CAVALIER HOMES INC
10-Q, 1997-08-11
MOBILE HOMES
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                                UNITED STATES
                        SECURITIES & EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q
                                   ---------

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the quarterly period ended      June 27, 1997
                                            -------------
                                        OR

[  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the transition period from ---------- to ----------


                          Commission File Number 1-9792

                             Cavalier Homes, Inc.
                        -------------------------------                   
           (Exact name of Registrant as specified in its charter)


      Delaware                                                   63-0949734
- ------------------                                         --------------------
(State or other jurisdiction of                               (IRS Employer
incorporation or organization)                            Identification Number)


         Highway 41 North & Cavalier Road,  Addison, Alabama    35540
        --------------------------------------------------------------     
                   (Address of principal executive offices)
                                   (Zip Code)


                                (205) 747-1575
                              ------------------                     
               (Registrant's telephone number, including area code)


                           --------------------------
(Former name, former address and former fiscal year, if changed since last year)


        Indicate by check mark whether the  registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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  the  number  of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the close of the latest practicable date.

         Class                                    Outstanding at August 11, 1997
- ---------------------------                       -----------------------------
Common Stock $.10 Par Value                             12,283,127  Shares

                                      -1-
<PAGE>


                            CAVALIER HOMES, INC. AND SUBSIDIARIES


                                            INDEX


                                                                       Page No.
Part I. Financial Information  (Unaudited)

        Consolidated Condensed Balance Sheets -                           3
        June 27, 1997 and December 31, 1996

        Consolidated Condensed Statements of Income -                     4
        Thirteen and  Twenty-Six Weeks ended June 27, 1997
        and June 28, 1996

        Consolidated Condensed Statements of Cash Flows -                 5
        Twenty-Six Weeks ended June 27, 1997 and
        June 28, 1996

        Notes to Consolidated Condensed Financial                         6
        Statements

        Management's Discussion and Analysis of Financial                 9
        Condition and Results of Operations

Part II.Other Information

        Item 4.  Submission of Matters to a Vote of                      13
        Security Holders

        Item 5.  Other Matters                                           13

        Item 6.  Exhibits                                                14

        Signatures                                                       16

















Certain  items in the report  that  follows  are marked  with an  asterisk  (*),
indicating  that they are  subject  to the  "Safe  Harbor"  Statement  under the
Private  Securities  Litigation  Reform  Act of  1995  found  on page 15 of this
report.




                                      -2-
<PAGE>
<TABLE>
<CAPTION>
                     CAVALIER HOMES, INC. AND SUBSIDIARIES
                     CONSOLIDATED CONDENSED BALANCE SHEETS
                            (Dollars in Thousands)
                                 (UNAUDITED)
<S>                                                               <C>           <C>

                                                                       June 27, December 31,
ASSETS                                                                   1997      1996
CURRENT ASSETS:                                                      ---------- ------------
     Cash and cash equivalents                                      $     9,992 $    24,529
     Marketable securities available for sale                                -        1,097
     Accounts receivable, less allowance for
            losses of $800                                               21,661       3,046
     Notes and installment contracts receivable - current                 1,609       1,086
     Inventories                                                         15,331      12,394
     Deferred income taxes                                                4,745       4,663
     Other current assets                                                   997       2,475
                                                                     ----------  ----------
            Total current assets                                         54,335      49,290
                                                                     ----------  ----------
PROPERTY, PLANT AND EQUIPMENT (Net)                                      27,140      24,760
                                                                     ----------  ----------
INSTALLMENT CONTRACTS RECEIVABLE, less
    allowance for credit losses of $1,175 (1997)
    and $941 (1996)                                                      42,664      34,504
                                                                     ----------  ----------
GOODWILL, less accumulated amortization of
    $711 (1997) and $588 (1996)                                           3,003       3,126
                                                                     ----------  ----------
OTHER ASSETS                                                              4,267       3,894
                                                                     ----------  ----------
                                                                    $   131,409 $   115,574
                                                                     ==========  ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Current portion of long-term debt                              $     1,808 $       951
     Accounts payable                                                    10,556       7,916
     Amounts payable under dealer incentive programs                      9,666      10,937
     Accrued wages and related withholdings                               2,866       1,652
     Accrued incentive compensation                                       2,036       2,615
     Estimated warranties                                                 7,000       7,000
     Accrued insurance                                                    1,775       2,023
     Other accrued expenses                                               8,136       7,722
                                                                     ----------  ----------
          Total current liabilities                                      43,843      40,816
                                                                     ----------  ----------
DEFERRED INCOME TAXES                                                     1,070       1,035
                                                                     ----------  ----------
LONG-TERM DEBT                                                           10,747       4,918
                                                                     ----------  ----------
STOCKHOLDERS' EQUITY:
     Series A Junior  Participating  Preferred  Stock,  $.01 par value;
        200,000 shares authorized, none issued
     Preferred stock, $.01 par value;
        300,000 shares authorized, none issued
     Common stock, $.10 par value; authorized
        50,000,000 shares; issued 12,257,260 (1997)
        and 12,169,128 (1996) shares                                      1,226       1,217
     Additional paid-in capital                                          32,081      31,057
     Retained earnings                                                   42,442      36,531
                                                                     ----------  ----------
         Total stockholders' equity                                      75,749      68,805
                                                                     ----------  ----------
                                                                    $   131,409 $   115,574
                                                                     ==========  ==========





See Notes to Consolidated Condensed Financial Statements

                                     -3-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        CAVALIER HOMES, INC. AND SUBSIDIARIES
                     CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                   (Dollars in Thousands Except Per Share Amounts)
                                    (UNAUDITED)

<S>                                        <C>       <C>             <C>         <C>

                                              Thirteen Weeks Ended    Twenty-Six Weeks Ended
                                              --------------------    ----------------------  
                                             June 27,    June 28,    June 27,    June 28,
                                               1997        1996        1997        1996
REVENUES:                                    ----------  ----------  ----------  ---------- 
     Net sales                              $    90,479 $    90,838 $   166,237 $   165,622
     Financial services                           1,296         772       2,438       1,392
                                             ----------  ----------  ----------  ----------
                                                 91,775      91,610     168,675     167,014
                                             ----------  ----------  ----------  ----------
COST OF SALES                                    74,746      74,643     136,676     136,456
 
SELLING, GENERAL AND ADMINISTRATIVE:
    Manufacturing                                10,544      10,675      19,901      19,332
    Financial services                              712         508       1,358         867
                                             ----------  ----------  ----------  ----------
                                                 86,002      85,826     157,935     156,655
                                             ----------  ----------  ----------  ----------
OPERATING PROFIT                                  5,773       5,784      10,740      10,359
                                             ----------  ----------  ----------  ----------
OTHER INCOME(EXPENSE):
    Interest expense:
       Manufacturing                                (35)         (4)        (79)        (20)
       Financial services                          (221)       (127)       (323)       (243)
    Other, net                                      397         229         685         564
                                             ----------  ----------  ----------  ----------
                                                    141          98         283         301
                                             ----------  ----------  ----------  ----------
INCOME BEFORE INCOME TAXES                        5,914       5,882      11,023      10,660
                                             ----------  ----------  ----------  ----------
INCOME TAXES                                      2,357       2,357       4,380       4,264
                                             ----------  ----------  ----------  ----------
NET INCOME                                  $     3,557 $     3,525 $     6,643 $     6,396
                                             ==========  ==========  ==========  ==========
NET INCOME PER SHARE                        $       .29 $       .29 $       .54 $      0.53
                                             ==========  ==========  ==========  ==========
WEIGHTED AVERAGE SHARES OUTSTANDING          12,413,503  12,263,996  12,404,261  12,128,577
                                             ==========  ==========  ==========  ==========








See Notes to Consolidated Condensed Financial Statements

                                     -4-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                   CAVALIER HOMES, INC. AND SUBSIDIARIES
              CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                         (Dollars in Thousands)
                               (UNAUDITED)
<S>                                                               <C>            <C>

                                                                      Twenty-Six Weeks Ended
                                                                      ---------------------- 
                                                                        June 27,    June 28,
                                                                          1997        1996
                                                                      ----------  ----------
OPERATING ACTIVITIES:
  Net income                                                        $     6,643 $    6,396
  Adjustments to reconcile net income to net cash used
     in operating activities:  
       Depreciation and amortization                                      2,091      1,763
       Provision for credit losses and repurchase commitments               234        133
       Gain on sale of property, plant and equipment                        (15)       (12)
       Equity in earnings of equity investments                            (187)      (200)
       Compensation related to issuance of stock options                     72         55
       Changes in assets and liabilities provided (used) cash, net of
          effects of acquisitions:
            Accounts receivable                                         (18,615)   (17,954)
            Inventories                                                  (1,900)    (2,357)
            Accounts payable                                              1,818      5,229
            Amounts payable under dealer incentive programs              (1,271)     1,617
            Estimated warranties                                            -          629
            Other assets and liabilities                                  2,125      2,441
                                                                      ---------  ---------
       Net cash used in operating activities                             (9,005)    (2,260)
                                                                      ---------  ---------
INVESTING ACTIVITIES:
  Proceeds from the sale of property, plant and equipment                    28         54
  Net cash paid in connection with acquisitions                            (871)      (370)
  Capital expenditures                                                   (4,032)    (4,155)
  Distribution from equity investments                                      248        194
  Proceeds from sale or maturity of marketable securities                 1,097      1,475
  Purchases and originations of notes and installment contracts         (10,934)    (8,825)
  Principal collected on notes and installment contracts                  2,017      1,348
                                                                      ---------  ---------
       Net cash used in investing activities                            (12,447)   (10,279)
                                                                      ---------  ---------
FINANCING ACTIVITIES:
  Proceeds from long-term borrowings                                      7,552      1,005
  Payments on long-term debt                                               (866)      (465)
  Cash dividends paid                                                      (731)      (549)
  Proceeds from exercise of stock options                                     4      3,453
  Proceeds from dividend reinvestment and stock purchase plans              956       -
                                                                      ---------  ---------
       Net cash provided by financing activities                          6,915      3,444
                                                                      ---------  ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS                               (14,537)    (9,095)
                                                                      ---------  ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                           24,529     21,005
                                                                      ---------  ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                            $     9,992 $   11,910
                                                                      =========  =========













See Notes to Consolidated Condensed Financial Statements

                                     -5-
</TABLE>
<PAGE>


                                 PART I.
                  CAVALIER HOMES, INC. AND SUBSIDIARIES
         Notes to Consolidated Condensed Financial Statements
    For the Thirteen and Twenty-Six Week Periods Ended June 27, 1997
                           and June 28, 1996
            (Dollars in Thousands except per share amounts)

1.     BASIS OF PRESENTATION

               The  accompanying  consolidated  condensed  financial  statements
               have been prepared in compliance with Form 10-Q  instructions and
               thus do not include all of the information and footnotes required
               by  generally   accepted   accounting   principles  for  complete
               financial  statements.  In  the  opinion  of the  Company,  these
               statements  contain all  adjustments  necessary to present fairly
               the  Company's  financial  position as of June 27, 1997,  and the
               results of its operations  for the thirteen and  twenty-six  week
               periods ended June 27, 1997 and June 28, 1996, and its cash flows
               for the twenty-six  week periods ended June 27, 1997 and June 28,
               1996. All adjustments are of a normal recurring nature.

               The  results of operations for the thirteen and twenty-six  weeks
               ended June 27, 1997 are not necessarily indicative of the results
               to be expected for the full year.

               Inventories  consist primarily of raw materials and are stated at
               the lower of cost (first-in, first-out method) or market.

               Certain  amounts from the 1996 periods have been  reclassified to
               conform to the 1997 period presentation.  These reclassifications
               had no effect on results of operations or stockholders' equity.

               Net  income per share is computed  by dividing  net income by the
               weighted  average  number of shares of common  stock  outstanding
               during the thirteen  and  twenty-six  week  periods  after giving
               effect  to the  equivalent  shares  which are  issuable  upon the
               exercise of stock options determined by the treasury stock method
               in accordance with APB No. 15.

               In  June 1997,  the Company  purchased  substantially  all of the
               assets and assumed certain  existing  liabilities of Pacer Homes,
               Inc. for a net cash payment of $871.

2.        ACCOUNTING STANDARDS NOT YET ADOPTED

               During  February 1997, the Financial  Accounting  Standards Board
               ("FASB")  issued  Statement  of  Financial  Accounting  Standards
               ("SFAS") No. 128, Earnings per Share, which will become effective
               for all  financial  statements  issued for periods  ending  after
               December  15,  1997,  including  interim  periods.  SFAS No.  128
               provides for the  presentation of basic and diluted  earnings per
               share  on the face of the  financial  statements  and  supersedes
               Accounting  Principles  Board (APB) Opinion No. 15,  Earnings per
               Share.  SFAS No. 128  requires  the  restatement  of earnings per
               share for prior periods  presented after its effective date. SFAS
               No. 128 does not have a material  effect  upon the  thirteen  and
               twenty-six  week  periods  ended June 27, 1997 and June 28, 1996.
               However,  the  impact  on other  prior  periods  has not yet been
               determined.

               The  FASB issued SFAS No. 131,  Disclosures  about Segments of an
               Enterprise  and  Related   Information,   in  June  1997,   which
               supersedes  Statement 14,  Financial  Reporting for Segments of a
               Business  Enterprise.  SFAS  No.  131  modifies  previous  annual
               segment  reporting and requires  selected segment  information in
               quarterly  reports.  Statement  No.  131  requires  that a public
               company  report a measure  of  segment  profit  or loss,  certain
               specific  revenue  and  expense  items  and  segment  assets.  It
               requires reconciliations of total segment revenues, total segment
               profit or loss, total segment assets and other amounts  disclosed
               for   segments  to   corresponding   amounts  in  the   company's
               general-purpose financial statements. The Statement also provides
               for  entity-wide  disclosures  about the  products and services a
               company provides, the material countries in which it holds assets
               and  reports  revenue  and its  major  customers.  SFAS  No.  131
               requires  that  companies  disclose  segment  data based upon how
               company management  determines  resource  allocations to segments
               
                                     -6-
<PAGE>

                                         PART I.
                       CAVALIER HOMES, INC. AND SUBSIDIARIES
               Notes to Consolidated Condensed Financial Statements
        For the Thirteen and Twenty-Six Week Periods Ended June 27, 1997
                            and June 28, 1996
         (Dollars in Thousands except per share amounts)

2.     ACCOUNTING STANDARDS NOT YET ADOPTED (continued)

               and measures segments' performance. This Statement  is  effective
               for financial statements issued for fiscal years beginning  after
               December  15,  1997.  The  adoption  of the  provisions  of  this
               Statement  will result only in increased  disclosures  on segment
               information  and will not  impact the  amounts  in the  financial
               statements.

 3.    SUPPLEMENTAL CASH FLOW DISCLOSURES
                                                Twenty-Six Weeks Ended
                                                ----------------------
                                                June 27,      June 28,
                                                  1997          1996
                                                --------      --------
       Cash paid for: Interest                 $     364     $     284
                      Income taxes             $   3,619     $   3,462

4.     CREDIT ARRANGEMENTS

               The  Company has a $23,000  revolving,  warehouse  and  term-loan
               agreement (the "Credit  Facility")  with its primary bank,  whose
               president  is a director  of the  Company.  The  Credit  Facility
               contains a revolving line of credit which provides for borrowings
               (including  letters  of  credit)  of up to  80%  and  50%  of the
               Company's   eligible  (as  defined)   accounts   receivable   and
               inventories, respectively, up to a maximum of $5,000. Interest is
               payable  under the  revolving  line of credit at the bank's prime
               rate (8.5% at June 27, 1997).

               The  warehouse and  term-loan  agreement  contained in the Credit
               Facility  provide for  borrowings  of up to 80% of the  Company's
               eligible (as defined) installment sale contracts, up to a maximum
               of $18,000.  Interest on term notes is fixed for a period of five
               years from  issuance at a rate based on the weekly  average yield
               on five-year treasury  securities  averaged over the preceding 13
               weeks,  plus 2%, and floats for the remaining two years at a rate
               (subject to certain  limits)  equal to the bank's prime rate plus
               .75%. The warehouse component of the Credit Facility provides for
               borrowings  of up to $2,000 with  interest  payable at the bank's
               prime  rate  plus  1%.  However,  in no event  may the  aggregate
               outstanding   borrowings   under  the   warehouse  and  term-loan
               agreement exceed $18,000.

               The  Credit   Facility   contains   certain   restrictive
               covenants,  which limit the  aggregate  of dividend  payments and
               purchases of treasury stock to 50% of consolidated net income for
               the two most recent years.  Amounts  outstanding under the Credit
               Facility are secured by the accounts  receivable and  inventories
               of the  Company,  loans  purchased  and  originated  by  Cavalier
               Acceptance  Corporation,   the  Company's  wholly  owned  finance
               subsidiary,  and the  capital  stock of certain of the  Company's
               consolidated subsidiaries. The bank's commitment under the Credit
               Facility will expire in April of 1998.

               As of June 27, 1997,  the Company had $9,137  borrowed  under the
               Credit Facility.

5.     STOCKHOLDERS' EQUITY

               A  five-for-four  stock split of the Company's common stock which
               was effected in the form of a 25% stock dividend was  distributed
               on  November  15, 1996 to  stockholders  of record on October 31,
               1996. All  historical  dividends and net income per share amounts
               have been adjusted for the stock split.

                                     -7-
<PAGE>


                                   PART I.
                     CAVALIER HOMES, INC. AND SUBSIDIARIES
             Notes to Consolidated Condensed Financial Statements
       For the Thirteen and Twenty-Six Week Periods Ended June 27, 1997
                              and June 28, 1996
               (Dollars in Thousands except per share amounts)

5.      STOCKHOLDERS' EQUITY (continued)

               Cash  dividends  were paid during this  quarter and  the previous
               three quarters as follows (all amounts are per share):
                                                                 Split Adjusted
                     Record Date             Payment Date         Dividend Paid
                     -----------             ------------         -------------
                     April 30, 1997          May 15, 1997           $      .030
                     January 31, 1997        February 14, 1997      $      .030
                     October 31, 1996        November 15, 1996      $      .030
                     July 31, 1996           August 15, 1996        $      .024


6.     COMMITMENTS AND CONTINGENCIES

               It is a customary practice in the manufactured  housing  industry
               to enter  into  repurchase  and other  recourse  agreements  with
               lending  institutions  which have provided  wholesale  floor plan
               financing to dealers.  Substantially  all of the Company's  sales
               are made to dealers located primarily in the southeast, southwest
               and midwest  regions of the United States  pursuant to repurchase
               agreements with lending institutions.  These agreements generally
               provide for repurchase of the Company's products from the lending
               institutions   for  the   balance   due  them  in  the  event  of
               repossession  upon a dealer's  default.  Although  the Company is
               contingently  liable for approximately  $90,000 at June 27, 1997,
               such  contingency  is reduced  by the  resale  value of the homes
               which may be  required  to be  repurchased.  Losses  under  these
               agreements have not been  significant in the past, and management
               expects no material loss in excess of the  allowance  provided of
               $800. *

               The  Company's  workmen's  compensation,  product  liability  and
               general liability insurance coverages are provided under incurred
               loss, retrospectively rated premium plans. Under these plans, the
               Company  incurs  insurance  expenses  based  upon  various  rates
               applied  to  current  payroll  costs and  sales.  Annually,  such
               insurance   expenses   are  adjusted  by  the  carrier  for  loss
               experience   factors  subject  to  minimum  and  maximum  premium
               calculations.  At June 27,  1997,  the Company  was  contingently
               liable  for  future  retrospective  premium  adjustments  up to a
               maximum  of  $7,300  in the  event  that  additional  losses  are
               reported related to prior periods.

               The Company is a party to  various legal  proceedings  incidental
               to its  business.  In the  opinion of  management,  the  ultimate
               liability,  if any,  with  respect  to these  proceedings  is not
               presently expected to materially affect the financial position or
               results of  operations  of the  Company;  however,  the  ultimate
               resolution  of these  matters could result in losses in excess of
               current estimates. *

               The Company and its equity  partner  have  jointly and  severally
               guaranteed a revolving  note,  with a balance of $700 at June 27,
               1997, of the limited  liability company in which the Company owns
               a 50% interest. The guaranty is limited to 60% of the outstanding
               principal balance up to a maximum guaranty of $600.

               The Company  and certain of its equity  partners  have    jointly
               and  severally guaranteed certain  short-term debt of the limited
               liability company in which the company owns a one-third interest.
               The guaranty is limited to 33% of  the  outstanding debt up to a 
               maximum guaranty of $333.   At June 27, 1997,  there is no amount
               outstanding under this guaranty.

- ---------------------------------------
* See Safe Harbor Statement on page 15.

                                     -8-
<PAGE>


                                    PART I.
                   CAVALIER HOMES, INC. AND SUBSIDIARIES
                  Management's Discussion and Analysis of
               Financial Condition and Results of Operations
                                 June 27, 1997

GENERAL

The  principal  business of the Company since its inception has been the design,
production  and sale of  manufactured  homes.  In the first quarter of 1992, the
Company,  through its wholly owned subsidiary,  Cavalier Acceptance  Corporation
("CAC"),  commenced retail installment sale financing operations, and by the end
of 1993,  these  operations  had become  significant  enough to require  segment
reporting by the Company.

The Company's business is cyclical and seasonal and is influenced by many of the
same economic and demographic factors that affect the housing market as a whole.
According  to the  Manufactured  Housing  Institute,  the  manufactured  housing
industry  posted gains in shipments  from 1992 through  1996,  with  approximate
total annual shipments of 211,000 (1992) increasing to 363,000 (1996),  and with
the greatest gains  occurring in the  southeastern  United  States.  The Company
conducts a substantial portion of its business in the southeastern United States
and attributes  past years' strong shipment growth to a reduction of alternative
housing,   increased  availability  of  retail  financing,   increased  consumer
confidence  and  continuing  strength in the national  economy.  The Company has
increased its production  capacity to better take advantage of the growth in the
industry, increasing the number of manufacturing facilities from four at the end
of 1992 to fourteen at June 27, 1997. The fourteenth  manufacturing facility was
added in June 1997 when the Company  purchased  substantially  all of the assets
and assumed certain existing liabilities of Pacer Homes, Inc., a manufacturer in
Texas, which is a growing market for the Company and the industry.

The manufactured housing industry has, over the past several years,  experienced
increases in both the number of retail dealers and manufacturing capacity, which
the Company  believes is currently  resulting in fewer home  deliveries,  higher
dealer  inventories,  lower order  backlogs  and  increased  price  competition.
Industry  statistics  reflect a decrease in home  shipments  of 3.3% through May
1997. Additionally, many of the Company's market areas experienced unusually wet
weather during portions of this period,  delaying many retail  deliveries by its
dealers.  The Company is uncertain at this time as to what effect these  factors
will have on sales and earnings during the balance of 1997 and thereafter. *

RESULTS OF OPERATIONS

The following  tables set forth,  for the periods and dates  indicated,  certain
financial and operating data,  including,  as applicable,  the percentage of net
sales or total revenue:

<TABLE>
<CAPTION>
<S>                            <C>           <C>            <C>           <C>        <C>           <C>            

STATEMENT OF INCOME SUMMARY                            For the Thirteen Weeks Ended
(Dollars in Thousands)          -------------------------------------------------------------------------
                                      June 27, 1997               June 28, 1996            Difference
                                --------------------------   -----------------------   ------------------
Net Sales                       $    90,479   100.0%         $    90,838   100.0%     $    (359)    -0.4%
Cost of Sales                        74,746    82.6%              74,643    82.2%           103      0.1%
                                 ----------   ------          ----------   ------      ---------
     Gross Profit on Sales      $    15,733    17.4%              16,195    17.8%     $    (462)    -2.9%
                                 ==========                   ==========               =========
Net Sales                       $    90,479                  $    90,838              $    (359)    -0.4%
Financial Services                    1,296                          772                    524     67.9%
                                 ----------                   ----------               ---------
     Total Revenue              $    91,775   100.0%              91,610   100.0%     $     165      0.2%
                                 ==========                   ==========                ========  
Selling, General
 and Administrative             $    11,256    12.3%         $    11,183    12.2%     $      73      0.7%
Operating Profit                $     5,773     6.3%         $     5,784     6.3%     $     (11)    -0.2%
Net Income                      $     3,557     3.9%         $     3,525     3.8%     $      32      0.9%
</TABLE>


- ---------------------------------------
* See Safe Harbor Statement on page 15.
                               
                                     -9-
<PAGE>


                                   PART I.
                   CAVALIER HOMES, INC. AND SUBSIDIARIES
                  Management's Discussion and Analysis of
               Financial Condition and Results of Operations
                                June 27, 1997
<TABLE>
<CAPTION>
<S>                             <C>            <C>          <C>            <C>       <C>              <C>

STATEMENT OF INCOME SUMMARY                         For the Twenty-Six Weeks Ended
(Dollars in Thousands)         ----------------------------------------------------------------------------
                                        June 27, 1997            June 28, 1996             Difference
                               --------------------------   ------------------------   --------------------

Net Sales                       $    166,237    100.0%      $    165,622    100.0%     $    615        0.4%
Cost of Sales                        136,676     82.2%      $    136,456     82.4%          220        0.2%
                                 -----------    ------       -----------    ------      -------    
     Gross Profit on Sales      $     29,561     17.8%      $     29,166     17.6%          395        1.4%
                                 ===========                 ===========                =======
Net Sales                       $    166,237                $    165,622               $    615        0.4%
Financial Services                     2,438                       1,392               $  1,046       75.1%
                                 -----------                 -----------                ------- 
     Total Revenue              $    168,675    100.0%      $    167,014    100.0%     $  1,661        1.0%
                                 ===========                 ===========                =======  
Selling, General
 and Administrative             $     21,259     12.6%      $     20,199     12.1%     $  1,060        5.2%
Operating Profit                $     10,740      6.4%      $     10,359      6.2%     $    381        3.7%
Net Income                      $      6,643      3.9%      $      6,396      3.8%     $    247        3.9%


</TABLE>

<TABLE>
<CAPTION>
<S>                                         <C>             <C>                 <C>               <C>

OPERATING DATA SUMMARY                        For the Thirteen Weeks                  For the Twenty-Six
(Dollars in Thousands)                                Ended                              Weeks Ended
                                            -------------------------             -------------------------
                                                 June 27,     June 28,                 June 27,    June 28,
                                                   1997        1996                     1997         1996
                                            -------------------------             -------------------------  
Installment Loan Originations               $      4,628 $     5,105              $    10,491 $      8,825
Capital Expenditures                        $      2,781 $     2,674              $     4,032 $      4,155
Home Shipments                                     3,696       3,826                    6,780        6,965
Floor Section Shipments                            5,342       5,439                    9,817        9,886
Independent Exclusive Dealers                        134         100                      134          100
Home Manufacturing Facilities                         14          11                       14           11

</TABLE>

Net Sales.  Net sales of  manufactured  homes for the thirteen week period ended
June 27,  1997,  declined  $359,000 or .4% as compared to the second  quarter of
1996,  and  the  Company  experienced  a  moderate  increase  in  net  sales  of
approximately  $615,000 for the twenty-six  week period ended June 27, 1997 over
the comparable  period in 1996.  The Company  believes the slight decline in net
sales for the second  quarter  and the  slowdown  in the rate of increase in net
sales for the year-to-date period is due to increased competitive factors in the
industry  caused by the  growth  over the last  several  years in the  number of
dealers  operating  in  the  industry  and  increased   manufacturing  capacity,
resulting  in a build-up  of dealer  inventories,  reduced  order  backlogs  and
increased  price  competition.  In  addition,  many  of  the  Company's  markets
experienced unusually wet weather during portions of this period. Homes sold for
the second  quarter  and  year-to-date  decreased  slightly by 130 homes and 185
homes,  respectively.  As part of the Company's marketing program, the exclusive
dealer  distribution  system has grown to 134 independent  exclusive dealers, up
from 115 dealers at the end of 1996.  The  Company's  product mix  continues  to
shift from single-section  homes to multi-section homes. During the thirteen and
twenty-six  weeks  ended June 27,  1997,  45% of the  Company's  homes sold were
multi-section homes compared to 42% for the previous year's comparable period.

Financial  Services Revenue.  The increases in current period financial services
revenue (primarily  interest income on retail installment  contracts) during the
current  thirteen and  twenty-six  week periods of $524,000 and  $1,046,000,  or
67.9% and 75.1%, respectively,  over the comparable periods in the previous year
are primarily  attributable to the growth of the Company's loan portfolio to $45
million, an increase of 68.6% over the June 1996 loan portfolio of $27 million.

Selling,  General  and  Administrative.  The  growth  in  selling,  general  and
administrative  expense during the current  thirteen and twenty-six week periods
of $73,000 and $1,060,000,  respectively,  over the previous  year's  comparable
periods is primarily  attributable to increased  expenses due to the addition of
personnel,  the opening and expansion of manufacturing  facilities and increased
administrative expenses of the financial services segment, offset by a reduction
in performance based incentive compensation.

                                     -10-
<PAGE>


                                PART I.
                 CAVALIER HOMES, INC. AND SUBSIDIARIES
                Management's Discussion and Analysis of
              Financial Condition and Results of Operations
                              June 27, 1997

Net Income. Net income per share during the current thirteen and twenty-six week
periods  was $.29 and  $.54,  respectively,  compared  to $.29 and $.53 from the
previous year's comparable  periods.  Net income per share has been adjusted for
all previous stock splits effected by the Company.

LIQUIDITY AND CAPITAL RESOURCES

The  following  table sets forth certain items  relating to the  measurement  of
liquidity  and  capital  resources  from the  Company's  consolidated  condensed
financial statements for the dates indicated:

<TABLE>
<CAPTION>
<S>                                                    <C>                     <C>    

BALANCE SHEET SUMMARY                                                   Balances as of
(Dollars in Thousands)                                   -----------------------------------------    
                                                            June 27, 1997        December 31, 1996
                                                         ------------------     ------------------ 
Cash and Cash Equivalents                                $            9,992     $           24,529
Accounts Receivable                                      $           21,661     $            3,046
Working Capital                                          $           10,492     $            8,474
Current Ratio                                                      1.2 to 1               1.2 to 1
Long-Term Debt                                           $           10,747     $            4,918
Ratio of Long-Term Debt to Equity                                    1 to 7                1 to 14
Installment Loan Portfolio                               $           44,998     $           36,425

</TABLE>

Working capital  increased by approximately $2 million from December 31, 1996 to
June 27, 1997,  primarily due to earnings  during the period  reduced by capital
expenditures and originations of installment  contracts by CAC which were offset
by long-term debt borrowings.

The increase in accounts  receivable from December 31, 1996 to June 27, 1997, is
a normal  seasonal  occurrence.  As is customary  for the  Company,  most of its
manufacturing  operations  are idle  during  the final two weeks of the year for
vacations,  holidays  and reduced  product  demand,  and during  this time,  the
Company collects the majority of its outstanding receivables.

The  Company's   primary   business  segment  is  the  production  and  sale  of
manufactured  housing.  In 1992, the Company began the operations of CAC to fund
installment sale contracts to the retail customers of the Company's  independent
exclusive  dealers.  As the  operations of CAC expanded,  in February  1994, the
Company  entered  into a credit  facility  with its primary  lender (the "Credit
Facility") (see footnote 4 to the consolidated  condensed  financial  statements
included herein) to provide  additional  funds for CAC's growth.  As of June 27,
1997,  the  Company's  portfolio  of  installment  sale  contracts  had grown to
approximately  $45  million  and  had  been  funded  primarily  with  internally
generated working capital, borrowings under the Credit Facility and a portion of
the net proceeds from an offering of the Company's common stock during 1994.

Since  entering  into  the  Credit  Facility,  the  Company  has  had  aggregate
borrowings of $11.7  million in order to continue to fund the  operations of CAC
and to reduce  the  interest  rate risk of the  Company's  loan  portfolio.  The
Company expects to continue to borrow funds under the Credit Facility to finance
the  continuing  operations  and growth of CAC.* On March 14, 1996,  the Company
executed  an  amendment  to the Credit  Facility  which  increased  the  maximum
available  borrowings under the warehouse and term-loan  agreements contained in
the Credit  Facility to $18 million from the previous  limit of $8 million.  The
amendment  increased the total amount of available  borrowings  under the Credit
Facility  (including  the  revolving  line of  credit) to $23  million  from $13
million.  In addition to the increase in available  borrowings  under the Credit
Facility,  the  interest  rate on  prospective  borrowings  under the  term-loan
portion of the agreement was reduced by .40%.

- ---------------------------------------
* See Safe Harbor Statement on page 15.

                                     -11-
<PAGE>


                                 PART I.
                   CAVALIER HOMES, INC. AND SUBSIDIARIES
                  Management's Discussion and Analysis of
               Financial Condition and Results of Operations
                               June 27, 1997

The Company's growth strategy currently includes the continued  expansion of the
financial services segment of its business.  Accordingly,  it is likely that the
Company will incur  additional  debt, or other forms of  financing,  in order to
continue to fund such growth.* The Company currently believes that existing cash
and investment balances and funds available under the Credit Facility,  together
with  cash  provided  by  operations,  will be  adequate  to fund the  Company's
operations and expansion plans for the next twelve months; however, there can be
no assurance to this effect.* In order to provide additional funds for continued
pursuit of the Company's growth  strategies and for operations,  the Company may
incur,  from time to time,  additional short and long-term bank indebtedness and
may issue, in public or private  transactions,  its equity and debt  securities,
the   availability  and  terms  of  which  may  depend  upon  market  and  other
conditions.* The Company may also engage in other transactions,  such as selling
or securitizing portions of its installment loan portfolio, that are designed to
facilitate the ability of the Company to originate an increased  volume of loans
and to reduce the Company's exposure to interest rate  fluctuations.*  There can
be no assurance that such possible additional  financing,  or the aforementioned
transactions  involving  the  Company's  installment  loan  portfolio,  will  be
available on terms  acceptable to the Company;  if they are not, the Company may
be forced to curtail the  expansion of its  financial  services  business and to
alter its growth strategies.

The  Company's  capital  expenditures  were  approximately  $4.0 million for the
twenty-six  weeks  ended June 27,  1997,  as  compared  to $4.2  million for the
comparable period of 1996.  Capital  expenditures  during these periods included
normal  property,  plant  and  equipment  additions  and  replacements  and  the
continued expansion and modernization of certain of the Company's  manufacturing
facilities.

RECENT ANNOUNCEMENT

As reflected in Item 5 below,  on August 4, 1997, the Company  announced that it
is engaged in discussions with Belmont Homes, Inc. (NASDAQ/NM:BHIX)  regarding a
possible strategic  combination with Belmont.  Under the terms tentatively being
discussed,  each common share of Belmont would be converted at a fixed  exchange
ratio equal to 0.80 common shares of the Company for each Belmont share owned in
a tax-free reorganization accounted for as a pooling-of-interests.

Belmont  Homes,  Inc.  is  subject  to  the  informational  requirements  of the
Securities  Exchange  Act of  1934  (the  "Exchange  Act"),  and  in  accordance
therewith  files  reports,  proxy  statements  and  other  information  with the
Securities and Exchange Commission (the  "Commission").  Copies of such reports,
proxy statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street,  N.W.,  Washington  D.C.  20549 and at the following  Regional
Offices of the Commission:  Seven World Trade Center,  13th Floor, New York, New
York 10048 and Citicorp Center,  500 West Madison Street,  Suite 1400,  Chicago,
Illinois 60661. Copies of such material can be obtained at prescribed rates from
the  Public  Reference  Section  of the  Commission,  450  Fifth  Street,  N.W.,
Washington,  D.C. 20549.  The Commission also maintains a site on the World Wide
Web at  http://www.sec.gov  that contains  reports,  proxy  statements and other
information  regarding registrants that file electronically with the Commission.
The common stock of Belmont is quoted on the Nasdaq  National  Market,  and such
reports,  proxy  statements and other  information  can also be inspected at the
offices of Nasdaq, 1735 K Street,  Washington,  D.C. 20006. The Company makes no
representation and assumes no responsibility for the accuracy or completeness of
any such reports, proxy statements or other information.

The Boards of  Directors  of the two  companies  have not yet met to approve the
possible combination. There can be no assurance that an agreement regarding such
a strategic  combination  with Belmont will be executed,  that the terms of such
agreement  will be  acceptable  to all parties or that the  transaction  will be
consummated.  There can also be no  representation  or assurance  made as to the
possible  impact of the  potential  strategic  combination  on the  consolidated
financial  condition  and results of  operations  of the  Company  should such a
strategic combination occur.

- ---------------------------------------
* See Safe Harbor Statement on page 15.

                                     -12-
<PAGE>


                                   PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                              Other Information
                                June 27,1997

ITEM 4         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               The Company's  Annual Meeting of Stockholders was held on May 14,
               1997.  Each person who was then  serving as a member of the Board
               of Directors was  re-elected for another year. The votes for each
               nominee were cast as follows:

                                                      Shares Voting
                                              -------------------------------  
                                                For       Against     Withheld
                                                ---       -------     --------- 
                  Barry B. Donnell            9,999,779     -0-       510,549

                  David A. Roberson           9,997,370     -0-       512,958

                  Michael R. Murphy           9,993,658     -0-       516,670

                  Thomas A. Broughton, III    9,980,933     -0-       529,395

                  John W Lowe                 9,977,160     -0-       533,168

                  Lee Roy Jordan              9,979,683     -0-       530,645

                  Gerald W. Moore             9,973,975     -0-       536,353


               The stockholders ratified the Board of Directors'  appointment of
               Deloitte & Touche LLP as Independent Certified Public Accountants
               for  the  Company.  The  appointment  was  ratified  by a vote of
               10,480,417   shares  for,   13,907  shares   against  and  16,004
               abstentions.

               The  stockholders   voted  to  amend  the  Amended  and  Restated
               Certificate of Incorporation to increase the number of authorized
               shares  of  Common  Stock  of  the  Company  from  15,000,000  to
               50,000,000.  The  amendment  was  approved by a vote of 8,395,992
               shares for, 1,967,481 shares against and 146,855 abstentions.

ITEM 5         OTHER MATTERS

               On August 4, 1997,  the Company  announced  that it is engaged in
               discussions with Belmont Homes, Inc. (NASDAQ/NM:BHIX) regarding a
               possible  strategic  combination  with  Belmont.  Under the terms
               tentatively  being discussed,  each common share of Belmont would
               be  converted  at a fixed  exchange  ratio  equal to 0.80  common
               shares of the Company for each Belmont  share owned in a tax-free
               reorganization  accounted  for  as  a  pooling-of-interests.  The
               Boards  of  Directors  of the two  companies  have not yet met to
               approve the possible combination.  There can be no assurance that
               an  agreement  will be  executed,  that  the  terms  of any  such
               agreement   will  be  acceptable  to  all  parties  or  that  the
               transaction will be consummated.

               The Board of Directors  has declared its regular  quarterly  cash
               dividend  of  $.03  per  share  payable  on  August  15,  1997 to
               stockholders of record on July 31, 1997.

                                     -13-
<PAGE>


                                       PART II.
                         CAVALIER HOMES, INC. AND SUBSIDIARIES
                                 Other Information
                                   June 27, 1997


ITEM 6         EXHIBITS AND REPORTS ON FORM 8-K

               The  exhibits  required  to be filed with this  report are listed
               below.  The Company will furnish upon request the exhibit  listed
               upon the receipt of $15.00 per  exhibit,  plus $.50 per page,  to
               cover the cost to the Company of providing the exhibit.


              (a)     (3)     Articles of Incorporation and By-laws.
                             (a) The  Amended  and   Restated   Certificate   of
                                 Incorporation of the Company,  filed as Exhibit
                                 3(a) to the  Company's  Annual  Report  on Form
                                 10-K for the year ended  December 31, 1993,  is
                                 incorporated herein by reference.
                             (b) Amendment   to   the   Amended  and   Restated
                                 Certificate  of  Incorporation  of the Company.
                             (c) The  Certificate  of  Designation  of  Series A
                                 Junior   Participating   Preferred   Stock   of
                                 Cavalier  Homes,  Inc. as filed with the Office
                                 of the  Delaware  Secretary of State on October
                                 24, 1996 and filed as Exhibit A to Exhibit 4 to
                                 the  Company's  Registration  Statement on Form
                                 8-A filed on October 30, 1996, is  incorporated
                                 herein by reference.
                             (d) The  Amended  and   Restated   By-laws  of  the
                                 Company.
                      
                        (4)   Instruments   Defining  the  Rights  of  Security 
                              Holders.
                             (a) Articles four, six, seven,  eight and nine of  
                                 the Company's Amended and Restated  Certificate
                                 of  Incorporation,  as  amended,  included   in
                                 Exhibit 3(a) and 3(b) above.
                             (b) Article II, Sections 2.1 through 2.18;  Article
                                 III, Sections 3.1 and 3.2; Article IV, Sections
                                 4.1 and 4.3;  Article VI,  Sections 6.1 through
                                 6.5;  Article  VIII,  Sections 8.1 and 8.2; and
                                 Article  IX  of  the   Company's   Amended  and
                                 Restated  By-laws,  included  in  Exhibit  3(d)
                                 above.
                             (c) Rights Agreement between Cavalier  Homes,  Inc.
                                 and  ChaseMellon   Shareholder  Services,  LLC,
                                 filed as  Exhibit 4 to  the  Company's  Current
                                 Report on  Form 8-K dated  October 30, 1996, is
                                 incorporated herein by reference.

                      (10)    Material Contracts.
                             (a) Guaranty  Agreement  between   SouthTrust  Bank
                                 of Alabama and Cavalier Homes, Inc. dated  June
                                 20, 1997, relating  to guaranty of payments  by
                                 Quality Housing Supply, LLC.
                             (b) Guaranty  Agreement  between  AmSouth  Bank  of
                                 Alabama and Cavalier  Homes,  Inc.  dated  June
                                 11, 1997, relating to guaranty of  payments  by
                                 Ridge Pointe Manufacturing, LLC.

                      (11)   Computation of Net Income per Common Share.

                      (27)   Article 5 - Financial  Data  Schedule for Form 10-Q
                             submitted  as Exhibit 27  as  an EDGAR filing only.

               (b)           The Company  did not file a Current  Report on Form
                             8-K during the  quarter  for which this  report was
                             filed.

                                     -14-
<PAGE>


                                 PART II.
                  CAVALIER HOMES, INC. AND SUBSIDIARIES
                            Other Information
                              June 27, 1997

     "Safe Harbor" Statement under the Private Securities  Litigation Reform Act
of 1995:

With the exception of historical factual information, the matters and statements
discussed,  made or incorporated  by reference in this Quarterly  Report on Form
10-Q (including statements regarding trends in the industry and the business and
growth and financing  strategies of the  Company),  as well as those  statements
specifically  designated  with  an  asterisk  (*),  constitute   forward-looking
statements, contain the words "believes," "anticipates," "expects," and words of
similar import, are based upon current expectations and are made pursuant to the
safe harbor provisions of the Private Securities  Litigation Reform Act of 1995.
Such forward-looking statements and words involve known and unknown assumptions,
risks,  uncertainties  and other  factors  which may cause the  actual  results,
performance or achievements  of the Company to be materially  different from any
future  results,  performance,  or  achievements  expressed  or  implied by such
forward-looking statements or words. Such assumptions,  risks, uncertainties and
factors include those associated with general economic and business  conditions;
manufactured housing and retail consumer financing industry trends,  cyclicality
and  seasonality;  availability  of consumer and dealer  financing;  changes and
volatility  and  uncertainty  in interest  rates;  the  sufficiency  of reserves
established for installment contract receivables;  warranty,  product liability,
workers'  compensation  and  other  litigation  arising  in  the  course  of the
Company's  manufacturing and financial services business;  contingent repurchase
and  guaranty   obligations;   dependence   on  key   personnel   and  favorable
relationships  with  employees;  demographic  changes;  whether  the current and
emerging  generations  of retirees  will have the same  interest  in  purchasing
manufactured homes; competition;  raw material and labor costs and availability;
import  protection  and  regulation;   relationships   with  and  dependence  on
customers,  distributors  and  dealers;  changes  in the  business  strategy  or
development  plans of the Company;  the  availability,  terms and  deployment of
capital;  changes in or the failure to comply with government  regulations;  and
the inability or failure to identify or consummate successful acquisitions or to
assimilate the operations of any acquired  businesses with those of the Company;
and other  assumptions,  risks  uncertainties and factors reflected from time to
time in the Company's filings with the Securities and Exchange  Commission.  The
Company  expressly  disclaims  any  obligation  to  update  any  forward-looking
statements  as a result  of  developments  occurring  after  the  filing of this
report.

                                     -15-
<PAGE>


                                      PART II.
                         CAVALIER HOMES, INC. AND SUBSIDIARIES
                                  Other Information
                                    June 27, 1997

SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                             Cavalier Homes, Inc.
                                             --------------------
                                             Registrant




Date: August 11, 1997                         /s/ David A.Roberson
      ---------------                             ---------------------  
                                             David A. Roberson - President
                                             and Chief Executive Officer


Date: August 11, 1997                          /s/ Michael R. Murphy
      ---------------                              ---------------------
                                              Michael R. Murphy -
                                              Chief Financial Officer (Principal
                                              Financial and Accounting Officer)


                                     -16-
<PAGE>




                           CERTIFICATE OF AMENDMENT

                                    TO THE
                              AMENDED AND RESTATED
                         CERTIFICATE OF INCORPORATION
                                      OF
                             CAVALIER HOMES, INC.


            In  accordance  with the  provisions  of Sections 103 and 242 of the
General  Corporation  Law of the State of  Delaware,  Cavalier  Homes,  Inc.,  a
Delaware corporation (the "Corporation"), does hereby certify as follows:

            1.   Article  4  of  the  Amended  and   Restated   Certificate   of
Incorporation  of the  Corporation  shall be  amended  by  replacing  the  first
paragraph of Article 4 with the following:

                  4. The total  number of shares of stock which the  corporation
            shall  have  authority  to issue is  50,500,000;  50,000,000  of the
            authorized  shares shall be Common Stock,  $.10 par value each;  and
            500,000 of the authorized  shares shall be Preferred Stock, $.01 par
            value each.

            2. The foregoing  amendment to the Amended and Restated  Certificate
of Incorporation of the Corporation has been duly adopted in accordance with the
provisions  of  Section  242 of the  General  Corporation  Law of the  State  of
Delaware.

            IN WITNESS WHEREOF, Cavalier Homes, Inc. has caused this certificate
to be signed by Barry B.  Donnell,  its  Chairman of the Board,  and attested by
Michael R. Murphy, its Secretary, as of the ____ day of May, 1997.

                                                  CAVALIER HOMES, INC.


                                          By:---------------------------
                                                    Barry B. Donnell
                                                Its Chairman of the Board
ATTEST:



By:---------------------------
          Michael R. Murphy
            Its Secretary





                             AMENDED AND RESTATED

                                 B Y - L A W S

                                      OF

                             CAVALIER HOMES, INC.

                            A Delaware Corporation






<PAGE>






                               TABLE OF CONTENTS


ARTICLE I OFFICES
      Section 1.1 Registered Office..........................................1
      Section 1.2 Additional Offices.........................................1
      Section 1.3 Books and Records..........................................1

ARTICLE II MEETINGS OF STOCKHOLDERS
      Section 2.1 Place of Meeting...........................................1
      Section 2.2 Annual Meetings............................................1
      Section 2.3 Notice of Annual Meetings..................................1
      Section 2.4 Notice of Stockholder Business and Nominations.............2
      Section 2.5 Procedure for Election of Directors........................4
      Section 2.6 Special Meetings...........................................4
      Section 2.7 Notice of Special Meetings.................................4
      Section 2.8 Business at Special Meetings...............................4
      Section 2.9 List of Stockholders.......................................4
      Section 2.10Record Date................................................4
      Section 2.11Quorum.....................................................5
      Section 2.12Voting.....................................................5
      Section 2.13Proxies....................................................6
      Section 2.14Inspectors of Elections; Opening and Closing the Polls.....6
      Section 2.15Postponement, Cancellation and Conduct of Meetings.........6
      Section 2.16Record Date for Action by Written Consent..................7
      Section 2.17Inspectors of Written Consent..............................7
      Section 2.18Effectiveness of Written Consent...........................7

ARTICLE III DIRECTORS
      Section 3.1 Number and Term............................................8
      Section 3.2 Vacancies; Removal.........................................8
      Section 3.3 Powers.....................................................8
      Section 3.4 Place of Meetings..........................................8
      Section 3.5 Annual Meetings............................................9
      Section 3.6 Regular Meetings...........................................9
      Section 3.7 Special Meetings...........................................9
      Section 3.8 Quorum; Telephone Meetings.................................9
      Section 3.9 Action by Consent..........................................9
      Section 3.10Committees.................................................9
      Section 3.11Minutes of Committees.....................................10
      Section 3.12Compensation..............................................10
      Section 3.13Conflict of Interest......................................10
      Section 3.14Presumption of Assent.....................................11

ARTICLE IV NOTICES
      Section 4.1 Notice to Stockholders....................................11
      Section 4.2 Notice to Directors.......................................11
      Section 4.3 Waiver of Notice..........................................12

ARTICLE V OFFICERS
      Section 5.1 Officers..................................................12
      Section 5.2 Compensation..............................................13
      Section 5.3 Election and Term of Office...............................13
      Section 5.4 Removal...................................................13
      Section 5.5 Vacancies.................................................13
      Section 5.6 Duties of Officers........................................13

ARTICLE VI CERTIFICATES OF STOCK
      Section 6.1 Certificates..............................................15
      Section 6.2 Signatures................................................15
      Section 6.3 Lost, Stolen or Destroyed Certificates....................15
      Section 6.4 Transfer of Stock.........................................16
      Section 6.5 Registered Stockholders...................................16

ARTICLE VII INDEMNIFICATION
      Section 7.1 Indemnification  in  Actions  Arising  Out of  Capacity  as
            Officer, Directors, Employee or Agent...........................16
      Section 7.2 Indemnification in Actions by or in Right of Corporation..17
      Section 7.3 Indemnification When Successful on Merits or Otherwise....17
      Section 7.4 Determination of Meeting Applicable Standard..............17
      Section 7.5 Payment of Expenses in Advance of Disposition of Action...17
      Section 7.6 Nonexclusivity of Article.................................18
      Section 7.7 Insurance.................................................18
      Section 7.8 Constituent Corporations..................................18
      Section 7.9 Definitions...............................................18

ARTICLE VIII GENERAL PROVISIONS
      Section 8.1 Dividends.................................................19
      Section 8.2 Reserves..................................................19
      Section 8.3 Checks....................................................19
      Section 8.4 Fiscal Year...............................................19
      Section 8.5 Seal......................................................19
      Section 8.6 Contracts.................................................19
      Section 8.7 Voting of Corporation's Securities........................20
      Section 8.8 Procedure.................................................20
      Section 8.9 Resignations..............................................20

ARTICLE IX AMENDMENT OF BY-LAWS

HISTORY OF BY-LAWS



<PAGE>




                                  BY-LAWS OF


                             CAVALIER HOMES, INC.

                            A Delaware Corporation



                                   ARTICLE I

                                    OFFICES

            Section I.1 Registered  Office.  The registered office shall be in
the City of Wilmington, County of New Castle, State of Delaware.

            Section  I.2  Additional  Offices.   The  principal  office  of  the
corporation shall be located in Addison,  Alabama. The corporation may also have
offices at such other  places  both  within and without the State of Delaware as
the board of  directors  may from time to time  determine or the business of the
corporation may require.

            Section I.3 Books and  Records. Books and records of the corporation
may be kept outside the State of Delaware at such place  or  places  as may from
time to  time be  designated  by the  board  of directors.


                                  ARTICLE II

                           MEETINGS OF STOCKHOLDERS

            Section II.1 Place of Meeting.  All meetings of the stockholders for
the election of directors  shall be held at such place either  within or without
the State of Delaware as shall be designated  from time to time by the  board of
directors and stated in the notice of the meeting. Meetings of stockholders  for
any other purpose  may be held at such time and  place,  within or  without  the
State of Delaware, as shall be stated in the notice of the meeting.

            Section II.2 Annual Meetings.  The annual meeting of stockholders of
the corporation  shall be held on such date and at such place and time as may be
fixed by  resolution  of the Board of  Directors.  At the  annual  meeting,  the
stockholders  shall elect a board of directors and transact such other  business
as may properly be brought before the meeting.

            Section II.3 Notice of Annual Meetings. Unless otherwise required by
law,  written notice of the annual meeting  stating the place,  date and hour of
the meeting shall be given to each stockholder  entitled to vote at such meeting
not less than ten (10) nor more than  sixty  (60)  days  before  the date of the
meeting. Such further notice shall be given as may be required by law.

            Section II.4 Notice of Stockholder Business and Nominations.
                  (a)  Annual  Meetings  of  Stockholders.  (1)  Nominations  of
persons  for  election  to the board of  directors  of the  corporation  and the
proposal of  business to be  considered  by the  stockholders  may be made at an
annual  meeting of  stockholders  (A)  pursuant to the  corporation's  notice of
meeting,  (B) by or at the  direction  of the board of  directors  or (C) by any
stockholder  of the  corporation  who was a stockholder of record at the time of
giving of notice  provided  for in this  by-law,  who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this by-law.

                        (2)   For   nominations   or  other   business  to  be
properly  brought before an annual  meeting by a stockholder  pursuant to clause
(C) of Paragraph  (a)(1) of this by-law,  the stockholder must have given timely
notice  thereof in writing to the  secretary of the  corporation  and such other
business  must be otherwise be a proper  matter for  stockholder  action.  To be
timely,  a  stockholder's  notice  shall be  delivered  to the  secretary at the
principal  executive  offices  of the  corporation  not later  than the close of
business on the  sixtieth  (60th) day nor earlier  than the close of business on
the ninetieth (90th) day prior to the first  anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the annual
meeting is more than  thirty (30) days before or more than sixty (60) days after
such  anniversary  date,  notice  by the  stockholder  to be  timely  must be so
delivered  not earlier  than the close of business on the  ninetieth  (90th) day
prior to such  annual  meeting  and not later than the close of  business on the
later of the  sixtieth  (60th)  day prior to such  annual  meeting  or the tenth
(10th) day  following the day on which public  announcement  of the date of such
meeting  is  first  made  by the  corporation.  In no  event  shall  the  public
announcement  of an adjournment of an annual meeting  commence a new time period
for the giving of a stockholder's  notice as described above. Such stockholder's
notice  shall set forth (A) as to each person whom the  stockholder  proposes to
nominate for election or re-election as a director all  information  relating to
such person that is required to be  disclosed  in  solicitations  of proxies for
election of directors  in an election  contest,  or is otherwise  required to be
disclosed in  solicitations  of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities  Exchange Act of 1934, as amended (the "Exchange  Act"), and Rule
14a-11 thereunder (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (B) as to
any other business that the stockholder  proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting,  the
reasons for conducting such business at the meeting and any material interest in
such business of such  stockholder  and the beneficial  owner,  if any, on whose
behalf the proposal is made; and (C) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i)  the  name  and  address  of  such  stockholder,   as  they  appear  on  the
corporation's  books, and of such beneficial owner and (ii) the class and number
of shares of the corporation which are owned  beneficially and of record by such
stockholder and beneficial owner.

                  (3)  Notwithstanding   anything  in  the  second  sentence  of
paragraph (a)(2) of this by-law to the contrary, in the event that the number of
directors  to be  elected  to the  board  of  directors  of the  corporation  is
increased and there is no public  announcement by the corporation  naming all of
the nominees  for  director or  specifying  the size of the  increased  board of
directors  at least  seventy  (70) days  prior to the first  anniversary  of the
preceding year's annual meeting, a stockholder's  notice required by this by-law
shall also be considered  timely,  but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the secretary at
the principal  executive  offices of the corporation not later than the close of
business  on the  tenth  (10th)  day  following  the day on  which  such  public
announcement is first made by the corporation.

            (b) Special  Meetings of  Stockholders.  Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting  pursuant to the  corporation's  notice of meeting.  Nominations  of
persons for election to the board of directors may be made at a special  meeting
of  stockholders  at  which  directors  are  to  be  elected   pursuant  to  the
corporation's  notice  of  meeting  (A) by or at the  direction  of the board of
directors  or (B)  provided  that the board of  directors  has  determined  that
directors  shall  be  elected  at  such  meeting,  by  any  stockholder  of  the
corporation  who is a  stockholder  of  record  at the time of  giving of notice
provided  for in this  by-law,  who shall be entitled to vote at the meeting and
who complies with the notice  procedures set forth in this by-law.  In the event
the  corporation  calls a special  meeting of  stockholders  for the  purpose of
electing one or more directors to the board of directors,  any such  stockholder
may  nominate a person or persons  (as the case may be),  for  election  to such
position(s)  as  specified  in  the  corporation's  notice  of  meeting,  if the
stockholder's  notice  required  by  paragraph  (a)(2) of this  by-law  shall be
delivered to the secretary at the principal executive offices of the corporation
not earlier than the close of business on the ninetieth (90th) day prior to such
special  meeting  and not later than the close of  business  on the later of the
sixtieth  (60th)  day prior to such  special  meeting  or the tenth  (10th)  day
following the day on which public  announcement is first made of the date of the
special  meeting and of the  nominees  proposed by the board of  directors to be
elected  at such  meeting.  In no event  shall  the  public  announcement  of an
adjournment of a special meeting  commence a new time period for the giving of a
stockholder's notice as described above.

            (c) General.  (1) Only such persons who are  nominated in accordance
with the  procedures  set forth in this  by-law  shall be  eligible  to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance  with the procedures
set forth in this by-law.  Except as otherwise  provided by law, the certificate
of  incorporation  or these by-laws,  the chairman of the meeting shall have the
power and duty to determine  whether a nomination or any business proposed to be
brought  before  the  meeting  was made or  proposed,  as the  case  may be,  in
accordance  with the procedures  set forth in this by-law;  and, if any proposed
nomination  or business is not in compliance  with this by-law,  to declare that
such defective proposal or nomination shall be disregarded.

                  (2) For purposes of this by-law,  "public  announcement" shall
mean  disclosure  in a press  release  reported  by the Dow Jones News  Service,
Associated Press or comparable  national news service or in a document  publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.

                  (3) Notwithstanding the foregoing provisions of this by-law, a
stockholder  shall also comply with all applicable  requirements of the Exchange
Act and the rules and  regulations  thereunder  with  respect to the matters set
forth in this  by-law.  Nothing  in this  by-law  shall be deemed to affect  any
rights  (i)  of   stockholders   to  request   inclusion  of  proposals  in  the
corporation's  proxy statement  pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred  Stock to elect  directors  under
specified circumstances.

            Section  II.5  Procedure  for  Election  of  Directors. 
Except as  otherwise  provided  by  the  certificate  of  incorporation  of  the
corporation, election of directors at all meetings of the stockholders  at which
directors are to be elected shall be by ballot.

            Section II.6 Special Meetings. Special meetings of the stockholders,
for any purpose or purposes,  unless  otherwise  prescribed by statute or by the
certificate of incorporation, may be called by the president and shall be called
by the  president  or  secretary  at the request in writing of a majority of the
total  number of  directors  which the  corporation  would have if there were no
vacancies (the "Whole Board").  Such request shall state the purpose or purposes
of the proposed meeting.

            Section II.7 Notice of Special Meetings.  Unless otherwise  required
by law, written notice of a special meeting stating the place,  date and hour of
the meeting and the purpose or purposes  for which the meeting is called,  shall
be given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder  entitled to vote at such meeting.  Such further
notice shall be given as may be required by law.

            Section II.8      Business   at   Special    Meetings.    Business
transacted  at any  special  meeting of  stockholders  shall be limited to the
purposes stated in the notice.

            Section II.9 List of Stockholders. The officer who has charge of the
stock ledger of the  corporation  shall prepare and make, at least ten (10) days
before  every  meeting  of  stockholders,  a complete  list of the  stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each  stockholder and the number of shares  registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting,  during ordinary  business hours,  for a
period of at least ten (10) days prior to the meeting,  either at a place within
the city where the meeting is to be held,  which place shall be specified in the
notice of the meeting,  or, if not so specified,  at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the  meeting  during  the  whole  time  thereof,  and  may be  inspected  by any
stockholder  who is present.  The original  stock  transfer books shall be prima
facie evidence as to who are the  stockholders  entitled to examine such list or
stock ledger or to vote, in person or by proxy, at any meeting of  stockholders.
Except as otherwise  required by law, failure to comply with the requirements of
this section shall not affect the validity of any action taken at such meeting.

            Section  II.10 Record  Date Section. In order that the   corporation
may determine the stockholders  entitled to notice of or to vote at any  meeting
of stockholders or any adjournment  thereof,  or allotment of any rights or  the
stockholders  entitled  to  exercise  any  rights of any  change, conversion  or
exchange of stock,  or for the purpose of any other lawful action, the board  of
directors  may fix a record  date,  which  record  date  shall not  precede  the
date upon which the resolution  fixing the record date is adopted  by the  board
of directors,  and which record date shall not be more than sixty (60) nor  less
than ten (10) days before the date of such  meeting.  If no record date is fixed
by the board of directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of  stockholders  shall be  at the close of
business on the day next  preceding  the day on  which  notice is given, or,  if
notice is waived,  at the close of business on the day next preceding the day on
which the meeting is held.  A determination  of  stockholders of record entitled
to  notice  of  or  to  vote  at  a  meeting  of stockholders shall apply to any
adjournment of the meeting;  provided,  however, that the board of directors may
fix a new record date for the adjourned meeting.

            Section  II.11  Quorum.  Except as otherwise  provided by law or the
corporation's  certificate  of  incorporation,  the holders of a majority of the
total votes (as determined in the manner  provided in Section 2.12 below) of all
classes of the stock  issued and  outstanding  and entitled to vote thereat (the
"Voting  Stock") (all such classes being  aggregated  together as a single class
for purposes of determining a quorum under this Section 2.11), present in person
or  represented  by proxy,  shall  constitute  a quorum at all  meetings  of the
stockholders for the transaction of business except that when specified business
is to be voted on by a class or series of stock  voting as a class,  the holders
of a majority of the shares of such class or series shall constitute a quorum of
such class or series for the  transaction  for such business.  At any meeting of
stockholders,  whether annual or special, or any adjournment thereof,  including
any such  meeting at which a quorum  shall not be present  or  represented,  the
chairman  of the  meeting or a majority  of the  stockholders  entitled  to vote
thereat,  present in person or represented by proxy, shall have power to adjourn
the meeting from time to time,  without  notice other than  announcement  at the
meeting.  At such  adjourned  meeting  at which a quorum  shall  be  present  or
represented  any business may be transacted  which might have been transacted at
the meeting as originally  notified.  If the adjournment is for more than thirty
(30)  days,  or if after  the  adjournment  a new  record  date is fixed for the
adjourned  meeting,  a notice of the  adjourned  meeting  shall be given to each
stockholder of record entitled to vote at the meeting.  The stockholders present
at a duly called  meeting at which a quorum is present may  continue to transact
business   until   adjournment,   notwithstanding   the   withdrawal  of  enough
stockholders to leave less than a quorum.

            Section II.12 Voting.  Unless otherwise  provided in the certificate
of  incorporation  of the  corporation,  and  subject to the  provisions  of the
General Corporation Law of the State of Delaware concerning the fixing of a date
for determination of stockholders of record,  each stockholder shall be entitled
to one vote for each share of capital  stock  held by such  stockholder.  When a
quorum is present at any  meeting,  the vote of the holders of a majority of the
"total  votes" of the stock  present in person or  represented  by proxy at such
meeting shall decide any question, other than the election of directors, brought
before such meeting,  unless the question is one upon which by express provision
of the  statutes or of the  certificate  of  incorporation  a different  vote is
required  in which case such  express  provision  shall  govern and  control the
decision of such  question.  All classes of stock of the  corporation  will vote
together as a single class on all matters coming before the stockholders, except
as otherwise provided by the General Corporation Law of the State of Delaware or
by the  certificate  of  incorporation.  For purposes of these  by-laws,  "total
votes" shall be determined (i) by multiplying the number of shares of each class
of stock entitled to vote by the number of votes for each share of such class as
authorized  by the  certificate  of  incorporation  (or in the  absence  of such
express  authorization in the certificate of incorporation,  the number of votes
for each  share as  provided  by the  General  Corporation  Law of the  State of
Delaware), and (ii) by totaling the sum of the votes of each class as determined
in (i),  which  shall  produce  the  number of  "total  votes."  Subject  to the
provisions of the certificate of incorporation  and to the rights of the holders
of  any  series  of  Preferred   Stock  to  elect   directors   under  specified
circumstances, all elections of directors by the stockholders of the corporation
shall be by plurality vote of the "total votes."

            Section  II.13  Proxies.   At  all  meetings  of   stockholders,   a
stockholder may vote by proxy executed in writing (or in such manner  prescribed
by the General Corporation Law of the State of Delaware) by the stockholder,  or
by his duly authorized  attorney-in-fact.  No proxy shall be voted or acted upon
after  three (3) years  from its date,  unless the proxy  provides  for a longer
period.

            Section II.14  Inspectors of Elections;  Opening and Closing
The board of directors by resolution  shall  appoint  one  or  more  inspectors,
which inspector or inspectors may include  individuals who serve the corporation
in other capacities,  including,  without  limitation,  as officers,  employees,
agents or  representatives,  to act at the meetings of  stockholders  and make a
written  report  thereof.  One or more  persons may be  designated  as alternate
inspectors  to  replace  any  inspector  who fails to act.  If no  inspector  or
alternate  has  been  appointed  to  act or is  able  to  act  at a  meeting  of
stockholders,  the chairman of the meeting shall appoint one or more  inspectors
to act at the meeting.  Each  inspector,  before  discharging his or her duties,
shall take and sign an oath  faithfully to execute the duties of inspector  with
strict  impartiality  and  according  to the  best  of his or her  ability.  The
inspectors shall have the duties  prescribed by law. The chairman of the meeting
shall fix and  announce  at the meeting the date and time of the opening and the
closing of the polls for each matter upon which the stockholders  will vote at a
meeting.

            Section   II.15   Postponement,Cancellation and Conduct of Meetings.
Any previously scheduled meeting  of  the stockholders  may  be  postponed,  and
(unless the certificate of incorporation otherwise provides) any special meeting
of the  stockholders  may be canceled,  by  resolution of the board of directors
upon public notice given prior to the date previously scheduled for such meeting
of stockholders.  The board of directors may to the extent not prohibited by law
adopt by resolution  such rules and  regulations  for the conduct of meetings of
stockholders  as it shall deem  appropriate.  Except to the extent  inconsistent
with such  rules and  regulations  as  adopted  by the board of  directors,  the
chairman of any meeting of  stockholders  shall have the right and  authority to
prescribe such rules,  regulations and procedures and to do all such acts as, in
the judgment of such  chairman,  are  appropriate  for the proper conduct of the
meeting. Such rules, regulations or procedures,  whether adopted by the board of
directors or  prescribed  by the chairman of the meeting,  may to the extent not
prohibited  by  law  include,   without  limitation,   the  following:  (i)  the
establishment of an agenda or order of business for the meeting;  (ii) rules and
procedures for maintaining order at the meeting and the safety of those present;
(iii)   limitations  on  attendance  at  or  participation  in  the  meeting  to
stockholders of record of the corporation, their duly authorized and constituted
proxies or such other  persons as the chairman of the meeting  shall  determine;
(iv)  restrictions  on  entry  to the  meeting  after  the  time  fixed  for the
commencement  thereof;  and (v) limitations on the time allotted to questions or
comments by participants.  Unless, and to the extent, determined by the board of
directors or the chairman of the meeting,  meetings of stockholders shall not be
required to be held in accordance with the rules of parliamentary procedure.
           
            Section  II.16  Record  Date for  Action by  Written Consent.
In  order  that  the  corporation  may  determine the  stockholders  entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record  date,  which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors,  and
which  date  shall not be more than ten (10) days  after the date upon which the
resolution  fixing the record  date is  adopted by the board of  directors.  Any
stockholder  of  record  seeking  to have  the  stockholders  authorize  or take
corporate  action by written  consent shall, by written notice to the secretary,
request the board of  directors  to fix a record  date.  The board of  directors
shall  promptly,  but in all events within ten (10) days after the date on which
such a request is  received,  adopt a resolution  fixing the record date.  If no
record date has been fixed by the board of directors within ten (10) days of the
date on which  such a request  is  received,  the  record  date for  determining
stockholders  entitled  to consent  to  corporate  action in  writing  without a
meeting,  when no  prior  action  by the  board  of  directors  is  required  by
applicable  law,  shall be the  first  date on which a  signed  written  consent
setting  forth the action  taken or  proposed  to be taken is  delivered  to the
corporation  by delivery to its  registered  office in Delaware,  its  principal
place of business or to any officer or agent of the  corporation  having custody
of the book in which  proceedings  of meetings  of  stockholders  are  recorded.
Delivery  made to the  corporation's  registered  office  shall be by hand or by
certified or registered mail,  return receipt  requested.  If no record date has
been fixed by the board of directors  and prior action by the board of directors
is required by  applicable  law,  the record date for  determining  stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of  business  on the date on which the board of  directors  adopts the
resolution taking such prior action.

           Section II.17 Inspectors of Written  Consent.
In  the  event of  the  delivery,  in  the  manner  provided by Section 2.16, to
the  corporation of the requisite  written consent or consents to take corporate
action  and/or any related  revocation or  revocations,  the  corporation  shall
engage nationally recognized independent inspectors of elections for the purpose
of promptly  performing a ministerial review of the validity of the consents and
revocations.  For the  purpose of  permitting  the  inspectors  to perform  such
review,  no action by written consent without a meeting shall be effective until
such date as the  independent  inspectors  certify to the  corporation  that the
consents  delivered to the corporation in accordance with Section 2.16 represent
at least  the  minimum  number  of votes  that  would be  necessary  to take the
corporate  action.  Nothing  contained  in this  paragraph  shall  in any way be
construed  to suggest or imply that the board of  directors  or any  stockholder
shall not be  entitled to contest  the  validity  of any  consent or  revocation
thereof,   whether  before  or  after  such  certification  by  the  independent
inspectors,  or to take any other action  (including,  without  limitation,  the
commencement, prosecution or defense of any litigation with respect thereto, and
the seeking of injunctive relief in such litigation).

            Section  II.18   Effectiveness  of  Written  Consent.
Every  written  consent  shall  bear  the  date of signature of each stockholder
who signs the  consent and no written  consent  shall be  effective  to take the
corporate action referred to therein unless,  within sixty (60) days of the date
the earliest dated written consent was received in accordance with Section 2.16,
a written consent or consents  signed by a sufficient  number of holders to take
such action are delivered to the corporation in the manner prescribed in Section
2.16.


                                  ARTICLE III

                                   DIRECTORS

            Section III.1 Number and Term.  The number of directors  which shall
constitute  the Whole  Board  shall be not less than one nor more than ten,  the
exact number to be  determined  by  resolution of a majority of the Whole Board,
subject to the rights of the holders of any series of  Preferred  Stock to elect
directors in specified  circumstances.  The number of directors may be increased
or  decreased  from time to time in the manner  provided  by the by-laws for the
amendment thereof,  but no decrease shall have the effect of shortening the term
of any incumbent  director.  Any director whose term of office has expired shall
continue to hold office until his successor shall be elected and qualify.

            Section III.2  Vacancies;  Removal.  Subject to the  certificate  of
incorporation  of the  corporation,  vacancies and newly  created  directorships
resulting from any increase in the authorized  number of directors may be filled
by a majority of the directors then in office,  though less than a quorum, or by
a sole remaining  director,  and the directors so chosen shall hold office until
the next annual  election and until their  successors are duly elected and shall
qualify,  unless sooner  removed.  If there are no directors in office,  then an
election of directors may be held in the manner provided by statute.  If, at the
time of filling any vacancy or any newly  created  directorship,  the  directors
then in office  shall  constitute  less than a majority  of the Whole  Board (as
constituted immediately prior to any such increase),  the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such  directors,  summarily order an election to be held to fill any
such  vacancies  or newly  created  directorships,  or to replace the  directors
chosen by the directors then in office.  Subject to the rights of the holders of
any series of Preferred  Stock with  respect to such series of Preferred  Stock,
any director,  or the entire board of  directors,  may be removed from office at
any time,  with or without cause,  by the holders of a majority of shares of the
corporation  then entitled to vote  generally in the election of directors.  The
holder of each share of capital stock entitled to vote thereon shall be entitled
to cast the same  number of votes as the holder of such  shares is  entitled  to
cast generally in the election of each director.

            Section III.3 Powers. The business and operations of the corporation
shall be managed by or under the  direction of its board of directors  which may
exercise  all such  powers of the  corporation  and do all such  lawful acts and
things as are not by statute or by the certificate of  incorporation or by these
by-laws required to be exercised or done by the stockholders.

            Section  III.4  Place of  Meetings.  The board of  directors  of the
corporation  may hold  meetings,  both  regular and  special,  either  within or
outside the State of Delaware.
            
            Section  III.5 Annual Meetings.  
The  first  meeting  of  each  newly elected board of directors shall be held at
the same place as the annual meeting of the stockholders  immediately  following
the adjournment thereof, and no notice of such meeting shall be necessary to the
newly elected  directors in order legally to constitute the meeting,  provided a
quorum  shall be present.  In the event of the failure of the board of directors
to hold such meeting at the same place as the annual meeting of the stockholders
immediately  following the adjournment  thereof, the meeting may be held at such
time and place as shall be specified in a notice given as  hereinafter  provided
for special  meetings of the board of  directors,  or as shall be specified in a
written waiver signed by all of the directors.

            Section III.6  Regular  Meetings.  Regular  meetings of the board of
directors  may be held  without  notice at such time and at such  place as shall
from time to time be determined by the board.

            Section  III.7  Special  Meetings.  
Special  meetings of the board may be called by the chairman of the board or the
president  on one (1) days'  notice to each  director,  delivered  in the manner
provided in Section 4.2 of these  by-laws;  special  meetings shall be called by
the  chairman  of the board or the  president  in like manner and on like notice
upon the written request of two (2) directors.

            Section III.8  Quorum;  Telephone  Meetings.  At all meetings of the
board,  a majority of the directors  then  constituting  the total number of the
board,  but not  less  than  two (2)  directors  except  when a board of one (1)
director is authorized and acting, then one director,  shall constitute a quorum
for the  transaction  of  business  and the act of a majority  of the  directors
present at any meeting at which there is a quorum  shall be the act of the board
of directors,  except as may be otherwise specifically provided by statute or by
the  certificate  of  incorporation.  If a quorum  shall not be  present  at any
meeting of the board of directors the directors  present thereat may adjourn the
meeting  from  time to time,  without  notice  other  than  announcement  at the
meeting,  until a quorum shall be present.  Any director may  participate in any
meeting of the board of  directors  or a committee  of the board of directors by
means of conference  telephone or similar  communications  equipment by means of
which  all  persons  participating  in such  meeting  can hear each  other,  and
participation  in a meeting pursuant to the provisions of this Section 3.8 shall
constitute presence in person at such meeting.

            Section III.9 Action by Consent.  Unless otherwise restricted by the
certificate of incorporation or these by-laws,  any action required or permitted
to be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent  thereto in writing,  and the writing or writings are filed
with the minutes of proceedings of the board or committee.

            Section III.10 Committees. The board of directors may, by resolution
passed by a majority of the Whole Board, designate one or more committees,  each
committee  to consist of one or more of the  directors of the  corporation.  The
board may designate one or more directors as alternate members of any committee,
who may  replace  any  absent  or  disqualified  member  at any  meeting  of the
committee.  In the absence or disqualification  of a member of a committee,  the
member or members  thereof  present at any  meeting  and not  disqualified  from
voting,  whether  or not  such  member  or  members  constitute  a  quorum,  may
unanimously  appoint  another  member  of the board of  directors  to act at the
meeting  in the  place of any  such  absent  or  disqualified  member.  Any such
committee,  to the extent  provided in the resolution of the board of directors,
shall have and may exercise  the powers and  authority of the board of directors
in the  management of the business and  operations of the  corporation,  and may
authorize  the seal of the  corporation  to be affixed  to all papers  which may
require it; but no such committee shall have the power or authority in reference
to amending the  certificate of  incorporation  (except that a committee may, to
the  extent  authorized  in any  resolution  or  resolutions  providing  for the
issuance  of shares of stock  adopted by the board of  directors  as provided in
Section 151(a) of the General  Corporation Law of the State of Delaware,  or any
successor  provision thereto,  fix the designation and any of the preferences or
rights of such  shares  relating  to  dividends,  redemption,  dissolution,  any
distribution  of  assets  of the  corporation  or the  conversion  into,  or the
exchange of such  shares for,  shares of any other class or classes or any other
series of the same or any other class or classes of stock of the  corporation or
fix the number of shares of any series of stock or  authorize  the  increase  or
decrease  of the  shares of any  series),  adopting  an  agreement  of merger or
consolidation,  recommending to the  stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets,  recommending
to the  stockholders  a  dissolution  of the  corporation  or a revocation  of a
dissolution,  or  amending  the  by-laws  of the  corporation;  and,  unless the
resolution or the certificate of  incorporation  expressly so provides,  no such
committee  shall  have the  power or  authority  to  declare  a  dividend  or to
authorize  the issuance of stock,  or to adopt a  certificate  of ownership  and
merger  pursuant to Section 253 of the General  Corporation  Law of the State of
Delaware, or any successor provision thereto. Such committee or committees shall
have such  name or names as may be  determined  from time to time by  resolution
adopted by the board of directors.
            
            Section  III.11 Minutes of  Committees.  Each  committee  shall keep
regular  minutes of its  meetings  and report the same to the board of directors
when required.

            Section  III.12  Compensation.  Unless  otherwise  restricted by the
certificate of incorporation, the board of directors shall have the authority to
fix the compensation of directors.  The directors may be paid their expenses, if
any, of  attendance  at each meeting of the board of directors and may be paid a
fixed sum for  attendance  at each meeting of the board of directors or a stated
salary as director.  No such payment shall preclude any other  compensation  for
directors nor shall it preclude any director from serving the corporation in any
other  capacity  and  receiving  compensation  therefor.  Members  of special or
standing  committees may be allowed like  compensation  for attending  committee
meetings.

            Section III.13    Conflict of Interest.

            (a) No contract or other transaction between the corporation and one
or more of its directors or officers,  or between the  corporation and any other
corporation, partnership, association or other organization in which one or more
of the  corporation's  directors or officers are directors or officers or have a
financial interest,  shall be void or voidable solely for such reason, or solely
because  such  director or  directors  or officer or officers  are present at or
participates  in the meeting of the board of  directors  or a committee  thereof
which authorizes or approves the contract or transaction, or solely because such
director's or directors' votes are counted for such purpose, if (1) the material
facts as to such director's or directors'  relationships  or interests and as to
the contract or transaction are disclosed or are known to the board of directors
or the  committee,  and the board or  committee  in good  faith  authorizes  the
contract  or  transaction  by  the  affirmative  votes  of  a  majority  of  the
disinterested directors,  even though the disinterested directors be less than a
quorum;  or  (2)  the  material  facts  as  to  such  director's  or  directors'
relationships  or interests as to the contract or  transaction  are disclosed or
are known to the  stockholders  entitled to vote  thereon,  and the  contract or
transaction is specifically  approved in good faith by vote of the stockholders;
or (3) the contract or transaction is fair as to the  corporation as of the time
it is authorized,  approved or ratified, by the board of directors,  a committee
thereof, or the stockholders.

            (b) Common or interested directors may be counted in determining the
presence  of a quorum at a meeting of the board of  directors  or of a committee
which authorizes the contract or transaction.
            Section III.14 Presumption of Assent Section  III.14  Presumption of
Assent.  A director of the  corporation who is present at a meeting of the board
of directors at which action on any corporate  matter is taken shall be presumed
to have  assented to the action taken unless his dissent shall be entered in the
minutes  of the  meeting  or unless he shall  file his  written  dissent to such
action  with the  person  acting as the  secretary  of the  meeting  before  the
adjournment  thereof or shall  forward  such dissent by  registered  mail to the
secretary of the corporation  immediately  after the adjournment of the meeting.
Such right to dissent  shall not apply to a director  who voted in favor of such
action.



                                  ARTICLE IV

                                    NOTICES

            Section IV.1 Notice to Stockholders.  Whenever, under the provisions
of applicable law or of the  certificate of  incorporation  or of these by-laws,
notice is required to be given to any stockholder,  it shall not be construed to
mean  personal  notice only,  but such notice may be given in writing,  by mail,
addressed to such stockholder,  at such  stockholder's  address as it appears on
the records of the corporation,  with postage thereon  prepaid,  and such notice
shall be deemed to be given at the time when the same shall be  deposited in the
United States mail.

            
            Section IV.2 Notice to Directors.  Whenever, under the provisions of
applicable  law or of the  certificate  of  incorporation  or of these  by-laws,
notice is required to be given to any  director,  it shall be  delivered  by the
chairman of the board,  the president or the  secretary to such director  within
the time provided in Section 3.7 of these by-laws. Such notice either (i) may be
in writing (A) delivered  personally,  (B) delivered by mailing to a director at
such  director's  address as it appears in the records of the  corporation,  (C)
delivered by telecopier or other means of electronic  facsimile  transmission or
(D)  delivered  by  telegram  or (ii) may be oral  given  either in person or by
telephone. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail, so addressed,  with postage  thereon  prepaid.  If by
telecopier or other electronic means of facsimile transmittal, such notice shall
be deemed  delivered  upon  completion of transmittal  from the sender  thereof,
provided  that it shall  have  been  directed  to such a place as is  reasonably
calculated  to cause  actual  receipt  of such  notice by such  director.  If by
telegram,  such  notice  shall be deemed to be  delivered  when the  telegram is
delivered to the  telegraph  company,  provided  that the notice shall have been
directed to such a place as is reasonably  calculated to cause actual receipt of
such notice by such director.  Neither the business to be transacted at, nor the
purpose of, any  regular or special  meeting of the board of  directors  need be
specified in any notice of such meeting, except for amendments to these by-laws,
as provided under Article IX.

            Section IV.3 Waiver of Notice. Whenever any notice is required to be
given  under  the  provisions  of the  General  Corporation  Law of the State of
Delaware  or of the  certificate  of  incorporation  or of  these  by-laws  to a
stockholder or director,  a waiver  thereof in writing,  signed by the person or
persons entitled to said notice, whether before or after the time stated therein
or the time of any meeting,  shall be deemed  equivalent  to giving such notice.
Attendance of a person at a meeting shall  constitute a waiver of notice of such
meeting,  except when the person  attends a meeting  for the express  purpose of
objecting,  at the beginning of the meeting,  to the transaction of any business
because the meeting is not lawfully called or convened.  Neither the business to
be  transacted  at, nor the purpose  of, any  regular or special  meeting of the
stockholders,  directors,  or  members  of a  committee  of  directors  need  be
specified in any written  waiver of notice  unless so required by statute or the
certificate of incorporation.


                                   ARTICLE V

                                   OFFICERS

            Section V.1 Officers.  The elected officers of the corporation shall
be a chairman of the board, a president, a secretary, a treasurer and such other
officers (including, without limitation, a chief financial officer) as the board
of  directors  from time to time may deem proper.  All  officers  elected by the
board of directors  shall each have such powers and duties as generally  pertain
to their respective offices,  subject to the specific provisions of this Article
V. Such officers shall also have such powers and duties as from time to time may
be conferred by the board of directors or any  committee  thereof.  The board of
directors may from time to time elect such other officers (including one or more
assistant  vice  presidents,  assistant  secretaries,  assistant  treasurers and
assistant controllers) and such agents, as may be necessary or desirable for the
conduct  of the  business  of the  corporation.  Any  committee  of the board of
directors  may from  time to time  elect,  or the  chairman  of the board or the
president may appoint,  officers and assistant  officers  (including one or more
assistant  vice  presidents,  assistant  secretaries,  assistant  treasurers and
assistant  controllers,  but  excluding  the  chairman of the board,  president,
secretary,  treasurer, chief financial officer and other senior elected officers
which shall be elected  solely by the board of directors) as may be necessary or
desirable  for the  conduct  of the  business  of the  corporation.  Such  other
officers and agents shall have such duties and shall hold their offices for such
terms as shall be provided in these by-laws or as may be prescribed by the board
of directors or such committee or by the chairman of the board or the president,
as the case may be. Any number of offices may be held by the same person  unless
the certificate of incorporation otherwise provides.
            Section V.2 Compensation. The salaries and other compensation of all
elected  officers  of the  corporation  shall be fixed  from time to time by the
board of  directors,  and no officer  shall be  prevented  from  receiving  such
compensation  by  reason  of  the  fact  that  he is  also  a  director  of  the
corporation.

            Section V.3 Election and Term of Office. The elected officers of the
corporation  shall be elected  annually by the board of directors at the regular
meeting of the board of directors  held on the date of the annual meeting of the
stockholders.  If the  election of officers  shall not be held at such  meeting,
such election shall be held as soon thereafter as convenient. Each officer shall
hold  office  until his  successor  shall have been duly  elected and shall have
qualified or until his death or until he shall resign or be removed from office.

            Section V.4 Removal. Any officer elected, or agent appointed, by the
board of directors may be removed,  with or without  cause,  by the  affirmative
vote of a majority of the Whole Board. Any officer elected by a committee of the
board of directors may be removed by the affirmative  vote of a majority of said
committee  or the Whole  Board,  with or  without  cause.  Any  officer or agent
appointed by the chairman of the board or the  president  may be removed by such
officer or the affirmative  vote of a majority of the Whole Board or a committee
thereof,  with or without  cause.  No elected  officer or other officer or agent
shall have any contractual  rights against the  corporation for  compensation by
virtue of such officer's or agent's  election or appointment  beyond the date of
the election or appointment of his successor,  his death, his resignation or his
removal,  whichever event shall first occur,  except as otherwise provided in an
employment contract or under an employee benefit or deferred compensation plan.

            Section V.5 Vacancies.  A newly created elected office and a vacancy
in any elected office because of death, resignation, or removal may be filled by
the board of directors for the  unexpired  portion of the term at any meeting of
the board of  directors.  Any vacancy in an office  appointed by the chairman of
the board or the  president  because of death,  resignation,  or removal  may be
filled by the chairman of the board or the president.

            Section V.6 Duties of Officers. The officers of the corporation,  if
and when elected by the board of directors  of the  corporation,  shall have the
following duties:

            (a) Chairman of the Board. The chairman of the board shall,  subject
to the direction of the board of  directors,  supervise and control the business
and affairs of the corporation.  He shall, when present, preside at all meetings
of the stockholders and of the board of directors.  He may sign certificates for
shares of the  corporation  and  deeds,  mortgages,  bonds,  contracts  or other
instruments  on behalf of the  corporation,  except where  required by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly  delegated by the board of directors to some other officer or
agent of the  corporation.  In general,  he shall perform all duties incident to
the office of chairman of the board and such other  duties as may be  prescribed
by the board of directors.

            (b) President.  The president shall be the chief executive and chief
administrative  officer of the  corporation  and shall have  general  and active
management of such areas and divisions of the business of the corporation as may
be  designated  by the board of directors  or by the chairman of the board.  The
president of the corporation  shall carry into effect the orders of the chairman
of the board and the board of  directors.  In the absence of the chairman of the
board or in the event of his death or  inability  to act,  the  president  shall
perform the duties of the  chairman of the board,  and when so acting shall have
all the powers of and be subject to all the  restrictions  upon the  chairman of
the board. The president may sign certificates for shares of the corporation and
deeds,  mortgages,  bonds,  contracts  or other  instruments  on  behalf  of the
corporation except where required by law to be otherwise signed and executed and
except where the signing and execution  thereof shall be expressly  delegated by
the board of directors  to some other  officer or agent of the  corporation.  In
general,  the  president  shall  perform  all duties  incident  to the office of
president  and such other duties as may be  prescribed by the board of directors
or the chairman of the board.

            (c) Vice Presidents. In the absence of the president or in the event
of the  president's  death or inability to act,  the vice  president  (or in the
event there be more than one vice  president,  the vice  presidents in the order
determined by the board of directors) shall perform the duties of the president,
and when so  acting,  shall  have all the  powers of and be  subject  to all the
restrictions  upon the president.  Any vice  president  shall perform such other
duties  as from  time to time  may be  assigned  to the  vice  president  by the
chairman of the board, the president or the board of directors.

            (d)  Secretary.   The  secretary  shall  keep  the  minutes  of  the
proceedings  of the  stockholders  and of the board of  directors in one or more
books  provided  for  that  purpose;  see  that all  notices  are duly  given in
accordance  with the  provisions  of these  by-laws or as  required  by law;  be
custodian of the corporate records and of the seal of the corporation;  see that
the  seal of the  corporation  is  affixed  to all  appropriate  documents,  the
execution  of  which  on  behalf  of the  corporation  under  its  seal  is duly
authorized; keep a register of the post office address of each stockholder which
shall be furnished to the secretary by such stockholder;  sign with the chairman
of the board,  the  president or the  treasurer  certificates  for shares of the
corporation,  the issuance of which shall have been  authorized by resolution of
the board of directors;  have general  charge of the stock transfer books of the
corporation;  and in  general  perform  all  duties  incident  to the  office of
secretary  and such  other  duties as from time to time may be  assigned  to the
secretary  by the  chairman  of the  board,  the  president,  or  the  board  of
directors.  If there is no treasurer of the  corporation,  the  secretary  shall
assume the authority and duties of treasurer.

            (e) Treasurer. If there is a treasurer of the corporation,  he shall
have charge and custody of and be  responsible  for all funds and  securities of
the  corporation,  receive and give  receipts  for moneys due and payable to the
corporation from any source whatsoever,  and deposit all such moneys in the name
of the corporation in such banks,  trust companies or other  depositaries as may
be  designated  by the board of  directors,  and in general  perform  all of the
duties incident to the office of treasurer and such other duties as from time to
time may be assigned to the  treasurer by the chairman of the board,  president,
or the board of directors. The treasurer may sign certificates for shares of the
corporation.  If required by the board of directors,  the treasurer shall give a
bond for the faithful  discharge of such treasurer's duties in such sum and with
such surety or sureties as the board of directors shall determine.

            (f) Assistant  Secretaries and Assistant  Treasurers.  The assistant
secretary,  or if there shall be more than one, the assistant secretaries in the
order determined by the board of directors,  shall, in the absence or disability
of the  secretary,  perform the duties and exercise the powers of the secretary.
The  assistant  treasurer,  or, if there shall be more than one,  the  assistant
treasurers  in the order  determined by the board of  directors,  shall,  in the
absence or  disability  of the  treasurer,  perform the duties and  exercise the
powers of the  treasurer.  The board of  directors  may  require  any  assistant
treasurer  to  give  a  bond  for  the  faithful  discharge  of  such  assistant
treasurer's duties in such sums and with such surety or sureties as the board of
directors shall determine.  The assistant  secretaries and assistant  treasurers
shall  all  perform  such  other  duties  as  shall be  assigned  to them by the
secretary  and  treasurer,  respectively,  or by the chairman of the board,  the
president, or the board of directors.


                                  ARTICLE VI

                             CERTIFICATES OF STOCK

            Section VI.1 Certificates.  Every holder of stock in the corporation
shall  be  entitled  to have a  certificate,  signed  by,  or in the name of the
corporation  by, the chairman of the board of  directors  or the  president or a
vice president,  and by the treasurer or an assistant treasurer or the secretary
or an assistant  secretary of the  corporation,  certifying the number of shares
owned by such holder of stock in the corporation. Certificates may be issued for
partly  paid  shares and in such case upon the face or back of the  certificates
issued to  represent  any such  partly  paid  shares,  the  total  amount of the
consideration  to be paid  therefor and the amount paid thereon shall be stated.
If the corporation  shall be authorized to issue more than one class of stock or
more than one series of any class,  the powers,  designations,  preferences  and
relative, participating, optional or other special rights of each class of stock
or series thereof and the  qualifications,  limitations or  restrictions of such
preferences  and/or  rights shall be set forth in full or summarized on the face
or back of the certificate  which the corporation  shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the  General  Corporation  Law of the State of  Delaware,  in lieu of the
foregoing  requirements,  there  may be set  forth  on the  face  or back of the
certificate  which the corporation shall issue to represent such class or series
of stock, a statement that the  corporation  will furnish without charge to each
stockholder who so requests the powers, designations,  preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications,  limitations or restrictions of such preferences
and/or rights.

            Section  VI.2  Signatures.  Any  of or  all  the  signatures  on the
certificate may be facsimile.  In case any officer,  transfer agent or registrar
who has signed or whose  facsimile  signature has been placed upon a certificate
shall have ceased to be such officer,  transfer  agent or registrar  before such
certificate is issued,  it may be issued by the corporation with the same effect
as if such person were such officer,  transfer agent or registrar at the date of
issue.

            Section VI.3 Lost,  Stolen or Destroyed  Certificates.  The board of
directors may direct a new  certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the corporation alleged to
have been lost,  stolen or  destroyed,  upon the making of an  affidavit of that
fact by the  person  claiming  the  certificate  of stock to be lost,  stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its  discretion  and as a condition  precedent to the
issuance  thereof,   require  the  owner  of  such  lost,  stolen  or  destroyed
certificate or certificates, or such owner's legal representative,  to advertise
the same in such manner as it shall  require  and/or to give the  corporation  a
bond in such sum as it may  direct as  indemnity  against  any claim that may be
made against the  corporation  with respect to the  certificate  alleged to have
been lost, stolen or destroyed.

            Section VI.4 Transfer of Stock. Upon surrender to the corporation or
the transfer agent of the  corporation of a certificate for shares duly endorsed
or  accompanied  by proper  evidence of  succession,  assignment or authority to
transfer,  it shall be the duty of the corporation to issue a new certificate to
the  person  entitled  thereto,  cancel  the  old  certificate  and  record  the
transaction upon its books.

            Section  VI.5  Registered  Stockholders.  The  corporation  shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and  assessments a person  registered on its books as the owner
of shares,  and shall not be bound to recognize  any equitable or other claim to
or interest in such share or shares on the part of any other person,  whether or
not it shall have express or other notice thereof,  except as otherwise provided
by the laws of the State of Delaware.


                                  ARTICLE VII

                         INDEMNIFICATION OF DIRECTORS,
                            OFFICERS AND EMPLOYEES

            Section VII.1  Indemnification in Actions Arising Out of Capacity as
Officer,  Directors,  Employee or Agent.  The  corporation  shall indemnify  any
person  who  was or is a  party  or is  threatened  to  be  made  a party to any
threatened,  pending,  or completed action,  suit or proceeding,  whether civil,
criminal,  administrative  or  investigative  (other than an action by or in the
right of the  corporation) by reason of the fact that he is or was a director or
officer  of  the  corporation,  or is or  was  serving  at  the  request  of the
corporation  as a  director,  officer,  employee,  partner  or agent of  another
corporation,  partnership,  joint venture,  trust or other  enterprise,  against
expenses  (including  attorneys'  fees),  judgments,  fines and amounts  paid in
settlement  actually  and  reasonably  incurred by him in  connection  with such
action,  suit or  proceeding  if he  acted  in good  faith  and in a  manner  he
reasonably  believed  to be in or not  opposed  to  the  best  interests  of the
corporation,  and,  with respect to any criminal  action or  proceeding,  had no
reasonable cause to believe his conduct was unlawful. The corporation shall have
the  power  in  its  discretion  to  indemnify  any  employee  or  agent  of the
corporation  in the same manner as the  corporation is required to indemnify its
officers and directors  under this Section 7.1. The  termination  of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo  contendere or its equivalent,  shall not, of itself,  create a presumption
that the person did not act in good  faith and in a manner  which he  reasonably
believed to be in or not opposed to the best interests of the corporation,  and,
with respect to any  criminal  action or  proceeding,  had  reasonable  cause to
believe that his conduct was unlawful.

            Section  VII.2   Indemnification  in  Actions  by  or  in  Right  of
Corporation.  The  corporation  shall  indemnify  any  person  who  was  or is a
party  or is  threatened  to be  made a  party  to any  threatened,  pending  or
completed  action or suit by or in the  right of the  corporation  to  procure a
judgment  in its favor by reason  of the fact  that he is or was a  director  or
officer,  of  the  corporation,  or is or was  serving  at  the  request  of the
corporation  as a  director,  officer,  employee,  partner  or agent of  another
corporation,  partnership,  joint venture,  trust or other  enterprise,  against
expenses (including  attorneys' fees) actually and reasonably incurred by him in
connection  with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the  corporation and except that no  indemnification  shall be
made in respect of any claim,  issue,  or matter as to which such  person  shall
have been adjudged to be able to the  corporation  unless and only to the extent
that the  Delaware  Court of  Chancery or the court in which such action or suit
was brought shall determine upon application  that,  despite the adjudication of
liability  but in view of all the  circumstances  of the  case,  such  person is
fairly and  reasonably  entitled to indemnity for such expenses which such court
shall deem proper.  The  corporation  shall have the power in its  discretion to
indemnify  any  employee or agent of the  corporation  in the same manner as the
corporation  is required to  indemnify  its officers  and  directors  under this
Section 7.2.
            Section  VII.3   Indemnification   When   Successful  on  Merits  or
Otherwise.
To the extent that a director, officer, employee or agent of the corporation has
been  successful  on the merits or otherwise  in defense of any action,  suit or
proceeding  referred  to in  Sections  7.1 and 7.2 of this  Article  VII,  or in
defense of any claim, issue or matter therein,  he shall be indemnified  against
expenses (including  attorneys' fees) actually and reasonably incurred by him in
connection therewith.

            Section VII.4  Determination of Meeting  Applicable Standard.
Any  indemnification   under  Sections 7.1  and 7.2 of  this Article VII (unless
ordered by a court) shall be made by the  corporation  only as authorized in the
specific  case  upon a  determination  that  indemnification  of  the  director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Sections 7.1 and 7.2 of this Article
VII.  Such  determination  shall be made (a) by a majority vote of the directors
who are not parties to such action, suit or proceeding,  even though less than a
quorum,  or (b) if there are no such directors,  or if such directors so direct,
by independent legal counsel in a written opinion, or (c) by the stockholders.
            
            Section  VII.5  Payment of  Expenses  in Advance of  Disposition  of
Action.
Expenses  incurred by an officer or director in defending  any civil,  criminal,
administrative,  or investigative action, suit, or proceeding may be paid by the
corporation  in  advance  of the final  disposition  of such  action,  suit,  or
proceeding  upon receipt of an  undertaking  by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this Article VII.
Such expenses (including attorneys' fees) incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.


            Section VII.6 Nonexclusivity of Article.
The   indemnification  and  advancement  of  expenses  provided  by, or  granted
pursuant to, this Article VII shall not be deemed  exclusive of any other rights
to which  those  seeking  indemnification  or  advancement  of  expenses  may be
entitled under any by-law,  agreement,  vote of  stockholders  or  disinterested
directors or  otherwise,  both as to action in his  official  capacity and as to
action in  another  capacity  while  holding  such  office,  and  shall,  unless
otherwise provided when authorized or ratified,  continue as to a person who has
ceased to be a  director,  officer,  employee  or agent  and shall  inure to the
benefit  of the  heirs,  executors  and  administrators  of such a  person.  The
indemnification  provided  by this  Article  VII shall not be  exclusive  of any
powers,  rights,  agreements or undertakings which may be legally permissible or
authorized  by or under  any  applicable  law  but,  notwithstanding  any  other
provision of this Article VII, the  indemnification  authorized  and provided by
this   Article   VII  shall  be   applicable   only  to  the  extent  that  such
indemnification shall not duplicate indemnity or reimbursement which such person
has received or shall receive otherwise than under this Article VII.
            
            Section VII.7 Insurance.
The corporation may purchase and maintain  insurance on  behalf  of  any  person
who is or was a director,  officer, employee or agent of the corporation,  or is
or was  serving  at the  request  of the  corporation  as a  director,  officer,
partner, employee or agent of another corporation,  partnership,  joint venture,
trust or  other  enterprise  against  any  liability  asserted  against  him and
incurred  by him in any such  capacity,  or  arising  out of his status as such,
whether or not the  corporation  would have the power to  indemnify  him against
such liability under the provisions of this Article VII or otherwise.

            Section  VII.8  Constituent Corporations.
For purposes of this Article VII, references to "the corporation" shall include,
in addition to this  corporation,  any  constituent  corporation ( including any
constituent of a constituent) absorbed by this corporation in a consolidation or
merger which, if its separate existence had continued,  would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any  person  who is or was a  director,  officer,  employee  or  agent  of  such
constituent corporation, or is or was serving at the request of such constituent
corporation  as a  director,  officer,  partner,  employee  or agent of  another
corporation,  partnership, joint venture, trust or other enterprise, shall stand
in the same  position  under the  provisions of this Article VII with respect to
the  resulting  or surviving  corporation  as he would have with respect to such
constituent corporation if its separate existence had continued.

            Section VII.9 Definitions.
For  purposes  of  this  Article  VII, the phrases "other enterprises," "fines,"
"serving  at the  request  of the  corporation"  and  "not  opposed  to the best
interests of the corporation"  shall, in addition to the normal meanings of said
phrases,  be deemed to include the meanings  ascribed to said phrases in Section
145(i) of the General  Corporation Law of the State of Delaware or any successor
provision thereto.


                                 ARTICLE VIII

                              GENERAL PROVISIONS

            Section  VIII.1  Dividends.  Dividends upon the capital stock of the
corporation,  subject to the provisions of the certificate of incorporation,  if
any,  may be  declared  by the board of  directors  at any  regular  or  special
meeting, pursuant to applicable law. Dividends may be paid in cash, in property,
or in shares of the capital stock,  subject to the provisions of the certificate
of incorporation and applicable law. In order that the corporation may determine
the  stockholders   entitled  to  receive  payment  of  any  dividend  or  other
distribution,  the board of directors  may fix a record date,  which record date
shall not precede the date upon which the  resolution  fixing the record date is
adopted,  and which  record date shall be not more than sixty (60) days prior to
such  action.  If no  record  date is fixed,  the  record  date for  determining
stockholders  for any such purpose  shall be at the close of business on the day
on which the board of directors adopts the resolution relating thereto.

            Section VIII.2 Reserves.  Before payment of any dividend,  there may
be set aside out of any funds of the  corporation  available for dividends  such
sum or sums as the directors  from time to time, in their  absolute  discretion,
think proper as a reserve or reserves to meet  contingencies,  or for equalizing
dividends,  or for repairing or maintaining any property of the corporation,  or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.

            Section VIII.3 Checks.  All checks or demands for money and notes of
the corporation shall be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.

            Section VIII.4    Fiscal Year.
The fiscal year of the corporation shall be fixed by  resolution of the board of
directors.

            Section VIII.5 Seal. The corporate seal shall have inscribed thereon
the name of the corporation and the words  "Corporate  Seal" and "Delaware." The
seal may be used by causing it or a facsimile thereof to be impressed or affixed
or reproduced or otherwise.

            Section VIII.6 Contracts.  Except as otherwise  required by law, the
certificate  of  incorporation   or  these  by-laws,   any  contracts  or  other
instruments  may be executed and  delivered in the name and on the behalf of the
corporation  by such  officer of  officers  of the  corporation  as the board of
directors  may from  time to time  direct.  Such  authority  may be  general  or
confined to specific  instances as the board may determine.  The chairman of the
board,  president or any vice  president may execute  bonds,  contracts,  deeds,
leases  and other  instruments  to be made or  executed  for or on behalf of the
corporation.  Subject to any restrictions imposed by the board of directors, the
chairman of the board,  president or any vice president of the  corporation  may
delegate  contractual  powers  to  others  under  his  jurisdiction,   it  being
understood,  however,  that any such  delegation of power shall not relieve such
officer of responsibility with respect to the exercise of such delegated power.

            Section VIII.7 Voting of Corporation's Securities.  Unless otherwise
ordered by the board of directors,  the chairman of the board,  the president or
any vice  president,  or such other officer as may be designated by the board of
directors to act in the absence of the  chairman of the board,  president or any
vice president, shall have full power and authority on behalf of the corporation
to attend and to act and to vote,  and to execute a proxy or proxies  empowering
others to attend and to act and to vote, at any meetings of security  holders of
any  corporation  in which  the  corporation  may hold  securities,  and at such
meetings the chairman of the board, the president,  any vice president,  or such
other officer of the  corporation,  or such proxy shall possess and may exercise
any and all rights and powers incident to the ownership of such securities,  and
which as the owner thereof the  corporation  might have possessed and exercised,
if present.  The  secretary or any  assistant  secretary may affix the corporate
seal to any such proxy or proxies so executed by the chairman of the board,  the
president,  any vice president,  or such other officer, and attest the same. The
board of directors by  resolution  from time to time may confer like powers upon
any other person or persons.

            Section  VIII.8  Procedure.  The accounts,  books and records of the
corporation  shall be audited  upon the  conclusion  of each  fiscal  year by an
independent certified public accountant selected by the board of directors,  and
it  shall be duty of the  board of  directors  to  cause  such  audit to be done
annually.

            Section VIII.9 Resignations.
Any director or any officer,  whether  elected or  appointed,  may resign at any
time by giving written notice of such  resignation to the chairman of the board,
the  president  or the  secretary,  and such  resignation  shall be deemed to be
effective as of the close of business on the date said notice is received by the
chairman of the board, the president or the secretary,  or at such later time as
is  specified  therein.  No  formal  action  shall be  required  by the board of
directors or the stockholders to make any such resignation effective.

                                  ARTICLE IX

                             AMENDMENT OF BY-LAWS

            These by-laws may be altered, amended, or repealed at any meeting of
the board of directors or of the  stockholders,  provided notice of the proposed
change was given in the notice of the  meeting  and, in the case of a meeting of
the board of  directors,  in a notice  not less  than two (2) days  prior to the
meeting;  provided,  however,  that, in the case of amendments by  stockholders,
notwithstanding  any other  provisions  of these by-laws or any provision of law
which might  otherwise  permit a lesser vote or no vote,  but in addition to any
affirmative vote of the holders of any particular class or series of the capital
stock of the corporation  required by law, the certificate of  incorporation  or
these by-laws,  the  affirmative  vote of the holders of at least eighty percent
(80%) of the total  votes of all of the then  outstanding  shares of the  Voting
Stock,  voting together as a single class,  shall be required to alter, amend or
repeal any provision of these by-laws.


<PAGE>





                              HISTORY OF BY-LAWS

1.    Amended and Restated - May 14, 1997





                             GUARANTY OF PAYMENT

THIS GUARANTY OF PAYMENT ("this  Guaranty") is made by the undersigned  (whether
one or more herein collectively called the  "Guarantor") with SOUTHTRUST BANK OF
ALABAMA,  NATIONAL ASSOCIATION (herein called the "Bank"),  a/an _______________
bank having its principal office located at Hamilton, Alabama,:
                             W I T N E S S E T H:

      To induce Bank to make a loan or to extend credit or make other  financial
products or services available to QUALITY HOUSING SUPPLY, LLC  (as  hereinafter
further defined, called "Borrower"),  and for the consideration set forth below,
Guarantor hereby agrees with Bank as follows:

   1.  This  Guaranty  is made for the  purpose  of  securing  to  Borrower,  at
Guarantor's  request, one or more loans or other extensions of credit from, or a
line of credit with, or the issuance of one or more letters of credit by, or the
issuance  of one or more  bankers'  acceptances  by,  or the  lease of  personal
property  from,  or the  furnishing of other  financial  products or services by
Bank, but the amount of the loan or other financial products or services and the
terms and conditions  thereof will be such as Bank, in its sole discretion,  may
deem appropriate.  All such loans or other financial products or services now or
hereafter provided by Bank to Borrower,  and all extensions or renewals of debts
or other obligations now or at any time hereafter owing by Borrower to Bank, are
made by Bank in reliance on this  Guaranty,  and are the  consideration  for the
execution and delivery of this Guaranty by Guarantor. Each term and provision of
every  promissory  note or other  evidence  of debt,  and every loan  agreement,
security  agreement,  mortgage,  deed to secure debt,  deed of trust,  letter of
credit reimbursement agreement,  bankers' acceptance agreement, lease agreement,
and every other contract  executed by Borrower and delivered to Bank, shall bind
Guarantor as if executed by Guarantor as the primary and  individual  obligation
of Guarantor.

   2.   Guarantor,   jointly   and   severally   if   more   than  one,   hereby
unconditionally  guarantees to Bank the payment and  performance  by Borrower of
all of the Guaranteed  Obligations (as hereinafter defined).  This Guaranty is a
guaranty of payment and performance and not of collection. In the event Borrower
at any time  defaults in the  payment or  performance  of any of the  Guaranteed
Obligations  as and  when the same  becomes  due,  whether  by  acceleration  of
maturity of the debt or obligation or  otherwise,  Guarantor  agrees to pay such
debt or perform such obligation immediately. Upon failure of Guarantor to do so,
Bank  may,  in its  discretion,  enforce  the  collection  of  such  debt or the
performance  of such  obligation  out of  Guarantor  by  action  in any court of
competent  jurisdiction,  or in any other manner provided by law, the same as if
such debt or obligation  were the primary and  individual  debt or obligation of
Guarantor,  and without  first  seeking to enforce  such debt or  obligation  by
action or otherwise against Borrower;  or, Bank may, in its discretion,  proceed
in any matter  provided by law or by contract for  collection  of debts  against
either or both Guarantor and Borrower the same as if such debts and  obligations
were primarily and individually the debt of both Guarantor and Borrower, jointly
and  severally.  (The  remainder of this  paragraph  applies only if this box is
marked: ) x Guarantor's liability under this Guaranty is limited to the sum of $
600,000.00  * , plus  interest  accrued on that sum prior to default at the rate
provided for  interest on the  Guaranteed  Obligations  and interest on that sum
after default at the rate provided for interest  following  default by Borrower,
plus all costs  (including  attorneys'  fees) incurred by Bank in collecting any
sum owed by Guarantor hereunder  following default by Guarantor.  This limittion
of liability applies separately to each Guarantor under this Guaranty.  Payments
made by Guarantor  prior to default by Borrower  and payments  made by any other
person (including any other Guarantor) will not reduce each Guarantor's  maximum
liability under this Guaranty.  Guarantor  agrees that Borrower's  obligation to
Bank may exceed any  limitation of liability of Guarantor  (individually  and in
the  aggregate,  if  more  than  one)  under  this  Guaranty.  * or  60%  of the
outstanding principal balance of any and all debts owing.

   3. This is a continuing  Guaranty.  This Guaranty extends to  all  debts  and
other  obligations  now  contracted or owing by Borrower to Bank and also to all
debts and  other  obligations  contracted  or owing by  Borrower  to Bank in the
future at any time up to the time this  Guaranty is  terminated  pursuant to the
provisions  of this  paragraph,  even though from time to time and for  extended
periods of time  there may be no debt or  obligation  owed to Bank by  Borrower.
Subject  to the  provisions  which  follow,  Guarantor  shall  have the right to
terminate  this Guaranty at any time effective 10 days after receipt by the then
president of Bank of written notice of  Guarantor's  intention to terminate this
Guaranty. Such termination will have prospective effect only and will not affect
Guarantor's  obligations  with respect to, and this Guaranty will remain in full
force and effect with respect to, all of the Guaranteed Obligations then due and
owing or then  contracted  for or existing,  whether or not yet due, at the time
such notice  becomes  effective,  and all interest  then  accrued or  thereafter
accruing  on any  of  the  foregoing,  and  all  expenses,  including  costs  of
collection and attorneys' fees, with respect to such Guaranteed Obligations with
respect to this  Guaranty,  and all  obligations  described in paragraph 5.e. of
this  Guaranty,  whether then  existing or arising in the future,  and also with
respect to any  subsequent  loans,  extensions  of credit,  and other  financial
accommodations  which, prior to receipt of such notice,  Bank may have committed
to make to Borrower  (regardless of whether Bank waives any default or condition
precedent to the making of such loans,  extensions of credit, or other financial
accommodations),  together with all interest thereon and all expenses, including
costs of collection and attorneys' fees, related thereto.

   4. Guarantor's  obligations  under this Guaranty are secured by the following
property and/or separate agreements provided by Guarantor:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The foregoing is for ease of reference only; failure to describe any property or
any  separate  agreement  which by its  terms  secures  this  Guaranty  does not
constitute a waiver of such  property or separate  agreement as  collateral  for
Guarantor's  obligations hereunder.) Guarantor hereby assigns to Bank and grants
to Bank, as additional collateral and in addition to any applicable right of set
off, a security  interest  in all  deposit  accounts  now or  hereafter  owed to
Guarantor by Bank and all personal property of Guarantor now or hereafter in the
actual or constructive possession or control of Bank.

   5.   Guarantor hereby irrevocably:

       a. Assents  to  all  terms  and  agreement  heretofore or hereafter  made
by Borrower with Bank, including,  but without limitation,  agreements regarding
the manner of disposing of any  collateral in a commercially  reasonable  manner
and  agreements  regarding  the  manner of giving  notice and the time of giving
notice of any sale or other intended disposition of any of such collateral;

       b. Consents  that  Bank  may,  without  discharging  Guarantor  or in any
way affecting the  obligations of Guarantor  under this Guaranty;  (i) exchange,
release or surrender to Borrower or to any  guarantor  or any other  person,  or
waive, release,  subordinate,  fail to perfect any lien or security interest in,
or otherwise impair, any collateral now or hereafter held as security for any of
the Guaranteed Obligations or any right of setoff against any deposit account of
Borrower;  (ii) waive or delay the  exercise  of any of its  rights or  remedies
against Borrower or any other person or entity,  including,  without limitation,
Guarantor;  (iii) with or without  consideration,  release Borrower or any other
person or entity,  including,  without  limitation,  any other  guarantor of the
Guaranteed  Obligations;  (iv) renew,  extend, or modify the terms of any of the
Guaranteed  Obligations  or of  any  promissory  note  or  other  instrument  or
agreement evidencing the same; (v) apply payments by Borrower, Guarantor, or any
other person or entity to any of the  Guaranteed  Obligations in such manner and
in such order as Bank may elect;  (vi) apply  payments  received for  Borrower's
account  first to pay any  indebtedness  of Borrower  that is not  guaranteed by
Guarantor, if any, before reducing the Guaranteed Obligations;  and (vii) in the
event of the filing of a petition (whether  voluntary or involuntary)  under any
chapter of the federal Bankruptcy Code with respect to Borrower,  participate in
the bankruptcy  proceedings and exercise any and all rights set forth in clauses
(i) through (vi) above, including, but without limitation, voting for or against
any  plan  of  reorganization,  consenting  to the use of any  cash  collateral,
consenting  to the  sale,  use or lease of any  collateral  securing  any of the
Guaranteed Obligations, and entering into any compromise or settlement regarding
the Guaranteed Obligations or any collateral therefor;

       c. Waives all notices  whatsoever  with respect to this  Guaranty or with
respect to the Guaranteed Obligations or any collateral therefor, including, but
without  limitation,  notice of (i) Bank's  acceptance  of this  Guaranty or its
intention to act, or its action, in reliance hereon;  (ii) the present existence
or future incurring of any of the Guaranteed Obligations or the terms or amounts
thereof or any change  therein;  (iii) any  default by  Borrower  or any surety,
pledgor,  grantor of any lien or security  interest,  or  guarantor,  including,
without limitation,  Guarantor; (iv) the obtaining or release of any guaranty of
surety  agreement  (in addition to this  Guaranty),  or any pledge,  assignment,
security  agreement,  mortgage,  deed to secure  debt,  deed of trust,  or other
security for any of the Guaranteed Obligations;

       d. Waives demand, dishonor,  protest, notice of presentment and notice of
nonpayment or dishonor with respect to any promissory  note or other  instrument
or agreement now or hereafter evidencing any of the Guaranteed Obligations,  and
any other  demands and  notices,  except such notices as are required by law and
cannot be waived,  and waives any  requirement  that suit under this Guaranty be
brought  within  any  period  of  time  shorter  than  the  general  statute  of
limitations applicable to contracts under seal;

       e. Agrees that, if at any time all or any part of any payment  previously
applied by Bank to any of the  Guaranteed  Obligations  must be returned by Bank
for any reason,  whether upon the claim of a  preference,  fraudulent  transfer,
prior  lien,  or other  claim of a  creditor,  debtor-in-possession,  trustee in
bankruptcy or other representative of creditors of Borrower,  or otherwise,  and
whether by court order,  administrative order, or non-judicial settlement,  this
Guaranty shall  continue in effect or shall be  reinstated,  as the case may be,
and Guarantor shall remain liable for the full amount returned as if such amount
had  never  been  received  by Bank,  notwithstanding  any  termination  of this
Guaranty  (whether under  paragraph 3 above or otherwise) or cancellation of any
promissory  note  or  other  instrument  or  agreement  evidencing  any  of  the
Guaranteed Obligations;

        f.  Waives  acceptance  of this  Guaranty  by Bank and agrees  that this
Guaranty  will be valid and binding  upon  Guarantor  when  delivered to Bank by
anyone having possession hereof after execution of this Guaranty by Guarantor;

        g.  Agrees  that   Guarantor's   liability   under  this  Guaranty  is
absolute  and is not  conditioned  on the  execution  of this  or any  similar
guaranty by any other person or upon the  occurrence or  nonoccurrence  of any
other event;

        h. Waives any right to require  Bank to marshall  the assets of Borrower
or any other  person and agrees  that Bank may proceed  against  any  collateral
securing  the  Guaranteed  Obligations  (whether or not  Guarantor  or any other
person  holds a lien on only a part of  such  collateral)  and  against  parties
liable on any of the Guaranteed Obligations in such order as Bank may elect, the
benefit  of any rule of law or equity to the  contrary  being  hereby  expressly
waived by Guarantor;

        i. Agrees that the liability of Guarantor  under this Guaranty shall not
be affected or impaired by, and this  Guaranty  shall  remain fully  enforceable
against  Guarantor for the full amount of the Guaranteed  Obligations  less only
payments  thereon  actually  received and retained by Bank  irrespective  of and
without reduction on account of, (i) any defense,  offset, or counterclaim which
Borrower may have or assert with respect to any of the  Guaranteed  Obligations,
including, but without limitation, filing of a petition in bankruptcy, discharge
in bankruptcy,  confirmation of a plan of reorganization (whether Bank voted for
or against such plan),  composition  with  creditors  (whether or not  including
Bank), failure of consideration, breach of warranty, statue of frauds, statue of
limitations, accord and satisfaction, waiver, estoppel, release, usury, or fraud
or  misrepresentation,  (ii)  termination of any present or future  relationship
between  Guarantor and Borrower or between  Guarantor and any other guarantor of
any  obligations of Borrower,  or (iii) death,  incompetency,  or dissolution of
Guarantor or Borrower;

        j.  Agrees   that  Bank  may,  at  its   election,  release  or  satisfy
of  record   any  collateral  for  this  Guaranty  only  after  any   applicable
preference periods have elapsed; and

        k. Subordinates  any  right  of  subrogation  against Borrower to Bank's
rights under the Guaranteed  Obligations and agrees that Guarantor shall have no
right to any payment or reimbursement  from Borrower on account of any sums paid
under  this  Guaranty  until  the  Guaranteed  Obligations  have  been  paid and
discharged in full.

   6. Guarantor  hereby wholly  subordinates  all  claims  which  Guarantor  may
now or hereafter have against Borrower to all debts and other  obligations which
Borrower may now or hereafter  owe to Bank,  and assigns all such claims to Bank
as additional  collateral  for the  Guaranteed  Obligations.  This  agreement of
subordination and assignment shall survive the termination of this Guaranty, and
shall remain in effect until all Guaranteed  Obligations existing on the date of
such  termination,  whether or not then due, and all  interest  then accrued and
thereafter accruing thereon,  together with all expenses,  including  collection
costs and attorneys'  fees,  are paid and performed in full.  Until full payment
and  performance  are made,  Guarantor  agrees  not to  accept  any  payment  or
satisfaction  of any kind on, or any  security  for,  any of the  claims  hereby
subordinated.  If  Guarantor  should  receive  any  such  payment  or  security,
Guarantor  agrees to deliver the same  immediately to Bank in the form received,
endorsed or assigned to Bank or in blank as Bank may require, for application on
account of, or as security for, the Guaranteed  Obligations.  Until such payment
or security is delivered to Bank, Guarantor agrees to hold the same in trust for
Bank. If at any time any of the claims hereby  subordinated  is evidenced by any
promissory note, chattel paper, or other instrument or writing, Guarantor agrees
to affix to every such  writing,  in form and  manner  satisfactory  to Bank,  a
statement  that the writing is subject to the terms of this  Guaranty  and, upon
request  of Bank,  agrees to endorse  and  deliver  any such  writing to Bank as
additional collateral for the Guaranteed Obligations. Bank will not be under any
duty to take any  action in  connection  with any such  writing  and will not be
responsible  in any respect in connection  therewith,  whether for any action it
may take or refrain from taking  against  prior  parties  thereto or  otherwise,
except to use  reasonable  care in the  custody of the  writing,  and except for
willful misconduct of its employees. At the request of Bank, Guarantor agrees to
cause  Borrower  to mark  Borrower's  records  to  indicate  that the  claims of
Guarantor  against  Borrower  are  subordinate  to the  claims  of Bank  against
Borrower and have been assigned to Bank as collateral.  In the event Borrower at
any time defaults in the payment of any debt owing to Bank when due,  whether by
acceleration  of  maturity  or  otherwise,  Bank may, in its own name or that of
Guarantor,  compromise,  collect, sue on, and give receipt for all claims hereby
assigned  by  Guarantor.  If Borrower  files or has filed  against it a petition
under any chapter of the Bankruptcy  Code, Bank may file proofs of claims in its
own name with respect to the claims hereby  assigned and may vote such claims in
the bankruptcy proceedings.

  7. Guarantor   acknowledges  that  the  statute  of  limitations applicable to
this Guaranty shall begin to run only upon Guarantor's failure or refusal to pay
any  of  the  Guaranteed   Obligations  following  default  in  the  payment  or
performance thereof by Borrower;  provided,  that if subsequent to such default,
Bank reaches an agreement  with Borrower on any terms causing Bank to forbear in
the  enforcement  of its claims  against  Guarantor,  the statute of limitations
shall be reinstated for its full duration until Borrower again defaults.

   8. Guarantor  hereby  consents  to  the  jurisdiction of any state of federal
court  holding in the county or district  in which  Bank's  principal  office is
located and, to the extent  permitted by  applicable  law,  waives any objection
based on venue or forum non conveniens with respect to any action  instituted in
any such court and agrees that such court shall be the  exclusive  venue for any
action under this Guaranty or concerning or relating to the relationship between
Guarantor and Bank or the  obligations  of Guarantor  with respect to any of the
Guaranteed  Obligations,  and agrees  that  process in any such  action  will be
sufficient if served on Guarantor by certified mail,  return receipt  requested,
or in any manner provided by law. Notwithstanding the foregoing, Bank shall have
the right to bring any action or  proceeding  against  Guarantor or  Guarantor's
property  in the  courts of any  other  jurisdiction  Bank  deems  necessary  or
appropriate  in order  to  enforce  the  obligations  of  Guarantor  under  this
Guaranty.

   9.  Guarantor  hereby  agrees  to  pay  all  costs  of collecting  under this
Guaranty after default by Guarantor,  including,  but without limitation,  court
costs,  litigation  expenses,  and  attorneys'  fees in the  amount  which is 15
percent  of the  unpaid  balance of the  Guaranteed  Obligations  at the time of
default by Borrower,  including  attorneys  fees  incurred by Bank in connection
with  any  bankruptcy  or  other  court or  receivership  proceedings  involving
Guarantor,  and in connection  with any work-out of the obligations of Guarantor
to Bank hereunder,  whether  involving  court  proceedings or not. If attorneys'
fees in such amount would be prohibited by applicable law, then Guarantor agrees
to pay  reasonable  attorneys'  fees not exceeding the maximum amount allowed by
law.  Each  provision  of this  Guaranty for the payment of  attorneys'  fees by
Guarantor shall be construed by reference to the provisions of this paragraph 9.

   10.  As used in  this  Guaranty,  the  following terms  have  the  following 
meanings:

      "Borrower" means the debtor  identified  above in this Guaranty,  together
with his, her, its or their heirs,  administrators,  executors,  successors, and
assigns,  including any resulting or surviving  corporation following any merger
or any other  reorganization,  and also  includes  any  debtor-in-possession  or
similar  entity  following  the  filing of a  petition  for relief by or against
Borrower  under any  chapter of the  federal  Bankruptcy  Code or in any similar
proceeding  under state or federal  law, and also  includes any  proprietorship,
partnership,  corporation,  trust, or other entity resulting from or arising out
of the  dissolution,  liquidation or change in form of business  organization by
Borrower or following any change of name or domicile by Borrower.

      "Guaranteed  Obligations"  means all debts and other obligations now
owed to Bank by Borrower,  all debts and other obligations in the future owed to
Bank  by  Borrower,  all  extensions  and  renewals  of any  of  such  debts  or
obligations,  and all interest  and other  lawful  charges on any or all of such
debts and obligations,  including, but without limitation, late charges, penalty
interest,  and costs of collection  (including reasonable attorneys' fees) which
Borrower  has  agreed  to pay to Bank,  or for  which  borrower  has  agreed  to
reimburse Bank, or for which Borrower is obligated to Bank under applicable law,
together with each and every  promissory note or other instrument or writing now
or hereafter  evidencing  the  obligation of Borrower to pay any such debt,  the
interest thereon, or such other charges; whether such debts or other obligations
are now foreseen or unforeseen;  whether now due or to become due in the future;
whether  incurred  with or without  notice to  Guarantor;  whether  arising from
contract,  tort or  otherwise;  whether  arising from an original  obligation of
Borrower to Bank or from an obligation  of Borrower  which was purchased by Bank
from  another;  whether  from time to time  increased,  or reduced,  or entirely
extinguished  and then  reincurred;  whether  direct or  indirect,  absolute  or
contingent,  or secured or unsecured;  whether otherwise  guaranteed or not; and
whether  arising  out of a loan of  money  or  other  extension  of  credit,  an
overdraft on a deposit  account or line of credit  account  with Bank,  use of a
credit  card or cards,  a sale or lease of goods,  the  issuance  of a letter of
credit  or  bankers'   acceptance,   the  purchase,   discount,   acceptance  or
certification of a note,  check, or draft, any combination of the foregoing,  or
otherwise. The Guaranteed Obligations include, without limitation,  interest and
other charges on any debt or  obligation of Borrower to Bank accruing  after the
filing of a petition  under any  chapter of the  federal  Bankruptcy  Code by or
against Borrower and any loans or other credit or financial products or services
extended  to  Borrower  after the filing of any such  petition.  The  Guaranteed
Obligations  specifically  are  not  limited  to  debts  and  other  obligations
contracted  for or arising  concurrently  with or prior to the execution of this
Guaranty and are not limited in amount unless  otherwise  specifically set forth
in writing in this Guaranty.

   11. No  delay  by  Bank  in enforcing its rights  hereunder  shall  prejudice
Bank's rights to enforce this Guaranty.  All of Bank's rights and remedies under
this  Guaranty,  under any other  agreement,  and under  applicable law shall be
cumulative,  and any failure of Bank to exercise  any such right or remedy shall
not be  construed  as a waiver  of the right to  exercise  the same or any other
right or  remedy at any time,  and from time to time,  thereafter.  No waiver by
Bank shall be effective  unless made in writing by a duly authorized  officer or
agent of Bank,  and no waiver by Bank of any right or remedy shall  constitute a
waiver of any other or future right or remedy.  This Guaranty shall inure to the
benefit of Bank, its successors and assigns,  and to any person to whom Bank may
grant an interest  in any of the  Guaranteed  Obligations,  and shall be binding
upon  Guarantor,  and his,  her,  its,  or their  respective  heirs,  executors,
administrators,  successors,  and  assigns.  This  Guaranty  shall be  governed,
construed,  and enforced in accordance with the  substantive  laws of the United
States and the state in which Bank's principal office is located, without regard
to principles of conflict of laws. This Guaranty is intended to take effect as a
document under seal.

   12. This  Guaranty  sets forth  the entire  agreement  and  understanding  of
Guarantor with respect to the subject matter hereof. Guarantor acknowledges that
no agent of Bank has made any  representation  which is inconsistent with any of
the  terms  of this  Guaranty  and  that no  officer  or  agent  of Bank has the
authority  to vary the terms of this  Guaranty  except in a writing  signed by a
duly  authorized  officer of Bank.  The making of the loans and providing of the
other  financial  services  referred to in this Guaranty  shall be solely in the
discretion  of the Bank,  and  reference  thereto in this  Guaranty,  whether in
paragraph 1 hereof or elsewhere,  shall not be deemed to be a commitment by Bank
to make any loan or provide any financial service.  In the event any one or more
of the provisions of this Guaranty shall be invalid, illegal or unenforceable in
any  respect,  the  validity,  legality  and  enforceability  of  the  remaining
provisions  of this  Guaranty  shall  not in any  way be  affected  or  impaired
thereby.  If more than one  person or entity  signs  this  Guaranty  below,  the
liability of such persons or entitles on this Guaranty is joint and several, and
all references to the singular in this Guaranty also include the plural.  In the
event of termination of this Guaranty as to any one or more of such  Guarantors,
this  Guaranty  shall  continue  in full  force and effect  with  respect to the
remaining Guarantors.  Bank may file a photocopy of this Guaranty as a financing
statement in any public office.

      IN WITNESS  WHEREOF,  each of the  Guarantors  has hereunto set his or her
hand and seal, or has caused this  Guaranty to be executed by its  officer(s) or
partner(s)  thereunto  duly  authorized  and its  corporate  seal to be  affixed
hereto, on the date first above written.

WINTESS(ES):                                          GUARANTOR(S):
                                              (Individual Guarantors sign below)

- ---------------------------------          ------------------------------ (Seal)
- ---------------------------------          ------------------------------ (Seal)
- ---------------------------------          ------------------------------ (Seal)
- ---------------------------------          ------------------------------ (Seal)

ATTEST:                                      (Corporate or Partnership Guarantor
                                              sign below)
                                           Cavalier  Homes, Inc.  TID#63-0949734
- ---------------------------------          -------------------------------------
        (Corporate Seal)    Title          By:  Michael R. Murphy      Secretary
                                           ------------------------------------
                                           Corp. Gty/Full Name   Corp. Gty Title



AMSOUTH

Continuing Guaranty Agreement                              Date:  June 11, 1997

   WHEREAS,  the  undersigned  (hereinafter  referred  to as  the  "Guarantors,"
whether  one or more) have  agreed to  guarantee,  jointly  and  severally,  the
payment  of all  credit  heretofore  or  hereafter  extended  and  all  advances
heretofore or hereafter made by AmSouth Bank of Alabama (hereinafter referred to
as the "Bank") to Ridge  Pointe  Mfg.,  L.L.C.  (hereinafter  referred to as the
"Borrower"),  and of all  other  Liabilities  (as  hereinafter  defined)  of the
Borrower to the Bank.

     NOW, THEREFORE, in consideration of the premises, the sum of ten dollars to
each of the  Guarantors  in hand paid by the Bank,  and other good and  valuable
consideration,  the receipt and  sufficiency of which is hereby  acknowledged by
each of the  Guarantors,  and in  order to  induce  the  Bank to  extend  to the
Borrower from time to time such extensions of credit, advances and forebearances
as the Bank in its sole  discretion may deem prudent and wise,  the  Guarantors,
jointly and severally,  unconditionally  and absolutely hereby guarantee the due
and  punctual  payment  to the Bank when and as the same  shall  become  due and
payable  (whether by acceleration or otherwise) of the following  (collectively,
the  "Liabilities"):  all  indebtedness,  obligations  and  liabilities  of  the
Borrower to the Bank of every kind, character and description whatsoever, direct
or  indirect,  absolute or  contingent,  due or to become due,  now  existing or
hereafter  incurred,  contracted  or arising,  joint or several,  liquidated  or
unliquidated,  regardless  of how they arise or by what  agreement or instrument
they  may be  evidenced  or  whether  they are  evidenced  by any  agreement  or
instrument,  and whether incurred as maker, drawer, endorser,  surety, guarantor
or otherwise, including without limitation obligations of the Borrower purchased
by the  Bank,  Recovered  Payments,  as  hereinafter  defined,  and  obligations
incurred in connection with the issuance of a letter of credit,  and any and all
extensions and renewals of all or any part of the same.

     The Guarantors  further  jointly and severally agree that, in the event the
Bank grants to the  Borrower  one or more  extensions  or renewals of any of the
Liabilities,  or any part thereof, or permits or requires any other modification
in any of the terms of the Liabilities, or any part thereof, in any manner which
may be acceptable to the Bank,  with or without notice to the  Guarantors,  this
guaranty shall, and is hereby made to extend to and cover such extended, renewed
or  modified  Liabilities,  on  whatever  terms and  conditions  the same may be
extended,  renewed or modified, and without regard to the number of times or the
manner  in  which  the same may have  been or  shall  be  extended,  renewed  or
modified.

     The Guarantors  further  jointly and severally agree (a) to pay any and all
of the Liabilities  upon demand at any time after maturity  thereof  (whether by
acceleration  or otherwise);  (b) to be bound by all of the terms and provisions
appearing  on the face of any  instrument  or  agreement  evidencing,  securing,
guaranteeing,  or executed in connection  with any of the Liabilities and of any
renewal  instrument or agreement  (the "Loan  Documents")  (including  any terms
waiving notice and agreeing to pay costs and expenses of collection in the event
of  default)  just as though  the  Guarantors  had  signed  such  instrument  or
agreement;  (c) that  the  Bank  will not be  required  first to  resort  to the
Borrower or any other maker,  endorser,  surety,  guarantor  or other  Guarantor
(each such Borrower,  maker,  endorser,  surety,  guarantor,  or other Guarantor
being hereinafter  individually called and "Obligor") or to the security pledged
or granted to it by any  instrument  or  agreement,  or  otherwise  assigned  or
conveyed to it, but in case of default in the payment of any of the  Liabilities
the Bank may forthwith look to the Guarantors  jointly and severally for payment
under  the  provisions  hereof;  and (d)  that  the  Bank's  enforcement  of the
Guarantors'  obligations  hereunder shall not be stayed or otherwise  delayed by
any claim (including  without  limitation,  a counterclaim) that any Obligor may
have against the Bank.

     The  Guarantors  hereby  further  jointly  and  severally  agree  that  the
obligations of the Guarantors hereunder are absolute, unconditional, present and
continuing guaranties of payment and not collectibility and shall not be subject
to any counterclaim,  recoupment,  set-off,  reduction or defense based upon any
claim that the Guarantors,  or any of them, may have against the Borrower or the
Bank and shall not be discharged,  impaired,  modified or otherwise  affected by
(a) the unenforceability, non-existence, invalidity or non-perfection of (i) any
of the  Liabilities,  (ii) any Loan Documents,  (iii) any renewal  instrument or
agreement or (iv) any lien, pledge, assignment,  security interest or conveyance
given as security  therefor;  (b) any  understanding or agreement that any other
person,  firm or  corporation  was or is to execute this  agreement or any other
document  evidencing,  guaranteeing  or securing  the  Liabilities,  or any part
thereof; (c) Bank's resort or failure or refusal to resort to any other security
or remedy for the collection of the  Liabilities,  or any part thereof;  (d) the
sale,  exchange,  release,  surrender,  or impairment of any collateral or other
security for the Liabilities,  or any part thereof; (e) the death, insolvency or
bankruptcy  of any  Obligor or the  failure of the Bank to file a claim  against
such  decreased or bankrupt  Obligor's  estate for such  Obligor's  liability or
obligation to the Bank; (f) any modification,  amendment,  supplement, or change
in the  status or terms of any of the  Liabilities  or any  collateral  or other
security  for the  Liabilities,  or any part  thereof;  (g) any  default  by the
Borrower in payment of any of the Liabilities;  (h) any compromise,  settlement,
release,  discharge,  termination,  waiver,  or  extension  of time for payment,
performance, or observance of, any obligation of any Obligor with respect to any
of the Liabilities;  (i) the application of any payments, proceeds of collateral
or other sums to any of the Liabilities in such order as the Bank may elect; (j)
any exercise or  non-exercise of any right,  remedy,  power, or privilege of the
Bank, with respect to any of the Liabilities or any collateral or other security
therefor; (k) any failure,  omission, delay, or lack of diligence on the part of
Bank to enforce,  assert,  or  exercise  any such right,  power,  privilege,  or
remedy;  (l) any claim (including,  but not limited to a counterclaim)  that any
Obligor  may have  against the Bank;  or (m) any other  event,  circumstance  or
condition,  whether or not the Guarantors, or any of the them, shall have notice
or knowledge thereof.

     The  Guarantors  further  jointly and severally  agree that it shall not be
necessary for the Bank to give any Guarantor  notice of or to obtain  consent or
approval of any Guarantor in connection  with, (a) the making of any advances or
any extensions of credit or the terms thereof, or of any renewal or extension of
or other modification with respect to the Liabilities,  or any part thereof; (b)
any of the  matters  described  in  clauses  (a)  through  (m) of the  preceding
paragraph;  or (c) the Bank's acceptance of and reliance on this agreement.  The
terms  hereof  shall inure to the benefit of the  successors  and assigns of the
Bank and shall be binding,  jointly and severally,  upon the  Guarantors,  their
heirs, executors, administrators, successors and assigns.

     Neither any failure nor any delay on the part of the Bank in exercising any
right,  power or  privilege  under  this  agreement  shall  operate  as a waiver
thereof,  nor shall a single or partial  exercise  thereof preclude any other or
further  exercise or the exercise of any other  right,  power or  privilege.  No
modification,  amendment or waiver of any provision of this  agreement  shall be
effective unless in writing and signed by a duly authorized officer of the Bank,
and then the same shall be effective  only in the specific  instance and for the
purpose for which given.  No notice to or demand on the  Guarantors  in any case
shall  entitle the  Guarantors  to any other or further  notice or demand in the
same, similar or other circumstances.

     The Guarantors jointly and severally hereby agree to indemnify and hold the
Bank harmless against any loss or expense,  including reasonable attorneys' fees
and disbursements, that may result from any failure of any Obligor to pay any of
the  Liabilities  when and as due and  payable or that may be  incurred by or on
behalf of the Bank in enforcing payment of any of the Liabilities against any of
the Guarantors or any of the Obligors; provided, however, that if this agreement
is subject to section 5-19-10 of the Code of Alabama 1975, attorneys' fees shall
be  limited  to 15% of the unpaid  balance  of the debt  after  default,  and no
attorneys'  fees  shall be  payable  if the  original  principal  amount  or the
original amount financed does not exceed $300.

     In addition to all liens upon, and rights of set-off  against,  any moneys,
securities,  or other property of the  Guarantors  given to the Bank by law, the
Bank shall have a lien upon and a right of set-off against all deposits, moneys,
securities,  and other property of any of the Guarantors now or hereafter in the
possession  of, or on  deposit  with,  the Bank,  whether  held in a general  or
special account or deposit, for safekeeping,  or otherwise;  and every such lien
and right of  set-off  may be  exercised  without  demand  upon or notice to the
Guarantors.

     Each of the  Guarantors  who now is or hereafter  becomes an  "insider," as
defined in 11 U.S.C.  Section  101 (or any  amendment  or  successor  thereto or
replacement  thereof), of the Borrower hereby waives and relinquishes all rights
(including without limitation rights of subrogation) that such Guarantor now has
or hereafter  may have to recover from or be  reimbursed  by the Borrower or the
Borrower's  property,  or from any person,  firm, or corporation that may now or
hereafter  have such a right to recover from or be reimbursed by the Borrower or
the Borrower's property, any amounts paid by such Guarantor to satisfy, in whole
or in part, the  Liabilities.  The provisions of this paragraph are made for the
express  benefit  of the  Borrower  as well  as the  Bank  and  may be  enforced
independently by the Borrower.

     The  Guarantors  further  jointly and severally  agree that this  agreement
shall remain in full force and effect until  revoked or  terminated by a written
instrument,  signed by the Guarantors and delivered to the Bank and acknowledged
in writing by the Bank, and even after any such revocation or termination, shall
be and remain  effective as to any Liabilities then  outstanding;  and that this
agreement  shall not be construed as being  terminated by payment in full of the
Liabilities to the Bank, if, thereafter, in the absence of written revocation or
termination by the Guarantors  acknowledged by the Bank, the Borrower obtains or
incurs additional or new Liabilities.  Notwithstanding  the foregoing  sentence,
this Continuing  Guaranty  Agreement and the Guarantors'  obligations  hereunder
shall continue to be effective or be automatically  reinstated,  as the case may
be,  any time  payment of all or any part of the  Liabilities  is  recovered  (a
"Recovered  Payment")  from the Bank as a result of a preference  or other claim
made under any bankruptcy, insolvency, dissolution, liquidation, reorganization,
receivorship, or similar law or otherwise. The collateral, if any, securing this
Continuing Guaranty Agreement may be held by the Bank until it is satisfied that
all time periods during which the payment of all or any part of the  Liabilities
may be recovered  from the Bank as a result of a preference or other claim under
any   bankruptcy,   insolvency,   dissolution,   liquidation,    reorganization,
receivorship, or similar law or otherwise have elapsed.

     Any  act or  circumstance  that  shall  toll  any  statute  of  limitations
applicable to the  Liabilities,  or any of them,  shall also toll the statute of
limitations  applicable to the Guarantors'  liability for the Liabilities  under
this Continuing Guaranty Agreement.

     The term "Guarantors" as used herein refers to the undersigned, whether one
or more natural  persons,  corporations,  associations,  partnerships,  or other
entities.

     This  agreement  shall be governed by, and  construed in  accordance  with,
Alabama law.

     This   agreement   and  the  other  Loan   Documents   contain  the  entire
understanding  and agreement between the guarantors and the Bank with respect to
the obligations of the Guarantors  hereunder and supersede any prior agreements,
understandings, promises, and statements with respect to such obligations.

     Witness the  signatures  and seals of the  undersigned  on the day and year
first written above.

NOTICE TO COSIGNER
     You are being  asked to  guarantee  all debt of the  borrower to this bank,
including all future debts of the borrower  entered into with this bank prior to
the time you revoke or terminate  this agreement in writing as set forth in this
agreement.  Think carefully before you do. If the borrower doesn't pay the debt,
you will  have to. Be sure you can  afford  to pay if you have to,  and that you
want to accept this responsibility.
     You may have to pay up to the full amount of the debt if the borrower  does
not pay. You may also have to pay late fees or collection costs,  which increase
this amount.
      The bank can collect  this debt from you without  first  trying to collect
from the borrower. The bank can use the same collection methods against you that
can be used against the borrower, such as suing you, garnishing your wages, etc.
If this  debt is ever in  default,  that fact may  become a part of your  credit
record.
      This notice is not the contract that makes you liable for the debt.

CAUTION-IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE  YOU  SIGN
IT.

Witness:                           Cavalier Homes, Inc.                   (L.S.)
Shirley Barnett                    By:   David Roberson    -  President   (L.S.)
- ---------------                    ------------------------------------------   




                                    Exhibit A
                                       to
                          Continuing Guaranty Agreement
                              Dated: June 11, 1997
                        Executed By: Cavalier Homes, Inc.
                       In Favor of AmSouth Bank of Alabama
                           (the "Guaranty Agreement")


      This Exhibit is attached to and made a part of the  Guaranty  Agreement as
fully and completely as if set forth in full therein. Terms used in this Exhibit
shall have the meaning given to them in the Guaranty Agreement.

      Notwithstanding  anything  to  the  contrary  contained  in  the  Guaranty
Agreement,  the  liability of each  Guarantor  under the  Guaranty  Agreement is
limited  to a "certain  percentage"  of the  principal  of and  interest  on the
Liabilities and all extensions and renewals of the Liabilities or of any portion
thereof,  from time to time and at any time outstanding  (but without  deduction
from the amount of the Liabilities  any amounts that may theretofore  have been,
or that may  thereafter  be, paid to the Bank by any other  Guarantor  under the
terms of the Guaranty Agreement or any other Agreement) plus the same percentage
of any costs of  collection,  including,  without  limitation,  court  costs and
attorneys'  fees  incurred  by  the  Bank  in  the  collection  of  any  of  the
Liabilities.  The "certain  percentage"  applicable to each  Guarantor  shall be
equal to the percentage  ownership of such Guarantor in the borrower at the time
payment  is  requested  by the Bank  under  the  Guaranty  Agreement;  provided,
however,  that the  "certain  percentage:  shall not be less  than  THIRTY-THREE
percent (33%).


   Cavalier Homes, Inc.
- -----------------------------------

   David A. Roberson      -   President
- ---------------------------------------


<TABLE>
<CAPTION>

                                      PART II. - EXHIBIT 11
                             CAVALIER HOMES, INC. AND SUBSIDIARIES
                         COMPUTATION OF NET INCOME PER COMMON SHARE

<S>                                       <C>           <C>          <C>         <C>   

                                              Thirteen Weeks Ended    Twenty-six Weeks Ended
                                              --------------------    ----------------------                      
                                              June 27,    June 28,    June 27,    June 28,
                                                1997        1996        1997        1996
                                              --------    --------    --------    --------
PRIMARY AND FULLY DILUTED
     Net Income                             $ 3,557,000 $ 3,525,000 $ 6,643,000 $ 6,396,000
                                             ==========  ==========  ==========  ==========
SHARES:

Primary
  Average common shares outstanding          12,234,046  11,731,470  12,212,019  11,537,809

  Dilutive effect if stock options
    were exercised                              179,457     532,526     192,242     590,768
                                             ----------  ----------  ----------  ----------
  Average common shares outstanding
    as adjusted (primary)                    12,413,503  12,263,996  12,404,261  12,128,577
                                             ==========  ==========  ==========  ==========
Fully Diluted
  Average common shares outstanding          12,413,503  12,263,996  12,404,261  12,128,577

  Additional dilutive effect if
    stock options were excercised
    (fully)                                           -      77,948       8,501      67,361
                                             ----------  ----------   ---------  ----------
  Average common shares outstanding
    as adjusted (fully diluted)              12,413,503  12,341,944  12,412,762  12,195,938
                                             ==========  ==========  ==========  ==========


  Primary Net Income per Common Share       $       .29  $      .29  $      .54  $      .53       
                                             ==========   =========   =========   =========
  Fully Diluted Net Income per Common Share $       .29  $      .29  $      .54  $      .52
                                             ==========   =========   =========   =========
</TABLE>

<TABLE> <S> <C>

<ARTICLE>                                                   5
<CIK>                                              0000789863
<NAME>                                  Cavalier Homes, Inc.
<MULTIPLIER>                                            1,000
<CURRENCY>                              U.S. Dollars
       
<S>                                       <C>
<PERIOD-TYPE>                                               6-MOS
<FISCAL-YEAR-END>                                      DEC-31-1997
<PERIOD-START>                                         JAN-01-1997
<PERIOD-END>                                           JUN-27-1997
<EXCHANGE-RATE>                                             1
<CASH>                                                  9,992
<SECURITIES>                                                0
<RECEIVABLES>                                          21,661
<ALLOWANCES>                                              800
<INVENTORY>                                            15,331
<CURRENT-ASSETS>                                       54,335
<PP&E>                                                 27,140
<DEPRECIATION>                                         10,912
<TOTAL-ASSETS>                                        131,409
<CURRENT-LIABILITIES>                                  43,843
<BONDS>                                                     0
                                       0
                                                 0
<COMMON>                                                1,226
<OTHER-SE>                                             74,523
<TOTAL-LIABILITY-AND-EQUITY>                          131,409
<SALES>                                               166,237
<TOTAL-REVENUES>                                      168,675
<CGS>                                                 136,676
<TOTAL-COSTS>                                         136,676
<OTHER-EXPENSES>                                            0
<LOSS-PROVISION>                                            0
<INTEREST-EXPENSE>                                        402
<INCOME-PRETAX>                                        11,023
<INCOME-TAX>                                            4,380
<INCOME-CONTINUING>                                     6,643
<DISCONTINUED>                                              0
<EXTRAORDINARY>                                             0
<CHANGES>                                                   0
<NET-INCOME>                                            6,643
<EPS-PRIMARY>                                               0.54
<EPS-DILUTED>                                               0.54
        


</TABLE>


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