CLAYTON HOMES INC
10-Q, 1999-02-11
MOBILE HOMES
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<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-Q


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


FOR THE QUARTERLY PERIOD ENDED   December 31, 1998
                                 -----------------

COMMISSION FILE NUMBER   1-8824
                         ------

                               CLAYTON HOMES, INC.
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

Delaware                                 62-1671360          
- -------------------------------          -------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification
incorporation or organization)           Number)

5000 Clayton Road
Maryville, Tennessee                                              37804 
- ----------------------------------------                        --------
(Address of principal executive offices)                       (zip code)

                    423-380-3000
 --------------------------------------------------
(Registrant's telephone number, including area code)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.   Yes   X       No      .
                                                -----        -----

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

    Shares of common stock $.10 par value, outstanding on December 31, 1998
- - 144,414,786.






                                       1
<PAGE>   2




                               CLAYTON HOMES, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                (Unaudited - in thousands except per share data)

<TABLE>
<CAPTION>
                                            Three Months Ended         Six Months Ended
                                               December 31,              December 31,
                                            1998         1997         1998         1997
                                            ----         ----         ----         ----
<S>                                      <C>           <C>         <C>           <C> 
REVENUES
  Net sales                              $ 247,407     $192,078    $ 494,599     $401,024
  Financial services                        54,851       46,154      105,850       87,204
  Rental and other income                   16,862       12,837       33,357       25,536
                                         ---------     --------    ---------     --------
    Total revenues                         319,120      251,069      633,806      513,764
                                         ---------     --------    ---------     --------

COSTS AND EXPENSES
  Cost of sales                            168,413      133,066      340,075      276,620
  Selling, general and administrative       88,357       67,871      172,682      138,665
  Financial services interest                2,809          595        5,259        1,197
  Provision for credit losses                2,700        1,000        5,259        2,000
                                         ---------     --------    ---------     --------
    Total expenses                         262,279      202,532      523,275      418,482
                                         ---------     --------    ---------     --------

OPERATING INCOME                            56,841       48,537      110,531       95,282
Interest income (expense), net/other        (1,228)       1,672       (2,221)       2,806
                                         ---------     --------    ---------     --------
Income before income taxes                  55,613       50,209      108,310       98,088
Provision for income taxes                  20,600       19,100       40,100       37,300
                                         ---------     --------    ---------     --------
   Net income                            $  35,013     $ 31,109    $  68,210     $ 60,788
                                         =========     ========    =========     ========

EARNINGS PER SHARE(1)
   Basic                                 $    0.24     $   0.21    $    0.47     $   0.41
   Diluted                               $    0.24     $   0.21    $    0.46     $   0.41

DIVIDENDS PAID PER SHARE(1)              $   0.016     $  0.016    $   0.032     $  0.032

AVERAGE SHARES OUTSTANDING(1)
   Basic                                   144,658      148,395      146,118      148,306
   Diluted                                 145,364      149,500      146,932      149,342
</TABLE>

(1) Adjusted for the December 9, 1998, 5-for-4 stock split.



                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                 (unaudited)     (audited)
                                                 December 31,     June 30,
                                                     1998           1998 
                                                     ----           ----
<S>                                              <C>             <C>
ASSETS
 Cash and cash equivalents                        $    8,995     $    1,731
 Receivables, net                                    899,569        837,197
 Inventories                                         163,933        167,113
 Property, plant and equipment, net                  278,355        261,549
 Other assets                                        201,347        190,167
                                                  ----------     ----------
   Total assets                                   $1,552,199     $1,457,757
                                                  ==========     ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
 Accounts payable and accrued liabilities         $  103,924     $  138,557
 Debt obligations                                    380,475        247,591
 Other liabilities                                   177,791        190,590
 Shareholders' equity                                890,009        881,019
                                                  ----------     ----------
   Total liabilities and shareholders' equity     $1,552,199     $1,457,757
                                                  ==========     ==========
</TABLE>


   (See accompanying notes to the condensed consolidated financial statements)




                                       2
<PAGE>   3

                               CLAYTON HOMES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited - in thousands)

<TABLE>
<CAPTION>
                                                                                     Six Months Ended
                                                                                        December 31,
                                                                                    1998          1997
                                                                                    ----          ----
<S>                                                                              <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                                       $  68,210     $  60,788
Adjustments to reconcile net income to net cash
provided (required) by operating activities:
        Depreciation and amortization                                                8,585         6,824
        Gain on sale of installment contract receivables, net of amortization       (3,243)      (19,642)
        Provision for credit losses                                                  5,259         2,000
        Deferred income taxes                                                       (2,565)      (19,920)
        Increase in other  receivables, net                                        (22,647)      (16,270)
        Decrease (increase) in inventories                                           3,180       (17,225)
        Decrease in accounts payable, accrued liabilities, and other               (60,962)      (47,922)
                                                                                 ---------     ---------
                Cash required from operations                                       (4,183)      (51,367)
        Origination of installment contract receivables                           (520,140)     (333,803)
        Proceeds from sales of originated installment contract receivables         410,215       358,338
        Principal collected on originated installment contract receivables          27,068        18,445
                                                                                 ---------     ---------
                Net cash required from operating activities                        (87,040)       (8,387)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables                                    (98,045)     (153,498)
Proceeds from sales of acquired installment contract receivables                   130,764       127,067
Principal collected on acquired installment contract receivables                     8,397         7,576
Acquisition of property, plant and equipment, net                                  (25,391)      (15,052)
Decrease in restricted cash and investments                                          4,915         8,556
                                                                                 ---------     ---------
                Net cash provided by (used in) investing activities                 20,640       (25,351)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends                                                                           (4,785)       (4,750)
Net borrowings on credit facilities                                                 54,767            --
Proceeds from (repayment of) long-term debt                                         78,117          (774)
Issuance of stock for incentive plans and other                                      1,993         3,021
Repurchase of common stock                                                         (56,428)       (2,145)
                                                                                 ---------     ---------
               Net cash provided by (used in) financing activities                  73,664        (4,648)
                                                                                 ---------     ---------

Net increase (decrease) in cash and cash equivalents                                 7,264       (38,386)
Cash and cash equivalents at beginning of period                                     1,731        89,695
                                                                                 ---------     ---------
Cash and cash equivalents at end of period                                       $   8,995     $  51,309
                                                                                 =========     =========
</TABLE>


   (See accompanying notes to the condensed consolidated financial statements)




                                       3
<PAGE>   4


                               CLAYTON HOMES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       The condensed consolidated financial statements of Clayton Homes, Inc.
         and its subsidiaries (Company) have been prepared by the Company,
         without audit, pursuant to the rules and regulations of the Securities
         and Exchange Commission. Certain information and footnote disclosures
         normally included in financial statements prepared in accordance with
         Generally Accepted Accounting Principles have been omitted. The
         condensed consolidated financial statements should be read in
         conjunction with the financial statements and notes thereto included in
         the Company's Annual Report to Shareholders for the year ended June 30,
         1998.

         The information furnished reflects all adjustments which are necessary
         for a fair presentation of the Company's financial position as of
         December 31, 1998, the results of its operations and its cash flows for
         the six month periods ended December 31, 1998, and 1997. All such
         adjustments are of a normal recurring nature.

2.       The results of operations for the six months ended December 31, 1998,
         and 1997 are not necessarily indicative of the results to be expected
         for the respective full years.

3.       Certain reclassifications have been made to the 1997 financial 
         statements to conform to the 1998 presentation.

4.       Debt obligations at December 31, 1998, and June 30, 1998, are 
         summarized as follows:

<TABLE>
<CAPTION>
                                                   December 31,       June 30,
                                                       1998             1998      
                                                       ----             ----
         <S>                                       <C>                <C>
         (in thousands)
         Lines of credit                             $282,640         $227,873
         Long term debt                                97,835           19,718             
                                                     --------         --------
              Total debt obligations                 $380,475         $247,591
</TABLE>

         The Company on December 30, 1998, privately placed $75.0 million of
         6.25% Senior Notes due December 30, 2003, with no principal
         amortization, primarily to facilitate the purchase, origination and
         warehousing of loan portfolios. The Senior Notes are guaranteed by all
         material subsidiaries of the Company and are governed by various
         financial covenants which require maintenance of certain financial
         ratios.

         Subsequent to December 31, 1998, the Company entered into a committed
         one year $300.0 million commercial paper conduit facility to facilitate
         the warehousing of manufactured housing loan portfolios.




                                       4

<PAGE>   5




                               CLAYTON HOMES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

5.       The following reconciliation details the numerators and denominators 
         used to calculate basic and diluted earnings per share for the 
         respective periods:

<TABLE>
<CAPTION>
                                                 Three Months Ended                Six Months Ended
                                                    December 31,                      December 31,
                                                1998            1997               1998          1997
                                                ----            ----               ----          ----
<S>                                            <C>            <C>                 <C>           <C>
(in thousands except per share data)
Net income                                     $ 35,013       $ 31,109            $ 68,210      $ 60,788
Average shares outstanding
         Basic                                  144,658        148,395             146,118       148,306
         Add: common stock equivalents              706          1,105                 814         1,036
                                               --------       --------            --------      --------
         Diluted                                145,364        149,500             146,932       149,342
Earnings per share
         Basic                                 $    .24       $    .21            $    .47      $    .41
         Diluted                               $    .24       $    .21            $    .46      $    .41
</TABLE>










                                       5



<PAGE>   6



PART I -- FINANCIAL INFORMATION

ITEM 1.     Financial Statements.

            See pages 2 through 4.

ITEM 2.     Management's Discussion and Analysis of Financial Condition and 
            Results of Operations.

SIX MONTHS ENDED DECEMBER 31, 1998:

The following table reflects the percentage changes in retail sales for the
Company's retail and community sales centers and wholesale sales to independent
retailers. It also reflects percentage changes in the average number of
Company-owned retail centers, communities and independent retailers, the average
sales per location, and the average price per home sold in each category.

<TABLE>
<CAPTION>
                                                                First Six Months
                                                            Fiscal Year 1999 vs 1998
                                                            ------------------------
         <S>                                                <C>
         Retail
                  Dollar sales                                       +34.5%
                  Number of retail centers                           +11.6%
                  Dollar sales per retail center                     +20.5%
                  Price of home                                      + 8.9%

         Wholesale
                  Dollar sales                                       +10.5%
                  Number of independent retailers                    + 4.1%
                  Dollar sales per independent retailer              + 6.2%
                  Price of home                                      + 4.1%

         Communities
                  Dollar sales                                       -22.7%
                  Number of communities                              + 8.2%
                  Dollar sales per community                         -28.5%
                  Price of home                                      + 1.1%
</TABLE>

Total revenues for the six months ended December 31, 1998, increased 23% to $634
million, as manufactured housing sales rose 23% to $495 million, financial
services income grew 21% to $106 million and rental and other income increased
31% to $33 million.

Net sales of the Retail group rose 34% to $317 million on a 9% rise in the
average home price, a 12% increase in Company-owned sales centers, and an 11%
increase in the average number of homes sold per sales center.

Net sales of the Manufacturing group increased 11% to $166 million as the number
of homes sold increased 6% to 7,554. The average wholesale price to independent
retailers increased 4% as a result of 




                                       6


<PAGE>   7

a shift in product mix towards multi-section homes.

Net sales of the Communities group decreased 23% to $12 million as 24% less
homes were sold, while the average home selling price increased 1%.

Financial services revenues increased 21%. Interest and loan servicing revenues
increased $32 million, and insurance related revenues rose $4 million. Rental
and other income increased 31% on a 28% rise in Communities rental income.

Loans sold through asset-backed securities totaled $532 million, compared to
$459 million during the same period last year.

Financial services interest expense increased to $5 million due to higher
average borrowings. Average debt collateralized by installment contract
receivables dropped 30% to $14 million, while the weighted average interest rate
moved from 10.30% to 10.62%. The terms of the debt preclude prepayment by the
Company.

Gross profit margins increased to 31.2% from 31.0% which is attributable to an
increase in internalization.

Selling, general and administrative expenses, as a percent of revenues,
increased to 27.2% from 27.0% in the prior year period. The provision for credit
losses increased to 1.1% from 0.5% of sales.

The following table represents delinquent installment sales contracts as a
percentage of the total number of installment sales contracts which the Company
services and either owns or for which it is contingently liable. A contract is
considered delinquent if any payment is more than one month past due.


<TABLE>
<CAPTION>
                                                                      Second Quarter Ended
                                                                           December 31,
                                                                    1998                1997
                                                                    ----                ----
<S>                                                      <C>             <C>            <C>
Total delinquencies as a percentage                      *Includes       Excludes
 of contracts outstanding:                                 Access        Access
                                                           ------        -------
         All contracts                                     3.43%          2.90%         2.66%
         Contracts originated by VMF                        N/A           2.76%         2.49%
         Contracts acquired from other institutions        6.40%          3.85%         3.58%
</TABLE>

*In the month of May 1998 the Company purchased $245 million in loans from
Access Financial Lending Corporation (Access) and contracted to service an
additional $267 million - for a total of $512 million in servicing.




                                       7



<PAGE>   8

The following table sets forth information related to loan loss/repossession
experience for all installment contract receivables which the Company either
owns or for which it is contingently liable.

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                          December 31,
                                                                    1998               1997
                                                                    ----               ---- 
<S>                                                       <C>              <C>         <C>
Net losses as a percentage of average                     *Includes        Excludes
 loans outstanding (annualized):                            Access          Access
                                                           --------        --------
         All contracts                                        1.3%            1.0%      0.7%
         Contracts originated by VMF                           N/A            0.9%      0.7%
         Contracts acquired from other institutions           3.4%            2.4%      1.0%

Number of contracts in repossession:
         All contracts                                       2,014           1,577     1,396
         Contracts originated by VMF                           N/A           1,459     1,272
         Contracts acquired from other institutions            555             118       124

Total number of contracts in repossession
 as a percentage of total contracts                           1.8%            1.5%      1.5%
</TABLE>



*In the month of May 1998 the Company purchased $245 million in loans from
Access Financial Lending Corporation (Access) and contracted to service an
additional $267 million - for a total of $512 million in servicing.

The decrease in inventories as of December 31, 1998, from June 30, 1998, is
explained as follows:


<TABLE>
<CAPTION>
         Manufacturing                                                     Increase (decrease)
         -------------                                                     -------------------
         <S>                                                               <C>
                  Finished goods                                                  $  1.3
                  Raw materials                                                    (10.0)

         Retail
         ------
                  Decrease in inventory levels at 273
                    Company-owned retail centers at
                    June 30, 1998                                                   (3.0)
                  Inventory to stock 14 new
                    Company-owned retail centers                                     6.7

         Communities
         -----------
                  Increase in inventory levels at 71
                    Communities at June 30, 1998                                     1.5
                  Inventory to stock three new
                    Communities                                                       .3
                                                                                  ------
                                                                                  $ (3.2)
                                                                                  ====== 
</TABLE>

On December 31, 1998, the order backlog for the Manufacturing group (consisting
of Company-owned and independent retailer orders) increased to $35 million, as
compared to $30 million for the same period last year.



                                       8

<PAGE>   9


SECOND QUARTER ENDED DECEMBER 31, 1998:

The following table reflects the percentage changes in retail sales for the
Company's retail and community sales centers and wholesale sales to independent
retailers. It also reflects percentage changes in the average number of
Company-owned retail centers, communities and independent retailers, the average
sales per location, and the average price per home sold in each category.

<TABLE>
<CAPTION>
                                                                 Second Three Months
                                                              Fiscal Year 1999 vs 1998
                                                              ------------------------
         <S>                                                  <C> 
         Retail
                  Dollar sales                                         +43.8%
                  Number of retail centers                             +12.2%
                  Dollar sales per retail center                       +28.1%
                  Price of home                                        + 9.8%

         Wholesale
                  Dollar sales                                         +10.6%
                  Number of independent retailers                      + 3.3%
                  Dollar sales per independent retailer                + 7.1%
                  Price of home                                        + 4.8%

         Communities
                  Dollar sales                                         -12.7%
                  Number of communities                                + 9.7%
                  Dollar sales per community                           -20.4%
                  Price of home                                        + 8.6%
</TABLE>

Total revenues for the three months ended December 31, 1998, increased 27% to
$319 million, as manufactured housing sales rose 29% to $247 million, financial
services income grew 19% to $55 million and rental and other income increased
31% to $17 million.

Net sales of the Retail group rose 44% to $158 million on a 10% rise in the
average home price, a 12% increase in Company-owned sales centers, and a 17%
increase in the average number of homes sold per sales center.

Net sales of the Manufacturing group increased 11% to $84 million as the number
of homes sold increased 6% to 3,751. The average wholesale price to independent
retailers increased 5% as a result of a shift in product mix towards
multi-section homes. The Company's plant in Waycross, Georgia was damaged by
severe storms on January 2, 1999, and will be repaired by late spring. There is
not expected to be a material effect on sales or profitability as orders will be
filled from other Company facilities.

Net sales of the Communities group decreased 13% to $6 million as 20% less homes
were sold, while the average home selling price increased 9%.

Financial services revenues increased 19%. Interest and loan servicing revenues
increased $16 million, and insurance related revenues rose $2 million. Rental
and other income increased 31% on a 28% rise in 



                                       9

<PAGE>   10



Communities rental income.

Loans sold through asset-backed securities totaled $288 million, compared to
$232 million during the same period last year.

Financial services interest expense increased to $3 million due to higher
average borrowings. Average debt collateralized by installment contract
receivables dropped 29% to $14 million, while the weighted average interest rate
moved from 10.78% to 10.88%. The terms of the debt preclude prepayment by the
Company.

Gross profit margins increased to 31.9% from 30.7% which is attributable to an
increase in internalization.

Selling, general and administrative expenses, as a percent of revenues,
increased to 27.7% from 27.0% in the prior year period. The provision for credit
losses increased to 1.1% from 0.5% of sales.

The following table sets forth write-off experience for the quarters ended
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                         Second Quarter Ended
                                                                           December 31, 1998
                                                                         1998             1997
                                                                         ----             ----
<S>                                                           <C>              <C>        <C> 
Net losses as a percentage of average                         *Includes        Excludes
 loans outstanding (annualized):                                Access          Access
                                                               -------         -------
         All contracts                                           1.4%            1.1%      0.9%
         Contracts originated by VMF                              N/A            1.0%      0.8%
         Contracts acquired from other institutions              3.8%            2.7%      1.3%
</TABLE>

*In the month of May 1998 the Company purchased $245 million in loans from
Access Financial Lending Corporation (Access) and contracted to service an
additional $267 million - for a total of $512 million in servicing.








                                       10
<PAGE>   11




Liquidity and Capital Resources

Cash at December 31, 1998, was $9.0 million as compared to $1.7 million at June
30, 1998. The Company anticipates meeting cash requirements with cash flow from
operations, revolving credit lines, senior notes, and sales of installment
contract and mortgage loan receivables and GNMA certificates.

The Company has committed and uncommitted lines of credit totaling $350.0
million and $62.5 million for working capital needs of which $255.0 million and
$27.6 million, respectively, were outstanding at December 31, 1998. These lines
of credit do not require collateral and are priced on LIBOR plus rates ranging
from 0.10% to 0.45%. The committed credit lines are guaranteed by all material
subsidiaries of the Company and are governed by various financial covenants
which require maintenance of certain financial ratios.

The Company on December 30, 1998, privately placed $75.0 million of 6.25% Senior
Notes due December 30, 2003, with no principal amortization, primarily to
facilitate the purchase, origination and warehousing of loan portfolios. The
Senior Notes are guaranteed by all material subsidiaries of the Company and are
governed by various financial covenants which require maintenance of certain
financial ratios.

Subsequent to December 31, 1998, the Company entered into a committed one year
$300.0 million commercial paper conduit facility to facilitate the warehousing
of manufactured housing loan portfolios.

Year 2000

Many of the Company's systems and related software are Year 2000 compliant.
However, the Company has in place a plan to address potential disruptions to
normal business activities related to the Year 2000. Areas addressed by the plan
include information systems (hardware and software), non-information systems,
embedded chips, and supply chain continuance. Currently, the Company has
completed the awareness and assessment stages of the project and all business
units are in various stages of renovation, validation, and implementation of
solutions. A Year 2000 Steering Committee has been established and a project
leader has been assigned to oversee the process and report on a weekly basis.
The steering committee is chaired by the President of the Company.

Information systems, consisting of hardware and software, are being modified or
replaced to ensure Year 2000 compliance. The Company's hardware consists of a
mainframe, networks, and personal computers. Most desktop computers have been
tested and are in compliance. The mainframe computers are compliant with respect
to the hardware and operating systems. Many of the Company's critical software
systems, such as the General Ledger, Accounts Payable, Payroll, Human Resources,
and Credit Application Tracking systems have been replaced by Year 2000
compliant packages. The remediation process for Financial Services and other
in-house, custom written software is expected to be completed by the end of
fiscal 1999. The Company plans to test each of these software systems using a
standardized testing methodology which will include millennium testing,
millennium leap year testing, and cross over year testing.




                                       11

<PAGE>   12


Non-information systems at corporate such as HVAC, elevator, phone system,
security systems, vaults, and computer rooms are Year 2000 compliant as a direct
result of building a new Corporate office. Similar equipment at field locations
is not dependent on embedded chip technologies and is not considered an area
of material exposure.

The Company has completed its surveying of major suppliers and vendors of raw
materials for Year 2000 compliance. The Company is not directly dependent on
electronic data interchange (EDI) for the purchase of raw materials, though some
of the Company's suppliers may be. Moreover, the bulk of raw materials (mostly
lumber) is readily available from other suppliers. Possible interruptions in
the supply chain can be circumvented by purchasing raw materials from an
alternate local supplier. Responses from the Company's surveys provide assurance
that our critical suppliers, including Financial Services providers, plan to be
compliant by the middle of 1999.

The costs associated with Year 2000 compliance are not expected to exceed
$500,000 or to have a material impact on the Company's financial position,
results of operations, or cash flows in future periods. Most of the hardware,
software, and non-information system replacements have been due to growth of the
Company and Year 2000 compliance is a byproduct of the replacement systems. The
custom written software is addressed by the in-house programming staff and
contract programming services. Most costs directly associated with Year 2000
compliance will be incurred during fiscal 1999.

Contingency planning, both short term and long term, for critical processes for
each business group has started and will be completed by the end of fiscal year
1999. To mitigate any unexpected problems with the Year 2000, plans could
include, but are not limited to: (1) rapid transitions to alternative suppliers
of services and materials, (2) replacement of errant equipment or software, (3)
manual ledgers, (4) increased work hours by Company personnel, (5) temporary
personnel, (6) outsourcing, and (7) routine backup of critical data to different
platforms. Should the Company be required to execute a long term contingency
plan, an adverse material effect to operations could result.

The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial condition. The Company believes that the
risk of failure to the Housing and Communities business units is not material
due to the low-technology nature of those businesses and manual processes are in
use for backup procedures now. Due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures could have
a material impact on the Company's results of operations, liquidity or financial
condition. The Year 2000 Project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its critical suppliers and
financial services providers. The Company believes that, with the implementation
of new business systems and completion of the Project as scheduled, the exposure
to significant interruptions of normal operations should be reduced.

New Accounting Pronouncements

During fiscal 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures
About Segments of an Enterprise and Related Information. SFAS 131 requires new
disclosures of segment information in a company's financial statements and is
effective for fiscal years beginning after December 15, 1997. These 



                                       12

<PAGE>   13


statements will be effective for the Company in fiscal 1999. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations, or cash flows.

On June 15, 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Financial Instruments and Hedging Activities. SFAS 133 establishes a new model
for accounting for derivatives and hedging activities based on these fundamental
principles: i) derivatives represent assets and liabilities that should be
recognized at fair value on the balance sheet; ii) derivative gains and losses
do not represent liabilities or assets and therefore, should not be reported on
the balance sheet as deferred credits or deferred debits; and iii) special hedge
accounting should be provided only for transactions that meet certain specified
criteria, which include a requirement that the change in fair value of the
derivative be highly effective in offsetting the change in the fair value or
cash flows of the hedged item. This statement is effective for fiscal years
beginning after June 15, 1999, and is not expected to have a material effect on
the Company's financial position or results of operations.

Additionally in October 1998, the FASB issued SFAS 134, Accounting for
Mortgaged-Backed Securities Retained after the Securitization of Loans Held for
Sale by a Mortgage Banking Enterprise. SFAS 134 requires that after an entity
engaged in mortgage banking activities has securitized mortgage loans that are
held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. The Company is currently assessing the effect, if
any, on its financial statements of implementing SFAS 134. SFAS 134 is effective
for the first fiscal quarter beginning after December 15, 1998.

Forward Looking Statements

Certain statements in this quarterly report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks fall generally within
three broad categories consisting of industry factors, management expertise, and
government policy and economic conditions. Industry factors include such matters
as potential periodic inventory adjustments by both captive and independent
retailers, general or seasonal weather conditions affecting sales and revenues,
catastrophic events impacting insurance reserves, cost of labor and/or raw
materials and industry consolidation trends creating fewer, but stronger
competitors capable of sustaining competitive pricing pressures.

Management expertise is affected by management's overall ability to anticipate
and meet consumer preferences, maintain successful marketing programs, continue
quality manufacturing output, keep a strong cost management oversight, meet the
Year 2000 compliance plan, and project stable gain on sale accounting
assumptions. Lastly, management has the least control over government policy and
economic conditions such as prevailing interest rates, government monetary
policy, stable regulation of manufacturing standards, consumer confidence,
favorable trade policies, and general prevailing economic and employment
conditions.



                                       13


<PAGE>   14



PART II -- OTHER INFORMATION

ITEM 1 - There were no reportable events for Item 1 through Item 5.

ITEM 6 - Exhibits and Reports for Form 8-K.

(a)      27.  Financial Data Schedule (SEC use only)

(b)            Reports on Form 8-K.
               Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior 
               Subordinate Pass-Through Certificates Series 1998D.  
               Filed November 17, 1998.





                                       14


<PAGE>   15



                               CLAYTON HOMES, INC.

                                   SIGNATURES

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


                                         CLAYTON HOMES, INC.
                                         -------------------
                                         (Registrant)


Date:  February 11, 1999                 /s/  Kevin T. Clayton          
       -------------------------         ---------------------------------------
                                         Kevin T. Clayton
                                         President and Chief Operating Officer



Date:  February 11, 1999                 /s/  Amber W. Krupacs         
       -------------------------         ---------------------------------------
                                         Amber W. Krupacs
                                         Vice President, Finance and Secretary



Date:  February 11, 1999                 /s/  Greg A. Hamilton            
       -------------------------         ---------------------------------------
                                         Greg A. Hamilton
                                         Vice President and Controller








                                       15


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CLAYTON HOMES, INC. FOR THE SIX MONTHS ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          JUN-30-1999
<PERIOD-START>                             JUL-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                           8,995
<SECURITIES>                                         0
<RECEIVABLES>                                  925,845
<ALLOWANCES>                                    26,276
<INVENTORY>                                    163,933
<CURRENT-ASSETS>                                     0
<PP&E>                                         352,268
<DEPRECIATION>                                  73,913
<TOTAL-ASSETS>                               1,552,199
<CURRENT-LIABILITIES>                          103,924
<BONDS>                                        380,475
                                0
                                          0
<COMMON>                                        14,441
<OTHER-SE>                                     875,568
<TOTAL-LIABILITY-AND-EQUITY>                 1,552,199
<SALES>                                        494,599
<TOTAL-REVENUES>                               633,806
<CGS>                                          340,075
<TOTAL-COSTS>                                  512,757
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                 5,259
<INTEREST-EXPENSE>                               7,480
<INCOME-PRETAX>                                108,310
<INCOME-TAX>                                    40,100
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    68,210
<EPS-PRIMARY>                                      .47
<EPS-DILUTED>                                      .46
        

</TABLE>


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