form10ksb.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-KSB
 
 
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
       For the fiscal year ended June 30, 2007

[  ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
    
       For the transition period from________to________

Commission fle number 000-05391
 
 
METWOOD, INC.
(Name of small business issuer in its charter)
 
 
NEVADA
83-0210365
(State or other jurisdiction
(IRS Employer
of incorporation or organization)
Identification No.)
 
819 Naff Road, Boones Mill, VA 24065
(Address of principal executive offices)

(540) 334-4294
(Issuer’s telephone number)
 
 
Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
$0.001 Par Value Common Voting Stock
(Title of Class)
 
 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X      No        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or an amendment to this Form 10-KSB. [  ]

State issuer’s revenues for its most recent fiscal year: $4,440,949

As of September 7, 2007 there were 11,923,999 common shares outstanding, and the aggregate market value of the common shares (based upon the average of the bid price ($.35) reported by brokers) held by non-affiliates was approximately $1,150,801.

Transitional Small Business Disclosure Format (check one): Yes [  ] No [X]
 
 
 
 
METWOOD, INC. AND SUBSIDIARY
FORM 10-KSB
TABLE OF CONTENTS

 
Page
PART I
  
   
Item 1          Description of Business
4
Item 2          Description of Property
8
Item 3          Legal Proceedings
8
Item 4          Submission of Matters to a Vote of Security Holders
8
   
PART II
 
   
Item 5          Market for Common Equity and Related Stockholder Matters
8
Item 6          Management’s Discussion and Analysis or Plan of Operation
9
Item 7          Financial Statements
11
Item 8          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
28
Item 8A       Controls and Procedures
28
   
PART III
 
   
Item 9          Directors and Executive Officers of the Registrant
28
Item 10        Executive Compensation
30
Item 11        Security Ownership of Certain Beneficial Owners and Management
31
Item 12       Certain Relationships and Related Transactions
32
Item 13       Exhibits and Reports on Form 8-K
33
Item 14        Principal Accountant Fees and Services
33
   
Signatures
34
   
Index to Exhibits
35
 
 
2
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, and plans and objectives of management. Statements that are not historical in nature and which include such words as “anticipate,” “estimate,” “should,” “expect,” believe,” “intend,” and similar expressions are intended to identify forward-looking statements for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act.
 
 
3

PART I

Item 1. Description of Business

Business Development

We were incorporated under the laws of the State of Wyoming on June 19, 1969. Following an involuntary dissolution for failure to file an annual report, we were reinstated as a Wyoming corporation on October 14, 1999. On January 28, 2000, we, through a majority shareholder vote, changed its domicile to Nevada through a merger with EMC Energies, Inc., a Nevada corporation. The Plan of Merger provided for the dissenting shareholders to be paid the amount, if any, to which they would be entitled under the Wyoming Corporation Statutes with respect to the rights of dissenting shareholders. We also changed our par value to $.001 and the amount of authorized common stock to 100,000,000 shares.

Prior to 1990, we were engaged in the business of exploring for and producing oil and gas in the Rocky Mountain and mid-continental areas of the United States. We liquidated substantially all of its assets in 1990 and were dormant until June 30, 2000, when it acquired, in a stock for-stock, tax-free exchange, all of the outstanding common stock of a privately held Virginia corporation, Metwood, Inc. (“Metwood”), which was incorporated in 1993. See Form 8-K and attached exhibits filed August 11, 2000. Metwood has been in the metal and metal/wood construction materials manufacturing business since 1992. Following the acquisition, we approved a name change from EMC Energies, Inc. to Metwood, Inc.

Effective January 1, 2002, Metwood acquired certain assets of Providence Engineering, PC (“Providence”), a professional engineering firm with customers in the same proximity as Metwood, paying $60,000 in cash and issuing 290,000 Metwood common shares to the two Providence shareholders (one of whom was also an officer and existing shareholder of Metwood prior to the acquisition). These shares were valued at the closing quoted stock price of $1.00 per share at the effective date of the purchase. On October 15, 2002, $15,000 additional cash was paid to one shareholder in exchange for the shareholder’s surrender of 15,000 shares of Metwood stock, and $50,000 was paid to that shareholder in two installments of $25,000 each (on January 15, 2004 and April 15, 2004) for 275,000 shares. All of the originally issued 290,000 shares of Metwood stock have thus been repurchased as of June 30, 2004. The initial purchase transaction was accounted for under the purchase method of accounting.

The consolidated company (“the Company, We, Us, Our”) provides construction-related products and engineering services to residential customers and contractors, commercial contractors, developers and retail enterprises, primarily in southwestern Virginia.

Principal Products or Services and Markets

Metwood — Residential builders are aware of the superiority of steel framing vs. wood framing, insofar as steel framing is lighter; stronger; termite, pest, rot and fire resistant; and dimensionally more stable in withstanding induced loads. Although use of steel framing in residential construction has generally increased each year since 1980, many residential builders have been hesitant to utilize steel due to the need to retrain framers and subcontractors who are accustomed to a “stick-built” construction method where components are laid out and assembled with nails and screws. Our initial founders, Robert Callahan and Ronald Shiflett, saw the need to combine the strength and durability of steel with the convenience and familiarity of wood and wood fasteners.
 
 
4

Our primary products and services are:

•
Girders and headers
 
•
Floor joists
 
•
Floor joist reinforcers
 
•
Roof and floor trusses and rafters
 
•
Metal framing
 
•
Square structural columns
 
•
Garage, deck and porch concrete pour over systems
 
•
Garage and post-and-beam buildings
 
•
Engineering, design and custom building services
 
Metwood manufactures light-gage steel construction materials, usually combined with wood or wood fasteners, for use in residential and commercial applications in place of more conventional wood products, which are inferior in terms of strength and durability. The steel and steel/wood products allow structures to be built with increased load strength and structural integrity and fewer support beams or support configurations, thereby allowing for structural designs that are not possible with wood-only products.

Providence — Extensively involved in ongoing product research and development for Metwood, Providence also offers its customers civil engineering capabilities which include rezoning and special use submissions; erosion and sediment control and storm-water management design; residential, commercial, and religious facility site development design; and utility design, including water, sewer and onsite treatment systems. Providence’s staff is familiar with construction practices and has been actively involved in construction administration and inspection on multiple projects.

Providence also performs a variety of structural design and analysis work, successfully providing solutions for many projects, including retaining walls, residential framing, commercial building framing, light-gage steel fabrication drawings, metal building retrofits and additions, mezzanines, and seismic anchors and restraints.

Providence has designed numerous foundations for a variety of structures. Its foundation design expertise includes metal building foundations, traditional building construction foundations, atypical foundations for residential structures, tower foundations, and sign foundations for a variety of uses and applications.

Providence has also designed and drafted full building plans for several applications. When subcontracting with local professional firms, Providence has the ability to provide basic architectural, mechanical, electrical, and detailed civil and structural design services for these facilities.
 
Providence has reviewed designs by manufacturers for a variety of structures and structural components, including retaining walls, radio towers, tower foundations, sign foundations, timber trusses, light-gage steel trusses, and light-gage steel beams. This service enables clients to take generic designs and have them certified and approved for construction in the desired locality.
 
 
5

Distribution Methods of Products and Services
 
Our sales are primarily wholesale, directly to lumber yards and home improvement stores mainly in Virginia. We rely primarily on our own sales force to generate sales; additionally, however, our distributors in Virginia, New York, Oklahoma, Arizona and Colorado and also utilizes the salespeople of wholesale yards stocking our products as an additional sales force. We are an authorized vendor for Lowe’s, Home Depot, 84 Lumber, Stock Building Supply, The Contractor Yard, and many more. We have several stocking dealers of our Square Columns and Reinforcing Products. We will sell directly to contractors in areas that we do not have a dealer, but with our national dealer relationships, we typically have a dealer to use.  We are in discussions with national engineered I-joist manufacturers who are interested in marketing our products and expect to announce affiliations with these companies in the near future. Metwood intends to continue expanding the wholesale marketing of its unique products to retailers, to increase dealer sales, and to license our technology and products to increase its distribution outside of Virginia, North Carolina and the South.
 
Status of Publicly Announced New Products or Services

We have acquired four new patents through assignment from Robert Callahan and Ronald Shiflett, the origional patent holders. All four patents reflect various modifications to our Joist Reinforcing Bracket which will make it even easier for tradesmen to insert utility conduits through wood joists.

Seasonality of Market

Our sales are subject to seasonal impacts, as its products are used in residential and commercial construction projects which tend to be at peak levels in Virginia and North Carolina between the months of March and October. Accordingly, our sales are greater in its fourth and first fiscal quarters. We build an inventory of its products throughout the winter and spring to support its sales season.  Due to the Seasonality of our Local Market, we are continuing our efforts to expand into markets that are not so seasonally impacted.  We have shipped projects to Florida, Georgia, South Carolina, Arizona, Washington, and more.  These markets have some seasonality, but increased exposure in these markets will help maintain stronger sales year around.

Competition

Nationally, there are over one hundred manufacturers of the types of products produced by us. However, the majority of these manufacturers are using wood-only products or products without metal reinforcement. Metwood has identified only one other manufacturer in the United States that manufactures a wood-metal floor truss similar to that of us. However, Metwood has often found that its products are the only ones that will work within many customers’ design specs.

Sources and Availability of Raw Materials and the Names of Principal Suppliers

All of the raw materials used by us are readily available on the market from numerous suppliers. The light-gage metal used by us is supplied primarily by Dietrich Industries, Marino-Ware, Telling Industries, Wheeling Corrugating, and Consolidated Systems, Inc. Our main sources of lumber are BlueLinx, Lowe’s, 84 Lumber Company and Smith Mountain Building Supply. Gerdau Amersteel, Descosteel and Adelphia Metals provide the majority of our rebar. Because of the number of suppliers available to us, its decisions in purchasing materials are dictated primarily by price and secondarily by availability. We do not anticipate a lack of supply to affect its production; however, a shortage might cause us to pass on higher materials prices to its buyers.

Dependence on One or a Few Major Customers

Presently we do not have any one customer whose loss would have a substantial impact on our operations.
 
 
6

Patents

We have twelve U.S. Patents:

       U.S. Patent No. 5,519,977, “Joist Reinforcing Bracket,” a bracket that reinforces wooden joists with a hole for the passage of a utility conduit. We refer to this as its floor joist patch kit.

       U.S. Patent No. 5,625,997, “Composite Beam,” a composite beam that includes an elongated metal shell and a pierceable insert for receiving nails, screws or other penetrating fasteners.

       U.S. Patent No. 5,832,691, a continuation in part of U.S. Patent No. 5,625,997, “Composite Beam,” a composite beam that includes an elongated metal shell and a pierceable insert for receiving nails, screws or other penetrating fasteners.

       U.S. Patent No. 5,921,053, “Internally Reinforced Girder with Pierceable Nonmetal Components,” a girder that includes a pair of “c” -shaped members secured together so as to form a hollow box which permits the girder to be secured within a building structure with conventional fasteners such as nails, screws and staples.

       U.S. Patent Nos. D472,791S; D472,792S; D472,793S; and D477,210S, all modifications of Metwood’s Joist Reinforcing Bracket, which will be used for repairs of wood I-joists.

Each of the above mentioned patents was originally issued to the inventors our founders, Robert Callahan and Ronald B. Shiflett, who licensed these patents to us.

Canadian Patent Nos. 101892, 101893, 101894, and 101895 for our joist reinforcing bracket designs.

Need for Government Approval of Principal Products

Our products must either be sold with an engineer’s seal or applicable building code approval. Our chief engineer has obtained professional licensure in several states, which permits products not building code approved to be sold and used with his seal. We expect his licensure in a growing number of states to greatly assist in the uniform acceptability of its products as it expands to new markets. Currently, we are seeking International Code Council (“ICC”) code approval on its joist reinforcers and beams. Once that approval is obtained, the products can be used in all fifty states and will eliminate the need for an engineer’s seal on individual products. To date, our 2x10 floor joist reinforcer has received both Bureau Officials Code Association approval (2001) and ICC approval (2004).

Time Spent During the Last Two Fiscal Years on Research and Development Activities

Approximately fifteen percent of our time and resources have been spent during the last two fiscal years researching and developing its metal/wood products, new product lines, and new patents.

Costs and Effects of Compliance with Environmental Laws

We do not incur any costs to comply with environmental laws. It is an environmentally friendly business in that its products are fabricated from recycled steel.

Number of Total Employees and Number of Full-Time Employees

We had thirty-seven employees at June 30, 2007, thirty-five of whom were full time.
 
 
7

Item 2. Description of Property

During the year ended June 30, 2005, we sold our facilities to a related party for $600,000 and subsequently leased the facilities back under a long-term lease agreement. We now lease our facilities in Boones Mill, Virginia, which consist of corporate offices, warehouses, a garage/vehicle maintenance building, and other multi-use buildings. The condition of these buildings is very good.

We do not invest in real estate or interests in real estate, real estate mortgages or securities of or interests in persons primarily engaged in real estate activities and therefore have no policies related to such investments.

Item 3. Legal Proceedings

We are not a party to any legal proceedings, nor, to the best of its knowledge, is any such proceedings threatened or contemplated.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Because there is no active trading market for Metwood, Inc. common stock, it is difficult to determine the market value of the stock. Based on the average bid price for our common stock at September 7, 2007 of $.35 per share (average asking price of $.60), the market value of shares held by non-affiliates would be $1,150,801. There are no preferred shares authorized.

We are listed on the OTC Bulletin Board of the National Association of Securities Dealers (“NASD”) under the symbol “MTWD.OB.”

Set forth below are the high and low bid prices for our common stock for the last two years:

Quarter Ended
High Bid 
Low Bid 
     
September 2005
$1.48 
$1.10 
December 2005
$0.81
$1.25 
March 2006
$0.91 
$1.10
June 2006
$0.90
$1.03
September 2006
$0.55
$0.90
December 2006
$0.35
$0.85
March 2007
$0.57
$0.70
June 2007
$0.51
$0.70

Holders

The number of holders of record of our common stock as of September 7, 2007 was 1,117. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name. The number of stockholders has been substantially the same during the past ten years.

Dividends

Per the negative covenants in the line-of-credit agreements, we are restricted from paying dividends until the debt is repaid. We have not paid any dividends on its common stock and do not intend to pay dividends in the foreseeable future.
 
 
8

Item 6. Management’s Discussion and Analysis or Plan of Operation

Plan of Operation

We anticipate that the next twelve months will be a period of continued growth as it seeks to further expand its presence in new markets throughout the United States through increased numbers of distributors, licensees and dealers. ICC code approval is being sought for our joist reinforcers and beams and is expected to be obtained within the coming fiscal year. If this approval is obtained, product marketability would be greatly enhanced and would likely lead to higher demand.

Higher product demand would likely increase the need for more capital as inventory requirements grew, which could be met through borrowing or a stock offering. No decision has been made at the present time, however, as to which means might be used to raise capital.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Below are selected financial data for the years ended June 30, 2006 and 2007:

       
  
2006
    
2007
  
             
               Revenues
   $
4,242,123
     $
4,440,949
  
               Net income
   $
171,160
     $
212,081
  
               Net income per common share
   $
0.01
     $
0.02
  
               Weighted average common shares outstanding
    
11,894,593
      
11,920,259
  
At June 30, 2007 and 2006:
                
               Total assets
   $
2,375,931
     $
2,576,675
  
               Working capital
   $
1,342,988
     $
1,539,453
  
               Shareholders’ equity
   $
1,951,213
     $
2,163,296
  
               **Less than $.01
                

No dividends have been declared or paid during the periods presented.

Results of Operations Fiscal 2007 Compared with Fiscal 2006

Revenues and Cost of Sales —  Consolidated gross sales increased $198,826, or 5%, for the year ended June 30, 2007 (“fiscal 2007”) compared to the year ended June 30, 2006 (“fiscal 2006”). Construction sales consisted of product sales, engineering, delivery and installation fees. Engineering sales consisted of fees for engineering services. Gross profit increased $171,554 (10%) from fiscal 2006 to fiscal 2007.

The increase in construction revenues was due to several factors, including adding inside sales support for outside sales reps, thereby freeing up the reps to make more daily contacts; increased marketing efforts, such as regular seminars for building inspectors and architects on our systems and services; and strengthened dealer relationships. Also, product prices were raised in the third quarter to compensate for the increasing cost of steel. In addition, we experienced heightened demand for our pour over systems for fiscal 2007 compared to fiscal 2006 which had the added benefit of increasing related installation fees. Growth in engineering sales resulted from both higher demand and quicker turnaround time on jobs.

Cost of sales increased by $27,272 overall (1%) in fiscal 2007 compared to fiscal 2006. On the construction side, cost of sales increased $52,573 (2%), while cost of engineering sales decreased $25,301 (16%). The rise in construction costs was due primarily to the higher steel prices we faced in fiscal 2007. However, efforts were made to secure as much steel as possible just prior to the new higher prices taking effect, thereby alleviating some of the impact of those increases. We anticipate that steel prices will continue to be high for the foreseeable future.
 
 
9

Administrative expenses — These costs increased $80,128, or 5%, to $1,541,711 in fiscal 2007 from $1,461,583 in fiscal 2006. The increase was due primarily to higher advertising and marketing, insurance and payroll costs. The increase is mainly attributable to an increase in payroll costs from $692,372 in fiscal 2006 to $771,793 in fiscal 2007 or an increase of $79,421 (11%). We hired new personnel to capacitate the increase in sales and new customers in fiscal 2007.

Other Income (Expense) —These amounts are immaterial to the financial statements taken as a whole and include miscellaneous and sundry items only.

Income Taxes — In fiscal 2007 our income tax expense was $131,778 compared to income tax expense of $89,145 in fiscal 2006. We increased our deferred tax liability by $9,855 in fiscal 2007. The primary components of the deferred tax liability relate to timing differences between book and tax depreciation and the treatment of goodwill amortization.,

Liquidity and Capital Reserves — Cash flows provided by operations in fiscal 2007 were $53,872 versus cash flows provided by operations in fiscal 2006 of $84,986, a decrease of $31,114. The decrease in cash flows from operations was primarily attributable to higher net income attributable to the increase in sales in fiscal 2007 and an increase in inventory which required cash outlays. We also used $153,032 for capital improvements and purchases of fixed assets, while we spent $231,115 for purchases of fixed assets in fiscal 2006. Financing activities in fiscal 2007 provided $37,567 compared to $11,402 used in fiscal 2006. The main provision of funds in 2007 was due to a net increase in borrowings under our line-of-credit agreement of $25,000.

We have historically funded its cash needs through operating income and credit line draws as needed. It will continue to rely on sales revenue as its main source of liquidity and will incur debt primarily to fund inventory purchases as sales growth produces increased product demand. Liquidity needs that cannot be met by current sales revenue may also arise in certain unusual circumstances such as has previously occurred when rain and snow significantly slowed construction activity and resulted in a corresponding decline in demand for our products. In those circumstances, debt may be added to meet our fixed costs and to maintain inventory in anticipation of a spurt in product demand that generally occurs once a weather-related slowdown has ended.

On a long-term basis, we also anticipate that product demand will increase considerably as it continues to expand its marketing and advertising campaign, which may include the use of television, radio, print and internet advertising. Efforts are well underway to increase the number of out-of-state sales representatives/brokers who will market our products throughout the country. As sales increase, we can add a second shift to meet the additional product demand without having to use funds to expand its production facilities. If additional cash becomes necessary to fund its growth, we may raise this capital through an additional follow-on stock offering rather than taking on more debt. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future. If we are unable to raise additional capital as needed, our growth potential will be adversely affected, and we would have to significantly modify its plans.

 
10
 
Item 7. Financial Statements
 
CONTENTS
  
 
  
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
12
   
CONSOLIDATED BALANCE SHEET ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY
14
 
 
CONSOLIDATED INCOME STATEMENTS
15
   
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
16
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
17
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
18-27
 
 
11
 
LAKE & ASSOCIATES, CPA’S LLC


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Metwood, Inc.

We have audited the accompanying consolidated balance sheet of Metwood, Inc. (the “Company”) and its wholly-owned subsidiary as of June 30, 2007 and related consolidated statements of operations, stockholders’ equity, and cash flows for the year ending June 30, 2007. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Metwood, Inc. (a Virginia corporation) and its wholly-owned subsidiary as of June 30, 2007 and the results of its operations and its cash flows for year ended June 30, 2007 in conformity with accounting principles generally accepted in the United States of America.

/s/ Lake & Associates, CPA’s LLC
Lake & Associates, CPA’s LLC
Boca Raton, Florida
September 5, 2007
 
 
REPORT OF INDEPENDENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors
Metwood, Inc.
819 Naff Road
Boones Mill, Virginia 24065
 
 
We have audited the accompanying consolidated balance sheet of Metwood, Inc. (a Nevada corporation) and its wholly-owned subsidiary as of June 30, 2006 and the related consolidated statements of income, stockholders’ equity, and cash flows for the two years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Metwood, Inc. and its wholly owned subsidiary as of June 30, 2006, and the consolidated results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ Bongiovanni & Associates, P.A.
Bongiovanni & Associates, P.A.
Cornelius, North Carolina
September 15, 2006
 
 
13
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY   
Balance Sheet   
 At June 30, 2007   
        
ASSETS 
      
        
CURRENT ASSETS
      
Cash and Cash Equivalents
   $
38,287
  
Accounts Receivable
    
398,042
  
Inventory
      
1,210,438
  
Recoverable Income Taxes
    
57,077
  
Prepaid Expenses and Other Current Assets
    
119,412
  
TOTAL CURRENT ASSETS
    
1,823,256
  
           
FIXED ASSETS
        
Leasehold Improvements
    
139,585
  
Furniture, Fixtures and Equipment
    
75,851
  
Computer Hardware, Software & Peripherals
    
173,148
  
Machinery and Shop Equipment
    
325,602
  
Vehicles
      
365,501
  
       
1,079,687
  
Accumulated Depreciation
     (579,356 )
   Net Fixed Assets
    
500,331
  
           
OTHER ASSETS
        
Goodwill
      
253,088
  
           
TOTAL ASSETS
   $
2,576,675
  
           
LIABILITIES AND STOCKHOLDERS' EQUITY
        
           
CURRENT LIABILITIES
        
Accounts Payable
   $
233,814
  
Accrued Expenses
    
19,989
  
Bank Line of Credit Payable
    
25,000
  
Customer Deposits
    
5,000
  
TOTAL CURRENT LIABILITIES
    
283,803
  
           
LONG-TERM LIABILITIES
        
Deferred Income Taxes, Net
   $
117,009
  
Related Party Payable
    
12,567
  
       
129,576
  
           
COMMITMENT - NOTE D and G
        
           
STOCKHOLDERS' EQUITY
        
Common Stock ($.001 par value, 100,000,000 shares authorized:
        
11,923,999 shares issued and outstanding at June 30, 2007)
    
11,924
  
Common Stock Not Yet Issued ($.001 par value, 2,150 shares)
    
2
  
Additional Paid-in-Capital
    
1,319,317
  
Retained Earnings
    
832,053
  
TOTAL STOCKHOLDERS' EQUITY
    
2,163,296
  
           
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   $
2,576,675
  
           
           
See notes to consolidated audited financial statements and auditors' report 
 
 
14
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY  
Income Statements      
For the Years Ending June 30, 2007 and 2006      
                
      
2007
    
2006
  
REVENUES AND COST OF SALES:
            
Construction Sales
   $
4,262,071
     $
4,030,648
  
Engineering Sales
    
178,878
      
211,475
  
Gross Sales 
    
4,440,949
      
4,242,123
  
Cost of Construction Sales
    
2,435,115
      
2,382,542
  
Cost of Engineering Sales
    
131,149
      
156,450
  
Gross Cost of Sales
    
2,566,264
      
2,538,992
  
Gross Profit 
    
1,874,685
      
1,703,131
  
                    
                    
ADMINISTRATIVE EXPENSES:
                
Advertising 
    
123,115
      
218,452
  
Construction/Bidding Data
    
19,287
      
11,419
  
Depreciation 
    
57,096
      
52,212
  
Insurance 
    
90,396
      
68,074
  
Office Expense 
    
35,321
      
51,034
  
Payroll Expense
    
771,793
      
692,372
  
Professional Fees
    
38,970
      
42,390
  
Rent  
    
78,600
      
78,000
  
Research and Development
    
13,000
      
8,000
  
Telephone 
    
38,734
      
34,924
  
Travel  
    
33,148
      
35,270
  
Vehicle Expense
    
62,392
      
34,834
  
Other  
    
179,859
      
134,602
  
TOTAL EXPENSES
    
1,541,711
      
1,461,583
  
                    
OPERATING INCOME
    
332,974
      
241,548
  
                    
Loss on Sale of Fixed Assets
    
-
       (866 )
Other Income 
    
10,885
      
19,623
  
Income Before Income Taxes
    
343,859
      
260,305
  
                    
Income Taxes 
     (131,778 )     (89,145 )
                    
Net Income 
   $
212,081
     $
171,160
  
                    
Net Income Per Common Share
                
Basic & Fully Diluted
   $
0.02
     $
0.01
  
                    
Weighted Average Common
                
Shares Outstanding
    
11,920,259
      
11,894,593
  
                    
                    
See notes to consolidated audited financial statements and auditors' report     
 
 
15
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY   
Statement of Stockholders' Equity                
For the Years Ending June 30, 2007 and 2006             
 
               
Common
    
Common
        
               
Shares
    
Stock
              
   
Common
    
Common
    
Not Yet
    
Not Yet
    
Additional
        
   
Shares
    
Stock
    
Issued
    
Issued
    
Paid-in
    
Retained
  
   
(000's)
    
($.001 Par)
    
(000's)
    
($.001 Par)
    
Capital
    
Earnings
  
                                     
Balances, July 1, 2005
    
11,878
     $
11,878
      
8
      
8
     $
1,304,818
     $
448,812
  
                                                 
Net income for year
    
-0-
      
-0-
      
-0-
      
-0-
      
-0-
      
171,160
  
                                                 
Common stock subscribed but not yet issued
    
-0-
      
-0-
      
19
      
19
      
5,946
      
-0-
  
                                                 
Issuance of common stock for services rendered
    
9
      
9
      
-0-
      
-0-
      
3,126
      
-0-
  
                                                 
Issuance of common stock subscribed
    
18
      
18
       (11 )     (11 )    
5,427
      
-0-
  
                                                 
Balances, June 30, 2006
    
11,905
     $
11,905
      
16
     $
16
     $
1,319,317
     $
619,972
  
                                                 
Net income for year
    
-0-
      
-0-
      
-0-
      
-0-
      
-0-
      
212,081
  
                                                 
Issuance of common stock for services rendered
    
19
      
19
      
-0-
      
-0-
      
-0-
      
-0-
  
                                                 
Issuance of common stock subscribed
    
-0-
      
-0-
       (14 )     (14 )    
-0-
      
-0-
  
                                                 
Balances, June 30, 2007
    
11,924
     $
11,924
      
2
     $
2
     $
1,319,317
     $
832,053
  
                                                 
                                                 
See notes to consolidated audited financial statements and auditors' report 
 
 
16
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Statements of Cash Flows      
For the Years Ending June 30, 2007 and 2006      
             
             
   
2007
    
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
   $
212,081
     $
171,160
  
Adjustments to reconcile net income to net
                
cash provided by operating activities:
                
Depreciation
    
114,992
      
112,967
  
Provision for deferred income taxes
    
9,855
      
18,193
  
Loss on sale of fixed assets
    
-
      
866
  
Common stock issued for services
    
-
      
3,135
  
(Increase) decrease in operating assets:
                
Accounts receivable
    
95,598
       (9,609 )
Inventory
     (227,467 )     (253,510 )
Prepaid expenses and other current assets
     (35,351 )     (15,838 )
Recoverable income taxes
     (57,077 )    
30,666
  
Increase (decrease) in operating liabilities:
                
Accounts payable and accrued expenses
    
2,829
       (13,314 )
Current income taxes payable
     (61,588 )    
40,270
  
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES
    
53,872
      
84,986
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Expenditures for fixed assets
     (153,032 )     (231,115 )
                 
NET CASH (USED IN) INVESTING ACTIVITIES
     (153,032 )     (231,115 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from issuance of common stock
    
-
      
11,402
  
Incurrence of related party payable
    
12,567
      
-
  
Borrowings from bank line of credit
    
75,000
      
-
  
Repayment of bank line of credit
     (50,000 )    
-
  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    
37,567
      
11,402
  
                 
NET (DECREASE) IN CASH AND CASH EQUIVALENTS
     (61,593 )     (134,727 )
                 
CASH AND CASH EQUIVALENTS:
                
Beginning of year
    
99,880
      
234,607
  
                 
End of year
   $
38,287
     $
99,880
  
                 
                 
See notes to consolidated audited financial statements and auditors' report
 
 
17
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activity - Metwood, Inc. (the Company) was organized under the laws of the State of Virginia on April 7, 1993.

Effective June 30, 2000, the Company entered an Agreement and Plan of Reorganization to acquire the majority of the outstanding common stock of a publicly held shell corporation. The acquisition resulted in a tax-free exchange for federal and state income tax purposes. Upon acquisition, the name of the shell corporation was changed to Metwood, Inc. (a Nevada corporation). Metwood, Inc. (a Virginia corporation) became a wholly owned subsidiary of Metwood, Inc. (a Nevada corporation). The transaction was accounted for as a reverse merger in accordance with Accounting Principles Board (“APB”) Opinion No. 16 wherein the stockholders of Metwood, Inc. (a Virginia corporation) retained the majority of the outstanding common stock of the Company after the merger. The publicly traded shell corporation did not have a material operating history for several years prior to the merger.

Effective January 1, 2002, the Company acquired certain assets of Providence Engineering, PC (“Providence”), a professional engineering firm with customers in the same proximity as the Company. The total purchase price of $350,000 was paid with $60,000 in cash and with 290,000 shares of the Company’s common stock to the two Providence shareholders. These shares were valued at the closing active quoted market price of the stock at the effective date of the purchase, which was $1 per share. One of the shareholders of Providence was also an officer and existing shareholder of the Company prior to the acquisition. The transaction was accounted for under the purchase method of accounting, and the purchase price was allocated as follows:

Accounts receivable
   $
75,000
  
Fixed assets
    
45,000
  
Goodwill
    
230,000
  
  Total
   $
350,000
  

In prior years, liabilities assumed at the date of acquisition were identified and paid. The amount of the liabilities paid was $23,088 and has been added to goodwill.

The consolidated company provides construction-related products and engineering services to residential customers and contractors, commercial contractors, developers and retail enterprises, primarily in southwestern Virginia.
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Basis of Presentation — The financial statements include the accounts of Metwood, Inc. (a Nevada corporation) and its wholly owned subsidiary, Metwood Inc. (a Virginia corporation) prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany balances and transactions have been eliminated.

Fair Value of Financial Instruments– The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, inventory, prepaid expenses and other current assets, accounts payable, accrued expenses, customer deposits and bank credit line approximate fair values based on the short-term maturity of these instruments.

Accounts Receivable — The Company grants credit in the form of unsecured accounts receivable to its customers based on an evaluation of their financial condition. The Company performs ongoing credit evaluations of its customers. The estimate of the allowance for doubtful accounts, which is charged off to bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. At June 30, 2007 allowance for doubtful accounts was approximately $8,000. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are charged off to the allowance for doubtful accounts when determined uncollectible. For the years ended June 30, 2007 and 2006, the bad debt expense was $30,887 and $1,220, respectively.

Fixed Assets– Fixed assets are recorded at cost and include expenditures that substantially increase the productive lives of the existing assets. Maintenance and repair costs are expensed as incurred. Depreciation is provided using the straight-line method. Depreciation of fixed assets is calculated over management prescribed recovery periods that range from three to thirty years.

When a fixed asset is disposed of, its cost and related accumulated depreciation are removed from the accounts. The difference between undepreciated cost and the proceeds from disposition is recorded as a gain or loss.

Management’s Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. At June 30, 2007, the significant estimates used by management include the valuation of its goodwill. Actual results could differ from those estimates.
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Cash and Cash Equivalents — For purposes of the Consolidated Statements of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, may exceed the federally insured limit of $100,000. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Revenue Recognition — Revenue is recognized when goods are shipped and earned or when services are performed, provided collection of the resulting receivable is probable. If any material contingencies are present, revenue recognition is delayed until all material contingencies are eliminated. Further, no revenue is recognized unless collection of the applicable consideration is probable.

Income Taxes — Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and for net operating loss carry forwards, where applicable. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

Earnings Per Common Share — Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. If applicable, diluted earnings per share would assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. This presentation has been adopted for the years presented. There were no adjustments required to net income for the years presented in the computation of diluted earnings per share.

Advertising — The Company expenses advertising costs as incurred. However, certain expenditures are treated as prepaid (such as trade show fees) if they are for goods or services which will not be received until after the end of the accounting period, and they are subsequently recognized as expenses in those periods in which the goods or services are received.

Inventory - Inventory, consisting of metal and wood raw materials located in the Company’s leased premises and is stated at the lower of cost or market using the first-in, first-out (FIFO) method.
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Patents — The Company has been assigned several key product patents developed by certain Company officers. No value has been recorded in the Company’s financial statements because the fair value of the patents was not determinable within reasonable limits at the date of assignment.

Research and Development — The Company performs research and development on its metal/wood products, new product lines, and new patents. Costs, if any, are expensed as they are incurred. For the years ended June 30, 2007 and 2006, the expenses relating to research and development were $13,000 and $8,000, respectively.

Goodwill — In June 2001 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead, such assets are to be tested for impairment annually or immediately if conditions indicate that such an impairment could exist. Transition to the new rules of SFAS 142 requires the completion of a transitional impairment test of goodwill within the first year of adoption. The Company adopted the provisions of SFAS 142 beginning July 1, 2002 and completed the transitional impairment test of goodwill as of July 1, 2002 and again as of June 30, 2007 and 2006 using discounted cash flow estimates and found no goodwill impairment.

Recent Accounting Pronouncements - In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Recent Accounting Pronouncements (Cont.) - In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”) which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006, which will be the Company’s calendar year 2007, and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The adoption of FIN 48 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.

In June 2006, the Financial Accounting Standards Board (“FASB”) ratified the provisions of Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)”. EITF Issue No. 06-3 requires that the presentation of taxes within revenue-producing transactions between a seller and a customer, including but not limited to sales, use, value added, and some excise taxes, should be on either a gross (included in revenue and cost) or a net (excluded from revenue) basis. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. EITF Issue No. 06-3 is effective for fiscal years beginning after December 15, 2006, which will be the Company’s fiscal year 2008. The adoption of EITF Issue No. 06-3 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements”. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for the fiscal year beginning November 15, 2006. The Company has adopted SAB No. 108 effective for the year end June 30, 2008.

Any error in the financial statements of a prior period discovered subsequent to their issuance shall be reported as a prior-period adjustment by restating the prior-period financial statements. Restatement requires that:
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Recent Accounting Pronouncements (Cont.) –

a. The cumulative effect of the error on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
c. Financial statements for each individual prior period presented shall be adjusted to reflect correction of the period-specific effects of the error.

In March 2006, the FASB issued SFAS No. 156. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement is effective as of the beginning of its first fiscal year that begins after September 15, 2006. An entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date of this Statement.
 
In September 2006, the FASB issued SFAS No. 157 and No. 158. Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice.

Statement No. 158 is an amendment of FASB Statements No. 87, 88, 106, and 132(R). It improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end consolidated statement of financial position, with limited exceptions.
 
The Company does not expect application of SFAS No. 156, 157 and 158 to have a material effect on its consolidated financial statements.
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE B – SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures of cash flow information for the years ended June 30, 2007 and 2006 are summarized as follows:

   
2006
    
2007
  
             Cash paid for :
      
             Income taxes
   $
21,318
     $
240,498
  
             Interest
   $
—
     $
1,080
  
             Supplemental disclosures of non-cash investing and financing activities:
      

NOTE C – RELATED PARTY TRANSACTIONS

For the years ended June 30, 2007, the Company had sales of $5,911 to a company owned by the CEO, Robert Callahan. For the year ended June 30, 2006, the Company had sales of $47,831 to its shareholder and CEO, Robert Callahan. As of June 30, 2007, the related party receivable with Mr. Callahan and the company he owns was $-0-.

As of June 30, 2007, the Company had a related party payable to Cahas Mountain Properties, Inc. a company owned by Mr. Callahan, for monies advanced.

NOTE D – COMMITMENT

In prior years, the Company implemented a stock-based incentive compensation plan for its employees. Participating employees have an after-tax deduction withheld by the Company throughout the calendar year. As of December 31 of each year, the employee is considered vested in the plan, and the Company will match the participating employee’s withheld amounts. The Company may also make a discretionary contribution based upon pay incentives or attendance. Periodically, the Company will purchase restricted stock on behalf of the employee in the amount of his withholdings, the Company’s match, and any discretionary contributions.

As of June 30, 2006, the Company had ten participating employees who withheld an amount immaterial to the consolidated financial statements. No accrual for the Company’s match has been made in the current year.
 
 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE E – SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS

The Company has available a $600,000 revolving line of credit with a local bank. Interest is payable monthly on the outstanding balance at the prime lending rate, which was 8.0% as of June 30, 2007. The note is secured by accounts receivable, equipment, general intangibles, inventory, and fixtures and furniture and is personally guaranteed by the Company’s CEO. The balance outstanding as of June 30, 2007 was $25,000.

NOTE F – EQUITY

During the years ended June 30, 2007 and 2006, the Company issued -0- and 9,500 common shares in payment for services valued at $-0- and $3,135, respectively. The common shares were valued at the fair market value of the shares at the time of issuance as determined by a third party source.

NOTE G – SALE OF FIXED ASSETS AND RELATED OPERATING LEASE

During the year ended June 30, 2006, the Company entered into a sales and leaseback transaction with a related party. The Company sold its various buildings at its corporate headquarters which house its manufacturing plants, executive offices, and other buildings for $600,000 in cash. The Company simultaneously entered into a commercial lease agreement with this entity whereby the Company is committed to lease back these same properties for $6,200 per month over a ten year term expiring on December 31, 2014. Rent expense charged to operations for the years ended June 30, 2007 and 2006 was $78,600 and $78,000, respectively.

Future minimum rental payments as of June 30, 2007 in the aggregate and for each of the five succeeding years and thereafter are as follows:

Year                                                                           Amount
2008                                                                           $   74,400
2009                                                                               74,400
2010                                                                               74,400
2011                                                                               74,400
2012                                                                               74,400
Thereafter                                                                    186,000
                                        $558,000

 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE H – INCOME TAXES

The components of income tax expense for the years ended June 30, 2007 and 2006 consist of:

 
2006
  
2007
  
Current:
            
   Federal
   $
58,869
     $
102,864
  
   State
    
12,067
      
19,059
  
     
70,936
      
121,923
  
Deferred:
    
   Federal
    
14,247
      
7,650
  
   State
    
3,962
      
2,205
  
     
18,209
      
9,855
  
Total income tax expense
   $
89,145
     $
131,778
  
 
The reconciliation of the provision for income taxes at the U. S. federal statutory income tax rate of 39% to the Company’s income taxes for the years ending June 30, 2006 and 2007 is as follows:
 
Income before income taxes
   $
260,305
     $
343,859
  
Income tax expense computed at the statutory rate
    
101,519
      
134,105
  
State income tax, net of federal tax effect
    
14,637
      
21,264
  
Non-deductible expenses
     (2,575 )     (3,084 )
Effect of graduated income tax rates
     (24,436 )     (20,507 )
Total income tax expense
   $
89,145
     $
131,778
  
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for federal and state income tax purposes. Deferred tax liabilities at June 30, 2007 were $117,009, net of deferred tax assets of $-0-. The components of these amounts are as follows:

Depreciation
   $
91,633
  
Amortization of goodwill
    
25,376
  
Net deferred tax liabilities
   $
117,009
  

 
METWOOD, INC. AND WHOLLY OWNED SUBSIDIARY
Consolidated Notes To Audited Financial Statements
For the Years Ended June 30, 2007 and 2006
 
NOTE I – CONCENTRATIONS

There is no single customer or group of related customers from whom the Company derived more than 10% of its accounts receivable as of June 30, 2007. The Company is potentially vulnerable to a concentration-related risk with respect to its metal suppliers, however, since three vendors supply approximately 70% of the metal used in the manufacture of the Company’s products, though these vendors have been used primarily because of their competitive pricing. Several other metal suppliers are available to the Company, but purchasing from them, should that become necessary, would likely result in increased costs.

NOTE J – SEGMENT INFORMATION

The Company operates in two principal business segments: (1) construction-related products and (2) engineering services. Performance of each segment is evaluated based on profit or loss from operations before income taxes. These reportable segments are strategic business units that offer different products and services. Summarized revenue and expense information by segment for the years ended June 30, 2006 and 2007 is as follows:

   
2006
    
2007
  
Construction:
            
Sales
   $
4,030,648
     $
4,262,071
  
Cost of sales
   $ (2,382,542 )   $ (2,435,115 )
Corporate and other expenses
   $ (1,496,312 )   $ (1,625,136 )
Segment income
   $
151,794
     $
201,820
  
Total assets
   $
2,122,843
     $
2,323,587
  
Capital expenditures
   $
208,823
     $
139,083
  
Depreciation
   $
100,428
     $
101,708
  
Interest expense
   $
—
     $
1,080
  

   
2006
    
2007
  
Engineering:
            
Sales
   $
211,475
     $
178,878
  
Cost of sales
   $ (156,450 )   $ (131,149 )
Corporate and other expenses
   $ (35,659 )   $ (37,468 )
Segment income
   $
19,366
     $
10,261
  
Total assets
   $
253,088
     $
253,088
  
Capital expenditures
   $
22,292
     $
13,949
  
Depreciation
   $
12,539
     $
13,284
  
Interest expense
   $
—
     $
—
  
 
 
27
 
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 8A. Controls and Procedures

a.
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Annual Report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting our management on a timely basis to material information required to be disclosed in our reports filed under the Exchange Act.

b.
There have been no significant changes in our internal controls or in other factors that could significantly affect such controls since the Evaluation Date.

PART III

Item 9. Directors and Executive Officers of the Registrant

Identification of Directors and Executive Officers

The following table sets forth the names and the nature of all positions and offices held by all directors and executive officers for the year ending June 30, 2007 and to the date of the filing of this report and the periods during which each such director or executive officer has served in his or her respective positions:

Name
Position and Background
Robert M. Callahan
President, Chief Executive officer
 
 
Mr. Callahan has been involved in the building industry for over thirty years. He is well recognized in southwestern Virginia as an innovator in the uses of passive solar design and wood/metal products in custom home building. Along with Mr. Ronald Shiflett, he formed Metwood, Inc. in 1993 to bring light-gage construction, used in commercial building for years, into common use in residential construction.
 
Shawn A. Callahan
Secretary/Treasurer, Vice President/General Manager, Chief Financial Officer
   
Education:  B.S. Computer Science and Mathematics, Virginia Military Institute
 
Since starting with Metwood, Inc. in May 1996, Mr. Callahan has played a major role in our restructuring, increasing production, improving efficiency, and developing computer aids for us.

 
28
 
Term of Office

The term of office of the current directors shall continue until new directors are elected or appointed.

Family Relationships

Robert Callahan is the father of Shawn Callahan.

Involvement in Certain Legal Proceedings

Except as indicated below and to the knowledge of management, during the past five years, no present or former director, person nominated to become a director, executive officer, promoter or control person of us:

(1)     was a general partner or executive officer of any business by or against which any bankruptcy petition was filed, whether at the time of such filing or two years prior thereto;

(2)     was convicted in a criminal proceeding or named the subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3)     was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;

(4)     was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than sixty days the right of such person to engage in any activity described above under this Item, or to be associated with persons engaged in any such activity; or

(5)     was found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, nor has a judgment been reversed, suspended, or vacated.
 
 
29

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, officers and persons who own more than 10% of our common stock or other registered class of equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required to furnish us with copies of all Section 16(a) forms they file.

Based solely on a review of the forms received covering purchase and sale transactions in our common stock during the fiscal year ended June 30, 2007, we believe that each person who, at any time during that period, was a director, executive officer, or beneficial owner of more than 10% of our common stock complied with all Section 16(a) filing requirements.

Item 10. Executive Compensation

The following table sets forth in summary form the compensation received during each of our last three fiscal years by our President and Chief Executive Officer, Robert M. Callahan:
 
Summary Compensation Table

           
Fiscal
Year
Annual
Salary
Bonuses
Other
Compen-
sation
Restricted
Stock
Awards
LTIP
Options
Restricted
Stock
Bonuses
         
   
(1)
 
(2)
(3)
(4)
(5)
(5)
  
 
2007
  $91,034
17,750
-0-
-0-
-0-
-0-
  
 
2006
  $79,000
5,000
-0-
-0-
-0-
-0-
  
 
2005
  $72,000
-0-
-0-
-0-
-0-
-0-
  

(1)
The dollar value of base salary (cash and non-cash) received, including amounts paid to Carolyn Callahan, wife of Robert M. Callahan.

(2)
The dollar value of bonuses (cash and non-cash) received.

(3)
During the periods covered by the table, we did not pay any other annual compensation not properly categorized as salary or bonus, including perquisites and other personal benefits, securities or property.

(4)
During the periods covered by the table, we did not make any award of restricted stock.

(5)
We currently have no stock option or restricted stock bonus plans.

No member of our management has been granted any option or stock appreciation right; accordingly, no tables relating to such items have been included within this item.
 
 
30

Compensation of Directors

There are no standard arrangements pursuant to which our directors are compensated for any services provided as director. No additional amounts are payable to our directors for committee participation or special assignments.
 
There are no arrangements pursuant to which any of our directors was compensated during our last completed fiscal year or the previous two fiscal years for any services provided as director.

Termination of Employment and Change of Control Arrangement

There are no compensatory plans or arrangements, including payments to be received from us, with respect to any person named in the Summary Compensation Table set out above which would in any way result in payments to any such person because of his resignation, retirement or other termination of such person’s employment with us or our subsidiaries, or any change in control of us, or a change in the person’s responsibilities following a change in control of us.

Item 11 . Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners

The following table sets forth the shares held by those persons who owned more than five percent of Metwood’s common stock as of September 7, 2007, based upon 11,923,999 shares outstanding:
Greater Than 5% Owners

Title of
Class
Name and Address
of Beneficial Owner
No. of
Shares
  
Percent
of Class
         
Common
 
Robert Callahan
819 Naff Road
Boones Mill, VA 24065
 
6,503,415
(1)
54.5%
Common
Ronald Shiflett
819 Naff Road
Boones Mill, VA 24065
2,151,282
(2)
18.0%
 
(1)
Includes direct and indirect interests. There are 4,000,000 common shares included in this amount that are owned in the names of family members of Mr. Callahan.

(2)   Ronald Shiflett has authorized Robert M. Callahan to have the voting rights for his shares of stock.
 
 
31
 
Security Ownership of Management

The following table sets forth the shares held by Metwood directors and officers as of September 7, 2007:
 
Management Ownership

Title of
Class
Name and Address
of Beneficial Owner
No. of
Shares
  
Percent
of Class
         
Common
 
Robert Callahan
819 Naff Road
Boones Mill, VA 24065
 
6,503,415
(1)
54.5%

(1)  Includes direct and indirect interests. There are 4,000,000 common shares included in this amount that are owned in the names of family members of Mr. Callahan.
 
* Less than 1%

Ownership of shares by directors and officers of Metwood as a group: 55.1%.

Changes in Control

We know of no contractual arrangements which may at a subsequent date result in a change our control.

Item 12 . Certain Relationships and Related Transactions

Following are the transactions between Metwood and members of management, directors, officers, 5% shareholders, and promoters of Metwood:

We contract with a construction company 50% owned by our CEO which provides capital improvements and maintenance work on our buildings and grounds.

On January 3, 2005, we entered into a sales and leaseback transaction with Cahas Mountain Properties, LLC (“Cahas”). Cahas is an LLC that is partially owned by members of the Callahan family which are also officers and directors of us. We sold our various buildings at our corporate headquarters which house our manufacturing plants, executive offices, and other buildings on January 3, 2005 for $600,000 in cash. We simultaneously entered into a commercial lease agreement with this entity whereby we committed to lease back these same properties for $6,200 per month over a ten year term. We paid $78,600 and $78,000 in rent to Cahas during fiscal 2007 and fiscal 2006, respectively.
 
 
32

Item 13 . Exhibits and Reports on Form 8-K

(a)
Exhibits

See index to exhibits

(b)
Reports on Form 8-K

None.

Item 14 . Principal Accountant Fees and Services

The following table sets forth the aggregate fees billed by Lake & Associates, CPA’s, PA and Bongiovanni & Associates, CPA’s for audit services rendered in connection with the consolidated financial statements and reports for the years ended June 30, 2007 and 2006, respectively:

   
2006
    
2007
  
             
Audit fees
   $
17,000
     $
20,000
  
Audit-related fees
    
—
      
—
  
Tax fees
    
—
      
—
  
All other fees
    
—
      
—
  
Total fees
   $
17,000
     $
20,000
  

Audit fees:  Consist of fees billed for professional services rendered for the audits of our consolidated financial statements and reviews of the interim consolidated financial statements included in quarterly reports and services that are normally provided by our auditors in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation.

Audit-related fees:  Consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit fees.” These services include accounting consultations in connection with the Sarbanes-Oxley Act of 2002.

Tax fees: Consist of fees billed for tax compliance, tax advice and tax planning services.

All other fees: Consist of fees billed for all other services other than those reported above.

 
33
 
SIGNATURES

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

Date:  September 7, 2007
/s/ Robert M. Callahan
Robert M. Callahan
President, CEO and Director
   
Date:  September 7, 2007
/s/ Shawn A. Callahan
Shawn A. Callahan
Secretary/Treasurer and Director/CFO
 
 
 
34
 
INDEX TO EXHIBITS


NUMBER
 
  
DESCRIPTION OF EXHIBIT
3(i)*
      
Articles of Incorporation
     
3(ii)*
  
By-Laws
     
31.1
  
     
31.2
  
     
32.1
  
     
       32.2  

*Incorporated by reference on Form 8-K, filed February 16, 2000.


 
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