Interview with: Charles G. Masters, CEO - featuring: their line of semi custom built, heavily constructed, on-frame, HUD Code, single and multi-section manufactured homes sold in the southeastern and south central United States.

Deer Valley Corporation (DVLY-OTC: BB)

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Deer Valley Corporation strives to give the end customer the look and feel of living in a permanent home with their high-end “HUD Code” houses

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Industrial Goods
Manufactured Housing

Deer Valley Corporation

4902 Eisenhower Blvd. – Suite 185
Tampa, FL 33634
Phone: 813-885-5998

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Charles G. Masters
Chief Executive Officer

Interview conducted by:
Lynn Fosse, Senior Editor
Published February 15, 2007

CHARLES G. MASTERS, Chief Executive Officer, President and Chairman of the Board of Directors of Deer Valley Corporation since January 2006. Mr. Masters was the founder of Deer Valley Acquisitions Corporation, and, since its inception in July 2005, has served as its Chief Executive Officer. In March 1998, Mr. Masters founded and has since served as CEO and CFO of Bumgarner Enterprises, Inc., an oil/gas development and a business-consulting firm. Since 2001, Mr. Masters has also served as Director, CEO and CFO of Ranger Industries, Inc., a public company, which is the sole shareholder of Bumgarner Enterprises. Ranger Industries engages in business consulting, due diligence research, and oil and gas exploration and development. Mr. Masters has founded and previously served as the CEO and CFO of several private companies involved in the development of military electronic communications and test equipment, pioneering the introduction of microprocessors into point of sale equipment, medical equipment, artificial intelligence devices, and the development of laser scanners. Mr. Masters received a B.S.E.E. (1961) from Duke University, an M.S.E.E. (1964) from the University of Pittsburgh and a M.S.M.S. (1966) from Johns Hopkins University.

Company Profile:
Through its wholly owned subsidiary, Deer Valley Homebuilders, Inc., Deer Valley Corporation designs, produces and sells manufactured homes in the southeastern and south central United States. It manufactures and sells a line of semi custom built, heavily constructed, on-frame, HUD Code, single and multi-section manufactured homes. The largest of the company’s home are 32’ by 90’. The company offers 22 standard models with various decors marketed under the Deer Valley brand name. It sells its products through a network of independent dealers operating approximately 110 retail centers. The company is headquartered in Tampa, Florida. Deer Valley’s two operating plants are located Guin, Alabama and Sulligent, Alabama. The company began operations in 2004.

CEOCFO: Mr. Masters, what was the vision when the company started and how has that developed?
Mr. Masters: “The company was started by Joel Logan and a group of guys that had known each other for a long time and were actively involved in the manufactured housing business. They began the company in 2004 with the vision of doing exactly what they, and now we have done, which is grow the company.”

CEOCFO: Give a little history and tell us what attracted you?
Mr. Masters: “The company shipped its first house in March of 2004 and at the time that it opened, the eight guys that were the founders, knew the industry and had been involved in the industry. Joel Logan had started his first company in the manufactured housing business when he was 27 years old and now he is 37 and starting another company. When they opened the door, because of contacts in the industry, they started out with a 100-unit backlog, which is very unusual. The net result was that by the second month that they were in business, they were profitable, and by the end of 2004 they were at $16 million a year revenue and earning about eight percent on that in a pre-tax basis. They were off to a good start. We learned of them and in January of 2006 after the company had now grown to a $35 million dollar a year company, we acquired control and put it into a public vehicle. The net result is now all the original founders are still there making the company operate, and it is still growing. Our run-rate right now is probably about $72 million a year in revenue as evidenced by our 2nd Quarter results. As you will see in the EDGAR filings, revenues for that quarter were close to $19 million. You can find financial details on the EDGAR system. Part of the growth has come from the fact that exactly two years after the first house was shipped from the original main plant, our second plant opened and shipped its first house. We now have two facilities. Both of them are located in northwestern Alabama.”

CEOCFO: Will you tell us a bit about the manufactured housing industry in general?
Mr. Masters: “Manufactured housing takes on all sorts of phases because one of the major elements of manufactured housing today is its so-called modular housing; that can take the form of multi-story apartment buildings and everything else. We build a more simple form of that in that we build to the HUD code so that we can theoretically ship to any state in the nation, under one building code. Those are all so-called on-frame houses, that means that the steel frame which as it goes down the road to its destination, has wheels on that frame. It is part of the integral construction of the house and the steel frame stays with it forever. Modular houses, by contrast are usually lifted off of some sort of transport mechanism by a crane and set down on a permanent foundation. To draw an analogy that people are used to, these are very high-end houses that are still of the double-wide concept that people are used to. The history of the manufactured housing, which goes back to World War II when the first pre-fab houses were first introduced.  After several evolutionary phases, higher end HUD code house and modular homes have developed. Our specific niche in the market is in the high-end of the HUD code houses. Our houses are finished almost exactly like the interior of a site-built house. When you look at or touch a wall in our homes, it has the same look and feel as you would have in a site-built house with sheet rock construction, full height ceilings. We build what is called a ‘heavy built house.’ We coined the term because as far as we know, we build the heaviest house. All of our floor joists, for example, are two by eights on sixteen-inch centers. The HUD code will allow you to build them on 22-inch centers. Our exterior walls are two-by-sixes, where even most site-built houses are two-by-fours. The same thing in the roofing structure and everything else; we just build a very solid permanent house. When you are inside one of our houses, you have no idea it was not built on-site.”

CEOCFO: Who is buying your homes?
Mr. Masters: “There is a range of buyers. A certain portion are young families buying starter homes, but for the most part our homes are bought by people who have places in the country; generally in the 45-65 years old range. Often they have sold a house somewhere else and this is either a second home or a retirement home. Our best selling house is our largest home, which is 32 by 90 feet; that is essentially 2800 square foot house. It is a big house. All of our homes are very competitively priced relative to site built houses and as such, fall into the general category of affordable housing. Of course, when measured in dollars, what is affordable varies from state to state, and with the region of the country.”

CEOCFO: Are these sold through dealers?
Mr. Masters: “HUD code houses are sold in different manners depending on the manufacturer. We are strictly a manufacturer; we sell only to independent dealers. Right now our dealer base is about 80 dealers who consolidated, own about 110 retail sales lots through the southeast. We do not have any that are exclusively Deer Valley dealers because we offer a limited product line. Most of our independent dealers also sell other manufactures that are built to reach a lower price point buyer. At this time, we do build for the lower priced market. The only entry we have that would reach a portion of that market is that we do build one single section unit, but it is built to the same high-end specifications as our double section homes. Our single units are a beautiful unit and it is in demand in certain parts of the country. Nevertheless, it is a fairly unusual product for us, and it not targeted to general buyer looking for the cheapest house per square foot of living area.”

CEOCFO: Do you do advertising or does the local dealer advertise your homes?
Mr. Masters: “For the most part the local dealer does it all. We sell as a wholesaler directly to the dealer; he sells to the end user. He arranges financing, insurance, and site preparation with the homeowner. He is responsible, in general, for finishing the product once it is onsite. Remember, you are taking a house and shipping it down the road in two big pieces and once it gets to the site, you have to put those two pieces together. Either the dealer has to have a skilled crew that goes out and finishes that interior mating process or through the dealer, we send a factory team to do it.”

CEOCFO: Do you someday envision people asking a dealer for a Deer Valley home, where brand recognition comes into play, or does it make a difference?
Mr. Masters: “Brand recognition makes a huge difference already. We are only two years into the business, but right now if a new purchaser has any friend that has ever had a modular house or mobile home, and if the friend has a Deer Valley, then the purchaser will come to the dealer lot looking for a Deer Valley by name. In general, our dealers can quickly evaluate serious new customer determine how much house they need and roughly how much house they can afford. However, assuming that minimum price per square foot is not the main issue, and then he will usually say we will start with a Deer Valley.  This usually leads to a shorter sales cycle because most people, once they have seen the Deer Valley, will not buy another alternative. The houses are simply that desirable. The feel of a permanent house is not universal in all homes offer by the HUD code  manufacturers, but when guest come into a Deer Valley home to an share the evening with your friends, they walk away feeling like they were in a permanent residence, not just something temporarily put there until the host upgrade to a site built house.”

CEOCFO: Does the current mortgage and home-building situation work for you or against you?
Mr. Masters: “As mortgage rates go up, they go up they drive people towards more affordable housing. When you walk into one of our larger houses and ask how much this is going to cost verses one built onsite, it is generally 20% less than what is built onsite. Then you ask yourself, when I can get one that is built onsite. Chances are it is several months and maybe a year from then that you can actually move in the door. On the other hand, if ask your dealer when you can have a Deer Valley, we used to say it will take three months to get them out of the factory. However, we have opened a second plant now, so the dealer can now say that he can have it for you in less than two months. In addition, it will be operational so that you can be cooking dinner and having friends over in less than sixty days plus you are going to significantly less for it. Interest rates drive people that are marginally able to afford a so-called site-built house towards a manufactured home in general and towards HUD code specifically if they want it quickly. Therefore, that helps us. On the other hand, if we had buyers that were buying our homes that were marginal and being able to afford one, it works against everyone in the housing industry. It can work both ways. For the most part, the niche that we are in does not target people that are straining to make a payment. Usually, they are looking for value, but they can afford a high-end house in this industry because it is well below what they would pay for an equivalent site-built house.

There is one other aspect of financing that unless you knew the manufactured housing business you would not know to ask. Financing for a HUD code home, has historically been different than financing for a site-built house and with a higher interest rate. It varies and can fluctuate with the availability of the money supply in the country. If you look at the history of HUD code and manufactured housing in general, it peaked in 1999 and then has fallen to about half of the number of units sold per year that was done in 1999; the exception being if you include the FEMA units being built in response to Hurricane Katrina. Our company born in a depressed industry and it has succeeded essentially when “the tide was still out.” You can imagine what will the future of this company could be if the “tide came in” driven by changes in financing or whatever took place enough where it forced a big movement back towards the manufactured housing business. I can tell you there is such a tide building. The manufactured housing industry has not has the same financing privileges and access to money as the real estate market in general. At tighter money supply often affects the dealers’ ability to get money because they “floor plan” the houses on the their sales lots the same way an automobile dealer does, but automobile dealer does it through different financing sources for the most part. Finally, if the retail market were to experience a real crunch on financing, it would definitely hurt us.”

CEOCFO: Do you see greater geographic distribution and are there other dealers that you would like to be with?
Mr. Masters: “We have been blessed by having relationships with the top dealers in many of the areas we that we serve, but we would like to see additional dealers in underserved areas of several states. We are not particularly interested in increasing the number of states until we can add a third plant, because the transportation is significant for a large unit like this. Essentially, it only makes economic since to deliver into about a 600-mile radius around your plants. In addition, our growth plan is not built on trying to dramatically increase the number of dealers in the area where we are, but rather to add modular housing to our product line. To do that, we are probably going have to open a third plant because modular housing is built to different state controlled codes. It is a different distribution mechanism in that you do not usually sell through dealers. You usually sell through people in the construction business or developers that are using the manufactured housing manufacturer essentially as a large subcontractor. This is so that when he buys a modular house from you, instead of having a dozen contractors hammering nails or whatever else, he buys housing modules with most of the subcontract functions already done. When you change from being an on frame HUD code manufacturer to a modular manufacturer, you take on the aspects of being a large subcontractor. That is the best way I can describe the difference between those two and the difference in the way our modular products would find their way to the end user.”

CEOCFO: What is ahead for the next few years and the affect of the overall market on your plans?
Mr. Masters: “The overall market is tough right now. It is a little bit of a seasonal business in that the fall and winter preceding Christmas, people just don’t buy as many houses; it doesn’t’ make a difference whether it is manufactured or not, they just don’t buy houses like they do in late spring and early summer. There is a cyclical nature on an annual basis, and we are expecting to see that. Many of our competitors are closing their plants for several days a week or several weeks out of a quarter, fortunately, we are not doing that, we have a backlog, and our sales force is working hard to maintain that. In terms of the growth for the long-term, we are relatively near capacity at our present plants; we could increase capacity enough to add 10% and maybe even 15 or 20%. However, our real growth will come from that third plant. The third plant will either have to open up a new geographic region, but more likely it will be to put us into the modular business. Because houses are built to a different code, even though they are built to our current quality standards, we will have to employ slightly different construction techniques and employ material handling techniques that are quite different than those used in HUD code production. The overall picture of what we will do is identical to what we do now; we just be taking a little different approach in some production areas in order to produce a product that is suitable for the modular market. Our vision is through either acquisition or opening a new plant from scratch, in the next few months we will try to find our foothold in that market.

In terms of looking at where the company is going, you have to look at what our growth rate has been. We did $16 million in 2004, $35 million in 2005, in 2006, our forecast is we will pretty much stay on the course we are now as far as production, and if we do that, it will produce something in the neighborhood of $60 to $70 million in revenue in 2006. This management team has not changed except that I have been added and a new board has been added. Our commitment is to grow.  If I were looking at this company as an investor, I would take a look at the two research reports that have been done on Deer Valley; both of them are strong reports and recommend the stock for speculative growth. I personally think we are the investors dream; we have grown rapidly, we are financially strong with a highly liquid balance sheet, and we have never had a month where we didn’t make money on an operating basis. Therefore, this year the IRS is smiling from ear-to-ear because we keep sending them money and that means we are making money. The bottom line is that if a company can grow as fast has we have grown and never had a month where we did not make money, it deserves the investors attention. Our startup expenses are on our new plant were fully amortized in the first quarter of this year, and yet we made money even in that quarter. For an investor, not a speculator, it is what you love to see.”

CEOCFO: Looking ahead, are there any challenges and how are you prepared?
Mr. Masters: “One big bump is how big will be this drop in the housing market. Even though we are a tiny piece of it so we can take market share, we will feel the effects of a major recession in housing because there are more used houses on the market; there is just less demand. No matter how much we compete, if the tide in house purchases goes increasingly low, it will ultimately impact us, so that is the main thing. The other thing could be self-generated. We are advancing very cautiously on our plan to enter the modular market. Several of our competitors both large and small have jumped off that bridge and have found it very difficult to make money there because there is much more customization to the house. A HUD code house is a big rectangle with a lot of flexibility on what you do inside of it. A modular house is completely architectural free form so that every house can be as different as night and day. In a manufacturing environment, a product that has a lot of similarity between the units that go out the door, is much easier to make money than something with an enormous amount of flexibility. Even with our extensive use of computer design, modular is still more difficult, and it requires different distribution channels. We are proceeding cautiously because our shareholders expect us to make money at every endeavor not just prove to the industry that we could build modular houses.”

CEOCFO: Why do you feel you can pull it off when others have not?
Mr. Masters: “We can be successful in building and selling modular homes because we have a very experienced team in terms of the assembly side. In addition, we are treading cautiously, and we will add the necessarily skills and know we have them before we step off any bridges.”

CEOCFO: In closing, what should people remember most about Deer Valley?
Mr. Masters: “This company has been ethically true to its commitments. We value our employees, our dealers, our vendors and our customers. To that end, we build houses that are designed and produced to meet the buyer’s quality expectations. Our houses are built to avoid lot of warranty work, or lot of follow-up fieldwork. All of that translates not only into the sales growth that we have experienced, but it also means that we have endeavored to avoid downstream problems that could come back and negatively affect our investors. Very importantly, we have not leveraged the company to achieve sales growth. When we did the restructuring at the beginning of this year at the time I got involved, we did not leverage the company’s assets one dollar. We brought in all new capital and that meant that the company continued to have a strong, highly liquid, balance sheet. In summary, we have a financially strong, rapidly growing company led by an aggressive, proven management team that is succeeding in a tough industry environment. Deer Valley’s has an unexcelled reputation for producing a high quality product line backed by a history of meeting commitments to its customers, dealers and vendors while consistently growing operating profits.  Deer Valley Corporation is the investors’ model company.”


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“Our specific niche in the market is in the high-end of the HUD code houses. Our houses are finished almost exactly like the interior of a site-built house. When you look at or touch a wall in our homes, it has the same look and feel as you would have in a site-built house with sheet rock construction, full height ceilings. We build what is called a ‘heavy built house.’ We coined the term because as far as we know, we build the heaviest house. All of our floor joists, for example, are two by eights on sixteen-inch centers. The HUD code will allow you to build them on 22-inch centers. Our exterior walls are two-by-sixes, where even most site-built houses are two-by-fours. The same thing in the roofing structure and everything else; we just build a very solid permanent house. When you are inside one of our houses, you have no idea it was not built on-site.” - Charles G. Masters

Deer Valley Product & Partner

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