**U.S. SECURITIES AND EXCHANGECOMMISSION**

 

**Washington,D.C.  20549**

 

**FORM 10-KSB/A**

 

**(AmendmentNo. 2)**

 

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

 

**Forthe Year Ended December 31, 2002**

 

**CommissionFile No. 000-31267**

 

**IWT TESORO CORPORATION**

(Name of Small Business Issuerin 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 under Section 12(b) of the ExchangeAct:** None**

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

 

Securities registered under Section 12(g) ofthe Exchange Act:

**CommonStock, $.001 par value**

(Title of Class)

 

Check whether the issuer (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the issuer was required to file suchreports, and (2) has been subject to such filing requirements for the past90 days.

 

Yes    ý   No    o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of issuer’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB.

 

Portions of the Proxy Statement for the 2003 Annual Meeting ofShareholders are incorporated by reference in Part III, Items 10, 11, and12.

 

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

 

State the aggregate market value of the voting stock held bynon-affiliates computed by reference to the price at which the stock was sold,or the average bid and asked prices of such stock, as of a date specifiedwithin the past 60 days:  $6,836,511.00

 

**APPLICABLEONLY TO CORPORATE REGISTRANTS**

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date.  11,205,502 shares asof June 13, 2003.

 

Transitional Small Business Disclosure Format (check one)     Yes    o   No    ý

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

**None**

 

 

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**PART I**

 

**EXPLANATORYNOTE**

 

Tesoro has restated the consolidated balancesheets as of December 31, 2002 and 2001, and the consolidated statements ofoperations, stockholders’ equity and cash flows for the year then ended.  In particular, Management determined thatTesoro had been incorrectly calculating the accruals for sales commissions.Management revised this calculation and determined that accrued expenses were understatedby approximately $204,000 for the years ended December 31, 2002.   Additionally, management reassessed itsmethodology for accounting for sample and display boards and determined thatthis promotional merchandise should have been expensed when distributed ratherthan capitalized and depreciated. The adjustments resulting from therestatement decreased net income for December 31, 2002 and 2001 byapproximately $615,000 and $465,000, respectively. This change also reducedproperty and equipment as of December 31, 2002 and 2001 by approximately$2,223,000 and $1,607,000, respectively. In connection with the restatementsfor accrued expenses and sample and display boards described above, the relatedtax effect was recorded resulting in a gross deferred tax asset for the yearended December 31, 2002 of approximately $597,000.  Finally, as part of the recapitalizationtransaction of IWT effective October 1, 2002 (see Note 1), the Company and eachof the three stockholders of International Wholesale Tile, Inc. entered into arepurchase agreement to commence on January 1, 2003. The maximum number ofredeemable shares under the repurchase agreement was 450,000. The transactionwas accounted for by reducing additional paid in capital to the extent abalance existed with the remaining portion of the transaction applied toaccumulated deficit as of December 31, 2002. Other than the financial statements and related notes, and Management’sDiscussion and Analysis set forth in Item 1 of this periodic report, whichtakes into account the effect of the restatement, all other information is asdescribed in Amendment No. 1 to the 10-KSB/A for the year ended December 31,2002, filed with the Securities and Exchange Commission on June 30, 2003.

 

**ITEM 1.****    DESCRIPTION OF BUSINESS**

 

***Background***

 

IWT Tesoro Corporation (Tesoro) was organized in Nevada on May 3rd,2000 originally under the name “Ponca Acquisition Corporation” but changed itsname to IWT Tesoro Corporation on September 23, 2002. It was originallyorganized to attempt to locate and negotiate with a business entity for thecombination of that target company with it. On October 1, 2002, itacquired all of International Wholesale Tile, Inc.’s (IWT) common stockfrom three shareholders. IWT is a wholesale distributor of imported ceramic,porcelain and stone floor, wall and decorative tiles organized in 1994. Inexchange for the IWT stock, the IWT shareholders each received 3.0 millionTesoro shares, representing 87% of Tesoro’s then outstanding common stock.

 

In January 2003, Tesoro organized a Bermuda company, IWT TesoroInternational, Ltd. (International) that will own any internationalsubsidiaries. Tesoro also organized IWT Tesoro Transport, Inc.(Transport). Transport is a federally licensed freight broker that manages bothinbound and outbound freight for IWT.

 

Tesoro’s executive offices are located at 191 Post Road West, Westport,CT 06880 and our telephone number is (203) 221-2770 and our web site canbe found at*http://www.iwttesoro.com*.

 

Anytime we refer to “we”, “our” or “us” in this Description ofBusiness, we mean International Wholesale Tile, Inc.

 

***Business and GrowthStrategy***

 

We believe that we have built our reputation by supplying qualityproducts with outstanding customer service at competitive prices. We strive tostay up-to-date with the newest styles and trends in the ceramic tile andmarble industry. We also aim to introduce high quality new products to themarketplace 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. Other keys to oursuccess include

 

•      active merchandising programs that assistour dealer/customers to meet the consumer’s demand with products presented inattractive easy to visualize environments;

 

•      acting as the extension of our dealernetworks’ stock availability by warehousing levels consistent with the dealers’delivery requirements;

 

•      selling only at the wholesale level; neverto the consumer.

 

We hope to increase our business in these channels by expandinggeographic penetration and by extending the lines of product we offer andsupport.

 

In April 2003, we moved to our new 147,000 square foot facilitythat will enable us to stock more inventory for future growth.

 

During 2002, we created TesoroTM—The Collection, a branded collection ofhigh quality porcelain floor and wall tiles complemented by coordinateddecorative borders and listellos. We plan to expand the TesoroTM line ofproducts by building our proprietary TesoroTM brand awareness. We further intendto further grow by acquiring or merging with existing regional distributors.

 

Our short-term objectives are to:

 

•      Raise equity capital for our internalgrowth, to

 

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

 

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

 

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•      Expand further into the home centerbusiness,

 

•      Increase our product lines,

 

•      Increase investment in merchandisesampling and displays within our customer base.

 

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

 

•     Provide capital for expansionthrough compatible business combinations.

 

On a short-term basis, we intend to look to acquire assets ofbusinesses with products and services that complement our business. We alsointend to establish subsidiaries based in Spain and Italy to handle ourrelationships with manufacturers located in those countries.

 

***The Ceramic,Porcelain and Natural Stone Flooring and Wall Covering Market***

 

We operate in the floor covering industry, which has grown from$12.4 billion in sales in 1992 to $21.3 billion in 2001, but was down1% in the first ten months of 2002. In 2000, the United States floor coveringindustries’ primary categories were carpet and rugs (63%), ceramic tile (11%),vinyl and rubber (14%), hardwood (8%), and laminate (4%). Each of thesecategories has been positively impacted by:

 

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

 

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

 

•      Growth in vacation homes.

 

Compound average growth rates for units sold (measured by square yards)for each of the floor covering categories above for the period from 1996through 2002 have exceeded the growth rate of the United States’ gross domesticproduct over the same period. During this time, based on square footage, thecompound average growth rate was 9.7% for ceramic tile.

 

According to Market Studies, Inc., a recognized industry marketresearch firm, and the estimated 2002 market for ceramic tile in the UnitedStates was approximately $2.3 billion, with approximately 2.6 billionsquare feet sold, representing a 10.9% and 14.2% growth rate over 2001,respectively. The compound average growth rate of square footage shipments was9.7% from 1996 through 2002 for ceramic tile.

 

Imported ceramic tile makes up 76% of the United States consumption, or1.5 billion dollars and 2.1 billion square feet, as estimated byMarket Studies. 48% of imported ceramic tile comes from Italy, 18% from Spainand 8% from Brazil. The balance originates from a large number of countriesincluding Turkey, China and Portugal. The United States’ market is the fourthlargest consumer of tile in the global market representing about 20% of globalconsumption. Our products are primarily imported and our purchases distributionamong international suppliers approximates these national statistics.

 

The average price of ceramic tile continued to fall during 2002, albeitat a slower pace. This price decline limited the increase in the value ofshipped product from 2001 to 2002 to 10.9%. The strong demand for new andremodeled housing in the United States, coupled with the continuing shift bythe consumer away from carpet and toward hard surfaces, has resulted in aforecast by Market Studies that the demand will remain robust and that priceswill stabilize. Market Studies predicts that sales of imported ceramic tilewill reach $2.09 billion in 2007 and further states:

 

The high growth rate of ceramic tile relative to other flooring optionshas led to more full service distributorships, manufacturers, and retailersadding ceramic tile to their lines. With more floor space being devoted toceramic tile at retail, efforts at product differentiation have intensified.Licensing, a relatively new strategy in the ceramic tile marketplace, isheating up, including the following partnerships: Shaw Industries with MarthaStewart and Kathy Ireland; Witex with Laura Ashley, Armstrong’s Liz Claiborneline in partnership with Carpet One, and Marrazzi Group with Benetton.

 

Sales in the ceramic tile industry are influenced by economic andmarket factors including:

 

•      consumer confidence;

•      spending for durable goods;

•      interest rates;

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

•      the overall strength of the economy.

 

3

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“US Ceramic Tile Market-2002 Edition”, published by Market Studies,pointed to a market growth rate of approximately 5% to 7% per year. This growthrate is higher in the Sun Belt areas, including the Southeastern part of theUnited States, where we currently operate.

 

Glazed floor and wall tile represented 86% of the total industrydollars shipped in 2000. Unglazed mosaic and porcelain, 11% of the total, andquarry title, 3% of the total, represent the balance of the industry’s 2002dollars shipped. The ceramic title industry’s two primary markets, residentialapplications and commercial applications, represents 67.6% and 32.0% of theindustry total, respectively. Of the total residential market, 62% of thedollar shipments are for new construction.

 

***IWT’s Products***

 

We purchase our products on the world market. Approximately 50% of ourproducts are imported from Italy, 35% from Spain and 5% each from Brazil,Turkey and China. Each foreign manufacturer has registered agents in the UnitedStates that work with us, as well as with other distributors. We believe thatwe maintain close personal contact with our suppliers, visiting the plantsregularly and working with suppliers to influence design, quality andreliability. We do not purchase any raw materials, but only finished goods. Ourprincipal suppliers and the countries in which each is located include

 

•      Gruppo CBS, division of Kis Ceramiche,Italy;

•      Imolagres, Italy;

•      Ceramica Gomez, Spain;

•      Ceramica Colli, Italy;

•      Ceramica Fondavalle, Italy; and

•      Ceramica Gaya, S.A., Brazil

 

Our product types include ceramic tile, porcelain tile, tumbled marble,mosaic listellos and medallions, honed and filled marble, unfilled marble,resin travertine listellos, and polished medallions. Each year, new productsare added to our product line. For example, we have recently added granitecounter and backsplash tiles to our product mix. Items are removed when theybecome obsolete, which we define as having minimal sales in any consecutive 12-monthperiod.

 

We maintain a wide distribution of price points for our product. Ourlowest priced products include red body ceramic tiles to mid priced solid bodyporcelain to higher priced natural stone tiles. Pricing strategies are alsodesigned to provide incentives to customers for purchasing product in largerquantities. We ship product to our customers in quantities ranging from “cutorder” specific to a consumer’s project to full pallets of a single product tofull container and truckload packages. These larger quantities allow ourcustomers to stock their own product to service cash and carry consumers.

 

The market for ceramic tiles, once characterized by little or no brandrecognition, is beginning to enter into branding agreements with well-knowndesigner names such as Martha Stewart and Laura Ashley. In May 2002, weintroduced our proprietary brand TesoroTM. Tesoro is a collection of porcelaintiles and decorative inserts, borders, and accents that will be marketedthroughout the United States. We have invested in specifically designed displayracks that communicate the quality and value of our new brand.

 

We import our products into the Port of Miami. All our customers areapproved by sales territory managers and must qualify as IWT customers.Material is shipped to the customer base via our trucks or by common carrier.We generally ship same day on orders placed before 2:00 p.m. Most deliverypoints are one to two day services for the southeastern United States. Localtrucks deliver between Daytona Beach, Florida and Miami, Florida. Each day,common carriers pick up materials near the end of the business day to deliverto other parts of the country.

 

***Inventory***

 

We are committed to maintaining inventory levels that support the salesof our dealer network. Our new 147,000 square foot warehouse contains over6 million square feet of product; representing over 2500 SKU’s (individuallynumbered product items). We target an inventory turn over rate of 2.5 to 3.0.This turn over rate is established to minimize out of stock situations and toattain our goal of same day shipping for qualified orders received by 2 PM.

 

Industry trends toward product packages, i.e. floor and wall tilecombinations and the pre-organized tile, borders, decorative listellos, bullnose and end caps, increases the number of parts we must carry in stock toensure that our customer can meet the demand of their consumer.

 

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***Freight andTransportation Costs***

 

We base our distribution costs on a number of factors including, amongothers,

 

•      factory cost,

•      freight (international and domestic), and

•      duties, tariffs, taxes and otherregulatory costs.

 

Because ocean freight charges differ from country to country, ourselling price is based on factors specific to each international manufacturer.We pay all our international manufacturers in U.S. dollars. The strength ofU.S. dollar relative to a specific country’s currency will have an impact onthe price we pay for product. There is now a new security port charge of$150.00 per shipment that we must pay. Additionally, we also take into accountthat title to our products transfers at the port of the originating country. Wegenerally ship between ten and twenty containers at any one time. We currentlyestimate that our maximum exposure for loss would be approximately $150,000.Based on maritime loss history, cost of ocean marine insurance and our ultimateability to subrogate against the freight carrier, we self-insure in the eventof loss after title is taken.

 

However, we often place special orders on behalf of our customers. Ifany shipments were lost or damaged, our clients would not be able to receivetheir product in a timely fashion, which, in turn, could adversely affect ourrelationship with those customers. To date, we have only incurred minimallosses with respect to products that have been lost after it acquired title.Likewise, the outbound transportation costs differ depending on how far ourproducts are to be shipped.

 

Because of the increase in gasoline and fuel prices and othersurcharges, our shipping costs have increased. However, we have not yet passedany surcharges to all customers. As such, our gross margins may be lowerbecause we are currently absorbing these increased costs.

 

As a result of these increased shipping costs, Tesoro recentlyorganized IWT Tesoro Transportation, Inc., a federally licensed freightcarrier. By working with this affiliate company to supply a portion of ourshipping needs, we hope to decrease these costs.

 

***IWT’s Customer Baseand Distribution Channels***

 

We distribute our products through three separate distributionchannels.

 

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

 

•      The home center “buy-it-yourself/do-it-yourself”store market makes up our second distribution channel. These customerstypically operate under blanket purchase orders. The home center market offersus the opportunity to ship truck and container load volumes to centraldistribution hubs for final distribution by the customer. There are two basicprograms for home center stores. The first is a special order program.Consumers place orders from sample boards provided by us to the store. Thestore representatives forward these orders to us and we ship the product eitherdirectly to the consumer or to the store for pick-up by the consumer. Thesecond program is a stocking program, which provides for a home center store tomaintain specific product inventories for their cash and carry trade. The homecenter store channel currently accounts for about 10% of our revenue.

 

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

 

We maintain separate and coordinated sales forces for each of thechannels of distribution. We also sell different product series to each channelto avoid market saturation or channel conflict. Currently, we do not depend onany single customer for more than 2% of our sales.

 

***Merchandising***

 

We believe that a strong and focused merchandising program is a keycomponent to our success. A mainstay of this program is our branding of ourTesoroTM collection of coordinated and high end products. We have created aseries of product display units that assist our dealers with the communicationof product combinations to their consumer. We are

 

5

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continually updating these displays with new products. We have afifteen-year warranty program for TesoroTM products that we believe elevate thequality position of our products.

 

***Credit andCollection Procedures***

 

We maintain strict criteria for credit approval:

 

•                  Potentialcustomers must complete our credit application;

•                  Creditmust be approved by our credit department; and

•                  Wemay require a personal guaranty.

 

Once approved, typically our customers receive 30-day terms.

 

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

 

•                  Havea store front,

•                  Sellretail, and

•                  Havea forklift.

 

When sales orders are entered, our computer system notes if a customeris on credit hold. If so, those orders are given to our credit department todetermine whether the products can be shipped. Customers are generally given a15 day grace period and orders are held and not shipped once an invoice is60 days or older.

 

***Marketing, Promotionand Sales***

 

Our public relations and marketing activities focus on creating demandfor our products. We have an in-house advertising and marketing staff thatdevelops and coordinates our sales materials. We use trade magazines articles,specifically designed mailer programs and trade shows as our primarycommunication devices.

 

Our commission based sales force work with dealers to place theproducts in show rooms, educate the dealers regarding the quality and varietyof product available to them and work with our internal customer service staffto facilitate delivery. We employ a seventeen-person full time sales force mostof whom have been with us for five years after spending many years in various facets of thetile business.

 

***Competition***

 

We compete in the flooring industry with both large national companiesthat supply both soft and hard materials and with smaller regional distributorsthat focus specifically on ceramic, porcelain and stone. Vertically integrated companies such as ShawIndustries and Mohawk, while maintaining their dominant positions in the carpetmarket, are moving aggressively into the hard flooring sector. Dal-tile, asubsidiary of Mohawk, manufactures, wholesales and retails tile on a nationalbasis.

 

Regional competitors such as Master Tile, Florida Tile and Arizona Tileact as both wholesalers and retailers. In their markets, each supplies smallerdealers and distributors and also operates branded retail outlets. We currentlyonly distribute on a regional basis at a wholesale level.

 

We believe that our competitive strengths include:

 

*•      Focusingsolely on the wholesale segment of the distribution process.* We do not ownor operate direct to consumer locations. We work exclusively through dealersand stocking distributors who service the buying public. As a result, we do notcompete with our customers. Our customers can buy from us specific materials tomeet a consumer’s need, i.e. “cut orders” or can stock limited amounts ofproduct for cash and carry business by purchasing larger quantities.

 

•      *Gettinginvolved in designing products.* We actively participate in designingand selecting new color, texture and formats for emerging style tends. Ourfield sales force is constantly working with our customers to identify trendsin the market. Feedback from these sources is continuously shared with themanufacturers. Manufacturer’s representatives frequently meet with us and ourmanagement travels to the manufacturing sites to communicate the markets needs.

 

•      *Buildingour TesoroTM Brand Equity.* We are branding all our designs and manyof our products with our Tesoro Brand. We incorporate products from differentmanufacturers and different countries into programs that leverage the best ofeach source to create Tesoro collections. Unlike most other tile and ceramicproducts, Tesoro products include a 15-year warranty against wear.

 

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•      *Providingsuperior merchandising and customer support programs.* We maintain anactive sampling program to ensure that customers have the latest materials intheir showrooms. Our field sales force continually updates, refreshes andreplaces sales materials. We distribute literature to consumers referencing ourdealer network participants. Our field personnel work with the customer andtrain them on the appropriate use and care of the product. Our goal is to makethe dealers’ job as easy as possible.

 

•      *Implementingour Distribution Philosophy.* We see ourselves as an extension of thedealer warehouse. We aim to be responsive to our customers’ needs by shippingmost orders the same day they are received. We also carry stock to back-up ourcustomers in the cash and carry market.

 

By maintaining these competitive strengths, we believe that we canprofitably challenge our competitors for a greater share of our targetedmarket.

 

***GovernmentRegulations***

 

The Federal trade commission regulates IWT’s wholesale operations. TheFederal Motor Carriers Administration regulates Transport’s freight brokerage.International is an exempt company subject to Bermudian commercial law. We donot expect to import product into Bermuda and will therefore maintain ourexempt status. Both federal and state authorities regulate the distribution andsale of imported products. We have obtained all required federal and statepermits, licenses and bonds to operate our businesses. We make no assurancesthat our operations and profitability will not be subject to more restrictiveregulations, oversight or increased taxation by foreign, federal, state orlocal agencies.

 

***Acquisitions andother Interests***

 

Tesoro intends to expand its operating activities globally. We have hadpreliminary discussions with manufacturers, product aggregators and agencies inSpain, Italy and Brazil. We expect to take an interest position in severaloperations during 2003. In the United States, we hope to expand our geographical position byacquiring the assets of similar, but smaller, distributors and are in preliminarydiscussions with a distributor on the west coast. We cannot assure anyone,however, that any of these discussions will result in the intended acquisitionsor that any acquisitions, if made, will generate the planned revenue orprofits.

 

***Intellectual Property***

 

Weincorporate our proprietary brand TesoroTM in connection with acollection of porcelain tiles and decorative inserts, borders, and accents. Weare in the process of applying for federal trademark protection for ourtrademark, but unless and until our registration is granted, we must rely oncommon law to protect our brand. We make no assurances that this protectionwill be meaningful. We are not aware of any claims of infringement against usand we have not been involved in any related court proceedings.

 

***Employees***

 

IWT currently employs 70 non-union warehouse and administrative staffand 15 inside salespeople. IWT believes that its relationships with itsemployees are good. Tesoro currently has two employees. Neither Transport norInternational currently has any employees.

 

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**ITEM 2.****    DESCRIPTION OF PROPERTY**

 

Tesoro currently subleases office space in Westport, Connecticut. Wepay a monthly base services fee of $2,400.00 and our lease expires September 30,2003. Tesoro anticipates that it will be obtaining more permanent space in thenear future.

 

IWT currently leases approximately 147,000 square feet in Palm City,Florida, of which 5,000 square feet is for office space and the remaining142,000 square feet is for warehouse space. The term of the lease is for10 years as follows:

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

 

**ITEM 3.****    LEGAL PROCEEDINGS**

 

We are not a party to any material pending legal proceedings and, tothe best of our knowledge; no such action by or against us is contemplated,threatened or expected.

 

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

 

On March 27, 2003, a majority of Tesoro’s stockholders electednine Directors to its Board and ratified the firm of Sewell and Company as itsindependent accountants.

 

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**IWTTESORO CORPORATION AND SUBSIDIARY**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**YEARSENDED DECEMBER 31, 2002 AND 2001**

 

**TABLEOF CONTENTS**

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

 

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

 

To the Board of Directors

IWT Tesoro Corporation and Subsidiaries

Westport, CT

 

We have audited the accompanying consolidatedbalance sheets of IWT Tesoro Corporation and Subsidiaries as of December 31,2002 and 2001, and the related consolidated statements of operations, changesin stockholders’ equity, and cash flows for each of the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly,we express no such opinion. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of IWT Tesoro Corporation and Subsidiaries as of December31, 2002 and 2001, and the results of its operations, and its cash flows foreach of those years in conformity with accounting principles generally acceptedin the United States of America.

 

As discussed in Note 16 to the accompanyingconsolidated financial statements, the Company has restated the consolidatedbalance sheets as of December 31, 2002 and 2001, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearsended December 31, 2002 and 2001.

 

 

/s/ KANTOR, SEWELL &OPPENHEIMER, PA

 

Hollywood, Florida

January 17, 2003, except as to Note 16, whichis as of August 10, 2005

 

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND2001

 
| ** **                                                                                                      | ** ** | **2002**       | ** ** | **2001**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                                                                      | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ASSETS                                                                                                          |       |           |       |           |       |
| Current Assets:                                                                                                 |       |           |       |           |       |
| Cash                                                                                                            |       | $              | 574,046    |           | $          | 402,500 |   |
| Accounts receivable, net allowance for  doubtful accounts                                                       |       | 2,875,532      |       | 2,068,556      |       |
| Inventories                                                                                                     |       | 6,047,876      |       | 4,985,427      |       |
| Prepaid expenses                                                                                                |       | 286,820        |       | 23,022         |       |
| Deferred tax asset                                                                                              |       | 597,196        |       | —         |       |
| Total current assets                                                                                            |       | 10,381,470     |       | 7,479,505      |       |
|                                                                                                            |       |           |       |           |       |
| Property and equipment, net                                                                                     |       | 489,502        |       | 509,200        |       |
|                                                                                                            |       |           |       |           |       |
| Other assets                                                                                                    |       | 191,725        |       | 175,074        |       |
|                                                                                                            |       | $              | 11,062,697 |           | $          | 8,163,779 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                      |       |           |       |           |       |
|                                                                                                            |       |           |       |           |       |
| Current Liabilities:                                                                                            |       |           |       |           |       |
| Accounts payable                                                                                                |       | $              | 5,403,816  |           | $          | 4,043,787 |   |
| Accrued expenses                                                                                                |       | 354,863        |       | 128,653        |       |
| Current portion of capital lease  obligations                                                                   |       | 47,222         |       | 34,509         |       |
| Current portion of notes payable, other                                                                         |       | 48,780         |       | 52,215         |       |
| Total current liabilities                                                                                       |       | 5,854,681      |       | 4,259,164      |       |
|                                                                                                            |       |           |       |           |       |
| Long-Term Debt:                                                                                                 |       |           |       |           |       |
| Note payable, revolving line of credit                                                                          |       | 4,864,778      |       | 3,958,578      |       |
| Capital lease obligations                                                                                       |       | 108,438        |       | 83,632         |       |
| Subordinated notes payable, stockholders                                                                        |       | 448,712        |       | 463,072        |       |
| Notes payable, other                                                                                            |       | 64,872         |       | 134,722        |       |
| Total long-term debt                                                                                            |       | 5,486,800      |       | 4,640,004      |       |
| Total liabilities                                                                                               |       | 11,341,481     |       | 8,899,168      |       |
|                                                                                                            |       |           |       |           |       |
| Redeemable common stock (450,000 shares  issued and outstanding)                                                |       | 1,073,160      |       | —         |       |
|                                                                                                            |       |           |       |           |       |
| Stockholders’ Equity:                                                                                      |       |           |       |           |       |
| Preferred stock, $0.001 par value,  25,000,000 authorized; none issued                                          |       | —         |       | —         |       |
| Common stock, $0.001 par value, 100 million  shares authorized; 10,587,834 and 9,000,000 issued and outstanding |       | 10,588         |       | 9,000          |       |
| Additional paid in capital                                                                                      |       | —         |       | 116,400        |       |
| Less: subscription receivable                                                                                   |       |           |       | (84,000        | )          |
| Accumulated deficit                                                                                             |       | (1,362,532     | )          | (776,789       | )          |
|                                                                                                            |       | (1,351,944     | )          | (735,389       | )          |
|                                                                                                            |       | $              | 11,062,697 |           | $          | 8,163,779 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

11

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF OPERATIONS

YEARSENDED DECEMBER 31, 2002 AND 2001

 
| ** **                                            | ** ** | **2002**       | ** ** | **2001**       | ** ** |
|-------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                            | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| 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                                               |       | 4,045,537      |       | 2,479,814      |       |
| Delivery                                              |       | 1,245,174      |       | 979,701        |       |
| General and administrative                            |       | 610,627        |       | 219,781        |       |
| Lease expense                                         |       | 479,905        |       | 426,229        |       |
| Depreciation and amortization                         |       | 156,296        |       | 172,030        |       |
| Insurance                                             |       | 324,699        |       | 232,520        |       |
| Repairs and maintenance                               |       | 250,378        |       | 120,336        |       |
| Sales expenses                                        |       | 144,396        |       | 129,474        |       |
| Advertising                                           |       | 1,179,077      |       | 736,888        |       |
| Professional fees                                     |       | 150,085        |       | 78,952         |       |
| Travel and entertainment                              |       | 104,831        |       | 64,471         |       |
| Bad debts                                             |       | 3,085          |       | 120,356        |       |
|                                                  |       | 8,694,101      |       | 5,760,552      |       |
| Income from operations                                |       | 1,425,072      |       | 1,237,129      |       |
|                                                  |       |           |       |           |       |
| Other income/(expenses)                               |       |           |       |           |       |
| Interest expense                                      |       | (328,920       | )          | (424,527       | )          |
| Other income                                          |       | 9,526          |       | 10,069         |       |
| Other expense                                         |       | (35,700        | )          | —         |       |
| Gain (loss) on disposal                               |       | 5,979          |       | (511           | )          |
| Gain (loss) on Foreign Currency                       |       | 4,407          |       | 231            |       |
|                                                  |       | (344,708       | )          | (414,738       | )          |
|                                                  |       |           |       |           |       |
| Net income before taxes                               |       | 1,080,364      |       | 822,391        |       |
|                                                  |       |           |       |           |       |
| Income tax benefit                                    |       | 597,174        |       | —         |       |
|                                                  |       |           |       |           |       |
| Net income                                            |       | $              | 1,677,538  |           | $          | 822,391 |   |
|                                                  |       |           |       |           |       |
| Earnings per common share -  Basic & diluted |       | $              | 0.14       |           | $          | 0.09 |   |
|                                                  |       |           |       |           |       |
| Weighted Average Common Shares Outstanding:           |       |           |       |           |       |
| Basic and diluted                                     |       | 11,845,775     |       | 9,000,000      |       |

 

See Notes to ConsolidatedFinancial Statements.

 

12

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

 
| ** **                                                        | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional**   | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                        | ** ** | **Common  Stock** | ** ** | **Paid in** | ** ** | **Subscription** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                        | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**      | ** ** | **Receivable**  | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Balance,  December 31, 2001, as restated                     |       | 9,000,000         |       | $           | 9,000      |             | $          | 116,400         |       | $           | (84,000    | )          | $          | (776,789 | ) | $ | (735,389 | ) |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Year Ended  December 31, 2002:                               |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Distributions,  September 30, 2002                           |       | —            |       | —      |       | —           |       | —          |       | (1,864,020  | )          | (1,864,020 | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Payment of  subscription receivable                               |       | —            |       | —      |       | —           |       | 84,000          |       |        |       | 84,000     |       |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Net income, nine  months ended September 30, 2002            |       | —            |       | —      |       | —           |       | —          |       | 2,214,239   |       | 2,214,239  |       |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Balance  September 30, 2002 - Before Recapitalization        |       | 9,000,000         |       | 9,000       |       | 116,400          |       | —          |       | (426,570    | )          | (301,170   | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Recapitalization,  October 1, 2002                           |       | 1,800,000         |       | 1,800       |       | (116,400         | )          | —          |       | 3,542       |       | (111,058   | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Balance After  Recapitalization on October 1, 2002           |       | 10,800,000        |       | 10,800      |       | —           |       | —          |       | (423,028    | )          | (412,228   | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Reclassification  of redeemable stock                             |       | (450,000          | )          | (450        | )          |             |       |            |       | (60,086     | )          | (60,536    | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Issuance of shares  in exchange for legal services                |       | 15,000            |       | 15          |       | 40,635           |       | —          |       | —      |       | 40,650     |       |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Issuance of  shares to employees, directors and consultants (SIP) |       | 134,500           |       | 135         |       | 364,360          |       | —          |       | —      |       | 364,495    |       |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Issuance of  shares - private offering                            |       | 83,334            |       | 83          |       | 249,917          |       | —          |       | —      |       | 250,000    |       |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Exercise of  warrants                                             |       | 5,000             |       | 5           |       | 14,995           |       | —          |       | —      |       | 15,000     |       |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Net loss 3 months  ended December 31, 2002                   |       | —            |       | —      |       | —           |       | —          |       | (536,701    | )          | (536,701   | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Accretion of  redeemable stock                                    |       | —            |       | —      |       | (669,907         | )          | —          |       | (342,717    | )          | (1,012,624 | )          |
|                                                              |       |              |       |        |       |             |       |            |       |        |       |       |       |
| Balance  December 31, 2002, as Restated                      |       | 10,587,834        |       | $           | 10,588     |             | $          | —          |       | $           | —     |       | $          | (1,362,532 | ) | $ | (1,351,944 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

13

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,2002 AND 2001

 
| ** **                                                                                   | ** ** | **2002**       | ** ** | **2001**       | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                                                   | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                                                                         |       |           |       |           |       |
| Cash flows from operating activities:                                                        |       |           |       |           |       |
| Net income                                                                                   |       | $              | 1,677,538  |           | $          | 822,391 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |           |       |           |       |
| Depreciation and amortization                                                                |       | 156,296        |       | 172,030        |       |
| Deferred income taxes                                                                        |       | (597,174       | )          | —         |       |
| Common stock issued for services and  compensation                                           |       | 405,145        |       |           |       |
| Provision for doubtful accounts and reserve  for returns                                     |       | 3,085          |       | 99,000         |       |
| (Gain) loss on disposal of property and  equipment                                           |       | (5,979         | )          | 511            |       |
| Changes in operating assets and  liabilities:                                                |       |           |       |           |       |
| (Increase) Decrease in:                                                                      |       |           |       |           |       |
| Accounts receivable                                                                          |       | (786,221       | )          | (293,040       | )          |
| Inventories                                                                                  |       | (1,062,449     | )          | 263,783        |       |
| Prepaid expenses and other assets                                                            |       | (280,438       | )          | (136,469       | )          |
| Increase (Decrease) in:                                                                      |       |           |       |           |       |
| Accounts payable and accrued expenses                                                        |       | 1,441,114      |       | (752,232       | )          |
| Other Liabilities                                                                            |       | 5,160          |       | 3,815          |       |
| Net cash provided by operating activities                                                    |       | 956,088        |       | 179,789        |       |
|                                                                                         |       |           |       |           |       |
| Cash flows from investing activities:                                                        |       |           |       |           |       |
| Acquisitions of property and equipment                                                       |       | (58,048        | )          | (16,819        | )          |
| Proceeds from sale of equipment                                                              |       | 11,000         |       | —         |       |
| Net cash used in investing activities                                                        |       | (47,048        | )          | (16,819        | )          |
|                                                                                         |       |           |       |           |       |
| Cash flows from financing activities:                                                        |       |           |       |           |       |
| Proceeds from revolving line of credit                                                       |       | 26,010,639     |       | 19,682,105     |       |
| Payments on revolving line of credit                                                         |       | (25,105,628    | )          | (19,236,612    | )          |
| Proceeds from issuance of stock                                                              |       | 349,000        |       | —         |       |
| Payments of long-term debt                                                                   |       | (113,125       | )          | (28,969        | )          |
| Repayment of stockholder loan                                                                |       | (25,000        | )          | —         |       |
| Distribution to stockholders                                                                 |       | (1,864,020     | )          | (521,458       | )          |
| Proceeds from related party note                                                             |       | 10,640         |       | 205,000        |       |
| Net cash provided by (used in) financing  activities                                         |       | (737,494       | )          | 100,066        |       |
|                                                                                         |       |           |       |           |       |
| Net Increase in Cash                                                                         |       | 171,546        |       | 263,036        |       |
|                                                                                         |       |           |       |           |       |
| Cash, Beginning                                                                              |       | 402,500        |       | 139,464        |       |
| Cash, Ending                                                                                 |       | $              | 574,046    |           | $          | 402,500 |   |
|                                                                                         |       |           |       |           |       |
| Cash Paid (Received) During the Period for:                                                  |       |           |       |           |       |
| Interest expense                                                                             |       | $              | 328,920    |           | $          | 424,527 |   |
| Non-Cash Investing and Financing  Activities:                                                |       |           |       |           |       |

 

See Notes to ConsolidatedFinancial Statements.

 

14

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Stockholders’ equity note:

 

As a result of the recapitalization on October 1, 2002, theCompany is deemed to have issued 1,800,000 common shares to the stockholders ofIWT Tesoro Corporation (f/k/a Ponca Acquisition Corp.).

 

On October 4, 2002, the Company issued 15,000 shares of commonstock valued at $2.71 per share, or a total of $40,650 in exchange for legalservices rendered in the amount of $4,950. As a result, the Company recognizeda loss on settlement of $35,700. The value of the stock was based on theprivate offering price of $3.00 per unit; each unit consisting of one share ofcommon stock and 11⁄2 warrants to purchase 11⁄2 shares of common stock. Thewarrants were priced using the Black-Scholes option-pricing model at the dateof sale. Accordingly, the average value of the warrants using the pricing modelwas $.29, and the value of each share was $2.71.

 

On October 4, 2002, the Company issued 10,000 shares of commonstock valued at $2.71 per share, or a total of $27,100, to a director under theStock Incentive Plan for past services rendered resulting in an immediatecharge to operations.

 

On October 14, 2002, the Company issued 75,900 shares of commonstock valued at $2.71 per share, or a total of $205,689, to employees under theStock Incentive Plan for services rendered resulting in an immediate charge tooperations.

 

On October 14, 2002, the Company issued 8,600 shares of commonstock valued at $2.71 per share, 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 commonstock valued at $2.71 per share, or a total of $81,300, to directors under theStock Incentive Plan for past services rendered resulting in an immediatecharge to operations.

 

On October 15, 2002, the Company issued 10,000 shares of commonstock valued at $2.71 per share, or a total of $27,100, in exchange forconsulting services rendered resulting in an immediate charge to operations.

 

See notes to financial statements.

 

15

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**IWTTESORO CORPORATION AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED DECEMBER 31, 2002 AND 2001**

 

**NOTE 1     NATURE OFOPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Business Description*

 

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

 

On October 1, 2002, IWT Tesoro Corporation (an inactive publiclyheld company) acquired 100% of the outstanding stock of International Wholesale Tile, Inc. (IWT) inexchange for 83% of its outstanding common stock in a transaction accounted foras a recapitalization of IWT. IWT Tesoro Corporation and Subsidiary are hereinafterreferred to as “the Company”.

 

The subsidiary (IWT) is a wholesale distributor of imported ceramic,porcelain, and stone tile, dealing mainly in imported floor tiles.

 

*Accounting Estimates*

 

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

 

*Cash and Cash Equivalents*

 

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

 

*Accounts Receivable*

 

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

 

*Inventories*

 

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

 

*Property and Equipment*

 

Property and equipment are stated at cost. Depreciation is computedusing the straight-line method based on the estimated useful lives of theassets, which range from 3-10 years. Major expenditures for propertyacquisitions and those expenditures, which substantially increase the estimateduseful lives of the property, are capitalized. Expenditures for maintenance,repairs, and minor replacements are charged to expense as incurred.

 

Income Taxes

 

Prior to the acquisition, the Company’s subsidiary had elected to betaxed as an S corporation according to the provisions of the Internal RevenueService, and distributed profits totaling $521,458 for the year ended December 31,2001. A total of $1,864,020 was distributed through September 30, 2002.Upon acquisition by the Company on October 1, 2002, InternationalWholesale Tile, Inc. ceased to qualify as an S corporation. On October 1,2002, the Company began accounting for income taxes under Financial AccountingStandards Board (FASB) Statement No. 109,*Accounting for Income Taxes*. SFAS No. 109 is an asset andliability approach that requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenrecognized in the financial statements or tax returns. (See Note 9)

 

16

----

 

*Revenue Recognition*

 

Revenues are recognized when products are shipped through third partyproviders (FOB shipping point with freight allowed in most orders), or whenproducts are received and accepted by customer if delivered by company (FOBdestination). Title passes to the customer at the FOB point (shipping ordestination). Customers have the right to return merchandise within 30 days ofthe date of shipment. The Company did not establish an allowance for returnbecause they are infrequent, represent a small dollar amount and occur over afairly short time period following the sale.

 

*Long Lived Assets*

 

The Company continually evaluates the carrying value of property andequipment, goodwill and other intangible assets to determine whether there areany impairment losses. If indicators of impairment are present, and futureundiscounted cash flows are not expected to be sufficient to recover the assets’carrying amount, an impairment loss would be charged to operations in the periodidentified based on the difference between the carrying value and the fairvalue of the asset.

 

No reduction for impairment of long-livedassets was necessary at December 31, 2002.

 

*Stock Options*

 

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

 

*Stock Options*

 

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

 

Had compensation costs for the Company’s stock option been determinedon the fair market value at the grant dates for the options, consistent withStatement of Accounting Standards No. 123,*Accounting for Stock Based Compensation* (Statement No. 123),and the Company’s results of operations forthe year ended December 31, 2002 would have changed to the pro-formaamounts indicated.

 
| ** **                                                                                                                         | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income  as reported                                                                                                            |       | $        | 1,677,538  |     | $          | 822,391 |   |
| Add: Stock  based employee compensation cost determined under fair value based method for  all awards, net of related tax effects. |       | (2,697   | )          | —   |       |
| Pro-forma  net income                                                                                                              |       | $        | 1,674,841  |     | $          | 822,391 |   |
| Net income  per share basic – diluted                                                                                         |       |     |       |     |       |
| As reported                                                                                                                        |       | $        | 0.15       |     | $          | 0.09 |   |
| Pro-forma                                                                                                                          |       | $        | 0.15       |     | $          | 0.09 |   |

 

17

----

 

*Advertising and Promotion*

 

Advertising and promotion expenses are charged to expense during theperiod in which they are incurred. Promotional merchandise, which includes boards and sample packs, areheld in other inventories until they are shipped to the customer at which pointthey are expensed.  Advertising andpromotion expenses in the consolidated statement of operations, was $ 1,179,077and $ 736,888 for the years ended December 31, 2002 and 2001,respectively.

 

*Shipping and Handling Cost*

 

The Company offers free delivery on sales over 100 sq. ft. which is thebulk of the sales, therefore most invoices billed to customers do not includeshipping and handling charges. When shipping and handling charges are billed tocustomers, then they are included in revenue. The cost incurred to ship theproducts to customers is included in the Statement of Operations under DeliveryExpense. At December 31, 2002 and 2001 the total amount of DeliveryExpense was $1,245,174 and $979,701.

 

Shipping and handling expenses not included in the line item “DeliveryExpense” at December 31, 2002 and 2001 consisted of the following:

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

 

*Cost of Goods Sold*

 

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

 

General and Administrative Expenses

 

The Company includes the following in general and administrativeexpenses: bank service charges, bank audit fees, convention expense, dues andsubscriptions, employee benefits, utilities, office supplies, outside services,consulting fees, postage, telephone and miscellaneous expenses. At December 31,2002 and 2001 the total amount of general and administrative expenses was $610,627and $219,781.

 

*Accounting Pronouncements*

 

Statement No. 141,*BusinessCombinations* (SFAS 141) establishes revised standards for accountingfor business combinations. Specifically, the statement eliminates the poolingmethod, provides new guidance for recognizing intangible assets arising in abusiness combination, and calls for disclosure of considerably more informationabout a business combination. This statement is effective for businesscombinations initiated on or after July 1, 2001. The adoption of thispronouncement on July 1, 2001 did not have a material effect on theCompany’s financial position, results of operations or liquidity.

 

Statement No. 142,*Goodwill andOther Intangible Assets* (SFAS 142) provides new guidance concerningthe accounting for the acquisition of intangibles, except those acquired in abusiness combination, which is subject to SFAS No. 141, and the manner inwhich intangibles and goodwill should be accounting for subsequent to theirinitial recognition. Generally, intangible assets with indefinite lives, andgoodwill, are no longer amortized; they are carried at lower of cost or marketand subject to annual impairment evaluation, or interim impairment evaluationif an interim triggering event occurs, using a new fair market value method.Intangible assets with finite lives are amortized over those lives, with nostipulated maximum, and an impairment test is performed only when a triggeringevent occurs. This statement is effective for all fiscal years beginning after December 15,2001. The Company believes that the

 

18

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implementation of SFAS No. 142 on January 1, 2002 did nothave a material effect on the Company’s financial position, results ofoperations or liquidity.

 

In August 2001, the FASB issued SFAS No. 143,*Accounting for Asset Retirement Obligations.*The standard requires entities to record the fair value of a liability for anasset retirement obligation in the period in which it is incurred. When theliability is initially recorded, the entity capitalizes a cost by increasingthe carrying amount of the related long-lived asset. Over time, the liability is accretedto its present value each period, and the capitalized cost is depreciated overthe useful life of the related asset. Upon settlement of the liability, an entityeither settles the obligation for its recorded amount or incurs a gain or lossupon settlement. The standard is effective for fiscal years beginning after June 15,2002. The adoption of SFAS No. 143 will not have a material impact on theCompany’s financial statements.

 

*Accounting Pronouncements*

 

Statement No. 144,*Accountingfor the Impairment or Disposal of Long-Lived Assets* supersedesStatement No. 121,*Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of*(SFAS No. 121). Though it retains the basic requirements of SFAS No. 121regarding when and how to measure an impairment loss, SFAS No. 144provides additional implementation guidance. SFAS No. 144 excludesgoodwill and intangibles not being amortized among other exclusions. SFAS No. 144also supersedes the provisions of APB No. 30,*Reporting the Results of Operations*, pertaining todiscontinued operations. Separate reporting of a discontinued operation isstill required, but SFAS No. 144 expands the presentation to include acomponent of an entity, rather than strictly a business segment as defined inSFAS No. 131,*Disclosures aboutSegments of an Enterprise and Related Information*. SFAS No. 144also eliminates the current exemption to consolidation when control over asubsidiary is likely to be temporary. This statement is effective for allfiscal years beginning after December 15, 2001. The Company believes thatthe implementation of SFAS No. 144 did not have a material effect on theCompany’s financial position, results of operations or liquidity.

 

In April 2002, the FASB issued SFAS No. 145, Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13and Technical Corrections that, among other things, rescinded SFAS No. 4,Reporting Gains and Losses from Extinguishment of Debt. With the rescission ofSFAS No. 4, the early extinguishment of debt generally will no longer beclassified as an extraordinary item for financial statement presentationpurposes. The provision is effective for fiscal years beginning after May 15,2002. The Company does not anticipate that the adoption of SFAS No. 145will have a material effect on its financial position or results of operations.

 

In June 2002, the FASB issued SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities,* which replaces Emerging Issues Task Force IssueNo. 94-3,*Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).* The newstandard required companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan. The statement is to be applied prospectively to exit ordisposal activities initiated after December 31, 2002. The Company doesnot anticipate that the adoption of SFAS No. 145 will have a materialeffect on its financial position or results of operations.

 

In December 2002, the FASB issued SFAS No. 148,*Accounting for Stock-Based Compensation—Transitionand Disclosure,* which amended SFAS No. 123,*Accounting for Stock-Based Compensation.*The new standard provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. Additionally, the statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in the annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used in reported results. Thisstatement is effective for financial statements for fiscal years ending after December 15,2002. In compliance with SFAS No. 148, the Company has elected to continueto follow the intrinsic value method in accounting for its stock-based employeecompensation arrangement as defined by APB No. 25.

 

*Earnings per Share*

 

Basic earnings per share for each year is computed by dividing incomefor the year by the weighted average number of common shares outstanding duringthe year. Diluted earnings per share include the effects of common stockequivalents to the extent they are dilutive. At December 31, 2002 allcommon stock equivalents were antidilutive and therefore diluted earnings pershare equaled basic earnings per share.

 

Basic and diluted weighted average number of shares outstanding is asfollows:

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

 

19

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At December 31, 2002, the total number of additional shares that couldpotentially dilute basic EPS in the future, but were not included in thecomputation of diluted EPS because of their antidilutive effect, was 565,000.At December 31, 2001, there were no common stock equivalents that couldpotentially dilute basic EPS in the future.

 

**NOTE2     CONCENTRATION OF CREDIT RISK**

 

Financial instruments that potentially subject the Company to creditrisk include cash on deposit with two financial institutions amounting to $572,846at December 31, 2002, which was insured for up to $100,000 per financialinstitution by the U.S. Federal Deposit Insurance Corporation.

 

The Company obtains detailed credit evaluations of customers andestablishes credit limits as required and routinely assesses the financialstrength of its customers. The Company competes primarily in the sale ofceramic tile and marble markets and sells its products to a multitude ofcustomers. There is no disproportionate concentration of credit risk.

 

**NOTE 3     ACCOUNTSRECEIVABLE**

 

Accounts receivable at December 31, 2002 and 2001 consisted of thefollowing:

 
| ** **                            | ** ** | **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 years ended December 31, 2002 and 2001was $3,085 and $120,356, respectively.

 

**NOTE 4     INVENTORY**

 

At December 31, 2002 and 2001, inventory consisted of thefollowing:

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

 

Inventory in transit consists of merchandise purchased overseas whichis not yet received in the warehouse. The Company obtains legal title at theshipping point. Inventory cost includes the purchase price and in-boundfreight.

 

**NOTE 5     PROPERTYAND EQUIPMENT**

 

Property and equipment at December 31, 2002 and 2001 consisted ofthe following:

 
| ** **                     | ** ** | **2002** | ** ** | **2001** | ** ** | **Depreciation  Period  in Years** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|------------------------------------|------------|
| Furniture  and fixtures        |       | $        | 89,238     |     | $          | 77,832                             |       | 5-10 |   |
| Machinery  and equipment       |       | 326,165  |       | 219,852  |       | 7-10                               |       |
| Vehicles                       |       | 207,071  |       | 273,967  |       | 5                                  |       |
| Computer  equipment            |       | 131,407  |       | 110,099  |       | 3-5                                |       |
| Leasehold  improvements        |       | 108,220  |       | 108,220  |       | 7                                  |       |
|                           |       | 862,101  |       | 789,970  |       |                               |       |
| Less  accumulated depreciation |       | (372,599 | )          | (280,770 | )          |                               |       |
|                           |       | $        | 489,502    |     | $          | 509,200                            |       |   |   |

 

Depreciation expense for the years ended December 31, 2002 and 2001was $ $129,732 and $120,371, respectively. (See Note 8)

 

20

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**NOTE 6     NOTES PAYABLE**

 

The Company has outstanding notes payable at December 31, 2002 and2001 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 |   |

 

*Notes Payable—Related Parties*

 

These notes may be paid down to a minimum balance of $85,000 inaccordance with a Subordination Agreement dated November 13, 2002.

 

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

 

21

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| ** **                                                                                                                                                                            | ** ** | **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 expense related to these loans was $9,361 and$15,328 at December 31, 2002 and 2001, respectively.

 

Long-term debt maturities for all notes payable for each of the nextfive years and thereafter are as follows:

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

 

**NOTE 7     LOANPAYABLE**

 

On November 21, 2000, the subsidiary (IWT) entered into a new loanand security 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 and restated effective November 13,2002, whereas the amount of the maximum credit was increased from $5,000,000 to$7,500,000. The average interest rate was 5% and 6% for the years ended December 31,2002 and 2001, respectively. The subsidiary (IWT) owed $4,864,778 and$3,958,578 against these revolving loansat December 31, 2002 and 2001, respectively.

 

The subsidiary (IWT) is subject to a number of restricted covenantsunder the debt agreement. The subsidiary (IWT) is in compliance with allcovenants during the years ended December 31, 2002 and 2001.

 

The total interest expense related to theseloans was $227,022 and $298,556 at December 31, 2002 and 2001,respectively.

 

22

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**NOTE 8     LEASES**

 

*Capital Leases*

 

The Company’s property under capital leases is included in property andequipment (See Note 5) and is summarized 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 |   |

 

*Operating Leases*

 

The Company leases office and warehouse space under a non-cancelableoperating lease, which has an initial term in excess of one year. During 2001,the Company negotiated a new ten-year lease agreement for a 147,000 square footwarehouse and office facility. The Company does not begin paying rent until 30days after the landlord completes construction, obtains a certificate ofoccupancy and notifies the Company that it can occupy the premises. It isanticipated that the Company will obtain access to the new facility on or aboutApril 1, 2003 and begin paying rent on or about May 1, 2003.

 

At December 31, 2002, future minimum annual lease payments underoperating and capital leases are as follows:

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

 

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

 

Total interest expense under capital leases was $9,429 and $13,199 forthe years ended December 31, 2002 and 2001, respectively.

 

**NOTE 9     INCOMETAXES**

 

During the first nine months of 2002, the subsidiary, InternationalWholesale Tile Inc. was taxed as an S corporation according to the provisionsof the Internal Revenue Code. Accordingly, no provision or liability forFederal income taxes is reflected in the accompanying statements for thatperiod of time.

 

Instead, the stockholders are liable for individual Federal incometaxes on their respective share of the Company’s taxable income. S corporationspay distribution of profits in lieu of dividends.

 

For the three months ended December 31 2002, the Company had a taxloss due to temporary differences. The Company has a federal net operating losscarryforward at December 31, 2002 of $500,374, subject to annuallimitations prescribed by the Internal Revenue Code, that are available tooffset future taxable income through 2022. No valuation allowance has beenrecorded to offset the net deferred taxes due to the certainty of the Company’sability to generate future taxable income.

 

The provision for income taxes at December 31, 2002 consisted of adeferred tax asset of $597,196.

 

23

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

 
| Deferred tax  assets:    |   |    |    |
|--------------------------|--------|---------|---------|
| Loss  carryforward       |   | $       | 188,291 |   |
| Allowance  for bad debts |   | 31,325  |    |
| Depreciation             |   | 377,095 |    |
| Contribution  carryover  |   | 485     |    |
|                     |   |    |    |
| Net deferred  tax asset  |   | $       | 597,196 |   |

 

Proforma tax and EPS data as if the Company had been a taxable entityin 2001:

 
| ** **               | ** ** | **Historical** | ** ** | **Pro forma** | ** ** |
|--------------------------|------------|----------------|------------|---------------|------------|
| Revenues                 |       |           |       |          |       |
| Sales, net               |       | $              | 19,626,819 |          | $          | 19,626,819 |   |
| Cost of  goods sold      |       | 12,629,138     |       | 12,629,138    |       |
|                     |       |           |       |          |       |
|                     |       | 6,997,681      |       | 6,997,681     |       |
| Operating  expense       |       | 5,760,522      |       | 5,760,522     |       |
| Other  income/(expense)  |       | (414,738       | )          | (414,738      | )          |
|                     |       |           |       |          |       |
| Net income  before taxes |       | 822,391        |       | 822,391       |       |
| Income tax  expense      |       | 0              |       | (247,375      | )          |
|                     |       |           |       |          |       |
| Net income               |       | $              | 822,391    |          | $          | 575,016 |   |
|                     |       |           |       |          |       |
| Earnings per  share      |       | $              | 0.09       |          | $          | 0.06 |   |

 

24

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** NOTE10     STOCKHOLDERS’ EQUITY**

 

The Articles of Incorporation provide for the authorization of25,000,000 shares of convertible preferred stock at $0.001, and 100,000,000shares of common stock at $0.001 par value. Each share of preferred stock isconvertible into 1 share of common stock. At December 31, 2002 11,037,834shares of common stock were issued and outstanding. Of those shares, 450,000were reclassified to Redeemable Common Stock to address the repurchaseagreement by which three shareholders could redeem up to 450,000 shares ofcommon stock (See Note 13)

 

*Common Stock*

 

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

 

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

 

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

 

On October 4, 2002, the Company issued 15,000 shares of commonstock valued at $2.71 per share or a total of $40,650 in exchange for legalservices rendered in the amount of $4,950. As a result, the Company recognizeda loss on settlement of $35,700. The value of the stock was based on theprivate offering price of $3.00 per unit; each unit consisting of one share ofcommon stock and 11⁄2 warrants to purchase 11⁄2 shares of common stock. Thewarrants were priced using the Black-Scholes option pricing model at the dateof sale. Accordingly, the average value of the warrants using the pricing modelwas $.29, and the value of each share was $2.71.

 

On October 4, 2002, the Company issued 10,000 shares of commonstock valued at $2.71 per share, based on the contemporaneous offering price,or a total of $27,100 to a director under the Stock Incentive Plan for pastservices rendered resulting in an immediate charge to operations.

 

On October 14, 2002, the Company issued 75,900 shares of commonstock valued at $2.71 per share, based on the contemporaneous offering price,or a total of $205,689 to employees under the Stock Incentive Plan for servicesrendered resulting in an immediate charge to operations.

 

On October 14, 2002, the Company issued 8,600 shares of commonstock valued at $2.71 per share, based on the contemporaneous offering price,or a total of $23,306 to four individuals under the Stock Incentive Plan inexchange for consulting services rendered resulting in an immediate charge tooperations.

 

*Common Stock*

 

On October 14, 2002, the Company issued 30,000 shares of commonstock valued at $2.71 per share, based on the contemporaneous offering price,or a total of $81,300 to directors under the Stock Incentive Plan for pastservices rendered resulting in an immediate charge to operations.

 

On October 15, 2002, the Company issued 10,000 shares of commonstock valued at $2.71 per share, based on the contemporaneous offering price,or a total of $27,100 in exchange for consulting services rendered resulting inan immediate charge to operations.

 

On October 21, 2002, the Company issued 53,334 shares of commonstock and 80,000 warrants for $3.00 per unit, or a total of $160,000, toaccredited investors pursuant to the private offering. (See Note 17)

 

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

 

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

 

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

 

*Fair Value of Shares Issued*

 

In absence of recent market determined prices of the common shares, thecompany valued the shares after the private offering (See Note 17) of $3.00 perunit, with an unit consisting of 1 share of common stock and 11⁄2 warrants topurchase 11⁄2 shares of common stock. The warrants were valued at $.29 by usingthe Black-Scholes pricing model at the date of sale. Consequently, the fairvalue of the shares of common stock included in the unit was determined to be$2.71.

 

25

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**NOTE 11     STOCKOPTIONS AND COMPENSATION PLAN**

 

*Stock Compensation Plan*

 

On December 27, 2001, IWT Tesoro Corporation adopted the “StockIncentive Plan.” The Company’s Stock Incentive Plan provides that eligibleemployees, consultants, and affiliates may be granted shares of common stock.Under the plan, the options granted are non-qualified stock options, incentivestock options, and restricted stock. The aggregate total common stock that maybe issued is 4,000,000 shares. For the year ended December 31 2002,124,500 restricted shares were issued to employees, directors and consultantsfor services rendered under the “Stock Incentive Plan.” For the year ended December 312001, no restricted shares were issued to employees, directors and consultantsfor services rendered under the “Stock Incentive Plan.” All restricted sharesissued under the plan are currently not registered and are subject to Rule 144without any additional restrictions imposed by the Compensation Committee atthe present time. The restricted shares issued to employees were recorded atthe fair value on the grant date. (See Note 10*Fair Value of Shares Issued*).

 

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

 

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

 

All options were granted to employees, and accounted for according toAPB 25; therefore no compensation expense was recognized.

 

For financial statement disclosure purposes, the fair market value ofeach stock option granted to officers and employees during 2002 was establishedat the date of grant using the Black-Scholes option pricing model in accordancewith 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 at December 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 |   |
|                               |            |                                      |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

26

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**NOTE 12     WARRANTS**

 

The Company sold 125,000 warrants as part of the private offering heldat the end of the year 2002, at an initial exercise price of $3.00 per share,expiring five years from the date of sale, exchangeable for 125,000 shares ofoutstanding 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 December 31,2002:

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

 

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

 

Changes during the year are presented as follows:

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

 

The following 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 per share at the beginning ofeach calendar quarter following the first public sale of the Company’s commonstock, pursuant to its effective Form 221 to be filed with the NationalAssociation of Securities Dealers.

 

**NOTE13     ACQUISITION**

 

On October 1, 2002, the Company acquired International WholesaleTile, Inc. In connection with the legal form of this transaction,International Wholesale Tile, Inc. became a wholly owned subsidiary of IWTTesoro Corporation. A total of 9,000,000 shares of common stock were issued forthe acquisition. For accounting purposes, the acquisition has been treated as acapital transaction and as a recapitalization of International Wholesale Tile, Inc.The financial statements became those of International Wholesale Tile, Inc.,with adjustments to reflect the changes in equity structure. The operations arethose of International Wholesale Tile, Inc. for all periods presented, andthose of IWT Tesoro Corporation from the recapitalization date. Theaccompanying consolidated balance sheets reflect the assets and liabilities athistorical cost of IWT Tesoro Corporation and International Wholesale Tile, Inc.at December 31, 2002; and the assets and liabilities at historical cost ofInternational Wholesale Tile, Inc. at December 31, 2001.

 

27

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As part of the transaction, the Company and each of the threeshareholders of International Wholesale Tile, Inc. entered into arepurchase agreement, to commence on January 1, 2003 for three years, bywhich the three shareholders may sell a certain amount of the Company’s commonstock back to the Company for a price based on an amount equal to 88% of theaverage trading price of the Company’s common stock so long as the stock istrading. The amount of stock is generally up to 25,000 shares for the firstyear, up to 50,000 shares for the second year, and up to 75,000 shares for thethird year. The repurchase agreement is contingent upon trading of the Company’sstock on the NYSE, the ASE, the NASDAQ, the Over the Counter Bulletin Board, orthe “Pink Sheets”. The maximum number of redeemable shares under the repurchaseagreement is 450,000.

 

On October 1, 2002, the date of the repurchase agreement, theCompany reclassified 450,000 redeemable shares to temporary equity at theirredeemable value for a total of $60,536. At December 31, 2002, the Companyadjusted the carrying value of the redeemable shares to reflect the change inthe redeemable value at the end of the year. This adjustment resulted in acharge to Additional Paid in Capital in the amount of $1,012,624. At December 31,2002, the maximum possible cash obligation related to redeemable common stockunder the repurchase agreement was $1,073,160, based on the repurchase price of88% of the fair value of the common stock at December 31, 2002 for amaximum of 450,000 shares.

 

**NOTE 14     RELATEDPARTY TRANSACTIONS**

 

The Company had a receivable at December 31, 2001 from ashareholder, 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 due to 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 loan occurred during the ordinary course ofbusiness, bearing no interest, and is due on demand. In the opinion ofmanagement, this loan bears no more than normal credit risk.

 

**NOTE15     EMPLOYMENT AGREEMENTS**

 

*IWT Tesoro Corporation*

 

On December 29, 2001, the board of directors of IWT Tesoro(Company) elected Henry J. Boucher, Jr. to serve as its president for anannual salary of $120,000. Mr. Boucher had signed a Salary DeferralAgreement with the Company, which was terminated by the board of directors. Alldeferred compensation for the year 2002 was paid to Mr. Boucher. Mr. Boucher’semployment may be terminated for cause at any time and within 30 days withoutcause.

 

*International Wholesale Tile, Inc.*

 

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

 

**NOTE16     RESTATEMENT**

 

The Company has restated the consolidated balance sheets as of December 31,2002 and 2001, and the consolidated statements of operations, stockholders’equity and cash flows for the year then ended as described below:

 

***Accrued Expenses***

 

Management determined that the Company had been incorrectly calculationthe accruals for sales commissions. Management revised this calculation anddetermined that accrued expenses were understated by approximately $204,000 asof December 31, 2002.

 

***Sample and DisplayBoards***

 

Management reassessed itsmethodology for accounting for sample and display boards and determined thatthis promotional merchandise should have been expensed when distributed ratherthan capitalized and depreciated. The adjustments resulting from therestatement decreased net income by approximately $616,000 and $465,000 for theyears ended December 31, 2002 and 2001, respectively. This change alsoreduced property and equipment as of December 31, 2002 and 2001 byapproximately $2,223,000 and $1,607,000, respectively.

 

***Deferred Taxes***

 

In connection with therestatements for accrued expenses and sample and display boards describedabove, the related tax effect was recorded resulting in a gross deferred taxasset for the year ended December 31, 2002 of approximately $597,000.

 

***Stockholders Equity***

 

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

 

The effects ofthese changes are summarized as follows:

 
| ** **                   | ** ** | **2002**                     | ** ** | **2001**        | ** ** |
|------------------------------|------------|------------------------------|------------|-----------------|------------|
| ** **                   | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| As of December 31:      |       |                         |       |            |       |   |   |   |   |   |   |   |   |
|                         |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| Consolidated  Balance Sheet: |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| Property and  equipment, net |       | 2,712,422                    |       | (2,222,920      | )          | 489,502 |   | 2,116,571 |   | (1,607,371 | ) | 509,200 |   |
| Deferred tax  assets         |       | 34,348                       |       | 562,848         |       | 597,196 |   | — |   | — |   | — |   |
| Accrued  expenses            |       | 151,064                      |       | 203,799         |       | 354,863 |   | 128,653 |   | — |   | 128,653 |   |
| Additional  paid in capital  |       | (686,068                     | )          | 686,068         |       | — |   | 116,400 |   | — |   | 116,400 |   |
| Retained  earnings (deficit) |       | (184,740                     | )          | (1,177,792      | )          | (1,362,532 | ) | 830,582 |   | (1,607,371 | ) | (776,789 | ) |

 
| ** **                             | ** ** | **2002**                     | ** ** | **2001**        | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------|------------|
| ** **                             | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| For the Year  Ended December 31:  |       |                         |       |            |       |   |   |   |   |   |   |   |   |
|                                   |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| Consolidated  Statement of Operations: |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| Net Sales                              |       | $                            | 25,387,708 |            | $          | — |   | $ | 25,387,708 |   | $ | 19,626,819 |   | $ | — |   | $ | 19,626,819 |   |
| Gross profit                           |       | 10,119,173                   |       | —          |       | 10,119,173 |   | 6,997,681 |   | — |   | $ | 6,997,681 |   |
| Operating  expenses                    |       | 7,874,786                    |       | 819,315         |       | 8,694,101 |   | 5,295,825 |   | 464,727 |   | 5,760,552 |   |
| Income  (loss) before income taxes     |       | 1,899,679                    |       | (819,315        | )          | 1,080,364 |   | 1,287,118 |   | (464,727 | ) | 822,391 |   |
| Income tax  benefit (expense)          |       | 34,348                       |       | 562,826         |       | 597,174 |   | — |   | — |   | 0 |   |
| Net Income  (loss)                     |       | 1,934,027                    |       | (256,489        | )          | 1,677,538 |   | 1,287,118 |   | (464,727 | ) | 822,391 |   |
|                                   |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| Earnings  (loss) per share:            |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| Basic and  Diluted                     |       | $                            | 0.19       |            | $          | (0.04 | ) | $ | 0.15 |   | $ | 0.14 |   | $ | (0.05 | ) | $ | 0.09 |   |

 

28

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**NOTE 17     PRIVATEOFFERING**

 

The Company adopted a subscription agreement on October 1, 2002 tocommence a private offering of its common stock to accredited investors onlyfor up to 1.0 million units at $3.00 per unit; each consisting of one (1) shareof common stock and warrants to purchase 11⁄2 shares initially at $3.00 pershare. The price of the warrants will increase by $.25 per share at thebeginning of each calendar quarter following the first public sale of thecommon stock of IWT Tesoro Corporation pursuant to the Company’s form 211 to befiled with the National Association of Securities Dealers (NASD).

 

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

 

**NOTE 18     SEGMENTINFORMATION**

 

The Company manages its operations as one segment and all revenue isderived from customers in the United States.

 

**NOTE19     SUBSEQUENT EVENTS**

 

On January 8, 2003, the Company incorporated a subsidiary, IWTTesoro International, Ltd. (ITIL). This subsidiary was set up as a foreignsubsidiary, to be based in Bermuda to handle future operations of foreignsubsidiaries.

 

On January 24, 2003, the Company set up IWT Tesoro Transport, Inc.(ITTI). Initially, this corporation will be a transport broker, but futureplans include overland transport of tile from Florida to destinations withinthe United States and return shipments of other freight back to Florida.

 

29

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**PART II**

 

**ITEM5.****                             MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

(a)                                  *Market Information*.  Tesoro’s commonstock has not yet commenced trading on any quotation system or exchange.

 

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 transaction involving a penny stock, unless exempt,the rules require:

 

(i)                                     thata broker or dealer approve a person’s account for transactions in penny stocksand

 

(ii)                                  thebroker or dealer receives from the investor a written agreement to thetransaction, setting forth the identity and quantity of the penny stock to bepurchased.

 

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

 

(i)                                     obtainfinancial information and investment experience and objectives of the person;and

 

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

 

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

 

(i)                                     setsforth the basis on which the broker or dealer made the suitabilitydetermination and

 

(ii)                                  thatthe broker or dealer received a signed, written agreement from the investorprior to the transaction.  Disclosure also has to be made about the risksof investing in penny stocks in both public offerings and in secondary trading,and about commissions payable to both the broker-dealer and the registeredrepresentative, current quotations for the securities and the rights andremedies available to an investor in cases of fraud in penny stocktransactions.

 

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.

 

Determination of our Share Price

 

An arbitrary process based upon a subjective evaluation by usdetermined the price of the common shares stated in this prospectus of $5.50and the exercise price of the warrant of $7.00. Among the factors considered indetermining the initial estimated price of the common shares are:

 

•                  Ourhistory and our prospects;

•                  Theindustry in which we operate;

•                  Thestatus and development prospects for our products;

•                  Ourpast and present operating results;

•                  Ourexecutive officers experience; and

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

 

Our offering price and the warrant exercise price should not beconsidered an indication of the actual value of our securities offered in thisprospectus. These prices are subject to change as a result of market conditionsand other factors and we cannot assure anyone that these securities can beresold at or above the initial public offering price.

 

Our Stockholders

 

At June 13, 2003, 11,205,502 shares of common stock wereoutstanding, which were held by approximately 149 stockholders of record.

 

30

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Our Dividend Policy

 

We have never paid, and do not intend to pay, any cash dividends on ourcommon stock in the current year. Therefore in all likelihood, an investor inthis offering will only realize a profit on his investment, in the short term,if the market price of our common stock increases in value.

 

Securities Authorized to be Issued upon our Equity Compensation Plans

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

 

----

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

 

**ITEM6.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.**

 

The following discussion should be read along with our financialstatements, which are included in another section of this prospectus. Thisdiscussion contains forward-looking statements about our expectations for ourbusiness and financial needs. These expectations are subject to a variety ofuncertainties and risks that may cause actual results to vary significantlyfrom our expectations. The cautionary statements made in this prospectus shouldbe read as applying to all forward-looking statements in any part of thisprospectus.

 

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 “Management’s Discussion and Analysis or Plan ofOperations” discussion to “the company,” “our,” “we” or “us” refers to Tesoro.

 

Effective October 1, 2002, we acquired International WholesaleTile, Inc. (IWT) through a share exchange and IWT became our wholly ownedsubsidiary. We issued a total of 9 million shares of our common stock inexchange for all of the IWT shares. As part of the transaction, Tesoro and eachof the three IWT stockholders entered into a repurchase agreement by which thethree stockholders may each sell a total of 150,000 shares of Tesoro’s commonstock over a three-year period back to us for a price based on an amount equalto 88% of its then weighted average trading price.  This agreement wasterminated on June 26, 2003.  At that time, the common stock was nottrading on any exchange or quotation system.

 

Through IWT, we provide hard floor and wall covering materialsprimarily ceramic, porcelain and granite tiles to the new construction andremodeling industries for the commercial and residential marketplaces. Wedistribute our products through a network of independently owned dealers anddistributors, buying groups and home center retailers. We currently purchaseour products predominately from foreign manufacturers.

 

Our primary source of revenue is the sale of hard flooring and wallcovering materials and our primary costs relate to the acquisition, warehousingand 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 working capital are a $7.5 million (US)revolving line of credit from a division of a large US commercial bank,stockholders’ equity and our suppliers who have extended us terms.Specifically, the terms we have negotiated with our international suppliers aremore advantageous than those we extend to our customers. This allows us, insome instances, to collect our receivables prior to paying our suppliers.During 2003, we expect to begin trading our stock on the OTC-BB and to raiseequity

 

31

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through the public market. Any new equity raised will be used tostrengthen our balance sheet and to provide capital for continued growth.

 

In the first quarter of 2003, we have created two new wholly ownedsubsidiary companies. The first is IWT Tesoro International Ltd, a Bermudabased exempt company. A Bermuda exempt company is a company domiciled inBermuda that is not actively involved in trade or business on the island and istherefore exempt from certain licensing requirements. International will serveas the holding company for any international based ventures we need to supportexpanding our sales effort. The other subsidiary is IWT Tesoro Transport, Inc.,a Florida corporation, and a licensed freight broker that will handle our inand out bound freight operations.

 

Results of Operations for the year ending December 31, 2002

 

The following discussion and analysis should be read in conjunctionwith the financial statements and notes thereto that appear elsewhere in thisdocument. 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 | % | 34 | % |

 

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

 

Sales for the year ended December 31, 2002 were $25,387,708 a 29%increase over sales for the year ended December 31, 2001. This growthfollows a 40% growth from 1999 to 2000 and a 31% growth from 2000 to 2001. Weare a relatively small player in a growing market. We are entering new marketsand adding new products; therefore, we expect to be able to grow faster thanthe market as a whole for the next several years. Our share of this market isapproximately 1%. The tile market in the United States is approximately$2.1 billion and is growing at a five to seven percent rate.

 

As we grow, we have been able to purchase product at lower prices andhave consequently lowered our cost of goods to 60% in 2002 from 64% in 2001 and68% in 2000. While there are certainly finite limits to improving our grossmargin percentage, it is imperative that we maintain these ratios as we grow.

 

Our earnings before interest, taxes, depreciation and amortization(EBITDA) grew from  1.3 million in 2001 to $1.5 million in 2002, a12% growth rate.  EBITDA is a concept usedby financial managers to compare businesses that operate in differentindustries with different capital needs, tax circumstances and debt structure.It is not a GAAP concept and should not be used as the only measure of acompany’s financial performance. Investors should refer to the financialstatements included in this document before making any investment decisions.

 

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

 
| ** **               | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Net income               |       | $        | 1,667,538  |     | $          | 822,391 |   |
| Interest  expense        |       | 328,920  |       | 424,527  |       |
| Income taxes  (deferred) |       | (597,174 | )          | 0        |       |
|                     |       |     |       |     |       |
| Depreciation             |       | 129,732  |       | 120,371  |       |
| Amortization             |       | 26,575   |       | 51,659   |       |
| EBITDA                   |       | $        | 1,555,591  |     | $          | 1,418,948 |   |

 

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

 

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

 

32

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In early April 2003, we moved into a new warehouse facility ofnearly 147,000 square feet, an increase of nearly 50% over the previousfacility. 5,000 square feet of the new facility is for office space. This newfacility will allow us to increase our inventory and better serve our customerswho rely upon us to meet the short lead times and limited inventory capacitythat exist in their markets. We hope to improve the efficiency of our warehouseoperations by simplifying the receiving and shipping functions. We currentlymaintain between four and five million square feet of product in ourfacility and expect that this will increase to between six andseven million square feet. Our inventory turns, in 2002, wereapproximately 3.8 times. We expect to lower those turns to about 3.2 during2003 and to 3.0 in 2004, however we cannot assure anyone that we will besuccessful in attaining these expectations. Availability of product is a keysuccess factor for us and is a good use of our capital.

 

Making it easy for our customers to sell product is a key successfactor for us. We have an extensive sampling and display program that augmentsthe training and marketing support we provide our customers.  Promotional expense is a significantoperating expense for the company.  .

 

*Liquidity and Capital Resources*

 

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

 

In October 2002, we commenced a private offering of our commonstock to accredited investors for up to one million units at $3.00 perunit. Each unit consists of one share of common stock and warrants to purchase11⁄2 shares initially at $3.00 per share for five years from the date the warrantwas issued. 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 and continuing until the warrant expires.

 

Through its closing as of March 31, 2003, we raised $530,000 fromunit’s sales. We also raised an additional $45,000 from 15,000 warrants thatwere exercised. All of the investors were provided with, or otherwise hadaccess to, information about the Company and its subsidiaries, includingfinancial information. The proceeds from the offering and the warrant exerciseswere used for general corporate purposes, including paying fees to outsideprofessionals and working capital.

 

On November 21, 2000, our subsidiary, IWT, entered into a new loanand security agreement with a financial institution totaling $5 million asa revolving loan, for a period of three years, with an option to renew for oneadditional year. This was amended and restated effective November 13, 2002and the amount of the maximum credit was increased from $5 million to$7.5 million. The interest rate on this loan is the Wachovia announcedprime rate plus .75% per year. Additionally, at the lender’s option, we alsopay prime plus 2.75% with respect to any non-contingent obligations

 

•                  onall outstanding obligations following termination or non-renewal of the creditfacility;

•                  formand after the date of an event of default occurs and for so long as such eventis continuing, as determined by lender;

•                  duringany time the amounts available to us are made or arise without our lender’sknowledge or consent.

 

**ITEM7.****                             FINANCIALSTATEMENTS**

 

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

 

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

 

On September 13, 2002, Tesoro notified the accounting firm ofMagee, Rausch & Shelton, LLP of Tulsa, OK (“MRS”) that MRS had beenreplaced as Tesoro’s principal accountant. MRS reported on and audited thefinancial statements prepared by Tesoro since our inception on May 3, 2000and ending July 15, 2000. It has not prepared any financial statementssubsequent to the July 15, 2000, reports.

 

33

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On August 23, 2002, Tesoro engaged the accounting firm of Sewelland Company, PA of Hollywood, Florida, as its principal accountant to audit thefinancial statements prepared by Tesoro for the fiscal year ended December 31,2002 and for its past financial filings. The decision to change accountants wasapproved by Tesoro’s Board of Directors and was based on its belief that Tesoro’soperations would be more accessible and economically undertaken by a FloridaSEC qualified accounting firm since its wholly-owned subsidiary, InternationalWholesale Tile, Inc. is a Florida corporation located in Palm City,Florida.

 

MRS did not prepare the audited financial statements for the last twofiscal years. However, for the previously prepared audited report prepared byMRS, the MRS report on Tesoro’s financial statements and audits contained noadverse opinion or disclaimer of opinion and were not qualified as touncertainty audit scope or accounting principle. For those reports anddocuments prepared by MRS, there have been no disagreements with MRS on anymatter of accounting principles or practices, financial statement disclosures,or auditing scope or procedures.

 

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

 

**Directors and Executive Officers**

 

The following table includes the names, positions with Tesoro and agesof our Executive Officers and Directors.

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

 

**Henry J. Boucher, Jr.**    Henryhas served as our President and a Director since December 29, 2001 and asour Chairman and Chief Executive Officer since November 2002. He is also aDirector of International and President and a Director of Transport. Henry isthe President and a Director of Borough Corporation, an inactive company. Hereceived his M.S. in economics from South Dakota State University in 1972. From1992 to June 1999, Henry was a Vice President of Mercer ManagementConsulting, a subsidiary of Marsh McLennan, an insurance brokerage firm. Priorto joining Mercer, he was a partner with the accounting firm of Coopers andLybrand (now PriceWaterhouse Coopers). From June 1999 to July 2000,Henry was a partner with Arthur Andersen. He joined Business Edge Solutions, atechnology consulting firm serving the financial services industry withe-commerce packaged solutions, where he was a Vice President until December 2000.Since January 2001, Henry has been a principal of Mentus Consulting LLC,consulting firm providing process improvement support services to a wide rangeof companies and industries.

 

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**Forrest Jordan.**    Forresthas served as a Senior Vice President of Tesoro since November 2002, aDirector since October 1, 2002, and as our Chief Financial Officer since March 28,2003. Forrest has served as a Vice President, Secretary and Treasurer of IWTsince April of 1994. He also serves as IWT’s sales manager. Forrest isalso a Director of IWT, of International and of Transport. He received hisM.B.A. from Anna Maria College in Paxton, MA.

 

**Paul F. Boucher.**    Paulhas served as a Senior Vice President of Tesoro since November 2002 and asone of our Directors since October 1, 2002. Paul has been the President ofIWT since April 1994 and in particular, focuses on IWT’s operations. He isalso a Director of IWT and International.

 

**Grey Perna.**    Greyhas served as a Senior Vice President of Tesoro since November 2002 and asone of our Directors since October 1, 2002. He has served as a VicePresident of IWT since January 1997. He also serves as IWT’s marketingmanager. He is also the President and a Director of International.

 

**James R. Edwards.**    Jimhas served as one of our Secretaries since November 2002 and as a TesoroDirector since April 20, 2002. He has been the Vice President, GeneralCounsel and Secretary of Wireless Knowledge, Inc., a telecommunicationscompany since March 2002. From April 2000 to March 2002, Jimserved as the Vice President, General Counsel and Secretary and Vice Presidentof Finance & Administrative for Vapotronics, Inc., a medicaldevice company. From March 1987 to April 2000, he was the VicePresident, General Counsel and Secretary of General Atomics, a high-technologyresearch and development company.

 

**Carl G. Anderson, Jr.**    Carlhas served as a Director of Tesoro since October 28, 2002. He is ViceChairman of the Board and General Manager of Arrow International Inc., a$300 million critical care medical device business located in Reading,Pennsylvania since 2002. Between May 1997 and 2002, Carl was the Presidentand Chief Executive Officer of ABC School Supply, a $50 million supplierof materials and equipment for public and private schools. Prior to joining ABCSchool Supply, he served as Vice President and General Manager of the RetailConsumer Products Division of James River Corporation since August 1994.He also served as Vice President of Marketing for James River Corporation from May 1992to August 1994. He was a marketing executive at Procter & Gamblefrom 1972 to 1984 and Vice President and General Manager at Nestle FoodsCorporation in Purchase, New York from 1984 to 1992. Carl also served as aDirector of the J.B. Williams Company, Inc., a manufacturer of consumerproducts, until the company was sold in October 2002 and as a Director ofABC School Supply until the company was sold in August 2002. He alsoserves as a trustee of Lafayette College. Carl graduated from Lehigh UniversityGraduate School of Business Administration in 1972 and Lafayette College in1967.

 

**James Lafond.**    Jimhas served as a Director of Tesoro since October 24, 2002. Through September 30,2002, he served as PricewaterhouseCooper’s Area Managing Partner for theGreater Washington Area, which encompasses client service offices inWashington, D.C., Maryland and Virginia. In this role, Jim had oversightresponsibility for all of the Firm’s lines of service, marketing and operationsin metropolitan Washington, D.C. Over the course of his career, Jim has led PWC’sNational Business Development and Industry Specialization functions, served asU.S. leader of the Marketing and Sales functions, and as Director of NationalEmerging Business Services, providing financial and tax advice to entrepreneursand growing companies. Jim was admitted as a General Practice Partner in 1974in Massachusetts, moved to New York in 1984, Florida in 1992 and to the GreaterWashington area in late 1994.

 

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

 

**Allen G. Rosenberg.**    Allenhas served as a Director of Tesoro since November 7, 2002. He co-foundedMarke Communications Inc. in 1979. Marke Communications is a directresponse agency specializing in marketing and graphic arts productions.

 

Paul and Henry Boucher are brothers.

 

**Nominees for Directors**

 

A majority of the members of Tesoro’s Board of Directors areindependent.

 

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Directors are elected at our annual meeting of stockholders and servefor one year or until their successors are elected. Our bylaws permit the Boardof Directors to fill any vacancy and such Director may serve until our nextAnnual Meeting of Stockholders or until his successor is elected and qualified.Officers are elected by the Board of Directors and their terms of office are,except to the extent governed by employment contracts, at the discretion of theBoard. The officers of the Company devote full time to our business.

 

**Board of Directors Committees**

 

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

 

Audit Committee

 

The members of our Audit Committee include Jim Lafond, Chairman, CarlAnderson and Bob Rogers. Each member possesses the required level of financialliteracy and at least one member, Jim Lafond, meets the current standards ofthe “audit committee financial expert” required by applicable rules andregulations. No member of the Audit Committee has any relationship to Tesoro orto any of its subsidiaries or affiliates that may interfere with the exerciseof their independence from management and Tesoro.

 

Our Audit Committee

 

•                  reviewsthe planned scope and results of audits,

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

•                  overseesany responses made to such recommendations, and

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

 

Our auditors report directly to the Audit Committee.

 

Our Audit Committee meets with management and our auditors to receiveinformation concerning, among other things, significant deficiencies in thedesign or operation of internal controls. This information is received andreviewed prior to the filing of the required officers’ certification with ourquarterly and annual reports filed with the SEC.

 

The Audit Committee’s formal written charter specifies:

 

•                  Itsmembership requirements;

•                  Itsrules and procedures;

•                  Itsauthority and responsibilities;

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

•                  Itsresponsibility to oversee the independence of the outside auditor.

 

Compensation Committee

 

The members of the Compensation Committee include Jim Edwards, Chairmanand Allen Rosenberg. Each of the members of this Committee meets theappropriate tests for independence and no member has any relationship to Tesoroor any of its subsidiaries or affiliates that may interfere with the exerciseof their independence from management and Tesoro.

 

The purpose of this Committee is to discharge the Board’sresponsibilities relating to

 

•                  our ExecutiveOfficers’ compensation;

•                  our equity-basedcompensation plans, including, without limitation, stock option and restrictedstock plans, in which officers or employees may participate, and

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

 

This Committee has overall responsibility for approving and evaluatingour executive officer compensation plans, policies and programs. It is alsoresponsible for producing an annual report on executive compensation to beincluded in our proxy statement and assisting in preparing certain informationto be included in other periodic reports filed with the SEC.

 

The Compensation Committee’s formal written charter specifies its

 

•                  Membershiprequirements;

 

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•                  Rules andprocedures; and

•                  Authorityand responsibilities.

 

Nominating and Governance Committee

 

The members of our Nominating and Governance Committee are CarlAnderson, Chairman, and Jim Edwards. Each member meets the appropriate testsfor independence. No member of this Committee has any relationship to Tesoro orany of its subsidiaries or affiliates that may interfere with the exercise oftheir independence from management and Tesoro.

 

The Nominating and Governance Committee is responsible for selectingthose individuals who stand for election to our Board of Directors and toconsider all reasonable comments from Stockholders regarding proposed nomineesfor Directors, as well as nominations for Board members recommended byStockholders.

 

The Committee also oversees the evaluation of the Board and managementand develops and recommends to the Board a set of Corporate Governanceguidelines. In addition, the Compensation Committee oversees reviews andapproves all of Tesoro’s ERISA and other employee benefit plans.

 

Like the Compensation Committee, the Nominating and Governance’s formalwritten charter specifies its:

 

•                  Membershiprequirements;

•                  Rules andprocedures; and

•                  Authorityand responsibilities.

 

**AUDIT COMMITTEE REPORT**

 

The purpose of the Audit Committee is to monitor (i) the integrityof the financial statements, (ii) the compliance with legal and regulatoryrequirements, (ii) the independent auditor’s qualifications andindependence, and (4) the performance of the Company’s internal auditfunction and independent auditors.  The Board of Directors, in itsbusiness judgment, has determined that each current member of the Committee is “independent”,as required by applicable listing standards of the Sarbanes-Oxley Act of 2002and applicable SEC rules. Management of the Company is responsible for thepreparation, presentation and integrity of the Company’s financial statements.Management is also responsible for the Company’s accounting and financialreporting principles and internal controls and procedures designed to assurecompliance with accounting standards and applicable laws and regulations. Theindependent auditors are responsible for auditing the Company’s financialstatements and expressing an opinion as to their conformity with accountingprinciples generally accepted in the United States of America. The AuditCommittee acts in accordance with a written charter adopted by the Board ofDirectors. The Committee reviews this charter annually.

 

In the performance of its oversight function, the Audit Committee hasconsidered and discussed the audited financial statements and unauditedquarterly financial statements with management and the independent auditorsincluding a discussion of the quality, not just the acceptability, ofaccounting principles, the reasonableness of significant judgments and theclarity of disclosures in the financial statements. The Audit Committee hasalso discussed with the independent auditors the matters required to bediscussed by Statement on Auditing Standards No. 61, Communication withAudit Committees as currently in effect. Finally, the Committee has receivedthe written disclosures and the letter from the independent auditors requiredby Independence Standard No. 1,*Independence Discussions with Audit Committees*, currently in effect,and has discussed with the auditors the auditors’ independence from the Companyand its management, and reviewed and approved the compatibility of non-auditservices provided by Sewell and Company and approved the fees paid to them forthe 2002 fiscal year.

 

The Audit Committee meets with the independent auditors, with andwithout management present, to discuss the results of their examinations, theirevaluations of the Company’s systems of internal control, and the overallquality of the Company’s financial reporting**.**The Audit Committee reviewed the Company’s internal controls with the Company’sindependent auditors and, consistent with Section 302 of theSarbanes-Oxley Act of 2002 and the rules adopted there under, met withmanagement and the auditors prior to the filing of officers’ certificationsrequired by that statute to receive any information concerning (a) significantdeficiencies in the design or operation of internal controls which couldadversely affect the Company’s ability to record, process, summarize and reportfinancial data and (b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the Company’sinternal controls.

 

It is not the Audit Committee’s duty or responsibility to conductauditing or accounting reviews or procedures. Audit Committee members are notemployees of the Company and may not be, and may not represent themselves tobe, or to serve as, accountants or auditors by profession. Members of the AuditCommittee rely, without independent

 

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verification, on the information provided to them and on therepresentations made by management and the independent accountants.

 

Based upon the reports and discussions described in this report, andsubject to the limitations on the role and responsibilities of the AuditCommittee referred to above, the Audit Committee recommended to the Board thatthe audited financial statements be included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2002 to be filed with the Securities andExchange Commission. The Committee has also recommended to the Company’sshareholders the re-appointment of Sewell and Company as Tesoro’s independentauditors for the 2003 fiscal year.

 

**JamesLafond, Chairman**

**CarlG. Anderson Jr.**

**RobertRogers**

 

**Corporate Governance.**

 

Our Boardhas also adopted “Principles of Corporate Governance,” a copy of which isattached as Appendix “D”.  These principles include the standards for ourBoard and management, which, include other things,

 

•                  requiresan ethical Board, Chief Executive Officer and management;

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

•                  describesour management’s responsibilities to new Board members;

•                  enumeratesthe guidelines for our Board’s compensation;

•                  providefor access to our management and independent advisors; and

•                  addresssuccession planning for senior management.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

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

 

Based on information provided to the Company, through June 13,2003, all required filings have been made with the following exceptions: (1) 161and River Road, LLC, a former controlling shareholder, was delinquent in filingits initial Form 3, which was due in February 2002, but which wasfiled in September 2002; (2) Baseball Cathedral, LLC, a formercontrolling shareholder, was delinquent in filing its initial Form 3,which was due in February 2002, but which was filed in September 2002;(3) Henry J. Boucher, Jr., the Company’s President, Interim ChiefFinancial Officer and Chairman, was delinquent in filing his initial Form 3due in January 2002 and a Form 4 due in February 2002 and a Form 4due in June 2002, but all of which were filed in September 2002; (4) JamesEdwards, a Director of the Company, was delinquent in filing his initial Form 3due in May 2002 but which was filed in September 2002; and MentusConsulting LLC, a former controlling shareholder, was delinquent in filing itsinitial Form 3 due in April 2002 and a Form 4 due in June 2002,both of which were filed in September 2002.

 

**ITEM10.****                      EXECUTIVECOMPENSATION**

 

The information described in our discussion concerning “ExecutiveOfficers” includes Henry Boucher, Paul Boucher, Forrest Jordan and Grey Perna.Prior to November 2002, no individual held the title of Chief ExecutiveOfficer; however Henry Boucher has acted in that capacity since December 2001.

 

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**SummaryCompensation Table**

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

 

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(1)                                  Henrysigned a Salary Deferral Agreement with Tesoro, which was terminated by ourBoard, with Henry abstaining from the vote

 

(2)                                  Theserepresent incentive stock options were granted as of November 23, 2002pursuant to our Stock Incentive Plan. The options are for ten years and have anexercise price is $3.00 per share. The options vest as follows: (a) 33% atsuch time as our Common Stock begins trading on the OTCBB (or equivalent), (b) 33%at such time as Tesoro attains no less than a $50.0 million market cap forten consecutive trading days, and (c) 34% when Tesoro achieves its 2003revenue and profit targets, as approved by Tesoro’s Board of Directors. Todate, none of these options have vested.

 

(3)                                  Ofthe annual salary, $63,250 represents salary for the last quarter of 2002following our acquisition of IWT effective October 1, 2002.

 

(4)                                  Includesan automobile allowance of $10,500 (of which $4,500 was paid in last quarter of2002 following the IWT acquisition), $2,055 for automobile fringe benefits(paid prior to the IWT acquisition), $2,885 for additional health benefits(paid prior to the IWT acquisition), and payment of $42,213 for an ExecutiveLife Insurance policy with his spouse as beneficiary (of which $6,329 was paidfollowing the IWT acquisition).

 

(5)                                  Includesautomobile fringe benefit of $2,137, health fringe benefits of $6,185 andpayment of $14,768 for an Executive Life Insurance policy with his spouse asbeneficiary.

 

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

 

(7)                                  Includesan automobile allowance of $6,785 (of which $4,500 was paid in last quarter of2002 following the IWT acquisition) and payment of $42,215 for an ExecutiveLife Insurance policy with his spouse as beneficiary (of which $8,402 was paidfollowing the IWT acquisition).

 

(8)                                  Includesautomobile fringe benefit of $265 and payment of $19,606 for an Executive LifeInsurance policy with his spouse as beneficiary.

 

(9)                                  Includesautomobile fringe benefit of $2,308.

 

(10)                            Includesan automobile allowance of $7,739 (of which $4,500 was paid in last quarter of2002 following the IWT acquisition), $1,936 for additional health benefits andpayment of $42,208 of an Executive Life Insurance policy with his spouse asbeneficiary (of which $7,514 was paid following the IWT acquisition).

 

(11)                            Includesautomobile fringe benefit of $1,113, health fringe benefits of $4,042 andpayment of $17,533 for an Executive Life Insurance policy with his spouse asbeneficiary.

 

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**Our 2001 Tesoro Stock Incentive Plan.**

 

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

 

We believe that our Plan satisfies our objective of enhancing ourprofitability and value for the benefit of our stockholders by enabling us tooffer our eligible employees, consultants and our affiliates, stock-basedincentives. We believe that this will help to create a means to raise the levelof stock ownership by these individuals in order to attract, retain and rewardsuch individuals and strengthen the mutuality of interests between suchindividuals and our stockholders.

 

Under the Plan, we may grant “non-qualified” and incentive stockoptions to purchase, and restricted stock (Awards). The aggregate maximumnumber of shares for which Awards may be issued under the Plan will be4 million shares of our common stock. The Plan does provide for equitableadjustment of the number of shares and the number of shares of each subsequentAward and of the unexercised portion of the stock option award described belowin the event of a change in our capitalization due to a stock split, stockdividend recapitalization, merger, or similar event. Other than with regard toincentive stock options, the number of shares that may be delivered under thePlan will be determined after giving effect to the use by a participant of theright, if granted, to cause Tesoro to withhold from the shares of common stockotherwise deliverable to a recipient upon exercising an Award in payment of allor a portion of his or her withholding obligation arising from such exercise.

 

Our Compensation Committee currently controls and manages the Plan’soperation and administration. The Committee has discretion to

 

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

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

•                                          delegateadministrative responsibilities,

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

 

The Committee, in its sole discretion, may grant stock options andrestricted stock to our employees and consultants, our subsidiary corporations,or parent corporation. Participants will be selected on the basis ofdemonstrated ability to contribute substantially to us. Our Board has authorityto grant stock options to Non-Employee Directors according to the Plan. Allawards are subject to the terms of a written agreement between the participantand us.

 

The awards granted under the Plan may be either incentive stock optionsor non-qualified stock options or restricted stock awards. The maximum numberof shares subject to any award of stock options or shares of Restricted Stockis 100,000.

 

The vesting schedule for any option granted under the Plan will bedetermined by the Committee and will be set forth in a specific optionagreement. To the extent not exercised, installments will accumulate and beexercisable, in whole or in part, at any time after becoming exercisable, butnot later than the date the option expires. The Committee has the right toaccelerate the exercisability of any option.

 

Incentive Stock Options

 

Stock options qualify as “incentive stock options” (ISOs) if they meetthe requirements of Section 422 of the Internal Revenue Code (Code). ISOsmay only be granted to our employees and our affiliates and any person holdingour capital stock or any affiliate possessing more than 10% of the totalcombined voting power of all classes of our capital stock. Affiliates will notbe eligible to receive ISOs unless the exercise price per share is at least110% of the fair market value of the stock on the date the option is granted.Each ISO granted pursuant to the Plan is exercisable, during the optionee’slifetime, only by the optionee or the optionee’s guardian or legalrepresentative.

 

Non-Qualified Stock Options

 

Non-qualified stock options may be granted to employees or to Directorswho are neither our officers nor employees, as well as to consultants and otherpersons who provide services to our affiliates and us. Stock options arenon-qualified stock options if they do not meet the requirements for ISOs.

 

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Restricted Stock

 

The Committee may grant shares of restricted stock, which is an awardof shares of common stock that is subject to the attainment of pre-establishedperformance goals and other conditions, restrictions and contingencies as theCommittee determines. Awards of restricted stock may be granted solely toparticipants who are our employees or consultants, or of any of itssubsidiaries or parent corporation. Unless otherwise determined by theCommittee at the time of the grant, each award of restricted Stock will providethat if the participant engages in detrimental activities (as defined in thePlan) prior to, or during the one year period after, any vesting of restrictedStock, the Committee may direct (at any time within two years thereafter) thatall unvested Restricted Stock be immediately forfeited to us and that theparticipant will pay us an amount equal to the fair market value at the time ofvesting of any restricted stock that has vested in the period referred toabove. (This does not apply upon a Change of Control). The Committee will fixthe purchase price of the Restricted Stock.

 

Awards of restricted stock must be accepted within 90 days (orsuch shorter period as the Committee may specify at grant) after the award dateby executing a Restricted Stock Award agreement and paying whatever price (ifany) the Committee designates. Additionally, recipients of restricted stock arerequired to enter into a restricted stock agreement, which states the restrictionsto which the shares are subject and the criteria or date or dates on which suchrestrictions will lapse. Within these limits, based on service, attainment ofobjective performance goals, and such other factors as the Committee maydetermine in its sole discretion, the Committee may provide for the lapse ofsuch restrictions or may accelerate or waive such restrictions at any time. Aparticipant who receives an Award of restricted stock shall not have any rightswith respect to such award of restricted stock, unless and until suchparticipant has delivered a fully executed copy of a restricted stock awardagreement and has otherwise complied with the applicable terms and conditionsof such award.

 

Awards of restricted stock may be intended to satisfy Section 162(m)of the Code. Under the Plan, an award of restricted stock may be conditionedupon or subject to the attainment of performance goals. These performance goalswill be based on one or more of the objective criteria with regard to us (orany subsidiary corporation, parent corporation, division, or other operationalunit of ours) as described in the Plan.

 

All options will lapse on the expiration of the option terms specifiedby the Committee in a certificate evidencing such option, but in no event willnon-qualified or incentive stock options be exercisable after the expiration of10 years from the date such option is granted (five years for participantswho own more than 10% of the total combined voting power of all classes of thestock of ours, our corporations or our parent corporation).

 

The exercise price per share of Common Stock subject to an IncentiveStock Option or a Stock Option intended to be “performance-based” for purposesof Section 162(m) of the Code shall be determined by the Committee at thetime of grant but shall not be less than 100% of the fair market value of theshares of Common Stock at the time of grant. However, if an Incentive StockOption is granted to a 10% Stockholder, the exercise price shall be no lessthan 110% of the fair market value of the Common Stock. The Committee willdetermine the exercise price per share of Common Stock subject to anon-qualified stock option.

 

To the extent that the aggregate fair market value (determined as ofthe time of grant) of the Common Stock with respect to which Incentive StockOptions are exercisable for the first time by an employee during any calendaryear under this Plan and/or any other stock option plan of ours or any of oursubsidiaries or parent corporation exceeds $100,000, such options shall betreated as non-qualified stock options. In addition, if an employee does notremain employed by us or any of our subsidiaries or parent corporation at alltimes from the time an ISO is granted until three months prior to the date ofexercise (or such other period as required by applicable law), such optionshall be treated as a non-qualified stock option. Should any provision of thisPlan not be necessary in order for the Stock Options to qualify as IncentiveStock Options, or should any additional provisions be required, the Committeemay amend this Plan accordingly, without the necessity of obtaining theapproval of our stockholders.

 

Payment of the purchase price is by (i) cash, (ii) check, or (iii) suchother consideration as the Plan Administrators, in their sole discretion,determine and is consistent with the Plan’s purpose and applicable law, or (iv) anycombination of the foregoing.

 

Upon the award of Restricted Stock, the recipient has all rights of astockholder with respect to the shares, including, without limitation, theright to receive dividends, the right to vote those shares and, subject to andconditioned upon the full vesting of the shares of restricted stock, the rightto tender those shares.

 

Optionees do not have stockholder rights (e.g., right to vote andreceive dividends) until they exercise their option and receive shares ofCommon Stock.

 

41

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Each stock option expires and is no longer exercisable on the datesthat the Plan administrators determine at the time when the options aregranted. Stock options can also be terminated under certain circumstancesfollowing a “Change of Control.”

 

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

 

•                                          aredissolved or liquidated,

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

•                                          transfersubstantially all of our property or more than 80% of our then outstandingshares to another corporation not controlled by our stockholders.

 

Upon a Change of Control, the Plan and any outstanding options willterminate unless we provide for the Plan to be assumed and continued with ouroptions either assumed or replaced with substitute options covering the sharesof a successor corporation. If no provision is made for Plan continuation, wewill give all option holders advance written notice of the Change of Control,all options will become fully exercisable and the option holders will then have30 days to exercise their options.

 

If our corporate structure changes or if our shares change (i.e. if werecapitalize, our stock splits, we consolidate, we undertake a rights offering,or we issue a stock dividend), the Plan administrators will make appropriateadjustments to the number or class of shares which may be distributed under thePlan and the option price or other price of shares subject to the outstandingawards under the Plan in order to maintain the purpose of the original grant.

 

The following discussion of the federal income tax consequences ofgranting and exercise of stock options and restricted stock awards under thePlan and the sale of common stock acquired as a result of any exercises ofoptions is based on an analysis of the Code, existing laws, judicial decisions,and administrative rulings and regulations, all of which are subject to change.In addition to being subject to the federal income tax consequences describedbelow, a participant may also be subject to state, local, estate and gift taxconsequences, none of which is described below. This discussion is limited tothe U.S. federal income tax consequences to individuals, who are citizens orresidents of the United States, other than those individuals who are taxed on aresidence basis in a foreign country.

 

*Incentive Stock Options.*

 

Neither the grant nor (provided the holding periods described below aresatisfied) the exercise of an incentive stock option will result in taxableincome to a participant or a tax deduction for us. However, for purposes of thealternative minimum tax, the excess of the fair market value of the sharesacquired upon exercise of an incentive stock option (determined at the time theoption is exercised) and the exercise price for such shares will be consideredpart of the participant’s income.

 

If the applicable holding periods described below are satisfied, thesale of shares of common stock purchased upon the exercise of an incentivestock option will result in capital gain or loss to the participant and willnot result in a tax deduction to us. To receive the foregoing incentive stockoption tax treatment as to the shares acquired upon exercise of an incentivestock option, a participant must hold such shares for at least two yearsfollowing the date the incentive stock option is granted and for one yearfollowing the date of the exercise of the incentive stock option. In addition,a participant generally must be an employee of ours (or a subsidiarycorporation or parent corporation of ours) at all times between the date ofgrant and the date three months before exercise of the option.

 

If the holding period rules are not satisfied, the portion of anygain recognized on the disposition of the shares acquired upon the exercise ofan incentive stock option that is equal to the lesser of the fair market valueof the shares on the date of exercise minus the exercise price, or the amountrealized on the disposition minus the exercise price, will be treated asordinary compensation income in the taxable year of the disposition of theshares, with any remaining gain being treated as capital gain. If the holdingperiods are not satisfied, we will generally be entitled to a tax deductionequal to the amount of such ordinary income included in the participant’staxable income, subject to Section 162(m) of the Code.

 

*Non-Qualified Stock Options.*

 

A participant will recognize no taxable income at the time anon-qualified stock option is granted to a recipient.

 

A participant will recognize ordinary compensation income at the time anon-qualified stock option is exercised, and the amount of such income will beequal to the excess of the fair market value on the exercise date of the sharespurchased by the optionee over the exercise price for such shares. Other thanwith regard to Non-Employee Directors, this ordinary compensation income willalso constitute wages subject to income tax withholding under the Code and we

 

42

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will require the participant to make suitable arrangements to ensurethat the participant remits to us an amount sufficient to satisfy all taxwithholding requirements.

 

We will generally be entitled to a deduction for federal income taxpurposes at such time and in the same amount as the amount includable in theparticipant’s ordinary income in connection with his or her exercise of anon-qualified stock option, subject to Section 162(m) described herein.

 

Upon a participant’s subsequent sale or other disposition of sharespurchased on exercise of a non-qualified stock option, the participant willrecognize capital gain or loss (which may be short-term or long-term dependingupon the participant’s holding period) on the difference between the amountrealized on such sale or other disposition and the participant’s tax basis inthe shares sold. The tax basis of the shares acquired upon the exercise of theoption will be equal to the sum of the exercise price for such shares and theamount includable in the participant’s income with respect to such exercise andacquisition of the shares.

 

*All Stock Options.*

 

The following considerations may also apply to grants of non-qualifiedstock options and/or incentive stock options:

 

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

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

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

 

In general, Section 162(m) of the Code does not allow a publiclyheld corporation, for federal income tax purposes, to deduct compensation inexcess of $1 million per year per person to its chief executive officerand the four other officers whose compensation is disclosed in its proxystatement, subject to specific exceptions. Our Plan does not currently qualifyfor the exceptions and is therefore subject to the limitations of Section 162(m).

 

Options may not be sold, assigned, transferred, pledged or encumbered,except by will or by the laws of descent and distribution. The optionee mayonly exercise an option during his or her lifetime or his or her estate, for aperiod of time after the optionee’s death.

 

Generally, our Board of Directors or the Committee has the power toamend, terminate or suspend all or any portion of the Plan without stockholderapproval. However, no amendment may impair an existing award or alter therights of a recipient of options already granted under the Plan without therecipient’s consent. Additionally, the Board of Directors may not, withoutfurther approval of our stockholders and according to Nevada law, solely to theextent required by the applicable provisions of Rule 16b-3, Section 162(m)or 422 of the Code, or the rules of any applicable exchange:

 

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

•                                          Increasethe maximum individual Participant limitations for a fiscal year,

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

•                                          Decreasethe minimum option price of any Stock Option,

•                                          Extendthe maximum Stock Option period,

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

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

 

Unless previously terminated by the Board of Directors, the Plan shallterminate on the earlier of December 31, 2012 or ten years after the datethe Plan is effective. Through December 31, 2002, 440,000 options weregranted and 124,500 restricted shares were issued under the Plan.

 

**Stock Option Grants in Last Fiscal Year**

 

During the fiscal year ended December 31, 2002, 440,000 optionswere granted to Tesoro’s Executive Officers and Directors pursuant to the Plan.As part of these grants, Henry Boucher, Jr., Paul Boucher, Forrest Jordanand Grey Perna each received 100,000 options on November 23, 2002. Theseoptions are exercisable for ten years from the grant date and their exerciseprice is $3.00 per share. The options vest as follows: (a) 33% at suchtime as our shares commence

 

43

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trading on the OTCBB (or equivalent), (b) 33% at such time asTesoro attains no less than a $50 million market cap for ten consecutivetrading days, and (c) 34% when Tesoro achieves its 2003 revenue and profittargets, as approved by Tesoro’s Board of Directors. As of March 31, 2003,none of these options have vested.

 

We also granted options to purchase 10,000 shares to Jim Edwards, JimLafond, Carl Anderson, Jr. and Allen Rosenberg. The exercise price ofthese options is $3.00 per share through November 22, 2012, 50% of whichvested immediately and 50% of which will vest on November 23, 2003.

 

**Option Exercises and Year End Values**

 

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

 

**Directors’ Compensation**

 

Under the Plan, the Board of Directors has the authority to grant toNon-Employee Directors, subject to the terms of the Plan, options to purchase

 

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

•                                          optionsto purchase up to a maximum of 75,000 shares of Common Stock in any calendaryear, provided the non-employee Director has not ceased to be a Director or ifhe ceased to be a Director he has not become an employee or consultant ofTesoro or its affiliates.

 

The per share exercise price will be determined by the Board ofDirectors but will not be less than 100% of the fair market value of the shareof Common Stock at the time of grant and may be subject to stockholderapproval. The term of each option granted to a Director pursuant to the Planshall be 10 years, and such option shall be 50% vested and exercisable onthe date such option is granted, and 50% vested and exercisable on the firstanniversary of the grant date.

 

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

 

•                                          Issuing10,000 shares upon accepting the Board appointment;

•                                          Astipend of $500 per Director per meeting attended;

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

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

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

 

**Employment and Consulting Agreements**

 

**Henry J. Boucher, Jr.**    OnDecember 29, 2001, Tesoro entered into an employment agreement with Henryto serve as Tesoro’s President. In consideration for his services, and underthe terms of his employment agreement, Henry receives an annual salary of$120,000. He had signed a Salary Deferral Agreement that was later terminatedby Tesoro’s Board, with Henry abstaining. All his deferred salary was paid toHenry Boucher in December 2002. He also receives a monthly car allowanceof $1,500. Henry Boucher’s employment may be terminated for cause at any timeand within 30 days without cause. He is subject to non-disclosure andnon-compete provisions.

 

On March 27, 2003, the Board of Directors voted to increase theterm of Henry Boucher’s employment agreement from one year to three years andto increase his salary to $240,000 per year at such time as the registrationstatement of which this prospectus is a part is effective. At that time, thesalary will be retroactive as of January 1, 2003. At the same time, theBoard also voted to issue Mr. Boucher a $25,000 bonus for 2002.

 

**Forrest Jordan.**    EffectiveOctober 2, 2002, IWT entered into an employment agreement with Forrest forone year, renewed automatically unless terminated by IWT not less than ninetydays prior to the expiration of the term. In consideration for his services,Forrest Jordan receives a salary of $253,000 per year. He also receives amonthly car allowance of $1,500. Forrest Jordan also receives a life insurancepolicy whose beneficiary is his family and such other compensation asdetermined by the Compensation Committee. He is subject to non-disclosure andnon-compete provisions. On March 27, 2003, the Board of Directors voted toincrease the term of his employment agreement from one year to three years andto issue Forrest Jordan a $25,000 bonus for 2002.

 

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**Paul F. Boucher.**    PaulBoucher’s employment agreement is substantially the same as that of ForrestJordan’s, with the exception that he receives an annual salary of $263,000. On March 27,2003, the Board of Directors voted to increase the term of his employmentagreement from one year to three years and to issue Paul Boucher a $25,000bonus for 2002.

 

**Grey Perna.**    GreyPerna’s employment agreement is substantially the same as that of ForrestJordan’s. On March 27, 2003, the Board of Directors voted to increase theterm of his employment agreement from one year to three years and to issue GreyPerna a $25,000 bonus for 2002.

 

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

 

The following table sets forth, as of June 13, 2003, the shares ofCommon Stock owned beneficially by (i) each of our Executive Officers, (ii) eachof our current Directors, (iii) all Executive Officers and Directors as agroup, (iv) each person known by us to be the beneficial owner of morethan five percent of our Common Stock. “Beneficial Ownership” is a technicalterm broadly defined by the Securities and Exchange Commission to mean morethan ownership in the usual sense. For example, Common Stock is “beneficially”owned not only if it is held directly, but also if it is held indirectly(though a relationship, a position as a director or trustee, or a contract orunderstanding), or has (or share the power to vote the stock or sell it) theright to acquire it within 60 days. Except as disclosed in the footnotesbelow, each of the Executive Officers, Directors and Nominees for Directorslisted have sole voting and investment power over his or its shares. As of June 13,2003, 11,205,502 shares of our common stock were issued and outstanding, heldby approximately 149 holders of record.

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

 

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*Less than 1%.

 

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

 

(2)                                  Memberof the Compensation Committee.

 

(3)                                  Memberof the Nominating and Governing Committee.

 

(4)                                  Includes5,000 incentive stock options, which are currently vested and which are exercisableat $3.00 per share through November 22, 2012. Also includes warrants topurchase up to 15,000 shares at $3.00 per share through January 7, 2008.

 

(5)                                  Memberof the Audit Committee.

 

(6)                                  Includes5,000 incentive stock options that are currently vested and are exercisable at$3.00 per share through November 22, 2012.

 

(7)                                  Includes5,000 incentive stock options that are currently vested and are exercisable at$3.00 per share through November 22, 2012. Also includes warrants topurchase up to 30,000 shares at $3.00 per shares through March 10, 2008.

 

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

 

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

 

(10)                            Includes12,000 shares held by Mr. Perna’s wife.

 

**ITEM12.****                      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The following are brief descriptions of transactions between us (or anyof our affiliates) and any of our Directors, Executive Officers or Stockholdersbeneficially owning more than 5% of our shares, or any member of the immediatefamily of any of those persons, or other entities in which such personsbeneficially own more than 5%.

 

In May 2002, Tesoro sold 100,000 shares of our common stock for anaggregate of $20,000 to Mentus Consulting LLC, a limited liability company,controlled by Henry J. Boucher, our President and Chief Executive Officer.

 

Forrest Jordan, Grey Perna and Paul F. Boucher as payees, holdpromissory notes from IWT in the principal amounts of $88,711.93, $120,000 and$240,000, respectively. The notes bear interest at 10% per year and are due onor before December 31, 2025. In connection with our credit facility for$7.5 million, Forrest, Grey and Paul have each entered into asubordination agreement with the lender that provides that each of theseobligations are subordinated to that of the lender and these obligations havealso been assigned to the lender as security for our obligations to the lender.

 

As part of our acquiring IWT, we issued nine million shares to ForrestJordan, Grey Perna and Paul F. Boucher. Each of these stockholders entered intoa repurchase agreement by which each may sell a total of 150,000 shares ofTesoro common stock over a three-year period back to us for a price per sharebased on 88% of Tesoro’s then weighted average price.  On June 26,2003, each of these repurchase agreements was terminated and is no longer ofany force or effect.

 

**ITEM13.****                      EXHIBITS,LIST AND REPORTS ON FORM 10-KSB/A**

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

 

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

 

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| 10.15 |   | Subordination Agreement between Congress  Financial Corporation (Florida). and Grey Perna (this document is omitted as  it is substantially similar to Forrest Jordan’s Subordination Agreement with  the exception of the employee’s name and address)                                                                                                                                                               |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16 |   | Termination of Repurchase Agreement dated June 26,  2003 between IWT Tesoro Corporation and Forrest Jordan (filed as an Exhibit to  the Company’s Form 8-K, filed with the Securities and Exchange  Commission on June 26, 2003).                                                                                                                                                                      |
| 10.17 |   | Termination of Repurchase Agreement dated June 26,  2003 between IWT Tesoro Corporation and Paul F. Boucher (this document is  omitted as it is substantially similar to Forrest Jordan’s Termination of  Repurchase Agreement with the exception of the name and address) (filed as an  Exhibit to the Company’s Form 8-K, filed with the Securities and  Exchange Commission on June 26, 2003). |
| 10.18 |   | Termination of Repurchase Agreement dated June 26,  2003 between IWT Tesoro Corporation and Grey Perna (this document is omitted  as it is substantially similar to Forrest Jordan’s Termination of Repurchase  Agreement with the exception of the name and address) (filed as an Exhibit to  the Company’s Form 8-K, filed with the Securities and Exchange  Commission on June 26, 2003).      |
| 21.   |   | Subsidiaries of Registrant (filed as an Exhibit to  the Company’s Registration Statement, filed with the Securities and Exchange  Commission on April 11, 2003)                                                                                                                                                                                                                                                  |
| 31.1  |   | Certification of Henry J. Boucher, Jr., Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                  |
| 31.2  |   | Certification of Forrest Jordan, Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                              |
| 32.1  |   | Certification of Henry J. Boucher, Jr., Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                  |
| 32.2  |   | Certification of Forrest Jordan, Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                              |
| 99.1  |   | MRS’ Letter To The Securities And Exchange  Commission. (filed as an Exhibit to the Company’s Report on  Form 8-K/A, filed with the Securities and Exchange Commission on October 8,  2002)                                                                                                                                                                                                            |
| 99.2  |   | Letter from Peter Goss regarding fiscal  year end (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on October 15, 2002)                                                                                                                                                                                                                         |

 

**Item14.****                            Controland Procedures.**

 

(a)                                  Withinthe 90 days prior to the date of this report, we carried out an evaluation,under the supervision and with the participation of management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14.  Based upon thisevaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information relating to us (including ourconsolidated subsidiaries) that is required to be included in our periodic SECreports.  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.

 

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

 

48

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act of1934, the Company caused this Registration Statement to be signed on its behalfby the undersigned thereunto duly authorized.

 
| IWT TESORO CORPORATION     |
|----------------------------|
|                       |
|                       |
| By:                        | /s/ Henry J. Boucher, Jr. |   |
|                       | Henry J.  Boucher, Jr., President |
|                       |
| Date: August 22, 2005 |

 

 

In accordance with the Exchange Act, this report has been signed belowby the following persons on behalf of the Company and in the capacities and onthe dates indicated.

 

 
| /s/ Henry J. Boucher, Jr.                                         |   |   | August 22, 2005 |   |
|------------------------------------------------------------------------|--------|--------|-----------------|--------|
| Henry J.  Boucher, Jr., Principal  Executive Officer         |   |   |            |
|                                                                   |   |   |            |
| /s/ Henry J. Boucher, Jr.                                         |   |   | August 22, 2005 |   |
| Henry J.  Boucher, Jr., Interim  Principal Financial Officer |   |   |            |
|                                                                   |   |   |            |
| /s/ Henry J. Boucher, Jr.                                         |   |   | August 22, 2005 |   |
| Henry J.  Boucher, Jr., Director                             |   |   |            |
|                                                                   |   |   |            |
| /s/ James R. Edwards, Director                                         |   |   | August 22, 2005 |   |
| James Edwards, Director                                                |   |   |            |
|                                                                   |   |   |            |
| /s/ Paul F. Boucher                                                    |   |   | August 22, 2005 |   |
| Paul F.  Boucher, Director                                        |   |   |            |
|                                                                   |   |   |            |
| /s/ Forrest Jordan                                                     |   |   | August 22, 2005 |   |
| Forrest Jordan, Director                                               |   |   |            |
|                                                                   |   |   |            |
| /s/ Grey Perna                                                         |   |   | August 22, 2005 |   |
| Grey Perna, Director                                                   |   |   |            |
|                                                                   |   |   |            |
| /s/ James Lafond                                                       |   |   | August 22, 2005 |   |
| James Lafond, Director                                                 |   |   |            |
|                                                                   |   |   |            |
| /s/ Allen Rosenberg                                                    |   |   | August 22, 2005 |   |
| Allen Rosenberg, Director                                              |   |   |            |
|                                                                   |   |   |            |
| /s/ Carl G. Anderson, Jr.                                         |   |   | August 22, 2005 |   |
| Carl G.  Anderson, Jr., Director                             |   |   |            |
|                                                                   |   |   |            |
| /s/ Robert Rogers                                                      |   |   | August 22, 2005 |   |
| Robert Rogers, Director                                                |   |   |            |
|                                                                        |        |        |                 |        |  |  |

 

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