ARTS WAY MANUFACTURING CO INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended November 30, 2001 Commission File No. 0-5131

ART'S-WAY MANUFACTURING CO., INC.

DELAWARE 42-0920725
____________________________ __________________________
State of Incorporation I.R.S. Employee Identification No.

Armstrong, Iowa 50514

Address of principal executive offices Zip Code

Registrant's telephone number, including area code: (712) 864-3131

Securities registered pursuant to Section 12(b) of the Act: None

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

Common stock $.01 par value

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, and (2) has been subject to
such filing 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 informational statements incorporated by reference in Part III of
this Form 10-K or any amendment to this form 10-K. [ ]

Aggregate market value of the voting stock held by non-affiliates of
the Registrant on February 14, 2002: $2,919,059

Number of common shares outstanding on February 14, 2002: 1,938,176

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement
for the Registrant's 2001 Annual Meeting of Stockholders to be filed
within 120 days of November 30, 2001 are incorporated by reference
into Part III.

Art's-Way Manufacturing Co., Inc.
Index to Annual Report
on Form 10-K

Part I Page
Item 1 - Description of Business 3 thru 5

Item 2 - Properties 5

Item 3 - Legal Proceedings 5

Item 4 - Submission of Matters to a Vote of Security Holders 5

Part II
Item 5 - Market for the Registrant's Common Stock and
Related Security Holder Matters 6

Item 6 - Selected Financial Statement Data 7

Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 thru 12

Item 7A -Quantitative and Qualitative Disclosures
About Market Risk 12

Item 8 - Financial Statements and
Supplemental Data 13

Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13

Part III
Item 10- Directors and Executive Officers of the Registant 14

Item 11- Executive Compensation 14

Item 12- Security Ownership of Certain Beneficial Owners
and Management 14

Item 13- Certain Relationships and Related Transactions 14

Part IV

Item 14- Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15

PART I

Item 1. Description of Business

(a) General Development of Business

Art's-Way Manufacturing Co., Inc. (the "Company" or "Art's-Way")
began operations as a farm equipment manufacturer in 1956. Its
manufacturing plant is located in Armstrong, Iowa.

During the past five years, the business of the Company has
remained substantially the same.

(b) Recent Events

On February 12, 2002, an Agreement was reached with J. Ward
McConnell, Jr., the owner of 10.4% of the outstanding stock
of the Company and the father of director Marc H. McConnell.
Under the Agreement, Mr. McConnell agreed to purchase 640,000
shares of the Company's common stock for $800,000. Mr.
McConnell now owns forty percent (40%) of the outstanding
stock of the Company. The proceeds are being used to repay
current obligations of the Company and for the reduction of
bank debt. Mr. McConnell agreed that without the approval of
the Board of Directors, excluding himself and his son, he will
not acquire as much as fifty percent (50%) of the Company's
common stock and will not take the Company private. Subsequently,
Donald A Cimpl, a director, resigned from the Board of Directors
and Mr. McConnell was elected as a director. At the same time,
James L. Koley resigned as Chairman of the Board and Mr.
McConnell was elected as Chairman of the Board. Mr. Koley
will remain as a director of the Company.

The Company is negotiating with its lender for an agreement to
provide long-term financing. Currently, the Company's debt of
approximately $2,963,000 with one of its lenders is payable
upon demand. The lender has submitted a financing proposal but
the final terms of the proposal are currently being negotiated.
If the Company is unable to obtain this new credit agreement,
it will be unable to pay its outstanding balance due upon
foreclosure.

Because of the Company's recurring losses from operations and
the demand nature of its operating and term debt, KPMG, LLP,
the Company's independent public accountants, have issued a
report on the Company's financial statements raising doubt
about the Company's ability to continue as a going concern.
Their opinion is contained on page F-1.

(c) Financial Information About Industry Segments

In accordance with accounting principles, generally accepted
in the United States of America, Art's-Way has only one industry
segment, metal fabrication.

(d) Narrative Description of Business

The Company manufactures specialized farm machinery under its own
and private labels.

Equipment manufactured by the Company under its own label includes:
portable and stationary animal feed processing equipment and related
attachments used to mill and mix feed grains into custom animal
feed rations; a high bulk mixing wagon to mix animal feeds
containing silage, hay, and grain; a line of mowers and stalk
shredders; minimum till seed bed preparation equipment; sugar beet
and potato harvesting equipment; and a line of land maintenance
equipment, edible bean equipment, and grain drill equipment.

Private label manufacturing of farm equipment accounted for 30%, 31%,
and 30% of total sales for the years ended November 30, 2001, 2000,
and 1999, respectively.

Art's-Way labeled products are sold by farm equipment dealers
throughout the United States. There is no contractual relationship
with these dealers to distribute Art's-Way products, and dealers may
sell a competitor's product line but are discouraged from doing so.

Raw materials are acquired from domestic sources and normally are
readily available.

The Company maintains patents and manufacturing rights on several
of its products covering unique aspects of design and has trademarks
covering product identification. Royalties are paid by the Company
for use of certain manufacturing rights. The validity of its patents
has not been judicially determined and no assurance can be given as
to the extent of the protection that the patents afford. In the
opinion of the Company, its patents, trademarks, and licenses are of
value in securing and retaining business. The Company currently has
three patents that expire in various years beginning in 2001 through
2012. The Company believes that those patents which expired in 2001
had no effect on the Company's business.

Sales of the Company's agricultural products are seasonal; however,
with recent additional product purchases and the development of
mowers, shredders, and beet harvesting machinery, coupled with
private labeled products, the impact of seasonality has been
decreased because the peak periods occur at different times. The
Company, similar to other manufacturers in the farm equipment
industry, is affected by factors peculiar to the farm equipment
field, including items such as fluctuations in farm income resulting
from the change in commodity prices, crop damage caused by weather
and insects, government farm programs, and other unpredictable
variables such as interest rates.

The Company has an OEM supplier agreement with Case Corporation.
Under the OEM agreement the Company has agreed to supply Case's
requirements for certain feed processing, tillage equipment, and
service parts under Case's label. The agreement has no minimum
requirements and can be cancelled upon certain conditions. For
the years ended November 30, 2001, 2000, and 1999, sales to Case
aggregated approximately 20%, 22%, and 30% of total sales,
respectively.

The backlog of orders on February 8, 2001 was approximately
$1,875,000 compared to approximately $1,900,000 a year ago. The
order backlog is expected to be shipped during the current fiscal
year.

The Company currently does no business with any local, state, or
federal government agencies.

The feed processing products, including private labeled units,
compete with similar products of many other manufacturers. There
are estimated to be more than 15 competitors producing similar
products, although total market statistics are not available. The
Company's products are competitively priced with greater diversity
than most competitor product lines. Beet harvesting equipment is
manufactured by three companies that have a significant impact on
the market. The Company's share of this market is estimated to be
about 45%. Other products such as mowers, shredders, and grain
drills are manufactured by approximately 20 other companies;
however, the Company believes its products are competitively
priced and their quality and performance are above average in a
market where price, product performance, and quality are principal
elements.

The Company is engaged in experimental work on a continual basis
to improve the present products and create new products. Research
costs for the current fiscal year were primarily expended on the
continuing development of beet harvesting equipment. All research
costs are expensed as incurred. Such costs approximated $125,000,
$302,000, and $310,000 for the years ended November 30, 2001, 2000,
and 1999, respectively. (See also note 1 to the Financial Statements).

The Company is subject to various federal, state and local laws and
regulations pertaining to environmental protection and the discharge
of materials into the environment. The Company does not anticipate
that they will have any future expenses or capital expenditures
relating to compliance with such regulations.

During the year ended November 30, 2001, the Company had peak
employment of 95 full-time employees, of which 81 were factory
and production employees, 2 were engineers and engineering draftsman,
11 were administrative employees, and 1 was in sales and sales
management. Employee levels tend to fluctuate based upon the
seasonality of the product line.

The Company's employees are not unionized. There has been no work
stoppage in the Company's history and no stoppage is, or has been,
threatened. The Company believes its relationship with its employees
is good.

(d) Financial Information about Foreign and Domestic Operation
and Export Sales

The Company has no foreign operations. Its export sales, primarily
to Canada and Denmark, accounted for less than 1% of sales and less
than 1% of operating loss in the years ended November 30, 2001, 2000,
and 1999.

Item 2. Properties

The existing executive offices, production, and warehousing
facilities of Art's-Way are built of hollow clay block/concrete
and contain approximately 240,000 square feet of usable space.
Most of these facilities have been constructed since 1965 and
are in good condition. The Company owns approximately 132
acres of land west of Armstrong, Iowa, which includes the factory
and inventory storage space. The Company currently leases excess
land to third parties for farming.

Item 3. Legal Proceedings

Various legal actions and claims are pending against the Company
consisting of ordinary routine litigation incidental to the
business. In the opinion of management, adequate provisions
have been made in the accompanying financial statements for
all pending legal actions and other claims. (See also note 10
to the Financial Statements.)

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

Not Applicable.

PART II

Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters

(a) Price Range of Common Stock

Per Share Common Stock Bid Prices by Quarter

Year ended Year ended
November 30, 2001 November 30, 2000
High Low High Low
First Quarter 3.188 2.750 4.219 3.500
Second Quarter 2.938 1.950 4.125 3.000
Third Quarter 2.340 2.000 4.000 3.250
Fourth Quarter 2.250 1.870 3.500 3.000

The Common Stock trades on The NASDAQ Small Cap Stock Market under the
symbol ARTW. The range of closing bid prices shown above are as reported
by the Small Cap NASDAQ. The quotations shown reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.

(b) Approximate Number of Equity Security Holders

Approximate number of
Title of Class Round Lot Shareholders as of February 20,2002
Common Stock, $.01
Par Value 448

(c) Dividend Policy

Holders of Common Stock of the Company are entitled to a pro rata share of
any dividends as may be declared, from time to time, from funds available
and to share pro rata in any such distributions available for holders of
Common Stock upon liquidation of the Company. The Company has not paid a
dividend during the past five years, and is currently restricted by its
loan covenants from paying any dividends.

Item 6. Selected Financial Statement Data

The following tables set forth certain information concerning the Income
Statements and Balance Sheets of the Company and should be read in
conjunction with the Financial Statements and the notes thereto
appearing elsewhere in this Report.

(a) Selected Income Statement Data (In Thousands of Dollars,
Except Per Share Amounts)

Year Year Year
ended ended ended
November 30, November 30, November 30,
2001 2000 1999
Net Sales $10,891 $14,229 $17,227
Net Loss $(2,382) $(2,166) $ (630)
Loss Per Share:
Basic $ (1.86) $ (1.72) $ (.50)
Diluted $ (1.86) $ (1.72) $ (.50)
Common Shares
and Equivalents
Outstanding:
Basic 1,279,613 1,256,351 1,248,456
Diluted 1,279,613 1,256,351 1,248,456

(a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per
Share Amounts)
November 30, November 30, November 30,
2001 2000 1999
Total Assets $ 6,755 $10,707 $15,078
Long-Term Debt $ 272 $ 345 $ 420
Dividends Per Share $ .00 $ .00 $ .00

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may be deemed to include forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that involve risk and uncertainty. Although the Company
believes that its expectations are based on reasonable assumptions, it
can give no assurance that its expectations will be achieved. The
important factors that could cause actual results to differ materially
from those in the forward-looking statements below ("Cautionary
Statements") include the Company's degree of financial leverage, the
factors described in Item 1(a and c) of this report, risks associated with
acquisitions and in the integration thereof, risks associated with
supplier/OEM agreements, dependence upon the farm economy and the impact
of competitive services and pricing, as well as other risks referenced
from time to time in the Company's filings with the SEC. All subsequent
written and oral forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified in their entirety
by the Cautionary Statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking
statements to reflect events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.

The following discussion and analysis of financial condition and results
of operations of the Company are based on the Financial Statements and
the notes thereto included herein.

(a) and (b) Liquidity and Capital Resources

Twelve months ended November 30, 2001

The Company's main source of funds was a reduction in accounts
receivable and inventories. The reduction in accounts receivable
results primarily from the lower sales volume. The reduction in
inventories resulted from a combination of lower production activity
necessitated by lower volume, and an inventory writedown following an
auction conducted in November 2001 to sell excess and obsolete inventory.
The auction resulted in a loss of $1,082,000. As a result of the auction
held in the fourth quarter, the Company obtained better market
information in regards to its aging inventory, leading to an increase
in its obsolete and excess inventory reserves of approximately $300,000.
The expense associated with this increase in the reserve recognizes the
continuing impact of the farm economy on the Company's asset value.

The positive cash flow from operations was used in part to reduce bank
loans by $944,000. Capital expenditures for the year ended November 30,
2001 were $59,000.

Twelve months ended November 30, 2000

The Company's main source of funds was a reduction in accounts
receivable and inventories. The accounts receivable decrease
results primarily from the lower sales volume. The decrease in
inventory results from the lower sales volume combined with
concentrated efforts to reduce inventory levels. The positive cash
flow from operations allowed for the reduction in bank borrowings.
There were no capital expenditures during the fiscal year ended
November 30, 2000.

Twelve months ended November 30, 1999

The Company's main source of funds was a reduction in accounts receivable
and inventories. The accounts receivable decrease results primarily from
the lower sales volume. The decrease in inventories results from the
lower sales volume offset partially by the acquisition of new product
lines in fiscal year 1999. The positive cash flow from operations allowed
for the reduction in bank borrowings. Capital expenditures were entirely
for production equipment.

Capital Resources

The Company has a credit agreement with a lending institution (lender)
that provides for a revolving line of credit (credit facility) and a
term loan.

The credit facility allows for borrowings up to $4,500,000, subject to
borrowing base percentages on the Company's accounts receivable and
inventory, and allowing for letters of credit up to $100,000. At
November 30, 2001, the Company has borrowed $2,073,704 and has
$100,000 in outstanding letters of credit. At November 30, 2000, the
Company had borrowed $2,552,183 and had $100,000 in outstanding letters
of credit. At November 30, 2001 and 2000, $68,000 and $212,000 were
available for borrowings, respectively. The interest rate is based on
the lender's referenced rate and is variable based upon certain
performance objectives. Under the terms of the agreement, the Company
will not pay more than 4% over the reference rate, nor less than the
reference rate during the term of the agreement. The outstanding
borrowings bear interest at 9.00% at November 30, 2001.

The term loan was for an original principal amount of $1,991,000.
The principal amount is repayable in monthly installments of $23,700
with the remaining balance due on demand.

All loans, advances and other obligations, liabilities and indebtedness
of the Company are secured by all present and future assets. The Company
pays an unused line fee equal to three-eighths of one percent of the
unused portion of the revolving line of credit. The Company's cash
account has been restricted by the lender, such that any available
cash is used to pay down on the credit facility.

During 1999, the Company was notified by its lender that the Company
did not fit the lender's customer profile and was requested to relocate
its financing needs.

At November 30, 2000 and 1999, the Company was in default of a loan
covenant, the fixed maturity coverage ratio, of their credit facility
and term loan. The lender notified the Company that the current loan
agreement provided that the lender may, as a result of any event of
default, accelerate the payment of all obligations. As a result, all
borrowings associated with this lender had been classified as current.
The lender did not call for the acceleration of the payment of all
obligations, but retained the right to do so at any time.

The initial term of the loan agreement ended on August 31, 2000.
In a letter dated May 26, 2000, the Company was notified that the
lender did not intend to extend the term of the loan agreement
beyond the termination date. Therefore, all of the obligations
outstanding under the credit agreement and term loan amounting to
$4,383,825 at August 31, 2000 were due and payable on August 31, 2000.

During the period between August 31, 2000 and August 31, 2001, the loan
agreement was amended several times to provide for extensions of various
lengths from 30 days to 90 days. On September 1, 2001, the lender sold the
loan to another lending institution (new lender). Under this arrangement,
the Company continued to operate under the same terms as existed prior to
the sale. The new lender granted extensions from September 1, 2001
through November 15, 2001, but has not granted an extension beyond this
date.

Although there is no documented extension, the new lender has submitted
a financing proposal to the Company in regards to long-term financing.
The final terms of the proposal are currently being negotiated.

The Company believes a new credit facility will be obtained from the
lender and that it will be able to meet its obligations under the new
credit agreement when completed. If the Company is unable to obtain a
new credit agreement, it will be unable to pay its outstanding balance
due upon foreclosure.

On February 12, 2002, an Agreement was reached between J. Ward McConnell,
Jr., a private investor, and the Company that allowed Mr. McConnell to
purchase 640,000 shares of authorized and unissued stock from the
Company for the sum of $800,000. The proceeds will be used for the
repayment of current obligations and for the reduction of bank debt.
Mr. McConnell has agreed that without prior approval of the Board of
Directors, excluding himself and his son, he will not acquire as much
as fifty percent (50%) of the Company's common stock and will not take
the Company private.

With the $800,000 capital infusion received from Mr. McConnell, the
Company will use approximately $500,000 of the proceeds in paying down
its aged outstanding payables to its suppliers. The Company is mindful
of the necessity to continue to control its costs, as it intends to
finance its working capital and pay down its debt through cash from
operations. The Company believes that the infusion of capital from
Mr. McConnell will also enable it to successfully complete negotiations
with its lender.

The Company's current ratio and its working capital are as shown in the
following table:

November 30, November 30, November 30,
2001 2000 1999
Current Assets $5,670,708 $ 8,610,676 $11,910,297
Current Liabilities 4,990,884 6,308,381 8,438,446
Working Capital $ 679,824 $ 2,302,295 $ 3,471,851

Current Ratio 1.1 1.4 1.4

The Company believes the funding expected to be generated from operations
and provided by the new credit facility when established, the infusion of
capital by Mr. McConnell, and its existing borrowing capacity will be
sufficient to meet working capital and capital investment needs.

(c) Results of Operations

Twelve months ended November 30, 2001 compared to the twelve months
ended November 30, 2000

Revenues decreased 23% to $10,891,000 from $14,229,000 while the
Company recorded a net loss of $2,382,000 ($1.86 per share)
compared to a net loss of $2,166,000 ($1.72 per share) in the prior
year. Revenues from Art's-Way branded products were down 23% while
OEM sales decreased 26%. The reduction in sales reflects the
continuing weakness in the farm economy. The sugar beet industry
continued to be in distress, with the processing plants moving from
private ownership to co-operative ownership and due to increasing
competition from foreign sugar producing sources. Demand for our
feed processing and land maintenance equipment is above expectations
and replacement parts sales remain strong.

Gross profit, as a percent of sales was 5% as compared to 17% for
the previous year. As is shown on the statement of operations, the
Company had unusual losses from disposition of excess and obsolete
inventory of $1,082,000 and an assest impairment writedown on tooling
related to product lines that have been abandoned of $547,000. Had
these two losses not occurred, the gross profit as a percent of sales
would have been 19%.

Operating expenses were down $860,000 from the previous year as a
result of cost cutting efforts in January 2001. As a percent of sales,
operating expenses were 22% and 23%, respectively when comparing the
years ended November 30, 2001 and 2000.

Other deductions decreased $306,000 from the previous year. Lower bank
borrowings combined with prime interest rate reductions and reduced
volume in our financed accounts receivable account resulted in this
reduction.

Twelve months ended November 30, 2000 compared to the twelve
months ended November 30, 1999

Revenues decreased 17% to $14,229,000 from $17,227,000 while the
Company recorded a net loss of $2,166,000 ($1.72 per share) compared
to a net loss of $630,000 ($.50 per share) in the prior year. Revenues
from Art's-Way branded products were down 18% while OEM sales decreased
16%. The reduction in sales reflects the continuing weakness in the farm
economy. The agricultural niche markets the Company serves were all hit
very hard by declining prices in both livestock and commodities. The sugar
beet industry has suffered from over production and increasing competition
from the sugar cane industry and competition from foreign sources. These
market situations and a general lack of confidence by U.S. farmers in the
direction the U.S. agricultural industry will move has adversely affected
the Company. The one main area of good activity was the cattle industry
where increased demand for beef caused an increase in beef cattle prices,
which resulted in good demand for our feed processing equipment.

Gross profit as a percent of sales decreased from 23% for the year ended
November 30, 1999 to 17% for the year ended November 30, 2000. This
decrease was primarily due to selling old inventory at distressed prices
and a $780,000 inventory valuation writedown to realign the inventory
values to current market conditions in the agricultural industry.
Manufacturing costs were approximately $1,000,000 lower in fiscal year
2000 than in 1999 due to the cost reduction measures implemented
December 1, 1999.

Operating expenses were down $675,000 from the previous year even after
recognizing approximately $189,000 in bad debt expense associated with
customers struggling or going out of business in the distressed
agriculture economy. This reduction in operating expenses was due to
the cost reduction measures implemented December 1, 1999.

Other deductions decreased slightly from the previous year. Interest
on lower bank borrowings was offset by higher interest rates. Lower
costs on the Company's program to offer floor plan financing to our
larger dealers reflects the reduced sales levels.

The Company implemented cost reduction programs that reduced its work
force from 123 to 97, which, when combined with other cost reductions,
reduced manufacturing and operating overhead by approximately
$1,200,000. Other cost reductions include reduced manufacturing costs
accomplished through manufacturing efficiency improvement programs,
reduced warranty costs accomplished through quality programs and other
variable cost controlling initiatives. The Company is now structured
to be more market responsive.

Utilization of Deferred Tax Assets

The Company has established a deferred tax asset valuation allowance
of approximately $2,108,000 and $1,258,000 at November 30, 2001 and
2000, respectively, due to the uncertainty of realizing various net
operating losses and tax credit carryforwards. In assessing the
realizability of deferred tax assets for these years, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Based upon the reversal of deferred tax
liabilities, the expiration dates of tax credits and carryforwards and
projected future taxable income, management believes it is more likely
than not the Company will realize the benefits of the November 30, 2000
net deferred tax assets. See also note 9 to the Financial Statements.

(d) Critical Accounting Policies

The Company has identified the following accounting policies as critical
to their operations.

Revenue Recognition - Revenue is typically recognized when risk of
ownership passes to the buyer. This generally occurs when the Company's
product is shipped from its facility to the customer.

Inventory Valuation - The Company values its inventory based on a
standard costing system which requires the inventory to be valued on the
first in, first out method of valuing inventory. Any inventory product
which has not moved within the past 3 years is considered significantly
aged, and an appropriate reserve percentage is assigned to that inventory
classification.

(e) Effect of New Accounting Standards

On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141 (SFAS No. 141), Business Combinations and
No. 142 (SFAS No. 142), Goodwill and Other Intangible Assests.
SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method.
Business combinations accounted for as poolings-of-interests and
initiated prior to June 30, 2001 are grandfathered. SFAS No. 142
replaces the requirement to amortize intangible assets with
indefinite lives and goodwill with a requirement for an impairment
test. SFAS No. 142 also requires an evaluation of intangible assets
and their useful lives and a transitional impairment test for goodwill
and certain intangible assets upon adoption. After transition, the
impairment tests will be performed annually. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, as of the beginning
of the year. As of November 30, 2001, the Company has no goodwill or
intangible assets recorded in its financial statements. Management
believes that SFAS No. 141 and SFAS No. 142 will have no significant
effect on the financial position, results of operations and cash flows
of the Company.

During June 2001, the FASB issued SFAS No. 143 (SFAS No. 143),
Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of a tangible long-lived asset. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. As of November 30,
2001, management believes that SFAS 143 will have no significant
effect on the financial position, results of operations and cash flows
of the Company. On October 3, 2001, the FASB issued SFAS No. 144
(SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, it retains many
of the fundamental provisions of that Statement. SFAS No. 144 is
effective for fiscal years beginning after December 31, 2001. As of
November 30, 2001, management believes that SFAS No. 144 will have no
significant effect on the financial position, results of operations,
and cash flows of the Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk, primarily from changes
in interest rates, associated with the variable rates on its
debt and its accounts receivable financing.

Item 8. Financial Statements and Supplemental Data

Financial Statements and Supplemental Data for the years ended
November 30, 2001, 2000, and 1999, are presented in a separate
section of this Report following Part IV.

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.

Not Applicable.

PART III

Item 10. Directors and Executive Officers

The information required by Item 10 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2001 and is included as Exhibit 99.1
hereto and incorporated herein by this reference.

Item 11. Executive Compensation

The information required by Item 11 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2001 and is included as Exhibit
99.1 hereto and incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2001 and is included as Exhibit
99.1 hereto and incorporated herein by this reference.

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2001 and is included as Exhibit
99.1 hereto and incorporated herein by this reference.

PART IV

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

(a) Index to Financial Statements and Schedules

See index to financial statements and supporting schedules on page F-2.

(b) Reports on Form 8-K

No current Reports on Form 8-K have been filed during the last fiscal
quarter of the period covered by this Report.

(c) Index to Exhibits

Any exhibits filed with Securities and Exchange Commission will be
supplied upon written request of William T. Green, Executive
Vice President, Finance, Art's-Way Manufacturing Co., Inc.,
Highway 9 West, Armstrong, Iowa 50514. A charge will be made to
cover copying costs. See Exhibit Index below.

Exhibits Required to be Filed

Number Exhibit Description

2 Agreement and Plan of Merger for Reincorporation of
Company in Delaware. Incorporated by reference to
Exhibit 2 of Annual Report on Form 10-K for the year
ended May 27, 1989.

3 Certificate of Incorporation and By-laws for Art's-Way
Manufacturing Co., Inc. Incorporated by reference to
Exhibit 3 of Annual Report on Form 10-K for the year
ended May 27, 1989.

10 Incorporated by reference are the Material Contracts
filed as Exhibit 10 of the Annual Report on Form 10-K
for the fiscal year ended May 30, 1981.

10.1 Art's-Way Manufacturing Co., Inc. 401 (k) Savings Plan.
Incorporated by reference to Exhibit 28 (a) to the
Art's-Way Manufacturing Co., Inc. Registration Statement
on Form S-8 filed on October 23, 1992.

10.2 Art's-Way Manufacturing Co., Inc. Employee Stock Option
Plan (1991). Incorporated by reference to Exhibit "A"
to Proxy Statement for Annual Meeting of Stockholders
held on October 15, 1991.

10.3 Art's-Way Manufacturing Co., Inc. Director Stock Option
Plan (1991). Incorporated by reference to Exhibit "B"
to Proxy Statement for Annual Meeting of Stockholders
held on October 15, 1991.

10.4 Asset Purchase Agreement between the Company and J. Ward
McConnell, Jr., and Logan Harvesters, Inc. Incorporated
by reference to Current Report on Form 8-K dated September
6, 1996.

10.5 Agreement dated February 12, 2002 between the Company and
J. Ward McConnell, Jr., purchase of 640,000 shares of
common stock. Incorporated by reference to Current Report
on Form 8-K filed February 22, 2002.

99.1 Proxy Statement for 2002 Annual Meeting to be filed on or
before 120 days after November 30, 2001.

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Art's-Way Manufacturing Co., Inc.:

We have audited the accompanying financial statements of
Art's-Way Manufacturing Co., Inc. (the Company) as listed in the
accompanying table of contents on page F-2. In connection with
our audits of the financial statements, we have also audited the
financial statement schedule as listed in the accompanying table
of contents. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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 the
Company at November 30, 2001 and 2000, and the results of its
operations and its cash flows for the years ended November 30, 2001,
2000, and 1999, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion,
the related financial statement schedule, when considered in
relation to the financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in note 14 to the financial statements, the Company has suffered
recurring losses from operations and has a debt maturity date that
raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described
in note 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

KPMG LLP

Omaha, Nebraska
January 28, 2002, except
as to note 14, which
is as of February 18, 2002

ART'S-WAY MANUFACTURING CO., INC.

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

FINANCIAL STATEMENTS

Statements of Operations -
Years ended November 30, 2001, 2000, and 1999, ................. F-3

Balance Sheets -
November 30, 2001 and 2000 .................................... F-4

Statements of Stockholders' Equity -
Years ended November 30, 2001, 2000, and 1999 ................... F-5

Statements of Cash Flows -
Years ended November 30, 2001, 2000, and 1999 ................... F-6

Notes to Financial Statements -
Years ended November 30, 2001, 2000, and 1999................... F-7 - F-16

SCHEDULE SUPPORTING FINANCIAL STATEMENTS

Schedule VII - Valuation and Qualifying Accounts............. S-1

All other schedules have been omitted as the required information is not
applicable or the information is included in the financial statements
or related notes.

ART'S-WAY MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS

YEARS ENDED
November 30, November 30, November 30,
2001 2000 1999

NET SALES $10,891,398 $14,229,178 $ 17,226,760
COST OF GOODS SOLD 8,768,676 11,867,404 13,299,177
LOSS ON INVENTORY
DISPOSITION 1,082,441 - -
ASSEST IMPAIRMENT
WRITEDOWN 546,523 - -

TOTAL COST OF GOODS
SOLD 10,397,640 11,867,404 13,299,177

GROSS PROFIT 493,758 2,361,774 3,927,583

EXPENSES:
Engineering 208,378 439,511 439,666
Selling 529,225 701,289 1,234,599
General and
administrative 1,670,987 2,128,164 2,269,710
Total expenses 2,408,590 3,268,964 3,943,975

LOSS FROM OPERATIONS (1,914,832) (907,190) (16,392)

OTHER INCOME (DEDUCTIONS):
Interest expense (411,101) (559,785) (525,237)
Other 9,208 (148,454) (196,544)
Net deductions (401,893) (708,239) (721,781)

LOSS BEFORE
INCOME TAXES (2,316,725) (1,615,429) (738,173)

INCOME TAX EXPENSE
(BENEFIT) 65,176 550,557 (108,247)

NET LOSS $(2,381,901) $(2,165,986) $(629,926)

LOSS PER SHARE
Basic $ (1.86) $ (1.72) $ (0.50)
Diluted (1.86) (1.72) (0.50)

COMMON SHARES AND
EQUIVALENT OUTSTANDING:
Basic 1,279,613 1,256,351 1,248,456
Diluted 1,279,613 1,256,351 1,248,456

See accompanying notes to financial statements.

ART'S-WAY MANUFACTURING CO., INC.
BALANCE SHEETS

November 30, November 30,
2001 2000
ASSETS

CURRENT ASSETS:
Cash $ 4,375 $ 4,375
Accounts receivable-customers,
net of allowance for doubtful accounts
of $55,301 and $76,303
in 2001 and 2000,
respectively 922,168 1,331,308
Inventories 4,690,008 7,184,324
Other current assets 54,157 90,669

Total current assets 5,670,708 8,610,676

PROPERTY, PLANT, AND EQUIPMENT,
at cost 10,583,740 10,603,061
Less accumulated depreciation 9,499,347 8,569,234

Net property, plant, and equipment 1,084,393 2,033,827

DEFERRED INCOME TAXES - 62,900

TOTAL $ 6,755,101 $ 10,707,403

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable to bank $ 2,073,704 $ 2,552,183
Current portion of term debt 962,040 1,355,023
Accounts payable 984,052 1,286,643
Customer deposits 64,449 127,196
Accrued expenses 634,306 987,336

Total current liabilities 4,718,551 6,308,381

LONG-TERM DEBT, excluding current
portion 272,333 344,609

Total liabilities 4,990,884 6,652,990

STOCKHOLDERS' EQUITY:
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,340,778 shares 13,408 13,408
Additional paid-in capital 1,249,611 1,559,037
Retained earnings 909,881 3,291,782
2,172,900 4,864,227

Less cost of common shares in treasury of
42,602 and 84,427 in 2001 and 2000,
respectively 408,683 809,814

Total stockholders' equity 1,764,217 4,054,413

TOTAL $ 6,755,101 $10,707,403

See accompanying notes to financial statements.

ART'S-WAY MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000, AND 1999

Additional
Number of Stated/ Paid-In Retained Treasury
Shares Par Value Capital Earnings Stock Total
BALANCE, NOVEMBER 30, 1998
1,245,931 $13,408 $1,618,453 $6,087,694 $(909,749)$6,809,806
Net Loss - - (629,926) - (629,926)
Shares reissued from treasury
10,420 - (59,416) - 99,935 40,519
BALANCE, NOVEMBER 30, 1999
1,256,351 13,408 1,559,037 5,457,768 (809,814) 6,220,399
Net Loss - - (2,165,986) - (2,165,986)
BALANCE, NOVEMBER 30, 2000
1,256,351 $13,408 $1,559,037 $3,291,782 $(809,814)$4,054,413
Net loss - - (2,381,901) - (2,381,901)
Shares reissued from treasury
41,825 - (309,426) - 401,131 91,705
BALANCE NOVEMBER 30, 2001
1,298,176 $13,408 $1,249,611 $ 909,881 $(408,683)$1,764,217

See accompanying notes to financial statements.

ART'S-WAY MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS

YEARS ENDED
Nov.30, Nov.30, Nov.30,
2001 2000 1999
CASH FLOWS FROM OPERATIONS:
Net loss $(2,381,901) $(2,165,986) $(629,926)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Gain on sale of property, plant,
and equipment (1,308) (6,616) (6,650)
Depreciation and amortization 453,603 517,462 579,931
Asset impairment writedown 546,523 - -
Deferred income taxes 62,900 550,557 (105,015)
Changes in assets and liabilities:
Decrease in:
Accounts receivable 409,140 1,130,194 1,294,329
Inventories 2,494,316 1,890,488 313,449
Income taxes recoverable - - 49,000
Other current assets 36,512 10,011 174,464
Increase (decrease) in:
Accounts payable (259,299) (913,140) 232,770
Customer deposits (62,747) 7,335 7,959
Accrued expenses (353,030) 70,908 (247,843)

Net cash provided by
operating activities 944,709 1,091,213 1,662,468

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment (58,534) - (270,801)
Proceeds from sale of property,
plant, and equipment 9,150 10,050 6,650
Net cash provided by (used in)
investing activities (49,384) 10,050 (264,151)

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in book
overdraft (43,292) 86,615 -
Payments of notes payable
to bank (478,479) (1,096,705) (719,415)
Principal payments on
term debt (465,259) (360,101) (459,861)
Proceeds from issuance of common
stock from treasury 91,705 - 40,519
Net cash used in financing
activities (895,325) (1,370,191) (1,138,757)

Net increase in cash - (268,928) 259,560

Cash at beginning of period 4,375 273,303 13,743

Cash at end of period $ 4,375 $ 4,375 $ 273,303

Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 411,101 $ 559,785 $ 525,237
Income taxes 2,276 4,790 3,952

See accompanying notes to financial statements.

ART'S-WAY MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

The Company is primarily engaged in metal fabrication and the
sale of its products in the agricultural sector of the economy.
Major products include animal feed processing products, sugar
beet and potato products, and land maintenance products.

INVENTORIES

Inventories are stated at the lower of cost or market, and cost is
determined using the first-in, first-out (FIFO) method.

AUCTION SALE OF INVENTORY

During the fourth quarter of 2001, the Company held an auction
to sell excess and obsolete inventory. The auction resulted in
a loss of $1,082,441, and is shown as a separate line item on
the statement of operations for the year ended November 30, 2001.

As a result of the inventory auction in the fourth quarter, the
Company obtained better market information in regards to its aging
inventory, leading to an increase in its obsolete and excess
inventory reserves of approximately $300,000 in the fourth quarter.
The expense associated with this increase in the reserve recognizes
the continuing impact of the farm economy on the Company's asset
value.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment is recorded at cost. Depreciation
of plant and equipment is provided using the straight-line method,
based on estimated useful lives of the assets which range from three
to thirty-three years.

IMPAIRMENT OF LONG-LIVED ASSETS

Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets, requires
the review of long-lived assets and certain identifiable intangibles
to be held and used for impairment wherever events or changes in
circumstances indicate that the carrying amount of asset may not be
recoverable. As of November 30, 2001 the Company determined the
carrying costs of certain fixed asset tooling items were not
recoverable because the Company has decided that it will no longer
manufacture the products that this tooling was being used to produce.
The impairment loss of $546,523 is presented as a separate component
of cost of goods sold on the statement of operations for the year
ended November 30, 2001.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating losses.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A valuation allowance is
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.

REVENUE RECOGNITION

Revenue is recognized when risk of ownership passes to the buyer.
This typically takes place when the product is shipped from the
Company's premises.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred.
Such costs approximated $125,000, $302,000, and $310,000
for the years ended November 30, 2001, 2000, and 1999,
respectively.

LOSS PER SHARE

Basic loss per common share is computed on the basis of
weighted average number of common shares. Diluted loss
per share is computed on the basis of weighted average
number of common shares plus equivalent shares assuming
exercise of stock options.

The difference in shares utilized in calculating basic and
diluted earnings per share represents the number of shares
issued under the Company's stock option plans less shares
assumed to be purchased with proceeds from the exercise of
the stock options. Due to the net losses in 2001, 2000, and
1999, the anti-dilutive effect of the Company's stock option
plans is not included in the calculation of diluted earnings
per share for those periods.

TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES

The Company has entered into an agreement whereby it can sell
accounts receivable to a financial institution. The agreement
provides for the Company to pay monthly interest on the face
amount of each invoice at a rate of 2.75% over the prime rate
from the date of the invoice for 180 days, or the date of
customer payment, whichever occurs first. The buyer is responsible
for servicing the receivables, and has recourse to the Company for
receivables outstanding greater than 180 days. Under SFAS No.140,
the sale of the receivables is reflected as a reduction of
trade accounts receivable. At November 30, 2001 and 2000, there
were $324,000 and $863,000, respectively, of receivables
outstanding which the Company had sold relating to this agreement.

STOCK BASED COMPENSATION

The Company accounts for stock options in accordance with the
provisions of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. Accordingly, the Company has not recognized compensation
expense for its options granted in the years ended November 30, 2001,
2000, and 1999. SFAS No. 123, Accounting for Stock-Based Compensation,
permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. SFAS
No. 123 also allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income and income per
share disclosure for employee stock option grants made in 1996 and
future years, as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123. See note 7 for
additional discussion and pro-forma disclosures.

USE OF ESTIMATES

Management of the Company has made a number of estimates and
assumptions related to the reported amount of assets and
liabilities, reported amount of revenues and expenses, and the
disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with accounting
principles generally accepted in the United States of America.
Actual results could differ from those estimates.

2. INVENTORIES

Major classes of inventory are:
November 30, November 30,
2001 2000
Raw materials $ 749,544 $ 1,054,509
Work in process 1,181,870 2,070,323
Finished goods 2,758,594 4,059,492
Total $ 4,690,008 $ 7,184,324

3. PROPERTY, PLANT, AND EQUIPMENT

Major classes of property, plant,
and equipment, are: November 30, November 30,
2001 2000
Land $ 180,909 $ 180,909
Buildings and improvements 2,615,573 2,615,573
Manufacturing machinery and
equipment 7,577,750 7,555,774
Trucks and automobiles 89,626 130,923
Furniture and fixtures 119,882 119,882
Total $ 10,583,740 $ 10,603,061

4. ACCRUED EXPENSES

Major components of accrued expenses are:
November 30, November 30,
2001 2000
Salaries, wages and commissions $ 294,961 $ 419,941
Accrued warranty expense 67,426 106,667
Other 271,919 460,728
Total $ 634,306 $ 987,336

5. LOAN AND CREDIT AGREEMENTS

Line of Credit

The Company has a credit agreement with a lending institution
(lender) that provides for a revolving line of credit (credit
facility) and a term loan. The credit facility allows for
borrowings up to $4,500,000, subject to borrowing base
percentages on the Company's accounts receivable and inventory,
and allowing for letters of credit up to $100,000. At
November 30, 2001, the Company has borrowed $2,073,704 and has
$100,000 in outstanding letters of credit. At November 30, 2000,
the Company had borrowed $2,552,183 and had $100,000 in out-
standing letters of credit. At November 30, 2001 and 2000,
$68,000 and $212,000 were available for borrowings, respectively.
The interest rate is based on the lender's referenced rate and
is variable based upon certain performance objectives. Under the
terms of the agreement, the Company will not pay more than 4%
over the reference rate, nor less than the refernece rate during
the term of agreement. The outstanding borrowings bear interest
at 9.00% at November 30, 2001.

The term loan was for an original principal amount of $1,991,000.
The principal amount is repayable in monthly installments of
$23,700 with the remaining balance due on demand.

All loans, advances and other obligations, liabilities, and
indebtedness of the Company are secured by all present and future
assets. The Company pays an unused line fee equal to three-eighths
of one percent of the unused portion of the revolving line of credit.
The Company's cash account has been restricted by the lender, such
that any available cash is used to pay down on the credit facility.

During 1999, the Company was notified by its lender that the
Company does not fit the lender's customer profile and was
requested to relocate its financing needs.

At November 30, 2000 and 1999, the Company was in default of a
loan covenant, the fixed maturity coverage ratio, of their
credit facility and term loan. The lender notified the Company
that the current loan agreement provided that the lender may, as
a result of any event of default, accelerate the payment of all
obligations. As a result, all term borrowings associated with this
lender had been classified as current. The lender did not call for
the acceleration of the payment of all obligations, but retained
the right to do so at any time.

The initial term of the loan agreement ended on August 31, 2000.
In a letter dated May 26, 2000, the Company was notified that
the lender did not intend to extend the term of the loan agreement
beyond the termination date. Therefore, all of the obligations
outstanding under the credit agreement and term loan amounting to
$4,383,825 at August 31, 2000 were due and payable on August 31, 2000.

During the period between August 31, 2000 and August 31, 2001,
the loan agreement was amended several times to provide for
extensions of various lengths from 30 days to 90 days. On
September 1, 2001, the bank sold the loan to another lending
institution (new lender). Under this arrangement, the Company
continued to operate under the same terms as existed prior to
the sale. The new lender granted extensions from September 1,
2001 through November 15, 2001, but has not granted an extension
beyond this date.

Although there is no documented extension, the new lender has
submitted a financing proposal to the Company in regards to
long-term financing. The final terms of the proposal are
currently being negotiated.

The Company believes a new credit facility will be obtained
from the new lender and that it will be able to meet its
obligations under the new credit agreement when completed.
If the Company if unable to obtain a new credit agreement,
it will be unable to pay its outstanding balance due upon
foreclosure.

Accounts payable at November 30, 2001 and 2000, includes book
overdraft amounts of $43,323 and $86,615, respectively.

A summary of the Company's term debt is as follows:

November 30, November 30,
2001 2000
Installment term loan payable
in monthly installments
of $23,700 plus interest at
four percent over the bank's
national money market rate
(9.00%), secured (a) $ 889,771 $ 1,280,000

State of Iowa Community Development
Block Grant promissory notes at
zero percent interest, maturity
2006 with quarterly payments
of $11,111 211,111 255,556

State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly
payments of $7,814 133,491 164,076

Total term debt 1,234,373 1,699,632

Less current portion of
term debt 962,040 1,355,023

Long-term debt, excluding
current portion $ 272,333 $ 344,609

(a) All borrowings under the installment note payable are secured by
the cash, accounts receivable, inventories and property, plant, and
equipment of the Company. The agreement requires the Company to
maintain specified ratios, as defined, of debt-to-tangible net worth
and net cash income to current maturities, and restricts the Company
from issuing any dividends.

A summary of the minimum maturities of term debt follows:

Year Amount
2002 $962,040
2003 $72,536
2004 $72,812
2005 $73,103
2006 $53,882

6. EMPLOYEE BENEFIT PLANS

The Company sponsors a defined contribution 401(k) savings plan
which covers substantially all full-time employees who must meet
eligibility requirements. Participating employees may contribute
as salary reductions a minimum of 4% of their compensation up to
the limit prescribed by the Internal Revenue Code. The Company may
make matching contributions at a discretionary percent upon the
approval from the Board of Directors. No contributions were made
by the Company in the years ended November 30, 2001 and 2000.
Company contributions were approximately $32,000 for the year
ended November 30, 1999.

7. STOCK OPTION PLANS

Under the 2001 Director Option Plan, options may be granted to
nonemployee directors at a price not less than fair market value
at the date the options are granted. Nonemployee directors who
have served for at least one year are automatically granted options
to purchase 5,000 common shares. Options granted are nonqualified
stock options. The option price, vesting period and term are set
by the Compensation Committee of the Board of Directors of the
Company. Options for an aggregate of 50,000 common shares may be
granted under the Plan. Each option will be for a period of 10
years and may be exercised at a rate of 25% at the date of grant
and 25% on the first, second and third anniversary date of the
grant on a cumulative basis. At November 30, 2001, the Company
had approximately 30,000 shares available for issuance pursuant
to subsequent grants.

A summary of changes in the stock option plans is as follows:

Nov. 30, Nov. 30, Nov. 30,
2001 2000 1999
Options outstanding at
beginning of period 46,500 51,500 103,078

Granted 40,000 - -

Canceled or other disposition (25,000) (5,000) (51,578)

Options outstanding at
end of period 61,500 46,500 51,500

Options price range
for the period $2.320 $6.000 $6.000
to to to
$6.750 $10.375 $10.375
Options exercisable at end
of period 31,500 46,500 50,250

At November 30, 2001, 2000, and 1999, the weighted-average remaining
contractual life of options outstanding was 7.0 years, 2.4 years and
3.2 years, respectively, and the weighted average exercise price was
$3.89, $8.27 and $8.47, respectively. The weighted average exercise
price for options exercisable at November 30, 2001 was $5.13.

The per share weighted-average fair value of stock options granted
during the years ended November 30, 2001, 2000, and 1999, was $2.39,
$4.73, and $4.64, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions: November 30, 2001 - expected dividend yield 0.0%,
risk-free interest rate of 4.92%, expected volatility factor of
29.25%, and an expected life of 10 years; November 30, 2000 - expected
dividend yield 0.0%, risk-free interest rate of 5.65%, expected
volatility factor of 29.36% and an expected life of 10 years;
November 30, 1999 - expected dividend yield 0.0%, risk-free interest
rate of 6.10%, expected volatility factor of 37.02% and an expected
life of 10 years.

Since the Company applies APB Opinion No. 25 in accounting for its
plans, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company recorded compensation
cost based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:

November 30, November 30, November 30,
2001 2000 1999

Net loss
As reported $(2,381,901) $(2,165,986) $(629,926)
Pro forma $(2,392,509) $(2,169,855) $(633,630)

Diluted loss
per share
As reported $(1.86) $(1.72) $(.50)
Pro forma $(1.87) $(1.73) $(.51)

8. LEASES

The Company has several noncancelable operating leases, primarily
for warehouse facilities, that expire over the next three years.
These leases generally contain renewal options for one-year
periods. Rental expense for operating leases during 2001, 2000,
and 1999 was $32,021, $34,192, and $25,959, respectively.

Future minimum lease payments under noncancelable operating leases
as of November 30, 2001 are:

Year ending November 30,
2002 $4,417
2003 3,567
2004 1,486

In the ordinary course of business, the Company expects to renew or
replace these leases as they expire.

9. INCOME TAXES

Total income tax expense (benefit) for the years ended November 30,
2001, 2000, and 1999, consists of the following:

November 30, November 30, November 30,
2001 2000 1999
Current:
Federal $ - - (3,232)
State 2,276 - -
2,276 - (3,232)

Deferred:
Federal 62,900 550,557 (105,015)
State - - -
62,900 550,557 (105,015)

$ 65,176 550,557 (108,247)

The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:

November 30, November 30, November 30,
2001 2000 1999
Statutory federal
income tax rate (34.0%) (34.0%) (34.0%)
Increase (decrease) due to:
Change in valuation
allowance 36.7 67.6 22.5
Research, development
and state tax credit - - (1.0)
Other-net - .5 (2.2)
2.7% 34.1% (14.7%)

Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
November 30, 2001, and 2000, are presented below:

November 30, November 30,
2001 2000
Deferred tax assets:
Net operating loss
carryforwards $1,325,218 $526,301
Tax credits 150,969 150,969
Accrued expenses 55,427 121,522
Inventory
capitalization 219,423 275,779
Asset reserves 261,494 365,565
Depreciation 95,473 -

Total deferred
tax assets 2,108,004 1,440,136
Less valuation
allowance 2,108,004 1,257,819
Net deferred tax
assets - 182,317

Deferred tax liability:
Depreciation - 119,417

Net deferred
tax assets - $ 62,900

For tax purposes, the Company has available at November 30,
2001, net operating loss carryforwards of approximately
$3,898,000 which will begin to expire in the year 2013. The
Company also has approximately $110,000 of research and
development credits and $41,000 of state tax credits which
begin to expire in the year 2007 and 2008, respectively.

The Company has established a deferred tax asset valuation
allowance of approximately $2,108,000 at November 30, 2001,
due to the uncertainty of realizing its deferred tax assets.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.

10. LITIGATION AND CONTINGENCIES

Various legal actions and claims are pending against the Company.
In the opinion of management and outside counsel, adequate
provisions have been made in the accompanying financial statements
for all pending legal actions and other claims.

11. CREDIT CONCENTRATION

The Company is primarily engaged in metal fabrication and the
sale of its products in the agricultural sector of the economy.
Major products include animal feed processing products, sugar
beet and potato products, and land maintenance products.

The Company's sales to one major original equipment manufacturer
were $2,213,054, $3,192,642, and $4,169,508 for the years ended
November 30, 2001, 2000, and 1999, respectively. Accounts
receivable from this customer are unsecured. Accounts receivable
from this customer were $152,340, $217,180, and $637,798 at
November 30, 2001, 2000, and 1999, respectively.

12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, defines fair value of a financial instrument
as the amount at which the instrument could be exchanged
in a current transaction between willing parties. At
November 30, 2001 and 2000, the carrying amount approximates
fair value for cash and cash equivalents, accounts receivable,
accounts payable, notes payable to lender, term debt and
other current liabilities.

The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, notes payable to lender, and
accrued expenses approximates fair value because of the short
maturity of these instruments. The fair values of each of the
Company's term debt instruments also approximates fair value
because the interest rate is variable as it is tied to the
lender's national money market rate.

13. SUBSEQUENT EVENT

The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. As discussed in note 5, the Company has significant
borrowings that are not covered by a documented loan extension
agreement, and these same borrowings have a maturity date on
demand by the lending institution.

Although there is no documented extension, the new lender has
submitted a financing proposal to the Company in regards to
financing. The final terms of the proposal are currently being
negotiated. The Company believes a new credit facility will be
obtained from this lender and that it will be able to meet its
obligations under the new credit agreement when completed. If
the Company is unable to obtain a new credit agreement, it will
be unable to pay its outstanding balance due upon foreclosure.

On February 12, 2002, an Agreement was reached between J. Ward
McConnell, Jr., a private investor, and the Company that allowed
Mr. McConnell to purchase 640,000 shares of authorized and
unissued stock from the Company for the sum of $800,000. The
proceeds will be used for the repayment of current obligations
and for the reduction of bank debt. Mr. McConnell has agreed
that without prior approval of the Board of Directors, excluding
himself and his son, he will not acquire as much as fifty percent
(50%) of the Company's common stock and will not take the Company
private.

With the $800,000 capital infusion received from Mr. McConnell,
the Company will use approximately $500,000 of the proceeds in
paying down its aged outstanding payables to its suppliers. The
Company is mindful of the necessity to continue to control its
cost, as it intends to finance its working capital and pay down
its debt through cash from operations. The Company believes the
infusion of capital from Mr. McConnell will also enable it to
successfully complete negotiations with its lender.

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 on February 22, 2002.

ART'S-WAY MANUFACTURING CO., INC.

By: James L. Koley By: William T. Green
Chairman of the Board Chief Financial Officer

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.

______________________________ February 22, 2002
James L. Koley Chairman of the Board Date
and Director

______________________________ February 22, 2002
David R. Castle Director Date

______________________________ February 22, 2002
George A. Cavanaugh, Jr. Director Date

______________________________ February 22, 2002
Donald A. Cimpl Director Date

______________________________ February 22, 2002
Douglas McClellan Director Date

_____________________________ February 22, 2002
Marc H. McConnell, Jr. Director Date

ART'S-WAY MANUFACTURING CO., INC. Schedule VII
VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts

Balance, November 30, 1998 $ 205,000

Additions:
Charged to Operating Expenses $ 64,000

Deduct:
Accounts Charged Off 45,304

Balance, November 30, 1999 223,696

Additions:
Charged to Operating Expenses 188,689

Deduct:
Accounts Charged Off 336,082

Balance, November 30, 2000 76,303

Additions:
Charged to Operating Expenses 48,000

Deduct:
Accounts Charged Off 69,002

Balance, November 30, 2001 $ 55,301