1
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934

For the Fiscal Year December 31, 1998

[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934

For the transition period from _______________ to ________________

Commission File Number: 0-19390
TREADCO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware 7534 and 5531 71-0706271
- -------------------------------------- ------------------------------------- -------------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)

1101 South 21st Street
Fort Smith, Arkansas 72901
(501) 784-6400
-------------------------------------
(Address, including zip code, and
telephone number, including area code, of registrant's
principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None
----------------
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value Nasdaq Stock Market / NMS
- ---------------------------------------------------- --------------------------------------------------
(Title of each class) (Name of each exchange
on which registered)

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 10, 1999 was $21,944,000.

The number of shares of Common Stock, $.01 par value, outstanding as of March
10, 1999 was 5,072,255.

DOCUMENTS INCORPORATED BY REFERENCE:

None

TREADCO, INC.
FORM 10-K

TABLE OF CONTENTS

ITEM PAGE
NUMBER NUMBER

PART I

Item 1. Business ............................................................................... 3
Item 2. Properties ............................................................................. 9
Item 3. Legal Proceedings ...................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders .................................... 9

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................................... 10
Item 6. Selected Financial Data ................................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................. 12
Item 7A. Market Risk ............................................................................ 22
Item 8. Financial Statements and Supplementary Data............................................. 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................... 21

PART III

Item 10. Directors and Executive Officers of the Registrant...................................... 22
Item 11. Executive Compensation ................................................................. 26
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 29
Item 13. Certain Relationships and Related Transactions ......................................... 30

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 32

Exhibit Index ........................................................................................ 59

PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

CORPORATE PROFILE

Treadco, Inc. (the "Company") is the nation's largest independent truck tire
retreader and the fourth largest commercial truck tire dealer. The Company has
56 locations in the United States located primarily in the south, southwest,
lower midwest and west.

ORGANIZATION

The Company was organized in June 1991 as the successor to the truck tire
retreading and new tire sales business conducted and developed by a wholly owned
subsidiary of Arkansas Best Corporation ("ABC"). In September 1991, the Company
completed an initial public offering of 2,500,000 shares of common stock at $16
per share. At December 31, 1998, ABC owned approximately 49% of the Company's
outstanding shares.

Arkansas Best Corporation Proposed Merger

On January 22, 1999, ABC announced that it had submitted a formal proposal to
the Company's Board of Directors in which the outstanding shares of the
Company's common stock not owned by ABC would be acquired for $9.00 per share in
cash. The announcement stated that the proposal had the support of Shapiro
Capital Management Company, Inc., the Company's largest independent stockholder,
which beneficially owns 1,132,775 shares (or approximately 22%) of the common
stock of the Company. On March 15, 1999, ABC and the Company signed a definitive
merger agreement for the acquisition of all shares of the Company's stock not
owned by ABC for $9.00 per share in cash via a tender offer, to commence within
five business days after the signing of the merger agreement. The tender offer
is subject to certain conditions including ABC owning two-thirds of the
outstanding shares of the Company upon completion of the tender.

BACKGROUND

The Company was initially established in 1958 to retread truck tires for ABF
Freight System, Inc. ("ABF"), another subsidiary of ABC, from a single location
in Little Rock, Arkansas. In 1969, the Company embarked on an expansion program
designed to market precured retreads to other trucking companies in the region.
The Company opened its second production facility in 1969 in Fort Smith,
Arkansas, its third in Pine Bluff, Arkansas in 1972 and since then has grown
steadily to operate 23 production/sales facilities and 33 additional sales
locations, primarily in the south, southwest, lower midwest and west.

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ITEM 1. BUSINESS -- Continued
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In order to fully service its customers, the Company also began to sell new
truck tires in 1972, and currently retails new truck tires manufactured by
Bridgestone, Michelin, Dunlop, General, Kumho, and other manufacturers. Today,
retread tire sales and new tire sales are part of a unified service that the
Company provides principally to its niche market of mid-sized commercial truck
fleet operators that maintain their own in-house truck operations and rely on
the Company's expertise in servicing comprehensive periodic truck tire
replacement and retread management programs.

During the past five years, the Company has grown at a compound annual rate of
9.9%, consisting of growth in retread sales of 4.0%, new tire sales of 13.0% and
service revenues of 27.9%. The Company expects to continue expanding its
business consistent with its historic policy of capitalizing on growth
opportunities while maintaining the same high quality of service to its
customers.

During 1996, the Company converted all of its production facilities from a
previous tread rubber and materials supplier to Oliver Rubber Company ("Oliver")
as a supplier. The conversion was completed in phases throughout the first three
quarters of 1996 with approximately one-third of its production facilities
converted each quarter. (See "Narrative Discussion of Business - Supplier
Relationships".)

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The response to this portion of Item 1 is included in the Company's financial
statements for the year ended December 31, 1998, which is submitted as a
separate section of this report.

RETREADING PROCESSES

The Company uses the precure process to retread tires at its 23 production/sales
facilities. The Company discontinued production using the mold cure process at
its St. Louis facility in March 1998.

During the initial stage of the precure process, used tires, or casings, are
delivered to a Company production facility where the casing is inspected for
punctures, ruptures or other defects. The casing is inspected using two
inspection methods to detect defects that are not visible to the human eye. If
the casing passes these tests, it is deemed to be retreadable and is then
inflated and the remaining tread is buffed off to assure a rounded, true running
tire. The undertread remains intact, providing extra protection to underlying
belts and plies.

Next a specific tread design is measured from strips of tread rubber, cut and
applied to the casing. A flexible rubber envelope then seals each tire which is
placed in a bonding chamber. Air pressure in the chamber creates uniform force,
applying pressure on all points of the tire. The tread is bonded to the casing
by using a combination of heat and air pressure to cure the encased tire in the
bonding chamber.

Cure times, heat temperatures and pressures are computer-controlled to bond
treads securely while protecting the future retreadability of the casings.

The principal raw material in manufacturing retreaded truck tires is synthetic
rubber, which is comprised of styrene and butadiene, both petroleum derivatives.
Thus, the commodity price of oil directly affects the price of the Company's
principal raw materials. However, because retreading

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ITEM 1. BUSINESS -- Continued
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uses roughly one-third of the amount of oil that the manufacture of a new tire
requires, retreads maintain a competitive price advantage in comparison to new
tires, particularly when oil prices increase dramatically.

SUPPLIER RELATIONSHIPS

The Company, prior to 1996, operated primarily as a franchise of Bandag,
Incorporated ("Bandag"), utilizing equipment and rubber products supplied by
Bandag.

In October 1995, the Company signed an agreement with the Oliver Rubber Company
("Oliver") to be a supplier of equipment and related materials for all of the
Company's facilities which ceased being Bandag franchised locations. In 1996,
the Company entered into comprehensive, multi-year license agreements for the
majority of its locations with Oliver. The conversion to Oliver from Bandag was
completed in phases throughout the first three quarters of 1996, with
approximately one-third of its production facilities converted each quarter.
Under the Oliver license agreement, the Company purchases from Oliver precured
tread rubber and bonding cushion gum and PNEUFLEX tread rubber (collectively
"Rubber Products"). The Company's obligation to purchase Rubber Products from
Oliver is subject to (i) Oliver's continuing to produce Rubber Products of no
less quality and durability than it presently produces, and (ii) Oliver's
overall pricing program for the Company.

SALES AND MARKETING

The Company's sales and marketing strategy is based on its service strengths,
its network of production and sales facilities and its strong regional
reputation. The Company targets mid-sized companies that maintain their own
in-house trucking operations, to which it offers (i) weekly service visits, (ii)
full pickup, repair and delivery service, (iii) comprehensive tire retreading
and (iv) new tire availability. In addition to excellent service, the Company
offers broad geographical coverage across the South, Southwest, lower Midwest
and West. This coverage is important for customers because they are able to
establish uniform pricing, utilize national account billing processes of major
new tire suppliers, and generally reduce the risk of price fluctuations. In
addition, the Company offers customers a history of reliable service with sound
financial and operating practices.

The Company markets its products through sales personnel located at each of its
23 production/sales facilities and 33 additional sales facilities. The Company's
sales people make personal sales calls on existing customers, typically on the
same day each week. They pick up casings to be retreaded and deliver retread and
new tires, as well as call on specifically targeted potential new customers. The
Company locates its plants in close proximity to interstate highways and
operates mobile service trucks in order to provide ready accessibility and
convenience to its customers, particularly fleet owners.

The trucking industry continuously faces rising costs on a number of different
fronts, including government regulations on safety, maintenance and fuel
economy. As a result, trucking companies continually seek ways of obtaining more
mileage out of new tires and less expensive ways of replacing old tires.
Retreading tires is significantly less expensive than buying new tires (about
one-third of the cost) and generally last as long as new tires used in similar
applications. Moreover, most tire casings can be retreaded one or two times. The
Company's average retail charge for retreading a customer's casing is
approximately $79, compared to an average retail selling price of approximately
$227 for a new tire. The Company also sells retreads including casings not
supplied

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ITEM 1. BUSINESS -- Continued
- --------------------------------------------------------------------------------

by the customer, for approximately $164 per tire. The number of retread tires
sold to customers supplying their own casings accounts for about 74% of the
total retread tires sold, with the remainder representing sales of retreaded
casings not supplied by the customer. Since tire expenses are a significant
operating cost for the trucking industry, many truck fleet operators develop
comprehensive periodic tire replacement and retread management programs, which
the Company actively assists its customers in formulating. The Company markets
its expertise to these operators as a retreader and new tire retailer that can
fully service tire management programs.

There are basically three types of tires on a tractor-trailer combination: front
steering wheels, rear tractor drive wheels and trailer wheels. Industry practice
is to utilize retreads in the drive and trailer positions; new tires are
generally placed on the steering axle. As tires are retreaded, they are moved
back to the drive and trailer positions under the operator's tire management
program. Most retreads have substantially the same life span as a new tire used
in similar applications. In managing a trucking fleet's tire management program,
the Company supplies both new and retread tires to its customers.

The following table illustrates the growth of the Company's retread, new tire
and service business:

- --------------------------------------------------------------------------------

RETREAD NEW TIRE SERVICE TOTAL
REVENUES REVENUES REVENUES REVENUES
-------- -------- -------- --------
(IN MILLIONS)

1994 .......................................... $ 69.8 $ 63.6 $ 7.3 $ 140.7
1995 .......................................... 69.2 68.8 9.9 147.9
1996 .......................................... 59.8 72.4 12.0 144.2
1997 .......................................... 65.3 81.0 15.0 161.3
1998 .......................................... 70.8 91.6 18.9 181.3

- --------------------------------------------------------------------------------

None of the Company's customers represented more than 3% of the Company's sales
for 1998. Affiliates of ABC accounted for approximately $2.2 million (1.2%) of
sales in 1998 and has not accounted for more than 3% of the Company's revenues
in any one of the last ten years.

In an effort to fully service its customers, the Company sells new truck tires
manufactured by Bridgestone, Michelin, Dunlop, General, Kumho, and other
manufacturers. The Company enjoys long-term relationships with its suppliers,
having served as a Bridgestone dealer for 26 years and as a Michelin dealer for
22 years. According to Dunlop, the Company is their largest domestic truck tire
dealer, and according to Bridgestone and Michelin, the Company is one of their
largest domestic truck tire dealers. These relationships reflect stable,
consistent working relationships which the Company believes provide it with
reliable sources of new tires and enable the Company to price its new tires
competitively.

COMPETITIVE FACTORS AND INDUSTRY CONDITIONS

According to Tire Retreading/Repair Journal (December 1998), the total truck
tire retread production nationally in 1998 was approximately 17.7 million units.
With its 673,000 retreads sold in 1998, the Company represented approximately
3.8% of the national market. Tire Retreading/Repair Journal also estimates that
the new replacement truck tire market nationally in 1998 was approximately 13.2
million units. With its 515,000 new tires sold in 1998, the Company represented
approximately 3.9% of the national market. During the last five years, the
Company's relative market share of the

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ITEM 1. BUSINESS -- Continued
- --------------------------------------------------------------------------------

national retread market in units has grown slightly from 3.5% to 3.8%, while its
share of the national new replacement truck tire market has grown from 2.4% to
3.9%.

Historically, as a Bandag franchisee, the Company competed primarily against
smaller independent dealers in a highly fragmented market. Following the
termination of its Bandag franchise agreements in 1996, the Company experienced
increased competition as Bandag granted additional franchises in some locations
it served. The new competition led to increased pricing pressures in the
marketplace. Also, as anticipated, Bandag targeted the Company's customers which
resulted in the loss of a substantial amount of national account business in
1996. In addition, in many cases, business retained was at lower profit margins.
The Company's ability to offer excellent service to its niche market customers,
competitive pricing, central administration and purchasing for its production
facilities, its ability to avoid interim warehousing costs, and its multiple
facilities covering key regional trucking routes in its market all combine to
appeal to fleet customers looking for cost-effective, broad geographical
coverage and reliability of service and, in management's opinion, enable the
Company to compete effectively.

In September 1997, Michelin Retreading Technologies Inc., an affiliate of
Michelin North America, announced that it would enter the truck tire retreading
business by offering franchises to selected Michelin tire dealers throughout
North America. It is unknown what long-term impact Michelin's entry into the
truck tire retreading business will have on the Company's existing markets.

During the fourth quarter of 1997, Bandag announced that it had acquired five of
its franchisees. The Company competes directly in certain markets with some of
these franchisees. It is unknown what long-term impact the acquisition of these
franchisees by Bandag will have on these markets.

According to Tire Retreading/Repair Journal (December 1998), there were
approximately 1,291 tire retreading production facilities nationwide (an
estimated 1,120 produce truck retreads) and innumerable new tire dealers. No
single dealer dominates the retread or new tire markets. While the Company is
the largest independent truck tire retreader, and third largest overall,
Goodyear is the largest single provider of retread services, which it offers
through its dealers who also sell new Goodyear tires.

The new truck tire business is also highly competitive and includes various
manufacturers, dealers and retailers. Generally, demand for new truck tires is
closely related to the strength of the regional and, ultimately, national
economies. As a low-cost alternative to new tires, demand for retread tires may
be less sensitive to economic downturns than the demand for new tires. The
Company has also experienced reduced demand for retreads and new truck tires in
the winter months due to more difficult driving and tire maintenance conditions
resulting from inclement weather.

In addition to competing by offering excellent service and competitive pricing,
the Company competes with new tire retailers by offering substantially the same
warranty coverage on retreads as is provided for new tires, emergency tire
assistance programs which provide for 24-hour, year-round emergency roadside
service and convenient sales and retreading locations.

INSURANCE AND SAFETY

Generally, claims exposure for the Company consists of general and auto
liability, property damage and bodily injury and workers' compensation. The
Company is effectively self-insured for the first $300,000 of each workers'
compensation loss and $200,000 of each general and auto liability loss. The
Company maintains insurance adequate to cover losses in excess of such amounts.
The

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ITEM 1. BUSINESS -- Continued
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Company has been able to obtain adequate coverage and is not aware of problems
in the foreseeable future which would significantly impair its ability to obtain
adequate coverage at comparable rates for its tire operations.

ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS

The Company's business is affected by a number of governmental regulations
relating to the development, production and sale of retread and new tires, to
the raw materials used to manufacture such products (including petroleum,
styrene and butadiene), and to environmental, tax and safety matters. In
addition, the retreading process creates rubber particulate, or "dust," which
requires gathering and disposal, and the Company disposes of used and
nonretreadable tire casings, both of which require compliance with environmental
and disposal laws. Laws protecting the environment have become more stringent.
In some situations, the Company could be liable for disposal problems, even if
the situation resulted from previous conduct of the Company that was lawful at
the time or from improper conduct of, or conditions caused by, persons engaged
by the Company to dispose of particulate and discarded casings. Such cleanup
costs or costs associated with compliance with environmental laws applicable to
the tire retreading process could be substantial and have a materially adverse
effect on the Company's financial condition. Management believes it is in
compliance with all laws applicable to such operations, however, and is not
aware of any situation or condition that it believes is likely to have a
material adverse effect on the Company's financial condition.

EMPLOYEES

At December 31, 1998, the Company had approximately 981 full-time employees: 274
in production; 244 in service positions; 172 in sales positions; 103 in
warehouse and delivery positions; and 188 in managerial, office and
administration. A total of 328 of such employees are salaried, while the
remaining employees are paid on an hourly basis. The Company's management
believes it enjoys a good relationship with its employees.

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ITEM 2. PROPERTIES

The Company currently owns 24 and leases 32 facilities. Twenty-three of these
facilities include space for the Company's production operations, while
remaining space is devoted to the Company's sales operations. The Company
believes that it will be able to renew its existing leases as they expire or
find suitable alternative locations, either of which may involve increased
rental expense. The leases generally provide for a base rental, as well as
charges for real estate taxes, insurance, common area maintenance and various
other items. The Company also owns its headquarters facility.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is named as a defendant in legal actions, the
majority of which arise out of the normal course of its business. The Company is
not a party to any pending legal proceedings which management believes to be
material to the financial condition of the Company. The Company generally
maintains liability insurance against most risks arising out of the normal
course of its business.

On October 30, 1995, the Company filed a lawsuit in Arkansas State Court,
alleging that Bandag Incorporated ("Bandag") and certain of its officers and
employees had violated Arkansas statutory and common law in attempting to
solicit the Company's employees to work for Bandag or its competing franchisees
and attempting to divert customers from the Company. At the Company's request,
the Court entered a Temporary Restraining Order barring Bandag, the Company's
former officers J.J. Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag
officers Martin G. Carver and William Sweatman from soliciting or hiring the
Company's employees to work for Bandag or any of its franchisees, from diverting
or soliciting the Company's customers to buy from Bandag franchisees other than
the Company, and from disclosing or using any of the Company's confidential
information. On November 8, 1995, Bandag and the other named defendants asked
the State Court to stop its proceedings, pending a decision by the United States
District Court, Western District of Arkansas, on a Complaint to Compel
Arbitration filed by Bandag in the Federal District Court on November 8, 1995.
The Federal District Court ruled that under terms of the Company's franchise
agreements with Bandag, all of the issues involved in the Company's lawsuit
against Bandag were to be decided by arbitration. The arbitration hearing began
September 21, 1998, and in December 1998, prior to the completion of the
arbitration, the Company entered into a settlement with Bandag, and certain of
Bandag's current and former employees. Under the settlement terms, the Company
received a one-time payment of $9,995,000 in settlement of all the Company's
claims. The settlement resulted in other income for the Company of $9,124,000.
The settlement payment was used to reduce the Company's outstanding borrowings
under its Revolving Credit Agreement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders during the fourth quarter
ended December 31, 1998.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock trades on the Nasdaq Stock Market under the symbol
"TRED." The following table sets forth the high and low sale prices of the
Common Stock as reported by Nasdaq and the dividends declared during the periods
indicated.

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CASH
HIGH LOW DIVIDEND
---- --- --------

1998
First Quarter .............................................. $ 10.000 $ 7.000 $ -
Second Quarter ............................................. 10.125 7.625 -
Third Quarter .............................................. 9.375 5.875 -
Fourth Quarter ............................................. 7.500 4.750 -

1997
First Quarter .............................................. $10.500 $ 8.625 $ .04
Second Quarter ............................................. 10.500 8.125 .04
Third Quarter .............................................. 12.750 9.375 .04
Fourth Quarter ............................................. 13.500 9.125 -

- --------------------------------------------------------------------------------

At March 10, 1999, there were 5,072,255 outstanding shares of the Company's
common stock which were held by 171 stockholders of record.

The declaration, payment and amount of dividends are subject to the discretion
of the Board of Directors. It is not expected that the Company will pay
dividends prior to the proposed merger with ABC, described below.

Arkansas Best Corporation Proposed Merger

On January 22, 1999, ABC announced that it had submitted a formal proposal to
the Company's Board of Directors in which the outstanding shares of the
Company's common stock not owned by ABC would be acquired for $9.00 per share in
cash. The announcement stated that the proposal had the support of Shapiro
Capital Management Company, Inc., the Company's largest independent stockholder,
which beneficially owns 1,132,775 shares (or approximately 22%) of the common
stock of the Company. On March 15, 1999, ABC and the Company signed a definitive
merger agreement for the acquisition of all shares of the Company's stock not
owned by ABC for $9.00 per share in cash via a tender offer to commence within
five business days after the signing of the merger agreement. The tender offer
is subject to certain conditions including ABC owning two-thirds of the
outstanding shares of the Company upon completion of the tender.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere
herein.

- --------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF EARNINGS DATA:
Revenues ................................. $ 181,293 $ 161,276 $ 144,154 $ 147,906 $ 140,678
Costs and expenses ....................... 178,801 163,785 149,337 142,920 129,162
Operating income (loss) .................. 2,492 (2,509) (5,183) 4,986 11,516
Interest expense, net .................... (1,086) (1,213) (873) (461) (236)
Amortization expense ..................... (636) (723) (723) (723) (738)
Settlement of litigation ................. 9,124 -- -- -- --
Other income ............................. 579 567 1,427 300 232
Income (loss) before income taxes ........ 10,473 (3,878) (5,352) 4,102 10,774
Provision (credit) for income taxes ...... 4,092 (1,374) (2,093) 1,711 4,265
Net income (loss) ........................ $ 6,381 $ (2,504) $ (3,259) $ 2,391 $ 6,509

Net income (loss) per share:
Basic ................................. $ 1.26 $ (.49) $ (.64) $ .47 $ 1.29
Diluted ............................... $ 1.25 $ (.49) $ (.64) $ .47 $ 1.28
Average shares outstanding:
Basic ................................. 5,072 5,072 5,072 5,072 5,055
Diluted ............................... 5,092 5,072 5,072 5,074 5,066

Cash dividends paid per share ............ $ -- $ .12 $ .16 $ .16 $ .16

BALANCE SHEET DATA:
Working capital .......................... $ 23,673 $ 27,273 $ 34,043 $ 44,878 $ 37,364
Total assets ............................. 107,370 100,458 105,416 93,035 89,583
Current portion of long-term debt ........ 2,545 2,305 1,645 863 123
Long-term debt (less current portion) .... 6,159 12,884 19,610 10,000 3,863
Stockholders' equity ..................... 65,216 58,835 61,948 66,018 64,438

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SIGNIFICANT EVENTS

Arkansas Best Corporation Proposed Merger

On January 22, 1999, ABC announced that it had submitted a formal proposal to
the Company's Board of Directors in which the outstanding shares of the
Company's common stock not owned by ABC would be acquired for $9.00 per share in
cash. The announcement stated that the proposal had the support of Shapiro
Capital Management Company, Inc., the Company's largest independent stockholder,
which beneficially owns 1,132,775 shares (or approximately 22%) of the common
stock of the Company. On March 15, 1999, ABC and the Company signed a definitive
merger agreement for the acquisition of all shares of the Company's stock not
owned by ABC for $9.00 per share in cash via a tender offer to commence within
five business days after the signing of the merger agreement. The tender offer
is subject to certain conditions including ABC owning two-thirds of the
outstanding shares of the Company upon completion of the tender. ABC currently
owns approximately 49% of the Company's shares.

Conversion to Oliver

In August 1995, Bandag, Incorporated ("Bandag"), the Company's primary tread
rubber supplier and franchiser, informed the Company that it would not renew the
Company's eight franchise agreements which expired in the summer of 1996. The
Company subsequently entered into an agreement with Oliver Rubber Company
("Oliver") to be a supplier of equipment and related materials for the eight
franchised locations and any other Company facility which ceased being a Bandag
franchised location. Bandag subsequently advised the Company that unless the
Company used the Bandag retread process exclusively, Bandag would not renew any
of the Company's remaining franchise agreements when they expired.

During 1996, the Company converted all of its production facilities that were
operated as Bandag retread franchises to Oliver licensed facilities. The
conversion was completed in phases throughout the first three quarters of 1996
with approximately one-third of its production facilities converted each
quarter.

The conversion resulted in up to two lost production days during each change,
some short-term operational inefficiencies and time lost as production employees
familiarized themselves with the new equipment. Also, management was required to
spend time with the conversion at the expense of the normal daily operations.

In October 1995, the Company filed a lawsuit in Arkansas State Court, against
Bandag and certain of its officers and employees arising out of the two
companies' former franchise relationship. Subsequently, Bandag filed a Complaint
to Compel Arbitration with the United States District Court, Western District of
Arkansas, which was granted.

The arbitration hearing began in September 1998. In December 1998, prior to the
conclusion of the arbitration, Bandag and the Company reached a settlement
agreement. Under the agreement, Bandag paid the Company $9,995,000 in settlement
of all the Company's claims. The settlement resulted in other income of
$9,124,000.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

RESULTS OF OPERATIONS

The Company is affected by seasonal fluctuations, which influence the demand for
retreads and new tires. The Company generally experiences reduced demand for
retreads and new tires in the first quarter due to more difficult driving and
tire maintenance conditions resulting from inclement weather. The Company is
also subject to cyclical national and regional economic conditions.

The Company is a party to a Transition Services Agreement with ABC whereby ABC
provides services in the areas of accounting, data processing, finance, legal,
tax, cash management, human resources, and risk management activities. The
Transition Services Agreement is effective indefinitely, unless terminated by
either party on 90 days' notice. The agreement requires the Company to pay a
service fee for these services based on the value and cost of services provided.
Certain other expenses, primarily data processing and programming services, are
charged to the Company based on their actual cost to ABC. The Company believes
that charges under the Transition Services Agreement are indicative of what the
costs would have been on a stand-alone basis.

The following table sets forth for the periods indicated a summary of sales by
category. Retread sales consists of the sale of customer retreads, stock casings
and retreads, and used tires. New tire sales consist of the sale of new tires
and commissions on the sale of new tires to new tire manufacturer national
accounts. Service consists of the sale of wheels and accessories and fees
charged to customers for services provided.

YEAR ENDED DECEMBER 31
1998 1997 1996
------------- ------------- -------------

SALES
Retread ........................................... $ 70,832,211 $ 65,325,556 $ 59,762,514
New tire........................................... 91,560,346 81,008,925 72,402,695
Service............................................ 18,900,651 14,941,730 11,988,918
------------- ------------- -------------
$ 181,293,208 $ 161,276,211 $ 144,154,127
============= ============= =============

The following table sets forth for the periods indicated a summary of the
Company's operating costs and expenses as a percentage of sales.

YEAR ENDED DECEMBER 31
1998 1997 1996
---- ---- ----

COSTS AND EXPENSES
Materials and cost of new tires............................................ 65.2% 68.1% 72.0%
Salaries and wages......................................................... 17.6 17.1 16.1
Depreciation and amortization.............................................. 3.5 3.5 3.0
Administrative and general................................................. 12.4 12.9 12.5
---- ----- -----
98.6% 101.6% 103.6%
==== ===== =====

Competitive Factors and Industry Conditions

During 1998 and the last half of 1997, there was a shortage of new tires
relative to demand. According to published reports, new tire manufacturers are
investing in plant expansion to increase capacity at their truck-tire production
plants. While the increased capacity should alleviate new tire shortages, a
decline in the demand for new tires could result in over-capacity in new tire
manufacturing. If new tire prices were to decline as a result, there would
likely be pressure on retread demand and pricing, which would adversely affect
the Company.

13
14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

Other Events

On March 31, 1998, the Company and Bridgestone/Firestone, Inc. ("Bridgestone")
signed an agreement whereby Bridgestone assumed operations of the Company's
Oncor retreading facility located in Hazelwood, MO. The Company will continue to
market the Oncor retread tires produced at this plant. The book value of the
assets sold to Bridgestone in connection with the transaction was approximately
equal to the related debt obligation to Bridgestone of $1.8 million which was
extinguished by the transaction. Accordingly, no significant gain or loss was
recognized by the Company on the transaction. The Company sold $4.8 million and
$3.7 million of Oncor retreaded tires in 1998 and 1997, respectively.

1998 Compared to 1997

Sales (including sales to affiliates) for 1998 increased 12.4% to $181.3 million
from $161.3 million for 1997. Sales from retreading for the year were $70.8
million, an 8.4% increase from $65.3 million during 1997. In 1998, retreaded
truck tire units sold increased 8.1% to approximately 673,000 tires. The average
sales price for retreads increased due primarily to a 3% price increase
implemented on October 1, 1998. Sales of new tires for 1998 were $91.6 million,
a 13.0% increase from $81.0 million during 1997. Although there was an
industry-wide shortage of new tires in 1998, new tire units sold increased 15.8%
to 515,000 tires (including 129,000 new tires sold to national account
customers). The Company had approximately 32,000 units on back order at December
31, 1998. The average sales price of new tires sold decreased approximately 1.2%
from 1997 due to the mix of new tires sold. Commissions on national account
sales also increased by 17.1% while the commission per tire sold decreased by
2.8%. Service revenues for 1998 were $18.9 million, an increase of 26.5% from
$15.0 million in 1997.

For 1998, "same store" sales increased 10.9% and "new store" sales accounted for
1.5% of the total increase from 1997. "Same store" sales include both production
facilities and sales locations in existence for the entire years of 1998 and
1997. "New store" sales resulted from one new sales location in 1998 and one new
sales location in 1997.

The decrease in materials and cost of new tires of 2.9% as a percent of sales
resulted primarily from improved casing costs and inventory controls. Salaries
and wages as a percent of sales increased 0.5% in 1998 when compared to the same
period in 1997. This increase resulted primarily from the implementation of a
gross profit-based commission plan for salesmen. Administrative and general
expenses as a percent of sales decreased 0.5% in 1998 when compared to the same
period in 1997, due to several factors, including improved collections of
accounts receivable and the impact of increased sales on fixed overhead costs.

14
15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

The Company's ability to return to profitability levels achieved prior to 1995
is substantially dependent upon improved pricing and replacement of retread
volume, which declined beginning in 1995 primarily due to national account
business which was lost to competitors. Also, new business frequently has lower
margins than established accounts due to increased competition in the Company's
markets.

Interest expense (net of interest income) for 1998 was $1,086,000 compared to
$1,213,000 for 1997. The decrease resulted primarily from a reduction in debt
outstanding.

The difference between the effective tax rate for 1998 and the federal statutory
rate resulted primarily from state income taxes, amortization of goodwill and
other nondeductible expenses (see notes to the financial statements).

Deferred tax assets totaled $1,632,286 at December 31, 1998 while deferred tax
liabilities totaled $126,343, resulting in net deferred tax assets of
$1,505,943. The Company believes that such assets will be realized through
reduction of future taxable income. Management has considered appropriate
factors in assessing the probability of realizing these tax assets. These
factors include the Company's historical profitability, the existence of
substantial taxable income in 1998, the impact on 1997 and 1996 operating
results of the conversion to Oliver and the substantial improvement in 1998
operating income compared to 1997. Management will continually evaluate the
realizability of deferred tax assets on a quarterly basis by assessing the need
for any valuation allowance.

1997 Compared to 1996

Sales (including sales to affiliates) for 1997 increased 11.9% to $161.3 million
from $144.2 million for 1996. Sales from retreading for the year were $65.3
million, a 9.3% increase from $59.8 million during 1996. In 1997, retreaded
truck tire units sold increased 9.5% to approximately 622,000 tires. The average
sales price for retreads decreased in 1997 as the Company faced new competition
at many locations, which caused added pressure on selling prices. Sales of new
tires for 1997 were $81.0 million, an 11.9% increase from $72.4 million during
1996. Although there was a lack of availability late in 1997, new tire units
sold increased 11.5% to 445,000 tires (including 107,000 new tires sold to
national account customers). The average sales price of new tires sold decreased
approximately 2.5% from 1996. Commissions on national account sales increased by
9.1%. Service revenues for 1997 were $15.0 million, an increase of 24.6% from
$12.0 million in 1996.

For 1997, "same store" sales increased 6.0% and "new store" sales accounted for
5.9% of the total increase from 1996. "Same store" sales include both production
facilities and sales locations in existence for the entire years of 1997 and
1996. "New store" sales resulted from one new sales location in 1997 and one new
production facility and five new sales locations in 1996.

Operating costs and expenses as a percent of sales were 101.6% for 1997 compared
to 103.6% for 1996. Materials and cost of new tires as a percent of sales
decreased to 68.1% from 72.0% during 1996, resulting primarily from lower tread
rubber costs from Oliver compared to Bandag. Salaries and wages as a percent of
sales increased to 17.1% for 1997 from 16.1% during 1996. The increase resulted
primarily from cost-of-living increases, new service employees and labor costs
at new locations which have not reached normal productivity levels. Depreciation
and amortization expense as a percent of revenue increased to 3.5% for 1997 from
3.0% in 1996 primarily as a result of the

15
16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

conversion to Oliver. During 1996, all of the existing Bandag retread equipment,
some of which was fully depreciated, was replaced with new Oliver equipment,
resulting in a higher depreciable cost basis. Administrative and general
expenses as a percent of sales increased to 12.9% for 1997 from 12.5% for 1996.
The increase resulted from several factors including expenses related to
employee insurance costs and bad debt expense.

Interest expense (net of interest income) for 1997 was $1,213,000 compared to
$874,000 for 1996. The increase resulted primarily from the increase in debt
outstanding relating to equipment purchases.

LIQUIDITY AND CAPITAL RESOURCES

The ratio of current assets to current liabilities was 1.66:1 at December 31,
1998, compared to 1.96:1 at December 31, 1997. Net cash provided by operating
activities was $13.3 million for 1998 compared to net cash provided by operating
activities of $10.0 million in 1997. Included in the 1998 cash provided by
operating activities was a $10.0 million payment received by the Company from
Bandag in settlement of litigation, and increases in cash due to improved
operating results. These increases in cash provided by operations were offset by
increases in inventories and prepaid expenses of $3.8 million and accounts
receivable of $2.5 million.

The Company is a party to a revolving credit facility with Societe Generale (the
"Credit Agreement") providing for borrowings of up to the lesser of $20 million
or the applicable borrowing base. The Company's borrowing base under the Credit
Agreement is equal to 80% of its eligible accounts receivable and 50% of its
tire casings, new tires and finished retreads inventories. At December 31, 1998,
the borrowing base was $30.6 million. The amount available under the Credit
Agreement at December 31, 1998 was $18.8 million. The Credit Agreement expires
in September 2001 unless renewed or extended.

The Credit Agreement contains various covenants which limit, among other things,
dividends, disposition of receivables, indebtedness and investments, as well as
requiring the Company to meet certain financial tests. The Company was in
compliance with the covenants at December 31, 1998.

The Company incurred approximately $10.3 million, $3.5 million and $19.9 million
in total capital expenditures (net of cash proceeds from the sale of property,
plant and equipment) in 1998, 1997, and 1996, respectively. Capital lease
obligations and notes payable related to capital expenditures were $362,000,
$2.3 million and $11.5 million for the years ended December 31, 1998, 1997 and
1996, respectively. The 1998 expenditures were used to acquire land and
structures, service trucks and other equipment. The 1996 capital expenditures
include the cost of replacing Bandag retreading equipment with Oliver equipment
at 24 locations.

16
17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

In 1999, the Company anticipates spending approximately $6.2 million in total
capital expenditures, net of proceeds from the sale of property, plant and
equipment. The following table outlines the 1999 capital expenditures program:

- --------------------------------------------------------------------------------
Capital Expenditures Program for 1999
Net of Proceeds from Sales
- --------------------------------------------------------------------------------

Land and buildings .................................................................................... $ 1,710,000
Trucks ................................................................................................ 2,936,000
Recapping equipment.................................................................................... 1,000,000
Miscellaneous equipment................................................................................ 600,000
-----------
$ 6,246,000
===========

Management believes that, based upon the Company's current levels of operations,
borrowings available under the Credit Agreement and other financing
arrangements, and cash flow from operations will be sufficient to finance
current and future operations, including the capital expenditure program, and
meet all present and future debt service requirements.

YEAR 2000

The Year 2000 issue derives from computer programs being written using two
digits rather than four to determine the applicable year. The Company recognizes
that the approach of the Year 2000 brings a unique challenge to the ability of
computer systems to recognize the date change from December 31, 1999, to January
1, 2000. As a result, the arrival of the Year 2000 could result in system
failures or miscalculations, causing disruption of operations, including, among
other things, a temporary inability to process transactions or to conduct other
normal business activity.

Management of the Company began addressing the impact of the Year 2000 on its
business operations and cash flows during 1996. The Company concluded that the
Year 2000 would impact its internal information technology ("IT") and
non-information technology systems. In addition, the Company believes that the
Year 2000 will impact its supplier chain environment. Beginning in 1996, and
continuing since that time, the Company has designated a group of personnel, who
work primarily for the Company's data-processing affiliate, Data-Tronics Corp.
to manage the conversion process for its own internal systems, including
purchased software, and to coordinate the conversion process for supplier chain
environment systems and effects. A discussion of the status of each of these
areas follows:

Internal IT and Non-IT Systems

Year 2000 conversions within the mainframe environment are in process. Mainframe
environment conversions include the hardware and operating systems, customized
applications, and purchased software. The Company has completed the Year 2000
conversion of its hardware and operating systems within its mainframe
environment. Year 2000 conversions for customized applications within the
mainframe environment included renovation and regression testing of 1 million
lines of code, which has been completed. The Company will retain certain
purchased software systems and replace certain purchased software systems.
Installation of Year 2000 compliant versions of retained systems software was
completed by December 31, 1998. The Company is negotiating the replacement of
certain purchased software packages for Year 2000 compliant software.

17
18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

Negotiations should be complete and the software replaced by March 31, 1999. The
carrying value of software systems to be replaced for Year 2000 compliance is
nominal.

Year 2000 conversions of the Company's desktop environment, which includes
network hardware and operating systems software, as well as the networked PC
hardware operating systems and applications inventory, are in process and should
be completed by March 31, 1999.

The Company's embedded systems are those that are automated with embedded
computerized microprocessor chips. The Company expects to complete all
conversions of embedded systems by March 31, 1999.

External IT and Non-IT Systems

The Company is in the process of obtaining an inventory of critical exposure
arising from the Company's suppliers. The Company's list of suppliers includes
financial institutions, telecommunications providers, utility companies and
insurance providers, as well as basic suppliers critical to the operations of
the Company, such as new tire manufacturers and the Company's supplier of
retread rubber. The Company has sent and is continuing to send questionnaires to
suppliers considered to be significant to operations to determine their status
with respect to Year 2000 issues. The Company is continually updating its list
of critical exposures.

The Company does not have any single customer that would be material to the
Company as a whole. However, the Company has some customers which, in the
aggregate, are significant to the Company's operations and financial results.
The Company is in the process of developing guidelines for surveying significant
customers' readiness for Year 2000. The Company presently expects that the
guidelines will be completed and customer contacts initiated by March 31, 1999.
The information provided by significant customers with respect to their Year
2000 readiness will be considered in the development of the Company's
contingency plan.

Year 2000 Costs

Personnel employed by the Company's data processing affiliate, Data-Tronics
Corp., are performing Year 2000 conversions and evaluations of third-party
systems. Since the beginning of the process, the Company estimates its
expenditures at approximately $40,000. For the period of time since 1996, Year
2000 costs have been absorbed in the Company's normal operating expenses which
are funded with internally-generated funds and the Company's revolving credit
facility. The Company's cash flows have not been adversely impacted to a
material degree by Year 2000 costs. Costs incurred through the current date for
Year 2000 conversion represent 2% of the total 1999 forecasted data processing
and programming costs.

The Company estimates that costs to be incurred from December 31, 1998 until the
Year 2000 will total approximately $42,000. The Company expects to continue to
expend these costs in normal operations and to fund them by utilizing
internally-generated funds and the Company's revolving credit facility.

It is management's conclusion that there have been no significant projects
deferred as a result of Year 2000 efforts.

18
19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

Contingency Planning

The Company is in the process of developing an assessment of its most reasonably
likely worst case Year 2000 scenario and its Year 2000 contingency plan. The
responses the Company receives from suppliers and customers regarding their Year
2000 readiness will play a critical role in these determinations. The Company
currently plans to have made an assessment of its most reasonably likely worst
case Year 2000 scenario by March 31, 1999. This and other relevant information
will be utilized to develop the Company's contingency plan. It is presently
expected that the contingency plan will be developed by June 30, 1999.

Like virtually all other public and private companies, the Company's day-to-day
business is dependent on telecommunications services, banking services and
utility services provided by a large number of entities. At this time, the
Company is not aware of any of these entities or of any significant supplier
that has disclosed that it will not be Year 2000 compliant by January 1, 2000.
However, many of these entities are, like the Company, still involved in the
process of attempting to become Year 2000 compliant. The Company plans to
attempt to obtain written assurance of Year 2000 compliance from all entities
which management considers critical to operations of the Company. However, it is
likely that some critical suppliers will not give written assurance as to Year
2000 compliance because of concerns as to legal liability.

Even where written assurance is provided by critical suppliers and a contingency
plan is developed by the Company to deal with possible non-compliance by other
critical suppliers, the Year 2000 conversion process will continue to create
risk to the Company which is outside the control of the Company. There can be no
assurance that a major Year 2000 disruption will not occur in a critical
supplier which will have an impact on the Company that could be material.

NEW ACCOUNTING PRONOUNCEMENTS

Comprehensive Income: In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting Comprehensive Income. The Statement
requires the classification of components of other comprehensive income by their
nature in a financial statement and display of the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital in the financial statements. The Company adopted FASB Statement No. 130
on January 1, 1998. For 1998, this statement had no impact on the Company's
financial statements since there are no items of other comprehensive income.

Segment Reporting: In June 1997, the FASB issued Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Statement provided
new requirements for reporting of segment information in annual financial
statements and also mandated reporting selected segment information in interim
financial reports to shareholders. The Statement superseded FASB Statement No.
14 on segments. Management of the Company evaluated the requirements of
Statement No. 131 and concluded that the Company operates in one business
segment. Accordingly, this statement had no impact on the Company's financial
statements.

Pensions and Other Postretirement Benefits: In February 1998, the FASB issued
Statement No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. The Statement revises employers' disclosures about
pensions and other postretirement plans without changing the measurement or
recognition of those plans. The Company adopted FASB Statement No. 132 in 1998.

19
20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------

Accounting for the Costs of Computer Software: In March 1998, the Accounting
Standards Executive Committee of the American Institute of CPA's ("AcSEC")
issued Statement of Position ("SOP") 98-1, Accounting for Costs of Computer
Software Developed For or Obtained For Internal Use. Under the SOP, qualifying
computer costs incurred during the "application development stage" are required
to be capitalized and amortized to income over the software's estimated useful
life. The SOP will be effective for the Company on January 1, 1999. The SOP will
result in capitalization of costs related to internal computer software
development. All such costs are currently expensed. The amount of costs
capitalized within any period will be dependent on the nature of software
development activities and projects in that period.

Accounting for the Costs of Start-Up Activities: In April 1998, the Accounting
Standards Executive Committee of the American Institute of CPA's ("AcSEC")
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. Under the SOP, certain costs associated with start-up activities are
required to be expensed as incurred. The SOP will be effective for the Company
on January 1, 1999. The Company has historically expensed start-up costs.
Accordingly, the Company does not anticipate the adoption of this SOP to have a
material impact on the Company's financial statements.

Derivative Instruments and Hedging Activities: In June 1998, the FASB issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Statement addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. The Statement will require the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative will either
be offset against the change in fair value of the hedged asset, liability, or
firm commitment through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The Statement is effective for
the Company in 2000. The Company is evaluating the impact the Statement will
have on its financial statements and related disclosures.

FORWARD LOOKING STATEMENTS

The foregoing management discussion contains forward-looking statements that are
based on current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from current expectations
due to a number of factors, including general economic conditions; competitive
initiatives and pricing pressures; availability and cost of capital; shifts in
market demand; weather conditions; government regulations; the performance and
needs of industries served by Treadco; actual future costs of operating expenses
such as the price of oil; self-insurance claims and employee wages and benefits;
the timing and amount of capital expenditures; and the accuracy of assessments
and estimates relating to Year 2000 issues.

20
21

ITEM 7A. MARKET RISK

The Company has no material market risk exposure for the periods ended December
31, 1998 or 1997.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item is submitted in a separate section of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

21
22

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Board is divided into three classes of directorships, with directors in each
class serving staggered three-year terms. At each annual meeting of
stockholders, the terms of directors in one of the three classes expire. At that
annual meeting of stockholders, directors are elected in a class to succeed the
directors whose terms expire, the terms of the directors so elected to expire at
the third annual meeting of stockholders thereafter. Pursuant to the Company's
Certificate of Incorporation, the Board has fixed the number of directorships at
six.

DIRECTORS OF THE COMPANY

The following information relates to the members of the Company's Board of
Directors.

- ------------------------------------------------------------------------------------------------------------------------------
NAME AGE BUSINESS EXPERIENCE
- ------------------------------------------------------------------------------------------------------------------------------

CLASS I -- TERM EXPIRES MAY 2001

Robert A. Young III................... 58 Mr. Young has been Chairman of the Board of Directors of the Company since
it was formed in June 1991. Mr. Young served as the Company's Chief
Executive Officer from June 1991 through October 1995. Mr. Young has been
Chief Executive Officer of Arkansas Best Corporation ("ABC") since August
1988, President since 1973 and was Chief Operating Officer of ABC from
1973 to 1988. Mr. Young has been a Director of ABC since 1970. Mr. Young
also is a Director of Mosler, Inc.

John H. Morris........................ 55 Mr. Morris has been a Director of the Company since it was formed in June
1991, and a Director of ABC since July 1988. Mr. Morris currently serves
as Co-chairman of Stonecreek Capital. Mr. Morris is a Director of
Outsourcing Services Group and a Director of Steelhorse Holdings, Inc. Mr.
Morris served as a Managing Director of Kelso & Company, Inc. ("Kelso")
from March 1989 to March 1992, was a General Partner from 1987 to March
1989, and prior to 1987 was a Vice President. Prior to 1985, Mr. Morris
was President of LBO Capital Corp. In February 1997, Merchant's
Transportation & Logistics Company, and its subsidiaries, filed petitions
under Chapter 11 of the federal bankruptcy laws. Mr. Morris served as a
Director of such entities through January 1997 and briefly served as the
President of such entities for about a two-week period in November 1995
before these entities became operating companies.

22
23

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- Continued
- --------------------------------------------------------------------------------

CLASS II -- TERM EXPIRES MAY 1999

John R. Meyers........................ 51 Mr. Meyers was appointed the Company's President-Chief Executive Officer
in October 1995. Mr. Meyers served as Treasurer of the Company from June
1991 through October 1995. From 1979 through 1995 Mr. Meyers served as
Vice President-Treasurer of Arkansas Best Corporation.

Nicolas M. Georgitsis................. 63 Mr. Georgitsis has been a Director of the Company since it was formed in
June 1991. Mr. Georgitsis has been an independent consultant since January
1991. From February 1986 to January 1991, Mr. Georgitsis was Senior Vice
President of American Standard Inc. in charge of Transportation Products.
Mr. Georgitsis is a Director of Mosler, Inc., and member of the Operating
Board of Trust Company of the West (Latin America Fund).

CLASS III -- TERM EXPIRES MAY 2000

William A. Marquard .................. 79 Mr. Marquard has been a Director of the Company since it was formed in
June 1991. Mr. Marquard has been Chairman of the Board and a Director of
ABC since November 1988. In April 1992, Mr. Marquard was elected as a
Director and Vice Chairman of the Board of Kelso. From 1971 to 1983, Mr.
Marquard was President and Chief Executive Officer of American Standard
Inc. and from 1979 to 1985, he was Chairman of the Board of American
Standard Inc. Mr. Marquard resumed his position as Chairman of the Board
of American Standard Inc. in February 1989 until March 31, 1992, when he
was named Chairman Emeritus. Mr. Marquard also became Chairman of the
Board of ASI Holding Corporation in February 1989 until March 31, 1992,
when he was named Chairman Emeritus. Mr. Marquard is a Director of Mosler,
Inc., Earle M. Jorgensen Co., and EarthShell Container Corporation.

Robert B. Gilbert..................... 74 Mr. Gilbert has been a Director of the Company since December 1991. From
April 1985 to February 1991, Mr. Gilbert was President and Chief Executive
Officer of Rheem Manufacturing Co. Since his February 1991 retirement, Mr.
Gilbert has been an independent consultant.

BOARD OF DIRECTORS AND COMMITTEES

The business of the Company is managed under the direction of the Board of
Directors. The Board meets on a regularly scheduled basis four times a year to
review significant developments affecting the Company and to act on matters
requiring Board approval. It also holds special meetings when Board action is
required between scheduled meetings. The Board met four times during 1998.
During 1998, each member of the Board participated in at least 75% of all Board
and applicable committee meetings held during the period for which he was a
Director.

The Board has established Audit, Executive Compensation and Development, and
Stock Option committees to assist it in the discharge of its responsibilities.
The functions of those committees, their current members and the number of
meetings held during 1998 are described below. The Board does not have a
committee for nomination of directors. The Board nominates candidates for
director.

23
24

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- Continued
- --------------------------------------------------------------------------------

Audit Committee. The Audit Committee recommends to the Board the appointment of
the firm selected to be independent public accountants for the Company and
monitors the performance of such firm; reviews and approves the scope of the
annual audit and quarterly reviews and evaluates with the independent public
accountants the Company's annual audit and annual consolidated financial
statements; reviews with management the status of internal accounting controls;
and evaluates problem areas having a potential financial impact on the Company
which may be brought to its attention by management, the independent public
accountants or the Board. Messrs. Gilbert and Georgitsis currently are members
of the Audit Committee. The Audit Committee met two times during 1998.

Executive Compensation and Development Committee. The Executive Compensation and
Development Committee is responsible for reviewing executive management's
performance and for determining appropriate compensation. Messrs. Marquard,
Georgitsis and Gilbert currently are members of the Executive Compensation and
Development Committee. The Executive Compensation and Development Committee met
two times in 1998.

Stock Option Committee. The Stock Option Committee administers the Company's
Incentive Stock Option Plan. The Stock Option Committee has the power to
determine from time to time the individuals to whom options shall be granted,
the number of shares granted, and the time or times at which options shall be
granted. Messrs. Georgitsis and Gilbert currently are members of the Stock
Option Committee. The Stock Option Committee met once during 1998.

24
25

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- Continued
- --------------------------------------------------------------------------------

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the name, age, principal occupation and business
experience during the last five years of each of the current executive officers
of the Company. The executive officers serve at the pleasure of the Board. For
information regarding ownership of the Common Stock by the executive officers of
the Company, see "PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP." There are no
family relationships among directors and executive officers of the Company.

John R. Meyers ................ 51 See previous description.
President -
Chief Executive Officer

Daniel V. Evans................ 51 Mr. Evans has served as Executive Vice President-Chief Operating Officer since
Executive Vice President - October 1995, and served as Vice President-Administration of the Company from June
Chief Operating Officer 1991 through October 1995. Mr. Evans served as Vice President-Administration of
ABC-Treadco, Inc. from 1989 to 1991, and served as Director of Administration from
1977 to 1989.

David E. Loeffler.............. 52 Mr. Loeffler was appointed Vice President - Chief Financial Officer and Treasurer
Vice President - of the Company and Arkansas Best Corporation ("ABC") in April, 1997. From December
Chief Financial Officer 1995 to April 1997, he was Vice President-Treasurer of ABC. From 1992 to 1995, Mr.
and Treasurer Loeffler was a private investor and in investment management. From 1983 to 1992 he
was Senior Vice President - Finance and Administration and Chief Financial Officer
for Yellow Freight System, Inc.

Richard F. Cooper.............. 47 Mr. Cooper has served as Secretary of the Company since it was formed in June 1991.
Secretary Mr. Cooper has been Vice President-Administration since 1995, Vice President-Risk
Management from 1991 to 1995, Secretary since 1987, and Vice President-General
Counsel since 1986 for Arkansas Best Corporation.

J. Lavon Morton ............... 48 Mr. Morton was appointed Vice President-Financial Reporting of the Company and of
Vice President - Arkansas Best Corporation ("ABC") in May 1997. Mr. Morton joined ABC as Assistant
Financial Reporting Treasurer in December 1996. From October 1984 until November 1996, Mr. Morton was a
Partner in Ernst & Young LLP. From 1972 until 1984, Mr. Morton was employed by
Ernst & Young LLP. Mr. Morton is a Certified Public Accountant.

25
26

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- Continued
- --------------------------------------------------------------------------------

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company's executive officers, directors, and persons who own more than 10%
of a registered class of the Company's equity securities are required to file,
under the Securities Exchange Act of 1934, reports of ownership and changes of
ownership with the Securities and Exchange Commission.

Based solely on information provided to the Company, the Company believes that
during the preceding year its executive officers, directors, and 10%
stockholders have complied with all applicable filing requirements.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth information regarding compensation paid during
each of the Company's last three fiscal years to the Company's Chief Executive
Officer and the Company's other executive officer who earned in excess of
$100,000, based on salary and bonus earned during 1998.

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- ---------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------------ ---- -------- -------- ------------ ---------- ---------- ------- ------------
SECURITIES
NAME OTHER RESTRICTED UNDERLYING
AND ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(1) ($) ($)(2) (#)(3) ($) ($)(4)
- ------------------------------ ---- -------- -------- ------------ ---------- ---------- ------- ------------

John R. Meyers ............... 1998 $220,000 $ 82,175 $ -- $ 5,771 15,000 $ -- $4,003
President-Chief 1997 $200,000 -- -- -- -- -- 2,000
Executive Officer 1996 $200,000 -- -- -- 30,000 -- 2,004

Daniel V. Evans............... 1998 $165,000 $ 41,450 $ -- $ 2,889 5,000 $ -- $3,025
Executive Vice President- 1997 $150,000 -- -- -- -- -- 1,625
Chief Operating Officer 1996 $150,000 -- -- -- 35,000 -- 2,740

(1) Reflects bonus earned during the fiscal year. Bonuses are normally paid
during the next fiscal year.

(2) Reflects value of performance units awarded, based on Company's Common
Stock trading price of $6.75 per share on December 31, 1998.

(3) Lists options to acquire shares of the Company's Common Stock. Includes
15,000 options for Mr. Evans repriced on October 24, 1996 to $10 per
option. The options were originally priced at $11.25 to $15.75.

(4) "All Other Compensation" includes the following for Messrs. Meyers and
Evans: (i) Company matching of contributions to the Company's Employees
Investment Plan of $4,033 and $3,025 for each named executive,
respectively.

26
27

ITEM 11. EXECUTIVE COMPENSATION -- Continued
- --------------------------------------------------------------------------------

OPTION GRANTS DURING 1998 FISCAL YEAR

The following table provides information related to options granted to the named
executive officers during 1998.

OPTIONS/SAR GRANTS TABLE

POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
- ---- ------------------------------ ------------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#)(2)(3)(4) FISCAL YEAR ($/SH)(5) DATE 5%($) 10%($)
- ---- ------------ ------------ --------- ---------- ------- --------

John R. Meyers 15,000 75.0% $8.000 01/26/08 $63,750 $161,400
Daniel V. Evans 5,000 25.0% 8.000 01/26/08 21,250 53,800

(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options.
These numbers do not take into account provisions of certain options
providing for termination of the option following termination of
employment, nontransferability or vesting over periods of up to five years.

(2) Options granted in 1998 are exercisable starting 12 months after the grant
date, with 20% of the shares covered thereby becoming exercisable at that
time and with an additional 20% of the option shares becoming exercisable
on each successive anniversary date, with full vesting occurring on the
fifth anniversary date.

(3) The options were granted for a term of 10 years, subject to earlier
termination in certain events related to termination of employment.

(4) In the event of a change in control, the Stock Option Plan permits the
Committee to accelerate vesting and to enable an employee to "put" the
excess of the fair market value over the exercise price of the options to
the Company.

(5) The Stock Option Plan permits the exercise of options by delivery of shares
of Common Stock owned by the optionee in lieu of or in addition to cash or
by financing made available by the Company.

OPTIONS/SAR EXERCISES AND HOLDINGS

The following table provides information related to options exercised by the
named executive officers during the 1998 fiscal year and the number and value of
options held at fiscal year end. The Company does not have any outstanding stock
appreciation rights.

AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE TABLE

SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED OPTIONS/ IN-THE-MONEY OPTIONS/SARS
ON EXERCISE REALIZED SARS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------

John R. Meyers -- 12,000 33,000 $ -- $ --
Daniel V. Evans -- 23,000 17,000 -- --

(1) The closing price for the Company's Common Stock as reported by the Nasdaq
Stock Market on December 31, 1998 was $6.75. Value is calculated on the
basis of the difference between the option exercise price and $6.75
multiplied by the number of shares of Common Stock underlying the option.

27
28

ITEM 11. EXECUTIVE COMPENSATION -- Continued
- --------------------------------------------------------------------------------

RETIREMENT AND SAVINGS PLANS

The Company maintains a retirement plan that generally provides fixed benefits
payable in lump sum form upon retirement at age 65. Benefits also may be paid in
the form of an annuity at the participant's election. Credited years of service
for each of the individuals named in the "EXECUTIVE COMPENSATION - SUMMARY
COMPENSATION TABLE" are: Mr. Meyers, 3 years; Mr. Evans, 27 years. Benefits are
based upon a participant's number of years of service with the Company and on a
participant's average total earnings (exclusive of extraordinary remuneration
and expense allowances and subject to the annual Code limitation after 1993 of
$150,000 as adjusted to reflect cost of living increases) during any five
consecutive calendar years during the participant's employment with the Company
since 1980, which will give the participant the highest average annual earnings.

The following table illustrates the total estimated lump sum benefit payable
from the retirement plan upon retirement at age 65 to persons in the specified
compensation and years-of-service classifications. Benefits listed in the table
are not subject to deductions for Social Security or other offset amounts.
Participants also are entitled to receive income from employee contributions, if
any, plus 7 1/2% interest in addition to the amounts shown.

PENSION PLAN TABLE

- --------------------------------------------------------------------------------

HIGHEST
FIVE YEAR
AVERAGE YEARS OF SERVICE
COMPENSATION 15 20 25 30 35
------------ ---------- ------------ ----------- ----------- -----------

$ 125,000 .......................... $ 159,375 $ 212,500 $ 265,625 $ 318,750 $ 371,875
150,000 .......................... 191,250 255,000 318,750 382,500 446,250
175,000 .......................... 204,000 272,000 340,000 408,000 476,000
200,000 .......................... 204,000 272,000 340,000 408,000 476,000
225,000 .......................... 204,000 272,000 340,000 408,000 476,000
250,000 .......................... 204,000 272,000 340,000 408,000 476,000
300,000 .......................... 204,000 272,000 340,000 408,000 476,000

- --------------------------------------------------------------------------------

The Company has agreed to provide reimbursement for otherwise unreimbursed
medical expenses to Mr. Meyers and Mr. Evans. These benefits are presently
covered by an insurance program and commence upon the employee's retirement at
age 60 or older from the Company and continue for the life of the employee (and
spouse or other eligible dependents).

COMPENSATION OF DIRECTORS

Messrs. Young and Meyers receive no compensation for services as a Director or
committee member. Non-employee directors receive a $25,000 annual retainer,
$1,000 for each Board meeting attended, and $500 for each committee meeting
attended, if the committee meeting is held other than in conjunction with a
Board meeting.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CHANGE-IN-
CONTROL ARRANGEMENTS

Pursuant to the Company's 1995 Performance Award Program, the Company has
entered into Unit Award Agreements with Mr. Meyers and Mr. Evans. The Agreements
provide that upon a change in control of ownership of the Company, as defined in
the Agreements, all unvested units immediately

28
29

ITEM 11. EXECUTIVE COMPENSATION -- Continued
- --------------------------------------------------------------------------------

vest with unit award payments to be made to the recipient at the expiration of
the award period, unless the Stock Option Committee determines to purchase the
units at the date of the change in control or take other action to maintain and
protect the rights of the recipient.

The Company's Stock Option Agreements with Messrs. Meyers and Evans provide that
in the event of a change in control of ownership of the Company, as defined in
the Agreement, all unvested options immediately vest.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP

The following table sets forth certain information concerning beneficial
ownership of the Company's Common Stock as of March 10, 1999, by (i) each person
who is known by the Company to own beneficially more than five percent (5%) of
the outstanding shares of Common Stock, (ii) each director and named executive
officer of the Company and (iii) all directors and executive officers as a
group.

SHARES PERCENTAGE
BENEFICIALLY OF SHARES
OWNED OUTSTANDING
------------ -----------

(i) NAME / ADDRESS

Arkansas Best Corporation ("ABC") (1)(4)(7)..................................... 2,497,200 48.0%
3801 Old Greenwood Road
Fort Smith, AR 72903

Shapiro Capital Management Co., Inc. (2)(7)..................................... 1,132,775 21.77%
3060 Peachtree Road
Atlanta, GA 30305

Franklin Resources, Inc......................................................... 329,000 6.32%
777 Mariners Island Blvd, 6th Floor
San Mateo, CA 94404

Dimensional Fund Advisors Inc. (3).............................................. 309,092 5.94%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401

(ii) NAME POSITION

William A. Marquard (5) ................. Director 27,000 *
Robert A. Young III (4)(5)............... Director 2,517,200 48.4%
John H. Morris (5)....................... Director 17,000 *
Robert B. Gilbert (5).................... Director 18,000 *
Nicolas M. Georgitsis (5)................ Director 22,000 *
John R. Meyers (5)....................... Director/President/CEO 25,500 *
Daniel V. Evans (5) ..................... Executive Vice President/COO 30,279 *

(iii) All Directors and Executive Officers as a Group (10 total) ............. 2,657,979 51.1%

- ------------------

*Less than 1%

(1) ABC's shares of the Company are subject to a pledge of assets to
Societe Generale, Southwest Agency, as Agent, under ABC's Credit
Agreement. Such arrangement, in the event of an uncured event of
default under ABC's Credit Agreement, could result at a subsequent date
in a change of control of the Company. ABC is not currently in default
under its Credit Agreement and does not expect such a default to occur.

29
30

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-- Continued
- --------------------------------------------------------------------------------

(2) According to the most recent Schedule 13G it has provided to the
Company, Shapiro Capital Management Co., Inc. is an investment adviser
registered under the Investment Advisers Act of 1940. Shapiro Capital
Management Co., Inc. has the following voting and investment powers
with respect to such shares: (a) sole voting power, 1,132,775; (b)
shared voting power, not applicable; (c) sole investment power,
1,132,775; (d) shared investment power, not applicable.

(3) According to the most recent Schedule 13G it has provided to the
Company, Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 309,092
shares of Company Common Stock, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all
such shares.

(4) Mr. Young directly owns 10,000 shares of Company Common Stock. Mr.
Young beneficially owns 2,216,908 shares, or 11.3%, of ABC's voting
common stock. Under federal securities law since Mr. Young is deemed to
be a controlling person of ABC, Mr. Young may be deemed to beneficially
own all 2,497,200 shares of Company Common Stock owned by ABC, which
shares are included as beneficially owned by him. Mr. Young's business
address is 3801 Old Greenwood Road, Fort Smith, AR 72903.

(5) Includes stock option shares of Common Stock which are vested and will
vest within 60 days of the record date as follows: Messrs. Marquard,
17,000 vested shares; Morris, 17,000 vested shares; Gilbert, 18,000
vested shares; Georgitsis, 18,000 vested shares; Young, 10,000 vested
shares; Evans, 28,000 vested shares; and Meyers, 21,000 vested shares.

(6) The denominator for all percentages include the number of beneficially
owned stock options of the Director and Executive Officer Group.

(7) According to its most recent Schedule 13D, by letter agreement Shapiro
Capital Management Company, Inc., has granted ABC its proxy to vote
Shapiro's Company shares under certain circumstances, therefore the
number of Company shares owned by Shapiro are deemed to be beneficially
owned by ABC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transition Services Agreement. The Company is a party to a Transition Services
Agreement with ABC whereby ABC provides services in the areas of accounting,
data processing, financial, legal, tax, cash management, human resources, and
risk management activities. The Transition Services Agreement is effective
indefinitely, unless terminated by either party on 90 days' notice. The
Agreement requires the Company to pay a service fee for these services based on
the value and cost of services provided. Certain other expenses, primarily data
processing and programming services, are charged to the Company based on their
actual cost to ABC. Total fees charged to the Company under this agreement were
as follows:

- --------------------------------------------------------------------------------

1998 1997 1996
----------- ----------- -----------

Service fee ........................................... $ 1,342,800 $ 1,400,021 $ 1,543,829
Data processing services .............................. 1,361,646 1,225,298 1,018,213
----------- ----------- -----------
$ 2,704,446 $ 2,625,319 $ 2,562,042
=========== =========== ===========

30
31

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Continued
- --------------------------------------------------------------------------------

Tire Asset Transfer Agreements. Effective as of July 1, 1991, in connection with
the separation of the Company's assets from ABC-Treadco, Inc. (a wholly owned
subsidiary of ABC), the Company assumed all obligations and liabilities
(including contingent liabilities) relating to its business formerly operated by
ABC-Treadco, Inc. or otherwise associated with its business assets, and agreed
to indemnify and hold ABC-Treadco, Inc. harmless from all obligations and
liabilities relating to the operations of its business prior to such date. In
turn, ABC-Treadco, Inc. has agreed to indemnify and hold the Company harmless
from all obligations and liabilities (including contingent liabilities) not
relating to the Company's business.

Taxes. Effective as of July 1, 1991, ABC, ABC-Treadco, Inc. and the Company
entered into an agreement to indemnify each other against certain tax
liabilities and to allocate among them tax deficiencies and refunds, if any,
arising with respect to periods prior to September 12, 1991.

Registration Rights. Pursuant to the terms of a Registration Rights Agreement
dated as of July 1, 1991, the Company has agreed that upon the request of ABC,
the Company will register, on up to two occasions, the sale of Company Common
Stock owned by ABC or its affiliates that ABC requests be registered under the
Securities Act of 1933, as amended, and applicable state securities laws. The
Company's obligation is subject to certain limitations relating to the timing
and size of registrations and other similar matters. The Company also is
obligated to offer ABC the right to include shares of Common Stock owned by it
or its affiliates in certain registration statements filed by the Company. The
Company will indemnify ABC and its officers, directors and controlling persons
for securities law liabilities in connection with any such offering, other than
liabilities resulting from information furnished in writing by ABC. The Company
is obligated to pay all expenses incidental to such registration, excluding
underwriters' discounts and commissions.

Other Arrangements. Affiliates of ABC paid the Company $2.2 million, $2.4
million and $2.5 million, for new and retread tires in 1998, 1997 and 1996,
respectively.

In November 1998, the Company purchased from ABC an office building for use as
the Company's headquarters. As consideration, the Company transferred its
present headquarters building to ABC, along with a cash payment of $500,000. In
the opinion of management of the Company, the transaction values were fair to
the Company.

31
32

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) FINANCIAL STATEMENTS

The response to this portion of Item 14 is submitted as a separate
section of this report.

(a)(2) FINANCIAL STATEMENT SCHEDULES

The response to this portion of Item 14 is submitted as a separate
section of this report.

(a)(3) EXHIBITS

The exhibits filed with this report are listed in the Exhibit Index
which is submitted as a separate section of this report.

(b) There were no reports filed on Form 8-K during the last quarter of
1998.

(d) FINANCIAL STATEMENT SCHEDULES

The response to this portion of Item 14 is submitted as a separate
section of this report.

32
33

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

TREADCO, INC.

By: /s/ David E. Loeffler
-----------------------------------------
David E. Loeffler
Vice President - Chief Financial Officer
and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Robert A. Young, III Chairman of the Board March 17, 1999
- ------------------------------------- -----------------------
Robert A. Young, III

/s/ John R. Meyers President and Chief Executive Officer March 16, 1999
- ------------------------------------- (Principal Executive Officer) -----------------------
John R. Meyers

/s/ David E. Loeffler Vice President - Chief Financial Officer March 16, 1999
- ------------------------------------- and Treasurer -----------------------
David E. Loeffler (Principal Financial and Accounting Officer)

/s/ Nicolas M. Georgitsis Director March 17, 1999
- ------------------------------------- -----------------------
Nicolas M. Georgitsis

/s/ Robert B. Gilbert Director March 16, 1999
- ------------------------------------- -----------------------
Robert B. Gilbert

/s/ William A. Marquard Director March 16, 1999
- ------------------------------------- -----------------------
William A. Marquard

/s/ John H. Morris Director March 16, 1999
- ------------------------------------- -----------------------
John H. Morris

33
34
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1998
TREADCO, INC.
FORT SMITH, ARKANSAS

34
35

FORM 10-K -- ITEM 8, ITEM 14(a)(1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
TREADCO, INC.

The following financial statements of Treadco, Inc. are included in Item 8:

BALANCE SHEETS -- December 31, 1998 and 1997

STATEMENTS OF OPERATIONS -- Years ended December 31, 1998, 1997, and 1996

STATEMENTS OF STOCKHOLDERS' EQUITY -- Years ended December 31, 1998, 1997,
and 1996

STATEMENTS OF CASH FLOWS -- Years ended December 31, 1998, 1997, and 1996

The consolidated financial statement schedule of Treadco, Inc. is included in
Item 14(d):

SCHEDULE II -- Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.

35
36

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Stockholders and Board of Directors
Treadco, Inc.

We have audited the accompanying balance sheets of Treadco, Inc. as of December
31, 1998 and 1997, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Treadco, Inc. at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

ERNST & YOUNG LLP

Little Rock, Arkansas
January 22, 1999, except for Note O
as to which the date is March 15, 1999

36
37

TREADCO, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------

DECEMBER 31
1998 1997
------------- -------------

ASSETS

CURRENT ASSETS
Accounts receivable:
Trade receivables, less allowances for doubtful accounts
(1998 -- $1,326,226; 1997 -- $1,719,389) ................... $ 21,084,591 $ 19,802,749
Other (primarily national accounts and volume rebates) ..... 6,085,814 5,734,366
Due from affiliates ............................................ 104,000 90,305
Inventories .................................................... 30,670,287 27,326,046
Prepaid expenses ............................................... 260,808 3,175
Federal and state income taxes refundable ...................... -- 1,221,681
Deferred income taxes .......................................... 1,360,417 1,466,469
------------- -------------
TOTAL CURRENT ASSETS ....................................... 59,565,917 55,644,791

PROPERTY, PLANT AND EQUIPMENT
Land ........................................................... 5,084,410 4,000,877
Structures ..................................................... 16,369,622 13,273,823
Retreading and other equipment ................................. 35,197,911 32,048,910
------------- -------------
56,651,943 49,323,610
Less allowances for depreciation ............................... (22,338,592) (17,994,542)
------------- -------------
34,313,351 31,329,068

OTHER ASSETS
Goodwill, less amortization
(1998 -- $ 4,370,795; 1997 -- $3,908,806) ..................... 12,232,164 12,694,153
Noncompete agreements, less amortization
(1998 -- $ 0; 1997 -- $1,132,082) ............................. -- 174,167
Deferred income taxes .......................................... 145,526 --
Other .......................................................... 1,113,431 616,003
------------- -------------
13,491,121 13,484,323
------------- -------------
$ 107,370,389 $ 100,458,182
============= =============

37
38

TREADCO, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------

DECEMBER 31
1998 1997
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Bank overdraft ................................................. $ 3,036,732 $ 125,148
Trade accounts payable ......................................... 17,905,325 17,144,202
Due to affiliate ............................................... 809,683 731,711
Accrued salaries, wages and other expenses ..................... 8,562,858 8,066,536
Federal and state income taxes ................................. 3,033,597 --
Current portion of long-term debt .............................. 2,544,645 2,304,691
------------ ------------
TOTAL CURRENT LIABILITIES .................................. 35,892,840 28,372,288

LONG-TERM DEBT, less current portion ................................ 6,159,351 12,883,763

OTHER LIABILITIES ................................................... 102,398 89,860

DEFERRED INCOME TAXES ............................................... -- 277,703

STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share --
authorized 2,000,000 shares; none issued ..................... -- --
Common stock, par value $.01 per share --
authorized 18,000,000 shares; issued and
outstanding 5,072,255 shares ................................. 50,723 50,723
Additional paid-in capital ..................................... 45,623,346 45,623,346
Retained earnings .............................................. 19,541,731 13,160,499
Accumulated other comprehensive income ......................... -- --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................. 65,215,800 58,834,568
------------ ------------
COMMITMENTS AND CONTINGENCIES
$107,370,389 $100,458,182
============ ============

The accompanying notes are an integral part of these financial statements.

38
39

TREADCO, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31
1998 1997 1996
------------- ------------- -------------

SALES
Non-affiliates .......................... $ 179,046,969 $ 158,912,429 $ 141,613,036
Affiliates .............................. 2,246,239 2,363,782 2,541,091
------------- ------------- -------------
181,293,208 161,276,211 144,154,127
COSTS AND EXPENSES
Materials and cost of new tires ......... 118,223,620 109,821,411 103,751,776
Salaries and wages ...................... 31,845,776 27,551,473 23,233,814
Depreciation and amortization ........... 6,266,151 5,610,647 4,389,621
Administrative and general .............. 22,465,951 20,801,826 17,961,604
------------- ------------- -------------
178,801,498 163,785,357 149,336,815

OPERATING INCOME (LOSS) ...................... 2,491,710 (2,509,146) (5,182,688)

OTHER INCOME
Settlement of litigation ................ 9,124,227 -- --
Interest income ......................... 39,479 43,682 26,252
Gain on asset sales ..................... 447,734 276,570 1,298,215
Other ................................... 131,511 290,649 129,265
------------- ------------- -------------
9,742,951 610,901 1,453,732

OTHER EXPENSES
Interest ................................ 1,125,026 1,256,452 899,786
Amortization of goodwill ................ 461,989 461,989 461,989
Amortization of noncompete agreements ... 174,167 261,250 261,250
------------- ------------- -------------
1,761,182 1,979,691 1,623,025
------------- ------------- -------------

INCOME (LOSS) BEFORE
INCOME TAXES ................................ 10,473,479 (3,877,936) (5,351,981)

FEDERAL AND STATE INCOME
TAXES (CREDIT)
Current ................................. 4,409,424 (1,897,172) (1,735,453)
Deferred ................................ (317,177) 523,612 (357,727)
------------- ------------- -------------
4,092,247 (1,373,560) (2,093,180)
------------- ------------- -------------

NET INCOME (LOSS) ............................ $ 6,381,232 $ (2,504,376) $ (3,258,801)
============= ============= =============

INCOME (LOSS) PER COMMON SHARE:
Basic ................................... $ 1.26 $ (.49) $ (.64)
============= ============= =============
Diluted ................................. $ 1.25 $ (.49) $ (.64)
============= ============= =============

CASH DIVIDENDS PAID PER COMMON SHARE ......... $ -- $ .12 $ .16
============= ============= =============

The accompanying notes are an integral part of these financial statements.

39
40

TREADCO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS INCOME
------------ ------------ ------------ ------------ -------------

Balances at January 1, 1996 . 5,072,255 $ 50,723 $ 45,623,346 $ 20,343,907 $ --
Net loss ............... -- -- -- (3,258,801) --
Cash dividends ......... -- -- -- (811,561) --
------------ ------------ ------------ ------------ -------------

Balances at December 31, 1996 5,072,255 50,723 45,623,346 16,273,545 --
Net loss ............... -- -- -- (2,504,376) --
Cash dividends ......... -- -- -- (608,670) --
------------ ------------ ------------ ------------ -------------

Balances at December 31, 1997 5,072,255 50,723 45,623,346 13,160,499 --
Net income ............. -- -- -- 6,381,232 --
------------ ------------ ------------ ------------ -------------

Balances at December 31, 1998 5,072,255 $ 50,723 $ 45,623,346 $ 19,541,731 $ --
============ ============ ============ ============ =============

The accompanying notes are an integral part of these financial statements.

40
41

TREADCO, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------

OPERATING ACTIVITIES
Net income (loss) .................................. $ 6,381,232 $ (2,504,376) $ (3,258,801)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization .................. 6,266,151 5,610,647 4,389,621
Amortization of goodwill ....................... 461,989 461,989 461,989
Amortization of noncompete agreements .......... 174,167 261,250 261,250
Provision for losses on accounts receivable .... 1,456,706 2,340,630 1,645,349
Provision (credit) for deferred income taxes ... (317,177) 523,612 (357,727)
Gain on asset sales ............................ (447,734) (276,570) (1,298,215)
Changes in operating assets and liabilities:
Receivables .................................. (2,464,710) (3,556,281) (1,002,972)
Inventories and prepaid expenses ............. (3,782,442) 2,870,139 3,004,523
Federal and state income taxes refundable .... 1,221,681 404,254 (1,625,935)
Other assets ................................. 155,772 (6,534) (706,306)
Trade accounts payable, accrued expenses
and income taxes payable .................... 4,132,245 4,028,989 5,784,752
Due to/from affiliates ....................... 64,277 (163,648) 575,135
Other liabilities ............................ 12,538 18,171 17,323
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................................... 13,314,695 10,012,272 7,889,986

INVESTING ACTIVITIES
Purchases of plant facilities and other property
and equipment ..................................... (10,577,501) (2,015,325) (11,433,665)
Proceeds from asset sales .......................... 656,546 856,129 3,048,387
Acquisition of assets .............................. (1,275,759) -- --
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................... (11,196,714) (1,159,196) (8,385,278)

FINANCING ACTIVITIES
Borrowings under revolving credit facility ......... 53,825,000 33,885,000 36,635,000
Payments under revolving credit facility ........... (56,575,000) (40,185,000) (36,335,000)
Principal payments on other long-term
debt and capitalized lease obligations ............ (2,279,565) (2,085,358) (597,244)
Dividends paid ..................................... -- (608,670) (811,561)
Net increase in cash overdrafts .................... 2,911,584 125,148 --
------------ ------------ ------------
NET CASH USED IN
FINANCING ACTIVITIES ................................... (2,117,981) (8,868,880) (1,108,805)
------------ ------------ ------------

NET DECREASE IN CASH AND
CASH EQUIVALENTS ....................................... -- (15,804) (1,604,097)
Cash and cash equivalents at beginning of year ..... -- 15,804 1,619,901
------------ ------------ ------------

CASH AND CASH EQUIVALENTS
AT END OF YEAR ......................................... $ -- $ -- $ 15,804
============ ============ ============

The accompanying notes are an integral part of these financial statements.

41
42

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------

NOTE A -- ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization: Treadco, Inc. (the "Company") was organized in June 1991 as the
successor to the truck tire retreading and new truck tire sales business
previously conducted and developed by a wholly owned subsidiary of Arkansas Best
Corporation ("ABC"). In September 1991, the Company completed an initial public
offering of 2,500,000 shares of common stock. At December 31, 1998, ABC owned
approximately 49% of the Company's outstanding shares.

In 1996, the Company entered into comprehensive, multi-year license agreements
for the majority of its locations with Oliver Rubber Company ("Oliver"). Under
the license agreements, Oliver will be a supplier of equipment and related
materials for Treadco's truck tire precure retreading business. These license
agreements require that the Company purchase from Oliver not less than 90% of
all rubber materials within the license territory for a one-year period or until
the Company has repaid all debt owed to Oliver. Prior to entering into the
Oliver license agreements, the Company had similar agreements with Bandag
Incorporated ("Bandag") which were terminated in 1996. As of December 31, 1995,
$840,000 in costs was accrued to provide for the costs of removal of Bandag
equipment which was required under the Bandag franchise agreements. The
equipment was sold to Bandag in 1996 at its estimated fair market value,
resulting in a gain of $1,034,372. The actual costs of equipment removal
incurred in 1996 did not differ materially from the $840,000 estimated at
December 31, 1995. The removal of Bandag equipment and the installation of
Oliver equipment were completed in phases throughout the first three quarters of
1996 with approximately one-third of the Company's production facilities
converted each quarter.

Business: The Company's operations include truck tire retreading and the sale of
both retreaded and new truck tires, as well as related services.

NOTE B -- ACCOUNTING POLICIES

Cash and Cash Equivalents: Short-term investments having a maturity of ninety
days or less when purchased are considered cash equivalents.

Claims Liabilities: The Company is self-insured up to certain limits for
workers' compensation and certain property damage and liability claims.
Provision has been made for the estimated retained liability for such claims,
based on historical trends, claims frequency, severity and other factors.

Concentration of Credit Risk: The Company sells to customers primarily in a
15-state area within the South, Southwest, lower Midwest, and West. The
Company's customers are primarily trucking companies or mid-sized companies that
maintain their own in-house trucking operations. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.

Compensation to Employees: Stock-based compensation to employees is accounted
for based on the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25").

42
43
TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

Consolidation: In May 1997, the Company's wholly owned subsidiary, Trans-World
Casings, Inc. was merged into the Company. Prior to that date, the financial
statements included the accounts of the Company and Trans-World Casings, Inc.
All significant intercompany accounts and transactions were eliminated in
consolidation.

Derivative Financial Instruments: The Company had no derivatives outstanding at
December 31, 1998 or 1997.

Goodwill: Excess cost over fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 15 to 40 years. The carrying value of
goodwill will be reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows over the remaining amortization
period, the Company's carrying value of the goodwill would be reduced by the
estimated shortfall of cash flows. No reductions have been required.

Income Taxes: Deferred income taxes are accounted for under the liability
method. Deferred income tax assets and liabilities reflect the effects of
temporary differences arising from a 1988 purchase transaction and the timing of
depreciation and cost recovery deductions and certain accrued expenses.

Inventories: Inventories are carried at the lower of cost (first-in, first-out
method) or market.

Noncompete Agreements: Certain noncompete agreements were entered into in
conjunction with a 1993 acquisition. These agreements were amortized over
five-year terms and were fully amortized during 1998.

Property, Plant and Equipment: Purchases of property, plant and equipment are
recorded at cost. For financial reporting purposes, the cost of such assets is
depreciated principally by the straight-line method over the estimated useful
life of the related asset ranging from 3 to 15 years. For tax reporting
purposes, accelerated depreciation or cost recovery methods are used.

Interest on funds used to finance construction of significant additions to
property and equipment is capitalized and amortized over the remaining life of
the related asset. During 1998, $37,000 of interest was capitalized. No interest
was capitalized during 1997 or 1996.

Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform to the current year's presentation.

Revenue Recognition: Sales are recognized when goods are delivered or services
performed.

Earnings (Loss) Per Share: The calculation of earnings (loss) per share is based
on the weighted average number of common (basic earnings per share) or common
equivalent shares outstanding (diluted earnings per share) during the applicable
period.

43
44

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Service Fees and Other Related Party Transactions: The Company is a party to a
Transition Services Agreement with ABC whereby ABC provides services in the
areas of accounting, data processing, financial, legal, tax, cash management,
human resources, and risk management activities. The Transition Services
Agreement is effective indefinitely, unless terminated by either party on 90
days' notice. The Agreement requires the Company to pay a service fee for these
services based on the value and cost of services provided. Certain other
expenses, primarily data processing and programming services, are charged to the
Company based on their actual cost to ABC. Total fees charged to the Company
under this agreement were as follows:

- --------------------------------------------------------------------------------

1998 1997 1996
---------- ---------- ----------

Service fee ............... $1,342,800 $1,400,021 $1,543,829
Data processing services .. 1,361,646 1,225,298 1,018,213
---------- ---------- ----------
$2,704,446 $2,625,319 $2,562,042
========== ========== ==========

NOTE C--RECENT ACCOUNTING PRONOUNCEMENTS

Comprehensive Income: In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting Comprehensive Income. The Statement
requires the classification of components of other comprehensive income by their
nature in a financial statement and display of the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the financial statements. The Company adopted FASB Statement No. 130
on January 1, 1998. For 1998, this statement had no impact on the Company's
financial statements since there are no items of other comprehensive income.

44
45

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

Accounting for Costs of Computer Software: In March 1998, the Accounting
Standards Executive Committee of the American Institute of CPA's ("AcSEC")
issued Statement of Position ("SOP") 98-1, Accounting for Costs of Computer
Software Developed For or Obtained For Internal Use. Under the SOP, qualifying
computer costs incurred during the "application development stage" are required
to be capitalized and amortized to income over the software's estimated useful
life. The SOP will be effective for the Company on January 1, 1999. The SOP will
result in capitalization of costs related to internal computer software
development. All such costs are currently expensed. The amount of costs
capitalized within any period will be dependent on the nature of software
development activities and projects in that period.

Accounting for the Costs of Start-Up Activities: In April 1998, the AcSEC issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Under
the SOP, certain costs associated with start-up activities are required to be
expensed as incurred. The SOP will be effective for the Company on January 1,
1999. The Company has historically expensed start-up costs, accordingly, the
Company does not anticipate the adoption of this SOP to have a material impact
on the Company's financial statements.

NOTE D-- INVENTORIES

- --------------------------------------------------------------------------------

DECEMBER 31
1998 1997
----------- -----------

New tires and finished retreaded tires ......... $25,523,111 $22,391,595
Materials and supplies ......................... 5,147,176 4,934,451
----------- -----------
$30,670,287 $27,326,046
=========== ===========

45
46

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

NOTE E -- LONG-TERM DEBT

- --------------------------------------------------------------------------------

DECEMBER 31
1998 1997
----------- -----------

Credit Agreement (1) ....................... $ 1,250,000 $ 4,000,000
Notes payable (2) .......................... 3,225,780 6,115,683
Capital lease obligations (3) .............. 4,228,216 5,072,771
----------- -----------
8,703,996 15,188,454
Less current portion ....................... 2,544,645 2,304,691
----------- -----------
$ 6,159,351 $12,883,763
=========== ===========

(1) The Company is a party to a revolving credit facility with Societe
Generale, Southwest Agency (the "Credit Agreement") providing for
borrowings of up to the lesser of $20 million or the applicable borrowing
base. The Company's borrowing base under the Credit Agreement is equal to
80% of its eligible accounts receivable and 50% of its tire casings, new
tires and finished retreads inventories. At December 31, 1998, the
borrowing base was $30.6 million. The Credit Agreement expires in September
2001 unless renewed or extended. At December 31, 1998, the weighted average
interest rate on advances under the Credit Agreement was 7.1%. The Company
pays a commitment fee on the unused portion of the Credit Agreement at
variable rates determined under the Credit Agreement. At December 31, 1998,
the commitment fee was .375%. The Credit Agreement contains various
covenants which limit, among other things, dividends, disposition of
receivables, indebtedness and investments, as well as requiring the Company
to meet certain financial tests. The Company was in compliance with the
covenants at December 31, 1998.

(2) In 1996, the Company entered into note agreements with Oliver totaling
approximately $5.2 million to finance the purchase of retreading equipment.
These notes payable bear interest at 5% and are payable in monthly
installments including interest through 2001.

On February 1, 1996, the Company entered into a non-interest-bearing note
to finance the purchase of non-Oliver retreading equipment installed in a
new, leased, retreading facility. The note was discounted using a 7.5%
interest rate to $1.9 million ($2.8 million face value). The note had a
ten-year term. In April 1998, the seller of the equipment and the Company
entered into an agreement whereby the seller assumed operations of the
facility and the Company transferred ownership of the equipment to the
seller. Under the agreement, the outstanding balance of the note ($1.8
million) was extinguished. There was no material gain or loss to the
Company on the transaction.

(3) Capital leases include vehicle leases with terms ranging from 3 to 5 years
with an average interest rate of 7.62%. Also included is a building lease
with a term through 2009 and an interest rate of 7.50%. Capital lease
obligations of $362,000, $2,318,000 and $4,141,000 were incurred for the
years ended December 31, 1998, 1997 and 1996, respectively.

Interest paid totaled approximately $ 1,170,000 in 1998, $1,318,000 in 1997, and
$900,000 in 1996.

46
47

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

Annual maturities of long-term debt, excluding capital lease obligations, in
1999 through 2003 are as follows: 1999- $1,090,927; 2000 - $1,146,741; 2001 -
$2,189,300; 2002 - $48,812; and none thereafter.

NOTE F -- ACCRUED EXPENSES

- --------------------------------------------------------------------------------

DECEMBER 31
1998 1997
---------- ----------

Accrued salaries, wages and incentive plans ...... $1,699,285 $1,791,428
Accrued vacation pay ............................. 842,706 722,706
Taxes other than income .......................... 2,330,117 2,168,205
Loss, injury, damage and workers'
compensation claims reserves .................... 2,655,604 2,580,469
Pension and benefit plan costs ................... -- 158,361
Other ............................................ 1,035,146 645,367
---------- ----------
$8,562,858 $8,066,536
========== ==========

NOTE G -- EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

1998 1997 1996
----------- ----------- -----------

Numerator:
Numerator for basic and diluted earnings
per share -- income (loss) available to
common stockholders ....................... $ 6,381,232 $(2,504,376) $(3,258,801)
=========== =========== ===========

Denominator:
Denominator for basic earnings per
share -- weighted-average shares .......... 5,072,255 5,072,255 5,072,255

Effect of dilutive securities:
Employee stock options .................... 20,057 -- --
----------- ----------- -----------
Dilutive potential common shares ........... 20,057 -- --
----------- ----------- -----------

Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions ............ 5,092,312 5,072,255 5,072,255
=========== =========== ===========

Basic earnings (loss) per common share ........ $ 1.26 $ (0.49) $ (0.64)
=========== =========== ===========

Diluted earnings (loss) per common share ...... $ 1.25 $ (0.49) $ (0.64)
=========== =========== ===========

47
48

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

NOTE H -- FEDERAL AND STATE INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:

- --------------------------------------------------------------------------------

DECEMBER 31
1998 1997
---------- ----------

Deferred tax liabilities:

Basis differences on property, plant and equipment ... $ 126,343 $ 730,672
Allowance for doubtful accounts ...................... -- 18,418
---------- ----------
Total deferred tax liabilities ................... 126,343 749,090

Deferred tax assets:

Accrued expenses ..................................... 1,392,995 1,316,699
Allowance for doubtful accounts ...................... 7,461 --
Uniform capitalization of inventories ................ 193,634 175,313
Postretirement benefit obligations other
than pensions ....................................... 38,196 33,518
State net operating loss carryovers .................. -- 412,326
---------- ----------
Total deferred tax assets ........................ 1,632,286 1,937,856
---------- ----------
Net deferred tax assets ................................... $1,505,943 $1,188,766
========== ==========

Significant components of the provision for income taxes are as follows:

- --------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31
1998 1997 1996
----------- ----------- -----------

Current tax expense (credit):

Federal ................................... $ 3,900,634 $(1,897,172) $(1,735,453)
State ..................................... 508,790 -- --
----------- ----------- -----------
Total current tax expense (credit) .... 4,409,424 (1,897,172) (1,735,453)

Deferred tax expense (credit):

Federal ................................... (466,445) 727,885 (63,724)
State ..................................... 149,268 (204,273) (294,003)
----------- ----------- -----------
Total deferred tax expense (credit) ... (317,177) 523,612 (357,727)
----------- ----------- -----------
Total income tax expense (credit) .............. $ 4,092,247 $(1,373,560) $(2,093,180)
=========== =========== ===========

48
49

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

A reconciliation between the effective income tax rate and the statutory federal
income tax rate is presented in the following table:

- --------------------------------------------------------------------------------

1998 1997 1996
----------- ----------- -----------

Income tax (benefit) at the statutory
federal rate of 34% .................... $ 3,560,983 $(1,318,498) $(1,819,674)
Federal income tax effects of:
State income taxes ................. (223,740) 69,453 99,961
Resolution of tax contingencies .... (71,067) (81,195) (172,922)
Amortization of nondeductible
goodwill .......................... 126,115 126,115 126,115
Other .............................. 41,898 34,838 (32,657)
----------- ----------- -----------
Federal income taxes (benefit) .......... 3,434,189 (1,169,287) (1,799,177)
State income taxes (benefit) ............ 658,058 (204,273) (294,003)
----------- ----------- -----------
$ 4,092,247 $(1,373,560) $(2,093,180)
=========== =========== ===========
Effective income tax rate ............... 39.07% (35.4)% (39.1)%
=========== =========== ===========

As of December 31, 1998, the Company had no state operating loss carryovers
remaining.

Approximately $1,522,000 of income taxes were paid in 1998 and no income taxes
were paid in 1997 and 1996. Income tax refunds amounted to $1,346,000 in 1998
and $2,374,000 in 1997.

49
50

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

NOTE I - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has a noncontributory defined benefit pension plan covering
substantially all employees. Benefits are based on years of service and employee
compensation. Contributions are made based upon at least the minimum amounts
required to be funded under provisions of the Employee Retirement Income
Security Act of 1974, with the maximum amounts not to exceed the maximum amount
deductible under the Internal Revenue Code. The plan's assets are held in a
common bank-administered trust fund and are primarily invested in equity and
government securities.

The Company sponsors plans that provide supplemental postretirement medical
benefits, life insurance and accident and vision care to full-time officers of
the Company, paying up to 80% of the covered charges incurred by participants of
the plan.

PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
----------- ----------- ----------- -----------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .... $ 3,685,313 $ 3,831,114 $ 316,314 $ 224,202
Service cost ............................... 163,470 394,382 4,122 1,517
Interest cost .............................. 269,029 263,914 15,472 17,995
Amendments ................................. (641,578) -- -- --
Actuarial (gain) loss ...................... 1,050,868 (217,973) (78,393) 73,593
Benefits paid .............................. (608,903) (586,124) (18,659) (993)
----------- ----------- ----------- -----------
Benefit obligation at end of year .......... $ 3,918,199 $ 3,685,313 $ 238,856 $ 316,314
----------- ----------- ----------- -----------

CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year ........................ 3,589,447 3,058,407 -- --
Actual return on plan assets ............... 657,527 691,514 -- --
Employer contribution ...................... 400,517 425,650 18,659 993
Benefits paid .............................. (608,903) (586,124) (18,659) (993)
----------- ----------- ----------- -----------
Fair value of plan assets at end of year ... 4,038,588 3,589,447 -- --
----------- ----------- ----------- -----------

Funded status .............................. 120,389 (95,866) (238,856) (316,314)
Unrecognized net actuarial loss ............ 886,897 305,631 34,102 112,495
Unrecognized prior service cost ............ (540,548) 31,649 (8,794) (10,992)
Unrecognized net transition
obligation (asset) ....................... (1,944) (2,133) 110,676 118,581
----------- ----------- ----------- -----------
Prepaid (accrued) benefit cost ............. $ 464,794 $ 239,281 $ (102,872) $ (96,230)
=========== =========== =========== ===========

The net pension asset of $464,794 is included in other assets at December 31,
1998. The net pension asset of $239,281 at December 31, 1997, is comprised of a
current liability of $158,361 included in accrued expenses and $397,642 included
in other assets.

The postretirement liabilities of $102,872 as of December 31, 1998 and $96,230
as of December 31, 1997 are included in other liabilities in the accompanying
balance sheets.

50
51

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

PENSION BENEFITS OTHER BENEFITS
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------

WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31:
Discount rate ................... 7.03% 7.50% 7.10% 7.03% 6.95% 7.50%
Rate of compensation increase ... 4.00% 4.00% 3.00% 4.00% 4.00% 3.00%
Expected long-term returns
on plan assets ................. 10.00% 9.40% 9.00% -- -- --

The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (in health care cost trend) is 9% for 1999 and 1998 and is
assumed to decrease gradually to 5% in 2002 and later.

PENSION BENEFITS OTHER BENEFITS
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------

COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ............................ $163,470 $394,382 $388,021 $ 4,122 $ 1,517 $ 6,409
Interest cost ........................... 269,029 263,914 283,726 15,472 17,995 16,400
Expected return on plan assets .......... (342,717) (289,051) (327,242) -- -- --
Transition (asset) obligation
recognition .......................... (189) (189) (189) 7,905 7,905 7,905
Amortization of prior service cost ...... (69,381) 2,767 2,767 (2,198) (2,198) --
Recognized net actuarial loss ........... 154,794 105,884 158,809 -- 315 237
-------- -------- -------- -------- -------- --------
Net periodic benefit cost ............... $175,006 $477,707 $505,892 $ 25,301 $ 25,534 $ 30,951
======== ======== ======== ======== ======== ========

Assumed medical cost trend rates have a significant effect on the amounts
reported for post retirement medical plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:

- --------------------------------------------------------------------------------

1% 1%
INCREASE DECREASE
-------- --------

Effect on total of service and interest cost components ... $ 3,705 $ (2,956)
Effect on postretirement benefit obligation ............... $ 41,779 $(33,663)
-------- --------

51
52

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

The Company has an investment plan (the "401(k) Plan") covering substantially
all employees. The investment plan permits participants to defer up to 15% of
their salary by salary reduction as provided in Section 401(k) of the Internal
Revenue Code. During 1998, up to 6% of a participant's compensation contributed
to the plan was matched by a Company deposit of 50% of such contribution. During
1997 and 1996, up to 4% of a participant's compensation contributed to the plan
was matched by a Company deposit of 50% of such contribution. The percentage of
the Company match is set annually. The matching contribution charged to
operations totaled approximately $318,000 in 1998; $121,000 in 1997; and
$135,000 in 1996.

NOTE J -- STOCK OPTION AND PERFORMANCE AWARD PLANS

The Company follows APB 25 and related Interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

The Company's Stock Option Plan (the "Option Plan") provides that up to 350,000
shares of common stock are available for awards of incentive and non-qualified
stock options to directors and key employees of the Company. Under the Option
Plan, the exercise price will not be less than fair market value for incentive
options. The options become exercisable ratably over a five-year or ten-year
period for incentive options and non-qualified options, respectively.

The Company also had a Disinterested Director Stock Option Plan which provided
that each of the directors who were administering the Company's Option Plan were
granted stock options each May to purchase 5,000 shares of the Company's Common
Stock. This plan was terminated in May 1994. The options previously granted
under this plan will continue in effect according to their terms.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant, using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
4.8%, 6.2% and 6.0%; dividend yields of .01%, .01% and .01%; volatility factors
of the expected market price of the Company's Common Stock of .37, .35 and .34;
and a weighted-average expected life of the option of 9.5 years.

52
53

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

1998 1997 1996
--------------- --------------- ---------------

Net income (loss) - as reported ................... $ 6,381,232 $ (2,504,376) $ (3,258,801)
=============== =============== ===============

Net income (loss) - pro forma ..................... $ 6,085,957 $ (2,789,488) $ (3,442,965)
=============== =============== ===============

Income (loss) per share - as reported (basic) ..... $ 1.26 $ (0.49) $ (0.64)
=============== =============== ===============
Income (loss) per share - as reported (diluted) ... $ 1.25 $ (0.49) $ (0.64)
=============== =============== ===============

Income (loss) per share - pro forma (basic) ....... $ 1.20 $ (0.55) $ (0.68)
=============== =============== ===============

Income (loss) per share - pro forma (diluted) ..... $ 1.20 $ (0.55) $ (0.68)
=============== =============== ===============

The following table summarizes the Company's stock option activity, and related
information for the periods indicated:

1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------

Outstanding beginning of year ...... 270,000 $ 8.58 215,000 $ 8.09 75,000 $ 13.30
Granted ............................ 20,000 8.00 55,000 10.49 140,000 7.06
Exercised .......................... -- -- -- -- -- --
Cancelled .......................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Outstanding - end of year .......... 290,000 $ 8.54 270,000 $ 8.58 215,000 $ 8.09
======= ======= ======= ======= ======= =======

Exercisable at end of year ......... 130,000 $ 8.78 78,000 $ 8.95 37,000 $ 10.00
======= ======= ======= ======= ======= =======

Estimated weighted-average
fair value per share of options
granted during the year ........... $ 4.43 $ 6.21 $ 4.47
======= ======= =======

53
54

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

The following table summarizes information concerning currently outstanding and
exercisable options:

WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- --------- ----------- ---------

$5.75 - $8.00 145,000 7.4 $ 6.89 50,000 $ 6.72
$10.00 - $10.75 145,000 6.3 10.19 80,000 10.07
--------------- ------- --- ------ ------ ------
290,000 130,000
======= =======

In October 1996, all grants issued prior to 1996 were repriced, changing the
exercise price to $10.00. The options were originally priced from $11.25 to
$15.75. The timing and requirements for vesting and the life of the options were
not changed.

In October 1995, the Company adopted a performance award program and awarded
30,000 and 15,000 units to the Company's President and Executive Vice President,
respectively. The units are valued based on the closing price per share of the
Company's common stock. The awards become 100% vested after four years, with the
awards increased yearly to the extent that the Company's return on equity
exceeds 8%. During 1998, the Company awarded 855 and 428 units to the Company's
President and Executive Vice President, respectively. Due to the reduction in
the price per share of the Company's stock, the Company recorded a credit to
expense of $56,000 in 1998 under the plan. The Company recorded expense of
$134,000 and $200,000 in 1997 and 1996, respectively.

NOTE K -- LEASES AND COMMITMENTS

The future minimum payments under capitalized leases at December 31, 1998, are
as follows:

1999............................................... $1,712,631
2000............................................... 1,277,917
2001............................................... 234,840
2002............................................... 234,840
2003 .............................................. 234,840
Thereafter......................................... 1,668,213
----------
Total minimum lease payments....................... 5,363,281
Amounts representing interest...................... 1,135,065
----------
Present value of net minimum lease payments
included in long-term debt ...................... $4,228,216
==========

54
55

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

Assets held under capitalized leases are included in property, plant, and
equipment at December 31 as follows:

1998 1997
---------- ----------

Equipment .................................. $4,488,189 $4,126,428
Land and buildings ......................... 2,081,293 2,081,293
---------- ----------
6,569,482 6,207,721
Less accumulated depreciation .............. 2,321,428 1,136,116
---------- ----------
$4,248,054 $5,071,605
========== ==========

Lease amortization is included in depreciation expense. Capital lease
obligations of $361,761 and $2,318,000 were incurred for the years ended
December 31, 1998 and 1997, respectively.

Rental expense for various production facilities and sales locations amounted to
approximately $1,405,000 in 1998, $1,765,000 in 1997 and $1,751,000 in 1996.

The future minimum rental commitments as of December 31, 1998, for all
noncancellable operating leases are as follows:

1999 ......................................... $1,485,652
2000 ......................................... 993,649
2001 ......................................... 720,768
2002.......................................... 564,241
2003 ......................................... 482,013
Thereafter ................................... 603,960
----------
$4,850,283
==========

Certain of the leases are renewable for substantially the same rentals for
varying periods. Future minimum rentals to be received under noncancellable
subleases totaled approximately $732,000 at December 31, 1998.

NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures of financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.

Long-term debt: The carrying amounts of the Company's borrowings under its
revolving credit agreement approximates fair value since the interest
rate under this agreement is variable. The fair values of the Company's
notes payable arrangements are estimated using current market rates.

55
56

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

The fair values of the Company's financial instruments and related carrying
value as of December 31 are as follows:

1998 1997
--------------------------- ---------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------

Cash and cash equivalents ... $ -- $ -- $ -- $ --
Short-term debt ............. 1,090,927 1,038,483 1,175,315 1,083,121
Long-term debt .............. 3,384,853 3,342,182 8,940,368 8,777,395
---------- ---------- ---------- ----------

NOTE M -- LITIGATION

The Company is not a party to any pending legal proceedings which management
believes to be material to the results of operations, cash flows or the
financial condition of the Company.

During 1998, 1997, 1996 and 1995, the Company charged to general and
administrative expenses $1,181,000, $552,000, $398,000 and $57,000,
respectively, for legal expenses related to the Bandag claim.

56
57

TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------

NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The tables below present unaudited quarterly financial information for 1998 and
1997.

- --------------------------------------------------------------------------------

1998
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------

Sales .......................... $ 37,504,948 $ 47,093,595 $ 52,136,551 $ 44,558,114
Costs and expenses ............. 38,081,442 45,592,596 50,730,022 44,397,438
------------ ------------ ------------ ------------
Operating income (loss) ........ (576,494) 1,500,999 1,406,529 160,676
Other expense (income) -- net... 394,834 65,831 308,581 (8,751,015)[a]
Income taxes (credit) .......... (343,862) 569,300 442,581 3,424,228
------------ ------------ ------------ ------------
Net income (loss) .............. $ (627,466) $ 865,868 $ 655,367 $ 5,487,463
============ ============ ============ ============

Basic and diluted net income
(loss) per common share ....... $ (0.12) $ 0.17 $ 0.13 $ 1.08
============ ============ ============ ============

1997
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------

Sales .......................... $ 33,211,474 $ 41,135,887 $ 46,769,038 $ 40,159,812
Costs and expenses.............. 35,746,528 40,800,195 45,831,309 41,407,325
------------ ------------ ------------ ------------
Operating income (loss)......... (2,535,054) 335,692 937,729 (1,247,513)
Other expense -- net............ 450,171 409,546 222,667 286,406
Income taxes (credit) .......... (1,096,442) (20,165) 294,247 (551,200)
------------ ------------ ------------ ------------
Net income (loss)............... $ (1,888,783) $ (53,689) $ 420,815 $ (982,719)
============ ============ ============ ============

Basic and diluted net income
(loss) per common share........ $ (0.37) $ (0.01) $ 0.08 $ (0.19)
============ ============ ============ ============

[a] Other income for the fourth quarter of 1998 includes income of $9.1 million
related to the settlement of a dispute between the Company and Bandag,
Incorporated.

NOTE O - SUBSEQUENT EVENT

On January 22, 1999, ABC announced that it had submitted a formal proposal to
the Company's Board of Directors in which the outstanding shares of the
Company's common stock not owned by ABC would be acquired for $9.00 per share in
cash. The announcement stated that the proposal had the support of Shapiro
Capital Management Company, Inc., the Company's largest independent stockholder,
which beneficially owns 1,132,775 shares (or approximately 22%) of the common
stock of the Company. On March 15, 1999, ABC and the Company signed a definitive
merger agreement for the acquisition of all shares of the Company's stock not
owned by ABC for $9.00 per share in cash via a tender offer to commence within
five business days after the signing of the merger agreement. The tender offer
is subject to certain conditions including ABC owning two-thirds of the
outstanding Company shares upon completion of the tender. ABC currently owns
approximately 49% of the Company's shares.

57
58

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
TREADCO, INC.

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
--------------------------
(1) (2)

BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS & OTHER ACCOUNTS DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
----------- ---------- ---------- ------------- -------------- -------------

Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts receivable $1,719,389 $1,456,706 $466,942 (A) $2,316,811 (B) $1,326,226
========== ========== ======== ========== ==========

Year Ended December 31, 1997:
Deducted from asset accounts :
Allowance for doubtful accounts receivable $1,161,266 $2,340,630 $382,607 (A) $2,165,114 (B) $1,719,389
========== ========== ======== ========== ==========

Year Ended December 31, 1996:
Deducted from asset accounts: 341,359 (A)
Allowance for doubtful accounts receivable $1,163,835 $1,645,349 $ 47,943 (C) $2,037,220 (B) $1,161,266
========== ========== ======== ========== ==========

Note A - Recoveries of amounts previously written off.

Note B - Uncollectible accounts written off.

Note C - The allowance for doubtful accounts of Five Bros., Inc. as of date of
acquisition.

58
59

FORM 10-K -- ITEM 14(c)
EXHIBIT INDEX
TREADCO, INC.

The following exhibits are filed with this report or are incorporated by
reference to previously filed material.

EXHIBIT NO.
- -----------

3.1* Certificate of Incorporation of the Company (previously filed
as Exhibit 3.1 to the Company's Form S-1 Registration Statement
under the Securities Act of 1933 dated July 3, 1991, Commission
File No. 33-41605, and incorporated herein by reference).

3.2* Bylaws of the Company (previously filed as Exhibit 3.2 to the
Company's Form S-1 Registration Statement under the Securities
Act of 1933 dated July 3, 1991, Commission File No. 33-41605,
and incorporated herein by reference).

10.1* Amended and Restated Credit Agreement entered into between the
Company and Societe Generale, Southwest Agency dated as of
September 30, 1997 (previously filed as Exhibit 10 to the
Company's Form 10-Q Quarterly Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for the quarter
ended September 30, 1997, Commission File No. 0-19390, and
incorporated herein by reference).

10.2* Form of Transition Services Agreement entered into between the
Company and Arkansas Best Corporation (previously filed as
Exhibit 10.8 to the Company's Form S-1 Registration Statement
under the Securities Act of 1933 dated July 3, 1991, Commission
File No. 33-41605, and incorporated herein by reference).

10.3* Form of Agreement entered into between the Company and Oliver
Rubber Company dated September 29, 1995 (previously filed as
Exhibit 10 to the Company's Form 10-Q Quarterly Report under
the Securities Exchange Act of 1934 for the quarter ended
September 30, 1995, Commission File No. 0-19390, and
incorporated herein by reference).

10.4*# Treadco, Inc. Performance Award Unit Program effective January
1, 1996 (previously filed as Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, Commission File No. 0-19390, and incorporate herein
by reference).

23 Consent of Ernst & Young LLP., Independent Auditors

27 Financial Data Schedule

- ----------

* Previously filed with the Securities and Exchange Commission and incorporated
herein by reference.

# Designates a compensation plan for Directors or Executive Officers.