Document:

Unassociated Document

    
      EXECUTION
VERSION  

    

    
      	 
      

    

       

    DEBTOR-IN-POSSESSION
REVOLVING CREDIT AGREEMENT

     

    Dated as
of November 29, 2010

     

    among

     

    PALM
HARBOR HOMES, INC.,

    AND

    THE OTHER
DEBTORS NAMED HEREIN,

     

    each as a
Debtor and Debtor-in-Possession

    and,
collectively,

    as the
Borrowers

     

    and

     

    FLEETWOOD
HOMES, INC.

     

    as
Lender

    
      	 
      

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      TABLE
OF CONTENTS

      

      
        
          
            
              	 
      	 
      	
                      Page

                    
	 
      	 
      	 
      
	
                      ARTICLE
      I        
    DEFINITIONS

                    	
                      2

                    
	 
      	 
      
	
                      Section
      1.01

                    	
                      Definitions

                    	
                      2

                    
	 
      	 
      	 
      
	
                      Section
      1.02

                    	
                      Computation
      of Time Periods

                    	
                      16

                    
	 
      	 
      	 
      
	
                      Section
      1.03

                    	
                      Accounting
      Terms; Certain Calculations

                    	
                      16

                    
	 
      	 
      	 
      
	
                      ARTICLE
      II        THE LOAN

                    	
                      16

                    
	 
      	 
      
	
                      Section
      2.01

                    	
                      Loan;
      Reserves and Releases

                    	
                      16

                    
	 
      	 
      	 
      
	
                      Section
      2.02

                    	
                      Use
      of Proceeds

                    	
                      16

                    
	 
      	 
      	 
      
	
                      Section
      2.03

                    	
                      Borrowing;
      Releases

                    	
                      17

                    
	 
      	 
      	 
      
	
                      Section
      2.04

                    	
                      Funding
      of Borrowings

                    	
                      17

                    
	 
      	 
      	 
      
	
                      Section
      2.05

                    	
                      Repayment

                    	
                      17

                    
	 
      	 
      	 
      
	
                      Section
      2.06

                    	
                      Prepayments

                    	
                      17

                    
	 
      	 
      	 
      
	
                      Section
      2.07

                    	
                      Note

                    	
                      18

                    
	 
      	 
      	 
      
	
                      Section
      2.08

                    	
                      Expiration
      of Commitments

                    	
                      18

                    
	 
      	 
      	 
      
	
                      Section
      2.09

                    	
                      Interest

                    	
                      18

                    
	 
      	 
      	 
      
	
                      Section
      2.10

                    	
                      Increased
      Costs

                    	
                      19

                    
	 
      	 
      	 
      
	
                      Section
      2.11

                    	
                      Payments
      and Computations

                    	
                      19

                    
	 
      	 
      	 
      
	
                      Section
      2.12

                    	
                      Taxes

                    	
                      19

                    
	 
      	 
      	 
      
	
                      Section
      2.13

                    	
                      Super-Priority
      Nature of Obligations and Liens

                    	
                      20

                    
	 
      	 
      	 
      
	
                      Section
      2.14

                    	
                      No
      Discharge; Survival of Claims

                    	
                      21

                    
	 
      	 
      	 
      
	
                      Section
      2.15

                    	
                      Waiver
      of Any Priming and Surcharge Rights

                    	
                      21

                    
	 
      	 
      	 
      
	
                      Section
      2.16

                    	
                      Control
      Account; Sweep of Funds

                    	
                      21

                    
	 
      	 
      	 
      
	
                      ARTICLE
      III      CONDITIONS

                    	
                      21

                    
	 
      	 
      
	
                      Section
      3.01

                    	
                      Conditions
      Precedent to the initial Borrowing of the Loan

                    	
                      21

                    
	 
      	 
      	 
      
	
                      Section
      3.02

                    	
                      Conditions
      Precedent to Each Borrowing

                    	
                      25

                    
	 
      	 
      	 
      
	
                      ARTICLE
      IV      REPRESENTATIONS AND
      WARRANTIES

                    	
                      26

                    
	 
      	 
      
	
                      Section
      4.01

                    	
                      Financial
      Condition

                    	
                      26

                    
	 
      	 
      	 
      
	
                      Section
      4.02

                    	
                      No
      Changes or Restricted Payments

                    	
                      26

                    
	 
      	 
      	 
      
	
                      Section
      4.03

                    	
                      Due
      Incorporation and Authority

                    	
                      26

                    
	 
      	 
      	 
      
	
                      Section
      4.04

                    	
                      No
      Conflicts; Default or Event of Default

                    	
                      27

                    
	 
      	 
      	 
      
	
                      Section
      4.05

                    	
                      Organizational
      Documents; Meeting Minutes

                    	
                      28

                    

            

          

        

      

      
        
           

        

        
          -i-

          
            

          

        

        
           

        

      

      TABLE
OF CONTENTS 

      (continued)

      

      
        
          
            	 
      	 
      	
                    Page

                  
	 
      	 
      	 
      
	
                    Section
      4.06

                  	
                    Litigation

                  	
                    28

                  
	 
      	 
      	 
      
	
                    Section
      4.07

                  	
                    Intellectual
      Property

                  	
                    28

                  
	 
      	 
      	 
      
	
                    Section
      4.08

                  	
                    Taxes

                  	
                    28

                  
	 
      	 
      	 
      
	
                    Section
      4.09

                  	
                    ERISA

                  	
                    28

                  
	 
      	 
      	 
      
	
                    Section
      4.10

                  	
                    Governmental
      Regulations, Etc

                  	
                    30

                  
	 
      	 
      	 
      
	
                    Section
      4.11

                  	
                    No
      Subsidiaries

                  	
                    30

                  
	 
      	 
      	 
      
	
                    Section
      4.12

                  	
                    Use
      of Proceeds

                  	
                    30

                  
	 
      	 
      	 
      
	
                    Section
      4.13

                  	
                    Real
      Property

                  	
                    31

                  
	 
      	 
      	 
      
	
                    Section
      4.14

                  	
                    Environmental
      Matters

                  	
                    32

                  
	 
      	 
      	 
      
	
                    Section
      4.15

                  	
                    Disclosure

                  	
                    33

                  
	 
      	 
      	 
      
	
                    Section
      4.16

                  	
                    Bank
      Accounts

                  	
                    33

                  
	 
      	 
      	 
      
	
                    Section
      4.17

                  	
                    Account
      Debtors

                  	
                    33

                  
	 
      	 
      	 
      
	
                    Section
      4.18

                  	
                    Insurance

                  	
                    33

                  
	 
      	 
      	 
      
	
                    Section
      4.19

                  	
                    Labor
      Matters

                  	
                    34

                  
	 
      	 
      	 
      
	
                    Section
      4.20

                  	
                    Reorganization
      Matters

                  	
                    34

                  
	 
      	 
      	 
      
	
                    Section
      4.21

                  	
                    Investment
      Banking and Finder’s Fees

                  	
                    35

                  
	 
      	 
      	 
      
	
                    ARTICLE
      V        AFFIRMATIVE
      COVENANTS

                  	
                    35

                  
	 
      	 
      
	
                    Section
      5.01

                  	
                    Financial
      Statements

                  	
                    35

                  
	 
      	 
      	 
      
	
                    Section
      5.02

                  	
                    Certificates;
      Other Information

                  	
                    38

                  
	 
      	 
      	 
      
	
                    Section
      5.03

                  	
                    Notices

                  	
                    38

                  
	 
      	 
      	 
      
	
                    Section
      5.04

                  	
                    Payment
      of Obligations

                  	
                    39

                  
	 
      	 
      	 
      
	
                    Section
      5.05

                  	
                    Conduct
      of Business and Maintenance of Existence

                  	
                    39

                  
	 
      	 
      	 
      
	
                    Section
      5.06

                  	
                    Maintenance
      of Property; Insurance

                  	
                    40

                  
	 
      	 
      	 
      
	
                    Section
      5.07

                  	
                    Inspection
      of Property; Books and Records; Discussions

                  	
                    41

                  
	 
      	 
      	 
      
	
                    Section
      5.08

                  	
                    Environmental
      Laws

                  	
                    41

                  
	 
      	 
      	 
      
	
                    Section
      5.09

                  	
                    Application
      of Proceeds

                  	
                    41

                  
	 
      	 
      	 
      
	
                    Section
      5.10

                  	
                    Compliance
      with Budgets

                  	
                    42

                  
	 
      	 
      	 
      
	
                    Section
      5.11

                  	
                    Compliance
      with Laws, Etc

                  	
                    42

                  
	 
      	 
      	 
      
	
                    Section
      5.12

                  	
                    Payment
      of Taxes, Etc

                  	
                    42

                  
	 
      	 
      	 
      
	
                    Section
      5.13

                  	
                    Collateral
      Documents

                  	
                    42

                  

          

        

      

      
        
           

        

        
          -ii-

          
            

          

        

        
           

        

      

      TABLE
OF CONTENTS

      (continued)

      

      
        
          
            	 
      	 
      	
                    Page

                  
	 
      	 
      	 
      
	
                    Section
      5.14

                  	
                    Accounts

                  	
                    42

                  
	 
      	 
      	 
      
	
                    Section
      5.15

                  	
                    Bankruptcy
      Cases

                  	
                    42

                  
	 
      	 
      	 
      
	
                    ARTICLE
      VI       NEGATIVE COVENANTS

                  	
                    43

                  
	 
      	 
      
	
                    Section
      6.01

                  	
                    Indebtedness

                  	
                    43

                  
	 
      	 
      	 
      
	
                    Section
      6.02

                  	
                    Liens

                  	
                    43

                  
	 
      	 
      	 
      
	
                    Section
      6.03

                  	
                    No
      Further Negative Pledges

                  	
                    43

                  
	 
      	 
      	 
      
	
                    Section
      6.04

                  	
                    Consolidation,
      Merger, Asset Sale, etc

                  	
                    43

                  
	 
      	 
      	 
      
	
                    Section
      6.05

                  	
                    Sale
      Leasebacks

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.06

                  	
                    Acquisitions

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.07

                  	
                    Investments

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.08

                  	
                    Restricted
      Payments

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.09

                  	
                    No
      Transfers to Affiliates

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.10

                  	
                    Limitations
      on Transactions with Affiliates

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.11

                  	
                    Payment
      of Other Indebtedness

                  	
                    44

                  
	 
      	 
      	 
      
	
                    Section
      6.12

                  	
                    Modification
      of Contractual Obligations

                  	
                    45

                  
	 
      	 
      	 
      
	
                    Section
      6.13

                  	
                    Bankruptcy
      Matters

                  	
                    45

                  
	 
      	 
      	 
      
	
                    Section
      6.14

                  	
                    No
      Material Pleadings

                  	
                    45

                  
	 
      	 
      	 
      
	
                    Section
      6.15

                  	
                    Fiscal
      Year

                  	
                    45

                  
	 
      	 
      	 
      
	
                    Section
      6.16

                  	
                    Accounting
      Changes

                  	
                    45

                  
	 
      	 
      	 
      
	
                    ARTICLE
      VII     EVENTS OF DEFAULT

                  	
                    45

                  
	 
      	 
      
	
                    Section
      7.01

                  	
                    Events
      of Default

                  	
                    45

                  
	 
      	 
      	 
      
	
                    Section
      7.02

                  	
                    Acceleration;
      Remedies

                  	
                    48

                  
	 
      	 
      	 
      
	
                    ARTICLE
      VIII    ADDITIONAL SECURITY

                  	
                    48

                  
	 
      	 
      
	
                    Section
      8.01

                  	
                    Priority
      and Liens

                  	
                    48

                  
	 
      	 
      	 
      
	
                    ARTICLE
      IX      MISCELLANEOUS

                  	
                    49

                  
	 
      	 
      
	
                    Section
      9.01

                  	
                    Notices

                  	
                    49

                  
	 
      	 
      	 
      
	
                    Section
      9.02

                  	
                    Right
      of Set-Off

                  	
                    50

                  
	 
      	 
      	 
      
	
                    Section
      9.03

                  	
                    Benefit
      of Agreement

                  	
                    50

                  
	 
      	 
      	 
      
	
                    Section
      9.04

                  	
                    No
      Waiver; Remedies Cumulative

                  	
                    51

                  
	 
      	 
      	 
      
	
                    Section
      9.05

                  	
                    Payment
      of Expenses; Indemnification

                  	
                    51

                  

          

        

      

      
        
           

        

        
          -iii-

          
            

          

        

        
           

        

      

      TABLE
OF CONTENTS

      (continued)

      

      
        
          
            	 
      	 
      	
                    Page

                  
	 
      	 
      	 
      
	
                    Section
      9.06

                  	
                    Amendments,
      Waivers and Consents

                  	
                    52

                  
	 
      	 
      	 
      
	
                    Section
      9.07

                  	
                    Survival

                  	
                    52

                  
	 
      	 
      	 
      
	
                    Section
      9.08

                  	
                    Waiver

                  	
                    52

                  
	 
      	 
      	 
      
	
                    Section
      9.09

                  	
                    Governing
      Law

                  	
                    53

                  
	 
      	 
      	 
      
	
                    Section
      9.10

                  	
                    Consent
      to Jurisdiction; Service of Process; Waiver of Jury Trial

                  	
                    53

                  
	 
      	 
      	 
      
	
                    Section
      9.11

                  	
                    Binding
      Effect; Assignment

                  	
                    53

                  
	 
      	 
      	 
      
	
                    Section
      9.12

                  	
                    Interpretation;
      Headings

                  	
                    53

                  
	 
      	 
      	 
      
	
                    Section
      9.13

                  	
                    Severability
      of Provisions

                  	
                    54

                  
	 
      	 
      	 
      
	
                    Section
      9.14

                  	
                    Counterparts

                  	
                    54

                  
	 
      	 
      	 
      
	
                    Section
      9.15

                  	
                    No
      Third Party Beneficiaries

                  	
                    54

                  
	 
      	 
      	 
      
	
                    Section
      9.16

                  	
                    Confidentiality

                  	
                    54

                  
	 
      	 
      	 
      
	
                    Section
      9.17

                  	
                    Conflict

                  	
                    55

                  

          

        

      

      
        
           

        

        
          -iv-

          
            

          

        

        
           

        

      

    

     

    This
DEBTOR-IN-POSSESSION REVOLVING CREDIT AGREEMENT, dated as of November 29, 2010
(this “Agreement”), by and
among PALM HARBOR HOMES, INC., a Florida corporation (“PHH”), and each of
the other direct or indirect Subsidiaries of PHH set forth on Schedule I hereto
each as a debtor and debtor-in-possession under chapter 11 of the Bankruptcy
Code (each, a “Borrower,” and,
collectively, the “Borrowers”) and
FLEETWOOD HOMES, INC., as lender (the “Lender”).

     

    WITNESSETH

     

    WHEREAS,
on November 29, 2010 (the “Petition Date”), each
of the Borrowers filed a voluntary petition for relief under title 11 of chapter
11 of the United States Code, 11 U.S.C. §§ 101 et seq (as amended, the
“Bankruptcy
Code”) with the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”),
thus commencing the cases that the Borrowers shall seek or have sought to be
jointly administered (collectively, the “Bankruptcy Cases”);
and

     

    WHEREAS,
from and after the Petition Date, the Borrowers continue to operate their
respective businesses as debtors and debtors-in-possession pursuant to sections
1107 and 1108 of the Bankruptcy Code; and

     

    WHEREAS,
each of the Borrowers has an immediate need for funds to continue to operate its
respective businesses and the Borrowers have not been able to obtain sufficient
credit or to incur sufficient debt from any other source sufficient to continue
their business operations; and

     

    WHEREAS,
the Borrowers have requested that the Lender extend credit to them through a
post-petition financing facility in an aggregate principal amount of up to
$50,000,000 (exclusive of interest added to the Loan in accordance with the
terms and conditions set forth herein); and

     

    WHEREAS,
the Borrowers have agreed to secure their obligations hereunder with first
priority Liens on and security interests, subject to specified exceptions, in,
all of their respective real, personal and intangible property, in accordance
with sections 364(c) and 364(d) of the Bankruptcy Code; and

     

    WHEREAS,
pursuant to section 364(c)(1) of the Bankruptcy Code, each Borrower agrees and
acknowledges that its obligations arising hereunder shall constitute allowed
administrative expense claims in the Bankruptcy Cases, having priority over all
administrative expenses of the kind specified in sections 503(b) and 507(b) of
the Bankruptcy Code, except the claims specifically granted priority under the
terms of this Agreement and the interim and final orders relating thereto;
and

     

    WHEREAS,
the Lender has indicated its willingness to agree to make such financing
available to the Borrowers pursuant to sections 364(c)(1), (2) and (3) and
section 364(d)(1) of the Bankruptcy Code on the terms and conditions of this
Agreement; and

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    NOW,
THEREFORE, in consideration of the premises and the covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

     

    ARTICLE
I

     

    DEFINITIONS

     

    Section
1.01     Definitions.

     

    As used
in this Agreement, the following terms shall have the meanings specified below
unless the context otherwise requires:

     

    “Accounts Receivable”
means, with respect to any Person, all trade and other accounts receivable and
other rights to payment from past or present customers and other account debtors
of such Person, and the full benefit of all security for such accounts or rights
to payment, including all trade, vendor and other accounts receivable
representing amounts receivable in respect of goods sold or leased or services
rendered to customers of such Person or in respect of amounts refundable or
otherwise due to such Person from vendors, suppliers or other
Persons.

     

    “Accounts Receivable
Value” means, as of any date of determination, the value of the Accounts
Receivable of Borrowers valued in the following manner:

     

    (a)           100%
of the amount of any Account Receivable shall be counted if, as of such date of
determination, such Account Receivable is aged 90 or less days from the date of
issuance of the statement or invoice therefor; and

     

    (b)           no
value shall be given to any Account Receivable that, as of such date of
determination, is aged more than 90 days from the date of issuance of the
statement or invoice therefor, or any Account Receivable that is owing by an
account debtor that is bankrupt, in receivership or insolvent or has ceased to
conduct business or is disputing such Account Receivable (but only with respect
to the amount disputed).

     

    “Acquisition” means
any transaction in which any Borrower directly or indirectly (a) acquires
any Property with which an ongoing business is conducted or is to be conducted;
(b) acquires all or substantially all of the assets of any Person or
division thereof, whether through a purchase of assets, merger or otherwise, (c)
acquires (in one transaction or as the most recent transaction in a series of
transactions) control of at least a majority of the Equity Interests of a
corporation, or (d) acquires control of more than 50% ownership interest in any
Person.

     

    “Affiliate” means,
with respect to any Person, a stockholder, executive officer, director, manager
or any other Person directly or indirectly controlling, controlled by or under
common control with such Person, where “control” means the possession, directly
or indirectly, of power to direct or cause the direction of the management or
policies of an entity.

     

    “Agreement” means this
Debtor-in-Possession Revolving Credit Agreement, together with all Exhibits and
Schedules hereto, as the same may be amended, supplemented or otherwise modified
from time to time.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    “Asset Sale” means the
sale, lease, transfer, conveyance or other disposition of any asset (including
by way of a sale and leaseback transaction); provided that,
notwithstanding the foregoing, none of the following shall be deemed to be an
Asset Sale (a) any sale of Inventory in the ordinary course of business
(including the liquidation of Inventory in closed locations), other than sales
at less than factory invoice price or, with respect to REO Property and raw
land, book value, without the prior written consent of Lender, (b) any transfer
of assets to a Borrower, (c) any sale, transfer or other disposition of overdue
and delinquent accounts in the ordinary course of business consistent with past
practice, (d) any disposition of cash or cash equivalents, (e) any surrender or
waiver of contract rights or the settlement, release or surrender of contract
rights or other litigation claims in the ordinary course of business, (f) any
sale, lease, or disposition of tangible personal property that have become worn
out, obsolete or damaged or otherwise unsuitable for use in connection with the
Business of the Borrowers, or (g) sale of the facility located in La Grange,
Georgia at Lots 146 and 175 of the 6th
District of Troup County, Georgia and such assets that have been used at such
facility for the entire three-month period immediately preceding the date
hereof.

     

    “Availability Period”
means the period from the Closing Date to the earlier of (a) the Business Day
immediately preceding the Maturity Date, or (b) the date on which the
Commitments are terminated in accordance with the provisions of this
Agreement.

     

    “Bankruptcy Cases” has
the meaning specified in the recitals hereto.

     

    “Bankruptcy Code” has
the meaning specified in the recitals hereto.

     

    “Bankruptcy Court” has
the meaning specified in the recitals hereto.

     

    “Base Commitment”
subject to the terms and conditions set forth herein, means $50,000,000
(exclusive of interest added to the Loan in accordance with the terms and
conditions set forth herein).

     

    “Bid Procedures Order”
means an order of the Bankruptcy Court, in form and substance reasonably
satisfactory to Lender, approving, among other things, (a) Palm Harbor Homes,
Inc., a Delaware Corporation (“Purchaser”), as the
stalking horse bidder for all or substantially all of the Property of the
Borrowers, (b) notice and service requirements to creditors and parties in
interest with respect to the transactions contemplated in that certain Asset
Purchase Agreement, by and among the Borrowers and Purchaser, (c) the break-up
fee and the expense reimbursement (and deeming the break-up fee an
administrative priority expense entitled to first priority under sections 503(b)
and 507(a)(1) of the Bankruptcy Code and which shall be a super-priority first
priority Lien on the transferred Property of the Borrowers pursuant to section
364 of the Bankruptcy Code), and (d) the bidding procedures relating to the
auction and sale of the transferred Property of the Borrowers, including the
ability of Purchaser, to the extent of its interest as assignee of Lender under
this Agreement, to credit bid all outstanding amounts owing by Borrowers under
the DIP Facility.

     

    “Borrower” has the
meaning specified in the preamble hereto.

     

    “Borrowing” means any
amount funded by Lender and made part of the Loan hereunder.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    “Business” means the
business of the design, production, marketing, sale and servicing of
manufactured and modular homes.

     

     “Business Day” means a
day other than a Saturday, Sunday or other day on which commercial banks in
Phoenix, Arizona are authorized or required by law to close.

     

     “Capital Expenditures”
means, for any period, with respect to the Borrowers, the aggregate of all
expenditures by the Borrowers for the acquisition or leasing (pursuant to a
Capital Lease) of fixed or capital assets or additions to equipment (including
replacements, capitalized repairs and improvements during such period) which are
required to be capitalized in accordance with GAAP on a balance sheet of any of
the Borrowers for any period.

     

    “Capital Lease” means,
as applied to any Borrower, any lease of any Property by such Borrower as lessee
which, in accordance with GAAP in effect as of the date of this Agreement, is or
should be accounted for as a capital lease on the balance sheet of such
Borrower.

     

    “Capital Lease
Obligation” means the capital lease obligations (including the payment of
rent or other amounts) relating to a Capital Lease determined in accordance with
GAAP in effect as of the date of this Agreement.

     

    “Change of Control”
means (a) a sale, lease or other disposition of assets or properties of any
Borrower having a book value of more than 50% of the book value of all the
assets and properties of such Borrower; (b) any transaction in which one or more
Persons shall after the Closing Date directly or indirectly acquire from the
holders thereof, by purchase or in a merger, consolidation or other transfer or
exchange of outstanding capital stock, ownership of or control over capital
stock of any Borrower (or securities exchangeable for or convertible into such
stock or interests) entitled to elect a majority of the Borrower’s board of
directors or representing more than 50% of the number of shares of common stock
of any Borrower outstanding; (c) the adoption of a plan relating to the
liquidation or dissolution of any Borrower; or (d) the designation, without the
prior approval of the Lender of a Chief Executive Officer of PHH other than that
person holding such office as of the Closing Date.

     

    “Closing Date” means
the date on which the conditions specified in Section 3.01 have
been satisfied.

     

    “Collateral” means the
Property subject to the Liens granted to the Lender under this Agreement and the
other Credit Documents.

     

    “Collateral Documents”
means the Security Agreement and any other document or instrument executed and
delivered by a Borrower granting a Lien on any of its Property (including the
Real Properties and Real Property Leases) to secure payment of the
Obligations.

     

    “Collections” means
all funds collected from any source whatsoever including any proceeds of any
Collateral regardless of source or nature and proceeds of the Equity Interests
of a non-Borrower; provided that “Collections”
shall not be deemed to include funds required to be held in escrow pursuant to
applicable Law.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    “Commitments” means,
collectively, the Base Commitment and the Supplemental Commitment.

     

    “Computer Software”
means all computer software (including source code, executable code, data,
databases and documentation) owned by or licensed to any Borrower which is used
in, or necessary for the conduct of, the respective Business of any
Borrower.

    

    “Contractual
Obligation” means, as to any Person, any provision of any security issued
by such Person or of any material agreement, instrument or undertaking to which
such Person is a party or by which it or any of its property is
bound.

    

    “Control Account” means that
certain debtor in possession account number to be established prior to the
Closing Date at Wells Fargo Bank, National Association or such other financial
institution acceptable to the Lender, in the name of PHH, for the purpose of
receiving all Collections in accordance with this Agreement and subject to an
account control agreement, in form and substance satisfactory to the Lender
which provides, among other requirements of the Lender, that all withdrawals
shall be subject to approval of the Lender.

     

    “Copyrights” has the
meaning set forth in the definition of “Intellectual Property”
herein.

     

    “Credit Documents”
means, collectively, this Agreement, the Note, the Collateral Documents and all
other related agreements and documents issued or delivered hereunder or
thereunder or pursuant hereto or thereto.

     

    “Critical Vendor
Motion” means a motion to be filed by the Borrowers with the Bankruptcy
Court seeking approval to pay the prepetition claims of certain of the
Borrowers’ vendors.

     

    “Default” means any
event, act or condition which, with notice or lapse of time, or both, would
constitute an Event of Default.

     

    “DIP Financing Order”
means the Interim DIP Financing Order or the Final DIP Financing Order, as
applicable.

     

    “Dollars” and “$” means dollars in
lawful currency of the United States of America.

     

    “Environmental, Health and
Safety Liabilities” means any and all claims, costs, damages, expenses,
liabilities and/or other responsibility or potential responsibility arising from
or under any Environmental Law or Occupational Safety and Health Law (including
compliance therewith).

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

     

    “Environmental Laws”
means all federal, state, local and foreign Laws, all judicial and
administrative orders and determinations, and all common law concerning public
health and safety, worker health and safety, pollution or protection of the
environment, including all those relating to the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
release, control, exposure to, or cleanup of any hazardous materials,
substances, wastes, chemical substances, mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise, odor, mold, or radiation, including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq.;
the Hazardous Materials Transportation Act, 49 U.S.C. §§ 5101 et seq.; the Clean
Water Act, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act, 15
U.S.C. §§ 2601 et seq.; the Clean Air Act, 42 U.S.C. §§ 7401 et seq.;
the Safe Drinking Water Act, 42 U.S.C. §§ 300f et seq.; the Atomic Energy Act,
42 U.S.C. §§ 2011 et seq.; the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. §§ 136 et seq.; and the Federal Food, Drug and Cosmetic Act,
21 U.S.C. §§ 301 et seq.

     

    “Equity Interests”
means all shares of capital stock (whether denominated as common stock or
preferred stock), equity interests, beneficial, partnership or membership
interests, joint venture interests, participations or other ownership or profit
interests in or equivalents (regardless of how designated) of or in a Person
(other than an individual), whether voting or non-voting.

     

    “Equivalent Equity
Interests” means all securities convertible into or exchangeable for
Equity Interests or any other Equivalent Equity Interests and all warrants,
options or other rights to purchase, subscribe for or otherwise acquire any
Equity Interests or any other Equivalent Equity, whether or not presently
convertible, exchangeable or exercisable.

     

    “ERISA” means the U.S.
Employee Retirement Income Security Act of 1974, as amended, together with the
rules and regulations promulgated thereunder.

     

    “ERISA Affiliate”
means, with respect to any Person, any trade or business (whether or not
incorporated) (i) under common control within the meaning of section 4001(b)(1)
of ERISA with such Person, or (ii) which together with such Person is treated as
a single employer under sections 414(b), (c), (m), (n) or (o) of the Internal
Revenue Code.

     

    “ERISA Event” means
(a) with respect to any Plan, the occurrence of a Reportable Event or the
substantial cessation of operations (within the meaning of section 4062(e) of
ERISA); (b) the withdrawal by any Borrower or any ERISA Affiliate from a
Multiple Employer Plan during a plan year in which it was a substantial employer
(as such term is defined in section 4001(a)(2) of ERISA), or the termination of
a Multiple Employer Plan; (c) the distribution of a notice of intent to
terminate or the actual termination of a Plan pursuant to section 4041(a)(2) or
4041A of ERISA; (d) the institution of proceedings to terminate or the actual
termination of a Plan by the PBGC under section 4042 of ERISA; (e) any event or
condition which would reasonably be expected to constitute grounds under section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan; (f) the complete or partial withdrawal of any Borrower or
any ERISA Affiliate from a Multiemployer Plan; (g) the conditions for imposition
of a Lien under section 302(f) of ERISA exist with respect to any Plan; or (h)
the adoption of an amendment to any Plan requiring the provision of security to
such Plan pursuant to section 307 of ERISA.

     

    “Event of Default” has
the meaning specified in Section
7.01.

     

    “Exchange Act” means
the Securities Exchange Act of 1934, as amended.

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

     

    “Final DIP Financing
Order” means the final order entered by the Bankruptcy Court pursuant to
sections 361, 362, 363 and 364 of the Bankruptcy Code authorizing and approving
the Borrowers’ entry into the Credit Documents and the transactions contemplated
thereby, which order shall include the provisions required to be included in the
Interim DIP Financing Order pursuant to Section 3.01(e),
which shall otherwise be in form and substance satisfactory to the Lender, in
its sole discretion, as to which no stay has been entered and which has not been
reversed, modified, vacated or overturned, and as to which no appeal is pending
and time for appeal has expired.

     

    “Final Order” means an
order entered by the Bankruptcy Court or other court of competent jurisdiction
as to which: (i) no appeal, notice of appeal, motion for reconsideration, motion
to amend or make additional findings of fact, motion to alter or amend judgment,
motion for rehearing or motion for new trial has been timely filed; (ii) the
time for instituting or filing an appeal, motion for rehearing or motion for new
trial shall have expired; and (iii) if an appeal has been timely filed no stay
pending an appeal is in effect and the time for requesting a stay pending appeal
shall have expired; provided, however, that the
filing or pendency of a motion under Rule 9024 of the Federal Rules of
Bankruptcy Procedure shall not cause an order not to be deemed a “Final Order”
unless such motion was filed within ten days of the entry of the order at
issue.

     

    “First Day Orders”
means all orders, reasonably deemed necessary or appropriate by the Lender,
entered by the Bankruptcy Court based on motions filed by the Borrowers on or
before the date which is three Business Days from the Petition
Date.

     

    “GAAP” means
generally-accepted accounting principles within the United States of America,
consistently applied.

     

    “Governmental Body”
means a domestic or foreign national, federal, state, provincial, or local
governmental, regulatory or administrative authority, department, agency,
commission, court, tribunal, arbitral body or self-regulated
entity.

     

    “Hazardous Activity”
means the distribution, generation, handling, importing, management,
manufacturing, processing, production, refinement, release, storage, transfer,
transportation, treatment or use (including any withdrawal or other use of
groundwater) of any Hazardous Material in, on, under, about or from any Owned
Real Property, whether or not in connection with the conduct of the Business,
except to the extent in material compliance with applicable Environmental
Law.

     

    “Hazardous Material”
means any substance, material or waste which is regulated by any Environmental
Law, including any material, substance or waste which is defined as a “hazardous
waste,” “hazardous material,” “hazardous substance,” “extremely hazardous
waste,” “restricted hazardous waste,” “contaminant,” “pollutant,” “toxic waste”
or “toxic substance” under any provision of Environmental Law, and including
petroleum, petroleum product, asbestos, presumed asbestos-containing material or
asbestos-containing material, urea formaldehyde and polychlorinated
biphenyls.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    “Indebtedness” means,
with respect to any Person, (a) all obligations of such Person for borrowed
money; (b) all obligations of such Person evidenced by bonds, debentures, notes
or similar instruments, or upon which interest payments are customarily made;
(c) all obligations of such Person under conditional sale or other title
retention agreements relating to Property purchased by such Person (other than
customary reservations or retentions of title under agreements with suppliers
entered into in the ordinary course of business); (d) all obligations of such
Person issued or assumed as the deferred purchase price of Property or services
purchased by such Person (other than trade debt incurred in the ordinary course
of business and due within six months of the incurrence thereof) which would
appear as liabilities on a balance sheet of such Person; (e) all obligations of
such Person under take-or-pay or similar arrangements or under commodities
agreements; (f) all Indebtedness of others secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on, or payable out of the proceeds of production from,
Property owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed; provided that for purposes
hereof the amount of such Indebtedness shall be limited to the greater of (i)
the amount of such Indebtedness as to which there is recourse to such Person and
(ii) the fair market value of the Property which is subject to the Lien; (g) all
Support Obligations of such Person; (h) the principal portion of all obligations
of such Person under Capital Leases; (i) all obligations of such Person in
respect of interest rate protection agreements, foreign currency exchange
agreements, commodity purchase or option agreements or other interest or
exchange rate or commodity price hedging agreements; (j) the maximum amount of
all standby letters of credit issued or bankers’ acceptances facilities created
for the account of such Person and, without duplication, all drafts drawn
thereunder (to the extent unreimbursed); (k) all preferred stock issued by such
Person and required by the terms thereof to be redeemed, or for which mandatory
sinking fund payments are due, by a fixed date; and (l) the principal balance
outstanding under any synthetic lease, tax retention operating lease,
off-balance sheet loan or similar off-balance sheet financing product to which
such Person is a party, where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an operating lease in
accordance with GAAP.  The Indebtedness of any Person shall include
the Indebtedness of any partnership or joint venture in which such Person is a
general partner or a joint venturer, but only to the extent to which there is
recourse to such Person for payment of such Indebtedness.

     

    “Information” has the
meaning specified in Section
9.16.

     

    “Initial Projected
Budget” has the meaning specified in Section
5.01(d)(i).

     

    “Initially Secured Owned Real
Properties” has the meaning specified in Section
3.01(c)(iii)(B).

     

     “Intellectual
Property” means all of the following in any jurisdiction throughout the
world (a) trade names, trademarks and service marks, service names, brand names,
logos, Internet domain names, trade dress and similar rights, logos, slogans,
and corporate names (and all translations, adaptations, derivations and
combinations of the foregoing), and general intangibles of a like nature,
together with all goodwill associated with each of the foregoing and all
registrations and applications to register any of the foregoing (“Marks”); (b) patents,
patent applications and patent disclosures, together with all reissuances,
divisionals, continuations, continuations-in-part, revisions, reissues,
extensions and reexaminations thereof (“Patents”);
(c) copyrights (whether registered or unregistered) and applications for
registration and copyrightable works (“Copyrights”); (d)
confidential and proprietary information, including trade secrets and know-how
(including ideas, research and development, engineering designs and related
approvals of Governmental Bodies, self-regulatory organizations and trade
associations, inventions, formulas, compositions, manufacturing and production
processes and techniques, designs, drawings and specifications; and (e) all
licenses and sublicenses held by any Borrower as licensee pertaining to
intellectual property of any other Person; and for the avoidance of doubt,
“Intellectual
Property” shall exclude Computer Software.

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    “Interest Payment
Date” during the term of this Agreement, means the first Business Day of
each calendar month.

     

    “Interim DIP Financing
Order” means the interim order substantially in the form attached hereto
as Exhibit D,
entered by the Bankruptcy Court under sections 361, 362, 363 and 364 of the
Bankruptcy Code authorizing and approving, subject to the approval of the Final
DIP Financing Order, the Borrowers’ entry into the Credit Documents and the
transactions contemplated hereby, which order shall include the provisions
required to be included therein pursuant to Section 3.01(e),
which shall otherwise be in form and substance satisfactory to the Lender, in
its sole discretion, and which shall not have been reversed, modified, vacated
or overturned.

     

    “Interim Period” the
period commencing on the date of entry of the Interim DIP Financing Order and
ending on the date on which the Final DIP Financing Order becomes a Final
Order.

     

    “Internal Revenue
Code” means the Internal Revenue Code of 1986, as amended, and any
successor statute thereto, as interpreted by the rules and regulations issued
thereunder, in each case as in effect from time to time.  References
to sections of the Internal Revenue Code shall be construed also to refer to any
successor sections.

     

    “Inventory” means, as
of any date of determination, all raw materials, work-in-progress, finished
goods and semi-finished goods, supplies and other inventories, wherever located,
used or produced by any Borrower, including REO Property obtained from HUD or
other parties and held for resale.

     

    “Investment” in any
Person, means any loan or advance to such Person, any purchase or other
acquisition of any Equity Interests, Equivalent Equity Interests or other
securities of, or equity interest in, such Person, any capital contribution to
such Person or any other investment in such Person, including any Support
Obligation incurred for the benefit of such Person.

     

    “Knowledge” means,
when used to qualify any representation, warranty or other statement of the
Borrowers contained herein, the actual current knowledge of any of Larry H.
Keener, Kelly Tacke, Ron Powell (solely as to PHH and Nationwide Homes, Inc.) or
Joe Kesterson (solely as to PHH) after reasonable investigation or inquiry into
the subject matter of the representation, warranty or other statement to which
such term is being applied.

     

    “Law” means any
federal, state, local or foreign statute, law, rule, regulation, order, writ,
ordinance, judgment, governmental directive, injunction, decree or other
requirement of any Governmental Body.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    “Leased Real
Properties” means each parcel of real property leased by any Borrower and
set forth in Schedule
4.13-B hereto.

     

    “Lender” has the
meaning specified in the preamble hereto.

     

    “Lien” means, with
respect to any asset, (a) any mortgage, deed of trust, leasehold deed of trust,
lien, pledge, hypothecation, encumbrance, adverse claim, charge or security
interest in, on or of such asset; (b) the interest of a vendor or a lessor under
any conditional sale agreement, Capital Lease or title retention agreement (or
any financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset; and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.

     

    “Loan” has the meaning
specified in Section
2.01(a).

     

    “Marks” has the
meaning set forth in the definition of “Intellectual Property”
herein.

     

    “Material Adverse
Effect” means a material adverse effect on (a) the condition (financial
or otherwise), operations, Business, prospects, assets, Property or liabilities
of the Borrowers taken as a whole; (b) the ability of any Borrower to perform
any obligation under any Credit Document to which it is a party; (c) the
legality, validity or enforceability of any Credit Document; (d) the
perfection or priority of the Liens granted pursuant hereto and the Collateral
Documents; or (e) the rights and remedies of the Lender under the Credit
Documents, the Interim DIP Financing Order or the Final DIP Financing
Order.

     

    “Material Pleading”
means (a) a plan of reorganization; (b) any pleading that would impair, or would
have the effect of impairing, the ability of the Borrowers taken as a whole to
repay their obligations arising hereunder or under the Interim DIP Financing
Order or Final DIP Financing Order; (c) any pleading that would impair, or would
have the effect of impairing, the ability of Lender or its Affiliates from
bidding (including credit bidding) on the Property of the Borrowers pursuant to
section 363 of the Bankruptcy Code or any plan of reorganization; or
(d) any “debtor-in-possession financing” (other than the financing
contemplated by this Agreement) that does not provide for the repayment in full
of the Obligations arising hereunder on the date the first loan is made under
such other financing.

     

    “Maturity Date” means
the earliest to occur of (a) April 15, 2011; (b) the date which is 15 days after
entry of the Sale Order; (c) the date of the closing of the sale of the
Borrowers or the sale of all or substantially all of the Property of the
Borrowers; and (d) the date on which an Event of Default occurs.

     

    “Multiemployer Plan”
means a Plan which is a multiemployer plan as defined in sections 3(37) or
4001(a)(3) of ERISA.

     

    “Multiple Employer
Plan” means a Plan which any Borrower or any ERISA Affiliate and at least
one employer other than a Borrower or any ERISA Affiliate are contributing
sponsors.

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    “Net Cash Proceeds”
means the aggregate proceeds paid in cash received by any Borrower in respect of
any Asset Sale, net of (a) direct costs (including legal, accounting, broker and
investment banking fees, and sales commissions) paid or payable as a result
thereof; (b) taxes paid or payable as a result thereof, including a reserve
for the Borrowers' good faith estimate of income and franchise taxes payable in
connection with such sale; (c) repayment of Indebtedness that is required to be
repaid in connection with such Asset Sale; and (d) appropriate amounts to be
provided by the Borrowers as a reserve, in accordance with GAAP, against
liabilities associated with such Asset Sale and retained by any Borrower after
such Asset Sale, including pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale; provided that “Net Cash
Proceeds” shall include an amount equal to any reserves previously taken against
liabilities associated with Asset Sales immediately upon those reserves being
determined to be in excess of such liabilities.  “Net Cash Proceeds”
shall also include any cash received upon the sale or other disposition of any
non-cash consideration received by the Borrowers.

     

    “Note” has the meaning
specified in Section
2.07.

     

    “Obligations” means
the Loan, the Note and all other advances, debts, liabilities, obligations,
covenants and duties owing by any Borrower to the Lender, any Affiliate of any
Borrower or any indemnitee, of every type and description, present or future,
whether or not evidenced by any note or other instrument, arising under this
Agreement or under any other Credit Document, whether or not for the payment of
money, loan, guaranty, indemnification or in any other manner, whether direct or
indirect (including those acquired by assignment), absolute or contingent, due
or to become due, now existing or hereafter arising and however
acquired.  The term “Obligations” includes all interest, charges,
expenses, fees, reasonable attorneys’ fees and disbursements and any other sum
chargeable to the Borrowers (or any of them) under this Agreement or any other
Credit Document.

     

    “Occupational Safety and
Health Law” means any applicable Law designed to provide safe and
healthful working conditions and to reduce occupational safety and health
hazards, including the Occupational Safety and Health Act, and any program,
whether governmental or private (such as those promulgated or sponsored by
industry associations and insurance companies), designed to provide safe and
healthful working conditions.

     

    “Operating Lease”
means, as applied to any Person, any lease (including leases which may be
terminated by the lessee at any time) of any Property which is not a Capital
Lease other than any such lease in which that Person is the lessor.

     

    “Order for Relief” has
the meaning specified in section 301(b) of the Bankruptcy Code.

     

     “Other Taxes” has the
meaning specified in Section
2.12(b).

     

     “Owned Real
Properties” means each parcel of real property owned by any Borrower and
set forth in Schedule
4.13-A hereto, excluding any Inventory.

     

    “Patents” has the
meaning set forth in the definition of “Intellectual Property”
herein.

     

    “PBGC” means the
Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title
IV of ERISA, or any successor thereof.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    “Performance Trigger
Report” has the meaning specified in Section
5.01(d)(iv).

     

    “Performance Trigger Test
Date” means the last day of Borrowers’ fiscal month and such other dates
as the Lender shall reasonably request.

     

    “Performance Trigger”
shall have occurred if, at any time, the sum of (i) the aggregate value of the
Inventory as of the applicable Performance Trigger Test Date (determined in
accordance with GAAP); and (ii) the aggregate Accounts Receivable Value of the
Borrowers as of the applicable Performance Trigger Test Date is less than 75% of
the sum of the Borrowers’ reported aggregate Inventory value and Accounts
Receivable Value as of October 29, 2010 (which, for added certainty, shall
exclude any Account Receivable of any non-Borrower).

     

    “Permits” means
licenses, franchises, permits, variances, exemptions, orders, approvals and
authorizations of Governmental Bodies, including any applications therefor, that
are used for the conduct of the Business (or any part thereof) as currently
conducted.

     

    “Permitted
Investments” means Investments which are (a) cash and cash equivalents;
(b) Accounts Receivable created, acquired or made in the ordinary course of
business and payable or dischargeable in accordance with customary trade terms;
(c) Investments consisting of stock, obligations, securities or other property
received in settlement of Accounts Receivable (created in the ordinary course of
business) from obligors; (d) advances in the ordinary course of business to
employees, officers and directors to cover travel and entertainment expense and
other ordinary business purposes in the ordinary course of business as presently
conducted; and (e) other Investments in an aggregate amount not to exceed
$10,000.

     

    “Permitted Liens”
means:

     

    (a)           Liens
in favor of (i) the Textron Agent and the Textron Lenders in connection with the
Textron Facility; and (ii) Virgo in connection with the Virgo Credit
Agreement;

     

    (b)           Liens
for taxes, assessments or governmental charges or levies not yet due or Liens
for taxes being contested in good faith by appropriate proceedings for which
adequate reserves determined in accordance with GAAP have been established (and
as to which the Property subject to any such Lien is not yet subject to
foreclosure, sale or loss on account thereof);

     

    (c)           Liens
in respect of Property imposed by Law arising in the ordinary course of business
such as materialmen’s, mechanics’, warehousemen’s, carriers’, suppliers’,
landlords’ and other like Liens, provided that (i) for any such Liens arising
before the Petition Date, the enforcement and collection of such Liens is
initially stayed by section 362 of the Bankruptcy Code; and (ii) except as
pertaining to the Textron Facility, for any such Liens arising after the
Petition Date, such Liens secure only amounts not overdue for a period of more
than 30 days or are being contested in good faith by appropriate proceedings for
which adequate reserves determined in accordance with GAAP have been established
(and as to which the Property subject to any such Lien is not yet subject to
foreclosure, sale or loss on account thereof);

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    (d)           Liens
(other than Liens created or imposed under ERISA) consisting of deposits made by
a Borrower in the ordinary course of business in connection with, or to secure
payment of, obligations under workers’ compensation, unemployment insurance,
social security and other similar Laws, or to secure the performance of tenders,
statutory obligations, bids, leases, government contracts, trade contracts,
surety, stay, customs and appeals bonds, performance and return-of-money bonds,
or to secure liability to insurance carriers and other similar obligations
(exclusive of obligations for the payment of borrowed money);

     

    (e)           Liens
in connection with attachments or judgments (including judgment or appeal bonds)
provided that the judgments secured shall, within 30 days after the entry
thereof, have been discharged or execution thereof stayed pending appeal, or
shall have been discharged within 30 days after the expiration of any such
stay;

     

    (f)           easements,
rights-of-way, restrictions (including zoning restrictions), minor defects or
irregularities in title and other similar charges or encumbrances not, in any
material respect, impairing the use of the encumbered Property for its intended
purposes;

     

    (g)          any
interest of title of a lessor under, and Liens arising from UCC financing
statements (or equivalent filings, registrations or agreements in foreign
jurisdictions) relating to, the Real Property Leases;

     

    (h)          Liens
in favor of customs and revenue authorities arising as a matter of Law to secure
payment of customs duties in connection with the importation of
goods;

     

    (i)           normal
and customary rights of setoff upon deposits of cash in favor of banks or other
depository institutions; and

     

    (j)           Liens
existing as of the Petition Date; provided that no such Lien
shall at any time be extended to or cover any Property other than the Property
subject thereto on the Closing Date.

     

    “Person” means any
individual, partnership, joint venture, firm, corporation, limited liability
company, association, trust or other enterprise (whether or not incorporated) or
any Governmental Body.

     

    “Petition Date” has
the meaning set forth in the Recitals.

     

    “Plan” means any
employee benefit plan (as defined in section 3(3) of ERISA) which is covered by
ERISA and with respect to which any Borrower or any of its Subsidiaries or any
ERISA Affiliate is (or, if such plan were terminated at such time, would under
section 4069 of ERISA be deemed to be) an “employer” within the meaning of
section 3(5) of ERISA.

     

    “Pledged Certificated Equity
Interests” has the meaning set forth in the Security
Agreement.

     

    “Projected Budget” has
the meaning specified in Section
5.01(d)(i).

     

    “Property” means any
right or interest in or to any kind of property or asset, whether real, personal
or mixed, or tangible or intangible.

     

    “Real Properties” has
the meaning set forth in Section
4.13(b).

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    “Real Property Lease”
has the meaning set forth in Section
4.13(b).

     

    “Release” means any
spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing into the environment (including the
abandonment or discarding of barrels, containers and other closed receptacles
containing any Hazardous Materials).

     

    “REO Property” means,
for any Person, any real or personal Property acquired by such Person through
appropriate foreclosure and similar proceedings or from any third party that
acquired such Property through appropriate foreclosure and similar
proceedings.

     

    “Reportable Event”
means any of the events set forth in section 4043(c) of ERISA, other than those
events as to which the notice requirement has been waived by
regulation.

     

    “Responsible Officer”
means Larry H. Keener or Kelly Tacke.

     

    “Restricted Payment”
means, as to any Person, (a) any dividend, return of capital, distribution or
other payment or disposition of property for less than fair market value,
whether direct or indirect and whether in cash, securities or other property, on
account of any Equity Interests or Equivalent Equity Interests of any Person or
any of its Subsidiaries, in each case now or hereafter outstanding, including
with respect to a claim for rescission of a disposition of such Equity Interests
or Equivalent Equity Interests; and (b) any redemption, retirement, termination,
defeasance, cancellation, purchase or other acquisition for value, whether
direct or indirect, of any Equity Interests or Equivalent Equity Interests of
any Borrower, now or hereafter outstanding, and any payment or other transfer
setting aside funds for any such redemption, retirement, termination,
cancellation, purchase or other acquisition, whether directly or indirectly and
whether to a sinking fund, a similar fund or otherwise.

     

    “Sale Motion” has the
meaning specified in Section
7.01(i).

     

    “Sale Order” shall
mean the order of the Bankruptcy Court on the Sale Motion approving the sale of
the Property of the Borrowers.

     

    “Security Agreement”
means that certain Security Agreement, executed on the date hereof, by the
Borrowers in favor of the Lender, together with all Exhibits and Schedules
thereto, as such agreement may be amended, supplemented or modified from time to
time.

     

    “Senior Liens” has the
meaning specified in Section
3.01(e)(iii).

     

    “Single Employer Plan”
means any Plan which is covered by Title IV of ERISA, but which is not a
Multiemployer Plan or a Multiple Employer Plan.

     

    “Subsidiary” means, as
to any Person, any corporation, partnership, joint venture, limited liability
company, trust or estate of which (or in which) more than 50% of (a) the issued
and outstanding Equity Interests having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether
at the time Equity Interests of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency); (b)
the interest in the capital or profits of such partnership, joint venture or
limited liability company; or (c) the beneficial interest in such trust or
estate is at the time directly or indirectly owned or controlled by such Person,
by such Person and one or more of its other Subsidiaries or by one or more of
such Person’s other Subsidiaries.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    “Supplemental
Commitment” subject to the terms and conditions set forth herein, means
$5,000,000 (exclusive of interest added to the Loan in accordance with the terms
and conditions set forth herein).

     

    “Support Obligations”
means, as to any Person, without duplication, any obligations of such Person
(other than endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) guaranteeing or intended to guarantee any
Indebtedness of any other Person in any manner, whether direct or indirect, and
including any obligation, whether or not contingent, (a) to purchase any such
Indebtedness or any Property constituting security therefore; (b) to advance or
provide funds or other support for the payment or purchase of any such
Indebtedness or to maintain working capital, solvency or other balance sheet
condition of such other Person (including keep well agreements, maintenance
agreements, comfort letters or similar agreements or arrangements) for the
benefit of any holder of Indebtedness of such other Person; (c) to lease or
purchase Property, securities or services primarily for the purpose of assuring
the holder of such Indebtedness against loss; or (d) to otherwise assure or hold
harmless the holder of such Indebtedness against loss in respect thereof, but
specifically excluding guaranties or other assurances with respect to any
Borrower’s performance obligations under bids or contracts made or entered into
in the ordinary course of business.  The amount of any Support
Obligation hereunder shall (subject to any limitations set forth therein) be
deemed to be an amount equal to the outstanding principal amount (or maximum
principal amount, if larger) of the Indebtedness in respect of which such
Support Obligation is made.

     

    “Taxes” has the
meaning specified in Section
2.12(a).

     

    “Textron Agent” means
the agent under the Textron Facility.

     

    “Textron Facility”
means that certain Amended and Restated Agreement for Wholesale Financing
(Finished Goods – Shared Credit Facility) dated May 25, 2004, as amended, by and
among PHH, Palm Harbor Manufacturing, L.P., Palm Harbor Homes I, L.P., Palm
Harbor Marketing, Inc., Textron Financial Corporation and the other “Lenders”
named therein.

     

     “Textron Lenders”
means those certain lenders under the Textron Facility.

     

    “UCC” means the
Uniform Commercial Code, as in effect in any applicable
jurisdiction.

     

    “Virgo” means Virgo
Service Company, LLC, a Delaware limited liability company.

     

    “Virgo Credit
Agreement” means that certain Credit Agreement, dated as of January 29,
2010, in favor of Virgo and the lenders named therein, CountryPlace Acceptance
Corporation, CountryPlace Mortgage, LTD., CountryPlace Mortgage Holdings, LLC,
each as a borrower, and PHH, CountryPlace Acceptance G.P., LLC, and CountryPlace
Acceptance L.P., LLC, as the guarantors.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    “Weekly Budget” has
the meaning specified in Section
5.01(d)(ii).

     

    Section
1.02      Computation of Time
Periods..  For purposes of computation of periods of time
hereunder, the word “from” means “from and including” and the words “to” and
“until” each mean “to but excluding.”

     

    Section
1.03     Accounting Terms; Certain
Calculations.  Except as otherwise expressly provided herein,
all accounting terms used herein shall be interpreted, and all financial
statements and certificates and reports as to financial matters required to be
delivered to the Lender hereunder shall be prepared, in accordance with GAAP
applied on a consistent basis.

     

    ARTICLE
II

     

    THE
LOAN

     

    Section
2.01     Loan; Reserves and
Releases.

     

    (a)          Loan.  Subject
to the terms and conditions set forth herein, the Lender agrees to make certain
loans (the “Loan”) to the
Borrowers in accordance with and pursuant to the terms and conditions of this
Agreement in the aggregate amount of the Commitments; provided that any Borrowing
(including any reborrowing, once repaid) of the Supplemental Commitment shall be
subject to approval of the Lender in its sole discretion. The Loan (i) subject
to the limitations set forth in Section 2.01(b),
shall be made on the Closing Date and, subject to the limitations set forth in
Section
2.02(a), shall be made from time to time thereafter if requested by the
Borrowers pursuant to Section 2.03 during
the Availability Period; (ii) may be prepaid in accordance with the provisions
hereof, and once prepaid, may be reborrowed in accordance with the terms hereof;
and (iii) shall not exceed at any time the Commitments of the
Lender.

     

    (b)         Amount of Loan on the
Closing Date.  The Borrowers may borrow an aggregate amount not
to exceed the amount described in Section 2.02(a);
provided that no
Performance Trigger shall be in existence, as evidenced in the applicable
Performance Trigger Report.  In the event a Performance Trigger has
occurred and is continuing, the Lender shall not be obligated to fund any
Borrowings until such time as the Performance Trigger has been
cured.

     

    (c)          Releases.  Releases
of any Collections in the Control Account are subject to approval of the Weekly
Budget pursuant to the budgetary approval process as outlined in Section 5.01(d)(ii)
below.  Upon approval, the Lender shall release the approved
Collections to the Borrowers and, if and to the extent applicable, apply the
amounts set forth in the Weekly Budget to optional prepayments of the Loan, in
each case, on the first Business Day of the following week.

     

    Section
2.02     Use of
Proceeds.

     

    (a)          The
proceeds of the Borrowing funded on the Closing Date shall be used by the
Borrowers to pay (i) in full the Textron Facility on the Closing Date and (ii)
all costs and accrued and unpaid fees and expenses (including reasonable legal
fees and expenses) required to be paid to the Lender on or before the Closing
Date, to the extent then due and payable.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

    (b)         Thereafter,
the proceeds of any Borrowing funded pursuant hereto shall be used by the
Borrowers to finance working capital, for Capital Expenditures, and for other
general corporate purposes of the Borrowers at all times in accordance with the
Weekly Budget approved by the Lender pursuant to the budgetary approval process
as outlined in Section
5.01(d)(ii) below; provided that the Lender in
its sole discretion can approve additional releases upon request by the
Borrowers and approval of the use of funds using the budgetary approval process
as outlined in Section
5.01(d)(ii).

     

    Section
2.03     Borrowing;
Releases.  Pursuant to the budgetary approval process as
outlined in Section
5.01(d)(ii) below, and provided that no Performance Trigger has occurred
and is continuing, the Borrowers may borrow the amount set forth in the Weekly
Budget (in excess of released Collections approved by the Lender for the funding
of such Weekly Budget); provided that each Borrowing
shall be in an aggregate amount of not less than $100,000 or an integral
multiple of $100,000 in excess thereof; and provided further that in no event
shall a Borrowing cause the aggregate principal amount of the Loan outstanding
to exceed the Base Commitment without the prior consent of Lender (as evidenced
by its funding of the applicable amount from the Supplemental
Commitment).

     

    Section
2.04     Funding of
Borrowings.  If, for the applicable week, the Weekly Budget is
delivered on the preceding Thursday (or, if such day is not a Business Day, the
immediately preceding Business Day) not later than 11:00 A.M. (Mountain Standard
Time), each Borrowing and release of Collections approved by the Lender shall be
funded on the first Business Day of the following week.  Each Weekly
Budget approved by the Lender shall constitute an irrevocable request by the
Borrowers to borrow the funds set forth therein.  The Lender
shall, on the date of the proposed Borrowing, and upon fulfillment of the
applicable conditions set forth in ARTICLE III, make
available to the Borrowers, at their address referred to in Section 9.01, in
immediately available funds, the proposed Borrowing.

     

    Section
2.05     Repayment.  The
Borrowers shall, jointly and severally, repay the entire unpaid principal amount
of the Loan, together with all interest thereon and all other amounts and
Obligations payable under this Agreement, in full upon the Maturity
Date.

     

    Section
2.06     Prepayments.

     

    (a)          Optional
Prepayments.  The Borrowers may prepay the outstanding
principal amount of the Loan in whole, subject to any applicable prepayment
premium set forth herein, or in part, upon approval of the Weekly Budget
pursuant to the budgetary approval process as outlined in Section 5.01(d)(ii)
below, without penalty, in either case, together with accrued interest to the
date of such prepayment on the principal amount prepaid; provided, however, that each
partial prepayment shall be in an aggregate principal amount not less than
$500,000 or integral multiples of $500,000 in excess thereof (or such lesser
amount as is required to pay the Loan in full).  Upon the giving of
such notice of prepayment, the principal amount of the Loan specified to be
prepaid shall become due and payable on the date specified for such
prepayment.

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    (b)         Mandatory
Prepayments.  The Borrowers shall prepay the Loan (i) in an
amount equal to the Net Cash Proceeds of any Asset Sale completed in accordance
with Section
6.04(b), within one Business Day after receipt of such Net Cash Proceeds;
and (ii) from and in the amount of net proceeds (including from applicable
insurance policies) of casualty events and condemnations with respect to any of
their respective Property (the net proceeds shall also be net of a reserve for
the Borrowers’ good faith estimate of income and franchise taxes attributable
thereto), and subsequent permitted Indebtedness.

     

    (c)          Prepayment
Premiums.  Any prepayment in full prior to the Maturity Date
shall be accompanied by a prepayment premium, payable by the Lender in an amount
equal to 3% multiplied by the amount of the Lender’s Commitments; provided, that
for the avoidance of doubt, there shall be no Prepayment Premium payable in
accordance with a sale to the Lender or the highest bidder pursuant to the Sale
Motion.

     

    Section
2.07     Note.  The
obligation of the Borrowers to repay the Loan made by the Lender and to pay
interest thereon at the rates provided herein shall at all times be joint and
several obligations and shall be evidenced by a promissory note, substantially
in the form of Exhibit
A (the “Note”), executed by
all of the Borrowers, payable to the order of the Lender and in the principal
amount of the Lender’s Commitments.  Each Borrower authorizes the
Lender to record on the schedule annexed to the Note, the date and amount of
each Borrowing requested by the Borrowers and made by the Lender, and each
payment or prepayment of principal thereunder and agrees that all such notations
shall constitute prima
facie evidence of the matters noted.  Each Borrower further
authorizes the Lender to attach to and make a part of the Note continuations of
the schedule attached thereto as necessary.  No failure to make any
such notations, nor any errors in making any such notations, shall affect the
validity of the Borrower’s obligations to repay the full unpaid principal amount
of the Loan, together with all interest thereon and all other amounts and
Obligations payable under this Agreement, or the duties of the Borrowers
hereunder or the other Borrowers under the Security Agreement.

     

    Section
2.08     Expiration of
Commitments.  The Commitments shall expire on the last day of
the Availability Period.

     

    Section
2.09     Interest.  Interest
shall accrue on Borrowings under the Base Commitment at the per annum rate of 7%
and on Borrowings under the Supplemental Commitment at the per annum rate of
12%.  All interest on the Loan shall be based on a 365/366-day year
and actual days elapsed; provided, however, at all
times after the occurrence and during the continuance of an Event of Default,
interest on the Loan shall accrue and be payable at a per annum rate of
12%.  All interest on the outstanding principal balance of the Loan
shall be calculated monthly and shall be payable, at the option of the
Borrowers, either (a) in cash, monthly in arrears on each Interest Payment Date;
or (b) by the addition of such amount of interest to the then-outstanding
principal amount of the Loan on such Interest Payment Date; provided that, at
maturity or upon any prepayment of the Loan (whether in whole or in part), all
interest then-outstanding shall be payable prior to giving effect to any payment
of principal.  If, as of any Interest Payment Date, the Borrowers have
not paid the entire amount of interest then due, such failure to pay interest
shall be deemed to be an irrevocable election by the Borrowers to add such
remaining interest to the outstanding principal amount of the Loan on such
Interest Payment Date.  Any interest added to principal pursuant to
the provisions of this Section 2.09 shall,
from and after the Interest Payment Date, accrue interest as if an original part
of the principal amount of the Loan.

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

     

    Section
2.10     Increased
Costs.  If, due to either (a) the introduction of or any
change in or in the interpretation of any Law or regulation; or
(b) compliance with any guideline or request from any Governmental Body
(whether or not having the force of Law), there shall be any increase in the
cost to any Lender of agreeing to make or making, funding or maintaining the
Loan, then the Borrowers shall from time to time, upon demand by the Lender, pay
to the Lender additional amounts sufficient to compensate the Lender for such
increased cost.  A certificate as to the amount of such increased
cost, submitted to the Borrowers by the Lender, shall be conclusive and binding
for all purposes, absent manifest error.

     

    Section
2.11     Payments and
Computations.

     

    (a)          The
Borrowers shall make each payment hereunder and under the Note not later than
11:00 A.M. (Mountain Standard Time) on the day when due, in Dollars, to the
Lender at its address referred to in Section 9.01 in
immediately available funds without set-off or counterclaim.

     

    (b)         Whenever
any payment hereunder or under the Note shall be stated to be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of payment of interest or fee, as the case may be.

     

    Section
2.12     Taxes.

     

    (a)          Any
and all payments by the Borrowers under each Credit Document shall be made free
and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of the Lender, taxes measured by its net
income and franchise taxes (imposed in lieu of a tax on net income) imposed on
it by each jurisdiction under the Laws of which the Lender is organized or any
political subdivision thereof and taxes measured by the Lender’s net income and
franchise taxes (imposed in lieu of a tax on net income) imposed on it by each
jurisdiction under the Laws of which the Lender is organized or any political
subdivision thereof (all such non-excluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as “Taxes”).  If
any Borrower shall be required by Law to deduct or withhold any Taxes from or in
respect of any sum payable hereunder to the Lender (i) the sum payable
shall be increased as may be necessary so that after making all required
deductions or withholdings (including deductions or withholdings applicable to
additional sums payable under this Section 2.12) the
Lender, as the case may be, receives an amount equal to the sum it would have
received had no such deductions or withholdings been made; (ii) such
Borrower shall make such deductions or withholdings; and (iii) such
Borrower shall pay the full amount deducted or withheld to the relevant taxing
authority or other authority in accordance with applicable Law.

     

    (b)         In
addition, each Borrower agrees to pay any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies of any
applicable Governmental Body which arise from any payment made under any Credit
Document or from the execution, delivery, enforcement or registration of, or
otherwise with respect to, any Credit Document (collectively, “Other
Taxes”).

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

    (c)         Each
Borrower agrees to indemnify the Lender for the full amount of Taxes or Other
Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 2.12) paid by
the Lender and any liability (including for penalties, interest and expenses)
arising therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted.  This indemnification shall
be made within 30 days from the date the Lender makes written demand
therefor.

     

    (d)         Within
30 days after the date of any payment of Taxes or Other Taxes, the Borrowers
will furnish to the Lender, at its address referred to in Section 9.01, the
original or a certified copy of a receipt evidencing payment
thereof.

     

    (e)         Without
prejudice to the survival of any other agreement of the Borrowers hereunder, the
agreements and obligations of the Borrowers contained in this Section 2.12 shall
survive the payment in full of the Obligations.

     

    Section
2.13     Super-Priority Nature of
Obligations and Liens.  Except as otherwise set forth herein,
the Liens and security interests granted to the Lender on the Collateral and the
priorities accorded to the Obligations shall have the super-priority
administrative expense and senior secured status afforded by sections 364(c) and
364(d) of the Bankruptcy Code to the extent provided and as more fully set forth
and or provided for in the Interim DIP Financing Order and Final DIP Financing
Order, as applicable.  The Lender’s Liens on the Collateral and the
administrative claims under sections 364(c) and 364(d) of the Bankruptcy Code
afforded the Obligations shall also have priority over any claims arising under
section 506(c) of the Bankruptcy Code subject and subordinate only to the extent
provided and as more fully set forth in the Interim DIP Financing Order and/or
the Final DIP Financing Order, subject only to (a) Senior Liens; and (b)
only to the extent there are not sufficient, unencumbered funds in the Debtors’
estates to pay such amounts at the time payment is required to be made, the
Carve-Out (as defined below) in an aggregate amount not to exceed
$500,000.  The Carve-Out may be used only to pay (a) unpaid fees of
the Clerk of the Bankruptcy Court and the U.S. Trustee pursuant to 28 U.S.C. §
1930(a); (b) allowed professional fees and expenses of the Debtors and any
statutory committee appointed by the Bankruptcy Court under section 1102 of the
Bankruptcy Code (“Statutory Committee”)
(collectively, the “Professional Fees”)
incurred to the extent consistent with the Budget, but unpaid, prior to delivery
of a notice of an Event of Default (the “Carve-Out Notice”);
and (c) Professional Fees incurred subsequent to delivery of the Carve-Out
Notice to the extent consistent with the Budget in an amount not to exceed
$500,000 (items (a) through (c), collectively, the “Carve-Out”); provided, however, that the
Carve-Out shall not include, apply to or be available for any fees or expenses
incurred by any party, including the Borrowers or any Statutory Committee, in
connection with the investigation, initiation or prosecution of any claims,
causes of action, adversary proceedings or other litigation against the Lender,
including challenging the amount, validity, priority or enforceability of, or
asserting any defense, claim, counterclaim or offset to, the Obligations or the
Liens of the Lender under this Agreement in respect thereof.  The
Lender agrees that so long as the Maturity Date shall not have occurred or the
Lender has not exercised any remedies as a result of an Event of Default, the
Borrowers shall be permitted to pay compensation and reimbursement of expenses
allowed and payable under sections 330 and 331 of the Bankruptcy Code, as the
same may be due and payable, and the same shall not reduce the amount available
under the Carve-Out.   The foregoing shall not be construed as a
consent to the allowance of any fees and expenses or bonuses referred to above
and shall not affect the right of the Borrowers or the Lender to object to the
allowance and payment of such amounts.  Except as expressly set forth
herein or in the Interim DIP Financing Order and/or the Final DIP Financing
Order, no other claim having a priority superior or pari passu to that granted to
the Lenders by the Interim DIP Financing Order and/or the Final DIP Financing
Order shall be granted or approved while any Obligations under this Agreement
remain outstanding.

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

    Section
2.14     No Discharge; Survival of
Claims.  Except as otherwise set forth herein, (a) in the
absence of the Maturity Date having occurred, the Obligations shall survive the
entry of an order (i) confirming any chapter 11 plan in the Bankruptcy Cases,
(ii) converting the Bankruptcy Cases to one or more cases under chapter 7 of the
Bankruptcy Code, or (iii) dismissing the Bankruptcy Cases, and (b) the
super-priority administrative claim granted to the Obligations and all Liens
granted to the Lender shall continue in full force and effect and maintain their
priority as set forth in the Interim DIP Financing Order and/or the Final DIP
Financing Order until full payment of the Obligations.

     

    Section
2.15     Waiver of Any Priming and
Surcharge Rights.  The Borrowers hereby irrevocably waive any
right (i) pursuant to sections 364(c) or 364(d) of the Bankruptcy Code or
otherwise, to grant any Lien of equal or greater priority than the Liens
securing the Obligations; (ii) to approve or grant a claim of equal or superior
priority than the Obligations; and (iii) to surcharge the Collateral or the
Lender pursuant to sections 105, 506(c) and 552 of the Bankruptcy
Code.

     

    Section
2.16     Control Account; Sweep of
Funds.  At all times, each Borrower shall cause all Collections
to be deposited, within two Business Days of receipt, in the exact form received
in the Control Account.  Until so deposited, such funds shall be held
by such Borrower in trust for the Lender.  All proceeds being held by
the Lender in the Control Account (or by such Borrower in trust for the Lender)
shall continue to be held as collateral security for the Obligations and shall
not constitute payment of the Obligations. Amounts deposited in the Control
Account shall not be subject to withdrawal by any Borrower, except after payment
in full and discharge of all Obligations.

     

    ARTICLE
III

     

    CONDITIONS

     

    Section
3.01     Conditions Precedent to the
initial Borrowing of the Loan.

     

    The
obligation of the Lender to fund the initial Borrowing under the Loan on the
Closing Date is subject to satisfaction of all of the following conditions
precedent:

     

    (a)          Consent by Borrowers to
Entry of Orders for Relief.  The Borrowers shall have consented
to entry of Orders for Relief in the Bankruptcy Cases by each filing a voluntary
petition for relief under the Bankruptcy Code with the Bankruptcy
Court.

     

    (b)         Joint
Administration.  The Bankruptcy Court shall have entered an
order authorizing the joint administration of all of the Bankruptcy
Cases.

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    (c)          Certain
Documents.  The Lender shall have received, on the Closing
Date, the following, each dated the Closing Date unless otherwise indicated, in
form and substance satisfactory to the Lender:

     

    
      	
               
      

            	
              (i)

            	
              From
      each party hereto either (i) a counterpart of this Agreement signed on
      behalf of such party; or (ii) written evidence satisfactory to the Lender
      (which may include telecopy transmission of a signed signature page to
      this Agreement) that such party has signed a counterpart of this
      Agreement;

            

    

     

    
      	
               
      

            	
              (ii)

            	
              The
      original Note payable to the order of the Lender, duly executed by the
      Borrowers;

            

    

     

    
      	
               
      

            	
              (iii)

            	
              The
      Security Agreement, duly executed by the Borrowers, together
      with:

            

    

     

    
      	
               
      

            	
              (A)

            	
              certificates,
      if any, representing the Pledged Certificated Equity
      Interests;

            

    

     

    
      	
               
      

            	
              (B)

            	
              a
      first deed of trust or first mortgage (as applicable based on the
      jurisdiction in question) with respect to the Owned Real Property
      designated on Schedule 4.13-A
      as Initially Secured Owned Real Property (the “Initially Secured
      Owned Real Properties”), in form and substance reasonably
      satisfactory to the Lender and its counsel, duly executed by the
      applicable Borrower and prepared for filing with the applicable recording
      authority;

            

    

     

    
      	
               
      

            	
              (C)

            	
              commitments
      for an American Land Title Association policy or state equivalent policy
      of title insurance, with such endorsements as the Lender may reasonably
      require, issued by an insurer in such amounts as the Lender may reasonably
      require with respect to each of the Initially Secured Owned Real
      Properties and insuring the Lender’s first priority lien on said real
      estate, subject only to such exceptions as the Lender in its discretion
      may approve, together with such evidence relating to the payment of liens
      or potential liens as the Lender may
require;

            

    

     

    
      	
               
      

            	
              (D)

            	
              an
      account control agreement duly executed by the applicable financial
      institution and the applicable Borrowers, or other withdrawal release
      control with respect to the Control Account, in either case in form and
      substance satisfactory to the Lender directing that (i) all withdrawals
      from the Control Account shall be subject to approval of Lender; and (ii)
      after the occurrence and during the continuance of an Event of Default, on
      notice by Lender, all of the accounts set forth on Schedule 4.16 (other
      than the Control Account) shall be in the exclusive control of the Lender;
      and

            

    

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (E)

            	
              a
      termination and release agreement in form and substance satisfactory to
      the Lender, duly executed by the Textron Lenders (or their applicable
      successors and assigns) providing for the immediate release of all of its
      security interests in the assets of the Borrowers then held as collateral
      securing the Textron Facility, subject only to the condition of
      satisfaction of the obligations
thereunder.

            

    

     

    
      	
               
      

            	
              (iv)

            	
              Copies
      of (A) the audited consolidated balance sheets for the Borrowers as of
      March 27, 2009 and March 26, 2010, and the related audited consolidated
      statements of operations and cash flows for the fiscal year ending as of
      such date; (B) the unaudited consolidated balance sheet of the Borrowers
      as of September 24, 2010, and the related unaudited statements of
      operations and cash flows for the three and six-month periods ending as of
      such date; and (C) the unaudited balance sheets and related statements of
      operations, stockholders’ equity, and cash flow as of and for the month
      ended October 29, 2010, all of which have been made available to
      Lender;

            

    

     

    
      	
               
      

            	
              (v)

            	
              Receipt
      by the Lender of the following (or their equivalent) for each of the
      Borrowers, certified by a Responsible Officer as of the Closing Date to be
      true and correct and in force and effect as of such
  date:

            

    

     

    
      	
               
      

            	
              (A)

            	
              Resolutions.  Copies
      of resolutions of the board of directors approving and adopting the
      respective Credit Documents, the transactions contemplated therein and
      authorizing execution and delivery
thereof;

            

    

     

    
      	
               
      

            	
              (B)

            	
              Good
      Standing.  Copies of certificates of good standing,
      existence or its equivalent certified as of a recent date by the
      appropriate Governmental Bodies of the state of incorporation;
      and

            

    

     

    
      	
               
      

            	
              (C)

            	
              Incumbency
      Certificate.  A certificate of the Secretary or an
      Assistant Secretary of each of the Borrowers certifying the names and true
      signatures of each officer of each Borrower who has been authorized to
      execute and deliver any Credit Document or other document required
      hereunder to be executed and delivered by or on behalf of such Borrower;
      provided that no
      Secretary may certify to his or her own
  signature.

            

    

     

    
      	
               
      

            	
              (vi)

            	
              Officer’s Certificate
      Regarding Conditions Precedent.  A certificate, signed by
      a Responsible Officer of each of the Borrowers, stating that each of the
      conditions specified in Section 3.02(a)
      and Section
      3.02(b) has been satisfied;
and

            

    

     

    
      	
               
      

            	
              (vii)

            	
              Other Documents and
      Information.  Such additional documents, information and
      materials as the Lender may reasonably
request.

            

    

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

     

    (d)         Absence of Legal
Proceedings.  There shall be no action, suit, investigation or
proceeding (other than the Bankruptcy Cases) pending in any court or before any
arbitrator or governmental instrumentality which, in the sole discretion of the
Lender (as evidenced by the funding of the initial Borrowing hereunder; provided that the Lender
shall not be deemed to be bound by such determination of materiality for any
other purpose under this Agreement), could be expected to have a Material
Adverse Effect.

     

    (e)          DIP Financing
Orders.  The Lender shall have received evidence satisfactory
to the Lender, in its sole discretion, that the Interim DIP Financing Order has
been entered by the Bankruptcy Court and docketed by the Clerk of the Bankruptcy
Court, and that such order shall be in full force and effect and shall not have
been vacated, reversed, modified, amended, or stayed pending
appeal.  The Interim DIP Financing Order shall be satisfactory in
content to the Lender and shall, among other things:

     

    
      	
               
      

            	
              (i)

            	
              authorize
      the Borrowers to enter into this Agreement and the other Credit Documents,
      grant the Liens provided for herein and therein, execute all of the
      documents required hereby and thereby, repay all Indebtedness incurred by
      the Borrowers pursuant to this Agreement and the other Credit Documents,
      and perform any and all other obligations of the Borrowers under this
      Agreement and the other Credit
Documents;

            

    

     

    
      	
               
      

            	
              (ii)

            	
              provide
      that this Agreement and the other Credit Documents shall be binding upon
      and enforceable against any trustee in the Bankruptcy Cases or any trustee
      in any ensuing chapter 7 bankruptcy case should conversion to one or more
      cases under chapter 7 of the Bankruptcy
Code;

            

    

     

    
      	
               
      

            	
              (iii)

            	
              with
      respect to the Obligations, grant secured status pursuant to sections
      364(c)(2), 364(c)(3) and 364(d) of the Bankruptcy Code with respect to all
      Liens granted to the Lender pursuant to this Agreement and the other
      Credit Documents and provide that such Liens shall be automatically
      perfected and have priority over and be senior to any and all other Liens
      in any of the Collateral subject only to (A) validly existing Liens of the
      Textron Agent and the Textron Lenders under the Textron Facility, (B)
      validly existing Liens of Virgo under the Virgo Credit Agreement and (C)
      Liens existing as of the Petition Date (the items referred to in clauses
      (A), (B) and (C) are, collectively, the “Senior Liens”)
      and the Carve-Out;

            

    

     

    
      	
               
      

            	
              (iv)

            	
              provide
      that the Obligations constitute allowed administrative expense claims
      pursuant to section 364(c)(1) of the Bankruptcy Code having priority over
      all administrative expenses of the kind specified in sections 503(b) and
      507(b) of the Bankruptcy Code (except as otherwise provided in this
      Agreement);

            

    

     

    
      	
               
      

            	
              (v)

            	
              state
      that there shall be no priming of any Lien of the Lender other than
      pursuant to this Agreement;

            

    

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (vi)

            	
              provide
      that the automatic stay of section 362(a) of the Bankruptcy Code is
      modified to permit the Lender, upon the occurrence and during the
      continuance of a Default or an Event of Default, to (A) terminate the
      Commitments and accelerate all of the Obligations and all other
      obligations under this Agreement and the other Credit Documents without
      notice; and (B) exercise any other rights and remedies under the Credit
      Documents, the DIP Financing Orders or applicable Law after providing five
      Business Days prior written notice to the Borrowers, any Statutory
      Committee appointed in the Bankruptcy Cases and the office of the United
      States Trustee with only one notice required, for any Event of Default, or
      series of Events of Default arising out of the same
      circumstances.

            

    

     

    (f)          Motions,
Etc.  The Lender shall have reviewed and found satisfactory (i)
all motions, orders and other pleadings or related documents to be filed or
submitted to the Bankruptcy Court in connection with this Agreement, including
the Critical Vendor Motion; and (ii) all First Day Orders and related orders to
be filed by the Borrowers with the Bankruptcy Court in the Bankruptcy
Cases;

     

    (g)         Initial Projected
Budget.  The Lender shall have received the Initial Projected
Budget, in form, scope and substance satisfactory to the Lender in its sole
discretion;

     

    (h)         No Performance
Triggers.  No Performance Trigger shall have occurred and be
continuing, and no event, condition or change shall exist or have occurred that,
individually or in the aggregate, could reasonably be expected to cause a
Performance Trigger to occur; and

     

    (i)          No Material Adverse
Change.  Since the Petition Date, there shall have been no
event, condition or change that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect (other than those
events caused by or arising out of the Bankruptcy Cases, including the loss of
certain employees, officers, and directors by termination, resignation, or
otherwise) in (i) the business, condition, operations, assets, or prospects of
the Borrowers; (ii) the ability of the Borrowers to perform under this
Agreement; or (iii) the ability of the Lender to enforce this Agreement and the
obligations of the Borrowers hereunder.

     

    Section
3.02     Conditions Precedent to Each
Borrowing.  The obligation of the Lender to fund any Borrowing
(including the Borrowing being made by the Lender on the Closing Date) shall be
subject to the further conditions precedent that:

     

    (a)         Accuracy of Certain
Statements.  The following statements shall be true on the date
of such Loan, before and after giving effect thereto, and to the application of
the proceeds therefrom (and the acceptance by the Borrowers of the proceeds of
such Loan shall constitute a representation and warranty by the Borrowers that
on the date of such Loan such statements are true):

     

    
      	
               
      

            	
              (i)

            	
              The
      representations and warranties of the Borrowers contained in
      Article IV of this Agreement and in the other Credit Documents are
      true and correct on and as of such date as though made on and as of such
      date (unless such representations and warranties are made as of another
      date, in which case they shall be true and correct as of such
      date);

            

    

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (ii)

            	
              No
      Default or Event of Default has occurred and is continuing or will result
      from the Loan being made on such date;
and

            

    

     

    
      	
               
      

            	
              (iii)

            	
              No
      Performance Trigger has occurred and is continuing and no event, condition
      or change that, individually or in the aggregate, could reasonably be
      expected to cause a Performance Trigger to
  occur.

            

    

     

    (b)         No Violation of Law or
Injunction.  The making of the Loan on such date does not
violate any Law and is not enjoined, temporarily, preliminarily or
permanently.

     

    (c)         Final
Order.  With respect to any Loan requested to be funded after
January 13, 2011, the Final DIP Financing Order shall have become a Final
Order.

     

    ARTICLE
IV

     

    REPRESENTATIONS
AND WARRANTIES

     

    To induce
the Lender to enter into this Agreement, the Borrowers, jointly and severally,
hereby represent and warrant to the Lender on the date hereof and on each date
that a Weekly Budget is delivered, that:

     

    Section
4.01     Financial
Condition.  The Borrowers have provided to the Lender the
following consolidated financial statements with respect to the Borrowers: (a)
audited balance sheets and related statements of operations, stockholders’
equity, and cash flows as of and for the fiscal years ended March 27, 2009 and
March 26, 2010; (b) unaudited balance sheets and related statements of
operations, stockholders’ equity, and cash flow as of and for the three- and
six-month periods ended September 24, 2010; and (c) unaudited balance sheets and
related statements of operations, stockholders’ equity, and cash flow as of and
for the month ended October 29, 2010.  All of such financial
statements (including the notes thereto) have been prepared in accordance with
GAAP throughout the periods covered thereby and present fairly, in all material
respects, the respective financial positions of the Borrowers as of such dates
and the respective results of operations of the Borrowers for such periods;
provided, however, that
the financial statements referred to in clauses (b) and (c) above are subject to
normal year-end adjustments and lack footnotes and other presentation items
required by GAAP.

     

    Section
4.02     No Changes or Restricted
Payments.  Since September 24, 2010, except as set forth in
Schedule 4.02
(a) other than the commencement of the Bankruptcy Cases, there has been no
circumstance, development or event relating to or affecting the Borrowers which
has had or would be reasonably expected to have a Material Adverse Effect; and
(b) except as permitted herein, no Restricted Payments have been made or
declared by the Borrowers.

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

     

    Section
4.03     Due Incorporation and
Authority.  Each Borrower is a corporation, limited liability
company or limited partnership duly organized, validly existing and in good
standing under the Laws of the state of its organization and has all necessary
corporate, limited liability company or limited partnership power and authority
to own, lease and operate its assets and to carry on its business as it is now
being conducted, except where such failure would not reasonably be expected to
have a Material Adverse Effect.  Each Borrower has all requisite
corporate, limited liability company or limited partnership power and authority
to enter into this Agreement and all of the other Credit Documents to which it
is a party and carry out its obligations hereunder and consummate the
transactions contemplated hereby and thereby.  The execution and
delivery by such Borrower of this Agreement, the performance by such Borrower of
its respective obligations hereunder and the consummation by such Borrower of
the transactions contemplated hereby have been duly authorized by all requisite
corporate, limited liability company or limited partnership action on the part
of such Borrower.  This Agreement and all of the other Credit
Documents have been duly executed and delivered by each Borrower, and, upon due
authorization, execution and delivery hereof by the Lender, each of the Credit
Documents shall constitute the legal, valid and binding obligation of each
Borrower party thereto, enforceable against each such Borrower in accordance
with its terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, moratorium or other similar Laws affecting creditors
rights generally or by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at Law).

     

    Section
4.04     No Conflicts; Default or
Event of Default.

     

    (a)         The
execution and delivery by Borrowers of this Agreement, the consummation of the
transactions contemplated hereby, and the performance by the Borrowers of this
Agreement in accordance with its terms shall not:

     

    
      	
               
      

            	
              (i)

            	
              violate
      the certificate of incorporation or by-laws or comparable organizational
      instruments of any Borrower or contravene any resolution adopted by the
      directors, managers, shareholders, members or partners of any Borrower or
      any Borrower;

            

    

     

    
      	
               
      

            	
              (ii)

            	
              violate
      any Law to which any Borrower, the Business, any of the Property, any of
      the Borrowers is bound or subject;

            

    

     

    
      	
               
      

            	
              (iii)

            	
              result
      in the imposition or creation of any Lien (other than a Permitted Lien) on
      any Property of any Borrower; or

            

    

     

    
      	
               
      

            	
              (iv)

            	
              violate,
      result in any breach of, constitute a default (or an event that, with
      notice or lapse of time or both, would become a default) under, or require
      any consent of any Person (including any Governmental Body) pursuant to,
      any Contractual Obligation or Permit to which any Borrower is a party or
      by which it is bound, or any Permit held by a Borrower, except for
      consents, approvals or authorizations of, or declarations or filings with,
      the Bankruptcy Court;

            

    

     

    provided, however, that each of
the cases set forth in clauses (ii), (iii) and (iv) above is subject to
exceptions that (A) would not reasonably be expected, either individually or in
the aggregate, to prevent or materially delay the consummation by the Borrowers
of the transactions contemplated by this Agreement; or (B) arise as a result of
any facts or circumstances relating to the Lender or any of its
Affiliates.

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

    

    (b)         Except
as set forth on Schedule 4.04(b), no
Borrower has defaulted on any payment under or with respect to any Contractual
Obligation owed by it other than those defaults which in the aggregate have no
Material Adverse Effect and no Default or Event of Default hereunder has
occurred and is continuing.

     

    Section
4.05     Organizational Documents;
Meeting Minutes.  The Borrowers have delivered to the Lender
prior to the date hereof true, accurate and complete copies of the certificate
of incorporation and bylaws, or comparable organizational instruments, of the
Borrowers as in effect on the date hereof.

     

    Section
4.06     Litigation.  Except
for the Bankruptcy Cases and other matters on the docket related thereto and
except as otherwise disclosed on Schedule 4.06, (i)
there are no material claims (including with respect to product liability
claims) pending or, to the Knowledge of the Borrowers, threatened against any
Borrower with respect to the Business (or any part thereof), any of the Real
Properties or any of the other Property of the Borrowers; and (ii) there are no
claims pending or, to the Knowledge of the Borrowers, threatened by or against
any Borrower that challenge the validity of this Agreement or any of the
transactions contemplated hereby or that, either individually or in the
aggregate, would reasonably be expected to prevent or materially delay the
consummation by the Borrowers of the transactions contemplated by this
Agreement.

     

    Section
4.07     Intellectual
Property.  Each of the Borrowers owns, or has the legal right
to use, the Intellectual Property necessary for it to conduct its Business as
currently conducted.  No claim has been asserted and is pending by any
Person challenging or questioning the use of any such Intellectual Property or
the validity or effectiveness of any such Intellectual Property, nor does any
Borrower have Knowledge of any such claim, and to the Borrower's Knowledge the
use of such Intellectual Property by each Borrower does not infringe on the
rights of any Person.

     

    Section
4.08     Taxes.  Each
of the Borrowers, as applicable, has filed all federal and other tax returns and
material reports required to be filed, and has paid all federal and other taxes,
assessments, fees and other governmental charges levied or imposed upon it or
its properties, income or assets otherwise due and payable unless such unpaid
taxes and assessments (a) arose prior to the Petition Date and are not the
subject of a pending and unstayed assessment or collection action; or (b) are
(i) not yet past due or (ii) being contested in good faith and by appropriate
proceedings diligently pursued and as to which adequate reserves determined in
accordance with GAAP have been established on such Borrower’s books and records
and no Lien with respect to nonpayment thereof has been asserted.  No
Borrower is aware of any proposed tax assessments against it, with respect to
any prior period, in excess of amounts accrued on its financial statements (as
required to be accrued in accordance with GAAP), nor do the Borrowers anticipate
any further material tax liability with respect to any open taxable years taken
as a whole in excess of accrued amounts.

     

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

     

    Section
4.09     ERISA.

     

    (a) 
        During the five-year period
prior to the date on which this representation is made or deemed made: (i) no
ERISA Event has occurred, and, to the best Knowledge of the Borrowers, no event
or condition has occurred or exists as a result of which any ERISA Event could
reasonably be expected to occur, with respect to any Plan; (ii) no “accumulated
funding deficiency,” as such term is defined in section 302 of ERISA and section
412 of the Internal Revenue Code, whether or not waived, has occurred with
respect to any Plan; (iii) each Plan has been maintained, operated and funded in
compliance with its own terms and in material compliance with the provisions of
ERISA, the Internal Revenue Code and any other applicable federal or state Laws;
and (iv) no Lien in favor of the PBGC or a Plan has arisen or is reasonably
likely to arise on account of any Plan.

     

    (b)  
       The actuarial present value of all
“benefit liabilities” (as defined in section 4001(a)(16) of ERISA), whether or
not vested, under each Single Employer Plan, as of the last annual valuation
date prior to the date on which this representation is made or deemed made
(determined, in each case, in accordance with Financial Accounting Standards
Board Accounting Standards Codification (“FASB ASC”) 960, 962
and 965, utilizing the actuarial assumptions used in such Plan’s most recent
actuarial valuation report), did not exceed as of such valuation date the fair
market value of the assets of such Plan.

     

    (c)    
     Neither the Borrowers nor any ERISA Affiliate has
incurred, or, to the best Knowledge of the Borrowers, could be reasonably
expected to incur, any withdrawal liability under ERISA to any Multiemployer
Plan or Multiple Employer Plan.  Neither the Borrowers nor any ERISA
Affiliate would become subject to any withdrawal liability under ERISA if the
Borrowers or any ERISA Affiliate were to withdraw completely from all
Multiemployer Plans and Multiple Employer Plans as of the valuation date most
closely preceding the date on which this representation is made or deemed
made.  Neither the Borrowers nor any ERISA Affiliate has received any
notification that any Multiemployer Plan is in reorganization (within the
meaning of section 4241 of ERISA), is insolvent (within the meaning of section
4245 of ERISA), or has been terminated (within the meaning of Title IV of
ERISA), and no Multiemployer Plan is, to the best Knowledge of the Borrowers,
reasonably expected to be in reorganization, insolvent, or
terminated.

     

    (d)     
    No prohibited transaction (within the meaning of section
406 of ERISA or section 4975 of the Internal Revenue Code) or breach of
fiduciary responsibility has occurred with respect to a Plan which has subjected
or may subject the Borrowers or any ERISA Affiliate to any liability under
sections 406, 409, 502(i) or 502(l) of ERISA or section 4975 of the Internal
Revenue Code, or under any agreement or other instrument pursuant to the
Borrowers or any ERISA Affiliate has agreed or is required to indemnify any
person against any such liability.

     

    (e)       
  Neither the Borrowers nor any ERISA Affiliate has any material
liability with respect to “expected post-retirement benefit obligations” within
the meaning of the FASB ASC 715.  Each Plan which is a welfare plan
(as defined in section 3(1) of ERISA) to which sections 601-609 of ERISA and
section 4980B of the Internal Revenue Code apply has been administered in
compliance in all material respects of such sections.

     

    (f)       
   Neither the execution nor delivery of this Agreement nor the
consummation of the financing transactions contemplated thereunder will involve
any transaction which is subject to the prohibitions of sections 404, 406
or 407 of ERISA or in connection with which a tax could be imposed pursuant to
section 4975 of the Internal Revenue Code.

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

     

     Section
4.10     Governmental Regulations,
Etc.

     

    (a)      
   No part of the proceeds of the Loan hereunder will be used,
directly or indirectly, for the purpose of purchasing or carrying any “margin
stock” within the meaning of Regulation U.  If requested by the
Lender, the Borrowers will furnish to the Lender a statement to the foregoing
effect in conformity with the requirements of FR Form U-1 referred to in said
Regulation U.  No Indebtedness being reduced or retired out of the
proceeds of the Loan hereunder was or will be incurred for the purpose of
purchasing or carrying any margin stock within the meaning of Regulation U or
any “margin security” within the meaning of
Regulation T.  “Margin stock” within the meanings of Regulation U
does not constitute more than 25% of the value of the consolidated assets of the
Borrowers and their Subsidiaries.  None of the transactions
contemplated by this Agreement (including the direct or indirect use of the
proceeds of the Loan) will violate or result in a violation of the Securities
Act of 1933, as amended or the Exchange Act, or regulations issued pursuant
thereto, or Regulation T, U or X.

     

    (b)    
     No Borrower intends to, and no Borrower will, use
any proceeds of the Loan for any purpose that is improper under the Bankruptcy
Code.

     

    (c)    
     The Borrowers are not subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act or the
Investment Company Act of 1940, each as amended.  In addition, none of
the Borrowers is (i) an “investment company” registered or required to be
registered under the Investment Company Act of 1940, as amended, and is not
controlled by such a company; or (ii) a “holding company”, or a “subsidiary
company” of a “holding company”, or an “affiliate” of a “holding company” or of
a “subsidiary” of a “holding company”, within the meaning of the Public Utility
Holding Company Act of 1935, as amended.

     

    (d)     
    No director, executive officer or principal shareholder
of the Borrowers is a director, executive officer or principal shareholder of
the Lender.  For the purposes hereof the terms “director”, “executive
officer” and “principal shareholder” (when used with reference to any Lender)
have the respective meanings assigned thereto in Regulation O.

     

    Section
4.11     No
Subsidiaries.  Except as set forth on Schedule 4.11, each
of the Borrowers represents that, as of the Closing Date, there are no
Subsidiaries.

     

    Section
4.12     Use of
Proceeds.

     

    (a)       
  The proceeds of the Loan made hereunder shall be used by the
Borrowers solely as set forth in Section 2.02
above:

     

    
      	
               
      

            	
              (i)

            	
              to
      pay in full the Textron Facility;

            

    

     

    
      	
               
      

            	
              (ii)

            	
              to
      make payments under the Critical Vendor Motion and any order of the
      Bankruptcy Court thereon;

            

    

     

    
      	
               
      

            	
              (iii)

            	
              to
      pay the payables owed by the Borrowers that have been approved by the
      Lender pursuant to the budgetary approval process as outlined in Section
      5.01(d)(ii) below; and

            

    

     

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (iv)

            	
              for
      general working capital purposes (including the contribution to corporate
      overhead expenses and general restructuring costs as provided for
      herein).

            

    

     

    (b)     
    None of the proceeds of the Loan may be used by the
Borrowers to amortize, repay or prepay any Indebtedness of the Borrowers for
borrowed money, except as expressly provided herein with respect to the Textron
Facility and such payments as are expressly consented to in writing by the
Lender after the date hereof.

     

    (c)       
  No proceeds of the Loan or the Collateral will be used by the
Borrowers or any other Person (including any statutory committee appointed in
the Bankruptcy Cases) to (i) object to or contest in any manner, or raise any
defenses to, the validity, extent, perfection, priority or enforceability of the
Obligations, the Liens granted to the Lender under this Agreement and the
Collateral Documents or any other rights or interests of the Lender under this
Agreement and the other Credit Documents; or (ii) assert any claims or causes of
action, including any actions under Chapter 5 of the Bankruptcy Code, against
the Lender.

     

    Section
4.13     Real Property.

     

    (a)        
 Schedule
4.13-A lists the street address of each parcel of Owned Real
Property.  The applicable Borrower has fee simple title to each Owned
Real Property.  Except for the Owned Real Property, no Borrower now
owns any interest in any real property, other than leasehold interests and other
than the REO real property obtained from HUD or other parties and held for
sale.

     

    (b)       
  Schedule
4.13-B lists the street address (where available) of each parcel of
Leased Real Property (the Leased Real Property together with the Owned Real
Property, are collectively referred to herein as the “Real Properties”),
with respect to each lease (each a “Real Property Lease”)
in effect with respect to each Leased Real Property.

     

    (c)       
  The Borrowers have delivered to the Lender complete and accurate
copies of all Real Property Leases, including all addenda, amendments,
extensions and supplements thereto and assignments thereof.  No
Borrower has entered into any contract, arrangement or understanding with any
third party landlord, written or oral, that in any way alters or affects the
express terms and conditions of any Real Property Lease.  Each Real
Property Lease is valid and binding on the applicable Borrower and, to the
Knowledge of the Borrowers, the counterparties thereto, and is in full force and
effect.  No Borrower is in default under any Real Property Lease and,
to the Knowledge of the Borrowers, no other counterparty to any Real Property
Lease is in default thereof which, in either case could reasonably be expected
to have a Material Adverse Effect.  Except as provided in the lease
documents delivered to the Lender, to the Knowledge of Borrowers, no Borrower
has (i) subleased, licensed or otherwise granted any Person the right to use or
occupy any Leased Real Property or any portion thereof, or
(ii) collaterally assigned or granted any other Lien in or over any Real
Property Lease or any interest therein.

     

    (d)       
  The Borrowers’ use of the Real Properties for the various purposes
for which they are presently being used are permitted as of right under all
applicable Laws (including zoning Laws) except where the failure to comply could
not reasonably be expected to have a Material Adverse Effect.

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

     

    (e)   
      To the Knowledge of the Borrowers except
where the failure to comply could not reasonably be expected to have a Material
Adverse Effect, (i) all of the Real Properties, including buildings, fixtures
and other improvements thereon, are in good operating condition and repair,
ordinary wear and tear excepted, and no Owned Real Property is in need of repair
other than as part of routine maintenance in the ordinary course of business;
and (ii) all buildings, structures, improvements and fixtures on each of the
Real Properties are in compliance in all material respects with all applicable
Laws, including Occupational Safety and Health Laws.

     

    (f)      
    To the Knowledge of the Borrowers, except as provided in
the Real Property Leases or recorded in the real property records, and except as
set forth in Schedule
4.13(f), no Borrower has (i) leased, subleased, licensed or otherwise
granted to any Person the current or future right to use or occupy any of the
Real Properties or any portion thereof; or (ii) granted to any Person any
option, right of first refusal, offer, or other contract or right to purchase,
acquire, lease, sublease, assign or dispose of any interest in any of the Real
Properties.

     

    (g)       
  The Real Properties constitute all of the real property currently
used by the Borrowers in the conduct of the Business.

     

    (h)        
 There does not exist any actual or, to the Knowledge of the Borrowers,
overtly threatened or contemplated condemnation or eminent domain proceeding
that affects or could be reasonably expected to affect any Real Property or any
part thereof, and no Borrower has received any written notice of the intention
of any Governmental Body to undertake any such proceeding with respect to any of
the Real Properties, or any part thereof that in either case would reasonably be
expected to have a Material Adverse Effect.

     

    (i)         
 Except as set forth on Schedule 4.13(i), no
Borrower has any ongoing dispute or disagreement with any landlord in respect of
any obligation of such Borrower or such landlord under the terms of any Real
Property Lease or under applicable Law with respect to any Leased Real Property,
other than such disputes arising from and solely related to the Bankruptcy
Cases.

     

     Section
4.14     Environmental
Matters.

     

    (a) 
        Except as set forth in Schedule 4.14, each
Borrower is currently, and since January 1, 2005 has been, in
compliance in all material respects with all applicable Environmental Laws
applicable to its Business, the Property and the Property of its direct and
indirect Subsidiaries.  Except as set forth in Schedule 4.14, there
are no claims pursuant to any Environmental Law pending or, to the Knowledge of
the Borrowers, threatened against any Borrower in connection with the conduct or
operation of the Business or the ownership or use of any of the Real Properties
(or any of them).  Except as set forth in Schedule 4.14, within
the past five years, no Borrower has received any actual or threatened order,
notice or other written communication from any Governmental Body or other Person
of any actual or potential violation or failure of any Borrower to comply with
any Environmental Law or of any actual or threatened obligation on the part of
any Borrower to undertake or bear the cost of any Environmental, Health and
Safety Liabilities with respect to any of the Real Properties or any of its
other Property.

    
      
         

      

      
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    (b)      
   Except as set forth in Schedule 4.14, no
Borrower is currently required to undertake any corrective or remedial
obligation under any Environmental Law with respect to the Business, any of its
Property or any of the Leased Real Properties.

     

    (c)        
 The Borrowers have made available to the Lender all Phase I and Phase II,
if any, environmental reports, other engineering reports and any other material
documents in the Borrowers’ possession relating to any environmental or health
or safety matters, relating to the Real Properties and any of its other
Property.  Except as set forth on Schedule 4.14, or
except to the extent disclosed in such environmental and engineering reports, to
the Knowledge of the Borrowers, there are no Hazardous Materials present on or
in the environment at any of the Real Properties, including any Hazardous
Materials contained in barrels, aboveground or underground storage tanks,
landfills, land deposits, dumps, equipment (whether movable or fixed) or other
containers, either temporary or permanent, and deposited or located in land,
water, sumps, or any other part of any of the Real Properties, or incorporated
into any structure therein or thereon, except in material compliance with all
applicable Environmental Laws.

     

    (d)         
Except as set forth on Schedule 4.14, no
Borrower has conducted or knowingly permitted any Hazardous Activity on or with
respect to any of the Real Properties.

     

     Section
4.15     Disclosure.

     

    (a)
         Neither this Agreement,
any of the financial statements delivered to the Lender, any other document,
certificate or statement furnished to the Lender (with the exception of any
Projected Budget or Weekly Budget) nor any of the information delivered in
writing to the Bankruptcy Court by or on behalf of the Borrowers in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained therein or herein not misleading.

     

    (b) 
        Each Projected Budget (including
the Initial Projected Budget) and Weekly Budget furnished to the Lender by or on
behalf of any member of the Borrowers in connection with the transactions
contemplated hereby have been prepared in good faith on the basis of reasonable
assumptions.

     

     Section
4.16     Bank
Accounts.  Schedule 4.16
contains a complete and accurate list of all bank accounts maintained by the
Borrowers with any bank or other financial institution.

     

     Section
4.17     Account
Debtors.  Schedule 4.17 lists
the address in the Borrowers’ records of each Person who is obligated to remit
payments of any kind to any Borrower.

     

     Section
4.18     Insurance.  All
policies of insurance of any kind or nature owned by or issued to the Borrowers,
including policies of life, fire, theft, product liability, public liability,
property damage, other casualty, employee fidelity, workers’ compensation and
employee health and welfare insurance, are (a) in full force and effect; (b) to
the Knowledge of the Borrowers, sufficient; and (c) of a nature and provide such
coverage as is customarily carried by companies of the size and character of
such Person.

    
      
         

      

      
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     Section
4.19     Labor
Matters.  Except as set forth on Schedule
4.19,

     

    (a) 
        There are no strikes, work
stoppages, slowdowns or lockouts pending or, to the Knowledge of the Borrowers,
threatened against or involving the Borrowers, other than those which in the
aggregate have no Material Adverse Effect.

     

    (b) 
        There are no arbitrations or
grievances pending against or involving the Borrowers, nor are there any
arbitrations or grievances, to the Knowledge of the Borrowers, threatened
involving the Borrowers, other than those which, in the aggregate, if resolved
adversely to the Borrowers, would have no Material Adverse Effect.

     

    (c)   
      There is no organizing activity involving
the Borrowers pending or, to the Knowledge of the Borrowers, threatened by any
labor union or group of employees, other than those which in the aggregate have
no Material Adverse Effect.  There are no representation proceedings
pending or, to the Knowledge of the Borrowers, threatened with the National
Labor Relations Board, and no labor organization or group of employees of the
Borrowers has made a pending demand for recognition, other than those which in
the aggregate have no Material Adverse Effect.

     

    (d)     
    There are no unfair labor practices charges, grievances
or complaints pending or in process or, to the Knowledge of the Borrowers,
threatened by or on behalf of any employee or group of employees of the
Borrowers, other than those which in the aggregate, if adversely determined,
would have no Material Adverse Effect.

     

    (e)       
  There are no complaints or charges against the Borrowers pending or,
to the Knowledge of the Borrowers, threatened to be filed with any federal,
state, local or foreign court, governmental agency or arbitrator based on,
arising out of, in connection with, or otherwise relating to the employment by
the Borrowers of any individual, other than those which in the aggregate, if
resolved adversely, would have no Material Adverse Effect.

     

    (f)         
 The Borrowers are in compliance with all Laws, and all orders of any
court, Governmental Body or arbitrator, relating to the employment of labor,
including all such Laws relating to wages, hours, collective bargaining,
discrimination, civil rights, and the payment of withholding and/or social
security and similar taxes, except for such non-compliances that in the
aggregate have no Material Adverse Effect.

     

     Section
4.20     Reorganization
Matters.

     

    (a)       
  The Borrowers’ bankruptcy cases jointly administered as the
Bankruptcy Cases were commenced on the Petition Date in accordance with
applicable Law and proper notice thereof and proper notice of the hearings to
consider entry of the Interim DIP Financing Order has been given and proper
notice of the hearing to consider entry of the Final DIP Financing Order will be
given.

    
      
         

      

      
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    (b)    
     After entry of the Interim DIP Financing Order and
Final DIP Financing Order, as applicable, the Obligations will constitute
allowed administrative expense claims in the Bankruptcy Cases having priority
over all administrative expense claims and unsecured claims against the
Borrowers now existing or hereafter existing, of any kind whatsoever, to the
extent provided and as more fully set forth in the Interim DIP Financing Order
and Final DIP Financing Order.

     

    (c)      
   Except as otherwise set forth herein, after the entry of the
Interim DIP Financing Order and Final DIP Financing Order, as applicable, the
Obligations will be secured by valid and perfected Liens on all of the
Collateral and such Liens shall have the priorities set forth in the Interim DIP
Financing Order and Final DIP Financing Order and the other Credit
Documents.

     

    (d)       
  Notwithstanding any failure on the part of the Lender to perfect,
maintain, protect or enforce any Liens and security interests in the Collateral
granted pursuant to this Agreement, the  Interim DIP Financing Order
and Final DIP Financing Order (when entered) shall automatically, and without
further action by any Person, perfect such Liens and security interests against
the Collateral.

     

    (e)      
   The Interim DIP Financing Order and Final DIP Financing Order
(with respect to the period on and after entry of the Final DIP Financing
Order), as the case may be, are in full force and effect and have not been
reversed, stayed, modified, varied or amended without the consent of the
Lender.

     

    (f)        
  After the entry of the Interim DIP Financing Order (with respect to
the period prior to entry of the Final DIP Financing Order) or the Final DIP
Financing Order (with respect to the period on and after entry of the Final DIP
Financing Order), notwithstanding the provisions of section 362 of the
Bankruptcy Code, upon the Maturity Date of any of the Obligations (whether by
acceleration or otherwise), the Lender shall be entitled to immediate payment of
such Obligations and to enforce the remedies provided for hereunder and under
the other Credit Documents, without further application to or order by the
Bankruptcy Court, as more fully set forth in the Interim DIP Financing Order and
Final DIP Financing Order, as applicable.

     

     Section
4.21     Investment Banking and
Finder’s Fees.  Except for the fee paid to Raymond James &
Associates, Inc., no Borrower has paid or agreed to pay, or reimburse any other
party with respect to, any investment banking or similar or related fee,
underwriter’s fee, finder’s fee, or broker’s fee to any Person in connection
with this Agreement.

     

    ARTICLE
V

     

    AFFIRMATIVE
COVENANTS

     

    As long
as any of the Obligations or Commitments remain outstanding, the Borrowers
agrees with the Lender that:

     

     Section
5.01     Financial
Statements.

     

    The
Borrowers shall furnish, or cause to be furnished, to the
Lender:

    
      
         

      

      
        35

        
          

        

      

      
         

      

    

     

    (a)         Audited Financial
Statements.  As soon as available, but in any event within 75
days after the close of each fiscal year of PHH and its consolidated companies,
audited consolidated balance sheets of PHH and its consolidated companies as of
the close of such fiscal year, and audited consolidated statements of income and
retained earnings and cash flows of PHH and its consolidated companies for such
fiscal year, together with (i) copies of the reports and certificates
relating thereto of independent certified public accountants of recognized
standing selected by PHH and reasonably satisfactory to the Lender; (ii) such
accountants’ letter to management relating to such financial statements; and
(iii) a report of the Chief Executive Officer or Chief Financial Officer of PHH
containing management’s discussion and analysis of PHH and its consolidated
companies’ financial condition, results of operations and affairs for such
year.

     

    (b)         Quarterly Financial
Statements.  As soon as available, but in any event within
forty (40) days after the close of each of the first three fiscal quarters of
PHH and its consolidated companies, unaudited consolidated balance sheets of PHH
and its consolidated companies as of the close of each such fiscal quarter and
unaudited consolidated statements of income, retained earnings and cash flows of
PHH and its consolidated companies for such quarter and, for the second and
third quarter only, for the period from the beginning of the fiscal year to the
end of each such quarter, each such balance sheet and statement of income and
retained earnings and changes in financial position to be certified by the Chief
Executive Officer and Chief Financial Officer of the Borrowers as fairly
presenting in all material respects the financial condition and results of
operation of PHH and its consolidated companies; provided that any such
certificate may state that the accompanying balance sheet and statements are
subject to normal year-end footnote disclosures.

     

    (c)         Borrowers-Prepared Monthly
Financial Statements.  As soon as available but in any event
within ten Business Days after the close of each calendar month of each fiscal
year of the Borrowers, (a) unaudited consolidated balance sheets of the
Borrowers, together with a current report of Inventory (in form and substance
reasonably acceptable to Agent), in each case, as of the last day of such fiscal
month; and (b) unaudited consolidated statements of income of the Borrowers for
such fiscal month and for the period from the beginning of the fiscal year to
the end of such fiscal month, each such balance sheet, report of Inventory and
statement of income and changes in financial position to be certified by the
Chief Executive Officer and Chief Financial Officer of the Borrowers as fairly
presenting in all material respects the financial condition and results of
operation of the Borrowers; provided that any such
certificate may state that the accompanying balance sheet and statements are
subject to normal quarter and year-end adjustments and normal footnote
disclosures.

     

    (d)         Borrowers-Prepared Budgets
and Reconciliations.

     

    
      	
               
      

            	
              (i)

            	
              An
      itemized budget for the Borrowers in form, scope and substance
      satisfactory to, and approved by, the Lender in its sole discretion (the
      “Projected
      Budget”), (A) initially for the 13-week period immediately
      following the Closing Date (the “Initial Projected
      Budget”), to be delivered at least five days prior to the Closing
      Date; and (B) each week thereafter, on each Thursday (or, if such day is
      not a Business Day, the immediately preceding Business Day) not later than
      11:00 A.M. (Mountain Standard Time), a revised Projected Budget for the
      immediately following 13-week period together with a certificate from the
      Chief Financial Officer of the Borrowers explaining any variances from the
      Initial Projected Budget.

            

    

    
      
         

      

      
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              (ii)

            	
              On
      each Thursday (or, if such day is not a Business Day, the immediately
      preceding Business Day) not later than 11:00 A.M. (Mountain Standard Time)
      after the Closing Date, an itemized budget for the Borrowers (which may
      include optional prepayments of the Loan), in the form attached hereto as
      Exhibit
      B, and approved by, the Lender in its sole discretion for the
      immediately following week (the “Weekly
      Budget”), specifying therein (A) the amount of Collections
      requested for release to satisfy the budgeted obligations of the Borrowers
      for such week; (B) the aggregate amount of any proposed Borrowing in
      excess of such requested Collections, required to satisfy the budgeted
      obligations of the Borrowers for such week; and (C) a description in
      reasonable detail of the proposed use of proceeds of such requested
      Collections and, if applicable, Borrowing, together with a certificate
      from the Chief Financial Officer of the Borrowers explaining any variances
      between the actual results from operations from the previous week and the
      amounts set forth in the previously delivered Weekly
    Budget.

            

    

     

    
      	
               
      

            	
              (iii)

            	
              On
      each Thursday (or, if such day is not a Business Day, the immediately
      preceding Business Day) not later than 11:00 A.M. (Mountain Standard Time)
      after the Closing Date, a report, in form and substance satisfactory to
      the Lender in its sole discretion, delivered by the Borrowers specifying
      therein, including reasonable detail, the aggregate Borrowers’ reported
      aggregate new and used home retail Inventory at wholesale invoice plus the
      PHH and Nationwide Homes, Inc. aggregate Accounts Receivable to
      independent retailers, builders and developments, and the Borrowers’
      retail (segment 03) Accounts Receivable as of the end of the prior week,
      together with a certificate from the Chief Financial Officer of the
      Borrowers explaining any relevant changes in the level
      thereof.

            

    

     

    
      	
               
      

            	
              (iv)

            	
              Within
      ten Business Days after each Performance Trigger Test Date, a report, in
      form and substance satisfactory to the Lender in its sole discretion,
      delivered by the Borrowers specifying therein, including reasonable
      detail, the Borrowers’ aggregate Inventory value and aggregate Accounts
      Receivable Value as of such Performance Trigger Test Date (each, a “Performance Trigger
      Report”), together with a certificate from the Chief Financial
      Officer of the Borrowers comparing the above–reported amounts as a
      percentage of the same amounts reported as of October 29, 2010 and
      explaining any relevant changes in the level
  thereof.

            

    

     

    
      
         

      

      
        37

        
          

        

      

      
         

      

    

     

    All such
financial statements and reports delivered pursuant to this Section 5.01 shall be
complete and correct in all material respects (subject, in the case of interim
statements, to normal year-end audit adjustments) and shall be prepared in
reasonable detail and, in the case of the annual and quarterly financial
statements provided in accordance with subsections (a) and (b) above, in
accordance with GAAP applied consistently throughout the periods reflected
therein and further accompanied by a description of, and an estimation of the
effect on the financial statements on account of, any change in the application
of accounting principles.

     

    Section
5.02     Certificates; Other
Information.

     

    The
Borrowers shall furnish, or cause to be furnished, to the Lender:

     

    (a)         Officer’s Compliance
Certificate.  Concurrently with the delivery of the financial
statements referred to in Section 5.01(a) and
Section 5.01(b)
above, a certificate of a Responsible Officer, substantially in the form of
Exhibit C,
stating that, to the best of such Responsible Officer’s Knowledge and belief,
(i) the financial statements fairly present in all material respects the
financial condition of the parties covered by such financial statements; (ii)
during such period the Borrowers have observed or performed in all material
respects the covenants and other agreements hereunder and under the other Credit
Documents relating to them, and satisfied in all material respects the
conditions contained in this Agreement to be observed, performed or satisfied by
them; and (iii) such Responsible Officer has obtained no Knowledge of any
Default or Event of Default except as specified in such
certificate.

     

    (b)         Accountants’
Reports.  Promptly upon receipt, a copy of any final (as
distinguished from a preliminary or discussion draft) “management letter” or
other similar report submitted by independent accountants or financial
consultants to the Borrowers in connection with any annual, interim or special
audit or which refers in whole or in part to any inadequacy, defect, problem,
qualification or other lack of fully satisfactory accounting controls utilized
by the Borrowers.

     

    (c)         Bankruptcy Court
Matters.  Promptly, copies of all pleadings, motions,
applications and other documents filed by the Borrowers with the Bankruptcy
Court or distributed by the Borrowers to the office of the United States Trustee
or to any Statutory Committee.

     

    (d)         Other
Information.  Promptly, such additional financial and other
information as the Lender may from time to time reasonably request.

     

    Section
5.03     Notices.

     

    The
Borrowers shall give notice to the Lender of:

     

    (a)         Defaults.  Immediately
(and in any event within two days) after any applicable officer has Knowledge of
the occurrence of any Default or Event of Default.

     

    (b)         Contractual
Obligations.  Promptly (and in any event within five days)
after any applicable officer has Knowledge of the occurrence of any default or
event of default under any Contractual Obligation of the Borrowers which would
reasonably be expected to have a Material Adverse Effect.

     

    
      
         

      

      
        38

        
          

        

      

      
         

      

    

     

    (c)         Legal
Proceedings.  Promptly (and in any event within five days)
after any applicable officer has Knowledge of any litigation, or any
investigation or proceeding (including any environmental proceeding), or any
material development in respect thereof, affecting the Borrowers which, if
adversely determined, could result in liability in excess of
$250,000.

     

    (d)         ERISA.  Promptly
(and in any event within ten days) after any applicable officer has Knowledge or
has reason to know of (i) any event or condition, including, but not limited to,
any Reportable Event, that constitutes, or might reasonably lead to, an ERISA
Event; (ii) with respect to any Multiemployer Plan, the receipt of notice
as prescribed in ERISA or otherwise of any withdrawal liability assessed against
any of their ERISA Affiliates, or of a determination that any Multiemployer Plan
is in reorganization or insolvent (both within the meaning of Title IV of
ERISA); (iii) the failure to make full payment on or before the due date
(including extensions) thereof of all amounts which the Borrowers or any ERISA
Affiliate are required to contribute to each Plan pursuant to its terms and as
required to meet the minimum funding standard set forth in ERISA and the
Internal Revenue Code; or (iv) any change in the funding status of any Plan that
reasonably could be expected to have a Material Adverse Effect; together with a
description of any such event or condition or a copy of any such notice and a
statement by the Chief Financial Officer of the Borrowers briefly setting forth
the details regarding such event, condition, or notice, and the action, if any,
which has been or is being taken or is proposed to be taken by the Borrowers
with respect thereto.  Promptly upon request, the Borrowers shall
furnish the Lender with such additional information concerning any Plan as may
be reasonably requested, including, but not limited to, copies of each annual
report/return (Form 5500 series), as well as all schedules and attachments
thereto required to be filed with the Department of Labor and/or the Internal
Revenue Service pursuant to ERISA and the Internal Revenue Code, respectively,
for each “plan year” (within the meaning of section 3(39) of
ERISA).

     

    (e)         Other.  Promptly
(and in any event within five days), any other development or event of which any
applicable officer has Knowledge and determines could reasonably be expected to
have a Material Adverse Effect.

     

    Each
notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the Borrowers propose to take with respect
thereto.

     

    Section
5.04     Payment of
Obligations.  Subject to the DIP Financing Orders and to the
Lender funding the Loan as required under this Agreement, the Borrowers shall
pay, discharge or otherwise satisfy, at or before maturity or before they become
delinquent (subject, where applicable, to specified grace periods), as the case
may be, all postpetition obligations of the Borrowers of whatever nature and any
additional costs that are imposed as a result of any failure to so pay,
discharge or otherwise satisfy such obligations, except when the amount or
validity of such obligations and costs is currently being contested in good
faith by appropriate proceedings and reserves, if applicable, in conformity with
GAAP with respect thereto have been provided on the books of the Borrowers, as
the case may be.

    
      
         

      

      
        39

        
          

        

      

      
         

      

    

     

    Section
5.05     Conduct of Business and
Maintenance of Existence.  Subject to the DIP Financing Orders,
the Borrowers shall (a) continue to engage, in Business of the same general type
as conducted on the Closing Date by the Borrowers and similar or related
businesses; (b) preserve, renew and keep in full force and effect its corporate
or other legal existence except as otherwise permitted by this Agreement; (c)
take all reasonable action to maintain all rights, privileges, licenses and
franchises necessary or desirable in the normal conduct of their Business except
to the extent that failure to comply therewith would not, in the aggregate, have
a Material Adverse Effect and (d) comply with all post-petition Contractual
Obligations, its certificate of incorporation or by-laws (or other
organizational or governing documents) and all Laws applicable to it except to
the extent that failure to comply therewith would not, in the aggregate, have a
Material Adverse Effect.

     

    Section
5.06      Maintenance of Property;
Insurance.

     

    (a)         The
Borrowers shall keep all of their material Property useful and necessary in
their Business in reasonably good working order and condition (ordinary wear and
tear excepted) except to the extent that failure to comply therewith would not,
in the aggregate, have a Material Adverse Effect.

     

    (b)         The
Borrowers agree to maintain, at the levels and of the types set forth in Schedule 5.06,
insurance policies then in effect or, with respect relevant workers’
compensation laws, at the level required to comply with and maintain coverages
required by relevant workers’ compensation laws, provided, the Borrowers may
continue to self insure or receive insurance through a state fund where they
currently do so or place Excess Employers Indemnity Insurance in the State of
Texas in lieu of a Workers’ Compensation Policy.  The Borrowers shall
assure that the insurance policies required by this Section shall continue to be
carried by insurance companies with a general policyholder service rating of not
less than “B++” as rated in the most recent available Best’s Insurance Report.
In the event that any such insurance company which provides a Borrower an
insurance policy or policies required by this Section is no longer financially
responsible and capable of fulfilling the requirements of such policies in the
reasonable opinion of the Lender, such Borrower shall use commercially
reasonable efforts to replace such insurance company within 30 days of receipt
of a written request of the Lender; provided, however, that the
amount of coverage required pursuant to this Section may be reduced or
eliminated, with the written consent of the Lender, if an insurance consultant
or insurance broker retained by any Borrower provides a written recommendation
that, based upon its evaluation of the such Borrower’s maximum foreseeable loss
in the event of a major conflagration, windstorm, explosion, riot, flood, or
similar event, a specified lesser amount is believed to be reasonable given the
nature of the risks insured.

     

    (c)         With
the exception of the Workers’ Compensation and Texas Excess Employers Indemnity
Insurance policies, all such policies shall name the applicable Borrower and the
Lender as insured parties, beneficiaries or loss payees as their interests may
appear.  Each policy shall be in such form and contain such provisions
as are generally considered standard for the type of insurance involved and
except for any workers’ compensation policy, shall contain a provision to the
effect that the insurer shall not cancel or substantially modify the policy
provisions without first giving thirty day advance written notice thereof to the
applicable Borrower and the Lender (except for non-payment of
premium).

     

    
      
         

      

      
        40

        
          

        

      

      
         

      

    

     

    (d)         The
Borrowers will give prompt written notice to the Lender of any loss or claim in
excess of $20,000 (regardless of whether it is covered by insurance), and the
Lender may make proof of loss if not made promptly by the applicable
Borrower.  Each insurance company is hereby authorized and directed to
make payment for such loss directly to the Lender instead of to the applicable
Borrower or to the applicable Borrower and the Lender
jointly.  Insurance proceeds or any part thereof may be applied by the
Lender, at its option, either to the reduction or payment of the Obligations
(without the premiums set forth in Section 2.06(c)) or
to the repair, rebuilding and restoration of the Property lost, damaged or
destroyed, but the Lender shall not be obligated to ensure the proper
application of any amount paid over to the applicable Borrower.

     

    Section
5.07      Inspection of Property;
Books and Records; Discussions.

     

    (a)         Each
Borrower shall keep proper books of records and account in which full, true and
correct entries in conformity with GAAP and all applicable Laws shall be made of
all dealings and transactions in relation to its businesses and
activities;

     

    (b)         Each
Borrower shall permit, during regular business hours and upon reasonable notice
by the Lender, the Lender, and its representatives, to visit and inspect any of
its properties and examine and make abstracts (including photocopies) from any
of its books and records;

     

    (c)         Each
Borrower shall permit the Lender to discuss the business, operations, properties
and financial and other condition of such Borrower (and, to the extent
applicable, the other Borrowers) with officers and employees of such Borrower
and such Borrower’s independent certified public accountants (which shall be
attended by a Responsible Officer if required by such independent certified
public accountants); and

     

    (d)         Each
Borrower shall permit the Lender and its representatives to conduct audits from
time to time of the Inventory and receivables of such Borrower, subject to Section 9.05(a), at
the expense of such Borrower.

     

    Section
5.08      Environmental
Laws.

     

    (a) Each
Borrower shall comply in all material respects with, and take reasonable actions
to ensure compliance in all material respects by all tenants and subtenants, if
any, with, all applicable Environmental Laws and obtain and comply in all
material respects with and maintain, and take reasonable actions to ensure that
all tenants and subtenants obtain and comply in all material respects with and
maintain, any and all licenses, approvals, notifications, registrations or
Permits required by applicable Environmental Laws; and

     

    (b) Each
Borrower shall conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Bodies regarding Environmental Laws
except to the extent that the same are being contested in good faith by
appropriate proceedings and the failure to do or the pendency of such
proceedings would not reasonably be expected to have a Material Adverse
Effect.

     

    Section
5.09      Application of
Proceeds.  The Borrowers shall use the proceeds of the Loan as
provided in Section
4.12.

     

    
      
         

      

      
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    Section
5.10     Compliance with
Budgets.  As of the end of each week, the aggregate amount of
actual disbursements for operating expenses (specifically excluding
disbursements for bankruptcy costs and adequate protection costs) by the
Borrowers during the applicable week shall not exceed the budgeted amounts for
such week (as set forth in the related Weekly Budget) by more than 10% on a
weekly cumulative measured basis.

     

    Section
5.11    Compliance with Laws,
Etc. Governmental Authorities shall comply, in all material respects with
all Laws, licenses and franchises, including all Permits.

     

    Section
5.12     Payment of Taxes,
Etc.  Each Borrower shall pay and discharge, and provide Lender
with proof of payment thereof, before the same shall become delinquent, all
lawful governmental claims, taxes, assessments, charges and levies, except where
contested in good faith by proper proceedings, if adequate reserves therefor
have been established on the books of the Borrowers in conformity with
GAAP.

     

    Section
5.13     Collateral
Documents.  Each Borrower, at its sole cost and expense, shall
take all actions necessary or reasonably requested by the Lender to maintain
each Collateral Document in full force and effect and enforceable in accordance
with its terms, including (a) making filings and recordations, (b) making
payments of fees and other charges, (c) issuing, and if necessary, filing
or recording supplemental documentation, including continuation statements, (d)
discharging all claims or other Liens (other than Permitted Liens and Senior
Liens) adversely affecting the rights of the Lender in the Collateral, and (e)
publishing or otherwise delivering notice to third parties.

     

    Section
5.14     Accounts.  On
the Closing Date, each Borrower shall provide notice to all applicable parties
(other than taxing authorities) of the revocation of all ACH debit access from
any account of such Borrower; it being understood that remittance of taxes be
allowed from accounts.  From and after the Closing Date, each Borrower
shall cause all Collections to be deposited in the Control Account pursuant to
Section
2.16.  Each Borrower hereby authorizes the Lender to collect
all payments, checks, drafts and other instruments received by any Borrower and
to withdraw and hold in reserve or release to the Borrowers funds from time to
time credited to the Control Account in accordance with Section 2.02 or Section 2.03, as
applicable.  Other than as permitted pursuant to an approved Weekly
Budget, no Borrower shall make any withdrawal from any account set forth on
Schedule 4.16,
or direct any funds to be sent from any account set forth on Schedule 4.16 (other
than the Control Account) to any Person other than the Control
Account.

     

    Section
5.15     Bankruptcy
Cases.  The Borrowers will use their best efforts to obtain the
approval of the Bankruptcy Court of this Agreement and the other Credit
Documents.  The Borrowers shall immediately provide to the Lender
copies of all Material Pleadings, notices, orders, agreements, and all other
documents served, filed or entered, as the case may be, in connection with, or
in relation to, the Bankruptcy Cases, including any documents provided by or to
the U.S. Trustee or any Statutory Committee.

     

    
      
         

      

      
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    ARTICLE
VI

     

    NEGATIVE
COVENANTS

     

    As long
as any of the Obligations or Commitments remain outstanding, each of Borrowers
hereby agrees with the Lender that:

     

    Section
6.01     Indebtedness.  No
Borrower shall contract, create, incur, assume or permit to exist, any
Indebtedness, except (a) Indebtedness arising or existing under this Agreement
and the other Credit Documents, and (b) Indebtedness existing on the Petition
Date and set forth on Schedule
6.01.

     

    Section
6.02     Liens.  No
Borrower shall contract, create, incur, assume or permit to exist, any Lien with
respect to any of its property or assets of any kind (whether real or personal,
tangible or intangible), whether now owned or hereafter acquired, except for
Permitted Liens and Senior Liens.

     

    Section
6.03     No Further Negative
Pledges.  Except with respect to prohibitions against other
encumbrances on specific Property encumbered to secure payment of particular
Indebtedness (which Indebtedness relates solely to such specific Property, and
improvements and accretions thereto, and is otherwise permitted hereby), no
Borrower shall enter into, assume or become subject to any agreement prohibiting
or otherwise restricting the creation or assumption of any Lien upon its
properties or assets, whether now owned or hereafter acquired, or requiring the
grant of any security for such obligation if security is given for some other
obligation.

     

    Section
6.04     Consolidation, Merger, Asset
Sale, etc.  Except as contemplated by the sale of the Borrowers
or substantially all of their Property in a sale pursuant to section 363 of the
Bankruptcy Code:

     

    (a)         No
Borrower shall enter into, or cause or permit any of its direct or indirect
Subsidiaries to enter into, a transaction of merger or consolidation (including
the sale of any Equity Interests or substantially all of the assets of such
Borrower or Subsidiary), liquidation, winding-up or dissolution, whether
voluntarily or involuntarily (or suffer to permit any such liquidation or
dissolution), other than in as permitted under this Agreement; and

     

    (b)         No
Borrower shall, without the prior written consent of the Lender (which shall not
be unreasonably withheld or delayed) consummate any Asset Sale; provided that any Asset Sale
to which the Lender consents shall provide that at least 75% of the
consideration in connection therewith shall be cash (and such payment shall be
contemporaneous with consummation of such Asset Sale).

     

    
      
         

      

      
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    Section
6.05      Sale
Leasebacks.  Except as set forth in Schedule 6.05, no
Borrower shall directly or indirectly, become or remain liable as lessee or as
guarantor or other surety with respect to any lease, whether an Operating Lease
or a Capital Lease, of any Property, whether now owned or hereafter acquired,
(a) which such Person has sold or transferred or is to sell or transfer to any
other Person other than the Borrowers; or (b) which such Person intends to use
for substantially the same purpose as any other Property which has been sold or
is to be sold or transferred by such Person to any other Person in connection
with such lease.

     

    Section
6.06      Acquisitions.  No
Borrower shall make any Acquisition.

     

    Section
6.07      Investments.  No
Borrower shall make any Investment in any Person except for Permitted
Investments.

     

    Section
6.08      Restricted
Payments.  No Borrower shall make nor permit any Restricted
Payments, except for transfers, including capital contributions, from a Borrower
to another Borrower.

     

    Section
6.09      No Transfers to
Affiliates.  Except as set forth in Schedule 6.09, no
assets of any Borrower may be transferred to any Affiliate of the Borrowers
absent the consent of the Lender, except for transfers permitted pursuant Section
6.08.

     

    Section
6.10      Limitations on Transactions
with Affiliates.  No Borrower shall enter into or permit to
exist any transaction or series of transactions with any officer, director or
Affiliate of such Person other than (a) intercompany transactions expressly
permitted by Section
6.08; (b) normal compensation and reimbursement of expenses of officers
and directors (including any retention arrangements approved by the Lender); and
(c) except as otherwise specifically limited in this Agreement, other
transactions which are entered into in the ordinary course of such Person’s
business on terms and conditions substantially as favorable to such Person as
would be obtainable by it in a comparable arm’s length transaction with a Person
other than an officer, director or Affiliate.

     

    Section
6.11      Payment of Other
Indebtedness.

     

    (a)         No
Borrower shall pay any Indebtedness arising prior to the Petition Date except as
permitted by this Agreement and as approved by the Bankruptcy
Court.

     

    (b)         No
Borrower shall voluntarily prepay any Indebtedness other than in the ordinary
course of business and provided that no Event of Default has occurred and is
continuing, except the Obligations in accordance with the terms of this
Agreement.

     

    
      
         

      

      
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    Section
6.12     Modification of Contractual
Obligations.  No Borrower shall alter, amend, modify, rescind,
terminate or waive any of its rights or obligations under, or fail to comply in
all material respects with, any of its material Contractual Obligations; provided, however, that in
the event of any breach or event of default by a Person other than the
Borrowers, the Borrowers shall promptly notify the Lender of any such breach or
event of default and take all such action as may be reasonably necessary in
order to avoid having such breach or event of default have a Material Adverse
Effect.

     

    Section
6.13     Bankruptcy
Matters.  Except as expressly permitted by this Agreement, no
Borrower shall incur, create, assume, suffer or permit to exist, or apply to the
Bankruptcy Court for authority to incur, create, assume, suffer or permit to
exist, any claim or Lien against the Borrowers or the Collateral to be pari passu with or senior to
the claims and Liens of the Lender against the Borrowers and the
Collateral.

     

    Section
6.14     No Material
Pleadings.  No Borrower shall file, nor shall it consent to the
filing by any other Person of, any Material Pleading in the Bankruptcy Cases
without the prior written consent of the Lender.

     

    Section
6.15     Fiscal
Year.  No Borrower shall change its fiscal year from its
current fiscal year end.

     

    Section
6.16     Accounting
Changes.  No Borrower shall make any change in accounting
treatment and reporting practices or tax reporting treatment, except as required
by GAAP or applicable Law and disclosed to the Lender.

     

    ARTICLE
VII

     

    EVENTS OF
DEFAULT

     

    Section
7.01     Events of
Default.

     

    An Event
of Default shall exist upon the occurrence of any of the following specified
events (each an “Event
of Default”):

     

    (a)         Payment.  Any
Borrower shall:

     

    
      	
               
      

            	
              (i)

            	
              default
      in payment when due of any principal or interest of the Loan;
      or

            

    

     

    
      	
               
      

            	
              (ii)

            	
              default,
      and such default shall continue for three or more Business Days, in
      payment when due of any fees or other amounts owing under this Agreement
      or any other Credit Documents or otherwise in connection herewith or
      therewith; or

            

    

     

    (b)         Representations.  Any
representation, warranty or statement made or deemed to be made herein, in any
of the other Credit Documents, or in any statement or certificate delivered or
required to be delivered pursuant hereto or thereto shall prove untrue in any
material respect on the date as of which it was made or deemed to have been made
(other than those which are untrue solely as a result of changes permitted by
this Agreement); or

     

    
      
         

      

      
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    (c)         Covenants.  Any
Borrower shall:

     

    
      	
               
      

            	
              (i)

            	
              Default
      in the due performance or observance of any term, covenant or agreement
      contained in ARTICLE V or ARTICLE VI;
or

            

    

     

    
      	
               
      

            	
              (ii)

            	
              Default
      in the due performance or observance by it of any term, covenant or
      agreement (other than those referred to in subsections (a), (b) or (c)(i)
      of this Section
      7.01) contained in this Agreement and such default shall continue
      unremedied for a period of at least 30 days after the earlier of a
      Responsible Officer becoming aware of such default or notice thereof by
      the Lender; or

            

    

     

    (d)         Other Credit
Documents.  (i) Any Borrower shall default in the due
performance or observance of any material term, covenant or agreement in any of
the other Credit Documents (subject to applicable grace or cure periods, if
any), or (ii) any Credit Document shall fail to be (or any Borrower shall claim
or allege in writing that any Credit Document is not) in full force and effect
or to give the Lender any material part of the Liens, rights, powers and
privileges purported to be created thereby; or

     

    (e)         Defaults under Other
Agreements.  With respect to any Indebtedness arising after the
Petition Date (other than Indebtedness outstanding under this Agreement) of any
Borrower, (i) the occurrence of any default after the Petition Date in any
payment (beyond the applicable grace period with respect thereto, if any) with
respect to any such Indebtedness; (ii) the occurrence after the Petition Date
and continuation of a default in the observance or performance relating to such
Indebtedness or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event or condition shall occur or condition
exist, the effect of which default or other event or condition is to cause, or
permit, the holder or holders of such Indebtedness (or trustee or agent on
behalf of such holders) to cause (determined without regard to whether any
notice or lapse of time is required), any such Indebtedness to become due prior
to its stated maturity; or (iii) any such Indebtedness shall be declared due and
payable, or required to be prepaid other than by a regularly scheduled required
prepayment, prior to the stated maturity thereof; or

     

    (f)          Judgments.  Any
Borrower shall fail within 30 days of the date due and payable to pay, bond or
otherwise discharge any judgment, settlement or order for the payment of money
relating to claims arising after the Petition Date which judgment, settlement or
order, when aggregated with all other such judgments, settlements or orders due
and unpaid at such time, is not covered by insurance and exceeds $500,000, and
which is not stayed on appeal (or for which no motion for stay is pending) or is
not otherwise being executed; or

     

    
      
         

      

      
        46

        
          

        

      

      
         

      

    

     

    (g)         ERISA.  Any
of the following events or conditions, if such event or condition could
reasonably be expected to have a Material Adverse Effect:  (i) any
“accumulated funding deficiency,” as such term is defined in section 302 of
ERISA and section 412 of the Internal Revenue Code, whether or not waived, shall
exist with respect to any Plan, or any Lien shall arise on the assets of the
Borrowers or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) an ERISA
Event shall occur with respect to a Single Employer Plan, which is, in the
reasonable opinion of the Lender, likely to result in the termination of such
Plan for purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with
respect to a Multiemployer Plan or Multiple Employer Plan, which is, in the
reasonable opinion of the Lender, likely to result in (A) the termination of
such Plan for purposes of Title IV of ERISA, or (B) the Borrowers or any ERISA
Affiliate incurring any liability in connection with a withdrawal from,
reorganization of (within the meaning of section 4241 of ERISA), or insolvency
of (within the meaning of section 4245 of ERISA) such Plan; or (iv) any
prohibited transaction (within the meaning of section 406 of ERISA or section
4975 of the Internal Revenue Code) or breach of fiduciary responsibility shall
occur which may subject the Borrowers or any ERISA Affiliate to any liability
under sections 406, 409, 502(i), or 502(l) of ERISA or section 4975 of the
Internal Revenue Code, or under any agreement or other instrument pursuant to
which the Borrowers or any ERISA Affiliate has agreed or is required to
indemnify any Person against any such liability; or

     

    (h)         Ownership.  There
shall occur a Change of Control; or

     

    (i)          Failure to File Sale Motion.
Unless otherwise agreed by Lender, (A) failure by any Borrower to have
filed with the Bankruptcy Court by the date which is three Business Days after
the date of this Agreement a motion for authority to sell substantially all of
the assets of the Borrowers pursuant to section 363 of the Bankruptcy Code (the
“Sale Motion”)
on terms and conditions acceptable to the Lender; (B) the entry of any order of
the Bankruptcy Court approving a Sale Motion on terms which are not acceptable
to the Lender; or (C) failure of the sale pursuant to such Sale Motion to have
been closed on terms acceptable to the Lender by the earlier of the date which
is 60 days after the Bankruptcy Court’s entry of the Bid Procedures Order or 135
days after the Petition Date; or

     

    (j)          Prepayment of Other
Indebtedness.  After the Petition Date, any Borrower shall pay
any Indebtedness arising before the Petition Date other than (i) pursuant to the
Critical Vendor Motion and any order thereon; and (ii) in accordance with the
terms hereof as permitted by orders of the Bankruptcy Court reasonably
satisfactory in form and substance to the Lender; or

     

    (k)         Bankruptcy
Cases.  The Bankruptcy Cases shall be dismissed or converted to
one or more cases under chapter 7 of the Bankruptcy Code; a trustee under
chapter 7 or chapter 11 of the Bankruptcy Code shall be appointed in the
Bankruptcy Cases, unless the appointment of such trustee is sought by the
Lender; or the Borrowers shall file or support any application for the approval
of, or there shall arise, any other claim which is an administrative expense
claim having priority over any or all administrative expenses of the kind
specified in sections 503(b) or 507(b) of the Bankruptcy Code; or

     

    (l)          Relief to Lien
Holders.  The Bankruptcy Court shall enter an order granting
relief from the automatic stay applicable under section 362 of the Bankruptcy
Code permitting foreclosure on any asset of the Borrowers; or

     

    (m)        First Day Orders. The
Borrowers shall fail to obtain all First Day Orders of the Bankruptcy Court
within three Business Days after execution of this Agreement; or

     

    (n)         DIP Financing
Orders.  The Bankruptcy Court shall enter an order amending,
supplementing, staying for a period in excess of five days, vacating or
otherwise modifying the Interim DIP Financing Order or the Final DIP Financing
Order which is not consented to by the Lender; or

     

    
      
         

      

      
        47

        
          

        

      

      
         

      

    

     

    (o)         DIP Financing Final
Order.  The Final DIP Financing Order, in a form satisfactory
to the Lender and containing the provisions outlined in Section 3.01(e) and
the form of order attached as Exhibit E, shall not
have been entered by the Bankruptcy Court on or before the expiration of the
Interim Period.

     

    Section
7.02      Acceleration;
Remedies.  Upon the occurrence and during the continuation of
an Event of Default, without further order of, application to, or action by the
Bankruptcy Court, the Lender (a) may, by written notice to the Borrowers declare
that all or any portion of the Commitments be terminated, whereupon the
obligation of the Lender to fund any future Borrowing shall immediately
terminate; and/or (b) may, by written notice to the Borrowers declare the Loan,
all interest thereon and all other amounts and Obligations payable under this
Agreement to be forthwith due and payable, whereupon the Loan, all such
interest, and all such amounts and Obligations shall become and be forthwith due
and payable, without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Borrowers.  In addition, subject
solely to any requirement of the giving of notice by the terms of the Interim
DIP Financing Order or the Final DIP Financing Order, the automatic stay
provided in section 362 of the Bankruptcy Code shall be automatically vacated
without further action or order of the Bankruptcy Court, and the Lender shall be
entitled to exercise all of its rights and remedies under the Credit Documents
and applicable Law, including all rights and remedies with respect to the
Collateral.

     

    ARTICLE
VIII

     

    ADDITIONAL
SECURITY

     

    Section
8.01      Priority and
Liens.

     

    (a)         As
to all Real Properties, the Borrowers hereby assign and convey as security,
grant a security interest in, hypothecate, mortgage, pledge and set over unto
the Lender all of the right, title and interest of the Borrowers in all Owned
Real Property and in all Real Property Leases, together in each case with all of
the right, title and interest of the Borrowers in and to all buildings,
improvements, and fixtures related thereto, any lease or sublease thereof, all
general intangibles relating thereto and all proceeds thereof, such assignment,
conveyance and security interest to have the priorities set forth in Section 2.13 above.
Nothing herein to the contrary shall restrict the Lender, on or after the date
hereof, from filing a first deed of trust, leasehold deed of trust, first
mortgage or comparable security document with respect to any of the Owned Real
Property and Leased Real Property to the extent not included in the Initially
Secured Owned Real Properties.

     

    (b)         The
Borrowers acknowledge that, pursuant to the DIP Financing Orders, the Liens in
favor of the Lender in all of such Owned Real Property and Real Property Leases,
and all of the other Collateral, shall be perfected without the taking of any
further action, including any recordation of any instruments of mortgage or
assignment, or the recording or filing of any financing statements, notices of
Lien or other similar instruments.

     

    
      
         

      

      
        48

        
          

        

      

      
         

      

    

     

    ARTICLE
IX

     

    MISCELLANEOUS

     

    Section
9.01      Notices.

     

    Any
notice or other communication required or permitted hereunder shall be in
writing and shall be deemed to have been duly given (a) on the day of delivery
if delivered in person; (b) on the day of delivery if delivered by
facsimile upon confirmation of receipt (provided that if
delivery is completed after the close of business, then the next Business Day);
(c) on the first Business Day following the date of dispatch if delivered using
a next-day service by a nationally recognized express courier service; or (d) on
the earlier of confirmed receipt or the fifth Business Day following the date of
mailing if delivered by registered or certified mail, return receipt requested,
postage prepaid.  All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated by
notice given in accordance with this Section 9.01 by the
party to receive such notice:

     

    if to the
Borrowers:

     

    c/o Palm
Harbor Homes, Inc.

    15303
Dallas Parkway, Suite 800

    Addison,
Texas  75001-4600

    Attention:  Larry
H. Keener, Chairman, President & CEO

    Facsimile:  (972)
764-9020

     

    with a
copy (which does not constitute notice) to:

    

    Locke
Lord Bissell & Liddell LLP

    2200 Ross
Avenue, Suite 2200

    Dallas,
Texas 75201

    Attention:  Gina
Betts

    Facsimile:  (214)
756-8515

    

    If to the
Lender:

    Fleetwood
Homes, Inc.

    c/o Cavco
Industries, Inc.

    1001
North Central Avenue, Suite 800

    Phoenix,
Arizona  85004-1935

    Attention:  James
P. Glew, General Counsel

    Facsimile:  (602)
256-6189

     

    and:

     

    Robert F.
Jordan

    Third
Avenue Management, LLC

    622 Third
Avenue

    32nd
Floor

    New York,
NY 10017

    Facsimile:  (212)
735-0003

    
      
         

      

      
        49

        
          

        

      

      
         

      

    

     

    with a
copy (which does not constitute notice) to:

     

    Garth D.
Stevens, Esq.

    Snell
& Wilmer L.L.P.

    One
Arizona Center

    400 East
Van Buren

    Phoenix,
Arizona 85018

    Facsimile:  (602)
382-6070

     

    Section
9.02      Right of
Set-Off.  In addition to any rights now or hereafter granted
under applicable Law or otherwise, and not by way of limitation of any such
rights, upon the occurrence of an Event of Default, the Lender is authorized at
any time and from time to time, without presentment, demand, protest or other
notice of any kind (all of which rights being hereby expressly waived), to
set-off and to appropriate and apply any and all deposits (general or special)
and any other indebtedness at any time held or owing by the Lender to or for the
credit or the account of the Borrowers against obligations and liabilities of
such Person to the Lender hereunder, under the Note, the other Credit Documents
or otherwise, irrespective of whether the Lender shall have made any demand
hereunder and although such obligations, liabilities or claims, or any of them,
may be contingent or unmatured, and any such set-off shall be deemed to have
been made immediately upon the occurrence of an Event of Default even though
such charge is made or entered on the books of the Lender subsequent
thereto.  Any Person purchasing a participation in the Loan and
Commitments hereunder pursuant to Section 9.03(c) may
exercise all rights of set-off with respect to its participation interest as
fully as if such Person were the Lender hereunder.

     

    Section
9.03      Benefit of
Agreement.

     

    (a)          Generally.  This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto; provided that, except as
expressly provided herein, the Borrowers may not assign or transfer any of their
interests without prior written consent of the Lender; provided, further, that the rights of
the Lender to transfer, assign or grant participations in its rights and/or
obligations hereunder shall be limited as set forth in this Section 9.03, provided however that
nothing herein shall prevent or prohibit the Lender from (i) pledging its Loan
hereunder to a Federal Reserve Bank in support of borrowings made by the Lender
from such Federal Reserve Bank; or (ii) granting assignments or selling
participations in the Lender’s Loan and/or Commitments hereunder to its parent
company and/or to any Affiliate or Subsidiary of the Lender.

     

    (b)          Assignments.  The
Lender may assign all or a portion of its rights and obligations hereunder
(including its Obligations and Commitments) to any other Person.  The
assigning Lender will give prompt notice to the Borrowers of any such
assignment.  Upon the effectiveness of any such assignment, the
assignee shall become a “Lender” for all purposes of this Agreement and the
other Credit Documents and, to the extent of such assignment, the assigning
Lender shall be relieved of its obligations hereunder to the extent of the Loan
and Commitments components being assigned.  Each of the Borrowers
agrees that upon notice of any such assignment and surrender of the Note, it
will promptly provide to the assigning Lender and to the assignee separate
promissory notes in the amount of their respective interests substantially in
the form of the original Note.

    
      
         

      

      
        50

        
          

        

      

      
         

      

    

     

    (c)           Participations.  The
Lender may sell, transfer, grant or assign participations in all or a portion of
the Lender’s rights, obligations or rights and obligations hereunder (including
all or a portion of its Commitments or its Loan); provided that (i) the Lender
shall remain a “Lender” for all purposes under this Agreement (the Lender’s
obligations under the Credit Documents remaining unchanged) and the participant
shall not constitute a Lender hereunder; (ii) no such participant shall have, or
be granted, rights to approve any amendment or waiver relating to this Agreement
or the other Credit Documents except to the extent any such amendment or waiver
would (A) reduce the principal of or rate of interest on or fees in respect of
the Loan in which the participant is participating or (B) postpone the date
fixed for any payment of principal (including extension of the Maturity Date or
the date of any mandatory prepayment), interest or fees in which the participant
is participating; and (iii) sub-participations by the participant (except to an
affiliate, parent company or affiliate of a parent company of the participant)
shall be prohibited.  In the case of any such participation, the
participant shall not have any rights under this Agreement or the other Credit
Documents (the participant’s rights against the Lender in respect of such
participation to be those set forth in the participation agreement with the
Lender creating such participation) and all amounts payable by the Borrowers
hereunder shall be determined as if the Lender had not sold such
participation.

     

    Section
9.04      No Waiver; Remedies
Cumulative.  No failure or delay on the part of the Lender in
exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Lender and  the
Borrowers shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or under any other Credit
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder.  The rights
and remedies provided herein are cumulative and not exclusive of any rights or
remedies which the Lender would otherwise have.  No notice to or
demand on the Borrowers in any case shall entitle the Borrowers to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Lender to any other or further action in any
circumstances without notice or demand.

     

    Section
9.05      Payment of Expenses;
Indemnification.

     

    (a)          Each
of the Borrowers agrees, jointly and severally, to:  (i) pay all
reasonable out-of-pocket costs and expenses of the Lender in connection with (A)
the conduct of due diligence including the costs of the Lender for obtaining
surveys, environmental assessments and title searches; (B) the negotiation,
preparation, execution and delivery and administration of this Agreement and the
other Credit Documents and the documents and instruments referred to therein
(including the reasonable fees and expenses of counsel of the Lender), up to a
maximum of $350,000 in the aggregate; provided that such limitation
shall not include any amounts paid or payable by Borrowers in respect of
required title insurance policies; (C) any amendment, waiver or consent relating
hereto and thereto including, but not limited to, any such amendments, waivers
or consents resulting from or related to any work-out, renegotiation or
restructure relating to the performance by the Borrowers under this Agreement;
and (D) enforcement of the Credit Documents and the documents and instruments
referred to therein (including in connection with any such enforcement, the
reasonable fees and disbursements of counsel for the Lender); (ii) permit the
Lender to perform monthly Inventory and Accounts Receivable field audits at the
Borrowers’ expense; provided that the Lender
shall not be precluded by application of this clause from conducting additional
audits at its own expense; and (iii) pay and hold the Lender harmless from and
against any and all present and future stamp and other similar taxes with
respect to the foregoing matters and save the Lender harmless from and against
any and all liabilities with respect to or resulting from any delay or omission
(other than to the extent attributable to the Lender) to pay such
taxes.

    
      
         

      

      
        51

        
          

        

      

      
         

      

    

     

    (b)          Each
of the Borrowers, jointly and severally, shall indemnify the Lender and its
officers, directors, employees, representatives and agents from and hold each of
them harmless against any and all losses, liabilities, claims, damages or
expenses incurred by any of them as a result of, or arising out of, or in any
way related to, or by reason of (A) any investigation, litigation or other
proceeding (whether or not the Lender is a party thereto) related to the
entering into and/or performance of any Credit Document, including the
management and application of funds deposited in the Control Account or the use
of proceeds of the Loan or the consummation of any other transactions
contemplated in any Credit Document, including the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding; or (B) the presence or Release of any Hazardous
Materials at, under or from any Property owned, operated or leased by the
Borrowers or any of its Subsidiaries, or the failure by the Borrowers or any of
its Subsidiaries to comply with any Environmental Law (but excluding, in the
case of either of clause (A) or (B) above, any such losses, liabilities, claims,
damages or expenses to the extent incurred by reason of gross negligence or
willful misconduct on the part of the Person to be indemnified).

     

    Section
9.06      Amendments, Waivers and
Consents.  No amendment or waiver of any provision of this
Agreement nor consent to any departure by the Borrowers therefrom shall in any
event be effective unless the same shall be in writing and signed by the Lender,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

     

    Section
9.07      Survival.  All
indemnities set forth herein shall survive the execution and delivery of this
Agreement, the making of the Loan, the repayment of the Loan and other
obligations under the Credit Documents and the termination of the Commitments
hereunder, and all representations and warranties made by the Borrowers herein
shall survive delivery of the Note and the making of the Loan
hereunder.

     

    Section
9.08      Waiver.  Each
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party hereto; (b) waive any inaccuracies
in the representations and warranties of the other party contained herein or in
any document delivered pursuant hereto; (c) waive compliance with any of the
agreements of the other party contained herein; or (d) waive satisfaction of any
condition to its obligations hereunder.  Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the party
to be bound thereby.  No delay on the part of any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any such right, power or privilege,
nor any single or partial exercise of any such right, power or privilege,
preclude any further exercise thereof or the exercise of any other such right,
power or privilege.  All remedies, rights, undertakings, obligations,
and agreements contained herein shall be cumulative and not mutually
exclusive.

    
      
         

      

      
        52

        
          

        

      

      
         

      

    

     

    Section
9.09      Governing
Law.  This Agreement and all claims with respect thereto shall
be governed by and construed in accordance with the federal bankruptcy law, to
the extent applicable, and, where state law is implicated, the laws of the State
of Delaware without regard to any conflict of laws rules thereof that might
indicate the application of the laws of any other jurisdiction.

     

    Section
9.10      Consent to Jurisdiction;
Service of Process; Waiver of Jury Trial.

     

    (a)          The
parties hereto irrevocably and unconditionally consent to submit to the
jurisdiction of the Bankruptcy Court for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agree
not to commence any litigation relating hereto except in the Bankruptcy
Court).

     

    (b)          Any
and all service of process and any other notice in any such claim shall be
effective against any party if given personally or by registered or certified
mail, return receipt requested, or by any other means of mail that requires a
signed receipt, postage prepaid, mailed to such party as herein
provided.  Nothing herein contained shall be deemed to affect the
right of any party to serve process in any manner permitted by Law or to
commence legal proceedings or otherwise proceed against any other party in any
other jurisdiction.

     

    (c)          If
any claim is brought by any party hereto to enforce its rights or another
party’s obligations under this Agreement or any other agreement, document or
instrument to be delivered by such party on the Closing Date in connection
herewith, the substantially prevailing party in such claim shall be entitled to
recover its reasonable attorneys’ fees and expenses and other costs incurred in
such claim, in addition to any other relief to which it may be
entitled.

     

    (d)          EACH
OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.

     

    Section
9.11     Binding Effect;
Assignment.  This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and
assigns.  This Agreement is not assignable by any party without the
prior written consent of the other party, except that the Lender may assign this
Agreement, in whole or in part, without the consent of Borrowers to a successor
or successors under a plan or plans of reorganization confirmed by the
Bankruptcy Court.

    
      
         

      

      
        53

        
          

        

      

      
         

      

    

     

    Section
9.12      Interpretation;
Headings.  All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may
require.  All terms defined in this Agreement in their singular or
plural forms have correlative meanings when used herein in their plural or
singular forms, respectively.  The term “Lender” includes (i) any of
the Lender’s successor(s); and (ii) any assignee of the Lender who becomes a
party hereto pursuant to Section
9.03.  Unless otherwise expressly provided, the words
“include,” “includes” and “including” do not limit the preceding words or terms
and shall be deemed to be followed by the words “without
limitation.”  All references herein to “Sections” shall be deemed
references to such parts of this Agreement, unless the context shall otherwise
require.  All references herein to “Schedules” and “Exhibits” shall
mean the Schedules and Exhibits attached to this Agreement and forming a part
hereof.  The words “herein,” “hereof” and “hereunder” and other words
of similar import refer to this Agreement as a whole, and not to any particular
Article, Section, subsection or clause in this Agreement.  The Section
headings in this Agreement are for reference only and shall not affect the
interpretation of this Agreement.  The parties acknowledge and agree
that (a) each party and its counsel reviewed and negotiated the terms and
provisions of this Agreement and have contributed to its revision; (b) the rule
of construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this Agreement;
and (c) the terms and provisions of this Agreement shall be construed fairly as
to all parties, regardless of which party was generally responsible for the
preparation of this Agreement.  Dates and times set forth in this
Agreement for the performance of the parties’ respective obligations hereunder
or for the exercise of their rights hereunder shall be strictly construed, time
being of the essence of this Agreement.  If the date specified or
computed under this Agreement for the performance, delivery, completion or
observance of a covenant, agreement, obligation or notice by any party, or for
the occurrence of any event provided for herein, is a day other than a Business
Day, then the date for such performance, delivery, completion, observance or
occurrence shall automatically be extended to the next Business Day following
such date.  Any definition of or reference to any agreement,
instrument or other document herein shall be construed as referring to such
agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified.

     

    Section
9.13      Severability of
Provisions.  If any provision or any portion of any provision
of this Agreement shall be held invalid or unenforceable, the remaining portion
of such provision and the remaining provisions of this Agreement shall not be
affected thereby.  If the application of any provision or any portion
of any provision of this Agreement to any Person or circumstance shall be held
invalid or unenforceable, the application of such provision or portion of such
provision to Persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby.

     

    Section
9.14     Counterparts.  This
Agreement may be executed by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all such
counterparts together shall constitute one and the same
instrument.  Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, of the parties
hereto.

     

    Section
9.15      No Third Party
Beneficiaries.  Except as otherwise set forth in this
Agreement, no provision of this Agreement is intended to, or shall, confer any
third party beneficiary or other rights or remedies upon any Person other than
the parties hereto.

    
      
         

      

      
        54

        
          

        

      

      
         

      

    

     

    Section
9.16     Confidentiality.  Each
of the Borrowers and the Lender agrees to keep confidential (and to cause its
affiliates, officers, directors, employees, agents and representatives to keep
confidential) all written information, materials and documents furnished to the
Lender by or on behalf of the Borrower (whether before or after the Closing
Date) which relates to the Borrower (the “Information”).  Notwithstanding
the foregoing, the parties hereto shall be permitted to disclose Information (a)
to its affiliates, officers, directors, employees, agents and representatives in
connection with its participation in any of the transactions evidenced by this
Agreement or any other Credit Documents or the administration of this Agreement
or any other Credit Documents, subject to the provisions of this Section 9.16; (b) to
the extent required by applicable Laws and regulations or by any subpoena or
similar legal process, or requested by any Governmental Body; (c) to the extent
such Information (i) becomes publicly available other than as a result of a
breach of this Agreement or any agreement entered into pursuant to clause (d)
below, (ii) becomes available to the Lender on a non-confidential basis from a
source other than the Borrower or (iii) was available to the Lender on a
non-confidential basis prior to its disclosure to the Lender by the Borrower;
(d) to any assignee or participant (or prospective assignee or participant) so
long as such assignee or participant (or prospective assignee or participant)
first specifically agrees in a writing furnished to and for the benefit of the
Borrower to be bound by the terms of this Section 9.16; or (e)
to the extent that the Borrower shall have consented in writing to such
disclosure.  Nothing set forth in this Section 9.16 shall
obligate the Lender to return any materials furnished by the
Borrower.

     

    Section
9.17     Conflict.  To
the extent that there is a conflict or inconsistency between any provision
hereof, on the one hand, and any provision of any Credit Document, on the other
hand, this Agreement shall control.

     

    [SIGNATURE
PAGES FOLLOW]

    
      
         

      

      
        55

        
          

        

      

      
         

      

    

     

    IN
WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this
Agreement to be duly executed and delivered as of the date first above
written.

    

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        	 
      	
                                                Palm
      Harbor Homes, Inc., a Florida corporation, as
      a Borrower

                                              
	 
      	 
      	 
      
	 
      	
                                                By:

                                              	/s/
      Larry H. Keener
	 
      	
                                                Name:

                                              	Larry
      H. Keener
	 
      	
                                                Title:

                                              	President
      and Chief Executive Officer
	 
      	 
      	 
      
	 
      	
                                                Palm
      Harbor GenPar, LLC, a Nevada limited liability company, as a
      Borrower

                                              
	 
      	 
      	 
      
	 
      	
                                                By:

                                              	/s/
      Larry H. Keener
	 
      	
                                                Name:

                                              	Larry
      H. Keener
	 
      	
                                                Title:

                                              	President
	 
      	 
      	 
      
	 
      	
                                                Palm
      Harbor Mfg., L.P., a Texas limited partnership, as a
      Borrower

                                              
	 
      	 
      	 
      
	 
      	
                                                By:

                                              	/s/
      Larry H. Keener
	 
      	
                                                Name:

                                              	Larry
      H. Keener
	 
      	
                                                Title:

                                              	President
	 
      	 
      	 
      
	 
      	
                                                Palm
      Harbor Real Estate, LLC, a Texas limited liability company, as a
      Borrower

                                              
	 
      	 
      	 
      
	 
      	
                                                By:

                                              	/s/
      Larry H. Keener
	 
      	
                                                Name:

                                              	Larry
      H. Keener
	 
      	
                                                Title:

                                              	President
      of Sole Member
	 
      	 
      	 
      
	 
      	
                                                Nationwide
      Homes, Inc., a Delaware corporation, as a
      Borrower

                                              
	 
      	 
      	 
      
	 
      	
                                                By:

                                              	/s/
      Larry H. Keener
	 
      	
                                                Name:

                                              	Larry
      H. Keener
	 
      	
                                                Title:

                                              	Chairman

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

    

    [SIGNATURE
PAGE TO CREDIT AGREEMENT]

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

     

    
      
        
          
            
              
                
                  
                    	 
      	
                            Palm Harbor Albemarie,
      LLC, a Delaware corporation, as a Borrower

                          
	 
      	 
      	 
      
	 
      	
                            By:

                          	/s/
      Larry H. Keener
	 
      	
                            Name:

                          	Larry
      H. Keener
	 
      	
                            Title:

                          	President
	 
      	 
      	 
      
	 
      	
                            Fleetwood Homes, Inc., a
      Delaware corporation, as Lender

                          
	 
      	 
      	 
      
	 
      	
                            By:

                          	/s/
      Joseph H. Stegmayer
	 
      	
                            Name:

                          	Joseph
      H. Stegmayer
	 
      	
                            Title:

                          	Vice
      President

                  

                

              

            

          

        

      

    

    

    [SIGNATURE
PAGE TO CREDIT AGREEMENT]Unassociated Document

    EXECUTION
VERSION

    
      
        
          	 
      
	 
      
	
                  SECURITY
      AGREEMENT

                

  

      

    

    Dated as
of November 29, 2010

     

    among

     

    PALM
HARBOR HOMES, INC.,

    AND

    THE OTHER
GRANTORS NAMED HEREIN,

     

    each as a
Grantor

     

    and,
collectively,

    as the
Grantors

     

    and

     

    FLEETWOOD
HOMES, INC.

     

    
      
        
          
            
              
                
                  
                    
                      	
                              
                                as
      Secured Party

                              

                            
	 

                    

                  

                

              

            

          

        

      

    

    

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    TABLE
OF CONTENTS

    (continued)

    

    
      
        
          
            	
                    ARTICLE
      I

                  	
                    DEFINITIONS

                  	
                    2

                  
	 
      	 
      	 
      
	
                    Section
      1.01

                  	
                    Definitions

                  	
                    2

                  
	
                    Section
      1.02

                  	
                    Certain
      Terms

                  	
                    4

                  
	 
      	 
      	 
      
	
                    ARTICLE
      II

                  	
                    Grant
      of Security Interest

                  	
                    4

                  
	 
      	 
      	 
      
	
                    Section
      2.01

                  	
                    Collateral

                  	
                    4

                  
	
                    Section
      2.02

                  	
                    Grant
      of Security Interest in Collateral

                  	
                    5

                  
	 
      	 
      	 
      
	
                    ARTICLE
      III

                  	
                    Representations
      and Warranties

                  	
                    5

                  
	 
      	 
      	 
      
	
                    Section
      3.01

                  	
                    Title;
      No Other Liens

                  	
                    5

                  
	
                    Section
      3.02

                  	
                    Perfection
      and Priority

                  	
                    6

                  
	
                    Section
      3.03

                  	
                    Jurisdiction
      of Organization; Chief Executive Office

                  	
                    6

                  
	
                    Section
      3.04

                  	
                    Locations
      of Books and Records

                  	
                    6

                  
	
                    Section
      3.05

                  	
                    Pledged
      Collateral

                  	
                    6

                  
	
                    Section
      3.06

                  	
                    Instruments
      and Tangible Chattel Paper Formerly Accounts

                  	
                    7

                  
	
                    Section
      3.07

                  	
                    Intellectual
      Property

                  	
                    7

                  
	
                    Section
      3.08

                  	
                    Commercial
      Tort Claims

                  	
                    8

                  
	
                    Section
      3.09

                  	
                    Specific
      Collateral

                  	
                    8

                  
	
                    Section
      3.10

                  	
                    Enforcement

                  	
                    8

                  
	
                    Section
      3.11

                  	
                    Representations
      and Warranties of the Credit Agreement

                  	
                    8

                  
	 
      	 
      	 
      
	
                    ARTICLE
      IV

                  	
                    Covenants

                  	
                    8

                  
	 
      	 
      	 
      
	
                    Section
      4.01

                  	
                    Maintenance
      of Perfected Security Interest; Further Documentation and
      Consents

                  	
                    8

                  
	
                    Section
      4.02

                  	
                    Changes
      in Locations, Name, Etc

                  	
                    9

                  
	
                    Section
      4.03

                  	
                    Pledged
      Collateral

                  	
                    9

                  
	
                    Section
      4.04

                  	
                    Accounts

                  	
                    11

                  
	
                    Section
      4.05

                  	
                    Delivery
      of Instruments and Tangible Chattel Paper and Control of Investment
      Property, Letter-of-Credit Rights and Electronic Chattel
    Paper

                  	
                    11

                  
	
                    Section
      4.06

                  	
                    Intellectual
      Property

                  	
                    12

                  
	
                    Section
      4.07

                  	
                    Notices

                  	
                    13

                  
	
                    Section
      4.08

                  	
                    Notice
      of Commercial Tort Claims

                  	
                    13

                  
	
                    Section
      4.09

                  	
                    Compliance
      with Credit Agreement

                  	
                    13

                  
	 
      	 
      	 
      
	
                    ARTICLE
      V

                  	
                    Remedial
      Provisions

                  	
                    13

                  
	 
      	 
      	 
      
	
                    Section
      5.01

                  	
                    Code
      and Other Remedies

                  	
                    13

                  
	
                    Section
      5.02

                  	
                    Control
      Account and Collections

                  	
                    16

                  
	
                    Section
      5.03

                  	
                    Pledged
      Collateral

                  	
                    17

                  
	
                    Section
      5.04

                  	
                    Registration
      Rights

                  	
                    18

                  
	
                    Section
      5.05

                  	
                    Deficiency

                  	
                    19

                  
	 
      	 
      	 
      
	
                    ARTICLE
      VI

                  	
                    Subordination

                  	
                    19

                  
	 
      	 
      	 
      
	
                    Section
      6.01

                  	
                    Subordination

                  	
                    19

                  
	
                    Section
      6.02

                  	
                    Restrictions
      on Payment and Transfer

                  	
                    20

                  

          

        

      

    

    
      
         

      

      
        -ii-

        
          

        

      

      
         

      

    

     

    
      
        
          
            
              
                
                  
                    
                      	
                              ARTICLE
      VII

                            	
                              The
      Administrative Secured Party

                            	
                              20

                            
	 	 	 
	
                              Section
      7.01

                            	
                              The
      Secured Party’s Appointment as Attorney-in-Fact

                            	
                              20

                            
	
                              Section
      7.02

                            	
                              Authorization
      to File Financing Statements

                            	
                              22

                            
	 	 	 
	
                              ARTICLE
      VIII

                            	
                              Miscellaneous

                            	
                              22

                            
	 	 	 
	
                              Section
      8.01

                            	
                              Reinstatement

                            	
                              22

                            
	
                              Section
      8.02

                            	
                              Independent
      Obligations

                            	
                              22

                            
	
                              Section
      8.03

                            	
                              No
      Waiver by Course of Conduct

                            	
                              22

                            
	
                              Section
      8.04

                            	
                              Amendments
      in Writing

                            	
                              23

                            
	
                              Section
      8.05

                            	
                              Additional
      Grantors; Additional Pledged Collateral

                            	
                              23

                            
	
                              Section
      8.06

                            	
                              Notices

                            	
                              23

                            
	
                              Section
      8.07

                            	
                              Benefit
      of Agreement

                            	
                              24

                            
	
                              Section
      8.08

                            	
                              Cumulative
      Remedies, Etc

                            	
                              24

                            
	
                              Section
      8.09

                            	
                              Amendments,
      Waivers and Consents

                            	
                              25

                            
	
                              Section
      8.10

                            	
                              Waiver

                            	
                              25

                            
	
                              Section
      8.11

                            	
                              Governing
      Law

                            	
                              25

                            
	
                              Section
      8.12

                            	
                              Consent
      to Jurisdiction; Service of Process; Waiver of Jury Trial

                            	
                              25

                            
	
                              Section
      8.13

                            	
                              Interpretation;
      Headings

                            	
                              26

                            
	
                              Section
      8.14

                            	
                              Severability
      of Provisions

                            	
                              26

                            
	
                              Section
      8.15

                            	
                              Counterparts

                            	
                              26

                            
	
                              ANNEXES
      AND SCHEDULES

                            	 
      
	
                              ANNEX
      1

                            	
                              Form
      of Pledge Amendment

                            	 
      
	
                              ANNEX
      2

                            	
                              Form
      of Joinder Agreement

                            	 
      

                    

                  

                

              

            

          

        

      

    

    

    
      
        
          
            	
                    SCHEDULE
      I-A

                  	
                    Grantors

                  
	
                    SCHEDULE
      I-B

                  	
                    Initial
      Limited Pledgors

                  
	
                    SCHEDULE
      I-C

                  	
                    Initial
      Pledged Entities

                  
	
                    SCHEDULE
      II

                  	
                    Commercial
      Tort Claims

                  
	
                    SCHEDULE
      III

                  	
                    Jurisdiction
      of Organization; Chief Executive Offices

                  
	
                    SCHEDULE
      IV

                  	
                    Location
      of Books and Records

                  
	
                    SCHEDULE
      V

                  	
                    Control
      Agreements

                  
	
                    SCHEDULE
      VI

                  	
                    Pledged
      Collateral

                  
	
                    SCHEDULE
      VII

                  	
                    Intellectual
      Property

                  

          

        

      

    

    
      
         

      

      
        
          iii

        

        
          

        

      

      
         

      

    

    This
SECURITY AGREEMENT (this “Agreement”) is made
as of November 29, 2010 by and among Palm Harbor Homes, Inc., a Florida
corporation (as referred to herein, the “PHH”) and each of the
direct and indirect Subsidiaries of PHH set forth on Schedule I-A hereto
(PHH or any such Subsidiary individually being a “Grantor” and
collectively being the “Grantors”) in favor
of Fleetwood Homes, Inc., a Delaware corporation (the “Secured
Party”).

     

    WITNESSETH

     

    WHEREAS,
on November 29, 2010 (the “Petition Date”), the
Grantors each filed a voluntary petition for relief under title 11 of chapter 11
of the United States Code, 11 U.S.C. §§ 101, et. seq. (as amended, the “Bankruptcy Code”)
with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”);
and

     

    WHEREAS,
from and after the Petition Date, the Grantors continue to operate their
respective businesses as debtors and debtors-in-possession pursuant to sections
1107 and 1108 of the Bankruptcy Code; and

     

    WHEREAS,
each of the Grantors has an immediate need for funds to continue to operate its
respective businesses and the Grantors have not been able to obtain sufficient
credit or to incur sufficient debt from any other source sufficient to continue
their business operations; and

     

    WHEREAS,
pursuant to the Debtor-in-Possession Revolving Credit Agreement dated as of the
date hereof (as the same may be modified from time to time, the “Credit Agreement”)
among each of the Grantors and the Secured Party, the Secured Party has agreed
to provide certain financial accommodations to the Grantors upon the terms and
subject to the conditions set forth therein; and

     

    WHEREAS,
each Grantor will derive substantial direct and indirect benefits from the
financial accommodations provided by the Secured Party under the Credit
Agreement; and

     

    WHEREAS,
it is a condition precedent to the obligation of the Secured Party to provide
such financial accommodations under the Credit Agreement that the Grantors shall
have executed and delivered this Agreement to the Secured Party;
and

     

    NOW,
THEREFORE, in consideration of the premises and the covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    ARTICLE
I

    DEFINITIONS

     

    Section
1.01          Definitions.

     

    “Additional Pledged Equity
Interests” means any and all interest in (a) any and all additional
interests in any Person owned by any Grantor that is a Pledged Subsidiary
hereafter acquired by such Grantor, including any Additional Pledged Equity
Interests in any such Pledged Subsidiary, any and all of Grantor’s other
additional rights and interests in and to such Pledged Subsidiary and any and
all of Grantor’s rights to and interests in any proceeds and distributions under
or pursuant to any Pledged Collateral Agreements of or with respect to such
Pledged Subsidiary or otherwise, including (i) warrants, options or other rights
entitling such Grantor to acquire any interest in capital stock or other Equity
Interests in such Pledged Subsidiary, (iii) securities, property, interest,
dividends and other payments and distributions issued as an addition to, in
redemption of, in renewal or exchange for, in substitution or upon conversion
of, or otherwise on account of, the Pledged Equity Interests of such Pledged
Subsidiary or such additional capital stock or other equity securities or other
interests in such Pledged Subsidiary, (iii) all rights of such Grantor to
receive moneys in repayment of loans made to such Pledged Subsidiary pursuant to
any Pledged Collateral Agreement or otherwise, (iv) all rights of such Grantor
to receive proceeds of any insurance, indemnity, warranty or guaranty with
respect to the Pledged Equity Interests in such Pledged Subsidiary, (v) all
claims of such Grantor for damages arising out of or for breach of or default or
misrepresentation under any Pledged Collateral Agreement or any documents,
instruments or opinions delivered pursuant thereto, (vi) any right of Grantor to
terminate any Pledged Collateral Agreement, to perform thereunder and to compel
performance and otherwise exercise all remedies thereunder and (vii) all rights
of such Grantor to vote and give appraisals, consents, decisions and directions
and exercise any other similar rights with respect to any lawful action of such
Pledged Subsidiary, and (b) to the extent not included in the foregoing, all
cash and non-cash proceeds and Support Obligations of or with respect to the
Pledged Equity Interests in such Pledged Subsidiary and any such Additional
Pledged Equity Interests, in each case from time to time received or receivable
by, or otherwise paid or distributed to or acquired by, such
Grantor.

     

    “Agreement” means this
Security Agreement, together with all Exhibits and Schedules hereto, as the same
may be amended, supplemented or otherwise modified from time to
time.

     

    “Applicable IP Office”
means the United States Patent and Trademark Office, the United States Copyright
Office or any similar office or agency within or outside the United
States.

     

    “Collateral” has the
meaning specified in Section
2.01(b).

     

    “Control Agreements”
means, with respect to any deposit account, any securities account, commodity
account, securities entitlement or commodity contract, an agreement, in form and
substance satisfactory to the Secured Party, among the Secured Party, the
financial institution or other Person at which such account is maintained or
with which such entitlement or contract is carried and the Grantor maintaining
such account, effective to grant “control” (as defined in the applicable UCC)
over such account to the Secured Party.

     

    “Liabilities” means
all claims, actions, suits, judgments, damages, losses, liability, obligations,
responsibilities, fines, penalties, sanctions, costs, fees, taxes, commissions,
charges, disbursements and expenses, in each case of any kind or nature
(including interest accrued thereon or as a result thereto and fees, charges and
disbursements of financial, legal and other advisors and consultants), whether
joint or several, whether or not indirect, contingent, consequential, actual,
punitive, treble or otherwise.

     

    “Limited Pledgors”
means each of the entities set forth on Schedule I-B, in its
capacity as a Grantor.

     

    “Pledged Certificated Equity
Interests” means all certificated securities and any other Equity
Interests or Equivalent Equity Interests of any Person evidenced by a
certificate, instrument or other similar document (as defined in the UCC), in
each case owned by any Grantor, and any distribution of property made on, in
respect of or in exchange for the foregoing from time to time, including all
Equity Interests and Equivalent Equity Interests listed on Schedule
VI.

    
      
         

      

      
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    “Pledged Collateral”
means, collectively, the Pledged Equity Interests and the Pledged Debt
Instruments.

     

    “Pledged Collateral
Agreement” means any shareholders agreement, operating agreement,
partnership agreement, voting trust, proxy agreement or other agreement or
understanding with respect to any Pledged Collateral.

     

    “Pledged Debt
Instruments” means all right, title and interest of any Grantor in
instruments evidencing any indebtedness for borrowed money owed to such Grantor
or other obligations, and any distribution of property made on, in respect of or
in exchange for the foregoing from time to time, including all indebtedness
described on Schedule
VI, issued by the obligors named therein.

     

    “Pledged Entity” means
each entity set forth on Schedule I-C hereto
and each entity listed as a Subsidiary on a Pledge Amendment (as defined in
Section
8.05).

     

    “Pledged Investment
Property” means any investment property of any Grantor, and any
distribution of property made on, in respect of or in exchange for the foregoing
from time to time, other than any Pledged Equity Interests or Pledged Debt
Instruments.

     

    “Pledged Equity
Interests” means all Additional Pledged Equity Interests, all Pledged
Certificated Equity Interests and all Pledged Uncertificated Equity
Interests.

     

    “Pledged Subsidiary”
means each Subsidiary of a Grantor, the Equity Interests in which is required to
be pledged hereunder, including each Subsidiary of a Grantor listed on Schedule
VI.

     

    “Pledged Uncertificated
Equity Interests” means any Equity Interest or Equivalent Equity Interest
of any Person that is not Pledged Certificated Equity Interest, including all
right, title and interest of any Grantor as a limited or general partner in any
partnership not constituting Pledged Certificated Equity Interests or as a
member of any limited liability company, all right, title and interest of any
Grantor in, to and under any certificate or articles of incorporation, bylaws or
other organizational document of any partnership or limited liability company to
which it is a party, and any distribution of property made on, in respect of or
in exchange for the foregoing from time to time, including in each case those
interests set forth on Schedule VI, to the
extent such interests are not certificated.

     

    “Secured Obligations”
has the meaning set forth in Section
2.02.

     

    “Secured Party” has
the meaning set forth in the Preamble.

    
      
         

      

      
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    Section
1.02          Certain
Terms.

     

    (a)           The
following terms have the meanings given to them in the UCC and terms used herein
without definition that are defined in the UCC have the meanings given to them
in the UCC:  “account”, “account debtor”,
“as-extracted
collateral”, “certificated
security”, “chattel paper”,
“commercial tort
claim”, “commodity contract”,
“deposit
account”, “electronic chattel
paper”, “equipment”, “farm products”,
“fixture”,
“general
intangible”, “goods”, “health-care-insurance
receivable”, “instruments”, “inventory”, “investment property”,
“letter-of-credit
right”, “proceeds”, “record”, “securities account”,
“security” and
“tangible chattel
paper”.

     

    (b)           Initially
capitalized terms used herein without definition are used as defined in the
Credit Agreement including, “Business Day”, “Capital Lease”,
“Closing Date”,
“Collections”,
“Computer
Software”, “Contractual
Obligation”, “Control Account”,
“Copyrights”,
“Credit
Document”, “Default”, “Event of Default”,
“Governmental
Body”, “Intellectual
Property”, “Knowledge”, “Law”, “Lien”, “Marks”, “Note”, “Obligations”, “Patents”, “Permits”, “Person”, “Permitted Lien”,
“Subsidiary”,
“Textron
Agent”, “Textron Facility”,
“Textron
Lenders”, “Support Obligations”,
“UCC” and
“Weekly
Budget”.

     

    ARTICLE
II

    GRANT OF
SECURITY INTEREST

     

    Section
2.01          Collateral.

     

    (a)           For
the purposes of this Agreement, all assets (other than the Equity Interests of
and in Countryplace Acceptance Corporation) of any Grantor (other than a Limited
Pledgor), whether presently existing or owned or hereafter arising or acquired,
of any kind or nature and wherever located, in which a Grantor (other than a
Limited Pledgor) now has or at any time in the future may acquire any right,
title or interests, including all of the following property, is collectively
referred to as the “All Assets
Collateral”:

     

    (i)           all
accounts, chattel paper (including electronic chattel paper), deposit accounts,
documents (as defined in the UCC), equipment, general intangibles, instruments,
inventory, investment property and any Support Obligations related
thereto;

     

    (ii)          the
commercial tort claims described on Schedule II and on
any supplement thereto received by the Secured Party pursuant to Section
4.08;

     

    (iii)         all
property of such Grantor held by the Secured Party, including all property of
every description, in the custody of or in transit to the Secured Party for any
purpose, including safekeeping, collection or pledge, for the account of such
Grantor or as to which such Grantor may have any right or power, including but
not limited to cash;

     

    (iv)         all
other goods (including but not limited to fixtures) and personal property of
such Grantor, whether tangible or intangible and wherever located;

     

    (v)          all
books, records and other documentation pertaining to the other property
described in this Section 2.01;
and

    
      
         

      

      
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    (vi)         to
the extent not otherwise included, all proceeds of the foregoing;

     

    (b)           For
the purposes of this Agreement, all of the following property, whether presently
existing or owned or hereafter arising or acquired and wherever located, by a
Limited Pledgor, or in which a Limited Pledgor now has or at any time in the
future may acquire any right, title or interests is collectively referred to as
the “Limited
Collateral” and, together with the All Assets Collateral, the “Collateral”:

     

    (i)           all
Pledged Equity Interests in each Pledged Entity;

     

    (ii)          all
rights, interests and claims with respect to the Pledged Equity Interests in
each Pledged Entity, including under any and all Pledged Collateral Agreement
with respect to such Pledged Entity;

     

    (iii)         all
books, records and other documentation pertaining to the other property
described in this Section
2.01(b);

     

    (iv)         to
the extent not otherwise included, all proceeds of the foregoing;

     

    Section
2.02          Grant of Security Interest
in Collateral.  Each Grantor, as collateral security for the
prompt and complete payment and performance when due (whether at stated
maturity, by acceleration or otherwise) of the Obligations of such Grantor (the
“Secured
Obligations”), hereby mortgages, pledges and hypothecates to the Secured
Party, and grants to the Secured Party a Lien on and security interest in, all
of its right, title and interest in, to and under the Collateral of such
Grantor.

     

    ARTICLE
III

    REPRESENTATIONS
AND WARRANTIES

     

    To induce
the Secured Party to enter into the Credit Documents, each Grantor hereby,
jointly and severally, represents and warrants to the Secured Party on the date
hereof and on each date that a Weekly Budget is delivered pursuant to the Credit
Agreement, that:

     

    Section
3.01          Title; No Other
Liens.  Except for Permitted Liens (other than those not
permitted to exist on any Collateral), such Grantor has good and marketable
title to all properties and assets, tangible and intangible, owned by it, and
each Grantor has rights in and power to transfer each item of the Collateral
upon which it purports to grant a Lien hereunder free and clear of any and all
Liens other than the Liens created and permitted in favor of the Secured Party
by the Credit Documents and the Permitted Liens.  No Grantor is in
possession of any equipment or other tangible asset that is owned by another
Person.  None of the assets of any Grantor is in the possession or
under the control of any other Person.

    
      
         

      

      
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    Section
3.02          Perfection and
Priority.  The security interest granted pursuant to this
Agreement constitutes a valid and continuing perfected security interest in
favor of the Secured Party in all Collateral.  Such security interest
is prior to all other Liens on the Collateral (except for Permitted
Liens).  Except as set forth in this Section 3.02, all
actions by such Grantor necessary or desirable to protect and perfect the Lien
granted hereunder on the Collateral have been duly taken.  No
authorization, approval or consent is required to obtained from any Governmental
Body or other Person for the grant of the security interest herein, the
perfection thereof or the exercise by the Secured Party of its rights and
remedies hereunder (other than the exercise by the Secured Party of any rights
or remedies with respect to the Initial Limited Pledgors and Subsidiaries which
would result in a change of control requiring prior insurance regulatory
approval from applicable insurance regulatory agencies having jurisdiction over
such Initial Limited Pledgors and Subsidiaries).

     

    Section
3.03          Jurisdiction of
Organization; Chief Executive Office.  Such Grantor’s
jurisdiction of organization, legal name and organizational identification
number, if any, and the location of such Grantor’s chief executive office or
sole place of business, in each case as of the date hereof, is specified on
Schedule III
and such Schedule
III also lists all jurisdictions of incorporation, legal names and
locations of such Grantor’s chief executive office or sole place of business for
the five years preceding the date hereof.

     

    Section
3.04           Locations of Books and
Records.  On the date hereof, such Grantor’s books and records
concerning the Collateral are kept at the locations listed on Schedule
IV.

     

    Section
3.05           Pledged
Collateral.

     

    (a)           The
Pledged Equity Interests pledged by such Grantor hereunder (i) is listed on
Schedule VI and
constitutes that percentage of the issued and outstanding equity of all classes
of each issuer thereof as set forth on Schedule VI, (ii) has
been duly authorized, validly issued and is fully paid and nonassessable (other
than Pledged Equity Interests in limited liability companies and partnerships)
and (iii) constitutes the legal, valid and binding obligation of the obligor
with respect thereto, enforceable in accordance with its terms.

     

    (b)           As
of the Closing Date, all Pledged Collateral (other than Pledged Uncertificated
Equity Interests) and all Pledged Investment Property constituting Collateral
consisting of instruments and certificates has been delivered to the Secured
Party in accordance with Section
4.03(a).

     

    (c)           Upon
the occurrence and during the continuance of an Event of Default, the Secured
Party shall be entitled to exercise all of the rights of the Grantor granting
the security interest in any Pledged Equity Interests constituting Collateral,
and a transferee or assignee of such Pledged Equity Interests shall become a
holder of such Pledged Equity Interests to the same extent as such Grantor and
be entitled to participate in the management of the issuer of such Pledged
Equity Interests and, upon the transfer of the entire interest of such Grantor,
such Grantor shall, by operation of law, cease to be a holder of such Pledged
Equity Interests; provided that Lender shall
not exercise this remedy with respect to the Initial Limited Pledgors and their
direct Subsidiaries to the extent (and only for so long as) the exercise of the
remedy granted in this Section 3.05(c) would
require insurance regulatory approval from any applicable insurance regulatory
agency having jurisdiction over such Initial Limited Pledgor or Subsidiary;
provided further that the Secured
Party shall be entitled to pursue all such regulatory approvals including, by
using the powers granted it in Section
7.01.

    
      
         

      

      
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    (d)           Except
as set forth in Schedule VI and any
certificate or articles of incorporation, bylaws or other organizational
document of any Grantor, there are no (i) Pledged Collateral Agreements which
affect or relate to the voting or giving of written consents with respect to any
of the Pledged Collateral and (ii) restrictions on the transferability of the
Pledged Collateral to Secured Party or with respect to the foreclosure, transfer
or disposition thereof by Secured Party.  Each Pledged Collateral
Agreement contains the entire agreement between the parties thereto with respect
to the subject matter thereof, has not been amended or modified, and is in full
force and effect in accordance with its terms.  To the best Knowledge
of such Grantor, there exists no material violation or material default under
any Pledged Collateral Agreement by such Grantor or the other parties
thereto.  Such Grantor has not knowingly waived or released any of its
material rights under or otherwise consented to a material departure from the
terms and provisions of any Pledged Collateral Agreement.

     

    (e)           No
control agreements exist with respect to any Collateral other than Control
Agreement in favor of the Secured Party and Control Agreements in favor of the
Textron Agent and the Textron Lenders in connection with the Textron
Facility.

     

    Section
3.06          Instruments and Tangible
Chattel Paper Formerly Accounts.  No amount payable to such
Grantor under or in connection with any account constituting Collateral is
evidenced by any instrument or tangible chattel paper that has not been
delivered to the Secured Party, properly endorsed for transfer, to the extent
delivery is required by Section
4.05(a).

     

    Section
3.07          Intellectual
Property.

     

    (a)           Schedule VII sets
forth a true and complete list of the following Intellectual Property
constituting Collateral such Grantor owns, licenses or otherwise has the right
to use:  (i) Intellectual Property that is registered or subject
to applications for registration, (ii) Internet domain names and (iii)
Intellectual Property and material Computer Software, separately identifying
that owned and licensed to such Grantor and including for each of the foregoing
items (A) the owner, (B) the title, (C) the jurisdiction in which such item has
been registered or otherwise arises or in which an application for registration
has been filed, (D) as applicable, the registration or application number and
registration or application date and (E) any licenses and sublicenses held by
any Grantor as licensee pertaining to Intellectual Property of any other Person
or other rights (including franchises) granted by the Grantor with respect
thereto.

     

    (b)           On
the Closing Date, all Intellectual Property constituting Collateral owned by
such Grantor is valid, in full force and effect, subsisting, unexpired and
enforceable, and no Intellectual Property constituting Collateral has been
abandoned.  No breach or default of any material license or sublicense
held by any Grantor as licensee pertaining to Intellectual Property of any other
Person or other right (including franchises) constituting Collateral shall be
caused by any of the following, and none of the following shall limit or impair
the ownership, use, validity or enforceability of, or any rights of such Grantor
in, any Intellectual Property constituting Collateral:  (i) the
consummation of the transactions contemplated by any Credit Document or (ii) any
holding, decision, judgment or order rendered by any Governmental
Body.  There are no pending (or, to the Knowledge of such Grantor,
threatened) actions, investigations, suits, proceedings, audits, claims,
demands, orders or disputes challenging the ownership, use, validity,
enforceability of, or such Grantor’s rights in, any Intellectual Property
constituting Collateral of such Grantor.  To such Grantor’s Knowledge,
no Person has been or is infringing, misappropriating, diluting, violating or
otherwise impairing any Intellectual Property constituting Collateral of such
Grantor.  Such Grantor, and to such Grantor’s Knowledge each other
party thereto, is not in material breach or default of any material license or
sublicense held by any Grantor as licensee pertaining to Intellectual Property
of any other Person or other right (including franchises) constituting
Collateral.

    
      
         

      

      
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    Section
3.08          Commercial Tort
Claims.  The only commercial tort claims of the Grantors
existing on the date hereof (regardless of whether the amount, defendant or
other material facts can be determined and regardless of whether such commercial
tort claim has been asserted, threatened or has otherwise been made known to the
obligee thereof or whether litigation has been commenced for such claims) are
those listed on Schedule
II.

     

    Section
3.09          Specific
Collateral.  None of the Collateral is, or is proceeds or
products of, farm products, as-extracted collateral, health-care-insurance
receivables or timber to be cut.

     

    Section
3.10          Enforcement.  No
Permit, notice to or filing with any Governmental Body or any other Person or
any consent from any Person is required for the exercise by the Secured Party of
its rights (including voting rights) provided for in this Agreement or the
enforcement of remedies in respect of the Collateral pursuant to this Agreement,
including the transfer of any Collateral, except as may be required in
connection with the disposition of any portion of the Pledged Collateral by laws
affecting the offering and sale of securities generally or any approvals that
may be required to be obtained from any bailees or landlords to collect the
Collateral.

     

    Section
3.11          Representations and
Warranties of the Credit Agreement.  The representations and
warranties made by each Grantor in ARTICLE IV of the
Credit Agreement (all of which are hereby incorporated herein by reference) are
true and correct on each of the dates as required by the Credit
Agreement.

     

    ARTICLE
IV

    COVENANTS

     

    Each
Grantor agrees with the Secured Party to the following, as long as any Secured
Obligation remains outstanding:

     

    Section
4.01          Maintenance
of Perfected Security Interest; Further Documentation and Consents.

     

    (a)           Generally.  Such
Grantor shall (i) not use or permit any Collateral to be used unlawfully or in
violation of any provision of any Credit Document, any Related Document, any
requirement of law or any policy of insurance covering the Collateral and (ii)
not enter into any Contractual Obligation or undertaking restricting the right
or ability of such Grantor or the Secured Party to dispose of any Collateral if
such restriction would have a Material Adverse Effect.

     

    (b)           Such
Grantor shall maintain the security interest created by this Agreement as a
perfected security interest having at least the priority described in Section 3.02 and
shall defend such security interest and such priority against the claims and
demands of all Persons (other than holders of Permitted Liens).

    
      
         

      

      
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    (c)           Grantor
shall furnish to the Secured Party from time to time statements and schedules
further identifying and describing the Collateral and such other documents in
connection with the Collateral as the Secured Party may reasonably request, all
in reasonable detail and in form and substance satisfactory to the Secured
Party.

     

    (d)           At
any time and from time to time, upon the written request of the Secured Party,
such Grantor shall, for the purpose of obtaining or preserving the full benefits
of this Agreement and of the rights and powers herein granted, (i) promptly and
duly execute and deliver, and have recorded, such further documents, including
an authorization to file (or, as applicable, the filing) of any financing
statement or amendment under the UCC (or other filings under similar
requirements of law) in effect in any jurisdiction with respect to the security
interest created hereby and (ii) take such further action as the Secured Party
may reasonably request, including (A) using its commercially reasonable efforts
to secure all approvals necessary or appropriate for the assignment to or for
the benefit of the Secured Party of any Contractual Obligation, including any
license or sublicense held by any Grantor as licensee pertaining to Intellectual
Property of any other Person or other right (including franchises), held by such
Grantor and to enforce the security interests granted hereunder and
(B) executing and delivering any Control Agreements with respect to deposit
accounts and securities accounts.

     

    (e)           No
Grantor shall, without the prior written consent of the Secured Party, take any
action or cause any party to take any action to terminate, amend or otherwise
modify any financing statement, or other security filing.

     

    Section
4.02          Changes in Locations, Name,
Etc.  Except upon 30 days’ prior written notice to the Secured
Party and delivery to the Secured Party of all documents reasonably requested by
the Secured Party to maintain the validity, perfection and priority of the
security interests provided for herein, such Grantor shall not do any of the
following:

     

    (i)           change
its jurisdiction of organization or its location, in each case from that
referred to in Section
3.03; or

     

    (ii)           change
its legal name or organizational identification number, if any, or corporation,
limited liability company, partnership or other organizational structure to such
an extent that any financing statement filed in connection with this Agreement
would become misleading.

     

    Section
4.03          Pledged
Collateral.

     

    (a)           Delivery of Pledged
Collateral.  Such Grantor shall (i) deliver to the Secured
Party, in suitable form for transfer and in form and substance satisfactory to
the Secured Party, (A) all Pledged Certificated Equity Interests constituting
Collateral of such Grantor, (B) all Pledged Debt Instruments constituting
Collateral of such Grantor (other than intercompany Pledged Debt Instruments by
a Grantor to another Grantor) and (C) all certificates and instruments
evidencing Pledged Investment Property constituting Collateral of such Grantor
and (ii) maintain all other Pledged Investment Property constituting Collateral
of such Grantor in a securities account that is the subject of an effective
Control Agreement maintained with a securities intermediary approved by the
Secured Party.

    
      
         

      

      
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    (b)           Event of
Default.  During the continuance of an Event of Default, the
Secured Party shall have the right, at any time in its discretion and without
notice to the Grantor, to transfer to or to register in its name or in the name
of its nominees any Pledged Collateral or any Pledged Investment Property
constituting Collateral of such Grantor.

     

    (c)           Exchange and Issuance of
Certificates.  The Secured Party shall have the right, at any
time in its discretion and without notice to the Grantor, to exchange any
certificate or instrument representing or evidencing any Pledged Collateral or
any Pledged Investment Property constituting Collateral for certificates or
instruments of smaller or larger denominations.  Upon the request of
the Secured Party, such Grantor shall cause certificates to be issued in respect
of any Pledged Uncertificated Equity Interests constituting
Collateral.

     

    (d)           Cash Distributions with
respect to Pledged Collateral.  As provided in ARTICLE V, such
Grantor shall be entitled to receive all cash distributions paid in respect of
the Pledged Collateral.

     

    (e)           Voting
Rights.  Except as provided in ARTICLE V, such
Grantor shall be entitled to exercise all voting, consent and corporate,
partnership, limited liability company and similar rights with respect to the
Pledged Collateral; provided, however, that no vote shall
be cast, consent given or right exercised or other action taken by such Grantor
that would impair the Collateral or be inconsistent with or result in any
violation of any provision of any Credit Document.

     

    (f)           Certification of Pledged
Equity Interests.

     

    (i)           Such
Grantor shall comply with all of its obligations under any Pledged Collateral
Agreements to which it is a party and shall enforce all of its rights
thereunder.

     

    (ii)          If
requested by Lender, such Grantor will take all actions necessary to cause each
Pledged Collateral Agreement relating to Collateral consisting of any and all
limited, limited liability and general partnership interests and limited
liability company interests of any type or nature (“Partnership and LLC
Collateral”) to provide specifically at all times that: (A) the
Partnership and LLC Collateral shall be securities and shall be governed by
Article 8 of the applicable UCC; (B) each certificate of membership or
partnership representing the Partnership and LLC Collateral shall bear a legend
to the effect that such membership interest or partnership interest is a
security and is governed by Article 8 of the applicable UCC; and (C) no consent
of any member, manager, partner or other Person shall be a condition to the
admission as a member or partner of any transferee that acquires ownership of
the Partnership and LLC Collateral as a result of the exercise by Secured Party
of any remedy hereunder or under applicable law.

    
      
         

      

      
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    (iii)         Such
Grantor shall not vote to enable or take any other action to amend or terminate,
or waive compliance with any of the terms of, any Pledged Collateral Agreement,
certificate or articles of incorporation, bylaws or other organizational
documents, or otherwise cast any vote or grant or give any consent, waiver or
ratification in respect of the Pledged Collateral, in any way that materially
changes the rights of such Grantor with respect to any such Pledged Collateral
in a manner adverse to the Secured Party or that adversely affects the validity,
perfection or priority of the Secured Party’s security interest
therein.

     

    Section
4.04          Accounts.  Such
Grantor shall not, other than in the ordinary course of business, (i) grant
any extension of the time of payment of any account constituting Collateral,
(ii) compromise or settle any such account for less than the full amount
thereof, (iii) release, wholly or partially, any Person liable for the payment
of any such account, (iv) allow any credit or discount on any such account or
(v) amend, supplement or modify any such account in any manner that could
adversely affect the value thereof.

     

    Section
4.05          Delivery of Instruments and
Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit
Rights and Electronic Chattel Paper.

     

    (a)           If
any amount payable under or in connection with any Collateral owned by such
Grantor shall be or become evidenced by an instrument or tangible chattel paper
other than such instrument delivered in accordance with Section 4.03(a) and
in the possession of the Secured Party, such Grantor shall mark all such
instruments and tangible chattel paper with the following
legend:  “This writing and the obligations evidenced or secured hereby
are subject to the security interest of Fleetwood Homes, Inc., as Lender” and,
at the request of the Secured Party, shall immediately deliver such instrument
or tangible chattel paper to the Secured Party, duly indorsed in a manner
satisfactory to the Secured Party.

     

    (b)           Such
Grantor shall not grant “control” (within the meaning of such term under Article
47-9106 of the UCC) over any investment property constituting Collateral to any
Person.

     

    (c)           If
such Grantor is or becomes the beneficiary of a letter of credit constituting
Collateral that is not a Support Obligation of any Collateral, such Grantor
shall promptly, and in any event within two Business Days after becoming a
beneficiary, notify the Secured Party thereof and enter into a Contractual
Obligation with the Secured Party, the issuer of such letter of credit or any
nominated Person with respect to the letter-of-credit rights under such letter
of credit.  Such Contractual Obligation shall assign such
letter-of-credit rights to the Secured Party and such assignment shall be
sufficient to grant control for the purposes of section 47-9107 of the UCC (or
any similar section under any equivalent UCC).  Such Contractual
Obligation shall also direct all payments thereunder to a Control
Account.  The provisions of the Contractual Obligation shall be in
form and substance reasonably satisfactory to the Secured Party.

     

    (d)           If
any Collateral owned by such Grantor shall be or become evidenced by electronic
chattel paper, such Grantor shall take all steps necessary to grant the Secured
Party control of all such electronic chattel paper for the purposes of section
9-105 of the UCC (or any similar section under any equivalent UCC) and all
“transferable records” as defined in each of the Uniform Electronic Transactions
Act and the Electronic Signatures in Global and National Commerce
Act.

    
      
         

      

      
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    Section
4.06          Intellectual
Property.

     

    (a)           Within
60 days after any change to Schedule VI for such
Grantor, such Grantor shall provide the Secured Party notification thereof and
the short-form intellectual property agreements and assignments and other
documents that the Secured Party reasonably requests with respect
thereto.

     

    (b)           Such
Grantor shall (and shall cause all its licensees to) (i) (A) continue to use
each Mark included in the Intellectual Property constituting Collateral in order
to maintain such Mark in full force and effect with respect to each class of
goods for which such Mark is currently used, free from any claim of abandonment
for non-use, (B) maintain at least the same standards of quality of products and
services offered under such Mark as are currently maintained, (C) use such Mark
with the appropriate notice of registration and all other notices and legends
required by applicable requirements of law, (D) not adopt or use any other Mark
that is confusingly similar or a colorable imitation of such Mark unless the
Secured Party shall obtain a perfected security interest in such other Mark
pursuant to this Agreement and (ii) not do any act or omit to do any act whereby
(A) such Mark (or any goodwill associated therewith) may become destroyed,
invalidated, impaired or harmed in any material way, (B) any material Patent
included in the Intellectual Property constituting Collateral may become
forfeited, misused, unenforceable, abandoned or dedicated to the public, (C) any
portion of the material Copyrights included in the Intellectual Property
constituting Collateral may become invalidated, otherwise impaired or fall into
the public domain or (D) any trade secret that is material Intellectual Property
constituting Collateral may become publicly available or otherwise
unprotectable.

     

    (c)           Such
Grantor shall notify the Secured Party immediately if it knows, or has reason to
know, that any application or registration relating to any Intellectual Property
constituting Collateral may become forfeited, misused, unenforceable, abandoned
or dedicated to the public, or of any adverse determination or development
regarding the validity or enforceability or such Grantor’s ownership of,
interest in, right to use, register, own or maintain any Intellectual Property
constituting Collateral (including the institution of, or any such determination
or development in, any proceeding relating to the foregoing in any Applicable IP
Office).  Such Grantor shall take all actions that are necessary or
reasonably requested by the Secured Party to maintain and pursue each
application (and to obtain the relevant registration or recordation) and to
maintain each registration and recordation included in the Intellectual Property
constituting Collateral.

     

    (d)           In
the event that any Intellectual Property of such Grantor constituting Collateral
is or has been infringed, misappropriated, violated, diluted or otherwise
impaired by a third party, such Grantor shall take such action as it reasonably
deems appropriate under the circumstances in response thereto, including
promptly bringing suit and recovering all damages therefor.

    
      
         

      

      
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    (e)           Each
Grantor shall take all actions, deliver all documents and provide all
information necessary or reasonably requested by the Secured Party to ensure any
Internet domain name constituting Collateral is registered.

     

    Section
4.07          Notices.  Such
Grantor shall promptly notify the Secured Party in writing and with reasonable
detail of its acquisition of any interest hereafter in property constituting
Collateral that is of a type where a security interest or lien must be or may be
registered, recorded or filed under, or notice thereof given under, any federal
statute or regulation.  Such Grantor agrees to notify the Secured
Party of any other event which could reasonably be expected to have a Material
Adverse Effect on the aggregate value of the Collateral or on the Liens created
hereunder or under any other Credit Document.

     

    Section
4.08          Notice of Commercial Tort
Claims.  Such Grantor agrees that, if it shall acquire any
interest in any commercial tort claim (whether from another Person or because
such commercial tort claim shall have come into existence) constituting
Collateral, (i) such Grantor shall, immediately upon such acquisition, deliver
to the Secured Party, in each case in form and substance satisfactory to the
Secured Party, a notice of the existence and nature of such commercial tort
claim and a supplement to Schedule II
containing a specific description of such commercial tort claim, (ii) Section 2.01(a) shall
apply to such commercial tort claim and (iii) such Grantor shall execute and
deliver to the Secured Party, in each case in form and substance satisfactory to
the Secured Party, any document, and take all other action, deemed by the
Secured Party to be reasonably necessary or appropriate for the Secured Party to
obtain a perfected security interest having at least the priority set forth in
Section 3.02 in
all such commercial tort claims.  Any supplement to Schedule II delivered
pursuant to this Section 4.08 shall,
after the receipt thereof by the Secured Party, become part of Schedule II for all
purposes hereunder other than in respect of representations and warranties made
prior to the date of such receipt.

     

    Section
4.09          Compliance with Credit
Agreement.  Such Grantor agrees to comply with all covenants
and other provisions applicable to it under the Credit Agreement (all of which
are hereby incorporated herein by reference) and agrees to the same submission
to jurisdiction as that agreed to by each Grantor in the Credit
Agreement.

     

    ARTICLE
V

    REMEDIAL
PROVISIONS

     

    Section
5.01          Code and Other
Remedies.

     

    (a)           UCC
Remedies.  During the continuance of an Event of Default, the
Secured Party may exercise, in addition to all other rights and remedies granted
to it in this Agreement and in any other instrument or agreement securing,
evidencing or relating to any Secured Obligation, all rights and remedies of a
secured party under the UCC or any other applicable law.

    
      
         

      

      
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    (b)           Disposition of
Collateral.  Without limiting the generality of the foregoing,
the Secured Party may, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon any Grantor or any other Person
(all and each of which demands, defenses, advertisements and notices are hereby
expressly waived to the maximum extent permitted by the Code and other
applicable law), during the continuance of any Event of Default (personally or
through its agents or attorneys), (i) enter upon the premises where any
Collateral is located, without any obligation to pay rent, through self-help,
without judicial process, without first obtaining a final judgment or giving any
Grantor or any other Person notice or opportunity for a hearing on the Secured
Party’s claim or action, (ii) take possession of, collect, receive, assemble,
process, appropriate, remove and realize upon any Collateral, or any part
thereof, and (iii) sell, lease, license, assign, dispose of, grant option or
options to purchase and deliver any Collateral (enter into Contractual
Obligations to do any of the foregoing), in one or more parcels at public or
private sale or sales, at any exchange, broker’s board or office of the Secured
Party or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk.  The Secured Party shall have
the right, upon any such public sale or sales and, to the extent permitted by
the UCC and other applicable requirements of law, upon any such private sale, to
purchase the whole or any part of the Collateral so sold, free of any right or
equity of redemption of any Grantor, which right or equity is hereby waived and
released.

     

    (c)           Management of the
Collateral.  Each Grantor further agrees, that, during the
continuance of any Event of Default, (i) at the Secured Party’s request, it
shall assemble the Collateral and make it available to the Secured Party at
places that the Secured Party shall reasonably select, whether at such Grantor’s
premises or elsewhere, (ii) without limiting the foregoing, the Secured Party
also has the right to require that each Grantor store and keep any Collateral
pending further action by the Secured Party and, while any such Collateral is so
stored or kept, provide such guards and maintenance services as shall be
necessary to protect the same and to preserve and maintain such Collateral in
good condition, (iii) until the Secured Party is able to dispose of any
Collateral, the Secured Party shall have the right to hold or use such
Collateral to the extent that it deems appropriate for the purpose of preserving
the Collateral or its value or for any other purpose deemed appropriate by the
Secured Party and (iv) the Secured Party may, if it so elects, seek the
appointment of a receiver or keeper to take possession of any Collateral and to
enforce any of the Secured Party’s remedies, with respect to such appointment
without prior notice or hearing as to such appointment.  The Secured
Party shall not have any obligation to any Grantor to maintain or preserve the
rights of any Grantor as against third parties with respect to any Collateral
while such Collateral is in the possession of the Secured Party.

     

    (d)           Application of
Proceeds.  The Secured Party shall apply the cash proceeds of
any action taken by it pursuant to this Section 5.01, after
deducting all reasonable costs and expenses of every kind incurred in connection
therewith or incidental to the care or safekeeping of any Collateral or in any
way relating to the Collateral or the rights of the Secured Party hereunder,
including reasonable attorneys’ fees and disbursements, to the payment in whole
or in part of the Secured Obligations, as set forth in the Credit Agreement, and
only after such application and after the payment by the Secured Party of any
other amount required by any requirement of law, need the Secured Party account
for the surplus, if any, to any Grantor.

    
      
         

      

      
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    (e)           Direct
Obligation.  The Secured Party shall not be required to make
any demand upon, or pursue or exhaust any right or remedy against, any Grantor
or any other Person with respect to the payment of the Secured Obligations or to
pursue or exhaust any right or remedy with respect to any Collateral therefor or
any direct or indirect guaranty thereof.  All of the rights and
remedies of the Secured Party under any Credit Document shall be cumulative, may
be exercised individually or concurrently and not exclusive of any other rights
or remedies provided by any requirement of law.  To the extent it may
lawfully do so, each Grantor absolutely and irrevocably waives and relinquishes
the benefit and advantage of, and covenants not to assert against the Secured
Party, any valuation, stay, appraisement, extension, redemption or similar laws
and any and all rights or defenses it may have as a surety, now or hereafter
existing, arising out of the exercise by them of any rights
hereunder.  If any notice of a proposed sale or other disposition of
any Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least ten days before such sale or other
disposition.

     

    (f)           Commercially
Reasonable.  To the extent that applicable requirements of law
impose duties on the Secured Party to exercise remedies in a commercially
reasonable manner, each Grantor acknowledges and agrees that it is not
commercially unreasonable for the Secured Party to do any of the
following:

     

    (i)           fail
to incur significant costs, expenses or other Liabilities reasonably deemed as
such by the Secured Party to prepare any Collateral for disposition or otherwise
to complete raw material or work in process into finished goods or other
finished products for disposition;

     

    (ii)          fail
to obtain Permits, or other consents, for access to any Collateral to dispose of
or for the collection or disposition of any Collateral, or, if not required by
other requirements of law, fail to obtain Permits or other consents for the
collection or disposition of any Collateral;

     

    (iii)         fail
to exercise remedies against account debtors or other Persons obligated on any
Collateral or to remove Liens on any Collateral or to remove any adverse claims
against any Collateral;

     

    (iv)         advertise
dispositions of any Collateral through publications or media of general
circulation, whether or not such Collateral is of a specialized nature or to
contact other Persons, whether or not in the same business as any Grantor, for
expressions of interest in acquiring any such Collateral;

     

    (v)          exercise
collection remedies against account debtors and other Persons obligated on any
Collateral, directly or through the use of collection agencies or other
collection specialists, hire one or more professional auctioneers to assist in
the disposition of any Collateral, whether or not such Collateral is of a
specialized nature or, to the extent deemed appropriate by the Secured Party,
obtain the services of other brokers, investment bankers, consultants and other
professionals to assist the Secured Party in the collection or disposition of
any Collateral, or utilize Internet sites that provide for the auction of assets
of the types included in the Collateral or that have the reasonable capacity of
doing so, or that match buyers and sellers of assets to dispose of any
Collateral;

     

    (vi)         dispose
of assets in wholesale rather than retail markets;

    
      
         

      

      
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    (vii)        disclaim
disposition warranties, such as title, possession or quiet enjoyment;
or

     

    (viii)       purchase
insurance or credit enhancements to insure the Secured Party against risks of
loss, collection or disposition of any Collateral or to provide to the Secured
Party a guaranteed return from the collection or disposition of any
Collateral.

     

    Each
Grantor acknowledges that the purpose of this Section 5.01 is to
provide a non-exhaustive list of actions or omissions that are commercially
reasonable when exercising remedies against any Collateral and that other
actions or omissions by the Secured Party shall not be deemed commercially
unreasonable solely on account of not being indicated in this Section
5.01.  Without limitation upon the foregoing, nothing contained
in this Section
5.01 shall be construed to grant any rights to any Grantor or to impose
any duties on the Secured Party that would not have been granted or imposed by
this Agreement or by applicable requirements of law in the absence of this Section
5.01.

     

    (g)           License.  For
the purpose of enabling the Secured Party to exercise rights and remedies under
this Section
5.01 (including in order to take possession of, collect, receive,
assemble, process, appropriate, remove, realize upon, dispose of or grant
options to purchase any Collateral) at such time as the Secured Party shall be
lawfully entitled to exercise such rights and remedies, each Grantor hereby
grants to the Secured Party an irrevocable, nonexclusive, worldwide license
(exercisable without payment of royalty or other compensation to such Grantor),
including in such license the right to sublicense, use and practice any
Intellectual Property constituting Collateral now owned or hereafter acquired by
such Grantor and access to all media in which any of the licensed items may be
recorded or stored and to all Computer Software and programs used for the
compilation or printout thereof.

     

    Section
5.02          Control Account and
Collections.

     

    (a)           From
and after the Closing Date, each Grantor shall cause all Collections and any
other payments in respect of the Collateral to be remitted to the Control
Account in accordance with the requirements of the Credit
Agreement.  Until so remitted, such funds shall be held by such
Grantor in trust for the Secured Party, segregated from other funds of such
Grantor.  All proceeds being held by the Secured Party in a Control
Account (or by such Grantor in trust for the Secured Party) shall continue to be
held as collateral security for the Secured Obligations and shall not constitute
payment thereof until released as provided in the Credit
Agreement.  Each Grantor hereby authorizes Secured Party to collect
all payments, checks, drafts and other instruments addressed to such Borrower
and to withdraw and hold in reserve or release such funds pursuant to the terms
of the Credit Agreement and, during the occurrence and continuance of an Event
of Default, to apply such funds against the Secured Obligations.  Each
Grantor acknowledges and agrees that the Secured Party shall have sole and
exclusive control of the Control Account until the Secured Obligations have been
paid in full.

    
      
         

      

      
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    (b)           Each
Grantor shall, upon the Secured Party’s request, deliver to the Secured Party
all original and other documents evidencing, and relating to, the Contractual
Obligations constituting Collateral and transactions that gave rise to any
account constituting Collateral or any payment in respect of general intangibles
constituting Collateral, including all original orders, invoices and shipping
receipts and notify account debtors that such accounts or general intangibles
have been collaterally assigned to the Secured Party and that payments in
respect thereof shall be made directly to the Secured Party.

     

    (c)           The
Secured Party may, without notice, at any time, in its own name or in the name
of others, communicate with account debtors or and any other payors in respect
of general intangibles constituting Collateral or obligors with respect thereto
to verify with them to the Secured Party’s satisfaction the existence, amount
and terms of any such Collateral or direct such account debtors or obligors to
make all payments directly to the Secured Party or as the Secured Party shall
direct.  Upon request of the Secured Party, Grantors shall provide to
the Secured Party signed, undated notices, on such Grantor’s letterhead,
notifying account debtors or obligors of the Grantors that all future payments
shall be made to the Control Account and such account debtors and obligors shall
no longer to make payment to such Grantor, but to make payment directly to the
Secured Party or as the Secured Party shall direct.

     

    (d)           Anything
herein to the contrary notwithstanding, each Grantor shall remain liable under
each account and each payment in respect of general intangibles to observe and
perform all the conditions and obligations to be observed and performed by it
thereunder, all in accordance with the terms of any agreement giving rise
thereto.  The Secured Party shall not have any obligation or liability
under any agreement giving rise to an account or a payment in respect of a
general intangible by reason of or arising out of any Credit Document or the
receipt by the Secured Party of any payment relating thereto, nor shall the
Secured Party be obligated in any manner to perform any obligation of any
Grantor under or pursuant to any agreement giving rise to an account or a
payment in respect of a general intangible, to make any payment, to make any
inquiry as to the nature or the sufficiency of any payment received by it or as
to the sufficiency of any performance by any party thereunder, to present or
file any claim, to take any action to enforce any performance or to collect the
payment of any amounts that may have been assigned to it or to which it may be
entitled at any time or times.

     

    Section
5.03          Pledged
Collateral.

     

    (a)           Voting
Rights.  During the continuance of an Event of Default, upon
notice by the Secured Party to the relevant Grantor or Grantors, the Secured
Party or its nominee may exercise (A) any voting, consent, corporate and other
right pertaining to the Pledged Collateral at any meeting of shareholders,
partners or members, as the case may be, of the relevant issuer or issuers of
such Pledged Collateral or otherwise and (B) any right of conversion, exchange
and subscription and any other right, privilege or option pertaining to the
Pledged Collateral as if it were the absolute owner thereof (including the right
to exchange at its discretion any such Pledged Collateral upon the merger,
amalgamation, consolidation, reorganization, recapitalization or other
fundamental change in the corporate or equivalent structure of any issuer of
Pledged Equity Interests constituting Collateral, the right to deposit and
deliver any such Pledged Collateral with any committee, depositary, transfer
agent, registrar or other designated agency upon such terms and conditions as
the Secured Party may determine), all without liability except to account for
property actually received by it; provided, however, that the Secured
Party shall have no duty to any Grantor to exercise any such right, privilege or
option and shall not be responsible for any failure to do so or delay in so
doing.

    
      
         

      

      
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    (b)           Proxies.  During
the occurrence and continuance of an Event of Default, in order to permit the
Secured Party to exercise the voting and other consensual rights that it may be
entitled to exercise pursuant hereto and to receive all dividends and other
distributions that it may be entitled to receive hereunder, (i) each Grantor
shall promptly execute and deliver (or cause to be executed and delivered) to
the Secured Party all such proxies, dividend payment orders and other
instruments as the Secured Party may from time to time reasonably request and
(ii) without limiting the effect of clause (i) above,
such Grantor hereby revokes all previous proxies with respect to the Pledged
Collateral and grants to the Secured Party an irrevocable proxy to vote all or
any part of the Pledged Collateral and to exercise all other rights, powers,
privileges and remedies to which a holder of such Pledged Collateral would be
entitled (including giving or withholding written consents of shareholders,
partners or members, as the case may be, calling special meetings of
shareholders, partners or members, as the case may be, and voting at such
meetings), which proxy shall be effective, automatically and without the
necessity of any action (including any transfer of any such Pledged Collateral
on the record books of the issuer thereof) by any other Person (including the
issuer of such Pledged Collateral or any officer or agent thereof) during the
continuance of an Event of Default and which proxy shall only terminate upon the
payment in full of the Secured Obligations.

     

    (c)           Authorization of
Grantors.  Each Grantor hereby expressly irrevocably authorizes
and instructs, without any further instructions from such Grantor, each issuer
of any Pledged Collateral pledged hereunder by such Grantor to (i) comply with
any instruction received by it from the Secured Party in writing that states
that an Event of Default is continuing and is otherwise in accordance with the
terms of this Agreement and each Grantor agrees that such issuer shall be fully
protected from Liabilities to such Grantor in so complying and (ii) unless
otherwise expressly permitted hereby, pay any dividend or make any other payment
with respect to such Pledged Collateral directly to the Secured
Party.

     

    (d)           Liability. Anything
herein to the contrary notwithstanding, (i) each Grantor shall remain liable
under any Pledged Collateral Agreement and any other contracts, agreements and
other documents to which it is a party included in the Collateral, to the extent
set forth therein, to perform all of its duties and obligations thereunder to
the same extent as if this Agreement had not been executed, (ii) the exercise by
the Secured Party of any of the rights hereunder shall not release any Grantor
from any of its duties or obligations under any such Pledged Collateral
Agreement or other contracts, agreements and other documents, and (iii) the
Secured Party shall not have any obligation or liability under any such Pledged
Collateral Agreements or other contracts, agreements and other documents by
reason of this Agreement, nor shall the Secured Party be obligated to perform
any of the obligations or duties of any Grantor thereunder or to take any action
to collect or enforce any Pledged Collateral Agreements or other such contract,
agreement or other document.

     

    Section
5.04         Registration
Rights.

     

    (a)           If,
in the opinion of the Secured Party, it is necessary or advisable to dispose of
any portion of the Pledged Collateral by registering such Pledged Collateral
under the provisions of the Securities Act of 1933 (the “Securities Act”),
each relevant Grantor shall cause the issuer thereof to do or cause to be done
all acts as may be, in the opinion of the Secured Party, necessary or advisable
to register such Pledged Collateral or that portion thereof to be disposed of
under the provisions of the Securities Act, all as directed by the Secured Party
in conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission applicable thereto and in
compliance with the securities or “Blue Sky” laws of any
jurisdiction that the Secured Party shall designate.

     

    
      
        
           

        

        
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    (b)           Each
Grantor recognizes that the Secured Party may be unable to effect a public sale
of any Pledged Collateral by reason of certain prohibitions contained in the
Securities Act and applicable state or foreign securities laws or otherwise or
may determine that a public sale is impracticable, not desirable or not
commercially reasonable and, accordingly, may resort to one or more private
sales thereof to a restricted group of purchasers that shall be obliged to
agree, among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale
thereof.  Each Grantor acknowledges and agrees that any such private
sale may result in prices and other terms less favorable than if such sale were
a public sale and, notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner.  The Secured Party shall be under no obligation to delay a
sale of any Pledged Collateral for the period of time necessary to permit the
issuer thereof to register such securities for public sale under the Securities
Act or under applicable state securities laws even if such issuer would agree to
do so.

     

    (c)           Each
Grantor agrees to use its commercially reasonable efforts to do or cause to be
done all such other acts as may be necessary to make such sale or sales of any
portion of the Pledged Collateral pursuant to this Section 5.04 valid
and binding and in compliance with all applicable requirements of
law.  Each Grantor further agrees that a breach of any covenant
contained in this Section 5.04 will
cause irreparable injury to the Secured Party, that the Secured Party has no
adequate remedy at law in respect of such breach and, as a consequence, that
each and every covenant contained in this Section 5.04 shall be
specifically enforceable against such Grantor, and such Grantor hereby waives
and agrees not to assert any defense against an action for specific performance
of such covenants except for a defense that no Event of Default has occurred
under the Credit Agreement.

     

    Section
5.05        Deficiency.  The
Grantors, jointly and severally, shall remain liable for any deficiency if the
proceeds of any sale or other disposition of any Collateral are insufficient to
pay the Secured Obligations and the fees and disbursements of any attorney
employed by the Secured Party to collect such deficiency.

     

    ARTICLE
VI

    SUBORDINATION

     

    Section
6.01         Subordination.  Each
Grantor agrees that all payments on account of any indebtedness for borrowed
money owing to such Grantor by any other Grantor (“Intercompany Debt”)
shall be subject, subordinate and junior, in right of payment and exercise of
remedies, to the indefeasible payment and satisfaction in full of all Secured
Obligations, and all Liens (if any) now or hereafter existing in favor of any
Grantor in respect of any Collateral shall be subject, subordinate and junior in
all respects and at all times to the Liens now or hereafter existing of the
Secured Party therein.  The Secured Party shall be deemed to have
acquired the Secured Obligations in reliance upon this ARTICLE
VI.

     

    
      
        
           

        

        
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    Section
6.02         Restrictions on Payment and
Transfer.  Each Grantor agrees (i) not to collect, or to
receive payment upon, by setoff or in any other manner, all or any portion of
the Intercompany Debt owing to it, except as expressly permitted by the Credit
Documents, and (ii) not to sell, assign, transfer, pledge, or grant a Lien on
any such Intercompany Debt.

     

    ARTICLE
VII

    THE
ADMINISTRATIVE SECURED PARTY

     

    Section
7.01         The Secured Party’s
Appointment as Attorney-in-Fact.  (a) Each Grantor hereby
irrevocably constitutes and appoints the Secured Party and its officers,
directors, employees, representatives and agents, with full power of
substitution, during the occurrence and continuance of an Event of Default, as
its true and lawful attorney-in-fact with full irrevocable power and authority
in the place and stead of such Grantor and in the name of such Grantor or in its
own name, for the purpose of carrying out the terms of the Credit Documents, to
take any appropriate action and to execute any document or instrument that may
be necessary or desirable to accomplish the purposes of the Credit Documents,
and, without limiting the generality of the foregoing, each Grantor hereby gives
the Secured Party and its officers, directors, employees, representatives and
agents the power and right, on behalf of such Grantor, without notice to or
assent by such Grantor, to do any of the following when an Event of Default
shall be continuing:

     

    (i)           in
the name of such Grantor, in its own name or otherwise, take possession of and
indorse and collect any check, draft, note, acceptance or other instrument for
the payment of moneys due under any account or general intangible constituting
Collateral or with respect to any other Collateral and file any claim or take
any other action or proceeding in any court of law or equity or otherwise deemed
appropriate by the Secured Party for the purpose of collecting any such moneys
due under any account or general intangible constituting Collateral or with
respect to any other Collateral whenever payable;

     

    (ii)          in
the case of any Intellectual Property constituting Collateral owned by or
licensed to the Grantors, execute, deliver and have recorded any document that
the Secured Party may request to evidence, effect, publicize or record the
Secured Party’s security interest in such Intellectual Property and the goodwill
and general intangibles of such Grantor relating thereto or represented
thereby;

     

    (iii)         pay
or discharge taxes and Liens levied or placed on or threatened against any
Collateral, effect any repair or pay any insurance called for by the terms of
the Credit Agreement (including all or any part of the premiums therefor and the
costs thereof);

     

    (iv)         execute,
in connection with any sale provided for in Sections Section 5.01
or Section
5.04, any document to effect or otherwise necessary or appropriate in
relation to evidence the disposition of any Collateral; or

     

    
      
        
           

        

        
          20

          
            

          

        

        
           

        

      

    

    

    (v)          (A)
direct any party liable for any payment under any Collateral to make payment of
any moneys due or to become due thereunder directly to the Secured Party or as
the Secured Party shall direct, (B) ask or demand for, and collect and receive
payment of and receipt for, any moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral, (C) sign
and indorse any invoice, freight or express bill, bill of lading, storage or
warehouse receipt, draft against debtors, assignment, verification, notice and
other document in connection with any Collateral, (D) commence and prosecute any
suit, action or proceeding at law or in equity in any court of competent
jurisdiction to collect any Collateral and to enforce any other right in respect
of any Collateral, (E) defend any actions, suits, proceedings, audits, claims,
demands, orders or disputes brought against such Grantor with respect to any
Collateral, (F) settle, compromise or adjust any such actions, suits,
proceedings, audits, claims, demands, orders or disputes and, in connection
therewith, give such discharges or releases as the Secured Party may deem
appropriate, (G) assign any Intellectual Property constituting Collateral owned
by the Grantors or any license or sublicense held by any Grantor as licensee
pertaining to Intellectual Property of any other Person or other right
(including franchises)  constituting Collateral of the Grantors
throughout the world on such terms and conditions and in such manner as the
Secured Party shall in its sole discretion determine, including the execution
and filing of any document necessary to effectuate or record such assignment and
(H) generally, dispose of, grant a Lien on, make any Contractual Obligation with
respect to and otherwise deal with, any Collateral as fully and completely as
though the Secured Party were the absolute owner thereof for all purposes and
do, at the Secured Party’s option, at any time or from time to time, all acts
and things that the Secured Party deems necessary to protect, preserve or
realize upon any Collateral and the Secured Party’s security interests therein
and to effect the intent of the Credit Documents, all as fully and effectively
as such Grantor might do.

     

    (b)           If
any Grantor fails to perform or comply with any Contractual Obligation contained
herein, the Secured Party, at its option, but without any obligation so to do,
may perform or comply, or otherwise cause performance or compliance, with such
Contractual Obligation.

     

    (c)           The
expenses of the Secured Party incurred in connection with actions undertaken as
provided in this Section 7.01,
together with interest thereon at a rate set forth in Section 2.09 of the
Credit Agreement, from the date of payment by the Secured Party to the date
reimbursed by the relevant Grantor, shall be payable by such Grantor to the
Secured Party on demand. None of the Secured Party, its respective affiliates,
officers, directors, employees, agents or representatives shall be responsible
to any Grantor for any act or failure to act under any power of attorney or
otherwise, except in respect of damages attributable solely to their own gross
negligence or willful misconduct as finally determined by a court of competent
jurisdiction, nor for any punitive, exemplary, indirect or consequential
damages.

     

    (d)           Each
Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be
done by virtue of this Section
7.01.  All powers, authorizations and agencies contained in
this Agreement are coupled with an interest and are irrevocable until this
Agreement is terminated and the security interests created hereby are
released.

     

    
      
        
           

        

        
          21

          
            

          

        

        
           

        

      

    

     

    Section
7.02         Authorization to File
Financing Statements.  Each Grantor authorizes the Secured
Party and its officers, directors, employees, representatives and agents, at any
time and from time to time, to file or record financing statements, amendments
thereto, and other filing or recording documents or instruments with respect to
any Collateral in such form and in such offices as the Secured Party reasonably
determines appropriate to perfect the security interests of the Secured Party
under this Agreement, and such financing statements and amendments may described
the Collateral covered thereby (other than the Limited Collateral, which
description will be specifically drafted) as “all assets of the
debtor”.  A photographic or other reproduction of this Agreement shall
be sufficient as a financing statement or other filing or recording document or
instrument for filing or recording in any jurisdiction.  Such Grantor
also hereby ratifies its authorization for the Secured Party to have filed any
initial financing statement or amendment thereto under the UCC (or other similar
laws) in effect in any jurisdiction if filed prior to the date
hereof.

     

    ARTICLE
VIII

    MISCELLANEOUS

     

    Section
8.01         Reinstatement.  This
Agreement shall remain in full force and effect and continue to be effective
should any petition be filed by or against any Grantor for liquidation or
reorganization, should any Grantor become insolvent or make an assignment for
the benefit of any creditor or creditors or should a receiver or trustee be
appointed for all or any significant part of any Grantor’s
assets.  Moreover, each Grantor agrees that, if any payment made by
any Grantor or other Person and applied to the Secured Obligations is at any
time annulled, avoided, set aside, rescinded, invalidated, declared to be
fraudulent or preferential or otherwise required to be refunded or repaid, or
the proceeds of any Collateral are required to be returned by the Secured Party
to such Grantor, its estate, trustee, receiver or any other party, including any
Grantor, under any bankruptcy law, state or federal law, common law or equitable
cause, then, to the extent of such payment or repayment, any Lien or other
Collateral securing such liability shall be and remain in full force and effect,
as fully as if such payment had never been made.  If, prior to any of
the foregoing, (i) any Lien or other Collateral securing such Grantor’s
liability hereunder shall have been released or terminated by virtue of the
foregoing or (ii) any provision of the Guaranty hereunder shall have been
terminated, cancelled or surrendered, such Lien, other Collateral or provision
shall be reinstated in full force and effect and such prior release,
termination, cancellation or surrender shall not diminish, release, discharge,
impair or otherwise affect the obligations of any such Grantor in respect of any
Lien or other Collateral securing such obligation or the amount of such
payment.

     

    Section
8.02         Independent
Obligations.  The obligations of each Grantor hereunder are
independent of and separate from the Secured Obligations.  If any
Secured Obligation is not paid when due, or upon any Event of Default, the
Secured Party may, at its sole election, proceed directly and at once, without
notice, against any Grantor and any Collateral to collect and recover the full
amount of any Secured Obligation then due, without first proceeding against any
other Grantor or any other Collateral and without first joining any other
Grantor in any proceeding.

     

    Section
8.03         No Waiver by Course of
Conduct.  The Secured Party shall not by any act (except by a
written instrument executed by it), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default.  No failure to exercise, nor any delay in
exercising, on the part of the Secured Party, any right, power or privilege
hereunder shall operate as a waiver thereof.  No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege.  A waiver by the Secured Party of any right or remedy
hereunder on any one occasion shall not be construed as a bar to any right or
remedy that the Secured Party would otherwise have on any future
occasion.

     

    
      
        
           

        

        
          22

          
            

          

        

        
           

        

      

    

     

    Section
8.04         Amendments in
Writing.  No amendment or waiver of any provision of this
Agreement and no consent to any departure by any party thereto shall be
effective unless the same shall be in writing and signed (i) in the case of an
amendment, consent or waiver to cure any ambiguity, omission, defect or
inconsistency or granting a new Lien for the benefit of the Secured Party or
extending an existing Lien over additional property, by the Secured Party and
the Grantors or (ii) in the case of any other waiver or consent.

     

    Section
8.05         Additional Grantors;
Additional Pledged Collateral.  

     

    (a)           Joinder
Agreements.  If, after the date hereof, any of the Grantors
create or otherwise acquire any Subsidiary, such Grantor shall promptly cause
such Subsidiary that is not a Grantor to become a Grantor hereunder, such
Subsidiary shall execute and deliver to the Secured Party a Joinder Agreement
substantially in the form of Annex 2 and shall
thereafter for all purposes be a party hereto and have the same rights, benefits
and obligations as a Grantor party hereto on the Closing Date.

     

    (b)           Pledge
Amendments.  To the extent any Grantor or Limited Pledgor
acquires any Pledged Collateral comprising a direct or indirect interest in any
Equity Interests, such Grantor or Limited Pledgor shall deliver a pledge
amendment duly executed by the Grantor in substantially the form of Annex 1 (each, a
“Pledge
Amendment”) with respect to such Pledged Collateral.  Each
Grantor and Limited Pledgor authorizes the Secured Party to attach each Pledge
Amendment to this Agreement.

     

    Section
8.06         Notices.  Any
notice or other communication required or permitted hereunder shall be in
writing and shall be deemed to have been duly given (a) on the day of delivery
if delivered in person, (b) on the day of delivery if delivered by facsimile
upon confirmation of receipt (provided that if
delivery is completed after the close of business, then the next Business Day),
(c) on the first Business Day following the date of dispatch if delivered using
a next-day service by a nationally recognized express courier service, or (d) on
the earlier of confirmed receipt or the fifth Business Day following the date of
mailing if delivered by registered or certified mail, return receipt requested,
postage prepaid.  All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated by
notice given in accordance with this Section 8.06 by the
party to receive such notice:

     

    if to the
Grantors:

     

    c/o Palm
Harbor Homes, Inc.

    15303
Dallas Parkway, Suite 800

    Addison,
Texas  75001-4600

    Attention:  Larry
H. Keener, Chairman, President & CEO

    Facsimile:  (972)
764-9020

    

    
      
        
           

        

        
          23

          
            

          

        

        
           

        

      

    

    
 

    with a
copy (which does not constitute notice) to:

     

    Locke
Lord Bissell & Liddell LLP

    2200 Ross
Avenue, Suite 2200

    Dallas,
Texas 75201

    Attention:  Gina
Betts

    Facsimile:  (214)
756-8515

    

    If to
Secured Party:

    Fleetwood
Homes, Inc.

    c/o Cavco
Industries, Inc.

    1001
North Central Avenue, Suite 800

    Phoenix,
Arizona  85004-1935

    Attention:  James
P. Glew, General Counsel

    Facsimile:  (602)
256-6189

     

    and

    
 

    Robert F.
Jordan

    Third
Avenue Management, LLC

    622 Third
Avenue

    32nd
Floor

    New York,
NY 10017

    Facsimile:  (212)
735-0003

     

    with a
copy (which does not constitute notice) to:

     

    Garth D.
Stevens, Esq.

    Snell
& Wilmer L.L.P.

    One
Arizona Center

    400 East
Van Buren

    Phoenix,
Arizona 85018

    Facsimile:  (602)
382-6070

     

    Section
8.07         Benefit of
Agreement.  This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto; provided that, except in
connection with an assignment of the Credit Agreement by Grantors expressly
permitted by the terms of the Credit Agreement, the Grantors may not assign or
transfer any of its interests without prior written consent of the Secured
Party.

     

    Section
8.08         Cumulative Remedies,
Etc.  No failure or delay on the part of the Secured Party in
exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Secured Party and the Grantors
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder or under any other Credit Document
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder or thereunder.  The rights and
remedies provided herein are cumulative and not exclusive of any rights or
remedies which the Secured Party would otherwise have.  No notice to
or demand on the Grantors in any case shall entitle the Grantors to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Secured Party to any other or further action in any
circumstances without notice or demand.

    
 

    
      
        
           

        

        
          24

          
            

          

        

        
           

        

      

    

     

    Section
8.09         Amendments, Waivers and
Consents.  No amendment or waiver of any provision of this
Agreement nor consent to any departure by the Grantors therefrom shall in any
event be effective unless the same shall be in writing and signed by the Secured
Party, and then any such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.

     

    Section
8.10         Waiver.  Each
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (b) waive any inaccuracies
in the representations and warranties of the other party contained herein or in
any document delivered pursuant hereto, (c) waive compliance with any of the
agreements of the other party contained herein, or (d) waive satisfaction of any
condition to its obligations hereunder.  Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the party
to be bound thereby.  No delay on the part of any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any such right, power or privilege,
nor any single or partial exercise of any such right, power or privilege,
preclude any further exercise thereof or the exercise of any other such right,
power or privilege.  All remedies, rights, undertakings, obligations,
and agreements contained herein shall be cumulative and not mutually
exclusive.

     

    Section
8.11         Governing Law. This
Agreement and all claims with respect thereto shall be governed by and construed
in accordance with the federal bankruptcy law, to the extent applicable, and,
where state law is implicated, the laws of the State of Delaware without regard
to any conflict of laws rules thereof that might indicate the application of the
laws of any other jurisdiction.

     

    Section
8.12         Consent to Jurisdiction;
Service of Process; Waiver of Jury Trial.

     

    The
parties hereto irrevocably and unconditionally consent to submit to the
jurisdiction of the Bankruptcy Court for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agree
not to commence any litigation relating hereto except in the Bankruptcy
Court).

     

    Any and
all service of process and any other notice in any such claim shall be effective
against any party if given personally or by registered or certified mail, return
receipt requested, or by any other means of mail that requires a signed receipt,
postage prepaid, mailed to such party as herein provided.  Nothing
herein contained shall be deemed to affect the right of any party to serve
process in any manner permitted by Law or to commence legal proceedings or
otherwise proceed against any other party in any other
jurisdiction.

     

    If any
claim is brought by any party hereto to enforce its rights or another party’s
obligations under this Agreement or any other agreement, document or instrument
to be delivered by such party on the Closing Date in connection herewith, the
substantially prevailing party in such claim shall be entitled to recover its
reasonable attorneys’ fees and expenses and other costs incurred in such claim,
in addition to any other relief to which it may be entitled.

     

    
      
        
           

        

        
          25

          
            

          

        

        
           

        

      

    

     

    EACH OF
THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.

     

    Section
8.13         Interpretation;
Headings.  All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may
require.  All terms defined in this Agreement in their singular or
plural forms have correlative meanings when used herein in their plural or
singular forms, respectively.  Unless otherwise expressly provided,
the words “include,” “includes” and “including” do not limit the preceding words
or terms and shall be deemed to be followed by the words “without
limitation.”  All references herein to “Sections” shall be deemed
references to such parts of this Agreement, unless the context shall otherwise
require.  All references herein to “Schedules” and “Exhibits” shall
mean the Schedules and Exhibits attached to this Agreement and forming a part
hereof.  The Section headings in this Agreement are for reference only
and shall not affect the interpretation of this Agreement.  The
parties acknowledge and agree that (a) each party and its counsel reviewed and
negotiated the terms and provisions of this Agreement and have contributed to
its revision, (b) the rule of construction to the effect that any ambiguities
are resolved against the drafting party shall not be employed in the
interpretation of this Agreement, and (c) the terms and provisions of this
Agreement shall be construed fairly as to all parties, regardless of which party
was generally responsible for the preparation of this
Agreement.  Dates and times set forth in this Agreement for the
performance of the parties’ respective obligations hereunder or for the exercise
of their rights hereunder shall be strictly construed, time being of the essence
of this Agreement.  If the date specified or computed under this
Agreement for the performance, delivery, completion or observance of a covenant,
agreement, obligation or notice by any party, or for the occurrence of any event
provided for herein, is a day other than a Business Day, then the date for such
performance, delivery, completion, observance or occurrence shall automatically
be extended to the next Business Day following such date.

     

    Section
8.14         Severability of
Provisions.  If any provision or any portion of any provision
of this Agreement shall be held invalid or unenforceable, the remaining portion
of such provision and the remaining provisions of this Agreement shall not be
affected thereby.  If the application of any provision or any portion
of any provision of this Agreement to any Person or circumstance shall be held
invalid or unenforceable, the application of such provision or portion of such
provision to Persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby.

     

    Section
8.15         Counterparts.  This
Agreement may be executed by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all such
counterparts together shall constitute one and the same
instrument.  Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, of the parties
hereto.

     

    [SIGNATURE
PAGES FOLLOW]

     

    
      
        
           

        

        
          26

          
            

          

        

        
           

        

      

    

     

    IN
WITNESS WHEREOF, each of the undersigned has caused this Security Agreement to
be duly executed and delivered as of the date first above written.

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      
                                                                        
                                                                          
                                                                            
                                                                              
                                                                                
                                                                                  
                                                                                    	
                                                                                            Palm Harbor Homes, Inc.,
      a Florida corporation,

                                                                                          
	
                                                                                            as
      a Grantor

                                                                                          
	 
      
	
                                                                                            By:

                                                                                          	
                                                                                            /s/
      Larry H. Keener

                                                                                          
	
                                                                                            Name:

                                                                                          	
                                                                                            Larry
      H. Keener

                                                                                          
	
                                                                                            Title:

                                                                                          	

                                                                                            President
      and Chief Executive Officer

                                                                                          
	 
      
	
                                                                                            Palm Harbor GenPar, LLC,
      a Nevada limited liability company, as a Grantor

                                                                                          
	 
      
	
                                                                                            By:

                                                                                          	
                                                                                            /s/
      Larry H. Keener  

                                                                                          
	
                                                                                            Name:

                                                                                          	
                                                                                            Larry
      H. Keener  

                                                                                          
	
                                                                                            Title:

                                                                                          	
                                                                                            President

                                                                                          
	 
      
	
                                                                                            Palm Harbor Mfg., L.P.,
      a Texas limited partnership, as a Grantor

                                                                                          
	 
      
	
                                                                                            By:

                                                                                          	

                                                                                            /s/
      Larry H. Keener

                                                                                          
	
                                                                                            Name:

                                                                                          	

                                                                                            Larry
      H. Keener

                                                                                          
	
                                                                                            Title:

                                                                                          	

                                                                                            President

                                                                                          
	 
      
	
                                                                                            Palm Harbor Real Estate,
      LLC, a Texas limited liability company, as a
  Grantor

                                                                                          
	 
      
	
                                                                                            By:

                                                                                          	

                                                                                            /s/
      Larry H. Keener

                                                                                          
	
                                                                                            Name:

                                                                                          	

                                                                                            Larry
      H. Keener

                                                                                          
	
                                                                                            Title:

                                                                                          	

                                                                                            President
      of Sole Member

                                                                                          
	 
      
	
                                                                                            Nationwide Homes, Inc.,
      a Delaware corporation, as a Grantor

                                                                                          
	 
      
	
                                                                                            By:

                                                                                          	

                                                                                            /s/
      Larry H. Keener

                                                                                          
	
                                                                                            Name:

                                                                                          	

                                                                                            Larry
      H. Keener

                                                                                          
	
                                                                                            Title:

                                                                                          	

                                                                                            Chairman

                                                                                          

                                                                                  

                                                                                

                                                                              

                                                                            

                                                                          

                                                                        

                                                                      

                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    [SIGNATURE
PAGE TO SECURITY AGREEMENT]  

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      
        
          
            
              
                	
                        Palm Harbor Albemarie,
      LLC, a Delaware corporation, as a Grantor

                      
	 
      
	
                        By:

                      	

                        /s/
      Larry H. Keener

                      
	
                        Name:

                      	

                        Larry
      H. Keener

                      
	
                        Title:

                      	

                        President

                      

              

            

          

        

      

    

     

    ACKNOWLEDGED
AND AGREED

    as of the
date first above written:

    
 

    Fleetwood Homes, Inc., a
Delaware

    corporation,
as Secured Party

       

    
      
        
          
            
              	
                      By:

                    	/s/
      Joseph H. Stegmayer
	
                      Name:

                    	Joseph
      H. Stegmayer
	
                      Title:

                    	Vice
      President

            

          

        

      

    

     

    
      [SIGNATURE
PAGE TO SECURITY AGREEMENT]

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