of at least $5 million;

•              Aminimum bid price of $4.00 per share; and

•              Atleast 300 stockholders who own at least 100 share each, among otherrequirements.

 

For a continued listing,a company must maintain:

 

•              Tworegistered and active market makers, one of which can be a market makerentering a stabilizing bid;

•              Stockholders’equity of at least $2.5 million, market capitalization of at least$35 million, or net income of at least $500,000 in the most recentlycompleted fiscal year or in two of the last three most recently completedfiscal years;

•              Apublic float of at least 500,000 shares;

•              Marketvalue of public float of at least $1 million; and

•              Aminimum bid price of $1.00 per share, among other requirements.

 

Our common stock will notinitially be eligible for listing on the NASDAQ SmallCap. Accordingly, tradingis currently being conducted on the OTCBB, which ordinarily has a much lowertrading volume than on NASDAQ. Very few market makers take

 

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interestin shares traded OTCBB and, accordingly, the markets for such shares are lessorderly than is usual for NASDAQ stocks. As a result of the low trading volumesordinarily obtained in over-the-counter markets, sales of common stock in anysignificant amount can generally not be absorbed without a dramatic reductionin price. Moreover, thinly traded shares in the over-the-counter markets aremore susceptible to trading manipulations than is ordinarily the case for moreactively traded shares.

 

THE APPLICATION OF THE “PENNYSTOCK RULES” COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

 

While our common stock iscurrently not considered to be a “penny stock”, it may in the future. Penny stocks generally are equity securities with a price of less than $5.00per share other than securities registered on certain national securitiesexchanges or quoted on the NASDAQ Stock Market, provided that current price andvolume information with respect to transactions in such securities is providedby the exchange or system.  Our common stock may be subject to “pennystock rules” that impose additional sales practice requirements onbroker-dealers who sell such securities to persons other than establishedcustomers and accredited investors (generally those with assets in excess of$1,000,000 or annual income exceeding $200,000 or $300,000 together with theirspouse).  For transactions covered by these rules, the broker-dealer mustmake a special suitability determination for the purchase of such securitiesand have received the purchaser’s written consent to the transaction prior tothe purchase.  Additionally, for any transaction involving a penny stock,unless exempt, the “penny stock rules” require the delivery, prior to thetransaction, of a disclosure schedule prescribed by the Commissionrelating to the penny stock market.  The broker-dealer also must disclosethe commissions payable to both the broker-dealer and the registeredrepresentative and current quotations for the securities.  Finally,monthly statements must be sent disclosing recent price information on thelimited market in penny stocks.  Consequently, the “penny stock rules” mayrestrict the ability of broker-dealers to sell our common stock and may havethe effect of reducing the level of trading activity of our common stock in thesecondary market.  These required penny stock restrictions will not applyto our securities if such securities maintain a market price of $5.00 or greater. There can be no assurance that the price of our common stock will reach ormaintain such a level.

 

A SMALL NUMBER OFSTOCKHOLDERS OWN MOST OF OUR COMMON STOCK.

 

Those persons who areofficers, directors or who own more than 5% of our common stock will hold approximately85% of our stock. Our management will continue to control most mattersrequiring approval by our stockholders. As a result, management acting togetherhave the ability to control substantially all matters submitted to ourstockholders for approval, including electing and removing directors and anymerger, consolidation, takeover or other business combination involving us, andto control our management and affairs. This may discourage a potential acquirerfrom making a tender offer or otherwise attempting to obtain control in anacquisition or takeover.

 

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

** **

Tesoro currentlysubleases office space in Westport, Connecticut. We pay a monthly base servicesfee of $3,100 per month and our lease expires June 2004.  Tesoroanticipates that it will be 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:

 

| 2004                 |   | $ 908,639                            |       |
|----------------------|--------|-------------------------------------------|------------|
| 2005                 |   | $ 851,887                            |       |
| 2006                 |   | $ 872,437                            |       |
| 2007                 |   | $ 893,800                            |       |
| 2008                 |   | $ 915,650                            |       |
| 2009 and  thereafter |   | An aggregate of $3,866,100 |       |
| **TOTAL**            |   | **$**  8,308,513                          | ** ** |

 

**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.****  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITYHOLDERS**

** **

NONE

 

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**PART II**

** **

**ITEM5.****  MARKETPRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

** **

*MarketInformation*.  On December 17, 2003, ourcommon stock commenced trading on the Over The Counter(OTC) Bulletin Board.  Trading of our common stock is limited and verysporadic and we make no assurances that an established public trading marketwill ever occur.

 

The high and low bid andask price for the stock is as follows:

 
| ** **               | ** ** | **High  Bid Price** | ** ** | **Low  Bid Price** | ** ** | **High  Ask Price** | ** ** | **Low  Ask Price** | ** ** |
|--------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| 12/17/03 – 12/31/03 |       | $                   | 5.25       |               | $          | 5.00                |       | $                  | 6.50       |   | $ | 6.00 |   |
| 1/1/04 – 3/23/04    |       | $                   | 6.00       |               | $          | 4.50                |       | $                  | 6.50       |   | $ | 5.25 |   |

 

The Securities andExchange Commission has adopted Rule 15g-9 which establishes thedefinition of a “penny stock”, for purposes relevant to Tesoro, as any equitysecurity that has a market price of less than $5.00 per share or with anexercise price of less than $5.00 per share, subject to certainexceptions.  For any transaction involving a penny stock, unless exempt,the rules require:

 

(i)            that a broker or dealer approve a person’s account fortransactions in penny stocks and

 

(ii)           the broker or dealer receive from the investor a writtenagreement to the transaction, setting forth the identity and quantity of thepenny stock to be purchased.

 

In order to approve aperson’s account for transactions in penny stocks, they must

 

(i)            obtain financial information and investment experience andobjectives of the person; and

 

(ii)           make a reasonable determination that the transactions inpenny stocks are suitable for that person and that person has sufficientknowledge and experience in financial matters to be capable of evaluating therisks of transactions in penny stocks.

 

The broker or dealer mustalso deliver, prior to any transaction in a penny stock a disclosure schedule preparedby the Commission relating to the penny stock market, which, in highlight form,

 

(i)            sets forth the basis on which the broker or dealer made thesuitability determination and

 

(ii)           that the broker or dealer received a signed, writtenagreement from the investor prior to the transaction.  Disclosure also hasto be made about the risks of investing in penny stocks in both publicofferings and in secondary trading, and about commissions payable to both thebroker-dealer and the registered representative, current quotations for thesecurities and the rights and remedies available to an investor in cases offraud in penny stock transactions.

 

Finally, monthlystatements have to be sent disclosing recent price information for the pennystock held in the account and information on the limited market in pennystocks.

 

(b)           *Holders*.  As of March 24, 2004,there were approximately 232 holders of Tesoro’s Common Stock.  The issuedand outstanding shares of Tesoro’s Common Stock were issued in accordance withthe exemptions from registration afforded by Section 4(2) of theSecurities Act of 1933 and Rule 506 promulgated thereunder.

 

(c)           *Dividends. * Dividends, if any, willbe contingent upon Tesoro’s revenues and earnings, if any, capital requirementsand financial conditions.  The payment of dividends, if any, will bewithin the discretion of Tesoro’s Board of Directors.  Tesoro presentlyintends to retain all earnings, if any, for use in its business operations andaccordingly, the Board of Directors does not anticipate declaring any dividendsprior to a business combination.

 

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(d)           *Securities Authorized to be Issuedupon our Equity Compensation Plans*

 

**EquityCompensation Plan Information**

** **
|                                                    |   | **Number  of  Securities  to be issued upon  Exercise of  Outstanding  options,  warrants  and rights** |       | **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)** |           |
|---------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| Equity compensation  plans approved by stockholders     |   | 306,668                                                                                                 |       | $                                                                                      |   |                                                                                                                                     | 3,568,832      |   |
| Equity compensation  plans not approved by stockholders |   | -0-                                                                                                     |       | -0-                                                                                    |   | -0-                                                                                                                                      |           |
|                                                    |   |                                                                                                    |       |                                                                                   |   |                                                                                                                                     |           |
| **Total**                                               |   | **306,668**                                                                                             | ** ** | **$**                                                                                  |   |                                                                                                                                     | **(3,568,832** | **)** |

 

(1)           Tesoro’sStock Incentive Plan includes the right to grant options and to issuerestricted stock and the Plan was approved by Tesoro’s then sole stockholder inDecember 2001. This number reflects 124,500 restricted shares that havebeen issued all pursuant to the Plan through December 31, 2003.

 

*Salesof Securities in connection with Our June 17, 2003 Offering.*

* *

On June 17, 2003,the Securities and Exchange Commission declared our registration statement on Form SB-2effective.

 

 In connection withthe Registration Statement, two offerings are occurring.  The first is theoffer and sale of 250,000 units at $5.50 per unit.  Each unit consists ofone share of Tesoro common stock and a warrant to purchase one share at $7.00per share through June 17, 2006.  The second is an offer by certainTesoro’s stockholders to sell an aggregate of 1,243,502 shares registered forresale.

 

As required by Rule 463,as of December 31, 2003, all 250,000 units were sold, for which Tesororeceived gross proceeds of $1,375,000.  Of the proceeds, $82,500 was paidin connection with financial advisory fees and commissions,$125,000 was paid for offering expenses and b. the remainder for inventory tosupport growth.

 

**ITEM6.****  MANAGEMENT’S DISCUSSION 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 containsforward-looking statements about our expectations for our business andfinancial needs. These expectations are subject to a variety of uncertaintiesand risks that may cause actual results to vary significantly from ourexpectations. The cautionary statements made in this prospectus should be readas applying to all forward-looking statements in any part of this prospectus.

 

We were incorporated on May 5,2000 as a Nevada corporation. Our principal office is located at 191 Post RoadWest, Suite 10, Westport, CT 06880. Any reference in this “Management’sDiscussion and Analysis or Plan of Operations” discussion to “the company,” “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 ofnine 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 terminatedon June 26, 2003.  At that time, the common stock was not trading onany exchange or quotation system.

 

Through IWT, we providehard floor and wall covering materials, primarily ceramic, porcelain andgranite 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 sourcesof working capital are a $17 million (US) revolving line of credit from adivision of a large US commercial bank, stockholders’ equity and our supplierswho have extended us terms.  During 2003, we began trading our stock onthe OTC-BB and raised equity through the public market. The new equity was usedto strengthen our balance sheet and to provide capital for continued 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 certainlicensing requirements. International will serve as the holding

 

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companyfor any international based ventures we need to support expanding our saleseffort. The other subsidiary is IWT Tesoro Transport, Inc., a Floridacorporation, and a licensed freight carrier that will handle our freightoperations.

 

Results of Operations forthe year ending December 31, 2003

 

The following discussionand analysis should be read in conjunction with the financial statements andnotes thereto that appear elsewhere in this document. The table below setsforth certain operating data as a percentage of total revenue for the periodsindicated.

 
| ** **          | ** ** | **Fiscal Year Ending  December 31** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2001**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Revenues            |       | 100                                      | %          | 100 | % | 100 | % |
| Cost of Goods  Sold |       | 64                                       | %          | 60 | % | 61 | % |
| Gross Margin        |       | 36                                       | %          | 40 | % | 39 | % |
| Operating  Expenses |       | 29                                       | %          | 34 | % | 41 | % |

 

*December 31,2003 compared to December 31, 2002*

 

Sales for the year ended December 31,2003 were $32,604,546 a 29% increase over sales for the year ended December 31,2002. This growth follows a 31% growth from 2002 to 2001 and a 29% growth from2001 to 2000. We are a relatively small player in a growing market. We areentering new markets and adding new products; and we expect to be able to growfaster than the market as a whole for the next several years. Our share of thismarket is approximately 1.5%. The tile market in the United States isapproximately $2.34 billion and is growing at a five to seven percentrate.

 

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. In 2003, we added a bulk salesunit.  In this unit we sell full truckload quantities to other wholesalersacross the United States and Canada.  The sales price of these bulkproducts is somewhat lower than our dealer unit and will have a moderatingimpact on our ability to reduce our cost of goods sold.  Consequently ourcost of goods sold increased to 61% for the year ended December 31,2003.  Our cost of goods will be a function of the mix of the sales fromour different units, but should stay in the range we have established over thepast few years.

 

Our earnings beforeinterest, taxes, depreciation and amortization (EBITDA) fell from $1.53 millionin 2002 to a loss of $520,241 in 2003.

 

We have includedreconciliation from our net income to EBITDA

 
| ** **                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Net income  (loss)              |       | $        | (1,865,317 | )        | $          | 1,667,538 |   |
| Interest expense                |       | 480,139  |       | 328,920  |       |
| Income taxes  benefit (expense) |       | 597,196  |       | (597,174 | )          |
| Depreciation                    |       | 267,741  |       | 129,732  |       |
| EBITDA                          |       | $        | (520,241   | )        | $          | 1,529,016 |   |

 

•              Themajor causes of the decreased EBITDA were (a) an decrease in net incomecaused by increased operating expenses for expanded warehouse facilities,shipping and sales personnel to open new business units and the costsassociated with being a public company, including one time costs for ourinitial public offering and ongoing legal, accounting and administrative costs,and (b) an decrease of 1% 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.

 

•              EBITDAis a concept used by financial managers to compare businesses that operate indifferent industries with different capital needs, tax circumstances and debtstructure.

 

In early April 2003,we moved into a new warehouse facility of nearly 147,000 square feet, anincrease of nearly 50% over the previous facility. 5,000 square feet of the newfacility is for office space.  In the third quarter of fiscal 2003, weacquired 68,000 square feet of additional adjacent warehouse space toaccommodate our new bulk sale unit. These new facilities will allow us toincrease our inventory and better serve our customers who rely upon us to meetthe short lead times and limited inventory capacity that exist in theirmarkets. We hope to improve the efficiency of our warehouse operations bysimplifying the receiving and shipping functions. We currently maintain betweennine and eleven million square feet of product in our facility.  Ourinventory turns, in 2003, were approximately 1.64 times. Availability ofproduct is a key success factor for us and is a good use of our capital.

 

16

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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 

 

*Liquidityand Capital Resources*

* *

We had cash balances of$867,361 and $574,046 at the end of December 31, 2003 and December 31,2002, respectively.

 

In December 2003, wecompleted a private offering of unregistered securities and signed asubscription agreement with an accredited investor to purchase 100,000 sharesof common stock and warrants to purchase 100,000 shares at $7.00 per share at$5.50 per unit.  In addition, the investor signed a stock pledge agreementand a promissory note for the $550,000, plus $3.0 interest per year thatmatures on June 30, 2004.  Subsequent to the end of fiscal 2003, thenote was paid in full. The proceeds were used for inventory and working capitalpurposes.  All of the warrants were outstanding at December 31, 2003.

 

During 2003, Tesorocompleted a public offering of units substantially similar to those describedabove at $5.50 per unit. We received net proceeds of $1,292,500 after offeringcosts of $82,500.  The proceeds were used for inventory and workingcapital purposes.  All of the warrants were outstanding at December 31,2003.

 

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 1-1/2 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 quarterfollowing the first public sale of Tesoro’s common stock and continue until thewarrant expires.  Through closing at March 31, 2003, we raised$530,000 from unit sales. We also raised an additional $255,000 from 85,000warrants that were exercised by year-end December 31, 2003. 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 witha financial 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. On September 10, 2003, we entered into a new loan and security agreementwith Fleet Capital, a division of Fleet Bank, N.A.  The new facility, arevolving line of credit, has a maximum limit of $17,000,000. The interest rateon this loan is calculated with reference to the Base rate and or LIBOR (LondonInterbank Offered Rate).  The balance due at December 31,2003 was $9,599,340.

 

**ITEM7.****  FINANCIALSTATEMENTS**

** **

**TABLEOF CONTENTS**

 
| Report of Independent  Registered Public Accounting Firm                       | 18     |
|--------------------------------------------------------------------------------|--------|
|                                                                           |   |
| Consolidated Balance Sheets (as  restated)                                     | 19     |
|                                                                           |   |
| Consolidated Statements of  Operations (as restated)                           | 20     |
|                                                                           |   |
| Consolidated Statements of  Changes in Stockholders’ Equity (as restated) | 21-22  |
|                                                                           |   |
| Consolidated Statements of  Cash Flows (as restated)                           | 23     |
|                                                                           |   |
| Notes to Consolidated  Financial Statements                                    | 24-34  |

 

17

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***Kantor,Geisler & Oppenheimer, PA***

 

*Certified Public Accountants& Associates*

7705 Davie Road Extension

Hollywood, Florida 33024

(954) 432-3100 (305)620-0616 (954) 436-6898 Fax

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directors

IWT Tesoro Corporation and Subsidiaries

Westport, CT

 

We have audited the accompanying consolidated balance sheets of IWTTesoro Corporation and Subsidiaries as of December 31, 2003 and 2002, and therelated consolidated statements of operations, changes in stockholders’ equity,and cash flows for each of the years then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall consolidated financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of IWT TesoroCorporation and Subsidiaries as of December 31, 2003 and 2002, and the resultsof its operations, and its cash flows for each of those years in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed in Note 18 to the accompanying consolidated financialstatements, the Company has restated the consolidated balance sheets as ofDecember 31, 2003 and 2002, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the years ended December31, 2003 and 2002.

 

 
| /s/ KANTOR, GEISLER & OPPENHEIMER, PA |   |
|-------------------------------------------|--------|

 

Hollywood, Florida

January 23, 2004, except as to Note 18, which is asof August 30, 2005

 

 

Member of the AmericanInstitute of Certified Public Accountants

Member of the Center forPublic Company Audit Firms

Member of the FloridaInstitute of Certified Public Accountants

 

18

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                        | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                        | ** ** | **(Restated)**              | ** ** | **(Restated)**              | ** ** |
| ASSETS                                                                                                            |       |                        |       |                        |       |
| Current Assets:                                                                                                   |       |                        |       |                        |       |
| Cash                                                                                                              |       | $                           | 867,361    |                        | $          | 574,046 |   |
| Accounts  receivable, net allowance for doubtful accounts of $175,000 and $83,245                                 |       | 4,852,705                   |       | 2,875,532                   |       |
| Inventories                                                                                                       |       | 13,058,839                  |       | 6,047,876                   |       |
| Prepaid expenses                                                                                                  |       | 754,281                     |       | 286,820                     |       |
| Note receivable  arising from sale of stock                                                                       |       | 550,000                     |       | —                      |       |
| Deferred tax  asset                                                                                               |       | —                      |       | 597,196                     |       |
| Total current  assets                                                                                             |       | 20,083,186                  |       | 10,381,470                  |       |
|                                                                                                              |       |                        |       |                        |       |
| Property and  equipment, net                                                                                      |       | 1,236,979                   |       | 489,502                     |       |
|                                                                                                              |       |                        |       |                        |       |
| Other assets                                                                                                      |       | 382,101                     |       | 191,725                     |       |
|                                                                                                              |       | $                           | 21,702,266 |                        | $          | 11,062,697 |   |
|                                                                                                              |       |                        |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                         |       |                        |       |                        |       |
|                                                                                                              |       |                        |       |                        |       |
| Current  Liabilities:                                                                                             |       |                        |       |                        |       |
| Accounts payable                                                                                                  |       | $                           | 9,859,161  |                        | $          | 5,403,816 |   |
| Accrued expenses                                                                                                  |       | 536,963                     |       | 354,863                     |       |
| Current portion  of capital lease obligations                                                                     |       | 63,152                      |       | 47,222                      |       |
| Current portion  of notes payable, other                                                                          |       | 42,719                      |       | 48,780                      |       |
| Total current  liabilities                                                                                        |       | 10,501,995                  |       | 5,854,681                   |       |
|                                                                                                              |       |                        |       |                        |       |
| Long-Term Debt:                                                                                                   |       |                        |       |                        |       |
| Note payable,  revolving line of credit                                                                           |       | 9,599,340                   |       | 4,864,778                   |       |
| Capital lease  obligations                                                                                        |       | 149,183                     |       | 108,438                     |       |
| Subordinated  notes payable, stockholders                                                                         |       | 338,662                     |       | 448,712                     |       |
| Notes payable,  other                                                                                             |       | 42,560                      |       | 64,872                      |       |
| Total long-term  debt                                                                                             |       | 10,129,745                  |       | 5,486,800                   |       |
| Total  liabilities                                                                                                |       | 20,631,740                  |       | 11,341,481                  |       |
|                                                                                                              |       |                        |       |                        |       |
| 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; 11,622,702 and 10,587,834  issued and outstanding |       | 11,623                      |       | 10,588                      |       |
| Additional paid  in capital                                                                                       |       | 3,883,949                   |       | —                      |       |
| Accumulated  deficit                                                                                              |       | (2,825,046                  | )          | (1,362,532                  | )          |
|                                                                                                              |       | 1,070,526                   |       | (1,351,944                  | )          |
|                                                                                                              |       | $                           | 21,702,266 |                        | $          | 11,062,697 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

19

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

YEARSENDED DECEMBER 31, 2003 AND 2002

 
| ** **                                                   | ** ** | **2003**       | ** ** | **2002**       | ** ** |
|--------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                   | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Revenue                                                      |       |           |       |           |       |
|                                                         |       |           |       |           |       |
| Sales, net of  discounts and returns                         |       | $              | 32,604,546 |           | $          | 25,387,708 |   |
| Cost of goods  sold                                          |       | 19,814,514     |       | 15,268,535     |       |
|                                                         |       |           |       |           |       |
| Gross profit                                                 |       | 12,790,032     |       | 10,119,173     |       |
|                                                         |       |           |       |           |       |
| Expenses                                                     |       |           |       |           |       |
| Payroll                                                      |       | 6,270,931      |       | 4,045,537      |       |
| Delivery                                                     |       | 1,576,816      |       | 1,245,174      |       |
| General and  administrative                                  |       | 749,054        |       | 637,202        |       |
| Lease expense                                                |       | 1,031,559      |       | 479,905        |       |
| Depreciation                                                 |       | 267,741        |       | 129,732        |       |
| Insurance                                                    |       | 353,752        |       | 324,699        |       |
| Repairs and  maintenance                                     |       | 386,190        |       | 250,378        |       |
| Sales expenses                                               |       | 712,816        |       | 144,396        |       |
| Advertising                                                  |       | 1,311,802      |       | 1,179,077      |       |
| Professional  fees                                           |       | 388,342        |       | 150,085        |       |
| Travel and  entertainment                                    |       | 309,009        |       | 104,831        |       |
| Bad debts                                                    |       | 204,581        |       | 3,085          |       |
|                                                         |       | 13,562,593     |       | 8,694,101      |       |
| Income (loss)  from operations                               |       | (772,561       | )          | 1,425,072      |       |
|                                                         |       |           |       |           |       |
| Other  income/(expenses)                                     |       |           |       |           |       |
| Interest expense                                             |       | (480,139       | )          | (328,920       | )          |
| Other expense                                                |       | (15,421        | )          | (15,788        | )          |
|                                                         |       | (495,560       | )          | (344,708       | )          |
|                                                         |       |           |       |           |       |
| Net income (loss)  before taxes                              |       | (1,268,121     | )          | 1,080,364      |       |
|                                                         |       |           |       |           |       |
| Income tax  benefit (expense)                                |       | (597,196       | )          | 597,174        |       |
|                                                         |       |           |       |           |       |
| Net income  (loss)                                           |       | $              | (1,865,317 | )              | $          | 1,677,538 |   |
|                                                         |       |           |       |           |       |
| Earnings (loss) per  common share - basic & diluted |       | $              | (0.17      | )              | $          | 0.15 |   |
|                                                         |       |           |       |           |       |
| Weighted Average  Common Shares Outstanding:                 |       |           |       |           |       |
| Basic and diluted                                            |       | 11,197,655     |       | 10,845,775     |       |

 

See Notes to ConsolidatedFinancial Statements.

 

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

 
| ** **                                                  | ** ** | **Common  Stock** | ** ** | **Additional  Paid in** | ** ** | **Subscription** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                  | ** ** | **Shares**        | ** ** | **Amount**              | ** ** | **Capital**      | ** ** | **Receivable**  | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Balance,  December 31, 2001, as restated               |       | 9,000,000         |       | $                       | 9,000      |             | $          | 116,400         |       | $           | (84,000    | ) | $ | (776,789 | ) | $ | (735,389 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Year Ended  December 31, 2002:                         |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Distributions,  September 30, 2002                     |       | —            |       | —                  |       | —           |       | —          |       | (1,864,020  | )          | (1,864,020 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Payment of  subscription receivable                         |       | —            |       | —                  |       | —           |       | 84,000          |       |        |       | 84,000 |   |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Net income, nine  months ended September 20,2002       |       | —            |       | —                  |       | —           |       | —          |       | 2,214,239   |       | 2,214,239 |   |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Balance  September 30, 2002 - Before Recapitalization  |       | 9,000,000         |       | 9,000                   |       | 116,400          |       | —          |       | (426,570    | )          | (301,170 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Recapitalization,  October 1, 2002                     |       | 1,800,000         |       | 1,800                   |       | (116,400         | )          | —          |       | 3,542       |       | (111,058 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Balance After  Recapitalization on October 1, 2002     |       | 10,800,000        |       | 10,800                  |       | —           |       | —          |       | (423,028    | )          | (412,228 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| 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, directors and consultants |       | 134,500           |       | 135                     |       | 364,360          |       | —          |       | —      |       | 364,495 |   |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Issuance of  shares - private offering                      |       | 83,334            |       | 83                      |       | 249,917          |       | —          |       | —      |       | 250,000 |   |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Exercise of  warrants                                       |       | 5,000             |       | 5                       |       | 14,995           |       | —          |       | —      |       | 15,000 |   |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Net loss 3 months  ended December 31, 2002             |       | —            |       | —                  |       | —           |       | —          |       | (536,701    | )          | (536,701 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Accretion of  redeemable stock                              |       | —            |       | —                  |       | (669,907         | )          | —          |       | (342,717    | )          | (1,012,624 | ) |
|                                                        |       |              |       |                    |       |             |       |            |       |        |       |   |   |
| Balance  December 31, 2002, as restated                |       | 10,587,834        |       | $                       | 10,588     |             | $          | —          |       | $           | —     |   | $ | (1,362,532 | ) | $ | (1,351,944 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

 
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Accumulated  Earnings** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                                                           | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**               | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Balance,  December 31, 2002, as restated                        |       | 10,587,834       |       | $                       | 10,588     |                      | $          | —      |       | $ | (1,362,532 | ) | $ | (1,351,944 | ) |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Issuance of  shares - private offering                               |       | 236,668          |       | 237                     |       | 959,764                   |       | —      |       | 960,001 |   |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Exercise of  warrants                                                |       | 80,000           |       | 80                      |       | 239,920                   |       | —      |       | 240,000 |   |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Issuance of  shares to employees and directors for services rendered |       | 18,200           |       | 18                      |       | 55,441                    |       | —      |       | 55,459 |   |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Issuance of  shares - public offering                                |       | 250,000          |       | 250                     |       | 1,292,250                 |       | —      |       | 1,292,500 |   |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Cancellation of  stock repurchase agreement                          |       | 450,000          |       | 450                     |       | 669,907                   |       | 402,803     |       | 1,073,160 |   |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Issuance of  shares officer’s performance based stock options   |       |             |       |                    |       | 666,667                   |       |        |       | 666,667 |   |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Net loss                                                             |       | —           |       | —                  |       | —                    |       | (1,865,317  | )          | (1,865,317 | ) |
|                                                                 |       |             |       |                    |       |                      |       |        |       |   |   |
| Balance,  December 31, 2003, as restated                        |       | 11,622,702       |       | $                       | 11,623     |                      | $          | 3,883,949   |       | $ | (2,825,046 | ) | $ | 1,070,526 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

22

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 

YEARSENDED DECEMBER 31, 2003 AND 2002

 
| ** **                                                                                           | ** ** | **2003**       | ** ** | **2002**       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                                                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Cash flows from  operating activities:                                                               |       |           |       |           |       |
| Net income  (loss)                                                                                   |       | $              | (1,865,317 | )              | $          | 1,677,538 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |           |       |           |       |
| Depreciation and  amortization                                                                       |       | 341,073        |       | 156,307        |       |
| Deferred income  taxes                                                                               |       | 597,196        |       | (597,174       | )          |
| Common stock  issued for services and compensation                                                   |       | 722,128        |       | 405,145        |       |
| Provision for  doubtful accounts and reserve for returns                                             |       | 259,581        |       | 3,085          |       |
| (Gain) loss on  disposal of property and equipment                                                   |       | 18,757         |       | (5,979         | )          |
| Changes in  operating assets and liabilities:                                                        |       |           |       |           |       |
| (Increase)  Decrease in:                                                                             |       |           |       |           |       |
| Accounts  receivable                                                                                 |       | (2,236,753     | )          | (786,221       | )          |
| Inventories                                                                                          |       | (7,010,963     | )          | (1,062,449     | )          |
| Deposit on  purchase of inventories                                                                  |       | —         |       | —         |       |
| Prepaid expenses  and other assets                                                                   |       | (513,560       | )          | (280,438       | )          |
| Increase in:                                                                                         |       |           |       |           |       |
| Accounts payable                                                                                     |       | 4,455,345      |       | 1,242,495      |       |
| Accrued expenses                                                                                     |       | 182,120        |       | 203,779        |       |
| Net cash  provided by (used in) operating activities                                                 |       | (5,050,393     | )          | 956,088        |       |
|                                                                                                 |       |           |       |           |       |
| Cash flows from  investing activities:                                                               |       |           |       |           |       |
| Acquisitions of  property and equipment                                                              |       | (1,029,310     | )          | (58,048        | )          |
| Proceeds from  sale of equipment                                                                     |       | 20,000         |       | 11,000         |       |
| Net cash used in  investing activities                                                               |       | (1,009,310     | )          | (47,048        | )          |
|                                                                                                 |       |           |       |           |       |
| Cash flows from  financing activities:                                                               |       |           |       |           |       |
| Proceeds from  revolving line of credit                                                              |       | 42,239,607     |       | 26,010,639     |       |
| Payments on  revolving line of credit                                                                |       | (37,662,341    | )          | (25,105,628    | )          |
| Collection on  notes receivable arising from sale of stock                                           |       | —         |       | —         |       |
| Proceeds from  issuance of stock                                                                     |       | 1,942,500      |       | 349,000        |       |
| Payments of  long-term debt                                                                          |       | (128,994       | )          | (113,125       | )          |
| Loan financing  costs                                                                                |       | (85,000        | )          | —         |       |
| Proceed from  issuance of long-term debt                                                             |       | 157,296        |       | —         |       |
| Repayment of  stockholder loan                                                                       |       | (110,050       | )          | (25,000        | )          |
| Distribution to  stockholders                                                                        |       | —         |       | (1,864,020     | )          |
| Proceeds from  related party note                                                                    |       | —         |       | 10,640         |       |
| Net cash  provided by (used in) financing activities                                                 |       | 6,353,018      |       | (737,494       | )          |
|                                                                                                 |       |           |       |           |       |
| Net Increase in  Cash                                                                                |       | 293,315        |       | 171,546        |       |
|                                                                                                 |       |           |       |           |       |
| Cash, Beginning                                                                                      |       | 574,046        |       | 402,500        |       |
| Cash, Ending                                                                                         |       | $              | 867,361    |           | $          | 574,046 |   |
|                                                                                                 |       |           |       |           |       |
| Cash Paid During  the Period for:                                                                    |       |           |       |           |       |
| Interest expense                                                                                     |       | $              | 473,056    |           | $          | 302,345 |   |
| Non-Cash  Investing and Financing Activities:                                                        |       |           |       |           |       |
| Acquisition of  property and equipment financed through long-term debt                               |       | $              | 172,667    |           | $          | 100,544 |   |
| Note receivable  arising from the sale of stock                                                      |       | $              | 550,000    |           | $          | — |   |
| Recapitalization                                                                                     |       | $              | —     |           | $          | (111,058 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

23

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THEYEARS ENDED DECEMBER 31, 2003 AND 2002**

 

**NOTE 1****                 SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

Nature of Operations

 

IWT Tesoro Corporation was incorporated in the state of Nevada on May 3,2000 as Ponca Acquisition Corporation.  On September 23, 2002, theCompany changed the name of Ponca Acquisition Corporation to IWT TesoroCorporation.

 

On October 1, 2002, IWT Tesoro Corporation (an inactive publiclyheld company) acquired 100% of the outstanding stock of International WholesaleTile, Inc. (IWT) in exchange for 83% of its outstanding common stock in atransaction accounted for as a recapitalization of IWT.

 

International Wholesale Tile, Inc. (IWT) is a wholesaledistributor of imported ceramic, porcelain, and stone tile, dealing mainly inimported floor & wall tiles.  IWT Tesoro International, Ltd.(ITIL) was set up as a foreign subsidiary, to be based in Bermuda to handlefuture operations of foreign subsidiaries.  IWT Tesoro Transport, Inc.(ITTI) was initially formed to be a transport broker.  ITTI has beenrelicensed as a common carrier for the overland transport of tile from Floridato destinations within the United States and return shipments of other freightback to Florida.

 

The consolidated financial statements include the accounts of IWTTesoro Corporation, the parent company, and its wholly-owned subsidiaries,International Wholesale Tile, Inc., IWT Tesoro Transport, Inc. andIWT Tesoro International, Inc.  Significant intercompany accounts andtransactions have been eliminated.  IWT Tesoro Corporation andSubsidiaries are hereinafter referred to as “the Company.”

 

Accounting Estimates

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased withan original maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable are stated at the face amount net of allowance fordoubtful accounts.  Generally accepted accounting principles require thatthe allowance method be used to reflect bad debts.  A provision fordoubtful accounts has been established to reflect an allowance for uncollectibleamounts.

 

Inventories

 

Inventories consisting of tiles are valued at the lower of cost ormarket.  Cost is determined by the first-in, first-out method(FIFO).  The Company includes inventory in transit as an asset of thecompany because merchandise overseas is purchased FOB shipping point. Title passes to the Company when merchandise leaves the factory.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Depreciation iscomputed principally by the straight-line method over the estimated usefullives.  Expenditures for maintenance, repairs, and minor replacements arecharged to expense as incurred.  Renewals and betterments are capitalized.

 

Income Taxes

 

The Company accounts for income taxes under Financial AccountingStandards Board (FASB) Statement No. 109,*Accounting for Income Taxes*.  SFAS No. 109 is an asset andliability approach that requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenrecognized in the financial statements or tax returns. (See Note 9)

 

Revenue Recognition

 

Revenues are recognized when products are shipped through commoncarrier (FOB shipping point with freight allowed in most orders), or whenproducts are received and accepted by customer if delivered by company (FOBdestination).  Title passes to the

 

24

----

 

customerat the FOB point (shipping or destination).  Customers have the right toreturn merchandise within 30 days of the date of shipment.

 

Long Lived Assets

 

The Company continuallyevaluates the carrying value of property and equipment to determine whetherthere are any impairment losses.  If indicators of impairment are present,and future undiscounted cash flows are not expected to be sufficient to recoverthe assets’ carrying amount, an impairment loss would be charged to operationsin the period identified based on the difference between the carrying value andthe fair value of the asset.

 

No reduction forimpairment of long-lived assets was necessary at December 31, 2003 or2002.

 

Stock Options

 

The Company elected toaccount for stock options issued to employees in accordance with AccountingPrinciples Board Opinion No. 25 (APB Opinion No. 25)*Accounting For Stock Issued to Employees*and related interpretations, which established financial accounting andreporting for compensation cost of stock issued to employees throughnon-variable plans, variable plans, and non-compensatory plans, and accountsfor stock options and warrants issued to non-employees in accordance with SFAS123,*Accounting for Stock-Based Compensation*,which established a fair value method of accounting for stock compensationplans with employees and others.

 

In accordance with SFAS No. 123,for options issued to employees, the Company has elected to account for thesestock options under APB No. 25 and related interpretations in accountingfor its plan.  Accordingly, no compensation costs have been recognized foroptions issued under the plan as of December 31, 2003 and 2002.

 

Had compensation costsfor the Company’s stock option been determined on the fair market value at thegrant dates for the options, consistent with Statement of Accounting Standards No. 123,*Accounting for Stock Based Compensation*(Statement No. 123), the Company’s results of operations for the yearsended December 31, 2003 and 2002 would have changed to the pro-formaamounts indicated.

 
| ** **                                                                                                                         | ** ** | **2003**          | ** ** | **2002**          | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                                         | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|                                                                                                                               |       |              |       |              |       |
| Net income  (loss)                                                                                                                 |       | $                 | (1,865,317 | )                 | $          | 1,677,538 |   |
| Add: Stock based  employee compensation cost determined under fair value based method for all  awards, net of related tax effects. |       | (2,281            | )          | (2,697            | )          |
|                                                                                                                               |       |              |       |              |       |
| Pro-forma net  income (loss)                                                                                                       |       | $                 | (1,867,598 | )                 | $          | 1,674,841 | ) |
|                                                                                                                               |       |              |       |              |       |
| Net income  (loss) per share - basic                                                                                               |       |              |       |              |       |
| As reported                                                                                                                        |       | $                 | (0.17      | )                 | $          | 0.15 |   |
|                                                                                                                               |       |              |       |              |       |
| Pro-forma                                                                                                                          |       | $                 | (0.17      | )                 | $          | 0.15 |   |
|                                                                                                                               |       |              |       |              |       |
| Net income  (loss) per share - diluted                                                                                             |       |              |       |              |       |
| As reported                                                                                                                        |       | $                 | (0.17      | )                 | $          | 0.15 |   |
|                                                                                                                               |       |              |       |              |       |
| Pro-forma                                                                                                                          |       | $                 | (0.17      | )                 | $          | 0.15 |   |

 

Advertising

 

Advertising costs arecharged to operations in the year incurred and were $1,311,802 and $1,179,077for the years ended December 31, 2003 and 2002, respectively.

 

Shipping and HandlingExpenses

 

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 handlingcharges.  When shipping and handling charges are billed to customers, theyare included in revenue.  The cost incurred to ship the products to customersthrough common carriers is included in the Statement of Operations underDelivery Expense. At December 31, 2003 and 2002 the total amount ofDelivery Expense was $1,576,816 and $1,245,174, respectively.

 

25

----

 

Cost of Goods Sold

 

The Company includes incost of goods sold the following expenses: cost of merchandise sold, inventoryadjustments, in-bound freight, duty and fees and discounts taken. At December 31,2003 and 2002 the total amount of cost of goods sold was $19,814,514 and$15,268,535, respectively.

 

Earnings per Share

 

Basic earnings per shareare computed based on the weighted average number of common shares outstandingduring each year.

 

Diluted earnings pershare are computed based on the weighted average number of common sharesoutstanding plus all potential dilutive common shares outstanding (stockoptions) during each year.

 

At December 31, 2002all common stock equivalents were antidilutive and therefore diluted earningsper share equaled basic earnings per share.

 

At December 31, 2003and 2002, the total number of additional shares that could potentially dilutebasic EPS in the future, but were not included in the computation of dilutedEPS because of their antidilutive effect, was 350,000 and 560,000,respectively.

 

Concentration of CreditRisk

 

Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistsof cash on deposit with two financial institutions amounting to $867,361 at December 31,2003, which was insured for up to $100,000 per financial institution by theU.S. Federal Deposit Insurance Corporation.

 

The Company believesconcentration of accounts receivable credit risk are limited due to the numberof customers.  It is the policy of management to obtain detailed creditevaluations of customers and establish credit limits as required.  TheCompany routinely assesses the financial strength of its customers. Outstanding accounts receivable are reviewed at the end of each reporting period,as well as the bad debt write-offs experienced in the past, and establish anallowance for doubtful accounts for uncollectible amounts.  There is nodisproportionate concentration of credit risk.  The Company purchasedcredit insurance for specific customers who purchase bulk materials and areoffered extended terms.

 

Accounting Pronouncements

 

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). Though it retains the basic requirements of SFAS No. 121 regarding whenand how to measure an impairment loss, SFAS No. 144 provides additionalimplementation guidance. SFAS No. 144 excludes goodwill and intangiblesnot being amortized among other exclusions.  SFAS No. 144 alsosupersedes the provisions of APB No. 30,*Reporting the Results of Operations*, pertaining to discontinuedoperations.  Separate reporting of a discontinued operation is stillrequired, but SFAS No. 144 expands the presentation to include a componentof an entity, rather than strictly a business segment as defined in SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information*.

 

26

----

 

SFAS No. 144 alsoeliminates the current exemption to consolidation when control over asubsidiaries is likely to be temporary.  This statement is effective forall fiscal years beginning after December 15, 2001.  The Companybelieves that the implementation of SFAS No. 144 did not have a materialeffect on the Company’s financial position, results of operations or liquidity.

 

In December 2002,the FASB issued SFAS No. 148,*Accounting for Stock-Based Compensation – Transition and Disclosure,*which amended SFAS No. 123,*Accountingfor Stock-Based Compensation.*  The new standard providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS No. 123to require prominent disclosures in the annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used in reported results.  This statement iseffective for financial statements for fiscal years ending after December 15,2002.  In compliance with SFAS No. 148, the Company has elected tocontinue to follow the intrinsic value method in accounting for its stock-basedemployee compensation arrangement as defined by APB No. 25.

 

**NOTE 2****                                                    FAIRVALUE OF FINANCIAL INSTRUMENTS**

** **

The carrying values ofcash and cash equivalents, accounts receivable, accounts payable and short-termdebt approximate fair value.  The fair value of long-term debt wasestimated by discounting the future cash flow using current borrowing rates forsimilar types and maturities of debt, except for the revolving creditagreements with floating rates, for which the carrying amounts were considereda reasonable estimate of fair value.

 

Debt:

 

The fair value andcarrying amount of long-term debt was as follows:

 
| ** **      | ** ** | **December 31** | ** ** |
|-----------------|------------|----------------------|------------|
| ** **      | ** ** | **2003**             | ** ** | **2002** | ** ** |
|            |       |                 |       |   |   |
| Fair Value      |       | $                    | 9,890,702  |   | $ | 5,162,608 |   |
| Carrying amount |       | $                    | 10,129,745 |   | $ | 5,486,800 |   |

 

**NOTE 3****                                                    INVENTORIES**

** **

Inventories consisted ofthe following:

 
| ** **            | ** ** | **December 31** | ** ** |
|-----------------------|------------|----------------------|------------|
| ** **            | ** ** | **2003**             | ** ** | **2002** | ** ** |
|                  |       |                 |       |   |   |
| Tiles                 |       | $                    | 11,102,115 |   | $ | 4,692,974 |   |
| Inventory in  transit |       | 1,956,724            |       | 1,354,902 |   |
|                  |       |                 |       |   |   |
|                  |       | $                    | 13,058,839 |   | $ | 6,047,876 |   |

 

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

 

**NOTE 4****                                                    NOTERECEIVABLE**

** **

The note receivable is apromissory note for $550,000.  The note bears interest at 3% per year witha maturity date of June 30, 2004. (See Note 10)  The note was paid infull in March 2004.

 

**NOTE 5****                                                    PROPERTYAND EQUIPMENT**

** **

Property and equipmentconsisted of the following:

 
| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2003**             | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **(as Restated)**    | ** ** | **(as Restated)** | ** ** |
| Furniture and  fixtures        |       | $                    | 307,247    |   | $ | 89,238 |   |
| Machinery and  equipment       |       | 477,996              |       | 326,165 |   |
| Vehicles                       |       | 211,215              |       | 207,071 |   |
| Computer  equipment            |       | 329,747              |       | 131,407 |   |
| Leasehold  improvements        |       | 409,125              |       | 108,220 |   |
|                           |       | 1,735,330            |       | 862,101 |   |
| Less accumulated  depreciation |       | (498,351             | )          | (372,599 | ) |
|                           |       |                 |       |   |   |
|                           |       | $                    | 1,236,979  |   | $ | 489,502 |   |

 

Depreciationexpense for the years ended December 31, 2003 and 2002 was approximately$267,000 and $129,000, respectively.

 

**NOTE 6****                                                    NOTESPAYABLE**

** **

The Company hasoutstanding notes payable as follows:

 
| ** **                                                                                                                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Notes Payable –  Related Parties                                                                                                                                                    |       |                 |       |   |   |
|                                                                                                                                                                                     |       |                 |       |   |   |
| Notes payable to  three majority stockholder; interest rate 10% per year; due December 31,  2025; no prepayment penalty; subject to Subordination Agreement of new line  of credit. |       | $                    | 338,662    |   | $ | 448,712 |   |
|                                                                                                                                                                                          |            |                      |            |  |  |  |  |

 

Interest expense relatedto these loans was approximately $34,000 and $57,000 for the years ended December 31,2003 and 2002, respectively.

 

27

----

 
| ** **                                                                                                                                                                                | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Notes Payable –  Unrelated Parties                                                                                                                                                   |       |                 |       |   |   |
|                                                                                                                                                                                      |       |                 |       |   |   |
| Various  equipment notes, payable in monthly installments ranging from $882 to $1,457;  maturing September 2004 through December 2005; interest rates  ranging from 0 to 8.95%. |       | $                    | 85,279     |   | $ | 113,652 |   |
|                                                                                                                                                                                      |       |                 |       |   |   |
| Less current  portion                                                                                                                                                                     |       | (42,719              | )          | (48,780 | ) |
|                                                                                                                                                                                      |       |                 |       |   |   |
|                                                                                                                                                                                      |       | $                    | 42,560     |   | $ | 64,872 |   |

 

Interest expense relatedto these loans was $6,763 and $9,361 for the years ended December 31, 2003and 2002, respectively.

 

Maturities of long-termdebt are as follows:

 
| 2004       |   | $       | 42,719  |   |
|------------|--------|---------|---------|--------|
| 2005       |   | 26,410  |    |
| 2006       |   | 8,528   |    |
| 2007       |   | 7,622   |    |
| 2008       |   | 0       |    |
| Thereafter |   | 338,662 |    |
|       |   |    |    |
|       |   | $       | 423,941 |   |

 

**NOTE 7****                                                    LINEOF CREDIT**

** **

An existing loan andsecurity agreement for a line of credit was restated effective November 13,2002, whereas the amount of the maximum credit was increased from $5,000,000 to$7,500,000.  The average interest rate was about 5% for the year ended December 31,2002, continuing through September 9, 2003.  IWT owed $4,864,778 onthis credit line at December 31, 2002.

 

On September 10,2003, the Company entered into a new loan and security agreement with afinancial institution for a revolving line of credit with a maximum limit of$17,000,000.  The agreement specifies that proceeds from this revolvingcredit loan must be used solely to satisfy the Company’s previous existing lineof credit in the amount of $7,288,903, and for general working capitalneeds.  All present and future assets of the Company collateralize thisloan. The rate of interest in effect for this agreement is calculated withreference to the Base Rate and/or LIBOR (London Interbank Offered Rate). The balance due at December 31, 2003 was $9,599,340.

 

Base Rate advances bear afluctuating interest rate per annum equal to prime plus 0.50%.  LIBORadvances bear a fixed rate per annum equal to 3.00% plus the LIBOR for theapplicable interest period.  At December 31, 2003 the Base Rate andthe LIBOR rate were 4.50% and 4.19%, respectively.

 

For the years ended December 31,2003 and 2002, interest expense related to the credit lines amounted to$413,164 and $227,022, respectively.  Interest expense at December 31,2003 includes a termination fee of $75,000 assessed for prepayment of the priorcredit line.

 

The Company incurred aclosing fee of $85,000 for the new revolving line of credit, which was deferredand will be amortized using the straight-line method over the 3-year life ofthe loan, with a charge to interest expense.  A total of $7,083 wasamortized during the year ended December 31, 2003.

 

**NOTE 8****                                                    LEASES**

 

Capital Leases

 

The Company has variouscapital leases included in property and equipment (See Note 5) which aresummarized as follows:

 
| ** **                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |
| Equipment                                  |       | $        | 394,326    |     | $          | 266,672 |   |
| Less:  Accumulated  depreciation |       | (94,655  | )          | (58,724  | )          |
|                                       |       |     |       |     |       |
| Net assets under  capital leases           |       | $        | 299,671    |     | $          | 207,948 |   |

 

28

----

 

Operating Leases

 

The Company leases officeand warehouse space under a non-cancelable operating lease, which has aninitial term in excess of one year.  In May 2003, the Company tookoccupancy of a new warehouse and office facility in Palm City, Florida with acombined total of 147,000 square feet of space.  In addition, the Companyentered into a new lease agreement for over 48,000 square feet of warehousespace at the old location, and a one-year sub-lease agreement for 20,000 squarefeet of warehouse space was signed effective August 1st, 2003. The Company also leasesoffice space in Westport, Connecticut for its corporate headquarters.

 

At December 31,2003, future minimum annual lease payments under operating and capital leasesare as follows:

 
| ** ** | ** ** | **Operating  Lease** | ** ** | **Capital  Leases** | ** ** |
|------------|------------|----------------------|------------|---------------------|------------|
|       |       |                 |       |                |       |
| 2004       |       | $                    | 908,639    |                | $          | 63,151 |   |
| 2005       |       | 851,887              |       | 63,586              |       |
| 2006       |       | 872,437              |       | 49,127              |       |
| 2007       |       | 893,800              |       | 30,175              |       |
| 2008       |       | 915,650              |       | 6,295               |       |
| Thereafter |       | 4,451,373            |       | 0                   |       |
|       |       |                 |       |                |       |
|       |       | $                    | 8,893,786  |                | $          | 212,334 |   |

 

Total lease expense underoperating leases was $1,031,559 and $479,905 for the years ended December 31,2003 and 2002, respectively.

 

Total interest expenseunder capital leases was $18,075 and $9,429 for the years ended December 31,2003 and 2002, respectively.

 

**NOTE 9****                                                    INCOMETAXES**

 

During the first ninemonths of 2002, the subsidiary, International Wholesale Tile Inc. was taxed asan S corporation according to the provisions of the Internal RevenueCode.  Accordingly, no provision or liability for income taxes isreflected in the accompanying statements for that period of time. Instead, the stockholders were liable for individual Federal income taxes ontheir respective share of the Company’s taxable income.  S corporationspay distribution of profits in lieu of dividends.

 

A summary of theclassification of deferred taxes at December 31, 2003 and 2002 arepresented below:

 
| ** **              | ** ** | **2003**  | ** ** | **2002** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|
|                    |       |      |       |     |       |
| Current                 |       | $         | 85,375     |     | $          | 0 |   |
| Non-Current             |       | 950,300   |       | 597,196  |       |
| Total                   |       | 1,035,675 |       | 597,196  |       |
| Valuation  allowance    |       | 1,035,675 |       | 0        |       |
| Net deferred tax  asset |       | $         | 0          |     | $          | 597,196 |   |

 

Deferred income taxesreflect the net tax effect of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  Significant components of the netdeferred tax assets (liabilities) were as follows:

 
| ** **                                  | ** ** | **2003**   | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|
|                                        |       |       |       |     |       |
| Deferred tax  assets                        |       |       |       |     |       |
| Net operating  loss                         |       | $          | 327,403    |     | $          | 188,291 |   |
| Accounts  receivable                        |       | 45,156     |       | 31,325   |       |
| Accrued expenses                            |       | 40,219     |       | —   |       |
| Deferred  compensation – Stock options |       | 250,867    |       | —   |       |
| Accumulated  depreciation                   |       | 368,704    |       | 377,095  |       |
| Other                                       |       | 3,326      |       | 485      |       |
|                                        |       | 1,035,675  |       | 597,196  |       |
| Less: Valuation  Allowance                  |       | (1,035.675 | )          | —   |       |
| Net deferred tax  assets                    |       | $          | —     |     | $          | 597,196 |   |

 

29

----

 

A reconciliation of thefederal statutory rate and the Company’s effective tax rate is presented asfollows:

 
| ** **                           | ** ** | **2003**       | ** ** | **2002**       | ** ** |
|--------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                           | ** ** | **Amount**     | ** ** | **%**          | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                 |       |           |       |           |       |   |   |   |   |
| Income tax at  statutory rate        |       | $              | (431,162   | )              | (34.0      | ) | $ | (201,994 | ) | (34.0 | ) |
|                                 |       |           |       |           |       |   |   |   |   |
| Permanent items                      |       | 34,981         |       | 2.8            |       | 6,321 |   | 1.0 |   |
|                                 |       |           |       |           |       |   |   |   |   |
| State taxes, net  of federal benefit |       | (42,298        | )          | (3.3           | )          | (20,891 | ) | (3.5 | ) |
|                                 |       |           |       |           |       |   |   |   |   |
| Effect of  S-Corporation conversion  |       | —         |       | —         |       | (380,610 | ) | (64.0 | ) |
|                                 |       |           |       |           |       |   |   |   |   |
| Change in  valuation Allowance       |       | $              | 1,035,675  |           |       |   | $ | — |   |   |   |
|                                 |       |           |       |           |       |   |   |   |   |
| Income tax  provision (benefit)      |       | $              | 597,196    |           |       |   | $ | (597,174 | ) | 100.5 | % |

 

**NOTE 10****                                             STOCKHOLDERS’EQUITY**

 

Common Stock

 

During March 2003,the Company completed a private placement of its securities, which wasinitiated in 2002.  As a result, the Company issued an aggregate of220,002 shares of its unregistered common stock at $3.00 per unit, resulting inaggregate proceeds of $660,000.  (See Note 13)

 

During December 2003,the Company completed a public offering of its securities.  As a result,the Company issued an aggregate of 250,000 shares of its registered commonstock at $5.50 per unit, resulting in aggregate net proceeds of $1,292,500after offering costs of $82,500.  (See Note 14)

 

In December 2003,the Company completed a private placement of its unregistered securities andsigned a subscription agreement with an investor to purchase 100,000 units at$5.50 per unit.  Each unit consisted of one (1) share of common stockand one warrant to purchase one additional share at $7.00 per share.  Inaddition, the investor signed a stock pledge agreement and a promissory notefor $550,000, at 3.0% interest per year, with a maturity date of June 30,2004.  The investor pledged the 100,000 shares to IWT Tesoro Corporationuntil the promissory note is paid in full.

 

In March 2004, theCompany received full payment for the promissory note.

 

Warrants

 

As it relates to theprivate placement, 330,000 warrants were issued at an initial price of $3.00per share.  These warrants will expire in 5 years from the date ofissuance.  Through December 31, 2003, 85,000 of these outstandingwarrants were exercised for a total of $255,000.

 

As it relates to theinitial public offering, 250,000 warrants were issued at $7.00 per shareexpiring on June 17, 2006.  At December 31, 2003 all warrantswere outstanding.

 

Through another privateoffering, 100,000 warrants were issued during 2003, at an exercise price of$7.00 per share, expiring three years from the date of sale. At December 31,2003 all of these warrants were outstanding.

 

For purpose of valuingwarrants, the Company used the Black-Scholes option pricing model with thefollowing assumptions for the years ended December 31:

 
| ** **                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |
| Expected  dividend yield   |       | 0%       |       | 0%       |       |
| Risk free  interest rate   |       | 2.12%    |       | 2.27%    |       |
| Expected time of  exercise |       | 2 years  |       | 3 years  |       |
| Expected  volatility       |       | 0.01%    |       | 0%       |       |

 

30

----

 

The average value of thewarrants at the issue date was $0.01 and $0.29 during 2003 and 2002,respectively.

 

Changes during the yearsare presented as follows:

 
| ** **                         | ** ** | **Number of Warrants** | ** ** | **Common  Stock** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|------------------------------------|------------|------------------------|------------|-------------------|------------|---------------------------------------|------------|
|                               |       |                   |       |              |       |                                  |       |
| Balance at  January 1, 2002   |       | —                 |       | —            |       | $                                     | —     |   |
| Issued                             |       | 125,000                |       | 125,000           |       | 3.00                                  |       |
| Exercised                          |       | 5,000                  |       | 5,000             |       | 3.00                                  |       |
| Forfeited                          |       | —                 |       | —            |       | —                                |       |
| Balance at December 31,  2002 |       | 120,000                |       | 120,000           |       | 3.00                                  |       |
|                               |       |                   |       |              |       |                                  |       |
| Issued                             |       | 555,000                |       | 555,000           |       | 5.52                                  |       |
| Exercised                          |       | 80,000                 |       | 80,000            |       | 3.00                                  |       |
| Forfeited                          |       | —                 |       | —            |       | —                                |       |
| Balance at  December 31, 2003 |       | 595,000                |       | 595,000           |       | $                                     | 5.35       |   |

 

Warrants outstanding andexercisable at December 31, 2003 are as follows:

 
| ** **                    | ** ** | **WARRANTS OUTSTANDING** | ** ** | **WARRANTS EXERCISABLE**                        | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|
| **Range of  Exercise  Price** | ** ** | **Number Outstanding**   | ** ** | **Weighted  Average Remaining Contracted Life** | ** ** | **Weighted Average Exercise  Price** | ** ** | **Number Exercisable** | ** ** | **Weighted Average Exercise  Price** | ** ** |
|                          |       |                     |       |                                            |       |   |   |   |   |   |   |
| $3.00-7.00                    |       | 245,000                  |       | 4.6 years                                       |       | $ | 4.04 |   | 245,000 |   | $ | 4.04 |   |
| $7.00                         |       | 350,000                  |       | 2.8 years                                       |       | $ | 7.00 |   | 350,000 |   | $ | 7.00 |   |

 

**NOTE 11****                                             STOCKOPTIONS AND COMPENSATION PLAN**

 

Stock Compensation Plan

 

On December 27,2001, IWT Tesoro Corporation adopted the Stock Incentive Plan (the Plan). The Plan provides that eligible employees, consultants, and affiliates may begranted shares of common stock.  Under the Plan, the options granted arenon-qualified stock options, incentive stock options, and restrictedstock.  The aggregate total common stock that may be issued under the Planis 4,000,000 shares.  The restricted shares issued to employees wererecorded at the fair value on the grant date. Under the Plan, a total of 18,200and 134,500 restricted shares were issued to employees, directors andconsultants for services rendered for the years ended December 31 2003 and2002, respectively.

 

Under the Plan, allunissued restricted shares were registered after the balance sheet date and allissued restricted shares were registered for resale without any additionalrestrictions imposed by the Compensation Committee.

 

On November 23,2002, the Company granted 40,000 options to directors at an exercise price of$3.00 per share, expiring in ten years.  At December 31, 2003, theoptions were fully vested.

 

On November 23,2002, the Company granted 400,000 options to officers at an exercise price of$3.00 per share, expiring in ten years. The options vest as follows: (a) 33%at such time as the Company’s common stock commences trading on theOver-The-Counter (OTC) Bulletin Board (equivalent); (b) 33% at such timeas the Company attains no less than a $50 million market cap for tenconsecutive trading days; and (c) 33% when the Company achieves its 2003revenue and profit targets.  At December 31, 2003 the options were66% vested.  The net loss for the year ended December 31,2003 includes $666,667 of stock-based compensation cost because ofperformance-based vesting criteria that were met during 2003 when the marketprice of the underlying stock was greater than the exercise price of theoptions. The following table illustrates the effect on net earnings (loss) andearnings (loss) per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, tonon-variable stock-based employee awards.

 
| ** **                                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2003**                          | ** ** | **2002** | ** ** |
| ** **                                                                                                                        | ** ** | **(Restated)**                    | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                                                |       | $                                 | (1,865,317 | ) | $ | 1,677,538 |   |
|                                                                                                                              |       |                              |       |   |   |
| Add: total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (2,281                            | )          | (2,697 | ) |
|                                                                                                                              |       |                              |       |   |   |
| Pro forma net  income (loss)                                                                                                      |       | $                                 | (1,867,598 | ) | $ | 1,674,841 |   |
|                                                                                                                              |       |                              |       |   |   |
| Earnings (loss)  per share – Basic and Diluted:                                                                              |       |                              |       |   |   |
| As reported                                                                                                                       |       | $                                 | (0.17      | ) | $ | 0.15 |   |
| Pro forma                                                                                                                         |       | $                                 | (0.17      | ) | $ | 0.15 |   |

 

During 2002, all optionswere granted to employees, and accounted for according to APB 25; therefore nocompensation expense 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       | %      |

 

31

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| ** ** | ** ** | **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   |       | 306,667                                     |       | 11                                                                               | %          | $                           | 3.00       |                 | 11/23/2012 |                                                                | $          | 0.20 |   |
|            |            |                                             |            |                                                                                  |            |                             |            |                      |            |                                                                     |            |  |  |

 

No options weregranted.  During 2003, 133,332 options expired.

 

Options outstanding andexercisable at December 31, 2003 are as follows:

 
| ** **                    | ** ** | **OPTIONS OUTSTANDING** | ** ** | **OPTIONS EXERCISABLE**                          | ** ** |
|-------------------------------|------------|-------------------------|------------|--------------------------------------------------|------------|
| **Range of  Exercise  Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining Contracted Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $                             | 3.00       |                    | 306,667    |                                             | 8.9        |   | $ | 3.00 |   | 306,667 |   | $ | 3.00 |   |
|                               |            |                         |            |                                                  |            |  |  |  |  |  |  |  |  |  |

 

**NOTE 12****                                             ACQUISITION**

** **

On October 1, 2002,the Company acquired International Wholesale Tile, Inc. In connection withthe legal form of this transaction, International Wholesale Tile, Inc.became a wholly owned subsidiary of IWT Tesoro Corporation.  A total of9,000,000 shares of common stock were issued for the acquisition.  Foraccounting purposes, the acquisition has been treated as a capital transactionand as a recapitalization of International Wholesale Tile, Inc.  Thefinancial statements became those of International Wholesale Tile, Inc.,with adjustments to reflect the changes in equity structure.  Theoperations are those of International Wholesale Tile, Inc. for all periodspresented, and those of IWT Tesoro Corporation from the recapitalizationdate.  The accompanying consolidated balance sheets reflect the assets andliabilities at historical cost of IWT Tesoro Corporation and InternationalWholesale Tile, Inc. at December 31, 2002; and the assets andliabilities at historical cost of International Wholesale Tile, Inc. at December 31,2001.

 

As part of thetransaction, the Company and each of the three shareholders of InternationalWholesale Tile, Inc. entered into a repurchase agreement, to commence on January 1,2003 for three years, by which the three shareholders may sell a certain amountof the Company’s common stock back to the Company for a price based on anamount equal to 88% of the average trading price of the Company’s common stockso long as the stock is trading.  The amount of stock is generally up to25,000 shares for the first year, up to 50,000 shares for the second year, andup to 75,000 shares for the third year.  The repurchase agreement is contingentupon trading of the Company’s stock on the NYSE, the ASE, the NASDAQ, the Overthe Counter Bulletin Board, or the “Pink Sheets.” The maximum number ofredeemable shares under the repurchase agreement is 450,000.

 

On June 26, 2003 theCompany voted to cancel the repurchase agreement.

 

**NOTE 13****                                             PRIVATEOFFERING**

** **

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 andwarrants to purchase 11⁄2 shares initially at $3.00 per share.  The price ofthe warrants will increase by $.25 per share at the beginning of each calendarquarter following the first public sale of the common stock of IWT TesoroCorporation pursuant to the Company’s form 211 to be filed with the NationalAssociation of Securities Dealers (NASD).

 

Under this privateoffering, the Company raised $660,000 in units sold, and through December 31,2003, 85,000 warrants were exercised for a total of $255,000.

 

**NOTE 14****                                             PUBLICOFFERING**

** **

On April 11, 2003,the Company filed a registration statement with the Securities and ExchangeCommission that was declared effective on June 17, 2003. Two offeringswere included in the registration statement. The first was the offer and saleof 250,000 units at $5.50 per unit.  Each unit consists of one share ofTesoro common stock and a warrant to purchase one share at $7.00 per sharethrough June 17, 2006.  Through July 7, 2003, these units wereoffered exclusively to current stockholders of the Company.  The secondoffering was to register on behalf of certain Tesoro stockholders an aggregateof 1,243,502 shares for resale; of this total 443,500 have no lock-up period,699,002 are subject to a six-month lock-up period, and 101,000 are subject to a12-month lock-up period.  The Company elected to extend this offering to December 14,2003.

 

Under the first publicoffering, the Company raised $1,292,500, net of offering cost, through the saleof the 250,000 units.  At 

 

32

----

 

December 31, 2003,no warrants were exercised under this offering.

 

**NOTE 15****                                             SEGMENTINFORMATION**

** **

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

 

**NOTE 16****                                             PENSIONPLAN**

** **

The Company sponsors a401(k) plan known as the International Wholesale Tile 401(k) Profit SharingPlan & Trust. (the Pension Plan).  The Pension Plan provides taxdeferred salary deductions for eligible employees.  Employees maycontribute from 1% to 12% of their annual compensation to the Pension Plan,limited to an annual maximum amount as set periodically by the Internal RevenueService.  The Company provides matching contributions equal to 100% of theemployee’s contributions up to a maximum of 3% of eligible pay.  Thecontribution expense related to the Pension Plan amounted to $76,249 and$59,352 for the years ended December 31, 2003 and 2002, respectively.

 

**NOTE 17****                                             SUBSEQUENTEVENTS**

** **

The Company filed formS-8 with the Securities and Exchange Commission on January 26, 2004,registering 4,000,000 shares of common stock that are issued or intended to beissued to employees, consultants and others under the 2001 Stock IncentivePlan.

 

On January 10, 2004,the Company granted 50,000 options to directors at an exercise price of $6.00per share, expiring in ten years.  The options will become vested andexercisable as follows: (a) 50% will vest immediately; and (b) theremaining 50% will vest on the anniversary date of the option grant.

 

**NOTE 18****                                          RESTATEMENTOF 2003 AND 2002 FINANCIAL STATEMENT**

** **

The Company has restatedthe consolidated balance sheets as of December 31, 2002 and 2002, and theconsolidated statements of operations, stockholders’ equity and cash flows forthe year then ended as described below:

 

***Accounts Receivable***

 

Managementdetermined that the Company had been incorrectly calculating the allowances forproduct returns.  Management revised thiscalculation and determined that accounts receivable and net sales wereoverstated by approximately $55,000 as of the year ended December 31,2003. 

 

***Accrued Expenses***

*** ***

Management determinedthat the Company had been incorrectly calculating the accruals for salescommissions. Management revised this calculation and determined that accruedexpenses were understated by approximately $400,000 and $204,000 as of December 31,2003 and 2002, respectively.

 

***Sample and Display Boards***

*** ***

Management reassessed itsmethodology for accounting for sample and display boards and determined thatthis promotional merchandise should have been expensed when distributed ratherthan capitalized and depreciated. The adjustments resulting from the restatement increased the net lossfor 2003 by approximately $758,000 and decreased net income for 2002 byapproximately $616,000. This change also reduced property and equipment as of December 31,2003 and 2002 by approximately $2,980,000 and $2,223,000, respectively.

 

***Deferred Taxes***

 

In connection with therestatements for accounts receivable, accrued expenses and sample and displayboards described above, the related tax effect was recorded resulting in gross deferred tax asset and recorded a valuation allowance, asneeded, to reduce net deferred tax assets to an amount considered by managementmore likely than not to be realized for the year ended December 31, 2003.At December 31, 2002 a gross deferred tax assets of approximately$598,000 was recorded. At December 31, 2003, a valuation allowance was recordedresulting in a net deferred tax asset of zero (See Note 9).

 

***Stockholders Equity***

 

As part of therecapitalization transaction of IWT effective October 1, 2002 (see Note1), the Company and each of the three stockholders of International WholesaleTile, Inc. entered into a repurchase agreement to commence on January 1,2003. The maximum number of redeemable shares under the repurchase agreementwas 450,000. The transaction was accounted for by reducing additional paid incapital to the extent a balance existed with the remaining portion of thetransaction applied to accumulated deficit as of December 31, 2002.

 

33

----

 

 The effects of these changes are summarized asfollows:

 
| ** **                            | ** ** | **2003**       | ** ** | **2002**        | ** ** |
|---------------------------------------|------------|----------------|------------|-----------------|------------|
| ** **                            | ** ** | **As**         | ** ** | ** **      | ** ** | ** ** | ** ** | **As** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Previously** | ** ** | ** **      | ** ** | **As** | ** ** | **Previously** | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**   | ** ** | **Adjustments** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| As of  December 31:              |       |           |       |            |       |   |   |   |   |   |   |   |   |
| Consolidated  Balance Sheet:          |       |           |       |            |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                  |       | $              | 4,907,705  |            | $          | (55,000 | ) | $ | 4,852,705 |   | $ | 2,875,532 |   | $ | — |   | $ | 2,875,532 |   |
| Property and  equipment, net          |       | 4,217,268      |       | (2,980,289      | )          | 1,236,979 |   | 2,712,422 |   | (2,222,920 | ) | 489,502 |   |
| Deferred tax  assets                  |       | 249,397        |       | (249,397        | )          | — |   | 34,348 |   | 562,848 |   | 597,196 |   |
| Accrued expenses                      |       | 137,292        |       | 399,671         |       | 536,963 |   | 151,064 |   | 203,799 |   | 354,863 |   |
| Deferred tax  liability               |       | 148,594        |       | (148,594        | )          | — |   | — |   | — |   | — |   |
| Additional paid  in capital           |       | 4,972,820      |       | (1,088,871      | )          | 3,883,949 |   | (686,068 | ) | 686,068 |   | 0 |   |
| Retained  earnings (deficit)          |       | (380,146       | )          | (2,444,900      | )          | (2,825,046 | ) | (184,740 | ) | (1,177,792 | ) | (1,362,532 | ) |
|                                  |       |           |       |            |       |   |   |   |   |   |   |   |   |
| ** **                            | ** ** | **2003**       | ** ** | **2002**        | ** ** |
| ** **                            | ** ** | **As**         | ** ** | ** **      | ** ** | ** ** | ** ** | **As** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Previously** | ** ** | ** **      | ** ** | **As** | ** ** | **Previously** | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**   | ** ** | **Adjustments** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| For the Year  Ended December 31: |       |           |       |            |       |   |   |   |   |   |   |   |   |
| Consolidated  Statement of            |       |           |       |            |       |   |   |   |   |   |   |   |   |
| Operations:                           |       |           |       |            |       |   |   |   |   |   |   |   |   |
| Net Sales                             |       | $              | 32,659,546 |            | $          | (55,000 | ) | 32,604,546 |   | $ | 25,387,708 |   | $ | — |   | $ | 25,387,708 |   |
| Gross profit                          |       | 12,845,032     |       | (55,000         | )          | 12,790,032 |   | 10,119,173 |   | — |   | 10,119,173 |   |
| Operating  expenses                   |       | 12,609,330     |       | 953,263         |       | 13,562,593 |   | 7,874,786 |   | 819,315 |   | 8,694,101 |   |
| Income (loss)  before income taxes    |       | (259,861       | )          | (1,008,260      | )          | (1,268,121 | ) | 1,899,679 |   | (819,315 | ) | 1,080,364 |   |
| Income tax  benefit (expense)         |       | 64,455         |       | (661,651        | )          | (597,196 | ) | 34,348 |   | 562,826 |   | 597,174 |   |
| Net Income  (loss)                    |       | $              | (195,406   | )               | $          | (1,669,911 | ) | $ | (1,865,317 | ) | $ | 1,934,027 |   | $ | (256,489 | ) | $ | 1,677,538 |   |
| Earnings (loss)  per share:           |       |           |       |            |       |   |   |   |   |   |   |   |   |
| Basic and  Diluted                    |       | $              | 0.02       |            | $          | (0.15 | ) | $ | (0.17 | ) | $ | 0.19 |   | $ | (0.04 | ) | $ | 0.15 |   |

 

 

**ITEM 8.****     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

** **

Effective December 1,2003, Tesoro independent accountants, Sewell and Company, PA, ofHollywood, Florida was replaced by the accounting firm of Kantor, Sewell &Oppenheimer, PA (KSO), the successor firm to Sewell and Company.  KSO maintains the same facilities asSewell and Company and is a Florida SEC qualified accounting firm.  Sewellreported on and audited the financial statements prepared by the Registrant forthe period commencing September 20, 2000 through September 30, 2003.

 

The recommendation byTesoro’s Audit Committee was based upon KSO becoming the successor firmpursuant to the merger of Sewell with Kantor and Oppenheimer.

 

None of Sewell’s reportson the financial statements for either the past two years contained an adverseopinion or a disclaimer of opinion, nor were qualified or modified as touncertainty, audit scope, or accounting principles.  Additionally, duringthe Registrant’s two most recent fiscal years and any subsequent interim periodpreceding Sewell’s dismissal, there were no disagreements with the Registrant’sformer accountant on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedures.

 

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, 2000 and ending July 15, 2000. It has notprepared any financial statements subsequent to the July 15, 2000,reports.

 

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 Wholesale Tile, 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 

 

34

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scope or procedures.

 

**ITEM 8A.****                                            CONTROLSAND PROCEDURES.**

** **

*DisclosureControls and Procedures*

* *

(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 and principal financial officer concluded thatour disclosure controls and procedures are effective in timely alerting them tomaterial information relating to us (including our consolidated subsidiaries)that is required to be included in our periodic SEC reports.

 

(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.

 

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

** **

**Directorsand Executive Officers**

** **

The following tableincludes the names, positions with Tesoro and ages of our Executive Officersand Directors.

 
| **Name**                    | ** ** | **Age** | ** ** | **Position**                                                                                                                                                                                                                                                                                                                 |
|-----------------------------|------------|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Henry J.  Boucher, Jr. |       | 56      |       | •    Tesoro:  Chairman, President, Chief Executive Officer, Director•    IWT  Tesoro International Ltd.: Director•    IWT  Tesoro Transport, Inc.: President and Director                                                                    |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| Forrest Jordan              |       | 56      |       | •    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             |       | 45      |       | •    Tesoro:  Director, Senior Vice President•    IWT:  President, Director•    IWT  Tesoro International Ltd.: Director                                                                                                                          |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| Grey Perna                  |       | 47      |       | •    Tesoro:  Director, Senior Vice President•    IWT:  Senior Vice President, Director•    IWT  Tesoro International Ltd.: President, Director                                                                                                   |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| James R. Edwards            |       | 52      |       | •    Tesoro:  Secretary, Director                                                                                                                                                                                                                                                                   |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| Carl G.  Anderson, Jr. |       | 59      |       | •    Tesoro:  Director                                                                                                                                                                                                                                                                              |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| James Lafond                |       | 61      |       | •    Tesoro:  Director Subsequently, resigned in March 2004                                                                                                                                                                                                                                         |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| Robert B. Rogers            |       | 68      |       | •    Tesoro:  Director                                                                                                                                                                                                                                                                              |
|                        |       |    |       |                                                                                                                                                                                                                                                                                                                         |
| Allen G. Rosenberg          |       | 56      |       | •    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

 

35

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President and a Directorof Borough Corporation, an inactive company. He received his M.S. in economicsfrom South Dakota State University in 1972. From 1992 to June 1999, Henrywas a Vice President of Mercer Management Consulting, a subsidiary of MarshMcLennan, an insurance brokerage firm. Prior to joining Mercer, he was apartner with the accounting firm of Coopers and Lybrand (now PriceWaterhouseCoopers). From June 1999 to July 2000, Henry was a partner withArthur Andersen. He joined Business Edge Solutions, a technology consultingfirm serving the financial services industry with e-commerce packagedsolutions, where he was a Vice President until December 2000. Since January 2001,Henry has been a principal of Mentus Consulting LLC, a consulting firmproviding process improvement support services to a wide range of companies andindustries.

 

**ForrestJordan.**    Forrest has served as a SeniorVice President of Tesoro since November 2002, a Director since October 1,2002, and as our Chief Financial Officer since March 28, 2003. Forrest hasserved as a Vice President, Secretary and Treasurer of IWT since April of1994. He also serves as IWT’s sales manager. Forrest is also a Director of IWT,of International and of Transport. He received his M.B.A. from Anna MariaCollege in Paxton, MA.

 

**Paul F.Boucher.**    Paul has served as a SeniorVice President of Tesoro since November 2002 and as one of our Directorssince October 1, 2002. Paul has been the President of IWT since April 1994and in particular, focuses on IWT’s operations. He is also a Director of IWTand International.

 

**GreyPerna.**    Grey has served as a SeniorVice President of Tesoro since November 2002 and as one of our Directorssince October 1, 2002. He has served as a Vice President of IWT since January 1997.He also serves as IWT’s marketing manager. He is also the President and aDirector of International.

 

**James R.Edwards.**    Jim has served as one of ourSecretaries since November 2002 and as a Tesoro Director since April 20,2002. He has been the Vice President, General Counsel and Secretary of WirelessKnowledge, Inc., a telecommunications company since March 2002, whichit absorbed into Qualcomm, its parent company.  From April 2000 to March 2002,Jim served as the Vice President, General Counsel and Secretary and VicePresident of Finance & Administrative for Vapotronics, Inc., amedical device company. From March 1987 to April 2000, he was theVice President, General Counsel and Secretary of General Atomics, ahigh-technology research and development company.

 

**Carl G.Anderson, Jr.**    Carl has served asa Director 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 from May 1992to August 1994. He was a marketing executive at Procter & Gamblefrom 1972 to 1984 and Vice President and General Manager at Nestle FoodsCorporation in Purchase, New York from 1984 to 1992. Carl also served as aDirector of the J.B. Williams Company, Inc., a manufacturer of consumerproducts, until the company was sold in October 2002, and as a Director ofABC School Supply until the company was sold in August 2002. He alsoserves as a trustee of Lafayette College. Carl graduated from Lehigh UniversityGraduate School of Business Administration in 1972 and Lafayette College in1967.

 

**JamesLafond.**    Jim has served as a Directorof Tesoro since October 24, 2002. Through September 30, 2002, heserved as PricewaterhouseCooper’s Area Managing Partner for the GreaterWashington Area, which encompasses client service offices in Washington, D.C.,Maryland and Virginia. In this role, Jim had oversight responsibility for allof the Firm’s lines of service, marketing and operations in metropolitanWashington, D.C. Over the course of his career, Jim has led PWC’s NationalBusiness Development and Industry Specialization functions, served as U.S.leader of the Marketing and Sales functions, and as Director of NationalEmerging Business Services, providing financial and tax advice to entrepreneursand growing companies. Jim was admitted as a General Practice Partner in 1974in Massachusetts, moved to New York in 1984, Florida in 1992 and to the GreaterWashington area in late 1994. Subsequently, James retired from the Board ofDirectors in March 2004.

 

**RobertB. Rogers.**    Bob has served as aDirector of Tesoro since January 2003, Since March 1999, he hasserved as the Chairman Emeritus of the Ewing Marion Kauffman Foundation. Bobbecame president of the Foundation in April 1990 and in September 1993was named chairman of the Board of its Directors. He remained as president ofthe Foundation until July 1997, when he assumed chairman duties full time.Between 1967 and 1971, Bob served in a variety of middle management positionsfor Trans World Airlines (TWA) in New York and in Kansas City. After leavingTWA, he joined the Kansas City financial services firm of Waddell and Reed,where he was corporate controller until 1974. From there, Bob became chieffinancial officer of Gateway Sporting Goods until he joined Marion Laboratoriesin 1975 as corporate controller. A wide range of positions, including vicepresident of information systems and controls, vice president of financialcontrols, vice president of community affairs and finally president of theMarion Foundation, marked Roger’s tenure at Marion. Bob is also a CertifiedPublic Accountant.

 

**Allen G.Rosenberg.**    Allen has served as aDirector of Tesoro since November 7, 2002. Since February 2, 2004,Allen serves as the Vice President of Marketing for Panolanm IndustriesInternational, Inc., a laminate manufacturing company. He also co-foundedMarke Communications Inc. in 1979, for which he worked until January 2004,a direct response agency specializing in marketing and graphic artsproductions.

 

36

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Paul and Henry Boucherare brothers.

 

**Directors**

** **

A majority of the membersof Tesoro’s Board of Directors are independent.

 

Directors are elected atour annual meeting of stockholders and serve for one year or until theirsuccessors are elected. Our bylaws permit the Board of Directors to fill anyvacancy and such Director may serve until our next Annual Meeting ofStockholders or until his successor is elected and qualified. Officers areelected by the Board of Directors and their terms of office are, except to theextent governed by employment contracts, at the discretion of the Board. Theofficers of the Company devote full time to our business.

 

During fiscal year 2003,the Board of Directors held four meetings and all directors attended at least75% of all meetings.

 

**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 memberof the 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

 

•                       reviewsthe planned scope and results of audits,

 

•                       considersany recommendations the auditors may make with respect to Tesoro’s internalcontrols and procedures,

 

•                       overseesany responses made to such recommendations, and

 

•                       reviewscertain reports, including our quarterly and annual reports that are filed withthe SEC.

 

Our auditors reportdirectly to 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’sformal written charter specifies:

 

•                       Itsmembership requirements;

 

•                       Itsrules and procedures;

 

•                       Itsauthority and responsibilities;

 

•                       Theoutside auditor’s accountability to the Board and Audit Committee, and

 

•                       Itsresponsibility to oversee the independence of the outside auditor.

 

During 2003, the AuditCommittee held eight meetings.

 

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 independence andno 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

 

•                  ourExecutive Officers’ compensation;

 

•                  ourequity-based compensation plans, including, without limitation, stock optionand restricted stock plans, in which officers or employees may participate, and

 

•                  arrangementswith executive officers relating to their employment relationships with Tesoro,including employment agreements, severance agreements, supplemental pension orsavings arrangements, change in control agreements and restrictive covenants.

 

37

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This Committee hasoverall responsibility for approving and evaluating our executive officercompensation plans, policies and programs. It is also responsible for producingan annual report on executive compensation to be included in our proxystatement and assisting in preparing certain information to be included inother periodic reports filed with the SEC.

 

The CompensationCommittee’s formal written charter specifies its

 

•                       Membershiprequirements;

 

•                       Rules andprocedures; and

 

•                       Authorityand responsibilities.

 

During 2003, theCompensation Committee held four meetings.

 

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 alsooversees the evaluation of the Board and management and develops and recommendsto the Board a set of Corporate Governance guidelines. In addition, theCompensation Committee oversees, reviews and approves all of Tesoro’s ERISA andother employee benefit plans.

 

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

 

•                       Membershiprequirements;

 

•                       Rules andprocedures; and

 

•                       Authorityand responsibilities.

 

During 2003, theNominating and Governance Committee held four meetings.

 

**AuditCommittee Report**

** **

The purpose of the AuditCommittee is to monitor (i) the integrity of the financial statements, (ii) thecompliance with legal and regulatory requirements, (iii) the independentauditor’s qualifications and independence, and (iv) the performance of theCompany’s internal audit function and independent auditors.  The Board ofDirectors, in its business judgment, has determined that each current member ofthe Committee is “independent”, as required by applicable listing standards ofthe Sarbanes-Oxley Act of 2002 and applicable SEC rules. Management of theCompany is responsible for the preparation, presentation and integrity of theCompany’s financial 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 ofsignificant judgments and the clarity of disclosures in the financialstatements. The Audit Committee has also discussed with the independentauditors the matters required to be discussed by Statement on AuditingStandards No. 61, Communication with Audit Committees as currently ineffect. Finally, the Committee has received the written disclosures and theletter from the independent auditors required by Independence Standard No. 1,*Independence Discussions with Audit Committees*,currently in effect, and has discussed with the auditors the auditors’independence from the Company and its management, and reviewed and approved thecompatibility of non-audit services provided by Sewell and Company and approvedthe fees paid to them for the 2003 fiscal 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 financialreporting**.** The Audit Committeereviewed the Company’s internal controls with the Company’s independentauditors and, consistent with Section 302 of the Sarbanes-Oxley Act of2002 and the rules adopted thereunder, met with management and theauditors prior to the filing of officers’ certifications required by thatstatute to receive any information concerning (a) significant deficienciesin the design or operation of internal controls which could adversely affectthe Company’s ability to record, process, summarize and report 

 

38

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financial data and (b) anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’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, withoutindependent verification, on the information provided to them and on therepresentations made by management and the independent accountants.

 

Based upon the reportsand discussions 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-KSB for the year ended December 31,2003 to be filed with the Securities and Exchange Commission. The Committee hasalso recommended to the Company’s shareholders the appointment of Kantor,Sewell and Oppenheimer as Tesoro’s independent auditors for the 2004 fiscalyear.

 

**JamesLafond, Chairman**

**CarlG. Anderson Jr.**

**RobertRogers**

** **

**CorporateGovernance.**

** **

Our Board has also adopted “Principles ofCorporate Governance/” These principles include the standards for our Board andmanagement, which, include other things,

 

•                       requiresan ethical Board, Chief Executive Officer and management;

 

•                       setsforth our Directors’ and committee members’ qualification standards andresponsibilities;

 

•                       describesour management’s responsibilities to new Board members;

 

•                       enumeratesthe guidelines for our Board’s compensation;

 

•                       providefor access to our management and independent advisors; and

 

•                       addresssuccession planning for senior management.

 

**Code ofEthics**

** **

On November 22,2002, Tesoro’s Board of Directors adopted a Code of Ethics for its executiveofficers, including its CEO and CFO. **ACOPY OF THE CODE OF ETHICS IS AVAILABLE ON TESORO’S WEBSITE AT**www.iwttesoro.com.  The Company will also provide, at no charge, a copy ofits Code of Ethics.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

** **

Section 16(a) of the Securities Exchange Act of 1934, asamended, requires our Executive Officers, Directors and 10% Shareholders tofile reports regarding initial ownership and changes in ownership with the SEC.Executive Officers, Directors, and 10% shareholders are required by SECregulations to furnish us with copies of all Section 16(a) forms theyfile. Our information regarding compliance with Section 16 is based solelyon a review of the copies of such reports furnished to us by our ExecutiveOfficers, Directors and 10% shareholders. These forms include (i) Form 3,which is the Initial Statement of Beneficial Ownership of Securities, (ii) Form 4,which is a Statement of Changes in Beneficial Ownership, and (iii) Form 5,which is an Annual Statement of Changes in Beneficial Ownership.

 

Based on informationprovided to the Company, through February 29, 2004, all required filings havebeen made with the following exceptions (a) James Edwards filed adelinquent Form 4 on February 4, 2003 that was due on January 10,2003; (b) Henry J. Boucher, Jr. filed a delinquent Form 4 on September 24,2003 that was due on September 14, 2003; (c) Henry J. Boucher, Jr.filed a delinquent Form 4 on December 18, 2003 that was due on December 15,2003; and (d)  Robert Rogers filed a delinquent Form 4 on December 19,2003 that was due on December 4, 2003.

 

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

 

The information describedin our discussion concerning “Executive Officers” includes Henry J. Boucher, Jr.,Paul Boucher, Forrest Jordan and Grey Perna. Prior to November 2002, noindividual held the title of Chief Executive Officer, however Henry J. Boucher, Jr.has acted in that capacity since December 2001.

 

39

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**SummaryCompensation Table**

 
| ** **                                          | ** ** | ** ** | ** ** | ** **               | ** ** | ** ** | ** ** | ** **                    | ** ** | **Long-Term  Compensation** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------------|------------|------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Awards** | ** ** | **Payouts**                   | ** ** |
| **Name and  Principal Position**                    | ** ** | **Year**   | ** ** | **Salary**               | ** ** | **Bonus**  | ** ** | **Other**                     | ** ** | **Restricted**              | ** ** | **Options/** | ** ** | **LTP** | ** ** | **All  Other** | ** ** |
|                                                |       |       |       |                     |       | **($)**    |       | **Annual  Compensation  ($)** |       | **Stock  Awards  ($)**      |       | **SARs** |   | **Payouts  ($)** |   | **Compensation** |   |
|                                                |       |       |       |                     |       |       |       |                          |       |                        |       |   |   |   |   |   |   |
| Henry J.  Boucher, Jr.,                   |       | 2003       |       | $                        | 240,000    |       | $          | 25,000                        |       | $                           | 18,000     | (2) | — |   | — |   | — |   | — |   |
| Chairman,  Director, President,                     |       | 2002       |       | 120,000                  |       | -0-        |       | -0-                           |       | —                      |       | 100,000 | (3) | -0- |   | -0- |   |
| Chief Executive  Officer(1)                         |       |       |       | —                   |       | —     |       | —                        |       | —                      |       | — |   | — |   | — |   |
|                                                |       |       |       |                     |       |       |       |                          |       |                        |       |   |   |   |   |   |   |
| Paul F.  Boucher, Director,                    |       | 2003       |       | $                        | 263,066    |       | $          | 25,000                        |       | $                           | 40,150     | (5) | — |   |   |   | -0- |   | $ | — |   |
| Senior Vice  President,                             |       | 2002       |       | 237,067                  | (4)        | -0-        |       | 57,6539                       | (6)        |                        |       | 100,000 | (3) | -0- |   | 621,340 | (8) |
| President,  International Wholesale Tile, Inc. |       | 2001       |       | 193, 783                 |       | —     |       | 23,090                        | (7)        | —                      |       | — |   | — |   | 173,819 | (8) |
| Forrest Jordan,  Director, Senior                   |       | 2003       |       | $                        | 253,067    |       | $          | 25,000                        |       | $                           | 42,374     | (9) | — |   |   |   | -0- |   | $ | — |   |
| Vice President,  Vice President,                    |       | 2002       |       | 237,067                  | (4)        | -0-        |       | 49,000                        | (10)       | —                      |       | 100,000 | (3) | -0- |   | 621,340 | (8) |
| Treasurer and  Secretary,                           |       | 2001       |       | 193,783                  |       | —     |       | 19,871                        | (11)       | —                      |       | — |   | — |   | 173,819 | (8) |
| International  Wholesale Tile, Inc.            |       |       |       |                     |       |       |       |                          |       |                        |       |   |   |   |   |   |   |
| Grey Perna,  Director, Senior                       |       | 2003       |       | $                        | 253,067    |       | $          | 25,000                        |       | $                           | 49,558     | (12) | — |   |   |   | -0- |   | $ | — |   |
| Vice President,  Vice President,                    |       | 2002       |       | 237,067                  | (4)        | -0-        |       | 51,883                        | (13)       | —                      |       | 100,000 | (3) | -0- |   | 621,3409 | (8) |
| International  Wholesale Tile, Inc.            |       | 2001       |       | 193,783                  |       | —     |       | 22,688                        | (14)       |                        |       | — |   | — |   | 173,819 |   |

 

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| (1)    |   | Henry signed a Salary  Deferral Agreement with Tesoro, which was terminated by our Board, with Henry  abstaining from the vote.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (2)    |   | This amount represents  an automobile fringe benefit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (3)    |   | These represent  incentive stock options granted as of November 23, 2002 pursuant to our  Stock Incentive Plan. The options are for ten years and have an exercise  price of $3.00 per share. The options vest as follows: (a) 33% at such  time as our Common Stock begins trading on the OTCBB (or equivalent),  (b) 33% at such time as Tesoro attains no less than a $50.0 million  market cap for ten consecutive trading days, and (c) 34% when Tesoro  achieves its 2003 revenue and profit targets, as approved by Tesoro’s Board  of Directors. To date, none of these options have vested.  During 2003,  of the options granted, 66,667 were vested and the remaining 33,333 have been  cancelled. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (4)    |   | Of the annual salary,  $63,250 represents salary for the last quarter of 2002 following our  acquisition of IWT effective October 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (5)    |   | Includes an automobile  allowance of $12,914, an automobile fringe benefit of $1,919 and payment of  $25,317 for an Executive Life Insurance policy with his spouse as  beneficiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (6)    |   | Includes an automobile  allowance of $10,500 (of which $4,500 was paid in last quarter of 2002  following the IWT acquisition), $2,055 for automobile fringe benefits (paid  prior to the IWT acquisition), $2,885 for additional health benefits (paid prior  to the IWT acquisition), and payment of $42,213 for an Executive Life  Insurance policy with his spouse as beneficiary (of which $6,329 was paid  following the IWT acquisition).                                                                                                                                                                                                                                                                                                 |

 

40

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| (7)    |   | Includes automobile  fringe benefit of $2,137, health fringe benefits of $6,185 and payment of  $14,768 for an Executive Life Insurance policy with his spouse as  beneficiary.                                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (8)    |   | Includes “S”  distributions and allowance for taxes.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (9)    |   | Includes an automobile  allowance of $7,413, automobile fringe benefits of $1,351 and payment of  $33,610 for an Executive Life Insurance policy with his spouse as  beneficiary.                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (10)   |   | Includes an automobile  allowance of $6,785 (of which $4,500 was paid in last quarter of 2002 following  the IWT acquisition) and payment of $42,215 for an Executive Life Insurance  policy with his spouse as beneficiary (of which $8,402 was paid following the  IWT acquisition).                                       |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (11)   |   | Includes automobile  fringe benefit of $265 and payment of $19,606 for an Executive Life Insurance  policy with his spouse as beneficiary.                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (12)   |   | Includes an automobile  allowance of $9,551, an automobile fringe benefit of $9,949 and payment of  $30,058 with his spouse as beneficiary.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (13)   |   | Includes an automobile  allowance of $7,739 (of which $4,500 was paid in last quarter of 2002  following the IWT acquisition), $1,936 for additional health benefits and  payment of $42,208 of an Executive Life Insurance policy with his spouse as  beneficiary (of which $7,514 was paid following the IWT acquisition). |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (14)   |   | Includes automobile  fringe benefit of $1,113, health fringe benefits of $4,042 and payment of  $17,533 for an Executive Life Insurance policy with his spouse as  beneficiary.                                                                                                                                              |

 

**Our 2001Tesoro Stock Incentive Plan.**

** **

On December 27,2001, our then sole Director recommended approving the 2001 Tesoro StockIncentive Plan (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 maygrant “non-qualified” and incentive stock options to purchase, and restrictedstock (Awards). The aggregate maximum number of shares for which Awards may beissued under the Plan will be 4 million shares of our common stock. ThePlan does provide for equitable adjustment of the number of shares and thenumber of shares of each subsequent Award and of the unexercised portion of thestock option award described below in the event of a change in ourcapitalization due to a stock split, stock dividend recapitalization, merger,or similar event. Other than with regard to incentive stock options, the numberof shares that may be delivered under the Plan will be determined after givingeffect to the use by a participant of the right, if granted, to cause Tesoro towithhold from the shares of common stock otherwise deliverable to a recipientupon exercising an Award in payment of all or a portion of his or herwithholding obligation arising from such exercise.

 

Our CompensationCommittee currently controls and manages the Plan’s operation and administration.The Committee has discretion to:

 

•                  Determinethe types, terms and conditions of all Awards, including exercise price orpurchase price (if any), performance goals, and other earn-out and/or vestingcontingencies and acceleration provisions,

 

•                  Adopt,alter or repeal administrative rules, guidelines and practices (includingspecial guidelines for non-U.S. employees),

 

•                  Delegateadministrative responsibilities,

 

•                  Construeand interpret the Plan’s terms and any agreements evidencing Awards granted.

 

The Committee, in itssole discretion, may grant stock options and restricted stock to our employeesand consultants, our subsidiary corporations, or parent corporation.Participants will be selected on the basis of demonstrated ability tocontribute substantially to us. Our Board has authority to grant stock optionsto Non-Employee Directors according to the Plan. All awards are subject to theterms of a written agreement between the participant and us.

 

The awards granted underthe Plan may be either incentive stock options or non-qualified stock optionsor restricted stock awards. The maximum number of shares subject to any awardof stock options or shares of Restricted Stock is 100,000.

 

41

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The vesting schedule forany option granted under the Plan will be determined by the Committee and willbe set 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 “incentivestock options” (ISOs) if they meet the requirements of Section 422 of theInternal Revenue Code (Code). ISOs may only be granted to our employees and ouraffiliates and any person holding our capital stock or any affiliate possessingmore than 10% of the total combined voting power of all classes of our capitalstock. Affiliates will not be eligible to receive ISOs unless the exerciseprice per share is at least 110% of the fair market value of the stock on thedate the option is granted. Each ISO granted pursuant to the Plan isexercisable, during the optionee’s lifetime, only by the optionee or theoptionee’s guardian or legal representative.

 

Non-Qualified StockOptions

 

Non-qualified stockoptions may be granted to employees or to Directors who are not our officersnor employees, as well as to consultants and other persons who provide servicesto our affiliates and us. Stock options are non-qualified stock options if theydo not meet the requirements for ISOs.

 

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 restrictedstock must be accepted within 90 days (or such shorter period as theCommittee may specify at grant) after the award date by executing a RestrictedStock Award agreement and paying whatever price (if any) the Committeedesignates. Additionally, recipients of restricted stock are required to enterinto a restricted stock agreement, which states the restrictions to which theshares are subject and the criteria or date or dates on which such restrictionswill lapse. 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 restrictedstock may be intended to satisfy Section 162(m) of the Code. Under thePlan, an award of restricted stock may be conditioned upon or subject to theattainment of performance goals. These performance goals will be based on oneor more of the objective criteria with regard to us (or any subsidiarycorporation, parent corporation, division, or other operational unit of ours)as described in the Plan.

 

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 pershare of Common Stock subject to an Incentive Stock Option or a Stock Optionintended to be “performance-based” for purposes of Section 162(m) of theCode shall be determined by the Committee at the time of grant but shall not beless than 100% of the fair market value of the shares of Common Stock at thetime of grant. However, if an Incentive Stock Option is granted to a 10%Stockholder, the exercise price shall be no less than 110% of the fair marketvalue of the Common Stock. The Committee will determine the exercise price pershare of Common 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 parentcorporation exceeds $100,000, such options shall be treated as non-qualifiedstock options. In addition, if an employee does not remain employed by us orany of our subsidiaries or parent corporation at all times from the time an ISOis granted until three months prior to the date of exercise (or such otherperiod as required by applicable law), such option shall be treated as anon-qualified stock option. Should any provision of this Plan not be necessaryin order for the Stock Options to qualify as Incentive Stock Options, or shouldany additional provisions be required, the Committee may amend this 

 

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Plan accordingly, withoutthe necessity of obtaining the approval of our stockholders.

 

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 ofRestricted Stock, the recipient has all rights of a stockholder with respect tothe shares, 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 they exercisetheir option and receive shares of Common Stock.

 

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 “Changeof Control” occurs if we

 

•                  aredissolved or liquidated,

 

•                  arereorganized, merged or consolidated with one or more corporations where we arenot the surviving entity, or

 

•                  transfersubstantially all of our property or more than 80% of our then outstandingshares to another corporation not controlled 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 corporatestructure changes or if our shares change (i.e. if we recapitalize, our stocksplits, we consolidate, we undertake a rights offering, or we issue a stockdividend), the Plan administrators will make appropriate adjustments to thenumber or class of shares which may be distributed under the Plan and theoption price or other price of shares subject to the outstanding awards underthe Plan in order to maintain the purpose of the original grant.

 

The following discussionof the federal income tax consequences of granting and exercise of stockoptions and 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 rules arenot 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 willrecognize no taxable income at the time a non-qualified stock option is grantedto a recipient.

 

43

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A participant willrecognize ordinary compensation income at the time a non-qualified stock optionis exercised, 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 will require the participant tomake suitable arrangements to ensure that the participant remits to us anamount sufficient to 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.

 

*AllStock Options.*

* *

The followingconsiderations may also apply to grants of non-qualified stock options and/orincentive stock options:

 

•                  Anyof our officers and directors subject to Section 16(b) of theExchange Act may be subject to special tax rules regarding the income taxconsequences concerning their stock options,

 

•                  Anyentitlement to a tax deduction on the part of us is subject to the applicabletax rules (including, without limitation, Section 162(m) of the Coderegarding a $1,000,000 limitation on deductible compensation), and

 

•                  Inthe event that the exercisability or vesting of any stock option is acceleratedbecause of a change in control, payments relating to the stock option (or aportion thereof), either alone or together with certain other payments, mayconstitute parachute payments under Section 280G of the Code, which excessamounts may be subject to excise taxes.

 

In general, Section 162(m)of the Code does not allow a publicly held corporation, for federal income taxpurposes, to deduct compensation in excess of $1 million per year perperson to its chief executive officer and the four other officers whosecompensation is disclosed in its proxy statement, subject to specificexceptions. Our Plan does not currently qualify for the exceptions and istherefore 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 the rules ofany applicable exchange:

 

•                  Increasethe aggregate number of shares of Common Stock that may be issued under thisPlan,

 

•                  Increasethe maximum individual Participant limitations for a fiscal year,

 

•                  Changethe classification of employees, Consultants or Non-Employee Directors eligibleto receive Awards

 

underthis Plan,

 

•                  Decreasethe minimum option price of any Stock Option,

 

•                  Extendthe maximum Stock Option period,

 

•                  Materiallyalter the Performance Criteria for the Award of Restricted Stock, or

 

•                  Makeany other amendment that would require stockholder approval under the rules ofany exchange or system on which our securities are listed or traded.

 

Unless previouslyterminated by the Board of Directors, the Plan shall terminate on the earlierof December 31, 2012 or ten years after the date the Plan is effective.Through December 31, 2003, 440,000 options were granted, of which 306,668have vested and the remaining 133,332 were cancelled.  Additionally,124,500 restricted shares were issued under the Plan.

 

Subsequent to the end offiscal 2003, all the share underlying the Plan were registered and those sharesalready issued were registered for resale, pursuant to a Form S-8.

 

**StockOption Grants in Last Fiscal Year**

** **

During the fiscal yearended December 31, 2003, no options were granted.

 

44

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**OptionExercises and Year End Values**

** **

No options were exercisedduring fiscal year ended December 31, 2003 by the persons named in the “SummaryCompensation Table” above.

 

**PensionPlan**

** **

The Company sponsors a401(k) plan known as the International Wholesale Tile 401(k) Profit SharingPlan & Trust.  The Pension Plan provides tax deferred salarydeductions for eligible employees.  Employees may contribute from 1% to 12%of their annual compensation to the Pension Plan, limited to an annual maximumamount as set periodically by the Internal Revenue Service.  The Companyprovides matching contributions equal to 100% of the employee’s contributionsup to a maximum of 3% of eligible pay.  The contribution expense relatedto the Pension Plan amounted to $76,249 and $59,352 for the years ended December 31,2003 and 2002, respectively.

 

**Directors’Compensation**

** **

Under the Plan, the Boardof Directors has the authority to grant to Non-Employee Directors, subject tothe terms of the Plan, options to purchase

 

•                  upto a maximum of 150,000 shares of Common Stock as of the date the non-employeeDirector begins service as a non-employee Director and

 

•                  upto a maximum of 75,000 shares of Common Stock in any calendar year, providedthe non-employee Director has not ceased to be a Director or if he ceased to bea Director he has not become an employee or consultant of Tesoro or itsaffiliates.

 

The per share exerciseprice will be determined by the Board of Directors but will not be less than100% of the fair market value of the share of Common Stock at the time of grantand may be subject to stockholder approval. The term of each option granted toa Director pursuant to the Plan shall be 10 years, and such option shallbe 50% vested and exercisable on the date such option is granted, and 50%vested and exercisable on the first anniversary of the grant date.

 

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

 

•                  Issuing10,000 shares upon accepting the Board appointment;

 

•                  Astipend of $500 per Director per meeting attended;

 

•                  Astipend of $500 per Director per committee meeting attended (with the exceptionof the Chair of the Audit Committee, who will receive a stipend of $1,000 permeeting);

 

•                  Reimbursementof out of pocket expenses incurred by each Director in order to attend ameeting (spouse costs included for annual stockholder/ Board meeting only); and

 

•                  10,000options to acquire shares of common stock at the fair market value per eachfull calendar year of service.

 

**CompensationCommittee Interlocks and Insider Participation**

** **

No member of ourcompensation committee has ever been an executive officer or employee of ours.None of our executive officers currently serve, or has served during the lastcompleted fiscal year, on the compensation committee or board of directors orany other entity that has one or more executive officers serving as a member ofour board of directors or compensation committee.

 

**BoardCompensation Committee Report on Executive Compensation**

** **

General CompensationPolicy.  The Compensation Committee administers the Corporation’sexecutive compensation program, which is intended to provide incentives toexecutive officers to achieve both current and long-term strategic managementgoals of the Corporation, with the ultimate objective of achieving a superiorreturn on the shareholders’ investment.  To this end, the program iscomprised of cash and equity-based components, which recognize performance asmeasured against the Corporation’s annual and long-term goals as well asperformance evaluated in comparison to industry peers.

 

Equity-basedcompensation, including the Stock Incentive Plan, encourages ownership andretention of the Corporation’s common stock by key employees, assuring thatthey have a meaningful stake in the Corporation’s continued success and therebyaligning the interests of these employees and shareholders.

 

The executivecompensation program is designed to assist the Corporation in achieving itsbusiness objectives by: maintaining a competitive compensation program toattract and retain qualified executives;  providing performance-basedincentive compensation that is directly related to the Corporation’s financialperformance and individual contributions to that performance; and linkingcompensation to factors which affect short-term and long-term stockperformance.

 

The manner in which theCommittee establishes the compensation and incentives of each of Tesoro’sexecutive officers listed in the 

 

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Summary CompensationTable is described below.

 

Cash Compensation. The Compensation Committee determined the annual cash compensation paid to theCorporation’s executive officers for 2003, consisting of salary and incentivecompensation.  The salaries paid to the executive officers named in theSummary Compensation Table for 2003 are shown in the “Salary” column of thatTable. These salaries were subjectively determined after consideration of theexecutive officer’s individual responsibilities, performance, experience, thechief executive officer’s evaluation of the other executive officers, a reviewof several measurements of the Corporation’s short-term and long-term financialresults compared with industry peers, and other factors such as budgetaryconsiderations and inflation rates.

 

The incentivecompensation in the form of stock option were granted and vested pursuant tothe Stock Incentive Plan, which incorporates modern incentive plan techniquesand executive retention features for the purpose of closely aligning theinterests of executives with those of shareholders.  Typically, theCommittee may assign to certain or all executive officers a target bonus. The participant’s incentive compensation is based on accomplishment of specificperformance levels set forth in stock option or incentive agreements.

 

On November 23,2002, the Committee granted incentive stock options pursuant to the Plan topurchase up to 100,000 shares to each of the four executive officers, 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 beginstrading on the OTCBB (or equivalent), (b) 33% at such time as Tesoroattains no less than a $50.0 million market cap for ten consecutivetrading days, and (c) 34% when Tesoro achieves its 2003 revenue and profittargets, as approved by Tesoro’s Board of Directors. Of the criteria, eachachieved (a) and (b), but not (c).  As such, options to purchase upto 66,667 shares were vested in each of the executive officers.

 

Other Compensation. The executive officers are also covered by medical plans that are generallyapplicable to full-time employees of the Corporation and itssubsidiaries.  They also receive automobile allowances and payment of lifeinsurance policies.

 

The above report issubmitted by:

 

**JamesEdwards, Chairman**

**AllenRosenberg**

** **

**Employmentand Consulting Agreements**

** **

**Henry J.Boucher, Jr.**    On December 29,2001, Tesoro entered into an employment agreement with Henry to serve as Tesoro’sPresident. In consideration for his services, and under the terms of hisemployment 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 in December 2002.He also receives a monthly car allowance of $1,500. Henry Boucher’s employmentmay be terminated for cause at any time and within 30 days without cause.He is subject to non-disclosure and non-compete provisions.

 

On March 27, 2003,the Board 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 of January 1,2003. At the same time, the Board also voted to issue Mr. Boucher a$25,000 bonus for 2002.

 

**ForrestJordan.**    Effective October 2,2002, IWT entered into an employment agreement with Forrest for one year,renewed automatically unless terminated by IWT not less than ninety days priorto the expiration of the term. In consideration for his services, ForrestJordan receives a salary of $253,000 per year. He also receives a monthly carallowance of $1,500. Forrest Jordan also receives a life insurance policy whosebeneficiary is his family and such other compensation as determined by theCompensation Committee. He is subject to non-disclosure and non-competeprovisions. On March 27, 2003, the Board of Directors voted to increasethe term of his employment agreement from one year to three years and to issueForrest Jordan a $25,000 bonus for 2002.

 

**Paul F.Boucher.**    Paul Boucher’s employmentagreement is substantially the same as that of Forrest Jordan’s, with theexception that he receives an annual salary of $263,000. 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 Paul Boucher a $25,000bonus for 2002.

 

**GreyPerna.**    Grey Perna’s employmentagreement is substantially the same as that of Forrest Jordan’s. 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 Grey Perna a $25,000 bonusfor 2002.

 

** ITEM 11.****        SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

** **

The following table setsforth, as of March 24, 2004, 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) eachperson known by us to be the beneficial owner of more than five percent of ourCommon Stock. “Beneficial Ownership” is a technical term broadly defined by the

 

46

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Securities and ExchangeCommission to mean more than ownership in the usual sense. For example, CommonStock is “beneficially” owned not only if it is held directly, but also if itis held indirectly (though a relationship, a position as a director or trustee,or a contract or understanding), or has (or share the power to vote the stockor sell it) the right to acquire it within 60 days. Except as disclosed inthe footnotes below, each of the Executive Officers and Directors listed havesole voting and investment power over his or its shares.  As of March 24,2004, 11,660,702 shares of our common stock were issued and outstanding, heldby approximately 232 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 |       | 850,167                         | (2)         | 7.2                    | %          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| James R. Edwards(3)(4)                                                                |       | Tesoro: Director                                                                                                                                                                                                                                          |       | 50,000                          | (5)         |                   | *          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| James Lafond(6)                                                                       |       | Tesoro: Director                                                                                                                                                                                                                                          |       | 25,000                          | (7)         |                   | *          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| Carl G.  Anderson, Jr.(4)(6)                                                     |       | Tesoro: Director                                                                                                                                                                                                                                          |       | 75,000                          | (8)         |                   | *          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| Robert B. Rogers(6)                                                                   |       | Tesoro: Director                                                                                                                                                                                                                                          |       | 22,500                          | (9)         |                   | *          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| Allen G. Rosenberg(3)                                                                 |       | Tesoro: Director                                                                                                                                                                                                                                          |       | 25,000                          | (7)         |                   | *          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| Paul F. Boucher                                                                       |       | •  Tesoro:  Director, Senior Vice President•  IWT:  President, Director•  IWT  Tesoro International Ltd.: Director                                                                                           |       | 3,096,667                       | (2)(10)(11) | 26.4                   | %          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| Forrest Jordan                                                                        |       | •  Tesoro:  Senior Vice President, Director•  IWT:  Senior Vice President, Treasurer, Secretary, Director•  IWT  Tesoro International Ltd.: Director                                                         |       | 3,066,667                       | (2)(10)     | 26.1                   | %          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| Grey Perna                                                                            |       | •  Tesoro:  Director, Senior Vice President•  IWT:  Senior Vice President, Director•  IWT  Tesoro International Ltd.: Director                                                                               |       | 3,068,667                       | (2)(10)(12) | 26.2                   | %          |
|                                                                                  |       |                                                                                                                                                                                                                                                      |       |                            |        |                   |       |
| All Current Officers,  Directors and Nominees for Director; as a Group (nine persons) |       |                                                                                                                                                                                                                                                      |       | 10,279,168                      |        | 85.5                   | %          |

 

----

*Less than 1%.

 

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

 

(2)                                  Includesoptions to purchase up to 66,667 shares at $3.00 per share.

 

(3)                                  Memberof the Compensation Committee.

 

(4)                                  Memberof the Nominating and Governing Committee.

 

(5)                                  Includes15,000 incentive stock options, of which (a) 10,000 are vested and whichare exercisable at $3.00 per share; and (b) 5,000 options are vested andexercisable at $6.00 per share.  Also includes warrants to purchase up to15,000 shares at $3.00 per share through January 7, 2008.

 

(6)                                  Memberof the Audit Committee.

 

(7)                                  Includes15,000 incentive stock options, of which (a) 10,000 are vested and whichare exercisable at $3.00 per share; and (b) 5,000 options are vested andexercisable at $6.00 per share.

 

47

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(8)                                  Includes15,000 incentive stock options, of which (a) 10,000 are vested and whichare exercisable at $3.00 per share; and (b) 5,000 options are vested andexercisable at $6.00 per share.  Also includes warrants to purchase up to10,000 shares at $3.00 per share through March 10, 2008.

 

(9)                                  Includes5,000 incentive stock options that are currently vested at $6.00 and warrantsto purchase 3,500 shares at $7.00 per share.

 

(10)                            IWT’sinstitutional lender requires that during the term of its loan, Paul Boucher,Grey Perna and Forrest Jordan will not allow their aggregate beneficiallyownership interest in Tesoro to be less than 51%.

 

(11)                            Includes30,000 shares held by Mr. Boucher’s minor children.

 

(12)                            Includes12,000 shares held by Mr. 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, GreyPerna and Paul F. Boucher as payees, hold promissory notes from IWT in theprincipal amounts of $88,711.93, $120,000 and $240,000, respectively. The notesbear interest at 10% per year and are due on or before December 31, 2025.In connection with our credit facility for $17.0 million, Forrest, Greyand Paul 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.  On June 26, 2003, each of theserepurchase agreements was terminated and is no longer of any force or effect.

 

**ITEM 13.****                                              EXHIBITS,LIST AND REPORTS ON FORM 10-KSB**

** **

a.                                       Exhibits

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                         |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1                |       | Form of Selected  Dealers Agreement (filed as an Exhibit to the Company’s Registration  Statement, filed with the Securities and Exchange Commission on June 4,  2003)                                              |
| 1.2                |       | Selected Exclusive  Dealers Agreement dated November 22, 2003 (filed as an Exhibit to  the Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on September 24, 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) |
| 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)                                                     |

 

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| 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 on Form 8-K,  filed with the Securities and Exhibit Commission on October 15,  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)                                                                                                                                                         |
| 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).      |
| 16.2   |   | Letter regarding change  in Certifying Accountants (filed as an Exhibit to the Company’s Report  on Form 8-K/A filed with the Securities and Exchange Commission on  March 2, 2004).                                                                                                                                                                                                                        |
| 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)                                                                                                                                                                                                                                                  |
| 31.1   |   | Certification of Henry  J. Boucher, Jr., Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification of Forrest  Jordan, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act.*                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification of Henry  J. Boucher, Jr., Chief Executive Officer pursuant to Section 906 of  the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                 |
| 32.2   |   | Certification of  Forrest Jordan, Chief Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                             |
| 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)                                                                                                                                                                                                            |

 

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| 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) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                     |
| *      |   |   Included  in this filing.                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                     |
| (b)    |   |   Reports  on Form 8-K.                                                                                                                                                                   |

 

**—**Reporton Form 8-K filed October 31, 2003 discussing Tesoro’s entering intoan Exclusive Dealer Agreement in connection with its Public Offering.

 

—Report on Form 8-Kfiled December 9, 2003 in connection with the Merger of Tesoro’sIndependent Accountants and the completion of the sale of its units in Tesoro’spublic Offering.

 

—Report on Form 8-Kfiled December 17, 2003 announcing the commencing of trading of Tesoro’scommon stock on the Over the Counter Bulletin Board under the symbol “IWTT”.

 

**ITEM14.****                                         PRINCIPALACCOUNTANT FEES AND SERVICES.**

** **

*Mergerof Independent Auditors*

* *

Effective December 1,2003, IWT Tesoro Corporation’s independent accountants, Sewell andCompany, PA, of Hollywood, Florida (Sewell) was replaced by the accounting firmof Kantor, Sewell & Oppenheimer, PA (KSO), the successor firm toSewell.  KSO maintains the same facilities as Sewell and is a Florida SECqualified accounting firm.  Sewell reported on and audited the financial statementsprepared by Tesoro for the period commencing September 20, 2000 through September 30,2003.

 

The recommendation byTesoro’s Audit Committee was based upon KSO becoming the successor firmpursuant to the merger of Sewell with Kantor and Oppenheimer.

 

*AuditFees*

* *

Sewell was the company’sprincipal accountant and reported on and audited the financial statementsprepared by Tesoro for the period commencing September 20, 2000 through September 30,2003.  Total fees paid to Sewell for audit services rendered during 2003and 2002 were $100,495 and $97,250, respectively.

 

KSO has been Tesoro’sprincipal accountant since October 1, 2003.  Total fees paid to KSOfor audit services rendered during the fourth quarter of 2003 was $74,830.

 

Total fees incurred bythe company for audit services rendered by Sewell and KSO during 2003 and 2002were $175,325 and $97,250, respectively.

 

*Audit-*Related*Fees.*

* *

Fees paid to Sewell foraudit-related services rendered through September 30, 2003 and during 2002were $0 and $0, respectively.

 

Fees paid to KSO foraudit-related services rendered for the fourth quarter of 2003 was $0.

 

No fees for audit-relatedservices rendered by Sewell and KSO were paid during 2003 and 2002,respectively.

 

*TaxFees.*

* *

Fees paid to Sewell for taxservices rendered through September 30, 2003 and during 2002 were $6,550and $0, respectively, related primarily to preparing federal and state taxreturns and other consulting services.

 

Fees paid to KSO for taxservices rendered for the fourth quarter of 2003 was $0.

 

Total fees incurred bythe company for tax services rendered by Sewell and KSO during 2003 and 2002were $6,550 and $0, respectively.

 

*AllOther Fees.*

* *

Total fees paid to Sewellfor all other services rendered through September 30, 2003 and during 2002were $3,490 and $0, respectively, primarily related to business review ofcontrols surrounding systems implementation, and other professional services.

 

Total fees paid to KSOfor all other services rendered for the fourth quarter of 2003 was $2,897,primarily related to audit committee meetings.

 

50

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Total fees incurred bythe company for all other services rendered by Sewell and KSO during 2003 and2002 were $6,387 and $0, respectively.

 

SIGNATURES

 

In accordance with Section 13or 15(d) of the Exchange Act of 1934, the Company caused this AnnualReport on Form 10KSB/A to be signed on its behalf by the undersignedthereunto duly authorized.

 

IWT TESORO CORPORATION

 
| By:                                                                                                                                                                                                                                                    | /s/ Henry J. Boucher, Jr.               |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------|--------|
|                                                                                                                                                                                                                                                   | Henry J.  Boucher, Jr.,  President |
|                                                                                                                                                                                                                                                   |                                         |
| Date: August 30,  2005                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                   |                                         |
| In accordance with the  Exchange Act, this report has been signed below by the following persons on  behalf of the Company and in the capacities and on the dates indicated, and  which represents a majority of the Company’s Board of Directors |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ Henry J. Boucher, Jr.                                                                                                                                                                                                                         | August 30,  2005                        |
| Henry J.  Boucher, Jr.,  Principal Executive Officer                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ Forrest Jordan                                                                                                                                                                                                                                     | August 30,  2005                        |
| Forrest Jordan,  Principal Financial Officer                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ Henry J. Boucher, Jr.                                                                                                                                                                                                                         | August 30,  2005                        |
| Henry J.  Boucher, Jr.,  Director                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ James R. Edwards,  Director                                                                                                                                                                                                                        | August 30,  2005                        |
| James Edwards, Director                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ Paul F. Boucher                                                                                                                                                                                                                                    | August 30,  2005                        |
| Paul F.  Boucher,  Director                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ Forrest Jordan                                                                                                                                                                                                                                     | August 30,  2005                        |
| Forrest Jordan,  Director                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                   |                                         |
| /s/ Grey Perna                                                                                                                                                                                                                                         | August 30,  2005                        |
| Grey Perna, Director                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                        |                                              |        |  |

 

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