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

**Washington, D.C.  20549**

 

**FORM 10-KSB**

 

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

**THESECURITIES EXCHANGE ACT OF 1934**

 

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

**Commission File No. 000-31267**

 

**IWT TESORO CORPORATION**

(Name of Small Business Issuer in Its Charter)

 

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

 

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

 

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

 

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

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

(Titleof Class)

 

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

Yes  ý   No  o

 

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

 

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

 

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

 

State the aggregate marketvalue of the voting stock held by non-affiliates computed by reference to theprice at which the stock was sold, or the average bid and asked prices of suchstock, as of a date specified within the past 60 days:  $3,550,302.

 

**APPLICABLE ONLY TO CORPORATE REGISTRANTS**

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date.  11,068,934 shares asof February 19, 2002.

 

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

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None

 

 

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**PART I**

 

**ITEM 1.        DESCRIPTIONOF BUSINESS**

 

**Generally**

 

IWT Tesoro (“Tesoro”) is a Nevada corporation organized on May 3rd,2000.  As of March 1, 2002, itsprincipal place of business is located at 191 Post Road West, Westport, CT06880, telephone number (203) 221-2770. Tesoro was originally incorporated under the name “Ponca AcquisitionCorporation” but changed its name on September 23, 2002 to IWT TesoroCorporation.  At that time, Tesoro alsoundertook a three for one forward stock split and authorized 25.0 millionshares of preferred stock, none of which are currently outstanding.

 

Effective October 1, 2002, Tesoro, aninactive reporting company, acquired all of the outstanding common stock ofInternational Wholesale Tile, Inc. (“IWT”) from the three IWT shareholders.  IWT is a wholesale distributor of imported ceramic, porcelain andstone tile, dealing mainly in imported floor tiles.  In exchange for the IWT stock, each of the three former IWTshareholders each received 3.0 million shares of Registrant’s common stock,which represented, as of the effective date, 83% of Tesoro’s outstanding commonstock.

 

In January 2003, Tesoro organized IWT TesoroInternational, Ltd., a Bermuda exempt company that will own our internationaltrading subsidiaries.

 

In January 2003, Tesoro organized IWT TesoroTransport, Inc.  (“Transport”).  Transport has applied to become a federallylicensed freight broker that currently will manage both inbound and outboundfreight for IWT.

 

For purposes of the following “Description ofBusiness,” any reference to “we”, “us”, the “Company” refers to InternationalWholesale Tile, Inc.

 

**Businessand Growth Strategy**

 

IWT believes that it has builtits reputation by supplying quality products with outstanding customer serviceat competitive prices.  We also striveto stay up to date with the newest styles and trends in the ceramic tile andmarble industry.  We also introduce highquality new products to the marketplace as soon as practicable.  We further believe that we have builtconfidence and loyalty among our customers by distributing our products only ona wholesale level and not selling direct to the consumer.

 

We will be moving to our new147,000 square foot facility during the first quarter of 2003, which willenable us to stock more inventory for future growth.  We hope to increase our business with home center stores andregional stocking distributors.  We alsoplan to expand the Tesorotm line of products by building ourproprietary Tesorotm brand awareness.  Through Tesoro, we also intend to further grow by acquisitions ormergers with existing regional distributors. We also intend to expand our dealer network in our targeted market thatwill be served from Palm City, Florida.

 

Our short-term objectives areto:

 

•                  Raise equitycapital for our organic growth,

 

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•                  to expand ourclient base by expanding throughout the United States and continuing to be apreferred vendor for national buying groups who work directly with some of thelargest home builders;

 

•                  to expandfurther into the home center business,

 

•                  Strengthen ourconsolidated balance sheet by reducing our debt to equity ratio, this will bemainly accomplished by using new equity to fund growth and eventually reducedebt, and

 

•                  Provide capitalfor geographic expansion through compatible business combinations.

 

On a long-term basis, we intendto look to acquire products and services that complement our products.  We also intend to establish subsidiariesbased in Spain and Italy to handle our relationships with our manufacturers.

 

**TheUnited States Ceramic Tile Market**

 

According to Market Studies,Inc., a recognized industry market research firm, the 2001 market for ceramictile in the United States was approximately $2.1 billion, with approximately2.3 billion square feet sold.  In theirpublication entitled “US Ceramic Tile Market-2002 Edition”, Market Studies,Inc. pointed to a market growth rate of approximately five to seven percent peryear.  This growth rate is higher in theSun Belt areas, including the southeastern United States where IWT currentlyoperates.

 

Distributors like us base ourdistribution costs on a number of factors including

 

•                  factory cost

•                  freight(international and domestic)

•                  duty

 

Because ocean freight chargesdiffer from country to country, our selling price is based on factors specificto each international manufacturer.  Nonetheless, all payments to our international manufacturers are in U.S.  dollars. In addition to the factors described above, we also take into accountthat title to our products transfers at the port of the originatingcountry.  We self-insure in the event ofloss after title is taken.  However, todate, we have only incurred minimal losses with respect to products that havebeen lost after it acquired title.

 

**IWT’sProducts**

 

We purchase our products on theworld market.  Approximately 50% of ourproducts are imported from Italy, 35% from Spain and 5% each from Brazil,Turkey and China.  Each foreignmanufacturer has registered agents in the United States that work with us, aswell as with other distributors.  Webelieve that we maintain close personal contact with our suppliers, visitingthe plants regularly and working with suppliers to influence design, quality andreliability.

 

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, newproducts are added to our product line and items removed when a product isobsolete.  We define obsolescence asminimal sales in any consecutive 12-month period.

 

3

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The following is a representative list of our manufacturers:

 

From Italy:

Ceramica Colli

Isla Tiles

Gruppo Elba

Ceramica Fondovalle

Gruppo Ceramiche Saicis

Acif Ceramiche

 

From Spain:

Ceramica Gomez

Metropol Ceramica

Geologica Tiles

Alfa Ceramica

Ceramicas Gaya

 

From Brazil:

CeramicaChiarelli

IncepaCeramicos

 

From Turkey:

EczacibasiVitra

Port - San

 

From China:

Free TrueMarble Limited

 

In May 2002, we introduced ourproprietary brand Tesorotm. Tesoro is a collection of porcelain tiles and decorative inserts,borders, and accents that will be marketed throughout the United States.

 

We import our products into thePort of Miami.  All our customers areapproved by sales territory managers and must qualify as IWT customers.  Material is shipped to the customer base viaour trucks or by common carrier.  Wegenerally ship same day on orders placed before 2:00 p.m.  Most delivery points are one to two dayservices for the southeastern United States. Local trucks deliver between Daytona Beach, Florida and Miami,Florida.  Each day, common carriers pickup materials near the end of the business day to deliver to other parts of thecountry.

 

**IWT’sCustomer Base and Distribution Channels**

 

Our customer base currentlyconsists of retail flooring dealers, lumberyards, home centers, regionaldistributors and national buying groups.  Currently our inside sales force services customers in theSoutheastern United States by cut orders and pallets.  Customers outside this distribution area are supplied full palletsand truckloads.

 

We distribute our productsthrough three separate channels.

 

4

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•                  Our largestchannel is the retail floor-covering dealer market.  This channel makes up about 80% of the sales revenue.  Those customers, who sell direct to thepublic, can be “cut to order” or “stocking” dealers/regional distributors.  We currently service approximately 2,000customers in this channel through its sales personnel.

 

•                  The home centerstore market makes up the second channel of distribution for us.   These customers operate under blanketpurchase orders.  The home center marketoffers us the opportunity to ship truck and container load volumes to centraldistribution hubs for final distribution by the customer.

 

•                  The thirdchannel is made up of national buying groups. These groups support independently owned, branded floor covering outletswith coordinated buying agreements that require us to market directly to eachindividual retail outlet.  This channelalso includes large builders who staff and maintain captive design centersspecifically for their own customers.

 

Channels two and threecurrently make up 20% of our current volume, but we believe that these channelshave the potential to grow rapidly.  Wemaintain separate and coordinated sales forces for each of the channels ofdistribution.  IWT does not depend onany single customer for more than 1% of its sales.

 

**Creditand Collection Procedures**

 

We maintain strict criteria forcredit approval:

 

•          Must complete IWT’scredit application;

•          Credit must be approvedby IWT’s credit department; and

•          Typically IWT mustreceive a personal guaranty.

 

Once approved,typically customers receive 30-day terms.

 

Additionally,to be an IWT customer, a business must

•          Have a store front,

•          Sell retail and

•          Must have a forklift.

 

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

 

**Competition**

 

We compete in the flooringindustry with larger competitors that have regional locations.  Some of the national distributors we competeagainst are much larger than us and both manufacture and distribute all linesof flooring (i.e.  carpet, hardwood orvinyl).  We, on the other hand,concentrate exclusively on the tile and marble distribution.  On the regional level, importers act asdistributors (a wholesaler) and at the same, time, sell directly to the enduser (a retailer).  We believe that byselling directly to the end-user and also selling to dealers, a company is, ineffect, competing against itself.

 

5

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**Employees.**

 

IWT currently employs 65 non-unionwarehouse and administrative staff and 15 salespeople servicing its customerbase.  IWT believes that itsrelationships with its employees are good. Tesoro currently has one employee who serves as its Chief ExecutiveOfficer, President and Interim Chief Financial Officer.

 

**ITEM 2.        DESCRIPTIONOF PROPERTY**

 

Tesoro currently subleases office space in Westport, Connecticut fromMentus Consulting LLC, an affiliate of Henry J.  Boucher, Jr., Tesoro’s Chairman, Chief Executive Officer,President and Interim Financial Officer. The monthly base services fee is $1,418.00 and lease expires April 30,2003.  Tesoro anticipates that it willbe obtaining more permanent space in the near future.

 

IWT currently leases 82,875 square feet of office and warehouse space.  The original lease was signed in 1998 andwas amended on June 25, 2001 for the lesser of (i) three years or (ii) thirtydays after IWT’s new facility is available. The currently monthly rent is $37,926.72 per month.

 

IWT leases office and warehouse space under a non-cancelable operatinglease.  It does not begin paying rentuntil 30 days after the landlord completes construction, obtains a certificateof occupancy, and notifies IWT that it can occupy the premises.  IWT expects to obtain access to the newfacility on or about April 1, 2003.  Thenew facility is for 147,000 square feet, of which 5,000 square feet is foroffice space and the remaining 142,000 square feet is for warehouse space.  The term of the lease is for 10 years asfollows: The rate for 2003 will be $568,207 (representing $151,707 from thecurrent lease and $416,500 for seven months under the new lease); the annualrate for the year 2004 will be $634,550; the annual rate for 2005 will be$649,250; the annual rate for 2006 will be $663,950; the annual rate for 2007will be $678,650; and for the year 2008 and thereafter, the operating leasewill be an aggregate of $3,866,100, for a total rate under the new lease of$6,909,000.

 

**ITEM 3.        LEGALPROCEEDINGS**

 

Neither Tesoro nor any of its subsidiaries are parties to any legalproceedings.

 

**ITEM 4.        SUBMISSIONSOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Contemporaneous with the mailing of this Form 10-KSB to TesoroShareholders, Tesoro is including an Information Statement to elect nineDirectors to its Board and to ratify the firm of Sewell and Company as itsindependent accountants.

 

6

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**IWT TESOROCORPORATION AND SUBSIDIARY**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER31, 2002 AND 2001**

 

**TABLE OF CONTENTS**

 
|                                                             | **Page No.** |
|------------------------------------------------------------------|--------------|
| Independent Auditors’ Report                                | 8            |
|                                                             |         |
| Consolidated  Balance Sheets                                     | 9            |
|                                                             |         |
| Consolidated  Statements of Operations                           | 11           |
|                                                             |         |
| Consolidated  Statements of Changes in Stockholders’ Equity | 12           |
|                                                             |         |
| Consolidated  Statements of Cash Flows                           | 13           |
|                                                             |         |
| Notes  to Consolidated Financial Statements                      | 15           |

 

 

7

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**INDEPENDENTAUDITORS’ REPORT**

 

To the Board of Directors

IWT Tesoro Corporation and Subsidiary

Westport, CT

 

We have audited the accompanying consolidatedbalance sheets of IWT Tesoro Corporation and Subsidiary as of December 31, 2002and 2001, and the related consolidated statements of operations, changes instockholders’ equity, and cash flows for the years ended December 31, 2002 and2001.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall consolidated financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of IWT Tesoro Corporation and Subsidiary as of December 31,2002 and 2001, and the results of its operations, and its cash flows for theyears ended December 31, 2002 and 2001, in conformity with accountingprinciples generally accepted in the United States of America.

 

 
| SEWELL AND COMPANY, PA |
|------------------------|
|                   |
| Hollywood, Florida     |
| January 17, 2003       |

 

8

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**IWT TESORO CORPORATION AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2002 AND 2001**

 

**Assets**

 
|                                |   | **2002**  |       | **2001**  |   |
|-------------------------------------|--------|-----------|------------|-----------|--------|
| Current assets                      |   |      |       |      |   |
| Cash                                |   | $         | 574,046    |      | $      | 402,500 |   |
| Accounts receivable, net            |   | 2,875,532 |       | 2,068,556 |   |
| Inventory                           |   | 6,047,876 |       | 4,985,427 |   |
| Prepaid expenses                    |   | 286,820   |       | 23,022    |   |
| Deferred tax asset                  |   | 34,348    |       | —    |   |
| Total current assets                |   | 9,818,622 |       | 7,479,505 |   |
|                                |   |      |       |      |   |
| Property and equipment, net         |   | 2,712,422 |       | 2,116,571 |   |
|                                |   |      |       |      |   |
| Other assets                        |   |      |       |      |   |
| Deposits                            |   | 9,173     |       | 2,915     |   |
| Other receivables                   |   | 64,205    |       | 40,452    |   |
| Other receivables - related parties |   | 5,500     |       | 26,913    |   |
| Other assets                        |   | 112,835   |       | 104,794   |   |
|                                |   | 191,713   |       | 175,074   |   |
|                                |   |      |       |      |   |
|                                |   | $         | 12,722,757 |      | $      | 9,771,150 |   |

 

See notes to financial statements

 

9

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**IWT TESORO CORPORATION AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2002 AND 2001**

 

**Liabilities and Stockholders’ Equity**

 
|                                                                                                                                                         |   | **2002**  |       | **2001**  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|--------|
|                                                                                                                                                         |   |      |       |      |   |
| Current liabilities                                                                                                                                          |   |      |       |      |   |
| Accounts payable                                                                                                                                             |   | $         | 5,403,816  |      | $      | 4,043,787 |   |
| Accrued expenses                                                                                                                                             |   | 126,340   |       | 109,091   |   |
| Other current liabilities                                                                                                                                    |   | 24,723    |       | 19,562    |   |
| Current portion of leases payable                                                                                                                            |   | 47,222    |       | 34,509    |   |
| Current portion of notes payable - other                                                                                                                     |   | 48,780    |       | 52,215    |   |
| Total current liabilities                                                                                                                                    |   | 5,650,881 |       | 4,259,164 |   |
|                                                                                                                                                         |   |      |       |      |   |
| Long term leases payable                                                                                                                                     |   | 108,438   |       | 83,632    |   |
| Long term notes payable - related parties                                                                                                                    |   | 448,712   |       | 463,072   |   |
| Long term notes payable - other                                                                                                                              |   | 64,872    |       | 134,722   |   |
| Long term loan payable                                                                                                                                       |   | 4,864,778 |       | 3,958,578 |   |
|                                                                                                                                                         |   | 5,486,800 |       | 4,640,004 |   |
|                                                                                                                                                         |   |      |       |      |   |
| Stockholders’ equity                                                                                                                                    |   |      |       |      |   |
| Preferred stock, $0.001 par value, 25,000,000 authorized; none issued                                                                                        |   | —    |       | —    |   |
| Common stock, $0.001 par value, 100 million shares authorized,  11,037,834 and 9,000,000 issued and outstanding at December 31, 2002 and  2001, respectively |   | 11,038    |       | 9,000     |   |
| Additional paid in capital                                                                                                                                   |   | 673,449   |       | 116,400   |   |
| Less: subscription receivable                                                                                                                                |   | —    |       | (84,000   | )      |
| Retained earnings                                                                                                                                            |   | 900,589   |       | 830,582   |   |
|                                                                                                                                                         |   | 1,585,076 |       | 871,982   |   |
|                                                                                                                                                         |   |      |       |      |   |
|                                                                                                                                                         |   | $         | 12,722,757 |      | $      | 9,771,150 |   |

 

See notes to financial statements

 

10

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**IWT TESORO CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2002 AND 2001**

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

 

See notes to financial statements

 

11

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**IWT TESORO CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                                        |   |       |   |   |   | **Additional  Paid in  Capital** |   | **Subscription  Receivable** |   | **Retained  Earnings** |   | **TOTAL**  |       |
|-------------------------------------------------------------|--------|------------|--------|--------|--------|----------------------------------|--------|------------------------------|--------|------------------------|--------|------------|------------|
| **Common Stock**                                            |
| **Shares**                                                  |   | **Amount** |
| Balance, December 31, 2000                                  |   | 6,000,000  |   | $      | 6,000  |                             | $      | 35,400                       |   | $                      | — |       | $          | 64,922 |   | $ | 106,322 |   |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares                                          |   | 3,000,000  |   | 3,000  |   | 81,000                           |   | (84,000                      | )      | —                 |   | —     |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Distributions                                               |   | —     |   | — |   | —                           |   | —                       |   | (521,458               | )      | (521,458   | )          |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Net income, 2001                                            |   | —     |   | — |   | —                           |   | —                       |   | 1,287,118              |   | 1,287,118  |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Balance, December 31, 2001                                  |   | 9,000,000  |   | 9,000  |   | 116,400                          |   | (84,000                      | )      | 830,582                |   | 871,982    |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Distributions, September 30, 2002                           |   | —     |   | — |   | —                           |   | —                       |   | (1,864,020             | )      | (1,864,020 | )          |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Payment of subscription receivable                          |   | —     |   | — |   | —                           |   | 84,000                       |   | —                 |   | 84,000     |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Recapitalization on October 1, 2002                         |   | 1,800,000  |   | 1,800  |   | (112,858                         | )      | —                       |   | —                 |   | (111,058   | )          |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares in exchanges for legal services          |   | 15,000     |   | 15     |   | 40,635                           |   | —                       |   | —                 |   | 40,650     |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares to employees for services rendered (SIP) |   | 75,900     |   | 76     |   | 205,613                          |   | —                       |   | —                 |   | 205,689    |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares to directors (SIP)                       |   | 40,000     |   | 40     |   | 108,360                          |   | —                       |   | —                 |   | 108,400    |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Sub-total                                                   |   | 10,930,900 |   | $      | 10,931 |                             | $      | 358,150                      |   | —                 |   | $          | (1,033,438 | ) | $ | (664,357 | ) |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares to consultants (SIP)                     |   | 8,600      |   | 9      |   | 23,297                           |   | —                       |   | —                 |   | 23,306     |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares in exchange for consulting services      |   | 10,000     |   | 10     |   | 27,090                           |   | —                       |   | —                 |   | 27,100     |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Issuance of shares for cash                                 |   | 83,334     |   | 83     |   | 249,917                          |   | —                       |   | —                 |   | 250,000    |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Exercise of warrants                                        |   | 5,000      |   | 5      |   | 14,995                           |   | —                       |   | —                 |   | 15,000     |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Net income, 2002                                            |   |       |   |   |   |                             |   | —                       |   | 1,934,027              |   | 1,934,027  |       |
|                                                        |   |       |   |   |   |                             |   |                         |   |                   |   |       |       |
| Balance, December 31, 2002                                  |   | 11,037,834 |   | $      | 11,038 |                             | $      | 673,449                      |   | $                      | — |       | $          | 900,589 |   | $ | 1,585,076 |   |

 

See notes to financial statements

 

12

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**IWT TESORO CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                                                               |   | **2002**    |      | **2001**    |   |
|------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|
| Cash flows from operating activities:                                              |   |        |      |        |   |
| Net Income                                                                         |   | $           | 1,934,027 |        | $      | 1,287,118 |   |
|                                                                               |   |        |      |        |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |        |      |        |   |
| Depreciation                                                                       |   | 422,435     |      | 317,852     |   |
| Loan amortization cost                                                             |   | 26,575      |      | 51,659      |   |
| Loss (gain) on sales of assets                                                     |   | (5,979      | )         | 511         |   |
| Bad debt                                                                           |   | 8,505       |      | 99,000      |   |
| Compensation in exchange for stock and options                                     |   | 405,145     |      | —      |   |
| (Increase) decrease in accounts receivable                                         |   | (786,221    | )         | (293,040    | )      |
| (Increase) decrease in inventory                                                   |   | (1,062,449  | )         | 263,783     |   |
| (Increase) decrease in prepaid expenses                                            |   | (263,798    | )         | (5,612      | )      |
| (Increase) decrease in other assets                                                |   | (50,988     | )         | (130,857    | )      |
| Increase (decrease) in accounts payable                                            |   |        |      |        |   |
| and accrued expenses                                                               |   | 1,231,915   |      | (752,232    | )      |
| Increase (decrease) in other liabilities                                           |   | 5,160       |      | 3,815       |   |
| Total adjustments                                                                  |   | (69,700     | )         | (445,121    | )      |
| Net cash provided by operating activities                                          |   | 1,864,327   |      | 841,997     |   |
|                                                                               |   |        |      |        |   |
| Cash flows from investing activities:                                              |   |        |      |        |   |
| Proceeds from sale of property                                                     |   | 11,000      |      | —      |   |
| Cash payments for the purchase of property                                         |   | (966,287    | )         | (679,027    | )      |
| Net cash used in investing activities                                              |   | (955,287    | )         | (679,027    | )      |
|                                                                               |   |        |      |        |   |
| Cash flows from financing activities:                                              |   |        |      |        |   |
| Proceeds from issuance of stocks                                                   |   | 349,000     |      | —      |   |
| Proceeds from loans                                                                |   | 26,010,639  |      | 19,682,105  |   |
| Proceeds from loans from related party                                             |   | 10,640      |      | 205,000     |   |
| Distributions to stockholders                                                      |   | (1,864,020  | )         | (521,458    | )      |
| Principal payments of stockholder loan                                             |   | (25,000     | )         | —      |   |
| Principal payments on notes payable                                                |   | (25,177,606 | )         | (19,236,612 | )      |
| Principal payment on capital leases                                                |   | (41,147     | )         | (28,969     | )      |
| Net cash provided by (used in) financing activities                                |   | (737,494    | )         | 100,066     |   |
|                                                                               |   |        |      |        |   |
| Net increase  in cash and cash  equivalents                                   |   | 171,546     |      | 263,036     |   |
|                                                                               |   |        |      |        |   |
| Cash and cash equivalents, beginning of period                                     |   | 402,500     |      | 139,464     |   |
|                                                                               |   |        |      |        |   |
| Cash and cash equivalents, end of period                                           |   | $           | 574,046   |        | $      | 402,500 |   |
|                                                                               |   |        |      |        |   |
| Supplemental disclosures of cash flow information:                                 |   |        |      |        |   |
|                                                                               |   |        |      |        |   |
| Cash paid during the period for:                                                   |   |        |      |        |   |
|                                                                               |   |        |      |        |   |
| Interest expense                                                                   |   | $           | 302,345   |        | $      | 400,187 |   |

 

See notes to financial statements

 

13

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Stockholders’ equity note:

 

As a result of the recapitalization onOctober 1, 2002, the Company is deemed to have issued 1,800,000 common sharesto the stockholders of IWT Tesoro Corporation (f/k/a Ponca Acquisition Corp.).

 

On October 4, 2002, the Company issued 15,000shares of common stock valued at $2.71 per share, or a total of $40,650 inexchange for legal services rendered in the amount of $4,950.  As a result, the Company recognized a losson settlement of $35,700. The value of the stock was based on the privateoffering price of $3.00 per unit; each unit consisting of one share of commonstock and 11⁄2 warrants to purchase 11⁄2 shares of common stock.  The warrants were priced using theBlack-Scholes option-pricing model at the date of sale.  Accordingly, the average value of thewarrants using the pricing model was $.29, and the value of each share was$2.71.

 

On October 4, 2002, the Company issued 10,000shares of common stock valued at $2.71 per share, or a total of $27,100, to adirector under the Stock Incentive Plan for past services rendered resulting inan immediate charge to operations.

 

On October 14, 2002, the Company issued75,900 shares of common stock valued at $2.71 per share, or a total of$205,689, to employees under the Stock Incentive Plan for services renderedresulting in an immediate charge to operations.

 

On October 14, 2002, the Company issued 8,600shares of common stock valued at $2.71 per share, or a total of $23,306, tofour individuals under the Stock Incentive Plan in exchange for consultingservices rendered resulting in an immediate charge to operations.

 

On October 14, 2002, the Company issued30,000 shares of common stock valued at $2.71 per share, or a total of $81,300,to directors under the Stock Incentive Plan for past services renderedresulting in an immediate charge to operations.

 

On October 15, 2002, the Company issued10,000 shares of common stock valued at $2.71 per share, or a total of $27,100,in exchange for consulting services rendered resulting in an immediate chargeto operations.

 

See notes to financial statements

 

14

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**IWT TESOROCORPORATION AND SUBSIDIARY**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER31, 2002 AND 2001**

 

**NOTE 1       NATUREOF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

BusinessDescription

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

 

On October 1, 2002, IWT TesoroCorporation (an inactive publicly held company) acquired 100% of theoutstanding stock of International Wholesale Tile, Inc. (IWT) in exchange for83% of its outstanding common stock in a transaction accounted for as arecapitalization of IWT.  IWT TesoroCorporation and Subsidiary are hereinafter referred to as “the Company”.

 

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

 

AccountingEstimates

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

 

Cash and CashEquivalents

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

 

AccountsReceivable

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

 

Inventories

Inventoriesconsisting of tiles are valued at the lower of cost or market.  Cost is determined by the first-in,first-out method (FIFO).

 

Property andEquipment

Property andequipment are stated at cost. Depreciation is computed using the straight-linemethod based on the estimated useful lives of the assets, which range from 3 –10 years.  Major expenditures forproperty acquisitions and those expenditures which substantially increase theestimated useful lives of the property, are capitalized. Expenditures formaintenance, repairs, and minor replacements are charged to expense asincurred.

 

15

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Income Taxes

Prior to the acquisition, theCompany’s subsidiary had elected to be taxed as an S corporation according tothe provisions of the Internal Revenue Service, and distributed profitstotaling $521,458 for the year ended December 31, 2001.  A total of $1,864,020 was distributedthrough September 30, 2002.  Uponacquisition by the Company on October 1, 2002, International Wholesale Tile,Inc. ceased to qualify as an S corporation. On October 1, 2002, the Company began accounting for income taxes underFinancial Accounting Standards Board (FASB) Statement No. 109, *Accounting for Income Taxes*.  SFAS No. 109 is an asset and liabilityapproach that requires the recognition of deferred tax assets and liabilitiesfor the expected future tax consequences of events that have been recognized inthe financial statements or tax returns. (See Note 9)

 

RevenueRecognition

Revenues are recognized whenproducts are shipped.  Revenue isreduced for estimated customer returns and allowances.

 

Long LivedAssets

The Company continuallyevaluates the carrying value of property and equipment, goodwill and otherintangible assets to determine whether there are any impairment losses.  If indicators of impairment are present, andfuture undiscounted cash flows are not expected to be sufficient to recover theassets’ carrying amount, an impairment loss would be charged to operations inthe period identified based on the difference between the carrying value andthe fair value of the asset.

 

No reduction for impairment oflong-lived assets was necessary at December 31, 2002.

 

Stock Options

The Company elected to accountfor stock options issued to employees in accordance with Accounting PrinciplesBoard Opinion No. 25**(APB OpinionNo. 25) *Accounting For Stock Issued toEmployees* and related interpretations, which established financialaccounting and reporting for compensation cost of stock issued to employeesthrough non-variable plans, variable plans, and non-compensatory plans, andaccounts for stock options and warrants issued to non-employees in accordancewith SFAS 123, *Accounting for Stock-BasedCompensation*, which established a fair value method of accountingfor stock compensation plans with employees and others.

 

Advertising

Advertising costs are chargedto operations as incurred.  Advertisingexpense totaled $203,838 and $74,680 for the years ended December 31, 2002 and2001, respectively.

 

16

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AccountingPronouncements

Statement No. 141, *Business Combinations* (SFAS 141)establishes revised standards for accounting for business combinations.  Specifically, the statement eliminates thepooling method, provides new guidance for recognizing intangible assets arisingin a business combination, and calls for disclosure of considerably moreinformation about a business combination. This statement is effective for business combinations initiated on orafter July 1, 2001.  The adoption ofthis pronouncement on July 1, 2001 did not have a material effect on theCompany’s financial position, results of operations or liquidity.

 

Statement No. 142, *Goodwill and Other Intangible Assets* (SFAS142) provides new guidance concerning the accounting for the acquisition ofintangibles, except those acquired in a business combination, which is subjectto SFAS No. 141, and the manner in which intangibles and goodwill should beaccounting for subsequent to their initial recognition.  Generally, intangible assets with indefinitelives, and goodwill, are no longer amortized; they are carried at lower of costor market and subject to annual impairment evaluation, or interim impairmentevaluation if an interim triggering event occurs, using a new fair market valuemethod.  Intangible assets with finitelives are amortized over those lives, with no stipulated maximum, and animpairment test is performed only when a triggering event occurs.  This statement is effective for all fiscalyears beginning after December 15, 2001. The Company believes that the implementation of SFAS No. 142 on January1, 2002 did not have a material effect on the Company’s financial position,results of operations or liquidity.

 

In August 2001, the FASB issuedSFAS No. 143, *Accounting for AssetRetirement Obligations.*  The standard requires entities torecord the fair value of a liability for an asset retirement obligation in theperiod in which it is incurred.  When the liability is initially recorded,the entity capitalizes a cost by increasing the carrying amount of the relatedlong-lived asset.  Over time, the liability is accreted to its presentvalue each period, and the capitalized cost is depreciated over the useful lifeof the related asset. Upon settlement of the liability, an entity eithersettles the obligation for its recorded amount or incurs a gain or loss uponsettlement.  The standard is effective for fiscal years beginning afterJune 15, 2002.  The adoption of SFAS No.143 will not have a material impact on the Company’s financial statements.

 

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 ofSFAS No. 121 regarding when and how to measure an impairment loss, SFAS No. 144provides additional implementation guidance. SFAS No. 144 excludes goodwill andintangibles not being amortized among other exclusions.  SFAS No. 144 also supersedes the provisionsof APB No. 30, *Reporting the Results ofOperations*, pertaining to discontinued operations.  Separate reporting of a discontinuedoperation is still required, but SFAS No. 144 expands the presentation toinclude a component of an entity, rather than strictly a business segment asdefined in SFAS No. 131, *Disclosures aboutSegments of an Enterprise and Related Information*.  SFAS No. 144 also eliminates the currentexemption to consolidation when control over a subsidiary is likely to betemporary.  This statement is effectivefor all fiscal years beginning after December 15, 2001.  The Company believes that the implementationof SFAS No. 144 did not have a material effect on the Company’s financialposition, results of operations or liquidity.

 

17

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AccountingPronouncements 

In April 2002, the FASB issuedSFAS No. 145, *Rescission of FASB StatementsNo. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections*,that, among other things, rescinded SFAS No. 4, *Reporting Gains and Losses from Extinguishment of Debt.*  With the rescission of SFAS No. 4, the earlyextinguishment of debt generally will no longer be classified as anextraordinary item for financial statement presentation purposes.  The provision is effective for fiscal yearsbeginning after May 15, 2002.  TheCompany does not anticipate that the adoption of SFAS No. 145 will have amaterial effect on its financial position or results of operations.

 

In June 2002, the FASB issuedSFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities,* which replaces EmergingIssues Task Force Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).  *The new standard requiredcompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than at the date of a commitment to an exit ordisposal plan.  The statement is to beapplied prospectively to exit or disposal activities initiated after December31, 2002.  The Company does notanticipate that the adoption of SFAS No. 145 will have a material effect on itsfinancial position or results of operations.

 

In December 2002, the FASBissued SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure,* which amendedSFAS No. 123, *Accounting for Stock-BasedCompensation.*  The newstandard provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  Additionally, thestatement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in the annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used in reported results. This statement is effective for financial statements for fiscal yearsending after December 15, 2002.  Incompliance with SFAS No. 148, the Company has elected to continue to follow theintrinsic value method in accounting for its stock-based employee compensationarrangement as defined by APB No. 25.

 

Earnings perShare

Basic earnings per share foreach year is computed by dividing income for the year by the weighted averagenumber of common shares outstanding during the year.  Diluted earnings per share include the effects of common stockequivalents to the extent they are dilutive. At December 31, 2002 all commonstock equivalents were antidilutive and therefore diluted earnings per shareequaled basic earnings per share.

 

Basic and diluted weightedaverage number of shares outstanding is as follows:

 

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

 

18

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**NOTE 2       CONCENTRATIONOF CREDIT RISK**

 

Financial instruments that potentiallysubject the Company to credit risk include cash on deposit with two financialinstitutions amounting to $572,846 at December 31, 2002, which was insured forup to $100,000 per financial institution by the U.S. Federal Deposit InsuranceCorporation.

 

The Company obtains detailedcredit evaluations of customers and establishes credit limits as required androutinely assesses the financial strength of its customers.  The Company competes primarily in the saleof ceramic tile and marble markets and sells its products to a multitude ofcustomers.  There is no disproportionateconcentration of credit risk.

 

**NOTE 3       ACCOUNTSRECEIVABLE**

 

Accounts receivable at December31, 2002 and 2001 consisted of the following:

 

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

 

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

 

**NOTE 4       INVENTORY**

 

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

 

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

 

19

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**NOTE 5       PROPERTY AND EQUIPMENT**

 

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

 

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

 

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

 

**NOTE 6       NOTES PAYABLE**

 

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

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

 

20

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Notes Payable– Related Parties

These notes may be paid down toa minimum balance of $85,000 in accordance with a Subordination Agreement datedNovember 13, 2002.

 

The total interest expenserelated to these loans was $56,532 and $45,785 at December 31, 2002 and 2001,respectively.

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

 

The total interest expenserelated to these loans was $9,361 and $15,328 at December 31, 2002 and 2001,respectively.

 

21

----

 

 

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

 

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

 

**NOTE 7       LOAN PAYABLE**

 

OnNovember 21, 2000, the subsidiary (IWT) entered into a new loan and securityagreement with a financial institution totaling $5,000,000 as a revolving loan,for a period of three years with an option to renew for one additionalyear.  This was amended and restatedeffective November 13, 2002, whereas the amount of the maximum credit wasincreased from $5,000,000 to $7,500,000. The average interest rate was 5% and 6% for the years ended December 31,2002 and 2001, respectively.  Thesubsidiary (IWT) owed $4,864,778 and $3,958,578 against theserevolving loans at December 31, 2002 and 2001, respectively.

 

Thesubsidiary (IWT) is subject to a number of restricted covenants under the debtagreement.  The subsidiary (IWT) is incompliance with all covenants during the years ended December 31, 2002 and2001.

 

The total interest expenserelated to these loans was $227,022 and $298,556 at December 31, 2002 and 2001,respectively.

 

**NOTE 8       LEASES**

 

Capital Leases

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

 

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

 

22

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**NOTE 8       LEASES**

 

OperatingLeases

The Company leases office andwarehouse space under a non-cancelable operating lease, which has an initialterm of ten years.  The lease was signedin August 2001 for a 147,000 square foot warehouse and office facility.  The Company does not begin paying rent until30 days after the landlord completes construction, obtains a certificate ofoccupancy and notifies the Company that it can occupy the premises.  It is anticipated that the Company willobtain access to the new facility on or about April 1, 2003 and begin payingrent on or about May 1, 2003.

 

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

 

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

 

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

 

Total interest expense undercapital leases was $9,429 and $13,199 for the years ended December 31, 2002 and2001, respectively.

 

**NOTE 9       INCOMETAXES**

 

During the first nine months of2002, the subsidiary, International Wholesale Tile Inc. was taxed as an Scorporation according to the provisions of the Internal Revenue Code.  Accordingly, no provision or liability forFederal income taxes is reflected in the accompanying statements for thatperiod of time.  Instead, thestockholders are liable for individual Federal income taxes on their respectiveshare of the Company’s taxable income. S corporations pay distribution of profits in lieu of dividends.

 

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

 

23

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The provision for income taxesat December 31, 2002 consisted of the following:

 

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

 

The tax effects of temporary differences that give rise to significantportions of deferred tax assets and liabilities at December 31, 2002 are asfollows:

 

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

 

 

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

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

 

**NOTE 10     STOCKHOLDERS’ EQUITY**

 

The Articles of Incorporationprovide for the authorization of 25,000,000 shares of convertible preferredstock at $0.001, and 100,000,000 shares of common stock at $0.001 parvalue.  Each share of preferred stock isconvertible into 1 share of common stock.

 

Common Stock

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

 

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

 

24

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Common Stock

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

 

On October 4, 2002, the Companyissued 15,000 shares of common stock valued at $2.71 per share or a total of$40,650 in exchange for legal services rendered in the amount of $4,950.  As a result, the Company recognized a losson settlement of $35,700. The value of the stock was based on the privateoffering price of $3.00 per unit; each unit consisting of one share of commonstock and 11⁄2 warrants to purchase 11⁄2 shares of common stock.  The warrants were priced using theBlack-Scholes option pricing model at the date of sale.  Accordingly, the average value of thewarrants using the pricing model was $.29, and the value of each share was$2.71.

 

On October 4,2002, the Company issued 10,000 shares of common stock valued at $2.71 pershare, based on the contemporaneous offering price, or a total of $27,100 to adirector under the Stock Incentive Plan for past services rendered resulting inan immediate charge to operations.

 

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

 

On October 14, 2002, theCompany issued 8,600 shares of common stock valued at $2.71 per share, based onthe contemporaneous offering price, or a total of $23,306 to four individualsunder the Stock Incentive Plan in exchange for consulting services renderedresulting in an immediate charge to operations.

 

On October 14,2002, the Company issued 30,000 shares of common stock valued at $2.71 pershare, based on the contemporaneous offering price, or a total of $81,300 todirectors under the Stock Incentive Plan for past services rendered resultingin an immediate charge to operations.

 

On October 15, 2002, theCompany issued 10,000 shares of common stock valued at $2.71 per share, basedon the contemporaneous offering price, or a total of $27,100 in exchange forconsulting services rendered resulting in an immediate charge to operations.

 

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

 

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

 

25

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Common Stock

On December 2, 2002, 5,000warrants were exercised for 5,000 shares of common stock at $3.00 per share, ora total of $15,000.

 

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

 

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

 

StockCompensation Plan

On December 27, 2001, IWT Tesoro Corporation adoptedthe “Stock Incentive Plan.”  TheCompany’s Stock Incentive Plan provides that eligible employees, consultants,and affiliates may be granted shares of common stock.  Under the plan, the options granted are non-qualified stockoptions, incentive stock options, and restricted stock.  The aggregate total common stock that may beissued is 4,000,000 shares.  For theyear ended December 31, 2002, 124,500 restricted shares were issued toemployees, directors and consultants for services rendered.

 

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

 

On November 23, 2002, the Company granted 400,000options to directors at an exercise price of $3.00 per share, expiring in tenyears. The options vest as follows: (a) 33% at such time as the Company’scommon stock commences trading on the Over-The Counter (OTC) Bulletin Board(equivalent); (b) 33% at such time as the Company attains no less than a $50million market cap for ten consecutive trading days; and (c) 34% when theCompany achieves its 2003 revenue and profit targets.

 

Inaccordance with SFAS No. 123, for options issued to employees, the Company haselected to account for these stock options under APB No. 25 and relatedinterpretations in accounting for its plan. Accordingly, no compensation costs have been recognized for optionsissued under the plan as of December 31, 2002. Had compensation costs for the Company’s stock option been determined onthe fair market value at the grant dates for the options, consistent withStatement of Accounting Standards No. 123, *Accountingfor Stock Based Compensation* (Statement No. 123), the Company’sresults of operations for the year ended December 31, 2002 would have changedto the pro-forma amounts indicated.

 
|                          |   |        |   | **2002** |      |
|-------------------------------|--------|-------------|--------|----------|-----------|
|                          |   |        |   |     |      |
| Net income -                  |   | As reported |   | $        | 1,934,027 |   |
|                          |   | Pro-forma   |   | $        | 1,833,731 |   |
|                          |   |        |   |     |      |
| Net income per share  basic - |   | As reported |   | $        | .18       |   |
|                          |   | Pro-forma   |   | $        | .17       |   |

 

26

----

 

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

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

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

 

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

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

 

The following table summarizes information about stock optionsoutstanding at December 31, 2002:

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

 

27

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**NOTE 12     WARRANTS**

 

The Company sold 125,000 warrants as part ofthe private offering held at the end of the year 2002, at an initial exerciseprice of $3.00 per share, expiring five years from the date of sale,exchangeable for 125,000 shares of outstanding stock.  At December 31, 2002, 5,000 warrants were exercised.

 

For purpose of valuing warrants, the Company used the Black-Scholesoption pricing model with the following assumptions for the year ended December31, 2002:

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

 

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

 

Changes during the year are presented asfollows:

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

 

The following table summarizes information about warrants outstandingat December 31, 2002:

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

 

The exercise price will increase by $.25 pershare at the beginning of each calendar quarter following the first public saleof the Company’s common stock, pursuant to its effective Form 221 to be filedwith the National Association of Securities Dealers.

 

28

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**NOTE 13     ACQUISITION**

 

On October 1, 2002, the Companyacquired International Wholesale Tile, Inc. In connection with the legal formof this transaction, International Wholesale Tile, Inc. became a wholly ownedsubsidiary of IWT Tesoro Corporation.  Atotal of 9,000,000 shares of common stock were issued for the acquisition.  For accounting purposes, the acquisition hasbeen treated as a capital transaction and as a recapitalization ofInternational Wholesale Tile, Inc.  Thefinancial statements became those of International Wholesale Tile, Inc., withadjustments to reflect the changes in equity structure.  The operations are those of InternationalWholesale Tile, Inc. for all periods presented, and those of IWT TesoroCorporation from the recapitalization date. 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 and liabilities athistorical cost of International Wholesale Tile, Inc. at December 31, 2001.

 

As part of the transaction, theCompany and each of the three shareholders of International Wholesale Tile,Inc. entered into a repurchase agreement by which the three shareholders maysell a certain amount of the Company’s common stock back to the Company for aprice based on an amount equal to 88% of the average trading price of theCompany’s common stock so 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.

 

**NOTE  14    RELATED PARTY**

 

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

 

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

 

**NOTE 15     EMPLOYMENT AGREEMENTS**

 

IWT TesoroCorporation

On December 29, 2001, the boardof directors of IWT Tesoro (Company) elected Henry J. Boucher, Jr. to serve asits president for an annual salary of $120,000.  Mr. Boucher had signed a Salary Deferral Agreement with theCompany, which was terminated by the board of directors.  All deferred compensation for the year 2002was paid to Mr. Boucher.  Mr. Boucher’semployment may be terminated for cause at any time and within 30 days withoutcause.

 

InternationalWholesale Tile, Inc.

At December31, 2001, the subsidiary, IWT, had employment agreements with its officers fora term of one year.  On October 2, 2002,new agreements were entered into.

 

29

----

 

**NOTE 16     PRIOR  PERIOD ADJUSTMENT**

 

For the year ended December 31,2001, an adjustment was made to the retained earnings of the Company to correctthe amounts reported for bad debt, depreciation, payroll, and interest expenseduring 2000 and 1999.

 

**NOTE 17     PRIVATE OFFERING**

 

TheCompany adopted a subscription agreement on October 1, 2002 to commence aprivate offering of its common stock to accredited investors only for up to 1.0million units at $3.00 per unit; each consisting of one (1) share of commonstock and warrants to purchase 11⁄2 shares initially at $3.00 per share.  The price of the warrants will increase by$.25 per share at the beginning of each calendar quarter following the firstpublic sale of the common stock of IWT Tesoro Corporation pursuant to theCompany’s form 211 to be filed with the National Association of SecuritiesDealers (NASD).

 

AtDecember 31, 2002, the Company had raised $265,000 in units and warrantsexercised.

 

**NOTE 18     SEGMENT INFORMATION**

 

TheCompany manages its operations as one segment and all revenue is derived fromcustomers in the United States.

 

**NOTE 19     SUBSEQUENT EVENTS**

 

OnJanuary 8, 2003, the Company incorporated a subsidiary, IWT TesoroInternational, Ltd. (ITIL).  This subsidiarywas set up as a foreign subsidiary, to be based in Bermuda to handle futureoperations of foreign subsidiaries.

 

OnJanuary 24, 2003, the Company set up IWT Tesoro Transport, Inc. (ITTI).  Initially, this corporation will be atransport broker, but future plans include overland transport of tile fromFlorida to destinations within the United States and return shipments of otherfreight back to Florida.

 

30

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**PART II**

 

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

 

(a)           Market*Information*.  Currently, no trading market for Tesoro’sCommon Stock exists at present and there has been no trading market todate.  We make no assurances that atrading market will ever develop or, if such a market does develop, that itwill continue.  Through a market maker,Tesoro will be filing an application to traded its common stock on the Over TheCounter (OTC) Bulletin Board.  We cannotassure anyone, however, that the application will be approved by the NationalAssociation of Securities Dealers (NASD) or if approved, when the approval willoccur.  Additionally, even if theapplication is approved, unless we file a registration statement with theSecurities and Exchange Commission to register shares of Common Stock  (whether shares to be issued by us or sharescurrently held by shareholders, for the next six months, there will only be avery limited number of shares (less than 400,000 shares) that will be availableto be traded.

 

The Securities and Exchange Commission has adopted Rule 15g-9 whichestablishes the definition of a “penny stock”, for purposes relevant to Tesoro,as any equity security that has a market price of less than $5.00 per share orwith an exercise price of less than $5.00 per share, subject to certainexceptions.  For any transactioninvolving a penny stock, unless exempt, the rules require:

 

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

 

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

 

In order to approve a person’s account for transactions in pennystocks, they must

 

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

 

(ii)           make a reasonabledetermination that the transactions in penny stocks are suitable for thatperson and that person has sufficient knowledge and experience in financialmatters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in apenny stock a disclosure schedule prepared by the Commission relating to thepenny stock market, which, in highlight form,

 

(i)            sets forth the basison which the broker or dealer made the suitability determination and

 

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

 

Finally, monthly statements have to be sent disclosing recent priceinformation for the penny stock held in the account and information on thelimited market in penny stocks.

 

(b)           *Holders*. Through February 17, 2002, there were 141 holders of Tesoro’s CommonStock.  The issued and outstandingshares of Tesoro’s Common Stock were issued in accordance with the exemptionsfrom registration afforded by Section 4(2) of the Securities Act of 1933 andRule 506 promulgated thereunder.

 

(c)           *Dividends. *Dividends,if any, will be contingent upon Tesoro’s revenues and earnings, if any, capitalrequirements and financial conditions. The payment of dividends, if any, will be within the discretion ofTesoro’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.

 

31

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(d)           *Securities Authorized for Issuance Under EquityCompensation Plans.*

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

 

----

(1)                                  TheCompany’s Stock Incentive Plan includes the right to grant options and to issuerestricted stock and the Plan was approved by the Company’s then soleshareholder in December 2001.  Thisnumber includes securities reflected inthe first column, “Number of Securities to be issued upon Exercise ofOutstanding options, warrants and rights”. This number also reflects 124,500 restricted shares that havebeen issued all pursuant to the Plan.

 

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

 

The following discussionregarding business, any statement of future expectations, including withoutlimitation, future revenues and earnings (losses), plans and objectives forfuture operations, future agreements, future economic performance or expectedoperational developments and all other statements regarding the future are“forward-looking” statements within the meaning of Section 27A of theSecurities Act of 1934, as amended, and as that term is defined in the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertaintiesand other factors that may cause our actual results, performance orachievements to be materially different from the results, performance orachievements expressed or implied by the forward-looking statements.  You should not unduly rely on thesestatements.  Forward-looking statementsinvolve assumptions and describe our plans, strategies, and expectations.  You can generally identify a forward-lookingstatement by words such as may, will, should, expect, anticipate, estimate,believe, intend, or project.  Thisreport contains forward-looking statements that address, among other things,

 

•                  our business andfinancing plans,

•                  regulatoryenvironments in which we operate or plan to operate, and

•                  trends affectingour financial condition or results of operations, the impact of competition,the start-up of certain operations, roll out of products and services andacquisition opportunities.

 

Factors, risks, anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements (Cautionary Statements) include, amongothers,

 

•                  our ability toraise capital,

•                  our ability tocontinue distributing our products,

•                  our ability toprovide our products and services at competitive rates,

 

32

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•                  our ability toexecute our business strategy in a competitive environment,

•                  our degree offinancial leverage,

•                  regulatoryconsiderations and risks related to international economies,

•                  risks related tomarket acceptance and demand for our products and services,

•                  our dependenceon third party suppliers,

•                  the impact ofcompetitive services,

•                  other risksreferenced from time to time in our SEC filings.

 

All subsequent written and oralforward-looking statements attributable to us, or anyone acting on our behalf,are expressly qualified in their entirety by the cautionary statements.  We do not undertake any obligations topublicly release any revisions to any forward-looking statements to reflectevents or circumstances after the date of this report or to reflectunanticipated events that may occur.

 

We were incorporated on May 5,2000 as a Nevada corporation.  Ourprincipal office is located at 191 Post Road West, Suite 10, Westport, CT06880.  Any reference in this documentto the company, our, we or us in this “Management’s Discussion and Analysis orPlan of Operations” refers to IWT Tesoro Corporation.

 

Effective October 1, 2002,Tesoro acquired International Wholesale Tile, Inc.  (IWT) through a share exchange and IWT became a wholly ownedsubsidiary of Tesoro.  We issued a totalof 9.0 million shares of Tesoro common stock in exchange all of the IWTshares.  As part of the transaction,Tesoro and each of the three IWT shareholders entered into a repurchaseagreement by which the three shareholders may sell a certain amount of Tesoro’scommon stock back to Tesoro for a price based on an amount equal to 88% of theweighted average trading price

 

Through IWT, we provide hardfloor and wall covering materials primarily ceramic, porcelain and granite tileto the new construction and remodeling industries for the commercial andresidential marketplaces.  We distributeour products through a network of independently owned dealers and distributors,buying groups and home center retailers. We currently purchase our products exclusively from foreign manufactures.  On October 1, 2002, we acquired IWT in shareexchange transaction.  The transactionresulted in the original IWT shareholders then receiving 83% of our thenoutstanding stock and we received 100% of IWT outstanding stock.

 

Our primary source of revenueis the sale of hard flooring materials and our primary costs relate to theacquisition, carrying inventory and delivery of those products.  While sales are made throughout the UnitedStates, the majority of our sales are in the southeastern quadrant of thecountry.  The primary sources of workingcapital are a $ 7.5 million (US) revolving line of credit from a division of alarge US commercial bank and from our suppliers who have extended us termssufficient to convert our receivables to cash. During 2003, we expect to begin trading our stock on a national marketexchange and to raise equity through the public market.  This equity will be used to strengthen ourbalance sheet, provide liquidity to our investors and to provide capital forcontinued growth.  We are currentlyraising capital through a limited private offering.  Through February 28, 2003, we have raised $475,000 in thisprivate offering.  These private equityfunds are being used to fund corporate operations and expand the business.

 

In 2003, we have created twonew wholly owned subsidiary companies. IWT Tesoro International Ltd, a Bermuda based exempt company that willbe the holding company for any international based ventures that we expect we willneed to support the expansion of our US sales effort; and IWT Tesoro Transport,Inc., a Florida corporation that will handle our in and out bound freightoperations.

 

33

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Results ofOperations for the year ending December 31, 2002

 

The following discussion andanalysis should be read in conjunction with the financial and notes theretothat appear elsewhere in this document. The table below sets forth certain operating data as a percentage oftotal revenue for the periods indicated.

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

 

##### Fiscal 2002 compared to Fiscal 2001

 

Sales for the year endedDecember 31, 2002 were $ 25,387,707 a 29% increase over sales for the yearended December 31, 2001.  This growthfollows a 40% growth from 1999 to 2000 and a 31% growth from 2000 to 2001.  As a relative small player in a growingmarket, we expect our sales growth to continue for the next several years,albeit at a slightly reduced rate of between 20 and 25%.  The tile market in the United States isapproximately $2.1 billion and is growing at a five to seven percent rate.

 

As we grow, we have been ableto purchase product at lower prices and have consequently lowered our cost ofgoods to 60% in 2002 from 64% in 2001 and 68% in 2000.  While there are certainly finite limits toimproving our gross margin percentage, it is imperative that we maintain theseratios as we grow.

 

Our earnings before interest,taxes and depreciation (EBITDA) grew from $2 million in 2001 to $2.65 millionin 2002, a 31% growth rate.

 

In March of 2003, we will moveinto a new warehouse facility of nearly 147,000 square feet.  This new facility will allow us to increaseour inventory and better serve our customers who rely upon us to meet the shortlead times and limited inventory capacity that exist in their markets.  We should be able to improve the efficiencyof our warehouse operations by simplifying the receiving and shippingfunctions.  We currently maintainbetween four and five million square feet of product in our facility, this willincrease to between six and seven million square feet.  Our inventory turns, in 2002, wereapproximately 3.8 times, we plan to lower that about 3.2 during 2003 and to 3.0in 2004.  Availability of product is akey success factor for us and is a good use of our capital.

 

Making it easy for ourcustomers to sell product is another key success factor for us.  We have an extensive sampling and displayprogram that augments the training and marketing support we provide ourcustomers.  Our inventory of samples inthe field with our customers represents a significant investment that iscapitalized on our balance sheet.

 

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##### Liquidity and Capital Resources

 

The Company had cash balances of $ 574,046 and $ 402,500 at the end offiscal 2002 and 2001 respectively.  TheCompany has generated positive cash flow from operations for the last threeyears.

 

On November 21, 2000, our subsidiary, IWT, entered into a new loan andsecurity agreement with a financial institution totaling $5,000,000 as arevolving loan, for a period of three years with an option to renew for oneadditional year.  This was amended andrestated effective November 13, 2002 and the amount of the maximum credit wasincreased from $5,000,000 to $7,500,000. IWT owed $4,864,778 and $3,958,578 against these revolvingloans at December 31, 2002 and 2001, respectively.  IWT is subject to anumber of restricted covenants under the debt agreement and is in compliancewith all covenants during the years ended December 31, 2002 and 2001.  The total interest expense related tothese loans was $227,022 and $298,556 at December 31, 2002 and 2001,respectively.

 

In October 2002, we commenced aprivate offering of our common stock to accredited investors for up to onemillion units at $3.00 per unit.  Eachunit consists of one share of common stock and warrants to purchase 1-1/2shares initially at $3.00 per share. The price of the warrants will increase by $.25 per share at thebeginning of each calendar quarter following the first public sale of Tesoro’scommon stock.  As of December 31, 2002,the Company had raised $265,000 in units and 5,000 warrants wereexercised.  All units were sold toaccredited investors pursuant to Rule 506 and Section 4(2) of the SecuritiesAct of 1933, as amended.  All of theinvestors were provided with, or otherwise had access to, information about theCompany and its subsidiaries, including financial information.

 

We intend to raise additionalcapital annually through the public market during 2003.  There is no assurance that we will be ableto raise capital at share prices acceptable to us.  However, these funds are not critical to our on-going operations.

 

As of February 28, 2003, wehave raised an aggregate of $475,000 pursuant to the private offering.

 

**ITEM 7.        FINANCIALSTATEMENTS**

 

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

 

**ITEM 8.        CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On September 13, 2002, Ponca Acquisition Corporation, now known as IWTTesoro Corporation (the “Company”) notified the accounting firm of Magee,Rausch & Shelton, LLP, of Tulsa, OK (“MRS”) that MRS had been replaced asthe Company’s principal accountant.  MRSreported on and audited the financial statements prepared by the Company forthe period since inception (May 3, 2000) and ending July 15, 2000.

 

On August 23, 2002, the Companyengaged the accounting firm of Sewell and Company of Hollywood, Florida, as itsprincipal accountant to audit the financial statements prepared by the Companyfor the current fiscal year and for its past filings.  The decision to change accountants was recommended by theCompany’s Board of Directors and was based on its belief that the Company’soperations would be more accessible and 

 

35

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economically undertaken by aFlorida SEC qualified accounting firm since its soon to be wholly-ownedsubsidiary, International Wholesale Tile, Inc. (“IWT”) is a Florida corporation located in Palm City, Florida.

 

None of MRS’ reports on thefinancial statements for either the past two years contained an adverse opinionor a disclaimer of opinion, nor were qualified or modified as to uncertainty,audit scope, or accounting principles. Additionally, during the Company’s two most recent fiscal years and anysubsequent interim period preceding MRS’ dismissal, there were no disagreementswith the Company’s former accountant on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedures.

 

**PART III**

 

Item 9 (Directors, ExecutiveOfficers, Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act), Item 10 (Executive Compensation), Item 11 (Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters) andItem 12 (Certain Relationships and Related Transactions) have been incorporatedby reference from our Definitive Information Statement, which will be filed withthe Commission not later than 120 days after December 31, 2002.

 

**Item 13.       Exhibits,List and Reports on Form 8-K.**

 

(a)           Exhibits

 
| EXHIBIT

NUMBER |   | DESCRIPTION                                                                                                                                        |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Articles of  Incorporation(1)                                                                                                                      |
| 3.1.1           |   | Articles of  Amendment to Articles of Incorporation dated September 23, 2002.(3)                                                                   |
| 3.2.1           |   | Bylaws(1)                                                                                                                                          |
| 3.2.2           |   | Amended and  Restated Bylaws(8)                                                                                                                    |
| 3.3             |   | Specimen  Stock Certificate(1)                                                                                                                     |
| 3.4.1           |   | Audit  Committee Charter(8)                                                                                                                        |
| 3.4.2           |   | Compensation  Committee Charter(8)                                                                                                                 |
| 3.4.3           |   | Nominating  and Governing Committee Charter(8)                                                                                                     |
| 10.1            |   | Agreement  with Peter Goss(1)                                                                                                                      |
| 10.2            |   | Shareholders  Agreement(1)                                                                                                                         |
| 10.3            |   | 2001 Ponca  Acquisition Corporation Stock Incentive Plan.(2)                                                                                       |
| 10.4            |   | Employment  Agreement between Ponca Acquisition Corporation and Henry Jr. Boucher, Jr.  dated as of December 29, 2002.(2)                          |
| 10.5            |   | Memorandum  of Understanding between Ponca Acquisition Corporation and the shareholders  of International Wholesale Tile, Inc.(2)                  |
| 10.6            |   | Stock  Purchase Agreement among the Shareholders of International Wholesale Tile,  Inc., and IWT Tesoro Corporation, effective October 1, 2002.(5) |
| 10.7            |   | Termination  of Shareholders Agreement(6)                                                                                                          |
| 10.8            |   | Repurchase  Agreement(7)                                                                                                                           |
| 99.1            |   | MRS’ letter  to the Securities and Exchange Commission.(4)                                                                                    |
| 99.2            |   | Letter from  Peter Goss regarding fiscal year end(5)                                                                                               |
| 99.3            |   | Certification  by IWT Tesoro Corporation’s Chief Executive Officer and Interim Chief  Financial Officer.                                      |

 
|     |
|-----|
| (1) |   | Filed as an  Exhibit to the Company’s Form 10-SB, filed with the Securities and Exchange  Commission on August 7, 2000. |

 

36

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|   |   |                                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    |   | Filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the Securities and  Exchange Commission on September 11, 2002.                                            |
|   |   |                                                                                                                                                                                |
| (3)    |   | Filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the Securities and  Exchange Commission on October 1, 2002.                                               |
|   |   |                                                                                                                                                                                |
| (4)    |   | 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.                                             |
|   |   |                                                                                                                                                                                |
| (5)    |   | Filed as an Exhibit to the  Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on October 15, 2002.                                              |
|   |   |                                                                                                                                                                                |
| (6)    |   | 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.                                            |
|   |   |                                                                                                                                                                                |
| (7)    |   | 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.                                            |
|   |   |                                                                                                                                                                                |
| (8)    |   | Filed as an Exhibit to the  Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2003.                                              |
|   |   |                                                                                                                                                                                |
| (b)    |   | Reports on Form 8-K.                                                                                                                                                                |
|   |   |                                                                                                                                                                                |
| (1)    |   | Form 8-K filed with the  Commission on October 1, 2002 disclosing the change in the Company’s  certifying accountant.                                                          |
| (2)    |   | Form 8-K/A filed with the  Commission on October 8, 2002 amending its disclosure concerning the change  in the Company’s certifying accountant.                                |
| (3)    |   | Form 8-K filed with the Commission on October  15, 2002 disclosing its acquisition  of IWT and appointing new Directors.                                                            |
| (4)    |   | Form 8-K  filed with the Commission on November 12, 2002 disclosing the appointment of  new outside directors, commencing a private offering, and filing a Form 211  with the NASD. |
| (5)    |   | Form 8-K/A  filed with the Commission on November 22, 2002 disclosing the audited  financial information and proforma information concerning IWT.                                   |
| (6)    |   | Form 8-K/A  filed with the Commission on December 4, 2002 amending the disclosure  concerning the filing of a Form 211 with the NASD.                                               |

 

**Item 14.       Controland Procedures.**

 

(a)           Within the 90 days prior to the date of this report, wecarried out an evaluation, under the supervision and with the participation ofmanagement, including our principal executive officer and principal financialofficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-14.  Based upon this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to us (including our consolidated subsidiaries) that isrequired to be included in our periodic SEC reports.  There have been no significant changes in our internal controlsor in other factors that could significantly affect those controls subsequentto the date we carried out this evaluation.

 

37

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(b)           There have been no significant changes in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation described in the preceding paragraph.

 

38

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, theCompany caused this Registration Statement to be signed on its behalf by theundersigned thereunto duly authorized.

 

IWT TESORO CORPORATION

 
| By:                                                                                                                                                                          | /s/ Henry J. Boucher, Jr.               |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|--------|
|                                                                                                                                                                         | Henry J.  Boucher, Jr.,  President |
|                                                                                                                                                                         |                                    |
| Date: February 26, 2003                                                                                                                                                      |
|                                                                                                                                                                         |                                    |
| 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. |
|                                                                                                                                                                         |                                    |
| /s/ Henry J. Boucher, Jr.                                                                                                                                                    |                                    |
| Henry J.  Boucher, Jr.,  Principal Executive Officer                                                                                                                    |
|                                                                                                                                                                         |                                    |
| /s/ Henry J. Boucher, Jr.                                                                                                                                                    |                                    |
| Henry J.  Boucher, Jr.,  Interim Principal Financial Officer                                                                                                            |
|                                                                                                                                                                         |                                    |
| /s/ Henry J. Boucher, Jr.                                                                                                                                                    |                                    |
| Henry J.  Boucher, Jr.,  Director                                                                                                                                       |
|                                                                                                                                                                         |                                    |
| /s/ James R. Edwards, Director                                                                                                                                               |                                    |
| James Edwards, Director                                                                                                                                                      |
|                                                                                                                                                                         |                                    |
| /s/ Paul F. Boucher                                                                                                                                                          |                                    |
| Paul F.  Boucher, Director                                                                                                                                              |
|                                                                                                                                                                         |                                    |
| /s/ Forrest  Jordan                                                                                                                                                          |                                    |
| Forrest  Jordan, Director                                                                                                                                                    |
|                                                                                                                                                                         |                                    |
| /s/ Grey  Perna                                                                                                                                                              |                                    |
| Grey Perna,  Director                                                                                                                                                        |
|                                                                                                                                                                         |                                    |
| /s/ James  LaFond                                                                                                                                                            |                                    |
| James  LaFond, Director                                                                                                                                                      |
|                                                                                                                                                                         |                                    |
| /s/ Allen  Rosenberg                                                                                                                                                         |                                    |
| Allen  Rosenberg, Director                                                                                                                                                   |
|                                                                                                                                                                         |                                    |
| /s/ Carl G.  Anderson, Jr.                                                                                                                                                   |                                    |
| Carl G.  Anderson, Jr., Director                                                                                                                                        |
|                                                                                                                                                                         |                                    |
| /s/ Robert  Rogers                                                                                                                                                           |                                    |
| Robert  Rogers, Director                                                                                                                                                     |
|                                                                                                                                                                              |                                         |        |  |

 

39

 

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** **

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**AND**

**INTERIM CHIEF FINANCIAL OFFICER**

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

 

 
| Date: February 26, 2003 | By: /s/ Henry J. Boucher, Jr.                                          |   |
|-------------------------|------------------------------------------------------------------------|--------|
|                    | Henry J. Boucher, Jr.,                                                 |
|                    | President, Chief Executive  Officer and Acting Chief Financial Officer |

 

 

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