CAVALIER HOMES INC
10-Q, 2000-05-15
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      March 31, 2000
                                            -----------------
                                       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 &32 Wilson  Boulevard, Addison, Alabama 35540
     ---------------------------------------------------------------
                 (Address  of  principal executive offices)
                                 (Zip Code)


                               (256) 747-9800
             ---------------------------------------------------
             (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 May 12, 2000
- -----------------------------                       ----------------------------
Common Stock, $.10 Par Value                             17,767,528 Shares



<PAGE>


<TABLE>
<CAPTION>


                                            CAVALIER HOMES, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED BALANCE SHEETS
                                              (Unaudited - dollars in thousands)
                                                                                              March 31,         December 31,
 ASSETS                                                                                         2000                1999
 CURRENT ASSETS                                                                            ----------------    ---------------
<S>                                                                                     <C>                 <C>

      Cash and cash equivalents                                                         $           24,862  $          39,635
      Accounts receivable, less allowance for losses of $4,415 (2000) and $3,464 (1999)             14,388              6,692
      Notes and installment contracts receivable - current                                           1,383                939
      Inventories                                                                                   49,369             50,120
      Deferred income taxes                                                                         15,502             15,166
      Other current assets                                                                           3,020              3,109
                                                                                           ----------------    ---------------
             Total current assets                                                                  108,524            115,661
                                                                                           ----------------    ---------------
 PROPERTY, PLANT AND EQUIPMENT (Net)                                                                72,699             74,495
                                                                                           ----------------    ---------------
 INSTALLMENT CONTRACTS RECEIVABLE, less
     allowance for credit losses of $1,686 (2000) and $1,656 (1999)                                  7,129              7,651
                                                                                           ----------------    ---------------
 GOODWILL, less accumulated amortization of $5,769 (2000) and $5,432 (1999)                         22,347             22,684
                                                                                           ----------------    ---------------
 OTHER ASSETS                                                                                        8,859              9,083
                                                                                           ----------------    ---------------
 TOTAL                                                                                  $          219,558  $         229,574
                                                                                           ================    ===============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
      Current portion of long-term debt                                                 $            1,129  $           1,119
      Notes payable under retail floor plan agreements                                              15,029             15,562
      Accounts payable                                                                              13,796             12,303
      Amounts payable under dealer incentive programs                                               22,882             25,442
      Accrued compensation and related withholdings                                                  6,658              5,312
      Estimated warranties                                                                          12,600             13,000
      Other accrued expenses                                                                        10,406             10,271
                                                                                           ----------------    ---------------
           Total current liabilities                                                                82,500             83,009
                                                                                           ----------------    ---------------
 DEFERRED INCOME TAXES                                                                               1,282              1,459
                                                                                           ----------------    ---------------
 LONG-TERM DEBT                                                                                     10,021             10,218
                                                                                           ----------------    ---------------
 OTHER LONG-TERM LIABILITIES                                                                         5,721              5,497
                                                                                           ----------------    ---------------

 STOCKHOLDERS' EQUITY:
      Common stock, $.10 par value; authorized 50,000,000 shares,
        issued 18,272,628 (2000) shares and 18,271,433 (1999) shares                                 1,827              1,827
      Additional paid-in capital                                                                    55,272             55,181
      Treasury stock, at cost; 505,100 (2000) shares and 480,100 (1999) shares                      (3,309)            (3,210)
      Retained earnings                                                                             66,244             75,593
                                                                                           ----------------    ---------------
          Total stockholders' equity                                                               120,034            129,391
                                                                                           ----------------    ---------------
 TOTAL                                                                                  $          219,558  $         229,574
                                                                                           ================    ===============


                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                         (Unaudited - dollars in thousands except per share amounts)
                                                                                                  Thirteen Weeks Ending

                                                                                              March 31,           April 2,
                                                                                                2000                1999
                                                                                           ----------------    ---------------
 REVENUE                                                                                $           89,693  $         163,416

 COST OF SALES                                                                                      78,281            130,575

 SELLING, GENERAL AND ADMINISTRATIVE                                                                24,292             25,878

 IMPAIRMENT CHARGE FOR IDLED FACILITIES                                                                528                  -
                                                                                           ----------------    ---------------
 OPERATING PROFIT (LOSS)                                                                           (13,408)             6,963
                                                                                           ----------------    ---------------
 OTHER INCOME (EXPENSE):
     Interest expense                                                                                 (608)              (165)
     Other, net                                                                                        241                643
                                                                                           ----------------    ---------------
                                                                                                      (367)               478
                                                                                           ----------------    ---------------
 INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)                                                       (13,775)             7,441

 INCOME TAXES (BENEFIT)                                                                             (5,138)             2,940
                                                                                           ----------------    ---------------
 NET INCOME (LOSS)                                                                      $           (8,637) $           4,501
                                                                                           ================    ===============
 BASIC NET INCOME (LOSS) PER SHARE                                                      $            (0.49) $            0.24
                                                                                           ================    ===============
 DILUTED NET INCOME (LOSS) PER SHARE                                                    $            (0.49) $            0.24
                                                                                           ================    ===============
 WEIGHTED AVERAGE SHARES OUTSTANDING                                                            17,770,809         18,733,889
                                                                                           ================    ===============
 WEIGHTED AVERAGE SHARES OUTSTANDING, ASSUMING DILUTION                                         17,780,524         18,836,758
                                                                                           ================    ===============

       See notes to consolidated financial statements.

</TABLE>



<PAGE>


<TABLE>
<CAPTION>

                                            CAVALIER HOMES, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (Unaudited - in thousands)
                                                                                                  Thirteen Weeks Ending

                                                                                              March 31,           April 2,
                                                                                                2000                1999
                                                                                           ----------------    ---------------
<S>                                                                                     <C>                 <C>
 OPERATING ACTIVITIES:
   Net income (loss)                                                                    $           (8,637) $           4,501
   Adjustments to reconcile net income to net cash provided by (used in)
   operating activities:
        Depreciation and amortization                                                                2,630              2,337
        Change in provision for credit losses and repurchase commitments                               981                 10
        Gain on sale of installment contracts                                                         (518)              (494)
        (Gain) loss on sale of property, plant and equipment                                            39                (17)
        Impairment charge for idled facilities                                                         528                  -
        Other, net                                                                                      56                132
        Changes in assets and liabilities provided (used) cash, net of effects
        of acquisitions:
             Accounts receivable                                                                    (8,647)           (32,074)
             Inventories                                                                               571             (8,708)
             Accounts payable                                                                        1,493             10,649
             Other assets and liabilities                                                           (1,684)             3,698
                                                                                           ----------------    ---------------

        Net cash used in operating activities                                                      (13,188)           (19,966)
                                                                                           ----------------    ---------------

 INVESTING ACTIVITIES:
   Net cash paid in connection with acquisitions                                                         -               (275)
   Proceeds from sale of property, plant and equipment                                                 131                 47
   Capital expenditures                                                                               (948)            (9,024)
   Proceeds from sale of installment contracts                                                      14,333             14,230
   Net change in notes and installment contracts                                                   (13,746)           (14,434)
   Other investing activities                                                                          112               (447)
                                                                                           ----------------    ---------------

        Net cash used in investing activities                                                         (118)            (9,903)
                                                                                           ----------------    ---------------

 FINANCING ACTIVITIES:
   Net borrowings (payments) on notes payable                                                         (533)             2,411
   Payments on long-term debt                                                                         (187)              (154)
   Proceeds from long-term borrowings                                                                    -                780
   Cash dividends paid                                                                                (712)              (777)
   Proceeds from exercise of stock options                                                               -                 14
   Net proceeds from sales of common stock                                                              64                  4
   Purchase of treasury stock                                                                          (99)           (13,963)
                                                                                           ----------------    ---------------

        Net cash used in financing activities                                                       (1,467)           (11,685)
                                                                                           ----------------    ---------------

 NET DECREASE IN CASH AND CASH EQUIVALENTS                                                         (14,773)           (41,554)
                                                                                           ----------------    ---------------

 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                     39,635             64,243
                                                                                           ----------------    ---------------

 CASH AND CASH EQUIVALENTS, END OF PERIOD                                               $           24,862  $          22,689
                                                                                           ================    ===============

 SUPPLEMENTAL CASH FLOW DISCLOSURES:
   Cash paid (received) for:
        Interest                                                                        $              417  $             111
        Income taxes                                                                                (2,851)             2,240

                                       See notes to consolidated financial statements.



</TABLE>


<PAGE>


                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
            (Unaudited - dollars in thousands except per share data)

1.   BASIS OF PRESENTATION
o        The accompanying  consolidated  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 management,  these statements  contain all adjustments  necessary to
         present  fairly the Company's  financial  position as of March 31, 2000
         and April 2, 1999, and the results of its operations and its cash flows
         for the thirteen  week periods  ended March 31, 2000 and April 2, 1999,
         respectively. All such adjustments are of a normal, recurring nature.

o        The results of operations  for the thirteen  weeks ended March 31, 2000
         are not  necessarily  indicative  of the results to be expected for the
         full year. The information included in this Form 10-Q should be read in
         conjunction  with  Management's  Discussion  and Analysis and financial
         statements  and notes  thereto  included in the  Company's  1999 Annual
         Report on Form 10-K.

o        The Company  reports two separate net income per share  numbers,  basic
         and  diluted.  Both are computed by dividing net income by the weighted
         average  shares   outstanding   (basic)  or  weighted   average  shares
         outstanding assuming dilution (diluted) as detailed below:

<TABLE>
<CAPTION>

                                                                           Thirteen Weeks Ended
                                                                   -------------------------------------
                                                                      March 31,            April 2,
                                                                        2000                1999
                                                                   ----------------   ------------------
<S>                                                                <C>                <C>

   Weighted average common shares
       outstanding (basic)                                              17,770,809           18,733,889

   Dilutive effect if stock options and warrants were exercised              9,715              102,869
                                                                   ----------------   ------------------
   Weighted average common shares
       outstanding, assuming dilution (diluted)                         17,780,524           18,836,758
                                                                   ================   ==================
</TABLE>

o    Certain amounts from the prior period have been reclassified to conform  to
     the 2000 presentation.

2.   ACCOUNTING STANDARD NOT YET ADOPTED
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
     Accounting  for  Derivative   Instruments  and  Hedging  Activities.   This
     statement is effective for financial  statements issued for years beginning
     after June 15, 2000. Cavalier is currently  evaluating SFAS No. 133 and has
     not yet  determined  its  impact on the  Company's  consolidated  financial
     statements.

3.   INVENTORIES
     Inventories are stated at the lower of cost (first-in, first-out method) or
     market.  Inventories  at March  31,  2000 and  December  31,  1999  were as
     follows:

                                       March 31,     December 31,
                                         2000           1999
                                    -------------  -------------

                 Raw materials         $ 24,103       $ 27,363
                 Work-in-process          3,424          3,513
                 Finished goods          21,842         19,244
                                    -------------  -------------
                 Total inventory       $ 49,369       $ 50,120
                                    =============  =============

4.   IMPAIRMENT CHARGE FOR IDLED FACILITIES
     Subsequent  to the end of the first  quarter,  as part of a cost  reduction
     strategy,   Cavalier  idled  two  home   manufacturing   plants  and  three
     company-owned  retail  locations.  The  Company  recorded  a first  quarter
     pre-tax charge of $528 ($332 or $0.02 per diluted share after tax) to write
     down the value of assets of the idled facilities.
<PAGE>
5.   STOCKHOLDERS' EQUITY
o        The  Company paid cash dividends of $.04 per share during the   quarter
         ended March 31, 2000.

o        During the first quarter of 2000, the Company repurchased 25,000 shares
         of stock under its stock repurchase program. At March 31, 2000, a total
         of  2,656,600  shares had been  repurchased  for  $24,050.  The Company
         retired  2,151,500  of these  shares at  December  31,  1999,  with the
         remaining   shares  being  recorded  as  treasury   stock.   Continuing
         authorization   remains  under  this  program  for  the  repurchase  of
         1,343,400 additional shares.

6.    CONTINGENCIES
o        The Company is contingently liable under terms of repurchase agreements
         with financial institutions providing inventory financing for retailers
         of its products.  These arrangements, which  are    customary   in  the
         industry, provide  for  the repurchase of products sold to retailers in
         the event of default  on  payments by  the  retailer.  The risk of loss
         under these agreements is spread over numerous retailers. The price the
         Company is obligated to pay generally declines over the period  of  the
         agreement and is  further  reduced  by  the resale value of repurchased
         homes.   The  estimated  potential  obligations  under  such agreements
         approximated $252,000 at March 31, 2000.  The Company has an  allowance
         for losses of  $4,415  (at March 31, 2000)  and $3,464 (at December 31,
         1999) based on prior experience and market conditions.

o        The  Company's   product  liability  and  general  liability  insurance
         coverages (with the exception  of  two  subsidiaries whose insurance is
         provided under  fully  insured  policies)  are  provided under incurred
         loss,  retrospectively  rated  premium  plans.  The  Company's workers'
         compensation coverage prior to February 1, 1999  was also covered under
         this  type  plan,  but  was  converted  on that date to a fully insured
         policy. Under these plans,  the Company incurs insurance expenses based
         upon  various   rates   applied   to  current  payroll costs and sales.
         Annually,  such  insurance  expense is adjusted by the carrier for loss
         experience factors subject to minimum and maximum premium calculations.
         Refunds   or   additional  premiums  are  estimated  and  recorded when
         sufficiently reliable data is available. At March 31, 2000, the Company
         was contingently liable for future retrospective premium adjustments up
         to  a  maximum  of  $14,456  in  the  event  that additional losses are
         reported related to prior periods.

o        The Company is engaged in various legal proceedings that are incidental
         to and arise in the course of its business.  Certain of the cases filed
         against the Company and other companies engaged in businesses   similar
         to  the  Company  allege,  among  other  things, breach of contract and
         warranty, product liability,  personal injury and fraudulent, deceptive
         or collusive practices in connection with their businesses. These kinds
         of suits are typical of suits that have been filed in recent years, and
         they sometimes seek  certification  as class actions, the imposition of
         large amounts of compensatory and punitive damages and  trials by jury.
         In  the  opinion   of  management, the ultimate liability, if any, with
         respect to the   proceedings in which the Company is currently involved
         is not   presently expected   to have  a material adverse effect on the
         Company. *  However,  the   potential exists for unanticipated material
         adverse judgments against the Company.

o        The Company and certain of its equity partners have guaranteed  certain
         debt for companies in which the Company owns various equity  interests.
         The  guarantees are limited to various  percentages of the  outstanding
         debt up to a maximum guaranty of $3,985.  At March 31, 2000,  $8,881was
         outstanding  under the  various  guarantees,  of which the  Company had
         guaranteed $3,050.

- -------
*See Safe Harbor Statement on page 12.
<PAGE>


7.    SEGMENT INFORMATION
      Segment  information   relating  to the first quarters of 2000 and 1999 is
      presented below:


                                               Thirteen Weeks Ended
                                       -------------------------------------
                                         March 31, 2000      April 2, 1999
                                       -------------------  ----------------
Gross revenue:
  Home manufacturing                   $           85,531   $       161,685
  Financial services                                1,447             1,455
  Retail                                            2,941             2,478
  Other                                             8,130             9,825
                                       -------------------  ----------------
      Gross revenue                    $            98,049  $        175,443
                                       ===================  ================

Intersegment revenue:
  Home manufacturing                   $            1,693   $         3,202
  Financial services                                    -                 -
  Retail                                                -                 -
  Other                                             6,663             8,825
                                       -------------------  ----------------
      Intersegment revenue             $             8,356  $         12,027
                                       ===================  ================

Revenue from external customers:
  Home manufacturing                   $           83,838   $       158,483
  Financial services                                1,447             1,455
  Retail                                            2,941             2,478
  Other                                             1,467             1,000
                                       -------------------  ----------------
      Total revenue                    $            89,693  $        163,416
                                       ===================  ================

Operating profit (loss):
  Home manufacturing                   $           (7,987)  $         9,581
  Financial services                                  173               179
  Retail                                           (1,881)             (267)
  Other                                              (338)              438
  Elimination                                         162              (374)
                                       -------------------  ----------------
  Segment operating profit (loss)                  (9,871)            9,557

  General corporate                                (3,537)           (2,594)
                                       -------------------  ----------------
      Operating profit (loss)          $          (13,408)  $          6,963
                                       ===================  ================

Identifiable assets:
  Home manufacturing                   $          157,169   $       180,251
  Financial services                               17,036            30,149
  Retail                                           21,486            11,607
  Other                                            15,305            13,671
  Elimination                                     (40,285)          (19,783)
                                       -------------------  ----------------
  Segment assets                                  170,711           215,895
  General corporate                                48,847            28,947
                                       -------------------  ----------------
      Total assets                     $          219,558   $       244,842
                                       ===================  ================



<PAGE>


PART I.  FINANCIAL INFORMATION

Item 1:  Financial Statements  (See pages 2 through 6)

Item 2:  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Industry and Company Outlook

Cavalier Homes,  Inc. and its subsidiaries are engaged in the production,  sale,
financing,  and  insuring of  manufactured  housing.  The  manufactured  housing
industry is cyclical and seasonal and is influenced by many of the same economic
and  demographic  factors that affect the housing market as a whole. As a result
of the growth in the  industry  during  much of the 1990s,  the number of retail
dealerships,   manufacturing   capacity   and   wholesale   shipments   expanded
significantly,  which ultimately  created slower retail turnover,  higher retail
inventory levels and increased price  competition.  Inventory  oversupply at the
retail level continues to have a significant impact on wholesale shipments as it
did during much of 1999. The  Manufactured  Housing  Institute  ("MHI") reported
that wholesale floor shipments  declined 19.8% through March 2000 as compared to
the same period of 1999. The industry has also been impacted by the loss of some
lenders from the manufactured housing retail and wholesale financing markets and
tightening of credit standards by those remaining.  In response to deteriorating
market   conditions,   manufacturers   have   closed  or  idled  some  of  their
manufacturing  facilities  and retail  dealers have closed some  locations.  The
Company also believes that the possibility  exists for additional  retail dealer
failures,  as well as for the loss of  additional  lenders  from  the  industry,
further   tightening  of  credit  standards  and  a  further  reduction  in  the
availability of wholesale and retail financing. *

Industry conditions  significantly  impacted Cavalier's financial results during
the first  quarter  of 2000.  The  Company is  uncertain  at this time as to the
extent and duration of these  developments  and as to what effect these  factors
will have on the Company's future sales and earnings. * Because of deteriorating
market conditions, subsequent to the end of the first quarter, the Company idled
two  additional  manufacturing  plants,  which  follows the idling of five other
plants  since the fall of 1999.  Impairment  charges  of $528 ($332 or $0.02 per
diluted  share  after  tax)  were  recorded  in the  first  quarter  of  2000 in
connection  with these closings and the closings of three  company-owned  retail
locations.  These manufacturing facilities built primarily single section homes,
and production has been  consolidated  into other plants.  The Company currently
believes  these  conditions  will  continue to  adversely  affect its  financial
performance  at least  through  the  second  quarter  of 2000.  * The  Company's
wholesale  shipments  during the second  quarter to date are over 40% behind the
prior year.  The Company is continuing to evaluate  capacity,  cost and overhead
issues and the need for further plant and retail lot consolidations, idlings and
closings in light of  developing  market  conditions.  * The Company can give no
assurance as to which one or more of these  options,  if any, it may  ultimately
adopt.

- -------
*See Safe Harbor Statement on page 12.
<PAGE>


Results of Operations (dollars in thousands)

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

<TABLE>
<CAPTION>

INCOME  STATEMENT  DATA                                        For the Thirteen Weeks Ended
                                        ---------------------------------------------------------------------------
                                           March 31, 2000                April 2, 1999               Difference
                                           ----------------              -------------               -----------
<S>                                      <C>                 <C>       <C>               <C>       <C>

Revenue:
   Home manufacturing net sales          $          83,838             $      158,483              $    (74,645)
   Financial services                                1,447                      1,455                        (8)
   Retail                                            2,941                      2,478                       463
   Other                                             1,467                      1,000                       467
                                           ----------------              -------------               -----------

Total revenue                            $          89,693     100.0%  $      163,416      100.0%  $    (73,723)      -45.1%
Cost of sales                                       78,281      87.3%         130,575       79.9%       (52,294)      -40.0%
                                           ----------------  ---------   -------------   ---------   -----------    ---------

Gross profit                             $          11,412      12.7%  $       32,841       20.1%  $    (21,429)      -65.3%
                                           ================  =========   =============   =========   ===========    =========


Selling, general and administrative      $          24,292      27.1%  $       25,878       15.8%  $     (1,586)       -6.1%
                                           ================  =========   =============   =========   ===========    =========

Impairment charge for idled facilities   $             528       0.6%  $            -        0.0%  $        528         0.0%
                                           ================  =========   =============   =========   ===========    =========

Operating profit (loss)                  $         (13,408)    -14.9%  $        6,963        4.3%  $    (20,371)     -292.6%
                                           ================  =========   =============   =========   ===========    =========

Other income (expense), net              $            (367)     -0.4%  $          478        0.3%  $       (845)     -176.8%
                                           ================  =========   =============   =========   ===========    =========

Net income (loss)                        $          (8,637)     -9.6%  $        4,501        2.8%  $    (13,138)     -291.9%
                                           ================  =========   =============   =========   ===========    =========


OPERATING DATA                                                           For the Thirteen Weeks Ended
                                                             ------------------------------------------------------
                                                                  March 31, 2000              April 2, 1999
                                                             -------------------------   -----------------------

Home manufacturing sales:
Floor shipments                                                 5,290                       9,585
Home shipments                 Single section                   1,555           45.5%       3,030         48.1%
                                Multi section                   1,861           54.5%       3,268         51.9%
                                                             ---------   -------------   ---------   -----------

Total shipments                                                 3,416          100.0%       6,298        100.0%

Shipments to company owned stores                                 (62)           1.8%        (115)         1.8%
                                                             ---------   -------------   ---------   -----------

Shipment to independent dealers                                 3,354           98.2%       6,183         98.2%
                                                             =========   =============   =========   ===========

Retail sales:
  Single section                                                   36           47.4%          37         53.6%
  Multi section                                                    40           52.6%          32         46.4%
                                                             ---------   -------------   ---------   -----------

Total sales                                                        76          100.0%          69        100.0%
                                                             =========   =============   =========   ===========

Cavalier produced homes sold                                       74           97.4%          50         72.5%
                                                             =========   =============   =========   ===========

Used homes sold                                                    21           27.6%           9         13.0%
                                                             =========   =============   =========   ===========

Other Operating Data:
Installment loan purchases                                 $   13,489                  $   15,362

Capital expenditures                                       $      948                  $    9,024

Home manufacturing facilities - operating                          17                          24

Independent exclusive dealer locations                            259                         255

Company owned stores                                               13                           7

</TABLE>
Revenue
Revenue  for the first  quarter of 2000  totaled  $89,693,  down 45% from 1999's
first quarter revenue of $163,416. The Company's business is seasonal in nature,
and the  first  quarter  is  traditionally  the  slowest  for  Cavalier  and the
industry.  The  Company's  revenues  and  profits  were  adversely  affected  by
challenging  market   conditions,   including,   among  other  things,   intense
competition,  the  ongoing  contraction  of dealer  locations,  reduced  lending
capacity and tightened credit standards, and inventory over-supply at the retail
level.

Home  manufacturing net sales accounted for virtually the entire decline against
the  comparable  1999  period,  falling  47% to  $83,838,  net  of  intercompany
eliminations  of $1,693.  Net sales for the first quarter of 1999 were $158,483,
net of intercompany eliminations of $3,202. Home shipments decreased 45.8%, with
floor  shipments  decreasing  by  44.8%.  Multi-section  home  shipments,  as  a
percentage of total shipments, continued to increase, from 51.9% of shipments in
the first  quarter of 1999 to 54.5% of shipments in 2000.  The  expansion of the
Company's  multi-section  product  base is in  response to  increasing  consumer
demand for  multi-section  homes as compared  to single  section  homes.  Actual
shipments of homes for the first quarter were 3,416 versus 6,298 in 1999.

Cavalier  attributes  the  decrease  in sales  and  shipments  primarily  to the
increasingly  unfavorable  industry  conditions  described  above.  In addition,
Cavalier's first quarter 1999 revenue was a record first quarter for the Company
and   represented   a  peak  before  the   downturn  the  Company  is  currently
experiencing.  Approximately 89% of Cavalier's shipments were to its core market
of 11 states,  where the Company's floor shipments  declined 44% compared to the
first quarter of 1999. The average price of homes sold fell 2.7% to $25,000 from
$25,700  during the same period of 1999,  also due primarily to the  competitive
market  conditions  in the  industry.  The Company's  exclusive  dealer  program
included 272 dealers,  including 13  company-owned  stores at March 31, 2000. At
April 2, 1999,  the exclusive  dealer  program  included 262 dealers,  including
seven company-owned  stores. Sales to exclusive dealers represented 53.5% in the
first quarter of 2000 versus 57.2% in the same period of 1999.

Revenue from the financial  services  segment  remained  virtually  unchanged at
$1,447 for the first  quarter  of 2000  compared  to $1,455 in 1999.  During the
first quarter of 2000, Cavalier Acceptance  Corporation  ("CAC"),  the Company's
wholly-owned  finance  subsidiary,  purchased  contracts  of $13,489  and resold
installment  contracts  totaling  $13,815.  In the first  quarter  of 1999,  CAC
purchased  contracts  of  $15,362  and  resold  installment  contracts  totaling
$13,735.  CAC does  not  retain  the  servicing  function  and does not earn the
interest income on these resold loans.

Revenue from the retail segment was $2,941 for 2000, of which 97.4% of the units
sold were Cavalier product in the first quarter of 2000,  compared to $2,478 for
1999.  Subsequent  to the end of the first  quarter,  the Company  closed  three
under- performing retail locations, and recorded impairment charges as discussed
below, bringing the number of company-owned retail locations to 13.

Other revenue consists mainly of revenue from the Company's wholesale supply and
component manufacturing  businesses.  Revenues from external customers increased
46.7%,  or $467,  for the first quarter of 2000 compared to the first quarter of
1999.  The increase is due primarily to the  expansion of a supply  company into
new geographic areas.

Gross Profit
Gross profit was $11,412,  or 12.7% of total  revenue,  for the first quarter of
2000, versus $32,841, or 20.1%, in 1999. Of the $21,429 decrease,  approximately
$14,800 was due to the volume decrease and $6,600 to margin erosion.  The margin
erosion includes $2,000 of additional sales discounts at the manufacturing level
to help encourage  sell-through of inventory,  $3,800 for inefficiencies related
to low volume and plant closings, and $700 due to company-owned retail locations
margin decrease.

Selling, General and Administrative
Selling,  general and  administrative  expenses during the first quarter of 2000
were  $24,292,  or 27.1% of total  revenue,  versus  $25,878 or 15.8% in 1999, a
decrease  of  $1,586.  The  overall  decrease  includes  a $2,113  reduction  in
salaries, wages and incentive compensation, a $743 reduction in delivery cost, a
$433 reduction in employee  benefits cost (primarily health  insurance),  a $344
reduction in advertising  and promotion cost and a $331 reduction in service and
warranty cost.  These  decreases  were partially  offset by the $951 increase in
reserve for  repurchases,  a $989 increase due to new supply and retail business
locations,  and a $597  increase in management  information  system and internet
strategy costs.

Impairment Charge for Idled Facilities
Subsequent to the end of the first  quarter,  the Company  idled two  additional
manufacturing  plants,  which  follows the idling of five other plants since the
fall of 1999.  Impairment charges of $528 ($332 or $0.02 per diluted share after
tax) were  recorded  in the  first  quarter  of 2000 in  connection  with  these
closings  and the  closings  of  three  company-owned  retail  locations.  These
manufacturing  facilities  built primarily  single section homes, and production
has been  consolidated  into other  plants.  The combined  closings of the seven
manufacturing facilities have decreased the Company's annual production capacity
by almost 11,000 floors,  or 24%, to a total estimated  capacity of about 35,000
floors. The Company does not expect this action to affect the Company's offering
in terms of either product lines or price points. *

Operating Profit (Loss)
Operating loss for the quarter was $13,408,  compared to an operating  profit of
$6,963  in the  first  quarter  of 1999.  Home  manufacturing  operating  profit
declined primarily due to the decrease in sales and the average selling price of
homes sold,  the  impairment  charges  for idled  facilities,  and the  industry
conditions cited above.  Financial  services operating profit remained virtually
unchanged  from the same period in 1999.  The retail  segment's  operating  loss

- -------
* See Safe Harbor Statement on page 12.
<PAGE>


increased $1,617 due to costs of additional locations and retail  infrastructure
over the prior year, low sales volume and the competitive  conditions  currently
prevalent in the marketplace.  The other segment  operating loss increase is due
mainly to the cost associated with the start-up cost of a new supply company. In
addition,  general corporate  operating expense,  which is not identifiable to a
specific  segment,  increased  $943  primarily  due  to  an  increase  in  costs
associated with a new management information system and internet strategy.

Other Income (Expense)
Interest  expense  increased $443 due primarily to the increase in notes payable
under retail floor plan  agreements  and amounts  outstanding  under  Industrial
Development  Revenue Bond Issues.  Other,  net  decreased  $402 due primarily to
lower income from supply  related  equity  partnerships  and decreased  interest
income due to lower average cash balances during the first quarter of 2000.

Net Income (Loss)
Before impairment charges related to the closures discussed above, the Company's
net loss in the first  quarter  was $8,305 or $0.47 per diluted  share  compared
with net income of $4,501,  or $0.24 per diluted  share in the first  quarter of
1999.  The Company's net loss for the first  quarter of 2000,  after  impairment
charges,  was $8,637,  or $0.49 per diluted share,  primarily due to the factors
noted above.

Liquidity and Capital Resources (dollars in thousands)

<TABLE>
<CAPTION>

BALANCE SHEET DATA                                          Balances as of
                                      ------------------------------------------------------------
                                              March 31, 2000                 December 31, 1999
                                      -----------------------------      -------------------------
<S>                                              <C>                                <C>

Cash and cash equivalents                        $          24,862                  $      39,635
Accounts receivable                              $          14,388                  $       6,692
Working capital                                  $          26,024                  $      32,652
Current ratio                                             1.3 to 1                       1.4 to 1
Long-term debt                                   $          10,021                  $      10,218
Ratio of long-term debt to equity                          1 to 12                        1 to 13
Installment loan portfolio                       $           8,956                  $       9,450

</TABLE>

Operating  activities during the first quarter of 2000 used net
cash of $13,188.

The increase in accounts  receivable and reduction in cash and cash  equivalents
from December 31, 1999 to March 31, 2000, 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,  during which time the Company  collects the majority of its outstanding
receivables.

The Company's  capital  expenditures  were  approximately  $948 for the thirteen
weeks ended March 31, 2000, as compared to $9,024 for the  comparable  period of
1999. 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.
Additionally,  during the first quarter of 1999,  the Company  purchased,  for a
total of $3,400,  two  Alabama  manufacturing  facilities  that were  previously
leased,  and  renovated  a Georgia  manufacturing  facility  that was  placed in
operation at the end of the quarter at a cost of $1,693.

The decrease in long-term  debt of $197 is primarily due to payments made on the
industrial development revenue bonds.

The Company  purchased  25,000 shares of treasury stock during the first quarter
of 2000 for $99.  The  Company  has  authorization  to acquire up to 1.3 million
additional shares under the current program.

In addition  to its normal  purchasing  and selling of loans to another  finance
company, subsequent to quarter end, the Company received proceeds of $1,400 from
the sale of loans that were previously held in its installment loan portfolio.

On March 31,  2000,  the Company  renewed its Credit  Facility  with its primary
lender through April 2002. The Credit Facility  presently  consists of a $35,000
revolving and term loan agreement. The Credit Facility contains a revolving line
of credit which  provides for borrowings  (including  letters of credit) up to a
maximum of $35,000.  Interest is payable under the  revolving  line of credit at
the bank's prime rate less 0.5%, or, if elected by the Company, the 90-day LIBOR
Rate plus 2.0%. The Credit  Facility  provides the option for amounts drawn down
for CAC's  benefit to be converted to a term loan with respect to  borrowings of
up to 80% of the Company's eligible (as defined) installment sales contracts, up
to a maximum of $35,000.  Interest under the 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 1.95%,
with a floating  rate for the remaining  two years  (subject to certain  limits)
equal to the  bank's  prime  rate  plus  0.75%.  However,  in no  event  may the
aggregate  outstanding  borrowings  under  the  revolving  line  of  credit  and
term-loan agreement exceed $35,000. No amounts were outstanding under the Credit
Facility at March 31, 2000 and April 2, 1999.

The credit facility contains certain  restrictive  covenants which limit,  among
other things,  the Company's ability to (i) make dividend payments and purchases
of treasury stock in an aggregate  amount which exceeds 50% of consolidated  net
income for the two most  recent  years,  (ii)  mortgage or pledge  assets  which
exceed, in the aggregate, $1,000, (iii) incur additional indebtedness, including
lease obligations,  which exceed in the aggregate $18,000,  excluding floor plan
notes  payable  which  cannot  exceed  $25,000,  and (iv)  make  annual  capital
expenditures in excess of $15,000.  In addition,  the Credit  Facility  contains
certain financial  covenants requiring the Company to maintain on a consolidated
basis certain defined levels of net working capital (at least $15,000),  debt to
tangible  net worth  ratio (not to exceed 2 to 1) and cash flow to debt  service
ratio  (not less than 1.75 to 1), and to  maintain  a current  ratio of at least
1.17 to 1 and the sum of  consolidated  tangible net worth plus  treasury  stock
purchases  must be at least  $90,000.  The Credit  Facility also requires CAC to
comply with certain specified restrictions and financial covenants.  The Company
has  obtained  appropriate  waiver  letters to the extent it was in violation of
certain covenants at March 31, 2000.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Market Risk
Market risk is the risk of loss arising from  adverse  changes in market  prices
and interest rates. The Company is exposed to interest rate risk inherent in its
financial  instruments,  but is not  currently  subject to foreign  currency  or
commodity  price risk.  The Company  manages its  exposure to these market risks
through its regular operating and financing activities.

The  Company  is  exposed  to  market  risk  related  to  investments  held in a
non-qualified trust used to fund benefits under its deferred  compensation plan.
These investments  totaled $3,281 at March 31, 2000. Due to the long-term nature
of the  benefit  liabilities  that these  assets  fund,  the  Company  currently
considers  its exposure to market risk to be low. * The Company does not believe
that a decline in market value of these  investments  would result in a material
near term funding of the trust or exposure to the benefit liabilities funded. *

The Company purchases retail  installment  contracts from its exclusive dealers,
at fixed interest rates, in the ordinary  course of business,  and  periodically
resells certain of these loans to a financial  institution  under the terms of a
retail finance agreement.  The periodic resale of installment  contracts reduces
the  Company's  exposure  to  interest  rate  fluctuations,  as the  majority of
contracts are held for a short period of time. The Company's  portfolio consists
of fixed rate contracts with interest rates generally ranging from 9.0% to 14.0%
and an  average  original  term of 269  months at March 31,  2000.  The  Company
estimated  the fair value of its  installment  contracts  receivable  at $7,375,
using  discounted  cash  flows and  interest  rates  offered  by CAC on  similar
contracts at March 31, 2000.

The  Company  has notes  payable  under  retail  floor  plan  agreements  and an
Industrial  Development  Revenue  Bond  Issue  that are  exposed  to  changes in
interest  rates.  Since these  borrowings are floating rate debt, an increase in
short-term  interest rates would adversely affect interest expense.  The Company
may  retire  this  debt  if  interest  rates  were  to  increase  significantly.
Additionally, the Company has five Industrial Development Revenue Bond Issues at
fixed  interest  rates.  The  estimated  fair  value of  outstanding  borrowings
approximated  carrying value at March 31, 2000.  The Company  estimated the fair
value of its debt instruments using rates at which the Company believes it could
have obtained similar  borrowings at that time. The Company also has the ability
to incur debt under its credit  facility,  which  provides  for  interest at the
bank's  prime rate less 0.5%,  or, if elected by the  Company,  the 90-day LIBOR

- ---------
*See Safe Harbor Statement on page 12.
<PAGE>
Rate  plus  2.0%,  for the  revolving  line of credit  and at fixed  rates for a
certain period of time for the term notes.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Our disclosure  and analysis in this Quarterly  Report on Form 10-Q contain some
forward-looking   statements.   Forward  looking  statements  give  our  current
expectations  or  forecasts of future  events,  including  statements  regarding
trends in the industry  and the  business,  financing  and other  strategies  of
Cavalier.  You can identify these statements by the fact that they do not relate
strictly to historical or current facts.  They generally are designated  with an
asterisk  (*)  and  use  words  such  as  "estimates,"   "projects,"  "intends,"
"believes,"  "anticipates,"  "expects,"  "plans,"  and other  words and terms of
similar  meaning  in  connection  with any  discussion  of future  operating  or
financial  performance.  From time to time,  we may also provide oral or written
forward-looking  statements in other  materials we release to the public.  These
forward-looking  statements  include  statements  involving  known  and  unknown
assumptions,  risks,  uncertainties and other factors which may cause our actual
results,  performance  or  achievements  to  differ  from  any  future  results,
performance,  or  achievements  expressed  or  implied  by such  forward-looking
statements or words. In particular,  such assumptions,  risks, uncertainties and
factors include those associated with the following:

o the cyclical and seasonal nature of the manufactured  housing industry and the
  economy  generally;
o limitations in Cavalier's  ability to pursue its business
  strategy;
o changes in demographic trends,  consumer preferences and Cavalier's
  business  strategy;
o changes  and  volatility  in  interest  rates  and  the
  availability of capital and consumer and dealer financing;
o the   ability  to  attract  and  retain quality independent dealers, executive
  officers and other personnel;
o competition;
o contingent repurchase and guaranty obligations;
o uncertainties regarding Cavalier's retail financing activities;
o integrating   the   business  operations  and  achieving  the  benefits of the
  1997 merger  with Belmont Homes, Inc. and  other acquisitions;
o the potential unavailability and price increases for raw materials;
o the potential unavailability of manufactured housing sites;
o regulatory constraints;
o the potential for additional warranty claims;
o litigation; and
o the potential volatility in our stock price.

Any or all of our forward-looking  statements in this report, in the 1999 Annual
Report to Stockholders  and in any other public  statements we make may turn out
to be wrong. These statements may be affected by inaccurate assumptions we might
make or by known or unknown risks and  uncertainties.  Many factors listed above
will  be   important   in   determining   future   results.   Consequently,   no
forward-looking  statement can be  guaranteed.  Actual  future  results may vary
materially.

We undertake no obligation to publicly  update any  forward-looking  statements,
whether as a result of new  information,  future  events or  otherwise.  You are
advised, however, to consult any further disclosures we make on related subjects
in our future filings with the  Securities and Exchange  Commission or in any of
our press  releases.  Also note that,  in our Annual Report on Form 10-K for the
period  ending  December 31, 1999,  under the heading  "Risk  Factors",  we have
provided a discussion of factors that we think could cause our actual results to
differ  materially from expected and historical  results.  Other factors besides
those listed could also adversely affect  Cavalier.  This discussion is provided
as permitted by the Private Securities Litigation Reform Act of 1995.


<PAGE>


PART II.  OTHER INFORMATION

Item 1:  Legal Proceedings

Reference is made to the legal proceedings  previously reported in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 under the
heading "Item 3 - Legal  Proceedings."  The description of legal  proceedings in
the Company's Form 10-K remains unchanged, except that, with respect to the suit
against Belmont Homes, Inc. and certain other defendants referenced therein, the
Court of Civil  Appeals  has  affirmed  the  Circuit  Court's  grant of  summary
judgment in favor of the  defendants on all counts  asserted in the  plaintiffs'
complaint.

Item 5:  Other Matters

The Board of Directors has declared its regular  quarterly cash dividend of $.04
per share payable on May 15, 2000 to  stockholders  of record on April 28, 2000.
The Company,  however, has announced that its Board of Directors may take action
in  the  future  to  reduce  or  eliminate  dividend  payments  if  it  believes
circumstances indicate the need for a more conservative dividend policy.

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  exhibits  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  Composite   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, 1998, is incorporated herein by reference.
                  (b) 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.
                  (c) The Amended and Restated By-laws of the Company,  filed as
                      Exhibit  3(d) to the  Company's  Quarterly  Report on Form
                      10-Q  for  the  quarter  ended  June  27,  1997,  and  the
                      amendments  thereto filed as Exhibit 3(e) to the Company's
                      Quarterly  Report  on  Form  10-Q  for the  quarter  ended
                      September  26, 1997,  and as Exhibit 3(c) to the Company's
                      Quarterly  Report  on  Form  10-Q  for the  quarter  ended
                      September 25, 1998, are incorporated herein by reference.

         (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) 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(c)
                      above.
                  (c) Rights  Agreement     between   Cavalier Homes, Inc.   and
                      ChaseMellon Shareholder Services, LLC, filed  as Exhibit 4
                      to  the  Registration  Statement on Form 8-A dated October
                      30, 1996, is incorporated herein by reference.

        (10)  Material Contracts.
                  (a) Assignment  and  Assumption  Agreement,  dated January 13,
                      1999, by and among Winston County  Industrial  Development
                      Association,  Cavalier  Manufacturing, Inc.   and Cavalier
                      Real Estate Co., Inc.
                  (b) Amended and  Restated  Revolving  and Term Loan  Agreement
                      among Cavalier and certain  subsidiaries  of Cavalier,  as
                      Borrowers and First Commercial  Bank, as Lender,  dated as
                      of March 31, 2000.
                  (c) Continuing  Guaranty  Agreement  between First  Commercial
                      Bank and  Cavalier,  dated  March 31,  2000,  relating  to
                      guaranty of payments of Cavalier Acceptance Corporation.

        (11)  Statement re: Computation of Net Income per Common Share.

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

(b)     Current Report on Form 8-K.
        None

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: May 15, 2000                            /s/ David A. Roberson
                                              ---------------------
                                              David A. Roberson - President
                                              and Chief Executive Officer


Date: May 15, 2000                            /s/ Michael R. Murphy
                                              ---------------------
                                              Michael R. Murphy -
                                              Chief Financial Officer (Principal
                                              Financial and Accounting Officer)



                 ASSIGNMENT AND ASSUMPTION AGREEMENT


                             Dated January 13, 1999


                                       By

                                       and

                                      Among


                                     WINSTON
                                COUNTY INDUSTRIAL
                                   DEVELOPMENT
                                   ASSOCIATION

                               an Alabama general
                                   partnership
                                       and


                          CAVALIER MANUFACTURING, INC.
                      (Cavalier Homes of Alabama Division)
                             a Delaware corporation

                                       and


                         CAVALIER REAL ESTATE CO., INC.
                             a Delaware corporation










<PAGE>


                       ASSIGNMENT AND ASSUMPTION AGREEMENT

         This ASSIGNMENT AND ASSUMPTION  AGREEMENT is made and entered into this
13th  day of January,  1999 by and among WINSTON COUNTY  INDUSTRIAL  DEVELOPMENT
ASSOCIATION,  an Alabama  general  partnership,  as Assignor  (the  "Assignor"),
CAVALIER  MANUFACTURING,  INC. (Cavalier Homes of Alabama Division),  a Delaware
corporation,  formerly  known as  Cavalier  Homes of  Alabama,  Inc.  ("Cavalier
Manufacturing") and CAVALIER REAL ESTATE CO., INC., a Delaware  corporation,  as
assignee (the "Assignee").

                                    Recitals

         Pursuant  to the  Constitution  and laws of the State of  Alabama,  The
Industrial  Development Board of the Town of Addison has heretofore acquired and
constructed  an  industrial  project (the  "Project")  on and including the real
property  described on Exhibit A hereto and has heretofore leased the Project to
the  Assignor   pursuant to the following  Lease  Agreements  (collectively  the
"Lease Agreement"): (i) Lease Agreement dated as of January 1, 1993, recorded in
Volume 321 at Page 558 et. seq. in the Office of the Judge of Probate of Winston
County,  Alabama and (ii) Lease  Agreement dated as of February 1, 1994 recorded
in Volume 333 at page 726 et seq. in said office.

         The  Assignor  has   heretofore   subleased  the  Project  to  Cavalier
Manufacturing  pursuant  to  Commercial  Sub-Lease  dated  March  5,  1993  (the
"Sublease").

         The  Assignor  and  Cavalier  Manufacturing  desire  to  terminate  the
Sublease for the purpose of transferring the interests of the Assignor in and to
the Project and the Lease Agreement to the Assignee.

         The Assignor  desires to assign and transfer,  and the Assignee desires
to acquire and assume, as provided herein,  all right, title and interest of the
Assignor in and to the Project and the Lease  Agreement and the  obligations  of
the Assignor with respect thereto.

         In consideration for such assignment and transfer,  the Assignee shall,
simultaneously with the execution of this Agreement,  execute and deliver a Bond
Guaranty Agreement with respect to the Bond.

                                    Agreement

         NOW THEREFORE,  in  consideration of the premises and of the payment of
ten dollars  ($10.00) and other good and valuable  consideration by the Assignee
to the Assignor,  the receipt and  sufficiency of which is hereby  acknowledged,
and  in  consideration  of  the  mutual  promises,  covenants  and  undertakings
contained  herein,  the  Assignor and  Cavalier  Manufacturing  and the Assignee
hereby agree as follows:

         Section 1. Cavalier  Manufacturing  hereby (a) exercises the option set
forth in paragraph  4(f) of the  Sublease  for the  purchase  price set forth in
paragraph  4(a)  of the  Sublease,  (b)  waives  and  releases  all  rights  and
privileges of Cavalier  Manufacturing  set forth in paragraphs  4(c) and 4(d) of
the Sublease,  and (c) directs the  assignment and conveyance by the Assignor of
all right title and interest of the Assignor in and to the Project and the Lease
Agreement to the Assignee.

         Section 2. The Assignor,  for itself and its respective  successors and
assigns,  hereby assign, sell, transfer, set over and convey to the Assignee all
of the rights, title and interests of the Assignor in and to

                  (1)      the real property and personal property described  on
         Exhibit A hereto, and

                  (2)      the Project (as defined in the Lease Agreement),  and

                  (3)  the  Lease  Agreement,  the  leasehold  interest  created
         thereby,  and all rights,  privileges  and options  (including  without
         limitation  each of the  options  set forth in  Article 11 of the Lease
         Agreement), of the lessee set forth therein, and

                  (4)      all rights as a named insured under any   policy   of
         title insurance with respect to the Project.

         Section 3. The  Assignee,  for itself and its  successors  and assigns,
hereby accepts the aforesaid transfer,  sale,  conveyance and assignment of said
rights,  title,  interests,  privileges  and  options to it in  accordance  with
Section 1 hereof and in consideration therefor hereby assumes and agrees to duly
and punctually observe and perform all obligations,  covenants,  liabilities and
restrictions as lessee under the Lease Agreement from and after the date hereof.

         Section 4. The Assignor does hereby  represent,  warrant,  covenant and
agree that the execution and delivery of this Agreement and compliance  with the
provisions  thereof will not conflict  with,  or  constitute  on the part of the
Assignor a breach of or default under, any indenture,  mortgage,  deed of trust,
agreement,  contract or other document or instrument to which such Assignor is a
party or by which the Assignor is bound or any existing law,  rule,  regulation,
judgment, order or decree to which the Assignor is subject.

         Section 5. The Assignee  agrees that from and after the date hereof the
Assignor  shall have no  liability  or  obligation  to or for the benefit of the
Assignee for performance of the Lease Agreement or any provision thereof and the
Assignee shall defend, indemnify and save harmless the Assignor from and against
any and all claims, causes of action, judgments,  damages, fines, penalties, and
other  losses,  costs and  expenses,  including  without  limitation  reasonable
attorneys' fees and costs of investigation  and litigation,  asserted against or
suffered by the Assignor and its successors and assigns,  that are related to or
arise out of, or result from, or are based upon,  the  observance or performance
of any  provision  of the Lease  Agreement,  including  without  limitation  the
presence of any pollutants,  contaminants,  toxic or hazardous  wastes, or other
substances regulated by law or which might create a hazard to health and safety,
which at any time from and after the date hereof are  deposited  or released on,
under or included in the Project and any clean up or other remedial  action with
respect to any thereof, and the violation of any law, rule,  regulation,  order,
ruling, notice or decree of any governmental  authority relating to pollution or
the protection of human health or the  environment  (specifically  including any
liabilities under the  Comprehensive  Environmental  Response,  Compensation and
Liability  Act of 1980, as amended,  42 U.S.C.  Sections 9601 et seq.) or claims
based  upon state or common law  theories  such as  trespass  or  nuisance.  The
provisions  of this  Section 5 shall  remain  in full  force  and  effect  until
commencement  of an  action  with  respect  to any such  event or  non-event  or
occurrence or non-occurrence shall be prohibited by law.

         Section 6. Cavalier  Manufacturing  agrees that from and after the date
hereof the Assignor  shall have no liability or obligation to or for the benefit
of Cavalier  Manufacturing  for  performance  of the  Sublease or any  provision
thereof and Cavalier Manufacturing shall defend, indemnify and save harmless the
Assignor  from and  against  any and all  claims,  causes of action,  judgments,
damages,  fines,  penalties,  and other losses,  costs and  expenses,  including
without  limitation  reasonable  attorneys' fees and costs of investigation  and
litigation,  asserted against or suffered by the Assignor and its successors and
assigns, that are related to or arise out of, or result from, or are based upon,
the  observance  or  performance  of any  provision of the  Sublease,  including
without  limitation  the  presence  of any  pollutants,  contaminants,  toxic or
hazardous wastes,  or other substances  regulated by law or which might create a
hazard to health and  safety,  which at any time from and after the date  hereof
are  deposited  or released on, under or included in the Project and any cleanup
or other remedial  action with respect to any thereof,  and the violation of any
law,  rule,  regulation,  order,  ruling,  notice or decree of any  governmental
authority  relating  to  pollution  or the  protection  of human  health  or the
environment  (specifically  including any  liabilities  under the  Comprehensive
Environmental  Response,  Compensation and Liability Act of 1980, as amended, 42
U.S.C.  Sections 9601 et seq.) or claims based upon state or common law theories
such as trespass or nuisance.  The  provisions of this Section 6 shall remain in
full force and effect until  commencement  of an action with respect to any such
event or non-event or occurrence or non-occurrence shall be prohibited by law.

         Section 7. The  Assignee  agrees that the  Assignor  makes no warranty,
either  express or implied,  or offer any  assurances,  that the Project will be
adequate for the purposes or needs of the Assignee with respect thereto.

         Section 8. The  Assignee  has been  provided  with and has reviewed the
Lease Agreement and consents and agrees to the terms thereof.

         Section 9. The  Assignor  and  Cavalier  Manufacturing  hereby  cancel,
terminate  and  discharge  the  Sublease  save and  excepting  any  agreement or
obligation of Cavalier Manufacturing to indemnify the Assignor, which agreements
and  obligations  shall  survive such  termination  and remain in full force and
effect until  commencement  of an action based  thereupon shall be prohibited by
law, and Cavalier Manufacturing does hereby waive and release any and all claims
against the Assignor for payment or  performance  of any obligation or agreement
thereunder.

         Section  10.  Cavalier  Manufacturing  and  the  Assignee  each  hereby
represents  and warrants that (a) the  execution and delivery of this  Agreement
and compliance with the provisions  hereof will not conflict with, or constitute
on the part of such person a breach of or default  under (i) its  organizational
documents (ii) any indenture, mortgage, deed of trust, commitment,  agreement or
other  instrument  to which such  person is a party or by which it is bound,  or
(iii) any existing law,  rule,  regulation,  judgment,  order or decree to which
such  person  is  subject,  and  (b)  the  operations  of the  Assignee  (i) are
consistent  with and in  furtherance  of the  purposes of the  Enabling  Law (as
defined in the Lease  Agreement)  and (ii) will  preserve  the  character of the
Project  as a  "project"  under  the  Enabling  Law  (as  defined  in the  Lease
Agreement).

         Section 11. The Assignor and  Cavalier  Manufacturing  and the Assignee
hereby  covenant  and agree  each for the  benefit  of the  other  that (a) this
Agreement  has been  delivered  in, and shall be  governed by and  construed  in
accordance with the laws of, the State of Alabama;  (b) all covenants,  promises
and agreements in this Agreement  contained by or on behalf of the Assignor,  or
by or on behalf of Cavalier Manufacturing and the Assignee, shall bind and inure
to the benefit of their respective successors,  assigns,  heirs,  administrators
and  executors,  as the  case  may be,  whether  or not so  expressed;  (c) this
Agreement  may be  executed in several  counterparts,  each of which shall be an
original and all of which shall constitute one and the same instrument;  and (d)
if any provision in this Agreement shall be invalid,  illegal or  unenforceable,
the validity,  legality and enforceability of the remaining provisions shall not
in any way be affected or in any way impaired thereby.



<PAGE>


         IN WITNESS  WHEREOF,  the  Assignor  has  caused  this  Assignment  and
Assumption  Agreement  to be  executed  by its  general  partners  and  Cavalier
Manufacturing  and the Assignee have each caused this  Assignment and Assumption
Agreement  to be executed in its name,  under seal,  and the same  attested,  by
officers  thereof  duly  authorized  thereunto,  and the  Assignor  and Cavalier
Manufacturing  and the  Assignee  have caused  this  Assignment  and  Assumption
Agreement to be dated as of the date and year first above written.

                                      WINSTON COUNTY INDUSTRIAL
                                      DEVELOPMENT ASSOCIATION
                                      an Alabama General Partnership

                                      /s/ James C. Caldwell               (L.S.)
                                      ------------------------------------------
                                      James C. Caldwell

                                      /s/ Stephen O. Hayes                (L.S.)
                                      ------------------------------------------
                                      Stephen O. Hayes

                                      /s/ William Revis McDaniel          (L.S.)
                                      ------------------------------------------
                                      William Revis McDaniel

                                      /s/ John Barry Mixon                (L.S.)
                                      ------------------------------------------
                                      John Barry Mixon

                                      /s/ David A. Roberson               (L.S.)
                                      ------------------------------------------
                                      David A. Roberson

                                      /s/ Rickie D. Romine                (L.S.)
                                      ------------------------------------------
                                      Rickie D. Romine

                                      /s/ Robert Lowell Burdick           (L.S.)
                                      ------------------------------------------
                                      Robert Lowell Burdick

                                      /s/  Jonathon D. Wilson             (L.S.)
                                      ------------------------------------------
                                      Jonathon D. Wilson

                                      /s/ Jonathan B. Lowe                (L.S.)
                                      ------------------------------------------
                                      Jonathan B. Lowe

                                      /s/ Michael Patrick Lowe            (L.S.)
                                      ------------------------------------------
                                      Michael Patrick Lowe

                                      /s/ Jerry F. Wilson, Jr.            (L.S.)
                                      ------------------------------------------
                                      Jerry F. Wilson, Jr.





<PAGE>


         IN WITNESS  WHEREOF,  the  Assignor  has  caused  this  Assignment  and
Assumption  Agreement  to be  executed  by  its  general  partner  and  Cavalier
Manufacturing  and the Assignee have each caused this  Assignment and Assumption
Agreement  to be executed in its name,  under seal,  and the same  attested,  by
officers  thereof  duly  authorized  thereunto,  and the  Assignor  and Cavalier
Manufacturing  and the  Assignee  have caused  this  Assignment  and  Assumption
Agreement to be dated as of the date and year first above written.


                                      CAVALIER REAL ESTATE CO., INC.



                                      By /s/ Michael R. Murphy
                                         -----------------------------
                                      Its President
                                         -----------------------------
SEAL

Attest:
       ----------------------------

       Its:------------------------

<PAGE>




         IN WITNESS  WHEREOF,  the  Assignor  has  caused  this  Assignment  and
Assumption  Agreement  to be  executed  by  its  general  partner  and  Cavalier
Manufacturing  and the Assignee have each caused this  Assignment and Assumption
Agreement  to be executed in its name,  under seal,  and the same  attested,  by
officers  thereof  duly  authorized  thereunto,  and the  Assignor  and Cavalier
Manufacturing  and the  Assignee  have caused  this  Assignment  and  Assumption
Agreement to be dated as of the date and year first above written.

                                      CAVALIER MANUFACTURING, INC.
                                      (Cavalier Homes of Alabama Division)



                                      By /s/ James C. Caldwell
                                        ------------------------------
                                      Its President
                                         -----------------------------
SEAL

Attest: /s/ Michael R. Murphy
       ----------------------------
       Its: Secretary
           ------------------------




<PAGE>



                               CONSENT AND RELEASE

         The  Industrial  Development  Board of the Town of Addison  does hereby
represent,  covenant and agree that (1) The Industrial  Development Board of the
Town of Addison has received a copy of the foregoing  Assignment  and Assumption
Agreement,  does hereby consent to the assignment of the leasehold  interests of
the Assignor (as defined in the said Assignment and Assumption Agreement) in and
to the property and Lease Agreement referenced in said Assignment and Assumption
Agreement  to the  Assignee  (as  defined  in  said  Assignment  and  Assumption
Agreement) and will deal with the Assignee, as lessee under the Lease Agreement,
for all purposes of the Lease Agreement, (2) The Industrial Development Board of
the Town of Addison does hereby  release and discharge each of the Assignor from
the observance and  performance of all  obligations of the lessee arising on and
after the date hereof under the Lease Agreement and any other document  executed
in connection with the Lease  Agreement,  and (3) the Lease Agreement is in full
force and effect and the Board has not declared any default thereunder.

         IN WITNESS  WHEREOF,  The Industrial  Development  Board of the Town of
Addison has caused this  instrument to be executed in its name,  under seal, and
the same attested,  by officers thereof duly authorized thereunto as of the date
of the acknowledgment hereof.

                                      THE INDUSTRIAL DEVELOPMENT BOARD OF
                                      THE TOWN OF ADDISON



                                      By:/s/ Kenneth Sudduth
                                         ----------------------------
                                      Its:President
                                          ---------------------------
S E A L


Attest: Marsha Dollar Pigg
       -----------------------------
       Its: Notary Public
           -------------------------


<PAGE>



                               CONSENT AND RELEASE

         First  Commercial Bank does hereby  represent,  covenant and agree that
(1) First  Commercial  Bank has received a copy of the foregoing  Assignment and
Assumption  Agreement,  does hereby  consent to the  assignment of the leasehold
interests  of the  Assignor (as defined in the said  Assignment  and  Assumption
Agreement)  in and to the  property  and  Lease  Agreement  referenced  in  said
Assignment  and  Assumption  Agreement  to the  Assignee  (as  defined  in  said
Assignment and Assumption  Agreement) and will deal with the Assignee, as lessee
under the Lease Agreement,  for all purposes of the Lease  Agreement,  (2) First
Commercial  Bank does hereby release and discharge the Assignor and each partner
thereof from the  observance and  performance  of all  obligations of the lessee
arising on and after the date  hereof  under the Lease  Agreement  and any other
document executed in connection with the Lease Agreement and does hereby release
and discharge that certain Bond Guaranty  Agreement  dated as of January 1, 1993
by the Assignor and the partners  thereof to First  Commercial Bank, and (3) the
Lease Agreement is in full force and effect and the undersigned has not declared
any default thereunder.

         IN WITNESS WHEREOF, First Commercial Bank has caused this instrument to
be  executed  in its name,  under  seal,  and the same  attested,  by an officer
thereof duly  authorized  thereunto  as of this 13th day of  January, 1999.


                                      FIRST COMMERCIAL BANK



                                      By: Jim Williams
                                         -------------------------------
                                      Its: Vice President
                                          ------------------------------

S E A L


Attest:
       -----------------------------
       Its:
           -------------------------





          AMENDED AND RESTATED REVOLVING AND TERM LOAN AGREEMENT

                                  by and among


                              Cavalier Homes, Inc.,
                          Quality Housing Supply, LLC,
                          Cavalier Manufacturing, Inc.,
                           Cavalier Industries, Inc.,
                               Delta Homes, Inc.,
                           Cavalier Enterprises, Inc.
                      Cavalier Associated Retailers, Inc.,
                   Quality Certified Insurance Services, Inc.,
                        Cavalier Asset Management, Inc.,
                     Cavalier Manufacturing Asset Co., Inc.,
                       Cavalier Industries Asset Co., Inc.
                      Cavalier Enterprises Asset Co., Inc.
                         Cavalier Real Estate Co., Inc.,
                        Cavalier Acceptance Corporation,

                                  as Borrowers

                                       and

                             First Commercial Bank,

                                    as Lender

                                   Dated as of

                                 March 31, 2000





<PAGE>



                                TABLE OF CONTENTS

                                                                             No.

ARTICLE I
         DEFINITIONS ........................................................  1
                  1.1      Defined Terms ....................................  1

                  1.2      Accounting Terms .................................  1

                  1.3      Construction of Terms ............................  1


ARTICLE II
         THE REVOLVING LOAN .................................................  2
                  2.1      General Terms ....................................  2

                  2.2      Disbursement of the Revolving Loan ...............  4

                  2.3      The Revolving Note ...............................  4

                  2.4      Payments of Principal ............................  4

                  2.5      Revolving Loan Borrowing Procedures, Interest  Rates,
                           Payments of Interest and Related Provisions ....... 4

                  2.6      Payment to Lender ................................  9

                  2.7      Use of Proceeds ..................................  9

                  2.8      [Intentionally Omitted]...........................  9

                  2.9      Letters of Credit9

                  2.10     Commitment and   Non-Usage Fees   for  the  Revolving
                           Loan ............................................. 10


ARTICLE III
         THE TERM LOANS ..................................................... 10
                  3.1      General Terms of the Term Loans .................. 10

                  3.2      Disbursement of the Term Loan(s) ................. 11

                  3.3      .................................................. 11
                           The Term Note(s) ................................. 11

                  3.4      Payments of Principal ............................ 11

                  3.5      Prepayment ....................................... 11

                  3.6      Interest Rate and Payments of Interest ........... 12

                  3.7      Payment to Lender ................................ 13

                  3.8      Use of Proceeds .................................. 13

                  3.9      [Intentionally Omitted] .......................... 13

                  3.10     [Intentionally Omitted] .......................... 13


ARTICLE IV
         CONDITIONS PRECEDENT ............................................... 13
                  4.1      Documents Required for the Closing ............... 13

                  4.2      Documents Required for Subsequent Advances ....... 15

                  4.3      Additional Conditions to the Term Loan(s) ........ 15

                  4.4      Additional Required Documents .................... 16

                  4.5      Certain Events ................................... 16

                  4.6      Legal Matters .................................... 17


ARTICLE V
         COLLATERAL SECURITY ................................................ 17

                  5.1      Composition of the Collateral .................... 17

                  5.2      Rights in Property Held by Lender ................ 17

                  5.3      Rights in Property Held Either  by  Borrowers  or  by
                           Lender ........................................... 17

                  5.4      Priority of Liens ................................ 18

                  5.5      Perfection ....................................... 18

                  5.6      Chattel Paper or Instruments ..................... 18



<PAGE>

                  5.7      Release of Documentation For Eligible Contracts .. 19

                  5.8      Power of Attorney ................................ 19


ARTICLE VI
         REPRESENTATIONS AND WARRANTIES ..................................... 20
                  6.1      Original 20

                  6.2      Additional Representations and Warranties of Cavalier
                           Acceptance ....................................... 23

                  6.3      Reliance   By   Cavalier    Acceptance   on    Dealer
                           Representations .................................. 25


ARTICLE VII
         COVENANTS OF BORROWERS ............................................. 25
                  7.1      Affirmative Covenants ............................ 25

                  7.2      Negative Covenants ............................... 30

                  7.3      Financial Covenants .............................. 32


ARTICLE VIII
         ADDITIONAL COVENANTS OF CAVALIER ACCEPTANCE ........................ 33
                  8.1      Affirmative Covenants ............................ 33

                  8.2      Negative Covenants ............................... 34

                  8.3      Financial Covenants .............................. 34


ARTICLE IX
         DEFAULT ............................................................ 35
                  9.1      Events of Default ................................ 35

                  9.2      Acceleration ..................................... 36

                  9.3      Remedies ......................................... 36

                  9.4      Right of Set-Off ................................. 37

                  9.5      Demand Obligations ............................... 38

                  9.6      Special Remedies ................................. 38


ARTICLE X
         MISCELLANEOUS ...................................................... 38
                  10.1     Construction ..................................... 38

                  10.2     Further Assurances ............................... 39

                  10.3     Indemnity ........................................ 39

                  10.4     Enforcement and Waiver by Lender ................. 39

                  10.5     Expenses of Lender ............................... 39

                  10.6     Notices .......................................... 39

                  10.7     Indemnity, Waiver and Release by Borrowers ....... 40

                  10.8     Reliance on this Agreement ....................... 41

                  10.9     Participation .................................... 41

                  10.10    No Partnership or Joint Venture .................. 41

                  10.11    Governing Law .................................... 41

                  10.12    JURISDICTION; WAIVERS ............................ 42

                  10.13    Binding Effect, Assignment ....................... 43

                  10.14    Termination ...................................... 43

                  10.15    Obligations Unconditional and Absolute ........... 43

                  10.16    Entire Agreement, Amendments ..................... 43

                  10.17    Severability ..................................... 43

                  10.18    Headings ......................................... 43

                  10.19    Counterparts ..................................... 43

                  10.20    Seal ............................................. 44

                  SCHEDULES AND EXHIBITS


Schedule I          -        Defined Terms
Schedule II         -        Borrower Exceptions
Exhibit II.6.1(B)   -        Other Corporate or Fictitious Names
Exhibit II.6.1(D)   -        Mergers, Acquisitions, and Certain Changes
Exhibit II.6.1(I)   -        Claims, Litigation
Exhibit II.7.2(G)   -        Existing Guaranties
Exhibit A           -        Form of Term Note
Exhibit B           -        Request for Advance - Revolving Loan
Exhibit C           -        Compliance Certificate - Consolidated
Exhibit C-1         -        Compliance Certificate - Cavalier Acceptance
Exhibit D           -        Subrogation and Contribution Agreement
Exhibit E           -        Assumption Agreement
Exhibit F           -        Existing Liens
Exhibit G           -        Qualification to do Business
Exhibit H           -        Places of Business and Locations of the Collateral
Exhibit I           -        Existing Indebtedness
Exhibit J            -       States of Incorporation of Consolidated Entities
Exhibit K           -        Cavalier Homes's Ownership of Consolidated Entities





<PAGE>





             AMENDED AND RESTATED REVOLVING AND TERM LOAN AGREEMENT


                  THIS   AMENDED  AND   RESTATED    REVOLVING  AND   TERM   LOAN
AGREEMENT (this  "Agreement"),  dated as of March 31, 2000, is made by and among
Cavalier Homes, Inc., a Delaware corporation ("Cavalier Homes"), Quality Housing
Supply, LLC, a Delaware limited liability company, Cavalier Manufacturing, Inc.,
a Delaware corporation, Cavalier Industries, Inc., a Delaware corporation, Delta
Homes, Inc., a Mississippi corporation,  Cavalier Enterprises,  Inc., a Delaware
corporation,  Cavalier  Associated  Retailers,  Inc.,  a  Delaware  corporation,
Quality Certified Insurance  Services,  Inc., an Alabama  corporation,  Cavalier
Asset Management,  Inc., a Delaware  corporation,  Cavalier  Manufacturing Asset
Co.,  Inc.,  a Delaware  corporation,  Cavalier  Industries  Asset Co.,  Inc., a
Delaware   corporation,   Cavalier  Enterprises  Asset  Co.,  Inc.,  a  Delaware
corporation,  Cavalier  Real  Estate  Co.,  Inc.,  a Delaware  corporation,  and
Cavalier Acceptance Corporation, an Alabama corporation ("Cavalier Acceptance"),
(collectively, the "Initial Participating Subsidiaries";  Cavalier Homes and the
Initial  Participating  Subsidiaries,  together  with all entities who hereafter
become   Participating   Subsidiaries  or  Participating   Partnerships,   being
hereinafter sometimes  collectively  referred to as the "Borrowers"),  and First
Commercial Bank, an Alabama state banking corporation (the "Lender").

                              W I T N E S S E T H:


                  WHEREAS, certain of the Borrowers and Lender entered into that
certain  Revolving,  Warehouse and Term Loan Agreement  dated as of February 17,
1994,  as amended by that certain First  Amendment to  Revolving,  Warehouse and
Term Loan  Agreement  dated as of March 14,  1996,  as amended  by that  certain
Second  Amendment to Revolving,  Warehouse and Term Loan  Agreement  dated as of
June 1, 1998 (as heretofore  amended,  the "Original Loan Agreement") to provide
financing for Borrowers;

                  WHEREAS, former Borrowers under the Original Loan   Agreement,
Belmont  Homes,  Inc.  and  Spirit  Homes,   Inc.,  were  merged  into  Cavalier
Enterprises,   Inc.,  and  Bellcrest  Homes,   Inc.  was  merged  into  Cavalier
Industries, Inc.
                  WHEREAS,  Borrowers  and Lender  wish to amend and restate the
Original  Loan  Agreement in its entirety,  as  hereinafter  set forth,  for the
purpose,  among others,  to provide Borrowers with financing in a maximum sum of
$35,000,000 upon the terms and subject to the conditions hereinafter set forth.

                  NOW,  THEREFORE,  in  consideration  of  the  promises  herein
contained,  and each  intending to be legally bound hereby,  the parties  hereto
agree as follows:



                                    ARTICLE I

                                   DEFINITIONS

         1.1      Defined Terms.  Defined terms used herein are as set forth  on
Schedule I attached hereto.

         1.2      Accounting  Terms.  Accounting terms used and    not otherwise
defined in this Agreement have the meanings  determined by, and all calculations
with respect to accounting or financial matters unless otherwise provided herein
shall be computed in accordance with, Generally Accepted Accounting Principles.

         1.3      Construction  of  Terms.  Whenever  used  in this   Agreement,
the singular  number shall include the plural and the plural the  singular,  and
pronouns of one gender shall include all genders. References herein to articles,
sections,   paragraphs  or   subparagraphs  or  the  like  shall  refer  to  the
corresponding  articles,  sections,  paragraphs or  subparagraphs or the like of
this Agreement. The words "hereof",  "herein", and terms of similar import shall
refer to this entire Agreement.  Unless the context clearly requires  otherwise,
the use of the words


<PAGE>




"including",  "such as", or terms of similar meaning,  shall not be construed to
imply the exclusion of any other particular elements.


                                   ARTICLE II

                               THE REVOLVING LOAN

         2.1      General Terms.

                  (A)  Subject  to  the  terms  hereof,   Lender  will  lend  to
Borrowers,  jointly and severally  (except as limited by the terms of subsection
(D) of this Section 2.1 or by the terms of the Assumption Agreements), from time
to time until the Loan  Termination  Date for the Revolving  Loan,  such sums in
integral  multiples  of $10,000 as Borrowers  may  request,  but which shall not
exceed,  in the  aggregate  principal  amount at any one time  outstanding,  the
lesser of:

                       (1)(a)   $35,000,000  minus (b) the aggregate outstanding
                                principal balance of  a ll  Term Loans, or

                       (2)      the Revolving Loan Commitment.

                  (B)  Subject to the terms  hereof,  Borrowers  may jointly and
severally borrow, repay without penalty or premium, and reborrow hereunder, from
the date of this  Agreement  until the Loan  Termination  Date for the Revolving
Loan. If at any time the unpaid principal  balance of the Revolving Loan exceeds
the  amount  Borrowers  could  borrow at such time under the  formula  set forth
above,  Borrowers shall  immediately and without demand pay such sums to Lender,
in multiples of $10,000 to the extent  necessary to reduce the Revolving Loan to
an amount which Borrowers could borrow at that time under such formula.

                  (C)   Each   Participating    Subsidiary   and   Participating
Partnership,  separately and severally,  hereby appoints and designates Cavalier
Homes as such party's agent and  attorney-in-fact to act on behalf of such party
for all purposes of the Loan  Documents.  Cavalier Homes shall have authority to
exercise  on  behalf  of  each   Participating   Subsidiary  and   Participating
Partnership  all  rights and  powers  that  Cavalier  Homes  deems,  in its sole
discretion,  necessary,  incidental or  convenient  in connection  with the Loan
Documents,   including  the  authority  to  execute  and  deliver  certificates,
documents,  agreements and other  instruments  referred to in or contemplated by
the Loan Documents,  request Advances hereunder, request the issuance of Letters
of Credit,  receive all proceeds of Advances under the Revolving  Loan, give all
notices,  approvals  and  consents  required or  requested  from time to time by
Lender and take any other actions and steps that a Participating Subsidiary or a
Participating  Partnership could take for its own account in connection with the
Loan  Documents  from  time to time,  it being the  intent of the  Participating
Subsidiaries  and the  Participating  Partnerships  to grant to  Cavalier  Homes
plenary  power  to act on  behalf  of the  Participating  Subsidiaries  and  the
Participating   Partnerships  in  connection  with  and  pursuant  to  the  Loan
Documents.  The appointment of Cavalier Homes as agent and  attorney-in-fact for
the  Participating  Subsidiaries and the  Participating  Partnerships  hereunder
shall  be  coupled  with an  interest  and be  irrevocable  so long as any  Loan
Document  shall remain in effect.  The Lender need not obtain any  Participating
Subsidiary's  or  Participating  Partnership's  consent or approval  for any act
taken by Cavalier Homes  pursuant to any Loan Document,  and all such acts shall
bind  and  obligate  Cavalier  Homes,  the  Participating  Subsidiaries  and the
Participating  Partnerships,  jointly  and  severally.  Lender  may  rely on any
representation  or request made or action taken by Cavalier  Homes in connection
with the Loan Documents as authorized by the Participating  Subsidiaries and the
Participating  Partnerships.  Each  Participating  Subsidiary and  Participating
Partnership  forever  waives and  releases  any claim  (whether now or hereafter
arising)  against  Lender based on Cavalier  Homes's lack of authority to act on
behalf  of  any  Participating   Subsidiary  or  Participating   Partnership  in
connection with the Loan Documents.

                  (D) The  liability  of  each  Participating  Partnership  with
respect  to  the  Obligations  shall  be  limited  to an  amount  equal  to  its
Partnership Liabilities. The liability of each Participating Subsidiary with


<PAGE>




respect to the Obligations shall be limited to an amount equal to the greater of
(i) 95% of the  Participating  Subsidiary's  Net Worth (as hereinafter  defined)
from time to time; or (ii) the amount that in a legal proceeding  brought within
the  applicable  limitations  period is determined by the final,  non-appealable
order of a court having  jurisdiction over the issue and the applicable  parties
to be the amount of value  given by Lender,  or  received  by the  Participating
Subsidiary,  in exchange for the  obligations  of the  Participating  Subsidiary
under this Agreement and the other Loan  Documents.  As used in this  subsection
(D),  "Net  Worth"  shall  mean  (x)  the  fair  value  of the  property  of the
Participating Subsidiary from time to time (taking into consideration the value,
if any of rights of  subrogation,  contribution  and  indemnity),  minus (y) the
total  liabilities  of  the  Participating   Subsidiary   (including  contingent
liabilities  discounted in appropriate  instances,  but excluding liabilities of
the Participating  Subsidiary under this Agreement and the other Loan Documents)
from time to time.

                  (E)  Each  of  the  Initial  Participating   Subsidiaries  (i)
acknowledges  that it has had full and complete access to the underlying  papers
relating  to the  Obligations  and all other  papers  executed  by any Person in
connection  with the  Obligations,  has reviewed  them and is fully aware of the
meaning  and  effect  of  their   contents;   (ii)  is  fully  informed  of  all
circumstances that bear upon the risks of executing this Agreement and the other
Loan  Documents and which a diligent  inquiry  would reveal;  (iii) has adequate
means to obtain  from the other  Borrowers  on a  continuing  basis  information
concerning  the other  Borrowers'  financial  condition  and is not depending on
Lender to provide such information,  now or in the future;  and (iv) agrees that
Lender shall have no obligation to advise or notify it or to provide it with any
data or information.

                  (F)  Each of the  Initial  Participating  Subsidiaries  hereby
agrees that its  obligations  and  liabilities  with respect to the  Obligations
other than the Term  Note(s)  are joint and  several  with the other  Borrowers,
continuing,  absolute and unconditional (subject to the provisions of subsection
(D) of this Section 2.1). Without limiting the generality of the foregoing,  the
obligations  and liabilities of each of the Initial  Participating  Subsidiaries
with  respect to the Loans and the Notes or under the Security  Documents  shall
not be released,  discharged,  impaired,  modified or in any way affected by (i)
the invalidity or  unenforceability  of any Loan  Document,  (ii) the failure of
Lender to give such Initial Participating  Subsidiary a copy of any notice given
to any other Borrower,  (iii) any  modification,  amendment or supplement of any
obligation,  covenant or  agreement  contained  in any Loan  Document,  (iv) any
compromise,  settlement,  release or termination of any obligation,  covenant or
agreement  in any Loan  Document,  (v) any  waiver of  payment,  performance  or
observance by or in favor of any other Borrower of any  obligation,  covenant or
agreement under any Loan Document,  (vi) any consent,  extension,  indulgence or
other action or inaction,  or any exercise or non-exercise of any right,  remedy
or privilege with respect to any Loan Document,  (vii) the extension of time for
payment  or  performance  of any of  the  Obligations,  (viii)  the  release  or
discharge of Lender's  claims  against any  Collateral now or any time hereafter
securing any of the  Obligations  or Borrowers,  or any of them, by operation of
law or  otherwise  or (ix) any other  matter that might be  otherwise  raised in
avoidance of, or in defense  against an action to enforce,  the  obligations  of
such Initial Participating Subsidiary under this Agreement, the Loans, the Notes
or any other Loan Document.

                  (G) None of the Borrowers will exercise any rights that it may
acquire by way of subrogation  under this Agreement or any of the Loan Documents
or any  Subrogation  and  Contribution  Agreement  referred to in subsection (H)
below, by any payment made hereunder or under any of the other Loan Documents or
otherwise,  until all the Obligations  have been paid in full and this Agreement
has been terminated. If any amount shall be paid to a Borrower on account of any
such subrogation  rights at any time when all of the Obligations  shall not have
been paid in full and this  Agreement  terminated,  such amount shall be held in
trust for the  benefit  of Lender  and shall be paid  forthwith  to Lender to be
credited to and applied toward the Obligations, whether matured or unmatured, in
accordance with the terms of the Loan Documents.

                  (H)  Borrowers  will not amend or waive any  provision  of the
Subrogation and  Contribution  Agreement  entered into by Borrowers of even date
herewith,  nor  consent  to  any  departure  by  any  party  thereto  from  such
Subrogation  and  Contribution  Agreement  or from any similar  Subrogation  and
Contribution  Agreements  executed  by  other  Participating   Subsidiaries  and
Participating  Partnerships after the Closing, without having obtained the prior
written consent of Lender to such amendment, waiver or consent.



<PAGE>




         2.2      Disbursement of the Revolving Loan.  Lender will credit or pay
the proceeds of each Advance under the Revolving Loan to the deposit  account of
any Borrower  with Lender or in such other  manner as  Borrowers  and Lender may
from time to time agree.

         2.3      The  Revolving  Note.  Borrowers' joint and several obligation
to repay the  Revolving  Loan shall be evidenced by the  Revolving  Note,  which
shall be duly executed by the Borrowers who are signatories hereto and joined in
by each  Subsidiary  and  Controlled  Partnership  that becomes a  Participating
Subsidiary or Participating Partnership after the Closing, under the terms of an
Assumption Agreement.

         2.4      Payments of Principal.  If not earlier   demanded pursuant  to
Section 9.2 or Section  9.5 hereof,  the  outstanding  principal  balance of the
Revolving Loan shall be due and payable to Lender on the Loan  Termination  Date
for the Revolving Loan. Such Loan Termination Date includes the date that demand
is made by Lender,  which  demand may be made at any time in  Lender's  sole and
absolute discretion.

         2.5      Revolving Loan Borrowing Procedures, Interest Rates,  Payments
of Interest and Related Provisions.

                  2.5.1    Borrowing Notices.

                           (A)      Cavalier Homes, on behalf of itself and  the
other Borrowers, will give Lender an appropriate Borrowing Notice not later than
10:00 a.m.  Local Time three (3) Banking  Days prior to the  Borrowing  Date for
LIBOR Rate Loans and not later than 10:00 a.m.  Local Time on the Borrowing Date
for Floating Rate Loans. A Borrowing  Notice is deemed to be given when actually
received by Lender at its Commercial Loan Department.

                           (B)      Once given to Lender, except as provided  in
Section 2.5.14 or unless Lender shall otherwise  consent,  such Borrowing Notice
shall not thereafter be revocable by Borrowers.

                           (C)      On   the   Borrowing  Date, if all terms and
conditions  of this  Agreement  have  been  complied  with,  Lender  shall  make
available the requested Advance of the Revolving Loan.

                           (D)      If requested by Lender, Cavalier, on  behalf
of itself and the other Borrowers, shall deliver to Lender, not later than 12:00
noon Local Time on the Borrowing Date,  written  confirmation  (substantially in
the form of Exhibit B) of any oral Borrowing  Notice.  Cavalier shall certify to
the accuracy of the information set forth thereon.

                  2.5.2 Interest  Rate.  Unless  Borrowers  shall have elected a
LIBOR Rate for all or a portion of the Advance of the Revolving Loan as provided
in Section 2.5.3 hereof,  the aggregate  unpaid principal amount of each Advance
of the  Revolving  Loan shall bear interest at a rate equal to the Floating Rate
with respect to the Revolving Loan.

                  2.5.3    Election of LIBOR Rate.

                           (A)      Subject to the provisions of Sections 2.5.4,
2.5.13,  2.5.14  and 2.7,  Cavalier  Homes,  on behalf  of itself  and the other
Borrowers,  may  elect  to pay  interest  on all or  part of an  Advance  of the
Revolving Loan or the Revolving Loan at the LIBOR Rate for an Interest Period by
giving Lender

                                    (1)     An   appropriate  Borrowing   Notice
                                            specifying a  LIBOR Rate  not  later
                                            than  10:00 a.m.  Local  Time  three
                                            (3) Banking  Days   prior   to   the
                                            Borrowing Date (in the case of a new
                                            Advance); or

                                    (2)     An appropriate Rate Selection Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking  Days prior to the first day
                                            of the new  Interest  Period (in the
                                            case of the  outstanding  LIBOR Rate
                                            Loan); or


<PAGE>




                                    (3)     An appropriate Rate Selection Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking  Days prior to the first day
                                            of the Interest  Period (in the case
                                            of the conversion of any outstanding
                                            Floating  Rate Loan to a LIBOR  Rate
                                            Loan).

                           (B)      (1)     Borrowers  may  obtain  estimates of
                                            the  interest  rates  on  which  the
                                            Base  LIBOR  Rate  is calculated  by
                                            telephoning Lender's   rate  desk on
                                            any day Lender is open for business.
                                            Borrowers may obtain  quotations  of
                                            the  interest  rates  on  which  the
                                            Base LIBOR Rate is    calculated  by
                                            telephoning    Lender's  rate   desk
                                            between  9:00  a.m.  and  10:00 a.m.
                                            Local Time  on  any   Banking Day. A
                                            Rate   Selection   Notice  is deemed
                                            given  when   actually   received by
                                            Lender   at   its   Commercial  Loan
                                            Department.  If the   Rate Selection
                                            Notice  is   initially   given    in
                                            writing,    it   shall   be given in
                                            substantially the  form of Exhibit B
                                            hereto. If the Rate Selection Notice
                                            is given in writing, Cavalier Homes,
                                            on  behalf of  itself  and the other
                                            Borrowers,  shall    certify  to the
                                            accuracy  of  the  information   set
                                            forth  thereon.  If  Borrowers  fail
                                            to  select   a  new  rate  option by
                                            giving a Rate   Selection  Notice by
                                            10:00   a.m.   Local   Time  on  the
                                            appropriate  Banking Day pursuant to
                                            the  provisions   of   Section 2.5.3
                                            hereof,  the Revolving Loan or  that
                                            portion   of   the   Revolving  Loan
                                            covered by the  expiring  LIBOR Rate
                                            option  shall be   a  Floating  Rate
                                            Loan on and  after  the last day  of
                                            the    Interest  Period   until  the
                                            Revolving  Loan is paid or until the
                                            effective   date  of  a   new   Rate
                                            Selection   Notice  pursuant to this
                                            section,  whichever is  the first to
                                            occur.

                                    (2)     If  requested  by  Lender,  Cavalier
                                            Homes,  on behalf of itself  and the
                                            other  Borrowers,  shall  deliver to
                                            Lender,  not later  than  12:00 noon
                                            Local  Time on the  first day of the
                                            Interest       Period,       written
                                            confirmation  (substantially  in the
                                            form of  Exhibit  B  hereto)  of any
                                            oral Rate Selection Notice. Cavalier
                                            Homes shall  certify to the accuracy
                                            of   the   information   set   forth
                                            thereon.

                  2.5.4    Restrictions on Interest Periods  and   Conversion to
LIBOR Rate.  Each new Advance of the Revolving  Loan shall be in an amount of at
least $500,000 and in an integral  multiple of $100,000 if a LIBOR Rate Loan and
that part of each  Floating  Rate Loan or LIBOR Rate Loan which is converted to,
or continued as, a LIBOR Rate Loan,  shall be in an amount of at least  $500,000
and shall be in an integral multiple of $100,000.  No Interest Period may extend
beyond the Loan Termination Date of the Revolving Loan.  Borrowers may not elect
a LIBOR Rate if, on the effective date of such  election,  there exists an Event
of Default.

                  2.5.5    Interest Basis and Payment Dates.

                           (A)      Interest at  the  rates determined according
to Sections  2.5.2 and 2.5.3 shall be  calculated on the basis of a 360-day year
and the  actual  number of days  elapsed.  Interest  shall  accrue on the unpaid
principal  balance of all Advances of the Revolving Loan at the applicable  rate
from and including the date the Advance is made to (but not  including) the date
of any payment on the  Revolving  Loan if payment is received by Lender prior to
2:00  p.m.  Local  Time and if not  received  by such  time,  then  through  and
including the date payment is received.

                           (B)      All interest accrued on each Floating   Rate
Loan made under this Article II shall be payable  monthly on the first (1st) day
of each calendar  month;  and all interest  accrued on each LIBOR Rate Loan made
under this Article II shall be payable on the last day of the  applicable  LIBOR
Rate Interest  Period,  and if such LIBOR Rate Interest Period exceeds three (3)
months,  interest  accrued  on such LIBOR Rate Loan also shall be payable on the
date which is three (3) months after the first day of the applicable LIBOR


<PAGE>




Rate  Interest  Period.  If not sooner paid in  accordance  with the  subsection
2.5.5(B), all accrued but unpaid interest on the Revolving Loan shall be due and
payable on the Loan Termination Date of the Revolving Loan.

                           (C)      If any scheduled payment   is  late ten (10)
days or more, Borrowers agree to pay a late charge equal to five percent (5%) of
the amount of the payment  which is late,  but not more than the maximum  amount
allowed by applicable Law (the "Late Charge"). This subparagraph does not extend
any payment due date expressly  stated in the Agreement or any Loan Document and
does not in any way prevent or estop Lender from requiring that payments be made
by  Borrowers   strictly  when  due.  Unless  accepted  by  Lender,  and  unless
accompanied by all other amounts then due to Lender,  the tender of such payment
by Borrowers does not cure the Event of Default arising from the payment default
upon which such Late Charge was assessed.

                           (D)      If, at   any  time, the   rate of   interest
accruing on any Advance of the Revolving Loan or the Late Charge shall be deemed
by any  competent  court of law,  governmental  agency or tribunal to exceed the
maximum rate of interest  permitted by any applicable  Laws, then, for such time
as such interest rate or Late Charge, as applicable,  would be deemed excessive,
its  application  shall be suspended  and there shall be charged  instead on any
such Advance the maximum rate of interest  permissible  under such Laws, and any
excess interest or charges  actually  collected by Lender shall be credited as a
partial prepayment of principal.

                           (E)      The     Floating    Rate    shall     change
contemporaneously with each change in the Revolving Rate.

                  2.5.6    Method  of  Payment.   Each  payment   (including any
prepayment)  of principal of and interest on the Revolving Loan and each payment
of Borrowers' reimbursement or indemnification obligations under Sections 2.5.8,
2.5.10, 2.5.11 or 10.3 or any other provision hereunder, shall be made to Lender
without  set-off or  counterclaim  in Dollars in immediately  available funds at
Lender's  main office (or, in the case of LIBOR Rate Loans at such other Lending
Installation,  if any,  as may be  specified  in a notice to  Cavalier  Homes by
Lender) by 2:00 p.m. Local Time on the date when payment is due.

                  2.5.7    Application   of Payments.    Any payment received by
Lender from  Borrowers,  or any of them,  with respect to the Revolving  Loan or
with no  particular  Obligation  specified,  will be  applied  by  Lender to all
obligations of Borrowers to Lender under the Revolving  Note or this  Agreement,
with each such payment to be applied in the following  order unless  Lender,  at
its option,  designates a different  order from time to time:  first to any sums
(other than principal or interest) then due, next to interest, and the remainder
(if any) to  principal,  with the most recent  Advances of  principal  under the
Revolving Loan to be paid first.

                  2.5.8    Optional Prepayments. Borrowers  may, at any time and
from time to time, with respect to the Revolving Loan,  prepay any Floating Rate
Loan,  in whole or in part,  without  premium or penalty.  Payment of  principal
owing upon any LIBOR Rate Loan,  in whole or in part,  is permitted  only on the
last day of the applicable  Interest Period. If,  notwithstanding the provisions
of this  section,  a LIBOR Rate Loan is prepaid for any reason other than demand
by Lender for payment, Borrowers,  jointly and severally, shall indemnify Lender
on demand for any loss incurred  thereby,  including any loss in  liquidating or
employing deposits acquired to fund or maintain the LIBOR Rate Loan.

                  2.5.9   Lending Installations.  Lender and any Participant may
book LIBOR Rate Loans at any Lending Installation selected by it, and may change
the Lending  Installation  from time to time. All terms of this Agreement  shall
apply to any such Lending Installation.

                  2.5.10   Failure to Pay or Borrow on Certain Dates; Taxes.

                           (A)      If any payment of a LIBOR Rate Loan   occurs
on a date which is not the last day of an  Interest  Period,  or if a LIBOR Rate
Loan is not made on the date specified in the Borrowing Notice or Rate Selection
Notice for any reason other than default of Lender or a Participant,  Borrowers,
jointly and severally,  shall upon demand  indemnify Lender and each Participant
for any costs incurred by Lender and each


<PAGE>




Participant resulting therefrom,  including any loss in liquidating as employing
deposits acquired to fund or maintain the LIBOR Rate Loan.

                           (B)      If and to the extent that any deduction   is
required by law to be made from any payment to Lender  under this  Agreement  or
the  Revolving  Note on  account  of  present  or  future  taxes  of any  nature
whatsoever  imposed  within  the United  States of  America by any  Governmental
Authority, Borrowers shall make the deduction for the account of Lender and make
timely payment  thereof to the  appropriate  Governmental  Authority.  Borrowers
shall  confirm any  payment of such taxes by sending  official  tax  receipts or
certified copies thereof to Lender promptly after payment.

                  2.5.11   Increased Cost and Reduced Return.

                           (A)      If after the date hereof the adoption of any
applicable  Requirement  of Law or any  change  therein,  or any  change  in the
interpretation or administration thereof by any Governmental Authority,  central
bank or comparable  agency  charged with the  interpretation  or  administration
thereof,  or compliance by Lender or any Participant (or any of their applicable
Lending  Installations) with any request or directive (whether or not having the
force of law) of any such  Governmental  Authority,  central bank or  comparable
agency:

                                    (1)     shall   subject    Lender   or   any
                                            Participant   (or   any   of   their
                                            applicable Lending Installations) to
                                            any tax,  duty or other  charge with
                                            respect  to LIBOR  Rate  Loans,  the
                                            Revolving   Note  or  any  of  their
                                            obligation to make or maintain LIBOR
                                            Rate  Loans,  or  shall  change  the
                                            basis of  taxation  of  payments  to
                                            Lender or any Participant (or any of
                                            their       applicable       Lending
                                            Installation) of the principal of or
                                            interest  on the LIBOR Rate Loans or
                                            any other  amounts  due  under  this
                                            Agreement  in  respect of LIBOR Rate
                                            Loans or any of their  obligation to
                                            make  or  maintain  the  LIBOR  Rate
                                            Loans  (except  for  changes  in the
                                            rate  of  tax  on  the  overall  net
                                            income of Lender, any Participant or
                                            any  of  their  applicable   Lending
                                            Installations); or

                                    (2)     shall   impose,   modify   or   deem
                                            applicable   any  reserve,   special
                                            deposit   or   similar   requirement
                                            (including,  without limitation, any
                                            such  requirement   imposed  by  the
                                            Board of  Governors  of the  Federal
                                            Reserve  System,  but excluding with
                                            respect  to any LIBOR  Rate Loan any
                                            such  requirement  included  in  the
                                            applicable  Reserve  Requirement  in
                                            calculating  the Base LIBOR Rate for
                                            such   loan)   against   assets  of,
                                            deposits with or for the account of,
                                            or credit extended by, Lender or any
                                            Participant   (or   any   of   their
                                            applicable Lending Installations) or
                                            on  the  London,  England  interbank
                                            eurodollar   market,  or  any  other
                                            condition  affecting  the LIBOR Rate
                                            Loans,   the   Revolving   Note   or
                                            Lender's   or   any    Participant's
                                            obligation to make or maintain LIBOR
                                            Rate Loans;

                  and the result of any of the foregoing is to increase the cost
to Lender or any Participant (or any of their applicable Lending  Installations)
of making or  maintaining a LIBOR Rate Loan (except to the extent such increased
costs are  already  included in the  determination  of the  applicable  interest
rate),  or to reduce the amount of any sum received or  receivable  by Lender of
any Participant (or any of their applicable  Lending  Installations)  under this
Agreement  or under the  Revolving  Note with respect  thereto,  or otherwise to
reduce  the net  yield to Lender or any  Participant  on the Loan by a  material
amount, then, within the time period specified in Section 2.5.12 hereof and upon
delivery  to Cavalier  Homes of a  certificate  complying  with  Section  2.5.12
hereof,  Borrowers shall pay to Lender such additional amount or amounts as will
compensate  Lender and the  affected  Participants  for such  increased  cost or
reduction.



<PAGE>




                           (B)      If after the date hereof   Lender   or   any
Participant shall have reasonably determined that the adoption of any applicable
Requirement of Law regarding  capital  adequacy,  or any change therein,  or any
change in the  interpretation  or  administration  thereof  by any  Governmental
Authority,  central bank or comparable agency charged with the interpretation or
administration  thereof,  or compliance by Lender or any  Participant (or any of
their Lending  Installations)  with any request or directive  regarding  capital
adequacy  (whether  or not  having  the  force of law) of any such  Governmental
Authority,  central bank or comparable agency, has reduced the rate of return on
capital  of  Lender  (or  any  person  or  entity  controlling  Lender)  or  any
Participant  as a  consequence  of  Lender's or such  Participant's  obligations
hereunder  to a level below that which Lender (or such person or entity) or such
Participant  would have  achieved  but for such  adoption,  change,  compliance,
request or directive by a material  amount,  then from time to time,  within the
time specified in Section 2.15.12 hereof, Borrowers shall pay to Lender and such
Participant such additional amount or amounts as will compensate Lender (or such
person or entity) and such Participant for such reduction.

                           (C)      Lender will promptly   notify Cavalier Homes
of any event of which it has knowledge,  occurring after the date hereof,  which
will entitle Lender or any Participant to compensation  pursuant to this Section
2.5.11 and will designate a different  Lending  Installation if such designation
will avoid the need for,  or reduce the amount of,  such  compensation  and will
not, in the reasonable  judgment of Lender,  expose Lender or any Participant to
additional  liability,  costs or reduction in rate of return.  Determinations by
Lender and any  Participant for purposes of this Section 2.5.11 of the effect of
the adoption of any applicable Requirement of Law, or any change therein, or any
change in the  interpretation  or  administration  thereof  by any  Governmental
Authority,  central bank or comparable agency charged with the interpretation or
administration  thereof,  of compliance by Lender or any  Participant  (or their
applicable Lending  Installations) with any request or directive (whether or not
having the force of law) of any such  Governmental  Authority,  central  bank or
comparable agency on its costs of making or maintaining the Revolving Loan or on
amounts receivable by it in respect of the Revolving Loan, and of the additional
amounts  required to  compensate  Lender and any  Participant  in respect of any
increased  costs or reduction in rate of return,  shall be conclusive,  provided
that such  determinations  are made on a reasonable basis and are supported by a
certificate complying with Section 2.5.12 hereof.

                  2.5.12   Lender's  Certificates;   Survival  of  Indemnity.  A
certificate of Lender, any Participant,  or any Lending Installation,  as to the
amounts due under Sections 2.5.8, 2.5.10 or 2.5.11 and all other  determinations
by any of them pursuant thereto,  shall, in the absence of manifest error and so
long as made on any reasonable  basis, be presumed to be correct.  Determination
of amounts  payable  under such  sections in  connection  with a LIBOR Rate Loan
shall be calculated as though Lender, the affected Participants, or the affected
Lending  Installation  funded  the LIBOR Rate Loan  through  the  purchase  of a
deposit of the type, amount and maturity  corresponding to the deposit used as a
reference  in  determining  the  applicable  Base LIBOR Rate for such loan.  The
amount  specified  in  the  certificate  shall  be  payable  at  the  end of the
applicable  Interest Period or within 15 days after receipt by Cavalier Homes of
the certificate, whichever is later. In determining amounts owed, any reasonable
averaging and attribution  methods may be used, which methods shall be specified
in the certificate or other  documentation  accompanying the demand for payment.
The  obligations  of Borrowers  under  Sections  2.5.8,  2.5.10 and 2.5.11 shall
survive  payment of the Revolving Loan and  termination of this  Agreement,  but
such obligations  shall terminate two years after the date the Revolving Note is
paid in full unless,  prior to the end of such  two-year  period,  Lender or any
Participant  shall have given Cavalier Homes notice that claim is made under any
of such sections and the approximate amount of such claim.

                  2.5.13   Illegality   Affecting   LIBOR Rate Loans. If, on  or
after the date of this Agreement,  the adoption of any applicable Requirement of
Law,  or  any  change  therein,   or  any  change  in  the   interpretation   or
administration thereof by any Governmental Authority, central bank or comparable
agency charged with the interpretation or administration  thereof, or compliance
by Lender or any Participant (or any of their applicable Lending  Installations)
with any  request or  directive  (whether or not having the force of law) of any
such  Governmental  Authority,  central bank or comparable  agency shall make it
unlawful or impossible for Lender or any Participant (or any of their applicable
Lending  Installations) to make, maintain or fund LIBOR Rate Loans, Lender shall
so notify  Cavalier Homes,  whereupon until Lender notifies  Cavalier Homes that
the
<PAGE>




circumstances  giving rise to such suspension no longer exist, the obligation of
Lender  and any  Participant  to make or  maintain  LIBOR  Rate  Loans  shall be
suspended.  As a result of such  suspension,  the Advances of the Revolving Loan
shall instead  accrue  interest at the Floating  Rate.  Before giving any notice
pursuant to this section, Lender and each affected Participant shall designate a
different Lending Installation for the LIBOR Rate Loans if such designation will
avoid the need for giving such  notice and will not, in the  judgment of Lender,
be otherwise disadvantageous to Lender or any Participant.

                  2.5.14   Availability of Interest Rate; Basis for  Determining
Interest Rate Inadequate or Unfair.  If on or prior to  the  first  day  of  any
Interest Period for any LIBOR Rate Loan:

                           (A)      Lender or any Participant determines or   is
advised  that  deposits in Dollars  (in the  applicable  amounts)  are not being
offered in the relevant market for such Interest Period, or

                           (B)      Lender or any Participant  determines   that
the LIBOR Rate will not adequately and fairly reflect the cost to Lender or such
Participant of funding the LIBOR Rate Loan for such Interest Period,

                  Lender shall  forthwith give notice thereof to Cavalier Homes,
whereupon until Lender  notifies  Cavalier Homes that the  circumstances  giving
rise to such  suspension  no longer  exist,  the  obligation to make or maintain
LIBOR Rate Loans shall be suspended.  Unless  Cavalier Homes notifies  Lender at
least two Banking Days before the date of any Advance of the Revolving  Loan for
which a Borrowing  Notice has previously been given that the Borrowers elect not
to borrow,  as a result of such  suspension,  such Advances shall instead accrue
interest at the Floating Rate.

         2.6      Payment to Lender.  All sums payable to Lender hereunder shall
be paid directly to Lender in United States  Dollars and  immediately  available
funds at the place payment is due. If Lender shall send to Borrowers  statements
of amounts  due  hereunder,  such  statements  shall be  considered  correct and
conclusively binding on Borrowers unless Borrowers notify Lender to the contrary
within thirty (30) days of the receipt of any statement  that any Borrower deems
to be  incorrect.  Alternatively,  at its sole  discretion,  Lender  may  charge
against any deposit  account of any  Borrower  all or any part of any amount due
hereunder.

         2.7      Use of Proceeds.  The proceeds of the Revolving  Loan shall be
used by Borrowers initially to renew and extend all existing loans or letters of
credit of  Borrowers  with Lender and  thereafter  for general  working  capital
purposes.

         2.8      [Intentionally Omitted].

         2.9      Letters of Credit.

                  (A) At the request of Cavalier Homes,  Lender may from time to
time,  but at its sole  discretion,  issue  Letters of Credit for the account of
Borrowers in such  amounts as  requested  by  Borrowers  and approved by Lender;
provided,  however,  that the maximum aggregate amount of outstanding  Letter of
Credit  Obligations  shall not exceed,  when added to the  Revolving  Loan,  the
maximum amount available to Borrowers under Section 2.1(A) hereof.  Each request
by  Borrowers  for issuance of a Letter of Credit shall be submitted by Cavalier
Homes on behalf of Borrowers on Lender's then-standard application and agreement
form for Letters of Credit,  shall obligate  Borrowers to reimburse  Lender upon
demand for any  amounts  drawn upon the Letter of Credit and for such other sums
as specified therein, shall be executed by a duly authorized officer of Cavalier
Homes and, if Lender should  require,  shall be submitted to Lender at least two
(2)  business  days prior to the  proposed  date of issuance  for such Letter of
Credit.  In  consideration  for  Lender's  issuance  of any  Letter  of  Credit,
Borrowers  shall pay to  Lender a fee for the  issuance  of each such  Letter of
Credit  equal to one  percent  (1%) per  annum of the  amount  of the  Letter of
Credit.  This fee  shall be due and  payable  upon the  issuance  of a Letter of
Credit and Lender may, at its election,  obtain payment of any such fee, if such
fee is not paid upon  issuance of the Letter of Credit,  either by debiting  any
account of any Borrower in the amount of such fee or making an Advance under the
Revolving Loan Commitment for the purpose of paying such fee. Any such Letter of
Credit issued by Lender shall be in form and substance  satisfactory  to Lender,
shall be in


<PAGE>




an  amount  that  does not  exceed  the  maximum  amount  permitted  under  this
subsection  (A) and shall  expire by its terms on a date not later than the Loan
Termination Date for the Revolving Loan.

                  (B) If a draft drawn  under any Letter of Credit is  presented
to Lender and  honored by Lender,  Borrowers  shall,  immediately  upon  written
demand of Lender,  reimburse Lender for the amount of such draft,  together with
interest thereon, from the date such draft is honored by Lender to and including
the date of  reimbursement by Borrowers,  at the rate of interest  applicable to
Advances  under the  Revolving  Loan  Commitment.  If  Borrowers  should fail to
reimburse  Lender upon such  demand,  Lender at its option may, but shall not be
required to, and without  further  notice to or demand upon  Borrowers,  make an
Advance  for the  purpose of paying to Lender the amount due to Lender  together
with interest  thereon.  Any Advance made by Lender under subsection (A) or this
subsection  (B) of this Section 2.9, shall for all purposes under this Agreement
be treated as an Advance under the Revolving Loan Commitment,  and the amount of
any such Advance  shall be included as part of the unpaid  principal  balance of
the Revolving Loan.

                  (C)  Notwithstanding  any other  provision of this  Agreement,
this Agreement shall not be terminated by Borrowers at any time during which any
Letter of Credit is in effect.  The  provisions of this Section 2.9 shall govern
the  issuance  of any  Letter of Credit  issued by  Lender  for the  account  of
Borrowers,  but this Agreement does not require or obligate  Lender to issue any
such  Letters  of Credit,  with the  issuance  thereof  being at  Lender's  sole
discretion.

         2.10     Commitment   and  Non-Usage Fees for the Revolving   Loan.  At
Closing and upon the renewal (if  applicable) of the Revolving  Loan,  Borrowers
shall pay the  Commitment  Fee (or if at renewal,  such other  commitment fee as
shall be mutually  agreed upon by Cavalier  Homes and Lender) for the  Revolving
Loan. In addition, Borrowers shall pay to Lender a non-usage fee (the "Non-Usage
Fee") equal to one-quarter  of one percent  (0.25%) times the Unused Line Amount
(as  hereinafter  defined).  As used in this Section 2.10, the term "Unused Line
Amount"  shall mean the amount by which the maximum  Revolving  Loan  Commitment
(which is $35,000,000 as of March 31, 2000) exceeds (i) the average  outstanding
principal balance of the Revolving Loan for the preceding 12-month period,  plus
(ii) the aggregate  outstanding  principal balance of all Term Loans. The Unused
Line  Amount  and  Non-Usage  Fee shall be  computed  on March 31,  2001 for the
preceding  12-month  period ended March 31, 2001,  and again on each  subsequent
March 31 for the preceding  12-month period then ended.  The Non-Usage Fee shall
be payable each April 15 following the March 31  computation  date. If Borrowers
do not pay any  Non-Usage  Fee to Lender upon  written  demand,  Lender,  at its
option may, but shall not be required to, and without  further  notice or demand
upon Borrowers,  make an Advance on the Revolving Loan for the purpose of paying
to Lender the amount of such  Non-Usage  Fee. Any such Advance so made by Lender
shall for all purposes  under the  Agreement be treated as an Advance  under the
Revolving Loan Commitment,  and the amount of any such Advance shall be included
as part of the unpaid  principal  balance of the Revolving Loan.  Alternatively,
Lender,  at its option may,  but shall not be required  to, and without  further
notice or demand upon any of the Borrowers,  charge against any deposit  account
of any of the Borrowers all or any part of the Non-Usage Fee due hereunder.



                                   ARTICLE III

                                 THE TERM LOANS

         3.1      General Terms of the Term Loans.

                  (A) Until the Loan  Termination  Date for the Revolving  Loan,
and so long as no Event of Default  shall have occurred and be  continuing,  and
subject to the satisfaction of all conditions precedent contained in Article IV,
indebtedness owing under the Revolving Loan borrowed for the benefit of Cavalier
Acceptance may, in a minimum  principal amount of $2,000,000,  be converted to a
Term Loan;  provided that the maximum  aggregate  principal  amount  outstanding
under the Revolving Loan and all of the Term Loans shall not exceed $35,000,000;
provided further that the maximum aggregate  principal amount  outstanding under
all of the Term  Loans  shall not  exceed  the  Contracts  Borrowing  Base.  The
Eligible  Contracts  delivered by Cavalier  Acceptance to Lender with respect to
each Term Loan shall for certain  purposes  hereunder  be allocated to such Term
Loan


<PAGE>




(the  "Allocated  Eligible  Contracts");  provided,  however,  that no more than
fifteen percent (15%) of the Eligible Contracts allocated to any applicable Term
Loan shall be C-Rated Contracts.

                  (B)  If at any time the  unpaid  principal balance of any Term
Loan shall exceed eighty  percent (80%) of the aggregate  outstanding  principal
balance of the Allocated  Eligible  Contracts for such Term Loan,  then Cavalier
Acceptance  shall  have  thirty  (30)  days  within  which to (i)  substitute  a
replacement  Eligible Contract to increase the aggregate  outstanding balance of
the Allocated Eligible Contracts for such Term Loan, and/or (2) pay such sums to
Lender, in multiples of $10,000, all as necessary to assure that the outstanding
principal balance of such Term Loan is not more than eighty percent (80%) of the
aggregate  outstanding principal balance of the Allocated Eligible Contracts for
such Term Loan;  provided,  however,  that with  respect  to any such  Allocated
Eligible Contracts which are Conseco Contracts,  Cavalier Acceptance agrees that
the loan-to-value threshold (at which Cavalier Acceptance must either substitute
a new  Eligible  Contract  or repay  principal  owing on the Term Loan) shall be
seventy percent (70%) rather than eighty percent (80%).

         3.2      Disbursement  of the Term  Loan(s).  Lender will credit or pay
the  proceeds  of each  Advance  under  the Term  Loan  Commitment  to  Cavalier
Acceptance's  deposit  account  with Lender or in such other  manner as Cavalier
Acceptance  and Lender may from time to time  agree.  The Term  Loan(s)  will be
advanced solely as a conversion to a Term Loan of indebtedness outstanding under
the Revolving Loan.

         3.3      The Term  Note(s).  At the time of the  establishment  of  any
Term Loan,  Cavalier  Acceptance will execute and deliver to Lender a Term Note,
evidencing  the  principal  amount  so  converted,  and will pay to  Lender  all
interest then accrued but unpaid on said principal amount.  The principal amount
of any Term Note shall not be less than $2,000,000.

         3.4      Payments of Principal.

                  The Term Loan(s).  If not earlier demanded pursuant to Section
9.2,  the  principal  of each Term Loan shall be payable  in  eighty-three  (83)
monthly installments, beginning on the 15th day of the month next succeeding the
date of the  applicable  Term Note, and continuing on the same day of each month
thereafter  until the seventh  anniversary date of each such Term Note, at which
time all outstanding  principal of such Term Loan, together with all accrued but
unpaid interest thereon,  shall be payable.  The monthly installments payable on
each Term Loan shall be the amount required, at the applicable interest rate, to
repay such Term Loan, in full, in  substantially  equal  monthly  payments.  All
principal  amounts  repaid on any Term Loan,  subject to Section  2.1,  shall be
available for reborrowing under the Revolving Loan.

         3.5      Prepayment.  The Term Loan(s) may be prepaid,  in full or   in
part,  upon  not less  than  thirty  (30)  days  notice  if such  prepayment  is
voluntary; provided, however, that a prepayment premium (the "Premium") shall be
payable on the Excess  Amount (as  hereinafter  defined)  if such  prepayment(s)
(whether  voluntary or  mandatory)  should occur within three (3) years from the
date of the applicable  Term Note(s) which evidences the Term Loan(s) upon which
such prepayment has been made, as follows:  (a) until the first anniversary date
of the Term Note, the Premium shall be equal to one and one-half percent (1.50%)
times the Excess Amount;  (b) from the first  anniversary  date of the Term Note
until the third  anniversary  date  thereof,  the premium  shall be equal to one
percent  (1.00%)  times  the  Excess  Amount;  and (c) from and  after the third
anniversary  date of each Term Note,  there shall be no Premium payable upon any
prepayment  of such Term Loan.  As used herein,  the "Excess  Amount"  means the
amount by which the principal  prepayments made on any Term Note, measured on an
annual basis for the  applicable  Prepayment  Period (as  hereinafter  defined),
shall  exceed  (A) the  outstanding  principal  balance  on the first day of the
Prepayment  Period times (B) ten percent (10%). As used herein,  the "Prepayment
Period" (x) means the period  beginning on the date of the applicable  Term Note
and continuing until (but not including) the first anniversary date of such Term
Note and (y) on and after the first  such  anniversary  date,  means the  period
commencing on such anniversary date and continuing until (but not including) the
next anniversary  date. For example,  if the outstanding  principal balance of a
Term Note on the first day of the Year-One Prepayment Period is $5,000,000, then
ten percent (10%) of such amount would be equal to $500,000,  which would be the
amount of principal that could be prepaid during the Year-One  Prepayment Period
without  payment of any  Premium.  If the  amount  prepaid  during the  Year-One
Prepayment  Period for such loan was  $750,000,  then the Excess Amount would be
$250,000  ($750,000  -  500,000),  and the  applicable  Premium  would  be equal
to$3,750.00 (1.5% times $250,000).


<PAGE>
                  For  partial  prepayments,  Lender  on  each  April  15  shall
calculate   the  amount  of  Premium   due  on  each  Term  Note  for  the  most
recently-ended  Prepayment  Period occurring on or before said April 15, and the
amount of such  premium  shall be payable by  Cavalier  Acceptance  each May 15,
following the April 15 computation  date. For  prepayments in full, the premiums
shall be  computed  and  payable on the date of  prepayment.  In addition to the
prepayments  specified under Section 3.1(B),  the Term Loans shall be subject to
certain mandatory  prepayments in the event that Cavalier  Acceptance shall have
received  prepayments to it of Chattel Paper which constitutes  Collateral under
this  Agreement  (regardless  of whether such Chattel  Paper is classified as an
Eligible Contract),  as follows: (1) In the event that Cavalier Acceptance shall
receive a principal prepayment upon an Allocated Eligible Contract,  then 80% of
the amount of such  prepayment  shall be due to Lender as a prepayment to Lender
of the Term Loan to which such Allocated  Eligible  Contract was allocated;  and
(2) in the event that  Cavalier  Acceptance  should  receive a prepayment of any
other Chattel Paper constituting Collateral under this Agreement,  then the full
amount of such  prepayment  shall be due to Lender as a prepayment to be applied
by Lender to such  Indebtedness  outstanding  upon the Term  Loans as Lender may
elect.

         3.6      Interest Rate and Payments of Interest.

                  The Term  Loan(s).  Interest on each   Term   Loan  shall   be
                  calculated  and paid as follows:

                           (1)      Interest  on the  principal  balance of each
                                    Term  Loan,  from time to time  outstanding,
                                    will be payable at a rate (the "Term  Rate")
                                    that will be fixed for five years at the per
                                    annum  rate of  interest  equal to 195 basis
                                    points  (1.95%) above the Five Year Treasury
                                    in the case of Term Loans converted from the
                                    Revolving  Loan on or after the date of this
                                    Agreement.  For any Term Loan, the Five Year
                                    Treasury shall be measured by adding, on the
                                    date of calculation,  the Five Year Treasury
                                    rates as have  been  made  available  on the
                                    thirteen (13) Mondays immediately  preceding
                                    (but  not  including)  the  date of the Term
                                    Note,  and  dividing  such  sum by  thirteen
                                    (13).  Lender will furnish to Cavalier Homes
                                    a report  of the  Five  Year  Treasury  each
                                    week.  After  five  years,  such  fixed rate
                                    shall convert to a floating rate of interest
                                    equal  to   three-quarters  of  one  percent
                                    (.75%)  above the Prime Rate in effect  from
                                    time to time; provided,  however,  that such
                                    floating  rate shall  never be less than the
                                    original  fixed rate for such Term Note, and
                                    shall never be greater  (prior to  maturity)
                                    than the original  fixed rate  multiplied by
                                    1.50.  The Term Rate in effect  from time to
                                    time after maturity, whether by acceleration
                                    or   otherwise,   shall   be  equal  to  the
                                    applicable Term Rate in effect prior to said
                                    maturity plus two percent (2.00%).

                           (2)      During  any  period  of  time in  which  the
                                    interest  rate  for any  Term  Loan is not a
                                    fixed  rate,  each time the Prime Rate shall
                                    change,  the Term  Rate for such  Term  Loan
                                    shall  change  contemporaneously  with  such
                                    change in the Prime Rate.

                           (3)      Interest shall be calculated on the basis of
                                    a 360-day year, by  multiplying  the product
                                    of the principal amount  outstanding and the
                                    applicable rate by the actual number of days
                                    elapsed,   and  dividing  by  360.   Accrued
                                    interest   through  the  last  day  of  each
                                    calendar  month  shall be payable on the due
                                    date of each payment of principal  under the
                                    Term Note.

                           (4)      Cavalier  Acceptance  agrees  to  pay a late
                                    charge  equal  to five  percent  (5%) of the
                                    amount of the payment which is late,  but no
                                    more  than the  maximum  amount  allowed  by
                                    applicable   Law  (the  "Late   Charge")  as
                                    follows:  (a) if any  scheduled  payment  is
                                    late  twenty (20) days or more or (b) if any
                                    scheduled  payment  is late ten (10) days or
                                    more, and two (2) or more scheduled payments
                                    have  been  late  twenty  (20)  days or more
                                    since  February  1 of the year in which such
                                    scheduled  payment  is late ten (10) days or
                                    more. This  subparagraph does not extend any
                                    payment  due date  expressly  stated  in the
                                    Agreement or any Security  Document and does
                                    not in any way prevent or estop  Lender from
                                    requiring  that payments be made by Cavalier
                                    Acceptance   strictly   when   due.   Unless
                                    accepted by Lender,  and unless  accompanied
                                    by all other amounts then due to Lender, the
                                    tender   of   such   payment   by   Cavalier
                                    Acceptance   does  not  cure  the  Event  of
                                    Default  arising  from the  payment  default
                                    upon which such Late Charge was assessed.

                           (5)      If,  at any  time,  the Term  Rate or a Late
                                    Charge  shall  be  deemed  by any  competent
                                    court  of  law,   governmental   agency   or
                                    tribunal  to  exceed  the  maximum  rate  of
                                    interest  permitted by any applicable  Laws,
                                    then, for such time as the Term Rate or Late
                                    Charge,  as  applicable,   would  be  deemed
                                    excessive,    its   application   shall   be
                                    suspended and there shall be charged instead
                                    the  maximum  rate of  interest  permissible
                                    under such Laws, and any excess  interest or
                                    charges  actually  collected by Lender shall
                                    be  credited  as  a  partial  prepayment  of
                                    principal.



         3.7      Payment  to Lender.  All sums  payable  to   Lender  hereunder
shall be paid  directly  to Lender  in United  States  Dollars  and  immediately
available  funds at the place  payment is due. If Lender  shall send to Cavalier
Acceptance  statements  of  amounts  due  hereunder,  such  statements  shall be
considered  correct  and  conclusively  binding on  Cavalier  Acceptance  unless
Cavalier  Acceptance  notifies Lender to the contrary within thirty (30) days of
its receipt of any statement which it deems to be incorrect.  Alternatively,  at
its sole  discretion,  Lender may charge against any deposit account of Cavalier
Acceptance all or any part of any amount due hereunder.

         3.8      Use of Proceeds.  The  proceeds of the Term  Loan(s) shall  be
used solely to repay portions of the Revolving Loan used by Cavalier  Acceptance
to originate  and fund loans  (evidenced  by Chattel  Paper  falling  within the
definition of an Eligible Contract) for the purchase of manufactured homes.

         3.9      [Intentionally Omitted].

         3.10     [Intentionally Omitted].



                                      ARTICLE IV

                                  CONDITIONS PRECEDENT

         The  obligation  of Lender to make the Loans and any Advance under this
Agreement, and the issuance by Lender of any Letter of Credit, is subject to the
following conditions precedent:

         4.1      Documents  Required for the Closing. Prior to the disbursement
of the initial Advance, the following  instruments and documents,  duly executed
by all proper Persons, shall have been delivered to Lender:

                  (A)  This Agreement;

                  (B)  The Revolving Note;

                  (C)  The Assumption Agreement;



<PAGE>



                  (D)  The financing statements required by Section 5.5;

                  (E)  A certificate   of   Cavalier  Homes's and  each  Initial
Participating  Subsidiary's corporate secretary, in form satisfactory to Lender,
dated as of the date of this  Agreement,  certifying  as to the  incumbency  and
signatures of the officers of each such  Borrower  signing this  Agreement,  the
Revolving  Note,  and the other Loan  Documents,  and each other  document to be
delivered  pursuant  hereto,  together  with the  following  documents  attached
thereto:

                           (1)      A copy of  resolutions  of  such  Borrower's
                                    board   of   directors    authorizing    the
                                    execution,  delivery and performance of this
                                    Agreement,  the Revolving Note and the other
                                    Loan  Documents,  and each other document to
                                    be delivered pursuant hereto; and

                           (2)      A copy, certified as of the most recent date
                                    practicable  by the judge of  probate of the
                                    county in which such Borrower's  articles or
                                    certificate of incorporation is filed or the
                                    secretary  of state of the state  where such
                                    Borrower is incorporated, as appropriate, of
                                    such  Borrower's  articles or certificate of
                                    incorporation;

                  (F)  A copy of the bylaws of each Borrower  (attached to   the
appropriate certificate of corporate secretary for each such Borrower);


                  (G)  Certificates, as of the most recent dates practicable, of
the  aforesaid  secretaries  of state,  the  secretary of state of each state in
which each Borrower is qualified as a foreign  corporation and the department of
revenue or taxation of each of the foregoing  states, as to the good standing of
such Borrower;

                  (H)  A written  opinion of Lowe,  Mobley & Lowe, legal counsel
for  Borrowers,  dated as of the date of this Agreement and addressed to Lender,
in form satisfactory to Lender;

                  (I)  The Closing Certificate, in form satisfactory  to Lender;

                  (J)  A  Compliance Certificate  as of a date not more than one
(1) day prior to the initial Advance,  substantially in the form of Exhibit C or
Exhibit C-1, as appropriate, attached hereto and incorporated herein, certifying
the existence of certain facts and  financial  information,  and, in the case of
any Term  Loan,  certifying  a  Contracts  Borrowing  Base  under  the Term Loan
Commitment of not less than the amount of the requested initial Advance;

                  (K)  The Commitment Fee;

                  (L)  The Pledge  Agreements, in form  satisfactory  to Lender,
together  with  certificates  representing  the  shares  pledged  thereby,  duly
endorsed in blank;

                  (M)  The  Guaranty  Agreement, in form satisfactory to Lender;

                  (N)  The Assignment of Life Insurance, in form satisfactory to
Lender;

                  (O)  The Subrogation and Contribution Agreement, substantially
in the form of Exhibit D, attached hereto and incorporated herein;

                  (P)  The  binders  for the  insurance  policies  described  in
Section 7.1(E) of this Agreement (such insurance  policies shall be delivered to
Lender within sixty (60) calendar days of the date of Closing); and

                  (Q)  The payment of accrued  costs and expenses  under Section
10.5 of this Agreement.



<PAGE>




         4.2      Documents Required for Subsequent Advances. At the  time   of,
and as a  condition  to,  each  subsequent  Advance  under  the  Revolving  Loan
Commitment or the Term Loan Commitment,  Cavalier Homes or Cavalier  Acceptance,
as  appropriate,  shall have duly delivered to Lender the following  instruments
and documents duly executed by all proper parties:

                  (A)  A Compliance  Certificate,  substantially  in the form of
Exhibit  C  or  Exhibit  C-1,  attached  hereto  and  incorporated   herein,  as
appropriate,  current  for  the  month  in  which  each  Advance  is  requested,
acceptable to Lender; and

                  (B)  A Request  for  Advance,  substantially  in the  form  of
Exhibit B, attached hereto and incorporated herein.

Borrowers  hereby  agree (i) that Lender shall be entitled to rely upon the most
recent  Compliance  Certificate in its possession until the same are superseded,
respectively,  by  another  such  certificate,  and (ii) that each  Request  for
Advance shall  constitute a confirmation of the  representations  and warranties
contained in the most recent such certificates then in Lender's  possession,  as
well as those contained in Article VI hereof.

         4.3  Additional Conditions   to   the  Term Loan(s).  Conversion of the
Indebtedness  owing  under the  Revolving  Loan to a Term Loan is subject to the
following additional conditions precedent:

                  (A)  Cavalier Acceptance shall have delivered to Lender a duly
authorized and executed Term Note pertaining to such Term Loan;

                  (B)  The original principal amount of any Term Note shall  not
be less than $2,000,000;

                  (C)  The original principal  amount of any Term Note shall not
exceed  the  Contracts  Borrowing  Base  for the  Allocated  Eligible  Contracts
furnished to and accepted as collateral for such Term Note by Lender;

                  (D)  Lender and its counsel shall be satisfied in all respects
with the enforceability  against Cavalier  Acceptance of any Term Note delivered
to evidence a Term Loan;

                  (E)  Cavalier  Acceptance  shall  have  provided  to  Lender a
schedule of the Allocated Eligible Contracts delivered at the time of conversion
for such Term Loan,  setting out such  information as may be required by Lender,
but which shall  include,  among other things,  the name and account  number for
each individual borrower,  the outstanding  principal balance of such borrower's
Eligible  Contract,  and the date through which payment has been made, and shall
have provided the executed original Eligible  Contracts and such other documents
related to the Eligible Contracts as Lender may require or request. Lender, upon
receipt of the  foregoing  documents  shall have a reasonable  amount of time to
review the same for conformity to Lender's  collateral  review standards and the
requirements  of  this  Agreement.  If any  document  submitted  relative  to an
Eligible Contract  requires  correction or otherwise to be conformed to Lender's
collateral  review  standards,  then such document shall be returned to Cavalier
Acceptance for  correction  and the Chattel Paper to which the document  relates
shall  be  ineligible  as an  Eligible  Contract  and for  funding  the  Advance
requested. With  the prior  written consent of Lender,  Cavalier  Acceptance may
provide Eligible  Contract(s) in substitution  for the Chattel Paper which fails
to meet Lender's collateral review standards.

         4.4      Additional Required Documents.

                  (A)  Lender shall also have  received on or before the date on
which a Subsidiary becomes a Participating  Subsidiary (i) a certificate of each
Subsidiary's corporate secretary,  in form satisfactory to Lender and certifying
as to the  incumbency  and  signatures of the officers of each such  Subsidiary,
together with the following documents attached thereto:

                           (1)      A  copy  of resolutions of such Subsidiary's
                                    board   of    directors    authorizing   the
                                    execution, delivery  and performance of this
                                    Agreement, the Revolving  Note and the other
                                    Loan Documents,  and each other  document to
                                    be delivered pursuant hereto;

<PAGE>

                           (2)      A copy, certified as of the most recent date
                                    practicable  by the judge of  probate of the
                                    county in which such  Subsidiary's  articles
                                    or certificate of  incorporation is filed or
                                    the  secretary  of state of the state  where
                                    such   Subsidiary   is   incorporated,    as
                                    appropriate,  of such Subsidiary's  articles
                                    or certificate of incorporation; and

                           (3)      At   Lender's  request,  a  copy   of   such
                                    Subsidiary's bylaws;

(ii)  certificates,  as of the most recent dates  practicable  of the  aforesaid
secretaries  of  state,  the  secretary  of  state of each  state in which  each
Subsidiary is qualified as a foreign  corporation  and the department of revenue
or taxation of each of the  foregoing  states,  as to the good  standing of such
Subsidiary;  (iii) a written opinion of Lowe,  Mobley & Lowe,  legal counsel for
each Subsidiary and addressed to Lender,  in form  satisfactory to Lender;  (iv)
fully executed  copies of all Loan Documents that this Agreement  requires to be
executed or delivered  (or both) by such  Subsidiary  (including a duly executed
Subrogation and Contribution Agreement and a duly executed Assumption Agreement,
in the case of any Subsidiary that becomes a Participating  Subsidiary after the
Closing,  and  fully  executed  Security  Documents);  and (v)  such  additional
supporting documents as Lender or its counsel may reasonably request.

                  (B)  Lender shall also have  received on or before the date on
which a Controlled Partnership becomes a Participating Partnership (i) a copy of
the partnership  agreement  under which such Controlled  Partnership was formed,
certified as true and correct on and as of the date of which Loan  Documents are
executed and delivered by such Controlled Partnership; (ii) a written opinion of
Lowe, Mobley & Lowe, legal counsel for such Controlled Partnership and addressed
to Lender,  in form  satisfactory  to Lender;  (iii) duly executed copies of all
Loan  Documents  that this  Agreement  requires to be executed or delivered  (or
both) by such  Controlled  Partnership  (including  a duly  executed  Assumption
Agreement,   in  the  case  of  any  Controlled   Partnership   that  becomes  a
Participating  Partnership  after  the  Closing,  and  fully  executed  Security
Documents);  and (iv)  such  additional  supporting  documents  as Lender or its
counsel may reasonably request.

         4.5      Certain Events.    At the time of the initial Advance, of each
subsequent Advance under any of the Loans and of the issuance of each  Letter of
Credit:
                  (A)  The representations  and  warranties  set  forth  in this
Agreement  shall  be true  and  correct  with the same  effect  as  though  such
representations  and  warranties  had  been  made on the date  the  Advance  was
requested  and on the  date  of the  Advance,  as the  case  may be,  except  as
otherwise expressly provided;

                  (B)  No  Event  of Default  shall   have   occurred   and   be
continuing,  and no event shall have occurred and be continuing  that,  with the
giving of notice or passage of time or both, would be an Event of Default;

                  (C)  No material  adverse  change  shall have  occurred in the
financial condition of any Borrower since the date of this Agreement; and

                  (D)  No demand for payment shall have been made by Lender;

                  (E)  Cavalier  Homes  and  Cavalier  Acceptance  shall be full
compliance  with the  provisions of Section 7.3 or Section 8.3, as  appropriate,
hereof; and

                  (F)  All of the Loan  Documents shall  have  remained  in full
force and effect.



<PAGE>




         4.6      Legal  Matters. At the time of the disbursement of the initial
Advance, and of each subsequent Advance,  under the Revolving Loan Commitment or
under the Term Loan  Commitment,  and of the  issuance of each Letter of Credit,
all legal matters incidental thereto shall be satisfactory to counsel to Lender.


                                    ARTICLE V

                               COLLATERAL SECURITY

         5.1      Composition    of   the  Collateral.  The  property in which a
security  interest is granted pursuant to the provisions of Sections 5.2 and 5.3
hereof  or  pursuant  to the  provisions  of any  Security  Document  is  herein
collectively  called the "Collateral." The Collateral and all of each Borrower's
other  property  of any  kind  held  by  Lender,  shall  stand  as one  general,
continuing collateral security for all Obligations and may be retained by Lender
until all  Obligations  have been  satisfied in full and Lender's  commitment to
lend under this Agreement has been terminated.

         5.2      Rights in  Property  Held by  Lender.  As  security  for   the
prompt satisfaction of all Obligations,  each Borrower hereby assigns, transfers
and conveys to Lender all of such  Borrower's  right,  title and interest in and
to, and grants Lender a lien on and a security interest in, all amounts that may
be  owing  from  time to time  by  Lender  to  such  Borrower  in any  capacity,
including,  without limitation, any balance or share belonging to such Borrower,
of any deposit or other  account with Lender,  which lien and security  interest
shall be independent of any right of set-off which Lender may have.

         5.3      Rights in  Property  Held  Either by  Borrowers or by  Lender.
As further security for the prompt satisfaction of all Obligations,  in addition
to any other or further security  provided under any of the Security  Documents,
each Borrower hereby assigns to Lender all of such Borrower's  right,  title and
interest in and to, and grants Lender a lien upon and security  interest in, all
of the following,  wherever  located,  whether now owned or hereafter  acquired,
together  with  all  replacements  therefor  and  proceeds  (including,  without
limitation,  insurance proceeds) thereof (all of which shall constitute original
Collateral under this Agreement):

                  (A)  Accounts;

                  (B)  Chattel Paper;

                  (C)  Contracts;

                  (D)  Contract Rights;

                  (E)  Documents;

                  (F)  Eligible Contracts;

                  (G)  General Intangibles;

                  (H)  Instruments;

                  (I)  Inventory;

                  (J)  Rights   as   seller   of Goods   and rights to returned,
                       repossessed or reclaimed Goods; and

                  (K)  All Records pertaining to any of the Collateral.

         5.4      Priority of Liens.  The foregoing liens shall be   first   and
prior liens except for Permitted Liens.


<PAGE>





         5.5      Perfection.

                  (A)  Each Borrower will:

                           (1)      Execute such financing statements (including
                                    amendments    thereto    and    continuation
                                    statements thereof), in form satisfactory to
                                    Lender  as  Lender  may  from  time  to time
                                    specify;

                           (2)      Pay, or reimburse Lender  for   paying,  all
                                    costs and taxes of filing or   recording the
                                    same in such public offices   as Lender  may
                                    designate;

                           (3)      Deliver such of the Collateral which in  the
                                    sole judgment of Lender is best perfected by
                                    possession, to  Lender or   its   designated
                                    agent or bailee; and

                           (4)      Take such  other  steps as  Lender  may from
                                    time  to  time  direct,  including,  without
                                    limitation,  the noting of Lender's  lien on
                                    the  Collateral and on any  certificates  of
                                    title  therefor,  all  to  perfect  Lender's
                                    security interest in the Collateral.

                  (B)  Cavalier Homes and each other  applicable  Borrower  will
further:

                           (1)      Execute such stock powers   relating to  the
                                    Pledged Stock,  in   form  satisfactory   to
                                    Lender   as   Lender   may from time to time
                                    specify;

                           (2)      Pay, or reimburse Lender   for   paying, all
                                    costs for the transfer of the Pledged Stock;

                           (3)      Deliver the Pledged Stock to Lender  or  its
                                    designated agent or bailee; and

                           (4)      Take such  other  steps as  Lender  may from
                                    time to time direct, all to perfect Lender's
                                    security interest in the Collateral.

                  (C)  In addition to the foregoing, and   not   in   limitation
thereof:

                           (1)      A    carbon,    photographic,    or    other
                                    reproduction  of  this  Agreement  shall  be
                                    sufficient as a financing  statement and may
                                    be filed in any  appropriate  office in lieu
                                    thereof; and,

                           (2)      To the extent lawful,  each Borrower  hereby
                                    appoints  Lender  as its  attorney-  in-fact
                                    (without requiring Lender to act as such) to
                                    execute any financing  statement in the name
                                    of such  Borrower,  and to perform all other
                                    acts  that  Lender  deems   appropriate   to
                                    perfect and continue  its security  interest
                                    in,  and  to  protect  and   preserve,   the
                                    Collateral.

         5.6      Chattel   Paper  or   Instruments. Each  Borrower will deliver
immediately  to Lender  any  Chattel  Paper or  Instruments  arising  out of the
Collateral  usually,  but not  exclusively,  as proceeds.  Further,  the parties
hereby  agree  that  such  Chattel  Paper  or  Instruments  constitute  original
Collateral  rather  than  proceeds;  but if  proceeds,  then  Lender's  security
interest created by this Agreement in the Chattel Paper or Instruments shall not
be claimed merely as proceeds.

         5.7      Release of  Documentation  For  Eligible  Contracts.  In   the
event Cavalier  Acceptance or Lender shall determine that a document relative to
any Chattel Paper or any Eligible Contract which has been delivered to Lender in
connection with the conversion of a portion of the Revolving Loan to a Term Loan
fails to meet Lender's  collateral  review  standards or is otherwise  deficient
subsequent  to the initial  review by Lender,  then upon  Cavalier  Acceptance's
delivery  to Lender of a trust  receipt in form and  substance  satisfactory  to
Lender and designating the purpose for which delivery is requested, Lender shall
deliver such documents to Cavalier Acceptance for correction.  Within forty-five
(45) days of Lender'  delivery  of any such  nonconforming  document to Cavalier
Acceptance for correction, such document shall be corrected or otherwise conform
to  Lender's  collateral  review  standards,   or  the  Contract  to  which  the
nonconforming document relates shall be ineligible and Cavalier Acceptance shall
pay Lender the unpaid  principal  balance of such  Contract  or,  with the prior
written  consent of Lender,  shall  deliver to Lender  Eligible  Contract(s)  in
substitution for such Contract.


<PAGE>
         5.8      Power of  Attorney.  Each   Borrower   hereby  constitutes and
appoints  Lender,  or any  other  person  whom  Lender  may  designate,  as such
Borrower's  attorney-in-fact,  to exercise  upon the  occurrence of any Event of
Default,  solely at Borrowers' joint and several cost and expense, all or any of
the following powers, all of which powers, being coupled with an interest, shall
be irrevocable until all Obligations shall have been performed and paid:

                  (A)  To receive, take,  endorse,  sign and deliver in Lender's
name or in the name of any Borrower any and all checks,  notes, drafts and other
instruments relating to Accounts and Eligible Contracts which constitute part of
the Collateral;

                  (B)  To receive, open and dispose of all mail addressed to any
Borrower  that relates to the  Collateral  and to notify postal  authorities  to
change  the  address  for the  delivery  thereof  to such  address as Lender may
designate;

                  (C)  To transmit  to  account  parties  and to  obligors  upon
Accounts and Eligible Contracts which constitute part of the Collateral,  notice
of Lender's interest therein,  and to demand and to receive from such Persons at
any time, in the name of Lender or of any Borrower or of the designee of Lender,
information concerning such Accounts,  such Eligible Contracts,  and the amounts
owing thereon;

                  (D)  To notify such  Account  Debtors and/or  obligors to make
payments on such Accounts and/or Eligible  Contracts  directly to Lender or to a
lock-box designated by Lender;

                  (E)  To take or to bring, in the name of Lender or in the name
of any Borrower,  all steps, action, suits or proceedings deemed by Lender to be
necessary  or  desirable  to effect  the  collection  of such  Accounts  or such
Eligible Contracts;

                  (F)  To exercise all of the rights and remedies of  Borrowers,
or any of them, with respect to the collection of the Accounts;

                  (G)  To settle, adjust, compromise, extend, renew,  discharge,
terminate or release the Accounts in whole or in part;

                  (H)  To sell or assign the Accounts  upon such terms, for such
amounts and at such time or times as Lender deems advisable;

                  (I)  To take control,   in any manner, of any item of  payment
on, or proceeds of, Collateral;

                  (J)  To use the  information  recorded on or  contained in any
data  processing  equipment and computer  hardware and software  relating to the
Collateral to which any Borrower has access; and

                  (K)  To do all acts and  things  necessary, in  Lender's  sole
judgment, to carry out the purposes of this Agreement.

                  All acts of such  attorney-in-fact  or designee taken pursuant
to this  Section 5.8 or Section  9.6 are hereby  ratified  and  approved by each
Borrower,  and said  attorney  or  designee  shall not be liable for any acts or
omissions nor for any error of judgment or mistake of fact or law.




<PAGE>




                                   ARTICLE VI

                         REPRESENTATIONS AND WARRANTIES

         6.1      Original. To induce Lender to enter into this  Agreement, each
of the Borrowers jointly and severally  represents and warrants to Lender, as of
the date hereof and,  except as otherwise  expressly  provided,  as of all times
(including,  without  limitation,  as of the date each Advance  under any of the
Loans is requested and made) until this Agreement is terminated in writing,  all
Obligations   hereunder  are  satisfied  and  no  commitments  hereunder  remain
outstanding, as follows:

                  (A)  Cavalier Homes is a corporation  duly  organized, validly
existing  and in good  standing  under the Laws of the State of  Delaware;  each
Consolidated  Entity is duly  organized,  validly  existing and in good standing
under the Laws of the state in which it is  incorporated  or formed,  all as set
forth in Exhibit J, attached hereto and incorporated herein;  Cavalier Homes and
each  Consolidated  Entity has the  lawful  power to own its  properties  and to
engage in the business it conducts,  and is duly  qualified and in good standing
in the  jurisdictions  wherein the nature of the  business  transacted  by it or
property  owned by it makes such  qualification  necessary;  the states in which
Cavalier Homes and each Consolidated  Entity is qualified to do business are set
forth in Exhibit G, attached hereto and incorporated  herein;  the percentage of
ownership  by  Cavalier  Homes  or  another  Borrower  as  applicable,   of  the
outstanding  stock of each  Consolidated  Entity  is as  listed  in  Exhibit  K,
attached hereto and incorporated herein; the addresses of all places of business
and headquarters of Cavalier Homes and each Consolidated Entity are as set forth
in Exhibit H, attached hereto and incorporated  herein, and the addresses of all
places where the Collateral is located and a brief  description of the nature of
the Collateral at each such location are set forth in Exhibit H;

                  (B)  Neither  Cavalier  Homes nor any Consolidated  Entity has
used any corporate or fictitious  name other than the name for Cavalier Homes or
each Consolidated Entity as is used in this Agreement,  which is the same as the
name shown,  respectively,  on Cavalier Homes's and each  Consolidated  Entity's
certificate or articles of incorporation  through the date of filing of the last
amendment thereto,  except as set forth in Exhibit II.6.1(B) attached hereto and
incorporated herein;

                  (C)  None of  the  Borrowers    is   directly   or  indirectly
controlled  by, or  acting on behalf  of,  any  Person  which is an  "Investment
Company," within the meaning of the Investment Company Act of 1940, as amended;

                  (D)  Neither  Cavalier  Homes nor any Consolidated  Entity has
been the surviving  corporation in a merger,  acquired any business,  or changed
its principal  executive office within five (5) years and one (1) month prior to
the date hereof,  except as set forth in Exhibit II.6.1(D),  attached hereto and
incorporated herein;

                  (E)  Neither Cavalier Homes nor any Consolidated  Entity is in
default  with respect to any of its  existing  Indebtedness,  and the making and
performance of this Agreement,  the Notes, and the other Loan Documents will not
(immediately, or with the passage of time, the giving of notice, or both):

                           (1)      Violate the charter or by-law  provisions of
                                    any  Borrower,  or violate any Law or result
                                    in a default under any contract,  agreement,
                                    or  instrument  to which any Borrower or any
                                    Consolidated  Entity  is a party or by which
                                    any Borrower or any  Consolidated  Entity or
                                    its property is bound; or

                           (2)      Result in the creation or imposition of  any
                                    security interest in, or lien or encumbrance
                                    upon, any of the assets of any  Borrower  or
                                    any Consolidated  Entity, except in favor of
                                    Lender;

                  (F)  Each  Borrower  has the power and authority to enter into
and perform this Agreement, the Notes to which it is a party, and the other Loan
Documents, and to incur the obligations herein and therein



<PAGE>




provided  for, and has taken all  corporate  action  necessary to authorize  the
execution, delivery, and performance of this Agreement, the Notes to which it is
a party, and the other Loan Documents;

                  (G)  This  Agreement,  the Notes, and the other Loan Documents
are, or when delivered will be, valid,  binding,  and  enforceable in accordance
with their respective terms;

                  (H)  The Security  Documents, together with any UCC-1s and all
other  documents  filed in  connection  therewith,  create as  security  for the
Obligations,  a valid and enforceable perfected first priority security interest
in and  lien  on all of  each  Borrower's  rights,  title  and  interest  in the
Collateral,  in favor of Lender,  superior  and prior to the rights of all third
Persons and subject to no other liens.

                  (I)  Except as  disclosed  in the  footnotes  to the Financial
Statements  delivered to Lender,  or in Exhibit  II.6.1(I)  attached  hereto and
incorporated herein, and except for matters in which an insurer has accepted the
defense without reservation of rights, there is no pending order, notice, claim,
litigation,  proceeding or investigation  against or affecting Cavalier Homes or
any  Consolidated  Entity,  except  such  order,  notice,   claim,   litigation,
proceeding or  investigation  that, in the good-faith  judgment of management of
Cavalier Homes or such  Consolidated  Entity, is not reasonably likely to result
in an adverse decision that would require the payment of $1,000,000 or more;

                  (J)  Cavalier Homes and each Consolidated  Entity has good and
marketable  title to all of its assets,  including the  Collateral,  free of any
security interest,  encumbrance or lien, or claim of any third person except for
Permitted Liens;

                  (K)  The Financial  Statements,  including  any  schedules and
notes  pertaining  thereto,  have been  prepared in  accordance  with  Generally
Accepted  Accounting  Principles  consistently  applied,  and fully  and  fairly
present the financial condition of Cavalier Homes and the Consolidated  Entities
as of the dates  thereof and the results of operations  for the periods  covered
thereby,  and there have been no material  adverse  changes in the  Consolidated
financial condition or business of Cavalier Homes and the Consolidated  Entities
from the dates of the Financial Statements to the date hereof;

                  (L)  As of   the   date  of the Financial Statements, Cavalier
Homes and the Consolidated  Entities had no material Indebtedness of any nature,
including,  without  limitation,  liabilities  for  taxes  and any  interest  or
penalties  relating  thereto,  except to the extent  reflected (in a footnote or
otherwise) and reserved  against in the Financial  Statements or as disclosed in
or  permitted  by  this  Agreement;  none  of the  Borrowers  knows  or has  any
reasonable  ground  to know of any  basis for the  assertion  against  it or any
Consolidated  Entity  of any  material  Indebtedness  of any  nature  not  fully
reflected and reserved against in the Financial Statements;

                  (M)  Except as otherwise  permitted herein, Cavalier Homes and
each Consolidated Entity have filed all federal, state and local tax returns and
other reports that they are required by Law to file prior to the date hereof and
which are material to the conduct of its  businesses,  have paid or caused to be
paid all taxes,  assessments  and other  governmental  charges  that are due and
payable  prior to the date  hereof,  and have made  adequate  provision  for the
payment  of such  taxes,  assessments  or  other  charges  accruing  but not yet
payable; none of the Borrowers has any knowledge of any deficiency or additional
assessment  in a  materially  important  amount in  connection  with any  taxes,
assessments or charges not provided for on its books;

                  (N)  Except to the extent that the failure to comply would not
materially  interfere  with the conduct of the business of Cavalier Homes or any
Consolidated Entity, each of Cavalier Homes and each Consolidated Entity has, to
the best of its knowledge, complied with all applicable Law with respect to:

                           (1)      Any restrictions,  specifications,  or other
                                    requirements  pertaining  to  products  that
                                    Cavalier  Homes or any  Consolidated  Entity
                                    manufactures  or  sells  or to the  services
                                    that Cavalier Homes or any Consolidated
                                    Entity performs;

                           (2)      The conduct of its businesses; and




<PAGE>




                           (3)      The use,   maintenance  and operation of the
                                    real and personal properties owned or leased
                                    by it in the conduct of its businesses;

                  (O)  No  representation or warranty by any Borrower  contained
herein  or in any  certificate  or  other  document  furnished  by any  Borrower
pursuant hereto contains any untrue statement of material fact or omits to state
a material fact necessary to make such representation or warranty not misleading
in light of the circumstances under which it was made;

                  (P)  Each  consent, approval or  authorization  of, or filing,
registration or  qualification  with, any Person that is required to be obtained
or effected by Cavalier Homes or any Consolidated Entity, in connection with the
execution  and  delivery  of this  Agreement,  the  Notes,  and the  other  Loan
Documents,  or the  undertaking or  performance  of any obligation  hereunder or
thereunder has been duly obtained or effected;

                  (Q)  All existing Indebtedness of each Borrower:

                           (1)      For money borrowed; or

                           (2)      Under any security agreement, mortgage,   or
                                    agreement covering the lease by any Borrower
                                    as lessee of real or personal property,

is described in Exhibit I, attached hereto and incorporated herein;

                  (R)  To the  best of each  Borrower's knowledge,  all  parties
(including each of Borrower and each Consolidated Entity) to any material lease,
contract  or  commitment  of any  kind  to  which  any  Borrower  or  any  other
Consolidated  Entity is a party have complied with the provisions of such lease,
contract  or  commitment;  no party is in  default  under  any  material  lease,
contract,  or other commitment  thereof and no event has occurred which, but for
the  giving  of notice or the  passage  of time,  or both,  would  constitute  a
default;

                  (S)  Neither Cavalier  Homes nor any  Consolidated  Entity has
made any  agreement  or taken any  action  which may cause any  Person to become
entitled to a commission or finder's fee as a result of the making of any of the
Loans;

                  (T)  Cavalier Homes's Consolidated federal tax returns for all
years of operation,  including the fiscal year of Cavalier  Homes ended December
31, 1999,  have been filed with the Internal  Revenue  Service and have not been
challenged or have been challenged and finally resolved;

                  (U)  Each Benefit Plan  maintained  or  contributed  to by any
Borrower or any ERISA  Affiliate  that is a Pension Plan  satisfies  the minimum
funding  standards  of Section 302 of ERISA;  (1) there have been no  Reportable
Events (as  defined in Section  4043 of ERISA) or  Prohibited  Transactions  (as
defined in Section  408 of ERISA)  with  respect to any  Benefit  Plan;  (2) the
Internal Revenue Service has not issued a minimum funding waiver with respect to
any Benefit  Plan that is a Pension  Plan;  (3) none of the  Benefit  Plans is a
multiemployer  plan as defined in Section 3(37) of ERISA;  (4) each Benefit Plan
to which 4980B of the  Internal  Revenue Code of 1986,  as amended,  applies has
been operated in compliance therewith; and (5) no Benefit Plan provides benefits
to employees  beyond  retirement or other  termination of employment  other than
benefits  required by Section  4980B of the Internal  Revenue  Code of 1986,  as
amended.

                  (V)  Each of Cavalier Homes and the Consolidated  Entities is,
to the best of its knowledge, in compliance with all Environmental Laws;

                  (W)  Each Borrower owns or has the rights to use,  pursuant to
written licenses, all patents, trademarks and copyrights used or employed in its
business and products; and




<PAGE>




                  (X)  No  Borrower's   Inventory  is  subject  to  any  license
agreement relating to patents, trademarks or copyrights which could, directly or
indirectly,  preclude or render  impracticable  the realization by Lender of the
value of such Inventory.

         6.2      Additional    Representations   and Warranties   of   Cavalier
Acceptance.  To induce Lender to enter into this Agreement,  Cavalier Acceptance
represents  and  warrants  to Lender,  as of the date hereof and as of all times
(including,  without limitation, as of the date each Advance under the Term Loan
Commitment is requested and made) until this Agreement is terminated in writing,
all Obligations  hereunder are satisfied,  and no commitments  hereunder  remain
outstanding,  that  with  respect  to each  Eligible  Contract  included  in the
Collateral:

                  (A)  All  parties  to the  Eligible  Contract  (including  any
co-buyer,  co-maker,  or  guarantor)  were of legal age and  otherwise had legal
capacity  to contract at the time they  signed the  Eligible  Contract,  and any
party identified as a "buyer" is, to the best knowledge of Cavalier  Acceptance,
not a "straw-man"  buyer acting on behalf of an undisclosed  third party, but is
instead intending to own and use the manufactured home described thereon;

                  (B)  All signatures on the Eligible  Contract  (including  the
signature of any co-buyer,  co- maker, or guarantor) are genuine and, if made in
a representative  capacity,  were duly authorized,  and the Eligible Contract is
valid and enforceable in accordance with its terms;

                  (C)  The address, including the county of  residence,  of each
party to the  Eligible  Contract  as of the date of  execution  of the  Eligible
Contract is correctly shown on the Eligible Contract;

                  (D)  The Eligible  Contract  correctly  sets  forth  the  cash
selling  price and down  payment  made to the  dealer in cash  and/or the amount
allowed by the  dealer  for any  property  taken in trade,  and the  application
submitted  to Cavalier  Acceptance  in  connection  with the  Eligible  Contract
arising  therefrom is true and correct in all respects to the best  knowledge of
Cavalier  Acceptance,  and each of the Eligible  Contracts  and the  application
fully  and  accurately  disclose  any  incentive,  rebate,  refund,  or the like
provided to or on behalf of the purchaser,  directly or indirectly,  and whether
provided by the manufacturer and/or the dealer;

                  (E)  The cash down payment made by the  purchaser and shown on
the Eligible Contract does not represent,  either directly or indirectly, a loan
made by, or otherwise arranged by, the dealer to or for the purchaser;

                  (F)  The    Eligible   Contract   correctly   describes    the
manufactured home sold by the dealer to the purchaser;

                  (G)  The sale of the manufactured home covered by the Eligible
Contract  was a bona fide sale at retail in the regular  course of the  dealer's
business  or a sale  by  such  dealer  of a  manufactured  home  that  has  been
repossessed by Cavalier Acceptance;

                  (H)  The manufactured home described in the Eligible  Contract
is not subject to any lien, encumbrance or security interest except any security
interest created in favor of Cavalier Acceptance;

                  (I)  No party  has  required  credit  life  insurance,  credit
disability  insurance,  accident and health  insurance or any other insurance of
any kind (other than property damage  insurance) in connection with the Eligible
Contract and the purchase of any such insurance  coverage is truly optional with
the purchaser;

                  (J)  The purchaser received a   fully completed copy   of  the
Eligible Contract at the time he or she signed it;

                  (K)  Unless Lender has  expressly  consented  in writing,  the
Eligible  Contract was not past due more than ninety (90) days (and the Eligible
Contract has not been re-dated) or dishonored at the time it



<PAGE>




was sold to Cavalier  Acceptance  or pledged to Lender  hereunder,  and Cavalier
Acceptance has no notice or knowledge of any claim,  defense, or setoff to which
the purchaser is entitled;

                  (L)  The dealer has notified the  purchaser  that the Eligible
Contract  would be  submitted  to Cavalier  Acceptance,  at its office,  and the
purchaser has been notified of the appropriate  address of such office, and that
all payments are to be made by the purchaser only to Cavalier  Acceptance or its
assigns,  and the dealer has not received  any payment on the Eligible  Contract
except for payments disclosed to Cavalier  Acceptance in writing at the time the
Eligible Contract is offered for sale to Cavalier Acceptance;

                  (M)  There has been delivered or caused to be delivered to the
appropriate  authority  within ten (10) days  following  the date upon which the
purchaser took possession of the manufactured home a duly completed  application
for a certificate of title for the vehicle  described in the Eligible  Contract,
Cavalier Acceptance is shown as the "first lienholder" on said application,  and
the  application  was  accompanied  by the existing  certificate of title or the
manufacturer's  certificate of origin for the home described on the  application
and the appropriate fee, or, if the home is not subject to the title laws, there
has been delivered to Cavalier  Acceptance a financing statement which correctly
described the home as  collateral,  is signed by the  purchaser as "debtor",  is
executed by the dealer as "secured party", shows the correct name and address of
the purchaser as "debtor",  and shows  Cavalier  Acceptance  as either  "secured
party" or "assignee of secured party";

                  (N)  The manufactured home described on the  Eligible Contract
 is new unless expressly designated on the Eligible Contract as "used";

                  (O)  The manufactured home identification number and/or serial
number  shown  on  the  Eligible  Contract  and  on  the  certificate  of  title
application and/or financing statement are true and correct;

                  (P)  The sale which gave rise to the Eligible Contract was not
solicited at the residence of the purchaser and is not subject to rescission or,
if  solicited  at a location  deemed  under  applicable  law to  constitute  the
residence of the purchaser and to give rise to a right of rescission,  notice of
such right of rescission was duly given to all persons entitled  thereto,  which
right has expired without being exercised;

                  (Q)  Either  the  manufacturer  or the  dealer  has  agreed to
service and repair the home  described  on the Eligible  Contract in  accordance
with any  warranty  made by the dealer or the  manufacturer  with respect to the
home;

                  (R)  All  insurance   premiums  financed  under  the  Eligible
Contract have been paid, except as otherwise disclosed in writing;

                  (S)  The person  executing  the Eligible Contract on behalf of
the  dealer,  including  its  execution  as the  seller  of the  home and as the
assignor of the Eligible Contract to Cavalier  Acceptance,  was fully authorized
to execute and deliver the  Eligible  Contract on behalf of the dealer,  and the
representations,  warranties and covenants set forth in the dealer's  assignment
for each Eligible  Contract  are,  upon  delivery of such  Eligible  Contract to
Cavalier Acceptance the valid and binding obligations of the dealer;

                  (T)  Cavalier Acceptance has good title to, and full right and
power to assign to Lender the Eligible  Contract,  and the Eligible  Contract is
not subject to any lien, encumbrance, or prior assignment;

                  (U)  All requirements  of all  applicable  federal  and  state
consumer  protection  laws and  regulations  in  connection  with  the  Eligible
Contract and the sale of the home described thereon have been complied with;

                  (V)  If  the   Eligible   Contract   is  a   Federal   Housing
Administration  contract,  the manufactured home and the home site upon which it
has  been  or  will be  placed  meet  all  applicable  eligibility  requirements
promulgated by the Department of Housing and Urban  Development  (HUD),  and the
requirements set forth in HUD's regulations,  including, without limitation, the
requirement  that certain  certificates  be  furnished by the dealer  and/or the
purchaser to Cavalier Acceptance concerning and evidencing such compliance, have
been complied with;

<PAGE>
                  (W)  In  connection with  any  sale  or  attempted  sale  of a
manufactured home to any person,  the dealer did not hold itself out as an agent
of Cavalier  Acceptance for any purpose,  and did not make any  representations,
assurance or other  statements  of any kind to any such person which  purport in
any way on behalf of or binding upon Cavalier Acceptance; and

                  (X)  The manufactured home is insured by the purchaser thereof
against  loss,  theft or damage  (including  both  collision  and  comprehensive
coverages) in an amount not less than the lesser of the unpaid  balance owing on
the Eligible Contract or the average retail value of the home, under a policy of
insurance  which  provides for payment to Cavalier  Acceptance in the event of a
loss covered by the policy.

         6.3      Reliance By Cavalier Acceptance   on  Dealer  Representations.
Lender and Cavalier Acceptance recognize that, in making the representations and
warranties  specified in Section 6.2 of this Agreement,  Cavalier Acceptance has
relied,  in those  instances  where  knowledge  of the matters  contained in the
representations  and  warranties  would not be within the personal  knowledge of
Cavalier  Acceptance,  upon  representations and warranties provided to Cavalier
Acceptance by the mobile home dealer from whom Cavalier  Acceptance acquired the
particular Eligible Contract.  To that end, Lender and Cavalier Acceptance agree
that so long  as  such  representations  and  warranties  are  made by  Cavalier
Acceptance in good faith and without  knowledge that any such  representation or
warranty  contained  in  Section  6.2 is  incorrect  when  made,  then  any such
misrepresentation  (if any)  shall  not be  deemed  to be an  Event  of  Default
hereunder,  and the only effect of such misrepresentation shall be to cause such
Chattel Paper to thereupon cease to be an Eligible Contract for purposes of this
Agreement.




                                   ARTICLE VII

                             COVENANTS OF BORROWERS

         Each Borrower does hereby jointly and severally covenant and agree with
Lender  that,  so  long as any of the  Obligations  remains  unsatisfied  or any
commitments hereunder remain outstanding, and thereafter until this Agreement is
terminated in writing, it will comply, and it will cause the other Borrowers and
other  Consolidated  Entities  to  comply,  at  all  times  with  the  following
covenants, unless the Lender in a particular instance shall have given its prior
written consent to the contrary:

         7.1      Affirmative Covenants.

                  (A)  Each  Borrower  will  take  and  will  cause  each  other
Consolidated  Entity  to take all  necessary  steps to  preserve  its  corporate
existence and franchises and comply with all present and future Laws  applicable
to it in the operation of its businesses and all material agreements to which it
is subject.

                  (B)  Each Borrower will use the proceeds of the Revolving Loan
only for the  purposes set forth in Section 2.7, and will furnish to Lender such
evidence as it may reasonably require with respect to such use.

                  (C)  Cavalier Homes will furnish to Lender:

                           (1)      Within thirty (30)  days after the close  of
                                    each calendar quarter:

                                    (i)     A   Consolidated  and  consolidating
                                            income statement of Cavalier   Homes
                                            and the Consolidated  Entities   for
                                            such period; and




<PAGE>




                                    (ii)    A Consolidated   and   consolidating
                                            balance sheet of Cavalier Homes  and
                                            the Consolidated Entities as  of the
                                             end of such period

                                    all in reasonable detail,   subject to year-
                                    end audit adjustments;

                           (2)      Within ninety (90) days after the close   of
                                    each fiscal year of Cavalier Homes:

                                    (i)     A    Consolidated   statement     of
                                            Stockholders'   Equity    and      a
                                            Consolidated statement of Cash Flows
                                            of    Cavalier    Homes    and   the
                                            Consolidated  Entities    for   such
                                            fiscal year;

                                    (ii)    Consolidated    and    consolidating
                                            income statements of  Cavalier Homes
                                            and the Consolidated  Entities   for
                                            such fiscal year; and

                                    (iii)   Consolidated     and   consolidating
                                            balance sheets   of Cavalier   Homes
                                            and the Consolidated Entities as  of
                                            the end of such fiscal year

                                    all  in  reasonable  detail,  including  all
                                    supporting   schedules  and  comments;   the
                                    Consolidated  statements  and balance sheets
                                    to be  audited by an  independent  certified
                                    public accountant selected by Cavalier Homes
                                    and  acceptable to Lender,  and certified by
                                    such  accountants  to have been  prepared in
                                    accordance    with    Generally     Accepted
                                    Accounting Principles, consistently applied,
                                    by  Cavalier  Homes  and  the   Consolidated
                                    Entities,  except  for  any  inconsistencies
                                    explained by such accountants to Lender,  in
                                    form  satisfactory  to Lender;  in addition,
                                    Cavalier   Homes  will   obtain   from  such
                                    independent certified public accountants and
                                    deliver to Lender,  within  ninety (90) days
                                    after  the  close  of  each  fiscal  year of
                                    Cavalier Homes, their written statement that
                                    in making the examination necessary to their
                                    certification    they   have   obtained   no
                                    knowledge   of  any  Event  of   Default  by
                                    Cavalier  Homes or any  other  Borrower,  or
                                    disclosing all Events of Default of Cavalier
                                    Homes or any other  Borrower  of which  they
                                    have obtained knowledge;  provided, however,
                                    that  in  making  their   examination   such
                                    accountants  shall  not  be  required  to go
                                    beyond  the  bounds  of  generally  accepted
                                    auditing   procedures  for  the  purpose  of
                                    certifying  financial   statements;   Lender
                                    shall  have the  right  from time to time to
                                    discuss the  affairs of  Cavalier  Homes and
                                    the  Consolidated   Entities  directly  with
                                    Cavalier   Homes's   independent   certified
                                    public  accountant  after notice to Cavalier
                                    Homes and  opportunity  of Cavalier Homes to
                                    be present at any such discussions;

                           (3)      Contemporaneously  with each  quarterly  and
                                    year-end  financial  report  required by the
                                    foregoing paragraphs,  and at any additional
                                    time in Lender's  discretion,  a  Compliance
                                    Certificate,  wherein  in  addition  to  the
                                    financial   information   reported  in  such
                                    Compliance  Certificate,  the  president  or
                                    chief  financial  officer of Cavalier  Homes
                                    shall  certify  that  he  has   individually
                                    reviewed the  provisions  of this  Agreement
                                    and  that  a  review  of the  activities  of
                                    Borrowers  and  the  Consolidated   Entities
                                    during such year or quarterly period, as the
                                    case may be,  has been  made by or under the
                                    supervision    of   the   signer   of   such
                                    certificate   with  a  view  to  determining
                                    whether each  Borrower  has kept,  observed,
                                    performed and fulfilled all its  obligations
                                    under this Agreement,  and that, to the best
                                    of his knowledge, each Borrower has observed
                                    and  performed  each and  every  undertaking
                                    contained  in this  Agreement  and is not at
                                    the time in  Default  in the  observance  or
                                    performance   of  any  of  the   terms   and
                                    conditions  hereof or, if any Borrower shall
                                    be  so  in  Default,   specifying  all  such
                                    Defaults  and  Events of Default of which he
                                    may have knowledge;



<PAGE>




                           (4)      Promptly  after sending or making  available
                                    or filing of the same,  copies of all 10-K's
                                    and 10-Q's that any Borrower  sends or makes
                                    available to its  stockholders and all other
                                    registration statements and reports that any
                                    Borrower   files  with  the  Securities  and
                                    Exchange Commission or any successor Person,
                                    which are requested by Lender;

                           (5)      At Lender's request,  an aging as of the end
                                    of the  calendar  quarter or other period to
                                    which each such  request  pertains,  in such
                                    form and detail as shall be  satisfactory to
                                    Lender,  of all  Accounts  of each  Borrower
                                    certified   by  the   president   or   chief
                                    financial  officer of  Cavalier  Homes to be
                                    complete and correct;

                           (6)      At  Lender's  request,  a  listing  of  each
                                    Borrower's  Inventory,   in  such  form  and
                                    detail as shall be  satisfactory  to Lender,
                                    showing    the    amount,    size,    grade,
                                    manufacturer, and cost of each item or group
                                    thereof, certified by the president or chief
                                    financial  officer of  Cavalier  Homes to be
                                    complete and correct; and

                           (7)      Upon  Lender's  request  from  time  to time
                                    copies of any or all agreements,  contracts,
                                    or  commitments  of the type  referred to in
                                    Section 6.1(R) hereof.

                  (D)  Cavalier Homes and each Consolidated Entity will maintain
 its  Inventory,  Equipment,  real estate and other  properties  in good
condition and repair (normal wear and tear excepted), and will pay and discharge
or  cause  to be paid  and  discharged  when  due,  the  cost of  repairs  to or
maintenance of the same, and will pay or cause to be paid all rental or mortgage
payments due on such real estate.  In addition,  Borrowers jointly and severally
agree to  reimburse  Lender for any  reasonable  expenses  incurred by Lender to
protect and preserve the Collateral pursuant to Section 5.5(C).

                  (E)  Cavalier   Homes   and each   Consolidated   Entity  will
maintain,  or cause to be maintained,  public liability insurance,  and fire and
extended coverage insurance on all tangible assets owned by it, naming Lender as
mortgagee and loss payee in all policies  insuring the  Collateral,  all in such
form and  amounts  as are  consistent  with  industry  practices  and with  such
insurers  as may be  satisfactory  to  Lender.  Such  policies  shall  contain a
provision  whereby  they cannot be canceled  except  after ten (10) days written
notice to Lender. Borrowers will furnish to Lender such evidence of insurance as
Lender may require.  Borrowers  hereby jointly and severally  agree that, in the
event Cavalier Homes or any Consolidated Entity fails to pay or cause to be paid
the  premium  on any  such  insurance,  Lender  may do so and be  reimbursed  by
Borrower therefor.  Lender is hereby appointed each Borrower's  attorney-in-fact
(without  requiring  Lender to act as such) to  endorse  any check  which may be
payable to such  Borrower to collect such  returned or unearned  premiums or the
proceeds of such insurance, and any amount so collected may be applied by Lender
toward satisfaction of any of the Obligations.

                  (F)  Cavalier Homes and the  Consolidated Entities will pay or
cause to be paid when due all taxes,  assessments  and charges or levies imposed
upon it or on any of its  property or which it is  required to withhold  and pay
over,  except where  contested  in good faith by  appropriate  proceedings  with
adequate  reserves  therefor  having  been set aside on their  books;  provided,
however, that Cavalier Homes and the Consolidated Entities shall pay or cause to
be paid all such  taxes,  assessments,  charges  or  levies  forthwith  whenever
foreclosure on any lien that attached (or security therefor) appears imminent.

                  (G)  Cavalier Homes and the Consolidated  Entities will,  when
requested to do so, make  available for  inspection by Lender's duly  authorized
representatives  any of its books and  Records,  and will  furnish to Lender any
information  regarding  its business  affairs and financial  condition  within a
reasonable time after written request therefor. Cavalier Homes and each Borrower
will and will cause each of the other Consolidated Entities to keep proper books
of record and account in which full,  true and correct  entries in all  material
respects shall be  substantially in conformity with GAAP and all requirements of
Law shall be  satisfied  in all  dealings  and  transactions  in relation to its
business and  activities.  Cavalier Homes and each Borrower will, and will cause
each of the  other  Consolidated  Entities  to,  permit  Lender's  officers  and
designated  representatives to visit and inspect,  during normal business hours,
any of the  properties  of such  Borrower or such  Consolidated  Entity,  and to
examine the books of account of such Borrower or such Consolidated Entity and to
discuss the affairs,  finances,  accounts of such Borrower or such  Consolidated
Entity,  and be advised as to the same by, its and their  officers,  all at such
reasonable times and intervals and to such reasonable  extent as Lender may from
time to time request. In connection with the foregoing, Lender agrees to utilize
such documents,  materials and information  solely and exclusively in connection
with  this  Agreement  and  the  other  Loan  Documents  and  the   transactions
contemplated  herein and therein to exercise  its best  efforts to keep all such
documents,  materials and  information  delivered or made available by Borrowers
confidential  from anyone other than Persons  employed or retained by Lender who
are expected to be engaged in evaluating,  approving, structuring, and enforcing
or administering the Loans; provided, however, that nothing herein shall prevent
Lender from disclosing such information;


<PAGE>

                           (1)      to   any  actual  or potential assignee   or
                                    participant of any loan or note;    provided
                                    that such assignee or participant shall   be
                                    subject to this Section;


                           (2)      upon  order of any  court or  administrative
                                    agency  after it, to the  extent  practical,
                                    gives notice to Cavalier  Homes  pursuant to
                                    which   Cavalier   Homes  or  the   affected
                                    Borrower may seek a protective order against
                                    such disclosure;

                           (3)      upon request or demand   of   any regulatory
                                    agency or authority having jurisdiction over
                                    Lender;

                           (4)      which has been publicly disclosed;

                           (5)      in connection with any litigation;

                           (6)      to    the  extent reasonably   required   in
                                    connection with the exercise of any   remedy
                                    hereunder;

                           (7)      to Lender's legal counsel  and   independent
                                    auditors     in   connection with   Lender's
                                    business.

                  (H)  Cavalier Homes and each  Consolidated Entity will collect
its Accounts and Eligible  Contracts and sell its Inventory only in the ordinary
course of business.

                  (I)  Cavalier  Homes and each  Consolidated  Entity  will keep
accurate and complete Records of its Accounts, Eligible Contracts, Inventory and
Equipment, consistent with sound business practices.

                  (J)  Cavalier Homes  and   each  Consolidated Entity will give
immediate notice to Lender of:

                           (1)      Any  litigation  or  proceeding  (other than
                                    matters in which an insurer has accepted the
                                    defense  without  reservation  of rights) in
                                    which  it  is  a  party,   except  any  such
                                    litigation  or   proceeding   where  in  the
                                    good-faith   judgment   of   management   of
                                    Cavalier Homes or such Consolidated  Entity,
                                    such  matter  is not  reasonably  likely  to
                                    result in an  adverse  decision  that  would
                                    require the payment of  $1,000,000  or more;
                                    and

                           (2)      The   institution   of  any  other  suit  or
                                    proceeding    involving    it   that   might
                                    materially   and   adversely    affect   its
                                    operations, financial condition, property or
                                    business prospects.

                  (K)  Within ten (10) days of Lender's  request  therefor, each
Borrower  will  furnish  to Lender  any or all of the  following:  (a) copies of
federal income tax returns filed by such Borrower; (b) such



<PAGE>




Borrower's  bylaws;  and (c) a complete list of Benefit Plans that such Borrower
and its  ERISA  Affiliates  have  ever  maintained  or to which it or they  have
contributed.

                  (L)  Cavalier Homes and each Consolidated Entity will pay when
due (or within  applicable grace periods) all Indebtedness  exceeding $50,000 in
amount  due  third  Persons,  except  when the  amount  thereof,  not to  exceed
$400,000,  is being contested in good faith by appropriate  proceedings and with
adequate  reserves  therefor  being set aside on the books of Cavalier Homes and
each Consolidated Entity.

                  (M)  Cavalier  Homes and each Consolidated  Entity will notify
Lender immediately if it becomes aware of the occurrence of any Event of Default
or of any  fact,  condition  or event  that  only  with the  giving of notice or
passage  of time or both,  could  become an Event of  Default,  or if it becomes
aware of any  material  adverse  change  in the  business  prospects,  financial
condition (including, without limitation, proceedings in bankruptcy, insolvency,
reorganization,  or the  appointment  of a receiver or  trustee),  or results of
operations of Cavalier Homes, or any Consolidated  Entity,  or of the failure of
Cavalier  Homes or any  Consolidated  Entity to observe any of its  undertakings
hereunder or under any of the Loan Documents.

                  (N)  Cavalier Homes and each  Consolidated  Entity will notify
Lender  thirty  (30) days in advance of any change in the  location of its chief
executive office or principal place of business.

                  (O)  Cavalier Homes and each  Consolidated  Entity will notify
Lender  thirty (30) days in advance of any change in the  location or use of any
of the  Collateral  and within  thirty (30) days after any change in  condition,
aside from normal wear and tear, of any of the Collateral.

                  (P)  Each Borrower and each ERISA Affiliate will:

                           (1)      Fund each of its Pension  Plans,  if any, in
                                    accordance  with no less  than  the  minimum
                                    funding  standards  set forth in Section 302
                                    of ERISA;

                           (2)      At  Lender's  request,  furnish  to  Lender,
                                    promptly  after  filing the same,  copies of
                                    all  reports  or  statements  filed with the
                                    United  States   Department  of  Labor,  the
                                    Pension Benefit Guaranty Corporation, or the
                                    Internal Revenue Service with respect to any
                                    Benefit Plans;

                           (3)      Promptly advise Lender of the occurrence  of
                                    any   Reportable   Even    or     Prohibited
                                    Transaction, each as defined in ERISA,  with
                                    respect to any Benefit Plan; and

                           (4)      Promptly  advise Lender of the issuance of a
                                    funding  waiver  by  the  Internal   Revenue
                                    Service with respect to any Pension Plan.

                  (Q)  Cavalier  Homes and each Consolidated  Entity will comply
with all  Environmental  Laws, and will handle,  store,  treat,  discharge,  and
dispose of any Hazardous  Materials  only in compliance  with all  Environmental
Laws.

                  (R)  Each Borrower will maintain its primary  deposit  account
relationship with Lender.

         7.2      Negative Covenants.

                  (A)  Neither Cavalier Homes nor any  Consolidated  Entity will
change  its  name,  enter  into any  merger,  consolidation,  reorganization  or
recapitalization,  reclassify  its capital  stock,  or  liquidate  or  dissolve;
provided, however, that this clause (A) is not intended to prevent Borrower from
raising capital through any public debt or securities offering.

                  (B)  Neither Cavalier Homes nor any  Consolidated  Entity will
sell,  transfer,  lease or  otherwise  dispose of all or (except in the ordinary
course of business) any material part of its assets.



<PAGE>




                  (C)  Unless  the  proceeds  of such  sale are  paid to  Lender
pursuant to this Agreement,  neither Cavalier Homes nor any Consolidated  Entity
will sell, or enter into any agreement to sell,  any of its Accounts or Eligible
Contracts.

                  (D)  Neither Cavalier Homes nor any  Consolidated  Entity will
sell,  lease,  transfer,  assign,  or otherwise dispose of any of the Collateral
except in the ordinary course of business and as permitted under this Agreement.

                  (E   Neither Cavalier Homes nor any  Consolidated  Entity will
sell,  or otherwise  dispose of, or for any reason cease  operating,  any of its
divisions, franchises, or lines of business.

                  (F)  Neither Cavalier Homes nor any  Consolidated  Entity will
mortgage, pledge, grant or permit to exist a security interest in or lien, which
exceed, in the aggregate,  $1,000,000,  upon any of its real property, now owned
or leased or hereafter  acquired or leased,  except for Permitted Liens,  unless
such  Borrower  gives Lender thirty (30) days notice of its intent to grant such
lien and Lender expressly consents in writing thereto.

                  (G)  Neither Cavalier Homes nor any  Consolidated  Entity will
become  liable,  directly or  indirectly,  as  guarantor  or  otherwise  for any
obligation of any other Person,  except for guarantees existing and disclosed to
Lender  prior to Closing and  endorsements  of  commercial  paper for deposit or
collection  in the ordinary  course of business;  provided,  however,  that with
respect to dealers  selling  Inventory  manufactured  by any Borrower,  Cavalier
Homes may guaranty up to $75,000 in principal amount of lines of credit used for
such dealer to purchase such Inventory.

                  (H)  Neither Cavalier Homes nor any  Consolidated  Entity will
incur, create, assume, or permit to exist any Indebtedness except:

                           (1)      The Loans;

                           (2)      Loans obtained by Cavalier Homes  from   the
                                    First   National   Bank of   Hamilton not to
                                    exceed  $1,000,000   in  aggregate principal
                                    amount;

                           (3)      Existing   Indebtedness   as  set  forth  in
                                    Exhibit I, attached hereto and  incorporated
                                    herein,  to the extent shown on such Exhibit
                                    I  to  be   permitted  to  exist  after  the
                                    Closing;

                           (4)      Trade indebtedness incurred in the  ordinary
                                    course of business;

                           (5)      Contingent Indebtedness permitted by Section
                                    7.2(G); and

                           (6)      Indebtedness  secured by Permitted Liens and
                                    lease  obligations  not  to  exceed,  in the
                                    aggregate,     $18,000,000     (with    such
                                    Indebtedness  and lease  obligations  not to
                                    exceed $50,000 for Cavalier Acceptance);  as
                                    used in this  paragraph,  the  term  "lease"
                                    means a lease  that  is not  reflected  on a
                                    Consolidated balance sheet of Cavalier Homes
                                    and the Consolidated Entities and should not
                                    be  so  reflected  under  General   Accepted
                                    Accounting  Principles;   provided,  however
                                    that notwithstanding the foregoing, Cavalier
                                    Homes  may  incur  up  to   $25,000,000   in
                                    additional    Indebtedness    to    purchase
                                    inventory   for  its   retail   manufactured
                                    housing sales operations, which Indebtedness
                                    may be secured  by a lien on said  inventory
                                    in favor of such floor plan lender(s).

                           (7)      Up to $25,000,000 of unsecured,  convertible
                                    subordinated  debentures  issued by Cavalier
                                    Homes, provided that (i) the holders of such
                                    Indebtedness  agree in favor of  Lender  and
                                    other creditors  (collectively,  the "Senior
                                    Creditors")  that the rights of such holders
                                    shall  be  junior  and  subordinate  to  the
                                    payment  rights of the Senior  Creditors and
                                    (ii)   the   documents   evidencing     such
                                    Indebtedness     contain   such   additional
                                    provisions regarding Lender's right to prior
                                    payment and priority as  may  be  acceptable
                                    to  Lender  in  its  discretion.
<PAGE>
                  (I)  Cavalier Homes will not declare or pay any  dividends, or
make any other payments or distributions on account of its capital stock, or any
payments to redeem,  purchase or retire any of its capital stock,  which exceed,
in the  aggregate for all such  payments,  fifty percent (50%) of the average of
its  Consolidated  net  income  determined  under  General  Accepted  Accounting
Principles,  consistently  applied,  by Cavalier Homes,  for the two most recent
fiscal  years  preceding  the period to which such  dividends  or  distributions
relate,  nor make any  assignment or transfer of Accounts,  Chattel  Paper,  or,
other than in the ordinary course of business, of Inventory.

                  (J)  Other than   any  Consolidated Entity,   neither Cavalier
Homes nor any  Consolidated  Entity  will  form any  Subsidiary,  or  Controlled
Partnership,  or make any  investment  in or make any loan in the  nature of any
investment to any Person, which, in the aggregate, exceed $1,050,000.

                  (K)  Neither Cavalier Homes nor any  Consolidated  Entity will
make any loan or  advance  to any of their  respective  officers,  shareholders,
directors or employees except for business travel and similar temporary advances
in the ordinary  course of business,  nor pay salary to executive and management
personnel  aggregating  in excess of the  Borrowers'  compensation  formula,  as
previously disclosed to Lender and as in effect as of December 31, 1999.

                  (L)  Neither Cavalier Homes nor any  Consolidated  Entity will
pay, in an  aggregate  amount in any fiscal year of Cavalier  Homes  (commencing
with the current fiscal year of Cavalier Homes),  lease obligations in excess of
$5,000,000;  as used in this  paragraph,  the term "lease" means a lease that is
not  reflected  on a  Consolidated  balance  sheet  of  Cavalier  Homes  and the
Consolidated  Entities and should not be so reflected under  Generally  Accepted
Accounting Principles.

                  (M)  Neither Cavalier Homes nor any  Consolidated  Entity will
purchase or otherwise invest in or hold securities, non-operating real estate or
other non-operating assets, except:

                           (1)      Direct  obligations   of   the United States
                                    of America;

                           (2)      The present investment as of the Closing  in
                                    any such assets;

                           (3)      Investments   described  in  the  memorandum
                                    dated  July  12,  1994 (a copy of  which  is
                                    incorporated  as Exhibit L to the Agreement)
                                    with  respect to the  corporate  bonds rated
                                    Baa  or  better  in   paragraph  1  of  said
                                    memorandum,   and  the  equity   investments
                                    described in paragraph 2 of said  memorandum
                                    so long as such  equity  investments  do not
                                    exceed,  at any  time,  more than 40% of all
                                    investments   described   in  this   Section
                                    7.2(M);

                           (4)      Operating   assets   that   hereafter become
                                    non-operating assets; and

                           (5)      Equity  investments,  made in the reasonable
                                    discretion of Cavalier  Homes,  in an annual
                                    aggregate amount not to exceed $500,000.

                  (N)  Neither Cavalier Homes nor any  Consolidated  Entity will
enter into any sale-leaseback transaction.

                  (O)  [Intentionally omitted.]

                  (P)  Neither Cavalier Homes nor any  Consolidated  Entity will
furnish to Lender any certificate or other document that will contain any untrue
statement of material fact or that will omit to state a material fact  necessary
to make it not  misleading  in light  of the  circumstances  under  which it was
furnished.



<PAGE>




                  (Q)  Neither  Cavalier Homes nor any Consolidated  Entity will
directly or indirectly apply any part of the proceeds of any of the Loans to the
purchasing or carrying of any "margin  stock" within the meaning of Regulation U
or any regulations, interpretations or rulings thereunder.

                  (R)  Neither  Cavalier Homes nor any Consolidated  Entity will
treat, store, handle, discharge, or dispose of any Hazardous Materials except in
compliance with all Environmental Laws.

                  (S)  Neither Cavalier Homes nor any  Consolidated  Entity will
enter  into any  transaction  or series  of  transactions  where any  Affiliate,
officer, director or shareholder of Cavalier Homes or any Consolidated Entity or
any family  member or Affiliate of the  foregoing,  is a  counter-party  to such
transaction or series of  transactions;  unless such  transaction is on the same
terms as those  available to  unaffiliated  Persons on an  "arms-length"  basis;
provided,  however,  that this  covenant  is not  intended to prohibit or impede
Cavalier  Homes use of, or transfers  among the  Borrowers of,  working  capital
within its Consolidated group.

                  (T)  Neither Cavalier Homes nor any  Consolidated  Entity will
enter  into any  agreement  whereby  title  to any of  Cavalier  Homes's  or the
Consolidated  Entity's  inventory  passes to any transferee prior to delivery by
Cavalier Homes or the Consolidated Entity.

                  (U)  Neither Cavalier Homes,  nor the  Consolidated  Entities,
will make capital  expenditures  for any fiscal year in excess of $15,000,000 in
the aggregate.

         7.3      Financial Covenants.


                  (A)  Cavalier Homes will maintain at all times:

                           (1)      Consolidated Net Working Capital of at least
                                    $15,000,000 and a ratio of Current Assets to
                                    Current Liabilities of not less than 1.17 to
                                    1.0.

                           (2)      The  sum of (A)  Consolidated  Tangible  Net
                                    Worth, plus (B) (i) in fiscal year 2000, the
                                    treasury  stock  purchased by Cavalier Homes
                                    in year  2000,  valued at cost,  and (ii) in
                                    fiscal  year  2001,   the   treasury   stock
                                    purchased  by  Cavalier  Homes in years 2000
                                    and 2001,  valued at cost,  must not be less
                                    than  $90,000,000 at all times.  In addition
                                    to   the   requirements   specified   above,
                                    Cavalier   Homes's   minimum    Consolidated
                                    Tangible  Net  Worth  requirement  shall  be
                                    automatically  increased by the net proceeds
                                    received  by  Cavalier  Homes in  connection
                                    with any issuance or  conversion  of capital
                                    stock.

                           (3)      A   ratio   of Consolidated Liabilities   to
                                    Consolidated Tangible Net Worth of not  more
                                    than 2.0 to 1.0;

                           (4)      A ratio of Consolidated Cash Flow  (measured
                                    on a historical basis) to Debt  Service   of
                                    not less than 1.75 to 1.00; and

         7.4      Interpretation   and   Consolidation.  Except   as   otherwise
expressly  provided in this  Article  VII,  each  Borrower  shall also cause and
require each of the  Consolidated  Entities to observe and perform the covenants
and agreements of this Article VII that are to be observed and performed by such
Borrower,  regardless  of  whether  any such  covenant  expressly  refers to the
Consolidated Entities. All financial covenants set forth in Section 7.3 shall be
computed  on a  Consolidated  basis  for  Cavalier  Homes  and the  Consolidated
Entities.  In addition,  all calculations required to be made in connection with
any numerical or dollar  limitations set forth in this Article VII shall be made
on a combined or  Consolidated  basis for  Cavalier  Homes and the  Consolidated
Entities, in accordance with Generally Accepted Accounting Principles, but after
elimination of intercompany items.





<PAGE>




                                  ARTICLE VIII

                   ADDITIONAL COVENANTS OF CAVALIER ACCEPTANCE

         Cavalier Acceptance does hereby covenant and agree with Lender that, so
long as any of the Obligations remains unsatisfied or any commitments  hereunder
remain  outstanding,  and  thereafter  until this  Agreement  is  terminated  in
writing, it will comply at all times with the covenants set forth in Article VII
hereof and the following additional covenants:

         8.1      Affirmative Covenants.


                  (A)  Cavalier  Acceptance  will use the  proceeds  of the Term
Loans only for the purposes set forth in Section 3.8, and will furnish to Lender
such evidence as it may reasonably require with respect to such use.

                  (B)  Cavalier Acceptance will furnish to Lender:

                           (1)      Within thirty (30) days after the close   of
                                    each calendar month:

                                    (i)     An  income   statement   of Cavalier
                                            Acceptance for such period; and

                                    (ii)    A   balance   sheet   of    Cavalier
                                            Acceptance  as   of  the end of such
                                            period,

                                    all in reasonable detail, subject   to year-
                                    end audit adjustments;

                           (2)      Contemporaneously   with  each  monthly  and
                                    year-end   financial   report  required  for
                                    Cavalier  Acceptance by this Section 8.1(B),
                                    and  at  any  additional  time  in  Lender's
                                    discretion     or    when    any    material
                                    deterioration  in  the  Contracts  Borrowing
                                    Base   would   be   disclosed   thereby,   a
                                    Compliance Certificate,  wherein in addition
                                    to the  financial  information  reported  in
                                    such Compliance  Certificate,  the president
                                    or  chief  financial   officer  of  Cavalier
                                    Acceptance   shall   certify   that  he  has
                                    individually reviewed the provisions of this
                                    Agreement   and   that  a   review   of  the
                                    activities  of  Cavalier  Acceptance  during
                                    such fiscal year or monthly  period,  as the
                                    case may be,  has been  made by or under the
                                    supervision    of   the   signer   of   such
                                    certificate   with  a  view  to  determining
                                    whether   Cavalier   Acceptance   has  kept,
                                    observed,  performed  and  fulfilled all its
                                    obligations under this Agreement,  and that,
                                    to  the  best  of  his  knowledge,  Cavalier
                                    Acceptance  has observed and performed  each
                                    and  every  undertaking  contained  in  this
                                    Agreement  and is not at the time in Default
                                    in the  observance or  performance of any of
                                    the  terms  and  conditions  hereof  or,  if
                                    Cavalier  Acceptance shall be so in Default,
                                    specifying  all such  Defaults and Events of
                                    Default of which he may have knowledge;

                           (3)      Contemporaneously   with   each   Compliance
                                    Certificate  for the Term Loans, a report as
                                    of the end of such  month,  in such form and
                                    detail as shall be  satisfactory  to Lender,
                                    of the then Eligible Contracts  certified by
                                    Cavalier  Acceptance's  president  or  chief
                                    financial   officer  to  be   complete   and
                                    correct; and

                           (4)      Contemporaneously   with   each   Compliance
                                    Certificate    for   the   Term   Loans,   a
                                    delinquency  report and repossession  status
                                    report  with  respect  to  all  of  Cavalier
                                    Acceptance's Chattel Paper, whether Eligible
                                    Contracts  or not,  each such report in such
                                    form and detail as shall be  satisfactory to
                                    Lender.




<PAGE>




                  (C)  Cavalier  Acceptance  will,  at its  sole  expense,  when
requested to do so by Lender, cause its independent certified public accountants
(which  shall be  acceptable  to  Lender) to  provide  such  audit  confirmation
relating to the Eligible Contracts as may reasonably be required by Lender.

                  (D)  So long as any Eligible Contract  constitutes  Collateral
hereunder,  (i) Cavalier  Acceptance  agrees,  as trustee for Lender and without
compensation  by Lender,  to service all Eligible  Contracts and to use its best
efforts to effect  collection of all amounts  payable  thereunder as they become
due; (ii) Cavalier  Acceptance  shall  perform such duties  exclusively,  unless
Lender shall give written approval  otherwise;  and (iii) upon demand by Lender,
after an Event of Default, Cavalier Acceptance shall notify each purchaser under
an Eligible  Contract of the assignment to Lender of the Eligible Contract under
which he is obligated,  including in such notice instructions that the purchaser
shall  make  all   payments  on  the  Eligible   Contract  to  Lender,   or  its
subcontracting servicing agent, as Lender shall direct.

         8.2      Negative Covenants.

                  (A)  Unless reasonably determined by Cavalier Acceptance to be
in its and Lender's best  interest,  Cavalier  Acceptance  will not  compromise,
extend,  release,  or  adjust  payments  on any  Eligible  Contract  or  related
documentation,  accept a  conveyance  of  pledged  property  in full or  partial
satisfaction of any Eligible Contract, or release any security interest securing
any Eligible Contract.

                  (B)  Cavalier Acceptance  will not transfer,  sell,  assign or
deliver any  Eligible  Contract  pledged to Lender to any  person,  corporation,
partnership, association or trust other than Lender.

                  (C)  Cavalier   Acceptance   will   not grant,  create, incur,
permit, assume or suffer to exist any mortgage,  pledge, lien, security interest
or other  encumbrance  of any kind upon any  Eligible  Contract now or hereafter
pledged to Lender,  unless and until such  Eligible  Contract has been  released
from the security  interest  granted to Lender,  except for (x) liens granted to
Lender to secure  the Notes and the Loans and (y) such  non-consensual  liens as
may be deemed to arise as a matter of law.

                  (D)  Unless reasonably determined by Cavalier Acceptance to be
in its and Lender's best interest,  Cavalier Acceptance will not modify or waive
any term of any pledged Eligible Contract or release any obligor.

         8.3      Financial Covenants.  (A) Cavalier Acceptance will maintain at
all times:


                  (i)      Net Working Capital in the following minimum amount:

                             During 2000 and thereafter...........$  500,000.00;

                  (ii)     Tangible Net Worth in the following minimum amount:

                             During 2000 and thereafter...........$1,000,000.00;

                  (iii)    A ratio of Liabilities to Tangible Net Worth of   not
                           more than 3.0 to 1.0;

                  (iv)     A Contracts  Borrowing  Base such that the  aggregate
                           outstanding  principal  amount of all Term Loans will
                           not,  at any time,  exceed  the  Contracts  Borrowing
                           Base;

                  (v)      An Average Repossession Ratio less than the following
                           maximum percentages:

                           March 31, 2000 and thereafter        less than 2.30%;

                  (vi)     A ratio of Loan Loss  Reserves  (after  deduction  of
                           losses   for   the   then-current   period)   to  the
                           then-outstanding   principal   balance  of   Cavalier
                           Acceptance's loan portfolio of not less than 2.00%.



<PAGE>






                                   ARTICLE IX

                                     DEFAULT

         9.1      Events of Default.  The occurrence of any one or more of  the
following events shall constitute a Default or an Event of Default hereunder:

                  (A)  Any   Borrower shall fail to pay when due any installment
of principal  under any of the Loans,  or any interest or fee payable under this
Agreement or any Security  Document or other Loan Document;  provided,  however,
that a payment  default  described  in this clause (A) shall not  constitute  an
Event of Default  unless such payment  default  shall not have been cured within
ten (10) days of written notice thereof from the Lender and, provided,  further,
however,  that the foregoing proviso shall not apply during any calendar year if
two (2) such defaulted  payments shall previously have occurred in such calendar
year.

                  (B) (1) Any  Borrower  shall fail to observe or perform any of
its covenants contained in Sections 7.1(A), 7.1(E), 7.1(M), 7.2(A); or

                      (2) Any Borrower or any Consolidated Entity shall  fail to
observe or perform  any other  obligation  to be  observed  or  performed  by it
hereunder  (other than any obligation of Cavalier  Acceptance  under Section 8.3
hereof),  or under  any of the  Notes to which it is a party or under any of the
other Loan  Documents,  and such  failure  shall  continue for fifteen (15) days
after the earlier of: (i) written  notice of such failure  from Lender;  or (ii)
Lender is notified or should have been notified of such failure  pursuant to the
provisions of Section 7.1(M).

                  (C)  Any Borrower or any Consolidated Entity shall (1) fail to
pay when due any Indebtedness  (other than the Loans) to Lender;  or (2) fail to
pay any  Indebtedness of more than $50,000 due any third Persons (other than any
Indebtedness  involving  bona  fide  disputes  of less than  $250,000)  and such
failure shall continue beyond any applicable grace period and shall not be cured
within  fifteen (15) days after written  notice  thereof from Lender to Cavalier
Homes.

                  (D)  Any  financial  statement,  representation,  warranty  or
certificate  made or  furnished by any  Borrower or any  Consolidated  Entity to
Lender in connection  with this  Agreement,  or as inducement to Lender to enter
into this  Agreement,  or in any separate  statement or document to be delivered
hereunder to Lender:  (1) shall be materially  false,  incorrect,  or incomplete
when made; or (2) shall become  materially  false or incorrect and remain so for
fifteen (15) days after the earlier of: (1) written  notice from Lender;  or (2)
Lender is notified or should have been  notified  pursuant to the  provisions of
Section 7.1(M).

                  (E)  Any  Borrower or any Consolidated  Entity shall admit its
inability to pay its debts as they mature,  or shall make an assignment  for the
benefit of itself or any of its creditors.

                  (F)  Proceedings in bankruptcy, or for  reorganization  of any
Borrower or any  Consolidated  Entity,  or for the  readjustment of any of their
respective  debts,  under the federal  Bankruptcy Code, as amended,  or any part
thereof,  or under any other Law,  whether  state or federal,  for the relief of
debtors,  now or hereafter  existing,  shall be commenced by any Borrower or any
Consolidated   Entity  or  shall  be  commenced  against  any  Borrower  or  any
Consolidated  Entity and shall not be discharged  within thirty (30) days of its
commencement.

                  (G)  A receiver, trustee or conservator shall be appointed for
any Borrower or any  Consolidated  Entity or for any  substantial  part of their
respective assets, or any proceedings shall be instituted for the dissolution or
the full or partial liquidation of any Borrower or any Consolidated  Entity, and
such receiver, trustee or conservator shall not be discharged within thirty (30)
days of his  appointment,  or such  proceedings  shall not be discharged  within
thirty (30) days of its commencement, or any Borrower or any Consolidated Entity
shall discontinue business or materially change the nature of its business.



<PAGE>




                  (H)  Any   Borrower   or  any Consolidated Entity shall suffer
final judgments for payment of money aggregating in excess of $250,000 and shall
not  discharge  the same  within a period of thirty  (30) days  unless,  pending
further proceedings, execution has been effectively stayed.

                  (I)  A creditor of any  Borrower  or any  Consolidated  Entity
shall obtain  possession of any substantial part of the Collateral by any means,
including, without limitation, levy, distraint, replevin or self- help.

                  (J)  The validity or enforceability of this Agreement,  any of
the Notes,  or any other Loan Document shall be contested by any Borrower or any
Consolidated  Entity  or any of them  shall  deny  that  it has  any or  further
liability or obligation hereunder or thereunder.

                  (K)  Any Pension Plan shall fail to meet the  minimum  funding
standards of Section 302 of ERISA as now in effect or hereafter amended.

                  (L)  A criminal  investigation is commenced  and results in an
indictment with respect to any Borrower or any Consolidated Entity.

                  (M)  Any  property  of any Borrower or any Consolidated Entity
is seized by a governmental  authority,  or a forfeiture proceeding is commenced
against Borrower or any Consolidated  Entity, or any property of any Borrower or
any Consolidated Entity.

                  (N)  Any default or event of default  shall occur under any of
the other Loan Documents.

         9.2      Acceleration.  Immediately   and   without notice   upon   the
occurrence of an Event of Default  specified in the foregoing  Sections  9.1(E),
9.1(F) or 9.1(G) or at Lender's option upon the occurrence of any other Event of
Default,  all Obligations,  whether  hereunder or otherwise,  shall  immediately
become due and payable without further action of any kind on Lender's part.

         9.3      Remedies. After the occurrence of any Event of Default, Lender
shall have, in addition to the rights and remedies given to it by this Agreement
or any other Loan Document,  all those allowed by all applicable Law, including,
without  limitation,  the Uniform Commercial Code as enacted in any jurisdiction
in which any  Borrower  or any  Collateral  may be  located.  No right or remedy
conferred upon Lender in this Agreement is intended to be exclusive of any other
right or remedy  contained in the Notes,  this  Agreement,  or in any other Loan
Document,  and every such right or remedy  shall be  cumulative  in  addition to
every  other  right or remedy  contained  herein or therein or now or  hereafter
available to Lender pursuant to applicable Law, in equity or otherwise.  Without
limiting the generality of the foregoing, Lender may immediately, without demand
of performance and without other notice (except as specifically required by this
Agreement or the other Loan Documents, or as required by Law and which cannot be
waived) or demand  whatsoever  to Borrowers,  all of which are hereby  expressly
waived, and without  advertisement,  sell at public or private sale or otherwise
realize upon,  the whole or, from time to time, any part of the  Collateral,  or
any interest  which any  Borrower may have  therein.  After  deducting  from the
proceeds of sale or other disposition of the Collateral all expenses  (including
all reasonable  expenses for legal  services),  Lender shall apply such proceeds
toward the  satisfaction  of the  Obligations in such order as Lender may elect.
Any  remainder of the proceeds  after  satisfaction  in full of the  Obligations
shall be distributed as required by applicable  Law. Notice of any sale or other
disposition  shall be given to Cavalier  Homes on behalf of  Borrowers  at least
five (5) days before the time of any  intended  public sale or of the time after
which any intended private sale or other  disposition of the Collateral is to be
made,  which Borrowers  hereby agree shall be reasonable  notice of such sale or
other  disposition.  Borrowers  shall be jointly  and  severally  liable for any
deficiency.  Each Borrower agrees to assemble,  or to cause to be assembled,  at
its own  expense,  the  Collateral  at such  place or  places  as  Lender  shall
designate.  At any such sale or other  disposition,  Lender  may,  to the extent
permissible  under  applicable  Law,  purchase  the  whole  or any  part  of the
Collateral, free from any right of redemption on the part of any Borrower, which
right is hereby waived and released.  Without  limiting the generality of any of
the rights and remedies conferred upon Lender under this paragraph,  Lender may,
to the full extent permitted by applicable Law:




<PAGE>




                  (A)  Refuse to extend  further Advances under any of the Loans
or convert or permit to be converted any portion of the Revolving Loan to a Term
Loan;

                  (B)  Enter upon any Borrower's premises, exclude therefrom any
Borrower  or  any  Affiliate  thereof,  and  take  immediate  possession  of the
Collateral,  either personally or by means of a receiver appointed by a court of
competent jurisdiction, using all necessary force to do so;

                  (C)  At Lender's option, use, operate, manage and control  the
Collateral in any lawful manner;

                  (D)  Collect and receive all rents, income, revenue, earnings,
issues and profits therefrom;

                  (E)  Maintain,   repair,  renovate,   alter   or   remove  the
Collateral as Lender may determine in its sole discretion; and

                  (F)  Collect all Accounts in Lender's or any Borrower's   name
and take control of any   cash   or non-cash   proceeds of any or all   of   the
Collateral;

                  (G)  Enforce  payment of any Accounts, prosecute any action or
proceeding  with respect to Accounts,  extend the time of payment of any and all
Accounts,  make  allowances and  adjustments  with respect  thereto and to issue
credits in the name of the Lender or any Borrower;

                  (H)  Settle, compromise,  extend, renew, release, terminate or
discharge,  in whole or in part, any Account or deal with the same as Lender may
deem advisable; and

                  (I)  Require any Borrower to open all   mail   only   in   the
presence  of a  representative  of the  Lender,  who  make  take  therefrom  any
remittance on any of the Collateral.

         9.4      Right of  Set-Off.  Upon the  occurrence  of  any   Event   of
Default,  Lender may, and is hereby authorized by each Borrower, at any time and
from time to time,  to the fullest  extent  permitted  by  applicable  Law,  and
without advance notice to any Borrower (any such notice being  expressly  waived
by each Borrower),  set-off and apply any and all deposits  (general or special,
time  or  demand,  provisional  or  final)  at  any  time  held  and  any  other
Indebtedness  at any time owing by Lender  to, or for the credit or the  account
of, any  Borrower  against any or all of the  Obligations  of  Borrowers  now or
hereafter existing whether or not such Obligations have matured and irrespective
of whether  Lender has  exercised  any other rights that it has or may have with
respect to such  Obligations,  including  without  limitation,  any acceleration
rights.  The  aforesaid  right of set-off  may be  exercised  by Lender  against
Borrowers  or any  of the  Consolidated  Entities  or  against  any  trustee  in
bankruptcy,  debtor in  possession,  assignee for the benefit of the  creditors,
receiver,  or execution,  judgment or attachment creditor of Borrowers or any of
the Consolidated Entities, or such trustee in bankruptcy,  debtor in possession,
assignee  for the benefit of  creditors,  receiver,  or  execution,  judgment or
attachment  creditor,  notwithstanding the fact that such right of set-off shall
not have been  exercised by Lender prior to the making,  filing or issuance,  or
service upon Lender of, or of notice of, any such  petition;  assignment for the
benefit of  creditors;  appointment  or  application  for the  appointment  of a
receiver; or issuance of execution, subpoena, order or warrant. Lender agrees to
promptly  notify  Cavalier Homes on behalf of Borrowers  after any such set- off
and application,  provided that the failure to give such notice shall not affect
the  validity of such set-off and  application.  The rights of Lender under this
Section 9.4, Section 9.5 and Section 9.6 are in addition to the other rights and
remedies  (including,  without  limitation,  any other rights of set-off)  which
Lender may have.

         9.5      Demand    Obligations.   All  of  the Obligations  (other than
the Term Loan(s)) of Borrowers shall be due and payable in full upon demand made
by Lender,  whether or not any Event of Default has  occurred and whether or not
Lender reasonably deems itself to be insecure. Demand may be made at any time or
without  reason.  The  enumeration  in Section  9.1 hereof of certain  Events of
Default,  and the  enumeration of certain  remedies  available to Lender upon an
Event of Default (as described in Sections 9.2, 9.3 and 9.4 hereof), does not in
any way limit the right of Lender to otherwise  demand payment in the absence of
the  occurrence of any Event of Default.  Demand is not thereby  qualified or in
any way relative in nature.



<PAGE>




         9.6      Special Remedies. Upon the occurrence of any Event of Default,
in addition to all rights and remedies  provided for in Article IX hereof,  each
Borrower agrees that Lender shall have the following  rights with respect to the
Collateral, and each will take all such steps as to permit Lender to realize the
benefit of such rights and as may be directed by Lender in connection therewith,
including, without limitation, the following:

                  (A)  Lender  or any other  Person  serving  as any  Borrower's
attorney-in-fact  under Section 5.8 of this Agreement shall have, in addition to
the powers set forth in  Section  5.8 or  otherwise,  the  following  rights and
powers: (i) to initiate contact with any Person with respect to the transfer and
vesting in Lender of the  Collateral  pledged to Lender,  and to request  and to
receive  confirmation  from any  Person  that all  rights of any  Borrower  with
respect to such  Collateral may be transferred to and exercised by Lender;  (ii)
to  notify  any and all  other  third  parties  as may be  deemed  necessary  or
desirable in order to insure a smooth and  efficient  transition of the Accocess
and Eligible Contracts pledged to Lender from any Borrower to Lender, including,
without  limitation,  the furnishing by any third parties of computer  services,
tax services,  insurance  services,  escrow services or similar  services to any
Borrower in connection  with its servicing  activities of loans  included in the
Collateral;  (iii) to exercise all or any of any Borrower's  rights and remedies
with  respect to its  Accounts  and its  Eligible  Contracts  pledged to Lender,
including, without limitation, the right to settle, adjust, compromise,  extend,
renew, discharge,  terminate or release any thereof, either in whole or in part,
or to sell,  assign,  transfer,  take control of, use and/or  dispose of, in any
manner,  all or any part of the  Collateral;  and (iv) to do all acts and things
necessary, in the sole judgment of Lender, to permit Lender to enjoy the benefit
of its security interest in the Collateral.

                  (B)  Each  Borrower  agrees to cooperate  fully with Lender in
connection  with any and all steps  taken by  Lender  under  Article  IX of this
Agreement,  including,  without limitation, the execution and delivery to Lender
and/or to third parties,  such additional documents,  notices,  certificates and
the like as to permit the  vesting in and  transfer  to Lender of the benefit of
its rights in and to the Collateral, including, without limitation, the Accounts
and Eligible Contracts pledged to Lender.


                                    ARTICLE X

                                  MISCELLANEOUS

         10.1     Construction.  The  provisions of  this  Agreement shall be in
addition to those of any guaranty,  pledge or security agreement,  note or other
evidence of liability held by Lender,  all of which are incorporated  herein and
shall be construed as  complementary  to each other.  Nothing  herein  contained
shall prevent Lender from enforcing any or all other notes, guaranties,  pledges
or security agreements in accordance with their respective terms.

         10.2     Further Assurances.  From time to time, each   Borrower   will
execute and deliver to Lender such  additional  documents  and will provide such
additional  information as Lender may reasonably  require to carry out the terms
of this Agreement and be informed of the status and affairs of Borrowers and the
Consolidated Entities. Each Borrower will take any and all actions as reasonably
requested  by Lender to ensure  that  Lender  enjoys  the full  benefits  of the
security intended to be granted  hereunder and under the Security  Documents and
the other Loan Documents.

         10.3     Indemnity.  Borrowers  hereby  agree  to jointly and severally
indemnify Lender and its officers,  directors, agents and attorneys against, and
to jointly and severally  hold Lender and all such other persons  harmless from,
any claims,  demands,  liabilities,  costs,  damages, and judgments  (including,
without limitation,  liability under any Environmental Laws and costs of defense
and attorneys' fees) resulting from any  representation  or warranty made by any
Borrower or on any  Borrower's  behalf  pursuant to Article VI of this Agreement
having been false or inaccurate when made (including,  without limitation,  each
time that an Advance  under any of the Loans is  requested  or made) or becoming
and remaining false or inaccurate  thereafter,  or resulting from any Borrower's
breach of any of the  covenants set forth in Article VII or Article VIII of this
Agreement. This agreement of indemnity shall be a continuing agreement and shall
survive  payment  of the  Loans  and  termination  of  this  Agreement  and  the
Obligations hereunder.



<PAGE>




         10.4     Enforcement and Waiver by Lender.  Lender shall have the right
at all times to enforce the provisions of this Agreement, each of the Notes, and
the other Loan Documents in strict accordance with the terms hereof and thereof,
notwithstanding  any conduct or custom on Lender's  part in  refraining  from so
doing at any time or times. Lender's failure at any time or times to enforce its
rights under such provisions, strictly in accordance with the same, shall not be
construed as having  created a custom in any way or manner  contrary to specific
provisions  of this  Agreement  or as having in any way or  manner  modified  or
waived the same. All rights and remedies of Lender are cumulative and concurrent
and the  exercise of one right or remedy shall not be deemed a waiver or release
of any other right or remedy.

         10.5     Expenses  of  Lender.  Borrowers  will, on demand, jointly and
severally reimburse Lender for all expenses,  including the fees and expenses of
legal  counsel  for  Lender,   reasonably   incurred  in  connection   with  the
preparation,  administration,  amendment,  modification,  renewal, extension, or
enforcement  of this  Agreement  and the  other  Loan  Documents  and any  other
documents  related to this Agreement and the collection or attempted  collection
of the Loans and the Notes;  provided,  however,  that Borrowers'  obligation to
reimburse  Lender  for the  legal  fees  (but not  including  the  out-of-pocket
expenses  incurred  by  legal  counsel  for  Lender)  incurred  in  the  initial
preparation  of these  documents  shall be limited to  $17,500.00.  If Borrowers
should fail to pay any such expenses, Lender may, but shall not be obligated to,
make such payment by making an Advance under the Revolving  Loan  Commitment for
such  purpose,  without  notice to  Borrowers.  Any amounts  paid or advanced by
Lender  under this  Section or under any of the  Security  Documents  shall bear
interest at the rate specified for Advances under the Revolving Loan Commitment.
The obligation of Borrowers  under this Section to pay all expenses  incurred by
Lender  shall  survive  payment  of the  Obligations  and  termination  of  this
Agreement.

         10.6     Notices. Any notices or consents required or permitted by this
Agreement  shall be in writing and shall be deemed  delivered  if  delivered  in
person  or if  sent  by  first  class  mail,  postage  prepaid,  return  receipt
requested,  or  telegraph,  or  facsimile,  as follows,  unless such  address is
changed by written notice hereunder:

                  (A)  If to any Borrower:

                       Cavalier Homes, Inc.
                       Post Office Box 540
                       Highway 41 North and Wilson Blvd.
                       Addison, Alabama 35540
                       Facsimile # (205) 747-3044
                       Attention:  Mr. David A. Roberson

                       with a copy to:

                       Lowe, Mobley & Lowe
                       Post Office Box 576
                       1210 21st Street
                       Haleyville, Alabama 35565
                       Facsimile # (205) 486-4531
                       Attention: John W Lowe, Esq.

                  (B)  If to Lender:

                       First Commercial Bank
                       800 Shades Creek Parkway
                       Birmingham, Alabama 35209
                       Facsimile #(205) 868-4898
                       Attention: Mr. James Williams




<PAGE>




                       with a copy to:

                       Bradley Arant Rose & White, LLP
                       2001 Park Place, Suite 1400
                       Birmingham, Alabama 35203
                       Facsimile #(205) 521-8500
                       Attention: J. David Dresher, Esquire

         10.7     Indemnity, Waiver and Release by Borrowers.  To    the maximum
extent permitted by applicable Law, each Borrower and each Consolidated Entity:

                  (A)  Protects,  indemnifies,  and holds Lender (including  any
Participant) and its employees, agents, representatives, officers, directors and
assigns,  harmless  against and of any and all  liabilities,  costs and expenses
(including  attorney's  fees,  court costs and  expenses),  judgments,  damages,
claims, demands, actions or proceedings by whomever asserted (including, but not
limited to,  retail  customers  with respect to the Chattel  Paper  constituting
Collateral  under this Agreement,  any person or persons who prosecute or defend
any  actions  or  proceedings  as  representative  of or on behalf of a class or
interest  group or any government  instrumentality,  body,  agency,  department,
commission or any administrative body or agency having jurisdiction  pursuant to
any  applicable  statute,  rule,  regulation,  order or decree)  arising out of,
connected  with,  or  resulting  from any claim or  defense  against  the dealer
selling the goods which gave rise to the applicable  Chattel  Paper,  or against
Cavalier Acceptance or any other Borrower,  whether such claim or defense arises
out of the Chattel Paper or the  underlying  sale of the home or otherwise,  and
whether the claim or defense is asserted in connection with the Lender's (or any
Participant's) attempting to collect the Chattel Paper or otherwise;

                  (B)  Waives protest of all commercial   paper at any time held
by Lender on which any Borrower is any way liable;

                  (C)  Except as the same may herein be   specifically  granted,
waives notice of acceleration and of intention to accelerate;

                  (D)  Waives  notice  and   opportunity  to  be  heard,   after
acceleration in the manner provided in Section 9.2, before exercise by Lender of
the remedies of self-help,  set-off, or of other summary procedures permitted by
any  applicable  Law or by any agreement  with any Borrower or any  Consolidated
Entity,  and  except  where  required  hereby  or by any  applicable  Law  which
requirement cannot be waived, notice of any other action taken by Lender; and

                  (E)  Releases  Lender and its officers,  attorneys, agents and
employees  from all claims for loss or damage  caused by any act or  omission on
the part of any of them except gross negligence or willful misconduct.

         10.8     Reliance   on  this   Agreement.   There  are  no  third-party
beneficiaries,  other than Borrowers or Lender,  to this Agreement or any of the
other Loan  Documents.  All conditions to Lender's  obligations to make Advances
under this Agreement are imposed solely and  exclusively  for Lender's  benefit.
Neither   Borrowers  nor  any  other  Person  shall  have  standing  to  require
satisfaction  of any such  condition  or be  entitled to assume that Lender will
refuse to make Advances in the absence of strict  compliance  with any or all of
such  conditions,  and neither  Borrower nor any other  Person or entity  shall,
under any circumstances, be deemed to be a beneficiary of any conditions hereof,
any or all of which conditions may be waived freely,  in whole or part by Lender
in its sole  discretion  at any time if Lender  deems it advisable to do so. The
parties  expressly  agree  that  whenever  notice is  required  to be given as a
condition precedent of the exercise of any right of Lender hereunder any failure
by Lender  to give such  notice  shall  result  only in  Lender's  inability  to
exercise  such  right in the  absence  of such  notice  and shall be of no other
consequence  whatsoever and give rise to no claim against Lender. This Agreement
shall not benefit and may not be relied upon by, any Person other than Borrowers
and Lender.  Nothing in this  Agreement or otherwise  creates an  obligation  on
Lender's  part to advise  Borrowers  or any other Person of whether any Advances
are available except upon an actual and bona fide request therefor.



<PAGE>




         10.9     Participation.   Notwithstanding  any  other provision of this
Agreement,  Borrowers  understand  that  Lender  may  enter  into  participation
agreements with Participants whereby Lender will allocate certain percentages of
its commitment to them.  Borrowers  acknowledge that, for the convenience of all
parties,  this  Agreement  is being  entered  into with Lender only and that its
Obligations hereunder are undertaken for the benefit of, and as an inducement to
any such Participant as well as Lender,  and Borrowers hereby grant to each such
Participant,  to the extent of its  participation in any of the Loans, the right
to set off deposit  accounts  maintained by any Borrower with such  Participant.
Each Borrower  authorizes  Lender to disclose  financial  and other  information
regarding such Borrower to Participants and potential Participants.

         10.10    No   Partnership or Joint Venture. Notwithstanding anything to
the contrary herein  contained or implied,  Lender,  by this Agreement or by any
action pursuant hereto or thereto, shall not be deemed a partner, joint venturer
or  participant  in the venture of Borrowers,  and Borrowers  hereby jointly and
severally  indemnify and agree to defend  Lender  harmless  (including,  without
limitation,  the payment of attorneys' fees) from any and all damages  resulting
from  such  allegation  or  construction  of  the  parties'  relationship.   The
requirements herein, and the restrictions imposed in this Agreement,  are solely
for the  protection  and benefit of Lender and shall not be  construed to create
any obligation on behalf of Lender to supervise, warn or disclose matters to any
Borrower.

         10.11    Governing Law. This Agreement is entered into  and performable
in Jefferson  County,  Alabama and the substantive Laws of the United States and
the State of Alabama,  without  giving  effect to its  principles of conflict of
laws, shall govern the construction of this Agreement and the documents executed
and delivered pursuant hereto, and the rights and remedies of the parties hereto
and thereto, except to the extent that the location of any Collateral in a state
or  jurisdiction  other than Alabama  requires  that the  perfection of Lender's
security interest hereunder, and the enforcement of certain of Lender's remedies
with respect to the  Collateral,  be governed by the laws of such other state or
jurisdiction.

                                                                        --------
                                                                         Initial
                                                                        (Lender)


                                                                        --------
                                                                         Initial
                                                              (Cavalier Homes on
                                                        behalf of each Borrower)



         10.12    JURISDICTION; WAIVERS.


                  (A)      JURY WAIVER.  EACH BORROWER AND LENDER HEREBY EACH:

                           (1)      IRREVOCABLY AND UNCONDITIONALLY WAIVES   THE
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING OR COUNTERCLAIM OF ANY TYPE
AS TO ANY MATTER  ARISING  DIRECTLY OR INDIRECTLY OUT OF OR WITH RESPECT TO THIS
AGREEMENT, THE NOTES, THE OTHER LOAN DOCUMENTS OR ANY OTHER DOCUMENT EXECUTED IN
CONNECTION HEREWITH OR THEREWITH; AND




<PAGE>




                           (2)      AGREES THAT ANY OF THEM MAY FILE A COPY   OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING,  VOLUNTARY AND
BARGAINED-FOR AGREEMENT BETWEEN AND AMONG THE PARTIES IRREVOCABLY TO WAIVE TRIAL
BY JURY, AND THAT ANY DISPUTE OR CONTROVERSY OF ANY KIND WHATSOEVER BETWEEN THEM
SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT  JURISDICTION  BY A JUDGE SITTING
WITHOUT A JURY.

                  (B)      CONSENT   TO   JURISDICTION ; WAIVER OF VENUE.   EACH
BORROWER AND LENDER HEREBY EACH:

                           (1)      KNOWINGLY AND VOLUNTARILY CONSENTS TO    THE
PERSONAL  JURISDICTION  OF ANY COURT OF COMPETENT  SUBJECT  MATTER  JURISDICTION
(WHETHER STATE OR FEDERAL) HOLDING IN BIRMINGHAM, JEFFERSON COUNTY, ALABAMA, FOR
THE  DETERMINATION  OF ANY CLAIM OR  CONTROVERSY  ARISING UNDER OR IN CONNECTION
WITH THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT, OR ANY OTHER DOCUMENT
EXECUTED IN  CONNECTION  HEREWITH OR THEREWITH;  AND  KNOWINGLY AND  VOLUNTARILY
WAIVES ANY OBJECTION TO THE EXERCISE OF PERSONAL  JURISDICTION OVER IT OR ANY OF
THEM BY SAID  COURTS  ON THE  GROUND  THAT IT OR ANY OF THEM  DOES  NOT HAVE THE
REQUISITE  MINIMUM  CONTACTS  WITH THE STATE OF ALABAMA OR THAT EXERCISE OF SUCH
JURISDICTION OTHERWISE FAILS TO MEET THE REQUIREMENTS OF MINIMUM CONTACTS OR DUE
PROCESS UNDER THE CONSTITUTION OF THE UNITED STATES OR THE STATE OF ALABAMA; AND
AGREES THAT  SERVICE OF PROCESS ON IT OR ANY OF THEM AT ITS ADDRESS SET FORTH IN
SECTION 10.6 OF THE AGREEMENT IN ACCORDANCE  WITH THE  PROVISIONS OF THE ALABAMA
RULES OF CIVIL PROCEDURE WILL BE SUFFICIENT NOTICE OF ANY PROCEEDING AGAINST ANY
OF IT OR ANY OF THEM IN ANY SUCH COURT,  AND WAIVES ANY  REQUIREMENT OF OTHER OR
ADDITIONAL  SERVICE  OF PROCESS OR NOTICE OF ANY SUCH  PROCEEDING;  AND  FURTHER
AGREES THAT EXERCISE OF JURISDICTION OVER IT OR ANY OF THEM BY COURTS HOLDING IN
BIRMINGHAM,  JEFFERSON COUNTY,  ALABAMA SHALL BE IN ADDITION TO, AND NOT IN LIEU
OF, THE  EXERCISE OF  JURISDICTION  OVER IT OR ANY OF THEM BY ANY OTHER COURT OF
COMPETENT JURISDICTION, WHETHER WITHIN OR WITHOUT THE STATE OF ALABAMA; AND

                           (2)      KNOWINGLY   AND   VOLUNTARILY   WAIVES   ANY
OBJECTION  THAT IT MAY NOW OR  HEREAFTER  HAVE TO THE  VENUE  OF ANY  ACTION  OR
PROCEEDING AGAINST IT OR ANY OF THEM IN ANY COURT MENTIONED  HEREINABOVE OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO
PLEAD OR CLAIM THE SAME.

         10.13    Binding  Effect, Assignment. This Agreement shall inure to the
benefit of, and shall be binding upon, the  respective  successors and permitted
assigns of the parties  hereto.  No Borrower  has the right to assign any of its
rights or obligations hereunder without Lender's prior written consent.

         10.14    Termination. The terms and provisions of this Agreement  shall
continue  in effect  until  the  Obligations  shall  have  been  fully  paid and
performed,  and Lender shall have no further  obligation  whatsoever to make any
Advances under any of the Loans, issue any Letters of Credit or extend any other
credit or  accommodation,  and Lender and Borrowers  terminate this Agreement in
writing. Following any termination (if applicable),  the terms and provisions of
this Agreement  (excluding any obligation to lend or other commitment  hereunder
made by Lender),  and all of the covenants and promises of Borrowers  hereunder,
shall be automatically  reinstated if at any time all or any part of any payment
made upon the Obligations is rescinded or must for any reason be returned to the
Person making such payment, whether due to insolvency, bankruptcy,  dissolution,
appointment of a custodian or receiver,  or any other reason whatsoever,  all as
though such payment had not been made.



<PAGE>




         10.15    Obligations  Unconditional   and  Absolute.  Borrowers  hereby
acknowledge  and agree  that  their  liability  to Lender  with  respect  to the
Obligations are  continuing,  absolute,  unconditional  and, except for the Term
Loans,  joint and several  (subject to the  provisions of Section 2.1(D) of this
Agreement).  Notwithstanding  the generality of the foregoing,  each  Borrower's
liability upon the Obligations shall remain in full force and effect,  and shall
not be affected,  discharged,  impaired or modified in any manner whatsoever due
to (a) the invalidity or  unenforceability of any of the Loan Documents executed
by any other Person,  (b) any Borrower's  failure to receive any notice given by
Lender to any other Person, (c) any modification, amendment or supplement of any
covenant or  agreement  contained in any of the Loan  Documents  executed by any
third Person,  (d) any  compromise,  settlement,  release or  termination of any
promise,  agreement or other  liability  contained in any of the Notes or any of
the other Loan  Documents,  (e) any waiver granted by Lender with respect to the
payment,  performance or observance of any promise or agreement  contained under
any of the Loan Documents, (f) any accommodation,  extension, action or inaction
(including any exercise or  non-exercise of any right or remedy) with respect to
any of the Loan  Documents,  (g) the  extension  of maturity  for the payment or
performance  of any of the  Obligations  due from any  Borrower  or other  third
Person, or (h) the release, discharge,  non-perfection or impairment of Lender's
claims or rights against any  Collateral  now or at any time hereafter  securing
any of the Obligations, or the release or discharge of any of Lender's claims or
rights  against  any  Borrower,  guarantor  or  third  Person  liable  upon  the
Obligations,  whether any such release,  discharge or  impairment  occurs due to
operation of law, action or inaction by Lender, or otherwise.

         10.16    Entire  Agreement,  Amendments.  This Agreement, including the
Schedules and Exhibits hereto,  all of which are hereby  incorporated  herein by
reference,  the other  Loan  Documents  and all  other  documents  executed  and
delivered pursuant hereto,  constitute the entire agreement between the parties,
and may be amended only by a writing signed on behalf of each party.

         10.17    Severability. If   any provision of this Agreement, the Notes,
or the other Loan Documents shall be held invalid under any applicable Law, such
invalidity  shall not affect any other provision of this Agreement or such other
instrument or agreement that can be given effect without the invalid  provision,
and, to this end, the provisions hereof are severable.

         10.18    Headings. The   table   of contents   and   article,  section,
paragraph  and  subparagraph  headings  hereof are inserted for  convenience  of
reference only, and shall not alter,  define,  or be used in construing the text
of such articles, sections, paragraphs or subparagraphs.

         10.19    Counterparts.  This Agreement may be executed in any number of
counterparts,  each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.

         10.20    Seal.  This Agreement is intended   to take   effect   as   an
instrument under seal.


            [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]




<PAGE>




                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Agreement to be executed by their respective duly authorized  officers as of the
day and year first above written.


                                             BORROWERS:

                                            CAVALIER HOMES, INC.


                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------

                                         QUALITY HOUSING SUPPLY, LLC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]

                            Its: Secretary
                                ------------------------------------------------


                                         CAVALIER MANUFACTURING,INC.


                           By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------


                                         CAVALIER INDUSTRIES, INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: President
                                ------------------------------------------------



                                            DELTA HOMES, INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------

<PAGE>



                                          CAVALIER ENTERPRISES, INC.



                             By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------



                                       CAVALIER ASSOCIATED RETAILERS, INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------


                                  QUALITY CERTIFIED INSURANCE SERVICES, INC.



                            By: /s/ June M. Martin
                               ------------------------------------------ [L.S.]
                            Its: Secretary
                                ------------------------------------------------


                                       CAVALIER ASSET MANAGEMENT, INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: President
                                ------------------------------------------------


                                    CAVALIER MANUFACTURING ASSET CO., INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------

                                     CAVALIER INDUSTRIES ASSET CO., INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------





<PAGE>





                                     CAVALIER ENTERPRISES ASSET CO., INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------


                                       CAVALIER REAL ESTATE CO., INC.



                            By: /s/ Michael R. Murphy
                               ------------------------------------------ [L.S.]
                            Its: President
                                ------------------------------------------------



                                         CAVALIER ACCEPTANCE CORPORATION


                            By: /s/ June M. Martin
                               ------------------------------------------ [L.S.]
                            Its: Secretary
                                ------------------------------------------------





                            LENDER:

                                            FIRST COMMERCIAL BANK


                            By: /s/ Jim Williams
                               ------------------------------------------ [L.S.]
                            Its: Vice President
                                ------------------------------------------------





<PAGE>





                                                                      SCHEDULE I

                                  DEFINED TERMS


                  "Accounts",   "Chattel   Paper",   "Contracts",   "Documents",
"Equipment",   "Fixtures",   "General  Intangibles",   "Goods",   "Instruments",
"Inventory" and other terms not specifically defined in the Agreement shall have
the  same  respective  meanings  as are  given to  those  terms  in the  Uniform
Commercial  Code as  currently  adopted and in effect in the State of Alabama on
the date of the Agreement.

                  "Account Debtor" means any Person for which any Borrower holds
any right to payment arising from a bona fide outright sale or lease of Goods or
for services rendered by such Borrower to that Person.

                  "Advance"  means  each loan of money or credit  made to one or
more of the Borrowers by Lender under the Agreement.

                  "Affiliate"  shall  mean any  Person  (A)  which  directly  or
indirectly through one or more intermediaries  controls, or is controlled by, or
is under common control with, any Borrower,  or (B) five percent (5%) or more of
the equity interest of which is held  beneficially or of record by any Borrower.
The term "control" means the possession, directly or indirectly, of the power to
cause the direction of the management and policies of a Person,  whether through
the ownership of voting securities, by contract or otherwise.

                  "Agreement"  means this Revolving and Term Loan Agreement,  as
may be amended or supplemented from time to time.

                  "Allocated Eligible Contracts" shall have the meaning ascribed
thereto in Section 3.1 of the Agreement.

                  "Assignment  of Life  Insurance"  means the  assignment of the
Insurance  Policy as Collateral  dated  February 17, 1994,  duly  authorized and
previously  executed by Cavalier Homes, as such Assignment of Life Insurance may
have heretofore been amended and may be hereafter supplemented or amended.

                  "Assumption  Agreement"  means each Assumption  Agreement duly
authorized and executed by each Subsidiary and Controlled Partnership that is to
become a Participating  Subsidiary or a Participating  Partnership after Closing
and  substantially  in the form of  Exhibit  E to the  Agreement,  as each  such
Assumption Agreement may be thereafter  supplemented or amended, and "Assumption
Agreements" means all of them, collectively.

                  "Average  Repossession Ratio" means the ratio of (A) the total
number of  repossession  for the current  fiscal year,  divided by the number of
months then-ended, to (B) the sum of the number of loans outstanding on the last
day of each month, divided by the number of months then-ended.

                  "Banking  Day" with respect to LIBOR Rate Loans means a day on
which banks are open for the general conduct of business in London,  England and
the state in which Lender has its main office,  and on which dealings in Dollars
are  carried  on in the  offshore  interbank  market;  and with  respect  to the
Floating Rate Loans, means a day on which Lender is open for the general conduct
of business at its main office.

                  "Base LIBOR Rate" for any  Interest  Period means the rate per
annum equal to the quotient of (a) the rate for  deposits in U.S.  Dollars for a
period of the  applicable  Interest  Period which  appears on Telerate Page 3750
("USD-LIBOR-  BBA") as of 11:00 a.m.  London time on the day that is two Banking
Days



<PAGE>




preceding the first day of the applicable  Interest Period, for a deposit amount
corresponding to the amount of the LIBOR Rate Loan to be outstanding during such
Interest  Period,  divided by (b) a number equal to 1.00 minus the  aggregate of
the rates (expressed as a decimal fraction) of the Reserve  Requirement  current
on the date two Banking Days prior to the beginning of such Interest Period.  If
the rate described in clause (a), above,  does not appear on Telerate Page 3750,
the rate under (a), above, will be the rate (stated as an annual percentage rate
rounded  upward to the  nearest  one-sixteenth  of one  percent)  determined  by
Lender, in its reasonable judgment, to be the rate at which Lender would acquire
Dollar deposits in the London,  England interbank eurodollar market for delivery
on the first  day of such  Interest  Period  for the  number  of days  comprised
therein  and in an  amount  equal to the  amount  of the  LIBOR  Rate Loan to be
outstanding  during such Interest Period. The Base LIBOR Rate calculated in this
manner shall be adjusted upward to the nearest one-hundredth of one percent. The
Base LIBOR Rate shall be adjusted automatically, upward or downward, as the case
may  be,  on  and  as of the  effective  date  of  any  change  in  the  Reserve
Requirement.

                  "Benefit  Plan" means any  employee  welfare  benefit  plan as
defined in Section 3(1) of ERISA or any employee pension benefit plan as defined
in Section 2(2) of ERISA.

                  "Borrower" means each of Cavalier Homes,   Inc.,  a   Delaware
corporation,  Quality Housing Supply, LLC, a Delaware limited liability company,
Cavalier Manufacturing, Inc., a Delaware corporation, Cavalier Industries, Inc.,
a Delaware corporation,  Delta Homes, Inc., a Mississippi corporation,  Cavalier
Enterprises, Inc., a Delaware corporation,  Cavalier Associated Retailers, Inc.,
a Delaware corporation,  Quality Certified Insurance Services,  Inc., an Alabama
corporation,  Cavalier Asset Management, Inc., a Delaware corporation,  Cavalier
Manufacturing Asset Co., Inc., a Delaware corporation, Cavalier Industries Asset
Co.,  Inc., a Delaware  corporation,  Cavalier  Enterprises  Asset Co.,  Inc., a
Delaware  corporation,  Cavalier Real Estate Co., Inc., a Delaware  corporation,
and Cavalier Acceptance  Corporation,  an Alabama corporation,  and the entities
that become  Participating  Subsidiaries and  Participating  Partnerships  after
Closing, and "Borrowers" means all of them, collectively.

                  "Borrowing Date" means any date on which  Borrower(s)  receive
or  propose to receive an Advance  under the  Revolving  Loan  pursuant  to this
Agreement.

                  "Borrowing   Notice"  or  "Request  for   Advance"   means  an
irrevocable  written  (including  facsimile),  telex or  telephonic  notice,  in
substantially  the  form of  Exhibit  B, to the  Agreement,  by the  appropriate
Borrower(s),  to Lender  specifying  (A) that the notice relates to making a new
Advance under the Revolving  Loan,  (B) the Borrowing  Date,  (C) the amounts of
Floating Rate Loans and LIBOR Rate Loans comprising such new Advance and (D) the
commencement  date and duration of the Interest  Period  applicable  to any such
LIBOR Rate Loan.

                  "Cash Flow" means, as to any Person, the aggregate of: (A) net
income after taxes (or the net  deficit,  as  applicable)  plus (B) amounts that
have been deducted for (i) amortization of intangible assets,  (ii) depreciation
and depletion, and (iii) deferred taxes and expenses; all as shown by the income
statement of such Person,  calculated  in  accordance  with  Generally  Accepted
Accounting Principles.

                  "Cavalier Acceptance" means Cavalier Acceptance   Corporation,
an Alabama corporation.

                  "Cavalier Homes" means   Cavalier   Homes,  Inc., a   Delaware
corporation.

                  "Charge-Off  Ratio" means the sum of the total  dollar  amount
charged as a loan loss against the Loan Loss Reserve  during the current  fiscal
year of Cavalier Acceptance,  divided by the then-outstanding  principal balance
of Cavalier Acceptance's loan portfolio.

                  "Closing"  means the time and place of  actual  execution  and
delivery of the Agreement, the Revolving Note and the other Loan Documents which
are to be executed at closing.



<PAGE>




                  "Closing   Certificate"   means   a   certificate,   in   form
satisfactory to Lender, dated as of the date of Closing, and signed on behalf of
each Borrower by the president or a vice president of such Borrower.

                  "Collateral"  means the property and rights, and any proceeds,
in whatever  form,  thereof,  described  in Sections  5.1,  5.2,  and 5.3 of the
Agreement and in the Security Documents.

                  "Commitment Fee" means with respect to the Revolving Loan, the
fee, due and payable and fully earned at Closing and thereafter upon renewal (if
applicable),  equal to  three-tenths  of one percent  (0.30%)  multiplied by the
Revolving Loan Commitment ($105,000).

                  "Compliance   Certificate"  means  (i)  with  respect  to  the
Revolving  Loan a  certificate  in  the  form  of  Exhibit  C to the  Agreement,
certified by the president or chief  financial  officer of Cavalier  Homes to be
correct,  which is  delivered  by  Cavalier  Homes on  behalf of  Borrowers  and
accepted  by Lender  pursuant  to  Section  4.1(I),  Section  4.2(A) or  Section
7.1(C)(3)  of the  Agreement  and  (ii)  with  respect  to  the  Term  Loans,  a
certificate  in the  form of  Exhibit  C-1 to the  Agreement,  certified  by the
president or chief financial officer of Cavalier Acceptance to be correct, which
is delivered by Cavalier  Acceptance and accepted by Lender  pursuant to Section
8.1(B) of the Agreement.

                  "Conseco   Contract"  means  Chattel  Paper   underwritten  by
Cavalier Acceptance in conformity with the Conseco Underwriting Guidelines.

                  "Conseco  Underwriting  Guidelines"  means those  underwriting
guidelines set forth on Exhibit A to Schedule 1 to this Agreement.

                  "Consolidated"  refers to the consolidation of the accounts of
a Person and its  Consolidated  Entities  on a balance  sheet and  statement  of
income and retained  earnings in accordance with Generally  Accepted  Accounting
Principles.

                  "Consolidated   Entity"   means  any  Person   the   financial
statements of which are appropriately consolidated with the financial statements
of  Cavalier  Homes  under   Generally   Accepted   Accounting   Principles  and
"Consolidated Entities" means all of them, collectively.

                  "Contracts Borrowing Base" means, at any time, with respect to
the Term Loans,  the amount computed on the Compliance  Certificate for the Term
Loans most recently delivered to, and accepted by, Lender in accordance with the
Agreement and equal to the aggregate of:

                  (A)  Eighty   percent  (80%)  of  the  aggregate   outstanding
                  principal balance of Eligible  Contracts that are rated higher
                  than a C-Rated Contract from a credit-quality standpoint (that
                  is,  that  are  rated  "A"  or  "B"  from  a  credit-  quality
                  standpoint); plus

                  (B)      Seventy percent (70%) of the  aggregate   outstanding
                  principal balance   of   Eligible   Contracts that are C-Rated
                  Contracts; plus

                  (C)  Seventy  percent  (70%)  of  the  aggregate   outstanding
                  principal  balance  of  Eligible  Contracts  that are  Conseco
                  Contracts.

                  Provided,  however,  no more than fifteen percent (15%) of the
                  total  Contracts  Borrowing  Base may be  comprised of C-rated
                  Contracts.

                  "Controlled  Partnership" means a general partnership of which
any Borrower or Subsidiary is a general partner,  or a limited partnership whose
sole general  partner is a Borrower and with respect to which  partnership  such
Borrower  or  Subsidiary  is  entitled  to  receive  not  less  than  50% of the
distributions  of cash made to the partners  thereof,  other than any  preferred
cash distribution arrangement approved by Lender in writing.

<PAGE>
                  "C-Rated  Contract"  means  an  Eligible  Contract  with a "C"
rating from a credit-quality standpoint as set forth in the proviso to subclause
(G) to the definition of Eligible Contract.

                  "Current Assets" and "Current  Liabilities" mean, at any time,
all assets or  liabilities,  respectively,  that, in accordance  with  Generally
Accepted Accounting Principles should be classified as current assets or current
liabilities, respectively, on a balance sheet of a Person.

                  "Debt Service" means, at any time, the sum of (i) all interest
payments  for the prior  twelve (12) months plus (ii)  current  maturities  (due
within the next twelve (12) month period) of Indebtedness.

                  "Default"  and "Event of  Default"  each mean the  occurrence,
with  respect to any of the Loans,  of an event  described in Section 9.1 of the
Agreement.

                  "Dollars" and "$" each mean United States Dollars.

                  "Eligible  Contract"  means,  at any time,  Chattel Paper upon
which lender has a property  perfected  security  interest and that conforms and
continues to conform to each and all of the following conditions:

                  (A) The  representations  contained in Section 6.2 and Section
6.3 of the  Agreement  are true and correct in all respects  with respect to the
Chattel Paper;

                  (B) The  Chattel  Paper  arose out of the retail sale of a new
home  manufactured  by one of the Borrowers or the sale of a  manufactured  home
repossessed by Cavalier Acceptance;

                  (C) The Chattel  Paper  evidences  the  obligation of a retail
customer to repay  Indebtedness  incurred to purchase a new home manufactured by
one of the Borrowers or the sale of a manufactured  home repossessed by Cavalier
Acceptance;

                  (D) The Chattel Paper has been duly assigned to, and is  owned
by, Cavalier Acceptance;

                  (E) The  Chattel  Paper is not more than ninety (90) days past
due in payment and the Chattel Paper has not been re-dated;

                  (F) The Chattel Paper evidences an amount   financed   not  in
excess of $70,000;

                  (G) The portfolio  index score used by Cavalier  Acceptance to
underwrite such Chattel Paper was not less than 70;

                  (H) The Chattel Paper was funded by Cavalier Acceptance on  or
after January 1, 2000; and

                  (I) The Chattel Paper has been reviewed and approved by Lender
in its sole discretion.

                  In the event of any dispute under the foregoing criteria about
whether  Chattel  Paper is or has ceased to be an  Eligible  Contract,  the sole
decision and discretion of Lender shall control.




<PAGE>




                  "Environmental   Laws"   means   the   federal   Comprehensive
Environmental  Response  Compensation  and  Liability Act of 1980  (CERCLA),  as
amended  (42  U.S.C.   Sections   9601,  et  seq.),   the  Hazardous   Materials
Transportation Act, as amended (49 U.S.C.  Sections 1801, et seq.), the Resource
Conservation  and Recovery Act (RCRA),  as amended (42 U.S.C.  Sections 6901, et
seq.),  the Clean Water Act, as amended (33 U.S.C.  Sections 1251, et seq.), the
Clean Air Act,  as  amended  (42  U.S.C.  Sections  7401,  et  seq.),  the Toxic
Substances  Control  Act, as amended (15 U.S.C.  Sections  2601,  et seq.),  the
Emergency  Planning and  Community  Right-to-Know  Act  (EPCRA),  as amended (42
U.S.C.  Sections  11001,  et seq.),  and the rules and  regulations  adopted and
publications  promulgated pursuant thereto, and the rules and regulations of the
Occupational Safety and Health  Administration (OSHA) pertaining to occupational
exposure  to  asbestos,  as  amended,  and any  other  federal,  state  or local
environmental law, ordinance, rule, or regulation now or hereafter in effect.

                  "ERISA" means the federal Employee  Retirement Income Security
Act of 1974,  as amended  and in effect from time to time,  and the  regulations
promulgated  by  the  Department  of  Labor  or  the  Pension  Benefit  Guaranty
Corporation thereunder.

                  "ERISA Affiliate" means any trade or business,  whether or not
incorporated, that with Borrower is a member of a group that would be treated as
a single  employer  for  purposes  of  Section  414(b),  (c),  (m) or (o) of the
Internal Revenue Code of 1986, as amended.

                  "Financial  Statements" means the Consolidated  balance sheets
of Cavalier  Homes and the  Consolidated  Entities as of December 31, 1998,  and
Consolidated  statements  of income  and  retained  earnings  and Cash  Flows of
Cavalier  Homes and the  Consolidated  Entities for the years or months ended on
such  dates all as  furnished  to Lender,  and shall also mean any such  balance
sheets and statements as may hereafter be furnished by any Borrower to Lender.

                  "Five Year Treasury"  means the weekly average yield on United
States treasury securities adjusted to a constant maturity of five (5) years, as
released each Monday by the Federal Reserve Board in Release H.15. The Five Year
Treasury on March 27, 2000 was ___%.

                  "Fixed  Assets"  means,  at any time,  all assets  (other than
Current Assets) that should,  in accordance with Generally  Accepted  Accounting
Principles be classified as assets on a balance sheet of any Borrower.

                  "Floating Rate" means the Revolving Rate.

                  "Floating  Rate Loan" means an Advance  thereon or part of the
Revolving Loan with an interest rate based on the Floating Rate.

                  "Generally  Accepted  Accounting  Principles"  and "GAAP" each
mean generally accepted  principles of accounting in effect from time to time in
the United States  applied in a manner  consistent  with those used in preparing
such  financial  statements  as have  theretofore  been  furnished  to Lender by
Borrowers.

                  "Governmental  Authority" means any nation or government,  any
state  and  any  political   subdivision  thereof,  and  any  entity  exercising
executive,  legislative,  judicial, regulatory or administrative functions of or
pertaining to government,  which has or asserts  jurisdiction  over Lender,  any
Borrower, or over the property of any of them.

                  "Guaranty  Agreement"  means  the  guaranty  of  payment  duly
authorized and executed by Cavalier Homes at Closing and in form satisfactory to
Lender,  as such Guaranty  Agreement may be hereafter  amended or  supplemented.
Such Guaranty  Agreement  shall  unconditionally  guarantee the repayment of all
Term Loans made by Lender to Cavalier Acceptance.



<PAGE>




                  "Hazardous  Materials" means any asbestos,  urea  formaldehyde
foam  insulation,   flammable  explosives,   radioactive  materials,   hazardous
materials,  hazardous  wastes,  hazardous  or toxic  substances,  or  related or
unrelated  substances or materials defined,  regulated,  controlled,  limited or
prohibited in any Environmental Laws.

                  "Indebtedness"   means,  as  to  any  Person,   all  items  of
indebtedness,  obligation or liability, whether matured or unmatured, liquidated
or unliquidated,  direct or contingent, joint or several, including, but without
limitation:

                  (A) All indebtedness  guaranteed,  directly or indirectly,  in
any manner,  or endorsed  (other than for  collection or deposit in the ordinary
course of business) or discounted with recourse;

                  (B)  All  indebtedness  in  effect  guaranteed,   directly  or
indirectly, through agreements, contingent or otherwise:

                           (1)      to purchase such indebtedness; or

                           (2) to purchase,  sell or lease (as lessee or lessor)
                  property,  products,  materials  or supplies or to purchase or
                  sell  services,  primarily  for the  purpose of  enabling  the
                  debtor to make payment of such  indebtedness  or to assure the
                  owner of the indebtedness against loss; or

                           (3)      to supply funds to or in any  other   manner
                  invest in the debtor;

                  (C) All  indebtedness  secured  by (or for which the holder of
such  indebtedness has a right,  contingent or otherwise,  to be secured by) any
mortgage,  deed of trust,  pledge,  lien,  security  interest or other charge or
encumbrance upon property owned or acquired subject thereto,  whether or not the
liabilities secured thereby have been assumed; and

                  (D) All  indebtedness  incurred  as the  lessee  of  Goods  or
services  under leases that, in accordance  with Generally  Accepted  Accounting
Principles, should not be reflected on the lessee's balance sheet.

                  "Initial  Participating Subsidiaries" means all  of   Cavalier
Homes,  Inc., a Delaware  corporation,  Quality Housing Supply,  LLC, a Delaware
limited liability company, Cavalier Manufacturing, Inc., a Delaware corporation,
Cavalier  Industries,  Inc.,  a  Delaware  corporation,  Delta  Homes,  Inc.,  a
Mississippi  corporation,  Cavalier  Enterprises,  Inc., a Delaware corporation,
Cavalier Associated Retailers,  Inc., a Delaware corporation,  Quality Certified
Insurance  Services,  Inc., an Alabama  corporation,  Cavalier Asset Management,
Inc., a Delaware corporation, Cavalier Manufacturing Asset Co., Inc., a Delaware
corporation,  Cavalier  Industries  Asset Co.,  Inc.,  a  Delaware  corporation,
Cavalier  Enterprises  Asset Co.,  Inc., a Delaware  corporation,  Cavalier Real
Estate Co., Inc., a Delaware corporation,  and Cavalier Acceptance  Corporation,
an Alabama corporation, collectively.

                  "Insurance Policy" means that certain life insurance policy in
the amount of $2,000,000 naming Jerry F. Wilson as insured, which is assigned to
Lender as  additional  security for the  Obligations  in the  Assignment of Life
Insurance.

                  "Interest  Period"  with  respect to a LIBOR Rate Loan means a
LIBOR Rate Interest  Period,  as such period may be shortened upon suspension of
the LIBOR Rate option under Sections 2.5.13, 2.5.14, 3.6(A).13 or 3.6(A).14.






<PAGE>




                  "Law" and "Laws" each mean all  ordinances,  statutes,  rules,
regulations, orders, injunctions,  judgments, writs or decrees of any government
or  political  subdivision  or agency  thereof,  or any court or similar  entity
established by any thereof.

                  "Lender" means First Commercial Bank, an Alabama state banking
corporation.

                  "Lending Installation" means any office, branch, subsidiary or
affiliate of Lender or any Participant.

                  "Letter  of Credit  Borrowings"  means the  maximum  aggregate
amount  that Lender  could be required to pay under any drafts that  conceivably
could be drawn under all Letters of Credit  outstanding  on such date,  but does
not include drafts that have been drawn and paid.

                  "Letter of Credit  Obligations" means (a) the Letter of Credit
Borrowings  and (b) the  reimbursement  obligations  and  other  obligations  of
Borrowers  under this  Agreement  with  respect to  drawings  made on Letters of
Credit  (including  any  obligations  owing under the  application  or agreement
relating to any such Letter of Credit), including all principal,  interest, fees
and other charges relating thereto.

                  "Letter  of  Credit"  means  each  letter of credit  issued by
Lender  pursuant to Section 2.9 of the Agreement,  and "Letters of Credit" means
all of them, collectively.

                  "Liabilities" means all Indebtedness and all other items that,
in  accordance  with  Generally  Accepted  Accounting   Principles,   should  be
classified as liabilities on a balance sheet of a Person.

                  "LIBOR  Rate" means the Base LIBOR Rate plus 200 basis  points
(2.00%). The LIBOR Rate shall be adjusted automatically,  upward or downward, as
the case may be, on and as of the effective date of any change in the Base LIBOR
Rate resulting from a change in the Reserve Requirement.

                  "LIBOR Rate  Interest  Period"  means a period of three months
(90 days),  or such  longer or shorter  period as Cavalier  Homes,  on behalf of
itself and the other Borrowers,  and Lender may agree from time to time. A month
means a period of thirty (30) days. If any LIBOR Interest Period would otherwise
end on a day which is not a Banking  Day, the LIBOR Rate  Interest  Period shall
end on the next Banking Day.

                  "LIBOR Rate Loan" means an Advance  under the  Revolving  Loan
with an interest rate based on the Base LIBOR Rate.

                  "Loan Documents"  means the Agreement,  the Revolving Note and
each  Term  Note,  the  applications  for  Letters  of  Credit,  the  Assumption
Agreements,  the Subrogation and Contribution Agreements, the Security Documents
and all other agreements, instruments and documents executed or delivered at any
time in  connection  with the  Obligations,  or to evidence or secure any of the
Obligations, all as may be amended or supplemented from time to time.

                  "Loan  Loss  Reserve"  means an  allowance  of  reserve  funds
established and maintained by Cavalier Acceptance,  through charges made against
operating  income,  to be used for the purpose of absorbing losses from Cavalier
Acceptance's loan portfolio.

                  "Loans"  means  the   Revolving   Loan  and  all  Term  Loans,
collectively.

                  "Loan  Termination  Date"  means,  (i)  with  respect  to  the
Revolving Loan, the earliest of (A) April 15, 2002 or (B) upon demand by Lender;
and (ii) with respect to any Term Loan,  the earlier of (A) the maturity date of
the applicable Term Note or (B) the date to which the maturity of the applicable
Term Note may be accelerated pursuant to Section 9.2 of the Agreement.



<PAGE>




                  "Local Time" means the time of day at Lender's main office.

                  "Long-Term  Liabilities"  means  Liabilities  less the portion
thereof that constitutes Current Liabilities.

                  "Net Working  Capital" means, at any time, the amount by which
Current Assets exceed Current Liabilities.

                  "Net Worth" means, at any time, Stockholders' Equity, less the
sum of:

                  (A) Any surplus  resulting   from any   write-up   of   assets
subsequent to the date of Closing;

                  (B) Any amount at which shares of capital stock  of   Borrower
appear as an asset on Borrower's balance sheet; and

                  (C) Loans and advances to stockholders, directors, officers or
employees, of Borrower or any Affiliate.

                  "Notes"  means  the   Revolving   Note  and  all  Term  Notes,
collectively.

                  "Obligations" means the obligations, whether joint or several,
of Borrowers:

                  (A) To pay the principal of and interest on the Revolving Note
and the Term Note(s) in accordance  with the terms  thereof and to satisfy,  pay
and  perform  the  Letter of Credit  Obligations  and all other  liabilities  to
Lender,  whether  under the  Agreement  or  otherwise,  whether now  existing or
hereafter  incurred,  matured  or  unmatured,  direct  or  contingent,  joint or
several,  including  any  extensions,  modifications,  and renewals  thereof and
substitutions therefor;

                  (B) To repay to Lender all amounts  advanced  by Lender  under
the Agreement or under any of the Security Documents,  or otherwise on behalf of
any Borrower, including, without limitation,  advances for principal or interest
payments to prior secured parties, mortgagees, or lienors, or for taxes, levies,
insurance  rent,  repairs to or maintenance or storage of any of the Collateral;
and

                  (C) To  reimburse  Lender,  on  demand,  for  all of  Lender's
expenses and costs,  including the reasonable  fees and expenses of its counsel,
in connection with the preparation, administration,  amendment, modification, or
enforcement  of  the  Agreement  and  the  documents  required  or  contemplated
hereunder,  including,  without limitation, any proceeding brought or threatened
to  enforce  payment  of any of the  obligations  referred  to in the  foregoing
paragraphs (A) and (B);  provided,  however,  that the obligation of Borrower to
reimburse  Lender  for the  legal  fees  (but not  including  the  out-of-pocket
expenses  incurred  by  legal  counsel  for  Lender)  incurred  in  the  initial
preparation of these documents shall be limited to $17,500.00.

                  "Participant" means any bank, financial institution, Affiliate
of Lender,  or other entity which purchases an interest in the Revolving Note or
any Term Note from Lender at any time.

                  "Participating  Partnership" means any Controlled  Partnership
that hereafter  executes and delivers to the Lender an Assumption  Agreement,  a
Security Agreement and all other documents necessary to assume joint and several
liability as to the  Obligations  arising with respect to the Revolving  Loan or
any  agreement  or  instrument  executed  by  such  Controlled   Partnership  in
connection  therewith  (to the  extent of its  Partnership  Liabilities)  and to
include all of its Accounts, Inventory and other Collateral in the Collateral.

                  "Participating Subsidiary" means (a) the Initial Participating
Subsidiaries and (b) any other  Subsidiary that hereafter  executes and delivers
to the  Lender an  Assumption  Agreement,  a  Security  Agreement  and all other
documents  neary to assume  joint and several  liability  as to the  Obligations
arising  with  respect to the  Revolving  Loan or any  agreement  or  instrument
executed by such  Subsidiary  in  connection  therewith  (in the maximum  amount
provided for in such  Assumption  Agreement) and to include all of its Accounts,
Inventory and other Collateral in the Collateral.

<PAGE>
                  "Partnership Liability" means, with respect to a Participating
Partnership,  that part, if any, of an Advance  (together with interest  thereon
and fees,  prepayment premiums and other charges properly  attributable thereto)
that  is  received  by and  used  by or for the  benefit  of such  Participating
Partnership,  as certified to Lender by Cavalier  Homes,  under  Section 4.2, in
connection  with Cavalier  Homes's  request for such Advance,  and  "Partnership
Liabilities"  means the aggregate  amount of all such parts of Advances that are
received by and used by or for the benefit of such Participating Partnership.

                  "Pension  Plan" means any employee  pension  benefit  plan, as
defined in Section 3(2) of ERISA that is subject to Section 302 of ERISA.

                  "Permitted Liens" means:

                  (A) Liens   for   taxes, assessments,  or   similar   charges,
incurred in the ordinary course of business that are not yet due and payable;

                  (B) Pledges  or  deposits  made  in  the  ordinary  course  of
business to secure payment of workmen's  compensation,  or to participate in any
fund in connection with workmen's compensation,  unemployment insurance, old-age
pensions or other social security programs;

                  (C) Liens of mechanics, materialmen,  warehousemen,  carriers,
or other like liens,  securing  obligations  incurred in the ordinary  course of
business that are not yet due and payable;

                  (D) Good faith pledges or deposits made in the ordinary course
of business to secure  performance of bids,  tenders,  contracts (other than for
the repayment of borrowed  money) or leases,  not in excess of ten percent (10%)
of the aggregate amount due thereunder,  or to secure statutory obligations,  or
surety,  appeal,  indemnity,  performance or other similar bonds required in the
ordinary course of business;

                  (E) Encumbrances  consisting of zoning restrictions,  easement
or other  restrictions  on the use of real  property,  none of which  materially
impairs the use of such property by Borrower or any  Consolidated  Entity in the
operation of its business, and none of which is violated in any material respect
by existing or proposed structures or land use;

                  (F) Liens in favor of Lender;

                  (G) Existing liens set forth or described on Exhibit F to  the
Agreement;

                  (H) Purchase  money security  interests  granted to secure not
more than the purchase  price of assets,  the purchase of which does not violate
the Agreement or any instrument or document contemplated under the Agreement;

                  (I) Non-purchase money security interests in the real property
of any Borrower or Consolidated Entity granted to secure aggregate  Indebtedness
not to exceed $1,000,000; and

                  (J) The following,  if the validity or amount thereof is being
contested in good faith by appropriate and lawful  proceedings,  so long as levy
and  execution  thereon  have been stayed and  continue to be stayed and they do
not, in the aggregate,  materially detract from the value of the property of any
Borrower or any Consolidated  Entity or materially impair the use thereof in the
operation of its business:



<PAGE>




                           (1) Claims or liens for taxes, assessments or charges
                  due and payable and subject to interest or penalty;

                           (2) Claims,  liens and encumbrances upon, and defects
                  of  title  to,  real  or  personal  property,   including  any
                  attachment of personal or real property or other legal process
                  prior to adjudication of a dispute on the merits;

                           (3) Claims   or  liens of   mechanics,   materialmen,
                  warehousemen, carriers, or other like liens; and

                           (4)  Adverse judgments on appeal.

                  "Person"  means  any  individual,  corporation,   partnership,
association,  joint-stock company,  trust,  unincorporated  organization,  joint
venture, court or government or political subdivision or agency thereof, and any
other legal entity.

                  "Pledge  Agreement"  means  each  of  the  assignments  of the
Pledged Stock as Collateral,  duly authorized and either previously  executed or
to be executed at Closing by each of Cavalier Homes,  Cavalier Acceptance or any
other Borrower, as applicable,  and in form satisfactory to Lender, as each such
Pledge  Agreement  may  be  hereafter  amended  or  supplemented,   and  "Pledge
Agreements" means all of them, collectively.

                  "Pledged  Stock"  has the  meaning  given to such  term in the
Pledge Agreement.

                  "Prime   Rate"  means  the  rate  of   interest   periodically
designated by Lender as its Prime Rate.  The Prime Rate is not  necessarily  the
lowest  interest  rate  charged  by  Lender.  The Prime  Rate on the date of the
Agreement is ___%.

                  "Rate   Selection   Notice"  means  an   irrevocable   written
(including facsimile),  telex or telephonic notice, in substantially the form of
Exhibit B to the Agreement, by the appropriate Borrower(s), to Lender specifying
(a)  that  the  notice  relates  to the  selection  of a  rate  option  for  the
outstanding  Revolving  Loan pursuant to Section 2.5.3 or 3.6(A).3,  as the case
may be, (b) the effective date of such selection (c) the amounts, individual and
in the aggregate, of any Floating Rate Loans and LIBOR Rate Loans comprising the
selection and (d) the commencement  date and the duration of the Interest Period
applicable to any LIBOR Rate.

                  "Records"  means  correspondence,   memoranda,  tapes,  discs,
microfilm,  microfiche,  papers,  books  and  other  documents,  or  transcribed
information of any type, whether expressed in ordinary or machine language,  and
all filing cabinets, computer hardware, and other containers in which any of the
foregoing is stored, maintained or updated.

                  "Regulation D" means Regulation D of the Board of Governors of
the Federal Reserve System as now or from time to time hereafter in effect,  and
shall include any successor or other  regulation or official  interpretation  of
said Board of Governors  relating to reserve  requirements  applicable to member
banks of the Federal Reserve System.

                  "Regulation U" means Regulation U of the Board of Governors of
the Federal  Reserve  System as now or from time to time hereafter in effect and
shall include any successor or other  regulation or official  interpretation  of
said Board of  Governors  relating to the  extension  of credit by banks for the
purpose of  purchasing or carrying  margin stocks  applicable to member banks of
the Federal Reserve System.

<PAGE>
                  "Requirement  of Law"  for any  person  or  entity  means  the
certificate of  incorporation  and by- laws or other  organization  or governing
documents of such person or entity and any law, treaty,  rule or regulation,  or
determination of an arbitrator or a court or other  Governmental  Authority,  in
each case  applicable  to or  binding  upon such  person or entity or any of its
property or to which such person or entity or any of its property is
subject.

                  "Reserve  Requirements"  with  respect to an  Interest  Period
means the weighted  average during the Interest Period of the maximum  aggregate
reserve requirement (including all basic, supplemental,  marginal, emergency and
other  reserves and taking into account any  transitional  adjustments  or other
scheduled changes in reserve  requirements  during the Interest Period) which is
imposed  under  Regulation  D or by  any  other  Governmental  Authority  having
jurisdiction  with respect thereto and which is applicable to the class of banks
of which  Lender is a member,  for LIBOR Rate Loan  purposes,  on  "eurocurrency
liabilities",  as  that  term  is  defined  in  Regulation  D  or  by  any  such
Governmental Authority.

                  "Revolving Loan" means the aggregate unpaid principal  balance
from time to time of all Advances made pursuant to Article II of the Agreement.

                  "Revolving Loan Commitment"  means the Lender's  commitment to
lend to Borrowers up to the sum of $35,000,000 in principal  amount  outstanding
from time to time pursuant to Article II of the  Agreement,  and subject to, the
terms of the Agreement.

                  "Revolving  Note"  means the Amended  and  Restated  Revolving
Note, in form satisfactory to Lender, dated as of the date of this Agreement and
payable on demand,  but if no demand is made,  on April 15,  2002,  made by each
Borrower to evidence such Borrower's  joint and several  obligation to repay the
Revolving Loan and the interest thereon, and includes any amendment to such note
and any  promissory  note given in extension  or renewal of, or in  substitution
for, such note.

                  "Revolving Rate" means the per annum rate of interest equal to
one-half of one percent (0.50%) below the Prime Rate in effect from time to time
until maturity of the Revolving  Note,  and two percent  (2.00%) above the Prime
Rate in effect from time to time after maturity of the Revolving  Note,  whether
by demand, acceleration or otherwise. Each time the Prime Rate shall change, the
Revolving Rate shall change concurrently with such change in the Prime Rate.

                  "Security   Documents"  means  the  Pledge   Agreements,   the
Assignment of Life Insurance, the Guaranty Agreement, and any documents required
or contemplated under Article V of the Agreement,  whether delivered at or after
the Closing, together with any other documents or agreements, now or hereinafter
in  effect,  which  secure  (A)  the  payment  of any of the  Loans  or (B)  the
performance of the Obligations of any Borrower thereunder.

                  "Stockholders'  Equity"  means,  at any  time,  the sum of the
following  accounts (less treasury stock carried at cost) set forth in a balance
sheet of Borrower  (or,  if the  Borrower  in  question  is  Cavalier  Homes,  a
Consolidated balance sheet of the Consolidated Entities), prepared in accordance
with Generally Accepted Accounting Principles consistently applied:

                  (A) The par or stated value of all outstanding capital stock;

                  (B) Capital surplus; and

                  (C) Retained earnings.

                  "Subrogation and Contribution Agreement" means the Amended and
Restated Subrogation and Contribution  Agreement duly authorized and executed at
Closing by each  Borrower or duly  authorized  and executed  thereafter  by each
Subsidiary and Controlled Partnership that becomes a Participating Subsidiary or
Participating  Partnership thereafter and substantially in the form of Exhibit D
to the Agreement,  as each such  Subrogation and  Contribution  Agreement may be
hereafter  or  thereafter   supplemented  or  amended,   and   "Subrogation  and
Contribution Agreements" means all of them, collectively.

<PAGE>

                  "Subsidiary"  means any  corporation  of which more than fifty
percent  (50%)  of the  outstanding  voting  securities  shall,  at the  time of
determination,   be  owned   directly,   or  indirectly   through  one  or  more
intermediaries, by any Borrower.

                  "Tangible Net Worth" means, at any time,  Stockholders' Equity
less the sum of:

                  (A) Any  surplus   resulting  from  any   write-up  of  assets
subsequent to the date of the latest  Financial  Statements  delivered to Lender
prior to Closing;

                  (B) Goodwill,  including any amounts,  however designated on a
balance sheet of any  Borrower,  representing  the excess of the purchase  price
paid for assets or stock acquired over the value  assigned  thereto on the books
of any Borrower;

                  (C) Patents, trademarks, trade names and copyrights;

                  (D) Any amount at which shares of   capital   stock   of   any
Borrower appear as an asset on any Borrower's balance sheet;

                  (E) Loans and advances to stockholders, directors, officers or
employees; and

                  (F) Any other  amount in respect  of an  intangible  that,  in
accordance with Generally Accepted Accounting  Principles,  should be classified
as an asset on a balance sheet of any Borrower.

                  "Term  Loan" means the unpaid  principal  balance of each term
loan made to Cavalier Acceptance  pursuant to Article III of the Agreement;  and
"Term  Loans"  means,  collectively,  all of such term  loans  made to  Cavalier
Acceptance.

                  "Term Loan Commitment"  means the Lender's  commitment to make
Term Loans to Cavalier  Acceptance  pursuant to Article III of the Agreement and
subject to the terms and conditions of this Agreement.

                  "Term Note" means the promissory note of Cavalier  Acceptance,
substantially  in the  form  of  Exhibit  A to  the  Agreement,  evidencing  its
obligation to repay a Term Loan, and includes any amendment to such note and any
promissory note given in extension or renewal of, or in  substitution  for, such
note,  and "Term Notes"  means,  collectively,  all of the Term Notes so made by
Cavalier Acceptance.

                  "Term Rate" means the rate defined in Section  3.6(A),  3.6(B)
of the Agreement.


                  "UCC-1" means each financing statement to be filed pursuant to
the  Uniform  Commercial  Code,  as  enacted  in any  state in which  any of the
Collateral is located, in order to perfect Lender's lien on the Collateral.

                  "Usage  Fee" means the fee due to Lender  pursuant  to Section
2.10 hereof.





<PAGE>



                                    EXHIBIT E

                  Exceptions to Representations and Warranties

See exhibits to the Assumption Agreement, as set forth below:

                         Supplement to Exhibit F
                         Supplement to Exhibit II.6.1(B)
                         Supplement to Exhibit II.6.1(D)
                         Supplement to Exhibit II.6.1(I)
                         Supplement to Exhibit II.7.2(G)
                         Supplement to Exhibit G
                         Supplement to Exhibit H
                         Supplement to Exhibit I
                         Supplement to Exhibit J
                         Supplement to Exhibit K


                        CONTINUING GUARANTY AGREEMENT

      THIS  CONTINUING  GUARANTY  AGREEMENT  ("this  Guaranty")  is  made by the
undersigned  (whether one or more, herein  collectively  called the "Guarantor")
with First  Commercial  Bank  (herein  called the  "Bank"),  an Alabama  banking
corporation  having its principal  office  located at 800 Shades Creek  Parkway,
Birmingham, Alabama, 35209;

WITNESSETH:

      To induce Bank to make a loan or to extend credit or make other  financial
products or services available to CAVALIER ACCEPTANCE CORPORATION (herein called
the "Borrower"),  and in consideration therefor, and for other good and valuable
consideration,  the receipt and sufficiency of which being hereby  acknowledged,
Guarantor  hereby  agrees  (and if more than one person  signs this  Guaranty as
Guarantor, each Guarantor jointly and severally agrees) with Bank as follows:

      Guarantor  hereby  unconditionally  guarantees  to Bank  the  payment  and
performance by Borrower of all of the Liabilities (as hereinafter  defined).  As
used herein,  "Liabilities"  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, and 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,
overdraft on a deposit account or line-of-credit  account,  use of a credit card
or cards,  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,  a sale or
lease of goods, the issuance of a letter of credit or banker's  acceptance,  the
purchase,  discount,  acceptance  or  certification  of a  note  or  draft,  any
combination of the foregoing,  or otherwise.  The Liabilities  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  Liabilities  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 on this Guaranty.

      Notwithstanding  the foregoing  definition of  Liabilities,  if one of the
following boxes is checked,  the obligation of the Guarantor with respect to the
Liabilities guaranteed hereunder shall be limited to:

      [ ]  the  following  described  debt (including all renewals,  extensions,
           refinancings,  amendments,  substitutions  or  replacements)  of  the
           Borrower:




      [ ]  the maximum principal amount of $_____ ,  plus  interest,  attorney's
           fees   and  collection  costs  (including    attorney's    fees  when
           permitted by    law),  and all other amounts  agreed to be paid under
           this  Guaranty.   This principal amount may be applied to such  debts
           of the Borrower as may be selected from time to time by the Bank.

      Guarantor further agrees (a) to pay to the Bank, in immediately  available
funds at the Bank's address in Alabama set forth above (or at such other address
as Bank may  direct),  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  or  executed  in  connection  with  any of the
Liabilities  and of any renewal  instrument  or agreement  (including  any terms
waiving notice and agreeing to pay costs and expenses of collection in the event
of default) just as though  Guarantor  had signed such  instrument or agreement;
and (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 of the same
being hereinafter  individually with the Borrower sometimes called an "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 Guarantor for payment
under the provisions hereof.

      Guarantor  further agrees that the obligations of the Guarantor  hereunder
are  primary  and  direct,  absolute,  unconditional,   present  and  continuing
guaranties  of payment  and not of  collection,  and shall not be subject to any
counterclaim,  recoupment,  set-off,  reduction or defense based either upon any
claim that the  Guarantor,  or any of them, may have against the Borrower or the
Bank,  or based upon any claim that the Borrower may have against 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  instrument  or  agreement  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 or surrender
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 deceased or bankrupt  Obligor's estate for the
amount  of  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;  (i) any
failure, omission, delay or lack of diligence on the part of the Bank to enforce
assert or exercise any such right, power,  privilege or remedy; or (l) any other
event, circumstance or condition,  whether or not the Guarantor, or any of them,
shall have notice or knowledge thereof.

      Guarantor  further  agrees 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 (l) of the  preceding  paragraph;  or (c) the
Bank's acceptance of and reliance on this Guaranty. 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 Guarantor, its heirs, executors, administrators,
successors and assigns.

      Guarantor  hereby  irrevocably:  (a) waives and  relinquishes any right of
subrogation or other right or reimbursement  from the Borrower or the Borrower's
estate,  and any other  right of payment  from the  Borrower  or the  Borrower's
estate,  arising  out of or on  account of any sums paid or agreed to be paid by
Guarantor  under this  Guaranty,  whether any such right is reduced to judgment,
liquidated,  unliquidated,  fixed,  contingent,  matured,  unmatured,  disputed,
undisputed,  secured,  or  unsecured;  (b) agrees that if at any time all or any
part of any  payment  previously  applied by the Bank to any of the  Liabilities
must be returned by Bank for any reason, whether upon the claim of a preference,
fraudulent  transfer,  or other  claim  of a  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 the Bank,  notwithstanding  any  termination  of this
Guaranty or cancellation of any promissory note or other instrument or agreement
evidencing or securing any of the Liabilities;  (c) agrees that the liability of
the 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 Liabilities  less only payments  thereon  actually  received and retained by
Bank irrespective of and without reduction on account of: (i) any defenses which
Borrower may have or assert with respect to any of the  Liabilities,  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,  statute of frauds,  statute of
limitations, accord and satisfaction, waiver, estoppel, release, usury, or fraud
or misrepresentation; or (ii) death or incompetency of Borrower.

      Neither any  failure  nor any delay on the part of the Bank in  exercising
any right,  power or privilege  under this  Guaranty  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  Guaranty  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  Guarantor  in any case
shall  entitle  the  Guarantor  to any other or further  notice or demand in the
same, similar or other circumstances.



<PAGE>



      Guarantor  further  agrees  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  Guarantor,  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 time or the manner in which the
same may have been or shall be extended, renewed or modified.

      Guarantor  further agrees 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 or attempting to enforce payment of any of the Liabilities  against
Guarantor  or  any of the  Obligors.  Without  limiting  the  generality  of the
foregoing, Guarantor specifically agrees to be liable to the Bank for reasonable
attorneys'  fees in the event any claim under this  Guaranty  is referred  after
default in the  Liabilities  to an attorney for  collections,  and in connection
therewith,  Guarantor and Bank agree that a reasonable  attorneys'  fee shall be
not less than 15% of the unpaid balance of the  Liabilities  after default,  and
that a reasonable  attorneys'  fee may be a greater amount when warranted by the
circumstances or requirements applicable to the particular situation.

      In addition to all liens upon, and rights of set-off against,  any moneys,
securities  or other  property of  Guarantor  given to the Bank by law, the Bank
shall have a lien upon and a right of set-off against all moneys, securities and
other property of Guarantor 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 Guarantor.

      Guarantor further agrees that this Guaranty shall remain in full force and
effect until revoked or terminated by a written instrument,  signed by Guarantor
and  delivered to the Bank and  acknowledged  in writing by the Bank,  and, even
after any such  revocation or  termination,  this  Guaranty  shall be and remain
effective as to any Liabilities then  outstanding;  and that this Guaranty 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
Guarantor acknowledged by the Bank, the Borrower obtains or incurs additional or
new Liabilities.

      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  Liabilities.  This agreement of subordination
and assignment shall survive the termination of this Guaranty,  and shall remain
in  effect  until  all  Liabilities  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 Liabilities.  Until such payment or security is delivered to Bank, Guarantor
agrees to hold the same in trust for Bank.  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. 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  Liabilities.
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.  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.

      The terms  "Guarantor"  as used herein refers to each of the  undersigned,
whether one or more natural persons, corporation, associations,  partnerships or
other entities.

      This agreement shall be governed by, and construed in accordance with, the
laws of the United States and the State of Alabama. Each Guarantor acknowledges:
(a) that  payments to the Bank by the Borrower and the  Guarantor are to be made
to the Bank in Alabama;  (b) that  failure of the  Borrower or the  Guarantor to
make such payment will have a substantial  impact on the economy of the State of
Alabama;  (c) that the Bank is organized  under the laws of, and/or has its main
office  located  in the State of  Alabama;  and (d) that it is  foreseeable  and
expected by each Guarantor  that: (i) the Guarantor will be held  accountable on
this Guaranty in the State of Alabama, and (ii) the Bank will enforce its rights
against  the  Guarantor  in the State of  Alabama.  Each  Guarantor  submits  to
jurisdiction  in the State of Alabama for any cause of action or action  arising
out of or in  connection  with this  Guaranty and agrees that venue for any such
action  shall be proper  in the  county  of the main  office  of the Bank.  Each
Guarantor  hereby  waives  any and all  rights  under  the laws of any  state or
jurisdiction to object to venue or jurisdiction within such county.


      Witness the  signatures  and seals of the  undersigned on this 31st day of
March, 2000.



                                                  CAVALIER HOMES, INC.

                                          By: Michael R. Murphy
                                             -----------------------------------
                                         Its: Vice President
                                             -----------------------------------

                                                    [Corporate Seal]


Witnessed By:

________________________

________________________


<TABLE>
<CAPTION>


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


                                                                           Thirteen Weeks Ended
                                                                   ------------------------------------
                                                                      March 31,            April 2,
                                                                        2000                 1999
                                                                   ---------------      ---------------
<S>                                                                <C>                  <C>

   Net income (loss)                                               $   (8,637,000)      $     4,501,000
                                                                   ===============      ===============
 SHARES:
   Weighted average common shares outstanding (basic)                   17,770,809           18,733,889
   Dilutive effect if stock options and warrants were exercised              9,715              102,869
                                                                   ---------------      ---------------
   Weighted average common shares
       outstanding, assuming dilution (diluted)                         17,780,524           18,836,758
                                                                   ===============      ===============

   Basic net income (loss) per share                               $         (.49)      $           .24
                                                                   ===============      ===============
   Diluted net income (loss) per share                             $         (.49)      $           .24
                                                                   ===============      ===============


</TABLE>

<TABLE> <S> <C>

<ARTICLE>                                                 5
<LEGEND>
This schedule contains summary   financial  information   extracted   from   the
consolidated  balance sheets and  consolidated  statements of income of Cavalier
Homes, Inc. and subsidiaries appearing in this Quarterly Report on Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER>                                                1,000

<S>                                                   <C>
<PERIOD-TYPE>                                               3-mos
<FISCAL-YEAR-END>                                     Dec-31-2000
<PERIOD-END>                                          Mar-31-2000
<CASH>                                                     24,862
<SECURITIES>                                                    0
<RECEIVABLES>                                              14,388
<ALLOWANCES>                                                1,311
<INVENTORY>                                                49,369
<CURRENT-ASSETS>                                          108,524
<PP&E>                                                    107,628
<DEPRECIATION>                                             34,929
<TOTAL-ASSETS>                                            219,558
<CURRENT-LIABILITIES>                                      82,500
<BONDS>                                                         0
                                           0
                                                     0
<COMMON>                                                    1,827
<OTHER-SE>                                                118,207
<TOTAL-LIABILITY-AND-EQUITY>                              219,558
<SALES>                                                    89,693
<TOTAL-REVENUES>                                           89,693
<CGS>                                                      78,281
<TOTAL-COSTS>                                              78,281
<OTHER-EXPENSES>                                                0
<LOSS-PROVISION>                                              981
<INTEREST-EXPENSE>                                            608
<INCOME-PRETAX>                                           (13,775)
<INCOME-TAX>                                               (5,138)
<INCOME-CONTINUING>                                        (8,637)
<DISCONTINUED>                                                  0
<EXTRAORDINARY>                                                 0
<CHANGES>                                                       0
<NET-INCOME>                                               (8,637)
<EPS-BASIC>                                                 (0.49)
<EPS-DILUTED>                                               (0.49)



</TABLE>


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