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, 1998 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 9, 1999: $4,830,471

Number of common shares outstanding on February 9, 1999: 1,245,931.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement
for the Registrant's 1998 Annual Meeting of Stockholders to be filed
within 120 days of November 30, 1998 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 6

Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 thru 11

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

Item 8 - Consolidated Financial Statements and
Supplemental Data 12
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12

Part III
Item 10- Directors and Executive Officers of the Registant 12

Item 11- Executive Compensation 12

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

Item 13- Certain Relationships and Related Transactions 12

Part IV

Item 14- Exhibits, Financial Statement Schedules and
Reports on Form 8-K 13

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) Financial Information About Industry Segments

In accordance with generally accepted accounting principles,
Art's-Way has only one industry segment, metal fabrication.

(c) 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, stalk shredders;
minimum till seed bed preparation equipment; sugar beet and potato
harvesting equipment; a line of land maintenance equipment and
a line of grain wagons.

In November, 1998, the Company entered into an agreement to
purchase certain assets relating to the manufacture and
distribution of grain drill equipment.

Research and development efforts have been put forth in the
development of the Company's product lines, both in the development
of new products and the upgrading of existing lines. The expenditures
should result in increased future sales.

Private label manufacturing of farm equipment accounted for 43%, 8%,
20%, and 22% of total sales for the year ended November 30, 1998, the
six-month period ended November 30, 1997 and each of the years ended
May 31, 1997, and 1996 respectively. The Company expects private label
manufacturing for the next twelve months to be approximately 32% of
sales.

Art's-Way labeled products are sold through farm equipment dealers
throughout the United States. There is no contractual relationship
with these dealers to distribute our 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 which 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
five patents which expire in various years beginning in 1999 through
2012.

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

The farm equipment industry has a history of carrying significant
inventory at dealers locations. The Company's beet, shredder and
potato product lines are sold with extended terms, however, the
remainder of the product lines are normally sold with 30 day terms.

The Company has a supplier agreement with Case Corporation. Under
the 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 year ended
November 30, 1998, the six-month period ended November 30, 1997
and each of the years ended May 31, 1997,and 1996 sales to Case
aggregated approximately 40%, 5%, 10%, and 15% of total sales,
respectively.

The backlog of orders on February 9, 1999 was approximately
$1,700,000 compared to approximately $7,000,000 a year ago. The
decrease is primarily tillage equipment for Case Corporation.
The balance of the order backlog consists of various Company branded
products. 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 20 competitors producing similar
products and 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 4 companies which have a significant impact on the
market. The Company's share of this market is estimated to be
about 55%. Other products such as mowers, shredders, grain drills
and grain wagons are manufactured by approximately 25 other companies
with total market statistics unavailable; 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 were primarily expended on a new line of feed processing
products and continuous development of beet harvesting equipment.
All research costs are expensed as incurred. Such costs approximated
$385,000 for the year ended November 30, 1998, $193,000 for the
six months ended November 30, 1997 and $301,000 and $224,000
for the years ended May 31, 1997, and May 31, 1996 respectively.
(See also Note 1 to the Consolidated 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 future expenses or capital expenditures relating to compliance
with such regulations will be material.

During the year ended November 30, 1998, the Company had peak
employment of 215 full-time employees,of which 164 were factory
and production employees, 19 were engineers and engineering draftsman,
19 were administrative employees and 13 were 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, accounted for less than 1% of sales and less than 1%
of operating income (loss) in the year ended November 30, 1998,
the six-month period ended November 30, 1997 and each of the years
May 31, 1997 and 1996.

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 140
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 and outside counsel,
appropriate provisions have been made in the accompanying
consolidated financial statements for all pending legal actions
and other claims. (See also Note 9 to Consolidated 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

Per Share Common Stock Bid Prices by Quarter

Year Ended Six-Months Ended Year Ended
Nov.30,1998 Nov. 30, 1997 May 31, 1997
High Low High Low High Low
First Quarter 10-1/2 9 5-1/2 4-1/2
Second Quarter 9-1/2 8-1/2 5-1/2 4-1/4
Third Quarter 8-3/4 7-5/8 8-1/2 6-1/4 6-1/4 4-3/4
Fourth Quarter 8 5-3/4 13-1/2 7-3/4 6-3/4 6

The Common Stock trades on The NASDAQ Stock Market under the symbol ARTW. The
range of closing bid prices shown above is as reported by NASDAQ.The quotations
shown reflect inter-dealer prices, without retail mark-up, markdown 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 10,1999
Common Stock, $.01
Par Value 451

(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.

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 Consolidated 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 Six Months Year Year Year Year
Ended Ended Ended Ended Ended Ended
Nov. 30, Nov. 30, May 31, May 31, May 31, May 28,
1998 1997 1997 1996 1995 1994
Net Sales $23,633 $11,137 $16,440 $13,830 $20,298 $20,473
Net Income (Loss)$ (324) $ 491 $ 80 $ (772) $(1,058)$ 623
Income (Loss)
Per Share:
Basic $ (.26) $ .39 $ .07 $ (.72) $ (.99) $ .58
Diluted $ (.26) $ .39 $ .07 $ (.72) $ (.99) $ .57
Common Shares
and Equivalents
Outstanding:
Basic 1,245,931 1,244,620 1,197,452 1,077,359 1,070,391 1,064,898
Diluted 1,245,931 1,261,911 1,199,871 1,077,359 1,070,391 1,087,846

(a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per
Share Amounts)
Nov. 30, Nov. 30 May 31 May 31 May 31 May 28
1998 1997 1997 1996 1995 1994
Total Assets $16,995 $15,322 $15,214 $11,886 $14,903 $17,261
Long-Term Debt $ 2,160 $ 1,452 $ 2,170 $ 1,846 $ 1,573 $ 2,173
Dividends Per
Share $ .00 $ .00 $ .00 $ .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(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 and its subsidiary
is based on the Consolidated Financial Statements and the
notes thereto included herein.

(a) and (b) Liquidity and Capital Resources

Twelve months ended November 30, 1998

The Company's main source of funds was additional bank borrowings. The
main use of funds by operating activities were increases in accounts
receivable and inventory. The accounts receivable increase results from
a slower payment pattern for our own branded equipment which increased
the days outstanding from 54 days to 58 days. Inventory increased due
primarily to Case tillage equipment production scheduled for December
1998. Expenditures for capital equipment were $518,000 including
$300,000 to upgrade computer hardware and software. The balance of the
expenditures was spent on production equipment.

Six-months ended November 30, 1997

For the six-months ended November 30, 1997, the Company's main source
of funds resulted from net income plus depreciation. This source was
offset by an increase in inventories and a decrease in customer
deposits. The inventory increase resulted from a higher production
load at November 30, 1997 due primarily from Case tillage equipment.
Customer deposits were from down payments on beet equipment. This
equipment was shipped during the six-month period, consequently
the decrease in customer deposits.

Comparison of year ended May 31, 1997 with May 31, 1996

In fiscal year 1997, the Company used $277,000 of cash from operations
compared to generating $1,199,000 cash from operations in fiscal year
1996. The decrease in cash from operations in fiscal year 1997 reflects
an increase in inventories and receivables, offset in part by increased
net income and payables.

In fiscal year 1997, major capital expenditures included two acquisitions.
The first acquisition was a line of potato farming equipment and associated
service parts. The second acquisition was a line of grain wagons and
associated service parts. The acquisitions, which included fixed assets
and inventory, were financed by the issuance of 145,000 shares of Art's-Way
common stock, loans from the State of Iowa and local sources obtained
through the State of Iowa Community Development Block Grant program and
borrowings under the Company's short term line of credit.

Capital Resources

In April 1998, the Company amended its revolving line of credit agreement.

The agreement allows for borrowings up to $6,000,000 based upon a
percentage of the Company's accounts receivable and inventory and
allows for letters of credit up to an aggregate amount of $300,000.
At November 30, 1998 the Company has borrowed $4,368,303 and has
$100,000 in outstanding letters of credit. The interest rate is
based on the bank's referenced rate and is variable based upon certain
performance objectives with a maximum of plus .50% of the referenced
rate and a minimum of plus zero (8.25% at November 30, 1998).

The amendment also provides for a restructured long-term loan in the
principal amount of $1,991,000. The principal amount is repayable in
monthly installments of $23,700 with the final payment due August 2000
unless the revolving credit facility is renewed. In the event that
the term of the revolving line of credit is subsequently extended,
the term loan shall continue to amortize, based upon the payment
schedule outlined above.

All loans, advances and other obligations, liabilities and indebtedness
of the Company are secured by all present and future assets.

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

November 30, November 30, May 31, May 31,
1998 1997 1997 1996
Current Assets $14,131,370 $12,486,599 $12,210,992 $9,578,494
Current Liabilities$ 7,884,736 $ 6,621,214 $ 6,821,525 $4,593,848
Working Capital $ 6,246,634 $ 5,865,385 $ 5,389,467 $4,984,646

Current Ratio 1.8 1.9 1.8 1.9

The Company believes its liquidity, capital resources, and borrowing
capacity are adequate for its current and intended operations.

(c) Results of Operations

Twelve months ended November 30, 1998 compared to the twelve months
ended November 30, 1997

The following proforma unaudited information is presented for the
twelve months ending November 30, 1997 in order to facilitate the
analysis for the twelve months ending November 30, 1998:

Unaudited
November 30, 1997

Net sales $20,302,000
Gross profit $ 5,972,000
Operating expenses $ 4,302,000
Interest expense $ 417,000
Net income $ 689,000

Revenue increased 16% to $23,600,000 from $20,300,000, while the
Company recorded a net loss of $324,000 ($.26 per share) compared
to a net income of $689,000 ($.56 per share) in the prior year.
The loss was all in the fourth quarter, where revenues were
13% higher at $6,290,000 from $5,550,000.

The increase in sales revenue was due to our new contract to provide
tillage equipment and related service parts to Case Corporation.
Total sales arising from the contract were $7,200,000. The Company
also benefited from a new agreement with New Holland to supply a
forage blower similar to that provided to other OEM customers.
This major increase in OEM business more than offset a 25% decline
in demand for the Company's branded products. A collapse in potato
prices, low hog prices and a poor farm economy in the Red River
Valley region, all contributed to the decline in demand.

Gross profit decreased from 29.4% for the twelve months ended
November 30, 1997 to 21.6% for the twelve months ended November 30,
1998. This dramatic change of 7.5 percentage points results primarily
from a change in product mix from 15% OEM, 85% Art's-Way brands in
1997 to 40% OEM, 60% Art's-Way brands in 1998. OEM business inherently
is less profitable. This product mix impact reduced our gross margin
by 5 percentage points. Problems incurred in the start-up of the new
tillage products due to late vendor delivery of components and
absorbing new manufacturing processes resulted in scheduling problems
for all products. This resulted in significant overtime to
catch up, with a consequent deterioration in production efficiency.
Warranty costs increased $173,000 due to startup problems
with a new model beet harvester.

Operating expenses were up 11% from last year. The full year impact
of the restoration of the Company contribution to the employee
401(k) plan impacted expenses by $122,000. Group insurance
to cover employee medical costs rose $236,000. New product
introduction costs were $148,000. $80,000 was spent on outside
consultants to determine the cause of our deteriorating
manufacturing performance. Bad debt reserves were increased
by $162,000 to cover the adverse potato market conditions.
Overall, operating expenses as a percentage of sales dropped
from 21.2% in 1997 to 20.3% in 1998.

Higher inventory levels throughout the year caused an increase
in interest expense by 34%. Other financing expenses include
$80,000 charge in the fourth quarter to be in compliance with
FASB 125 on the accounting treatment for sales of accounts receivable.

Six-months ended November 30, 1997

Sales increased due mainly to strength in sugar beet harvesting
equipment and related service parts. Other strong areas included corn
stalk shredders, where the Company enjoyed its best season since
1994, the SupRaMix vertical feed mixer and our traditional grinder
mixer products. Two areas of weakness in sales were the termination
of our OEM contract to make frames for a local fiberglass body
manufacturer and our deliberate scaling back of Logan potato equipment
production in view of a dramatic downturn in potato prices and
customer demand.

Gross profits increased due to improved production efficiencies,
a product mix of higher margin products and improved purchasing
of raw materials. Warranty expenses were impacted adversely by
$160,000 due to unanticipated problems with our new model beet
harvester. The Company encountered learning curve expenses
associated with the new tillage production for Case.

Operating expenses are up as the Company added staff in engineering
and sales to support our new product lines and to enhance our
position in the beet and feed processing business and due to the
reinstatement of the Company's contribution to the employee
401(k) retirement plan.

Interest costs were up, as the higher sales volumes required
higher working capital requirements.

Comparison of year ended May 31, 1997 with May 31, 1996

Sales revenues for FY 1997 rose 19% due to the acquisitions described
above and returning strength in other areas of our existing business.
Sales from the acquisitions exceeded $2,000,000, the feed processing
business was up 22%, and sales gains were made in our land maintenance
line. Sales declined in the sugar beet equipment line as we deliberately
delayed production beyond May 31, 1997 to minimize working capital, make
manufacturing room for our new products, and to allow more time for the
development of new features.

Gross profit for FY 1997 rose 46% on the higher sales volume, however
fiscal year 1996 gross profit was impacted by a $350,000 inventory
write-down. The ratio of cost of goods sold to net sales improved to
73.4% from last year's 78.4% (75.9% prior to the write-down). This
improvement in FY 1997 resulted from lower raw material costs and reduced
warranty expense.

Operating expenses were 7% higher than FY 1996. The two acquisitions
accounted for most of the increase, which included amortization of purchase
costs and additional employees to support the acquisitions. In addition,
the Company strengthened our beet equipment resources in the engineering
area. The 10% wage reduction implemented in June 1995 was progressively
restored which further increased operating expenses. The ratio of expenses
to sales fell from 25.7% in FY 1996 to 23.1% in FY 1997.

Interest expense was 29% lower in FY 1997 when compared to FY 1996. Improved
manufacturing flow reduced working capital requirements throughout the year.

Utilization of 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. Based upon
the reversal of deferred tax liabilities, projected future taxable income
and considering the expiration dates of tax credits and carryforwards,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences at November 30, 1998. See also
Note 8 to the Consolidated Financial Statements.

Year 2000 Issues

In 1998 the Company began preparing its computer-based systems for
year 2000 ("Y2K") computer software compliance issues. Historically,
certain computer programs were written using two digits rather than
four to define the applicable year. As a result, software may recognize
a date using the two digits "00" as 1900 rather than the year 2000.
Computer programs that do not recognize the proper date could generate
erroneous data or cause systems to fail. The Company's Y2K project covers
its significant computer programs and certain equipment, which contain
microprocessors and is divided into five major phases-assessment, planning,
conversion, implementation and testing. The Company has completed the
assessment and planning phases and is currently in the conversion,
implementation and testing phases. Systems which have been determined
not to be Y2K compliant are being either replaced or reprogrammed, and
thereafter tested for Y2K compliance. The Company expects the conversion,
implementation and testing phases to be complete by mid-1999.

The Company's Y2K project also considers the readiness of significant
customers and vendors. The Company is in the process of identifying
and contacting critical suppliers and customers regarding their
plans and progress in addressing their Y2K issues. The Company has
received varying information from such parties on the state of
compliance or expected compliance. The non-compliance of such vendors
could impair the ability of the Company to obtain necessary products
or to sell or provide services to its customers. Disruptions of
the computer systems of the Company's vendors could have a material
adverse effect on the Company's financial condition and results of
operations for the period of such disruption. Contingency plans are
being developed in the event that any critical supplier or customer
is not compliant.

The Company has incurred approximately $300,000 of Y2K project expense
to date. Future expenses are estimated to be approximately $5,000.
Such cost estimates are based upon presently available information
and may change as the Company continues with its Y2K project.

The Company believes that its internal operating systems will be
Year 2000 compliant before December 31, 1999. Therefore, the
Company believes that the most reasonably likely worst-case
scenario will be that one or more of third parties with which
the Company has a material business relationship will not have
successfully dealt with its Year 2000 issues. A critical third
party failure (such as telecommunication, utilities or
financial institutions) could have a material adverse affect
on the Company by eliminating the Company's ability to order
and pay for products from suppliers and receive orders and
payments from customers. It is also possible that one or
more of the internal operating systems will not function
properly and make it difficult to complete routine tasks,
such as accounting and other record keeping duties. Based
on information currently available, the Company does not
believe there will be any long-term operating systems failures.
However, the Company will continue to monitor these issues
as part of its Year 2000 project and will concentrate its
efforts on minimizing their impact.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 8. Consolidated Financial Statements and Supplemental Data

Consolidated Financial Statements and Supplemental Data for the year ended
November 30, 1998, the six-month period ended November 30, 1997 and for each
of the years ended May 31, 1997 and 1996, 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, 1998 which is included as Exhibit 99.1
hereto and incorporated herein by this reference.

Item 11. Executive Compensation

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, 1998 which 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 10 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A,
within 120 days after November 30, 1998 which 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 10 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A,
within 120 days after November 30, 1998 which 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, 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.

99.1 Proxy Statement for 1998 Annual Meeting to be filed on or
before 120 days after November 30, 1998.

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated financial statements of
Art's-Way Manufacturing Co., Inc. and subsidiary as listed in the
accompanying index. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and
financial statement schedule bases 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Art's-Way Manufacturing Co., Inc. and subsidiary at November 30, 1998
and November 30, 1997 and the results of their operations and their cash
flows for the year ended November 30, 1998 and the six-month period
ended November 30, 1997 and each of the years ended May 31, 1997 and
1996 in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken
as a whole, present fairly, in all material respects, the information
set forth therein.

KPMG PEAT MARWICK LLP

Omaha, Nebraska
January 15, 1999

ART'S-WAY MANUFACTURING CO., INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations -
Year ended November 30, 1998, six months ended
November 30, 1997 and years ended
May 31, 1997 and 1996 ..................................... F-3

Consolidated Balance Sheets -
November 30, 1998 and November 30, 1997....................... F-4 - F-5

Consolidated Statements of Stockholders' Equity -
Year ended November 30, 1998, six months ended
November 30, 1997 and years ended May 31, 1997, 1996 ....... F-6

Consolidated Statement of Cash Flows -
Year ended November 30, 1998, six months ended
November 30, 1997 and years ended May 31, 1997,and 1996..... F-7

Notes to Consolidated Financial Statements -
Year ended November 30, 1998, six months ended
November 30, 1997 and years ended May 31, 1997 and 1996..... F-8 - F-16

SCHEDULE SUPPORTING CONSOLIDATED
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 consolidated financial
statements or related notes.

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

YEAR SIX MONTHS
ENDED ENDED YEARS ENDED
November 30, November 30, May 31, May 31,
1998 1997 1997 1996

NET SALES $ 23,632,927 $11,137,092 $16,440,194 $13,830,471
COST OF GOODS SOLD 18,576,010 7,783,751 12,075,488 10,842,375

GROSS PROFIT 5,056,917 3,353,341 4,364,706 2,988,096

EXPENSES:
Engineering 632,541 269,473 353,814 278,426
Selling 1,463,497 759,787 1,372,910 1,495,415
General and
administrative 2,692,817 1,192,045 2,068,615 1,781,417
Total expenses 4,788,855 2,221,305 3,795,339 3,555,258

INCOME (LOSS)
FROM OPERATIONS 268,062 1,132,036 569,367 (567,162)

OTHER INCOME (DEDUCTIONS):
Interest expense (558,988) (264,939) (327,089) (459,066)
Other (270,397) (111,268) (117,033) (115,750)
Net deductions (829,385) (376,207) (444,122) (574,816)

INCOME (LOSS) BEFORE
INCOME TAXES (561,323) 755,829 125,245 (1,141,978)

INCOME TAX EXPENSE
(BENEFIT) (237,435) 265,140 45,222 (370,051)

NET INCOME (LOSS) $(323,888) $ 490,689 $ 80,023 $(771,927)

INCOME PER SHARE
Basic $ (0.26) $ 0.39 $ 0.07 $ (0.72)
Diluted (0.26) 0.39 0.07 (0.72)

COMMON SHARES AND
EQUIVALENT OUTSTANDING:
Basic 1,245,931 1,244,620 1,197,452 1,077,359
Diluted 1,245,931 1,261,911 1,199,871 1,077,359

See accompanying notes to consolidated financial statements.

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

November 30, November 30,
1998 1997
ASSETS

CURRENT ASSETS:
Cash $ 13,743 $ 8,692
Accounts receivable-customers,
net of allowance for doubtful accounts
of $205,000 and $31,000
respectively 3,755,831 3,005,837
Inventories 9,388,261 8,754,469
Deferred income taxes 649,391 464,426
Income tax receivable 49,000 99,000
Other current assets 275,144 154,175

Total current assets 14,131,370 12,486,599

PROPERTY, PLANT AND EQUIPMENT,
at cost 10,418,307 10,323,374
Less accumulated depreciation 7,554,454 7,488,142

Net property, plant and equipment 2,863,853 2,835,232

TOTAL $ 16,995,223 $15,321,831

See accompanying notes to consolidated financial statements.

November 30, November 30,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable to bank $ 4,368,303 $ 3,172,296
Current portion of long-term debt
359,862 483,157
Accounts payable 1,880,398 2,069,584
Customer deposits 111,902 106,793
Accrued expenses 1,164,271 789,384

Total current liabilities 7,884,736 6,621,214

LONG-TERM DEBT, excluding current
portion 2,159,732 1,451,794

DEFERRED INCOME TAXES 140,949 115,129

Total liabilities 10,185,417 8,188,137

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 1,618,453 1,618,453
Retained earnings 6,087,694 6,411,582
7,719,555 8,043,443
Less cost of common shares in treasury of
94,847 in 1998 AND 1997 909,749 909,749

Total stockholders' equity 6,809,806 7,133,694

TOTAL $16,995,223 $15,321,831

See accompanying notes to consolidated financial statements.

ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED NOVEMBER 30, 1998, SIX MONTHS ENDED NOVEMBER 30, 1997 AND
YEARS ENDED MAY 31, 1997 AND 1996

Additional
Number of Stated/ Paid-In Retained Treasury
Shares Par Value Capital Earnings Stock Total
BALANCE, MAY 28,1995
1,072,931 $ 13,408 $2,356,789 $6,612,797 $(2,568,838)$6,414,156
Net loss - - (771,927) - (771,927)
Common treasury shares issued
13,700 - (61,700) - 131,393 69,693
BALANCE, MAY 31,1996
1,086,631 13,408 2,295,089 5,840,870 (2,437,445) 5,711,922
Net income - - 80,023 - 80,023
Common treasury shares issued
151,800 - (657,202) - 1,455,766 798,564
BALANCE, MAY 31,1997
1,238,431 13,408 1,637,887 5,920,893 (981,679) 6,590,509
Net income - - 490,689 - 490,689
Common treasury shares issued
7,500 - (19,434) - 71,930 52,496
BALANCE, NOVEMBER 30, 1997
1,245,931 $13,408 $1,618,453 $6,411,582 $(909,749)$7,133,694
Net loss - - (323,888) - (323,888)
BALANCE NOVEMBER 30, 1998
1,245,931 $13,408 $1,618,453 $6,087,694 $(909,749)$6,809,806

See accompanying notes to consolidated financial statements.

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

YEAR SIX MONTHS
ENDED ENDED YEARS ENDED
November 30, November 30, May 31, May 31,
1998 1997 1997 1996
CASH FLOWS FROM OPERATIONS:
Net income (loss) $(323,888) $ 490,689 $ 80,023 $(771,927)
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating activities:
Loss on sale of property, plant
and equipment 6,798 16,852 13,553 2,140
Depreciation and amortization 481,176 280,700 586,152 572,109
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (749,994) (62,433) (479,163) 946,384
Inventories (633,792) (316,900)(2,236,826) 1,227,500
Other current assets (120,969) 6,494 (73,194) (46,343)
Increase (decrease) in:
Accounts payable (189,186) (61,362) 1,624,034 (1,427,404)
Customer deposits 5,109 (703,987) 438,979 276,187
Accrued expenses 374,887 24,164 (242,106) 127,745
Income taxes (recoverable) 50,000 (99,000) - 668,742
Deferred taxes (159,145) 200,655 24,532 (374,271)
Net cash provided (used)
by operating activities (1,259,004) (224,128) (264,016) 1,200,862

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (518,445) (151,134)(1,300,788) (19,568)
Proceeds from sale of property,
plant and equipment 1,850 21,347 5,400 -
Net cash used in investing
activities (516,595) (129,787)(1,295,388) (19,568)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of)
notes payable to bank 1,196,007 519,863 370,624 (1,518,191)
Proceeds from long-term debt 1,008,800 - 750,000 2,130,000
Principal payments on
long-term debt (424,157) (235,049) (426,000) (1,857,334)
Proceeds from issuance of common
stock from treasury - 52,496 798,564 69,693
Net cash provided by (used in)
financing activities 1,780,650 337,310 1,493,188 (1,175,832)

Net increase (decrease) in cash 5,051 (16,605) (66,216) 5,462

Cash at beginning of period 8,692 25,297 91,513 86,051

Cash at end of period $ 13,743 $ 8,692 $ 25,297 $ 91,513

Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 558,988 $ 264,939 $ 333,108 $ 490,876
Income taxes 2,094 162,985 22,267 6,992

See accompanying notes to consolidated financial statements.

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of
Art's-Way Manufacturing Co., Inc. ("Company" or "Art's-Way")
and its subsidiary, A-W Transportation Co. All material
intercompany balances and transactions have been eliminated in
consolidation. As of August 4, 1995, A-W Transportation Co. was
administratively dissolved.

CHANGE IN YEAR END

During 1997, the Company changed its fiscal year-end to November 30
in order to coincide with seasonality of the agriculture industry.
As a result, the accompanying consolidated financial statements include
the six-month transition period ended November 30, 1997, and comparative
unaudited financial information for the six-months ended November 30,
1996 is presented in note 13.

INVENTORIES

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

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.

CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.

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
consolidated 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. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Such
costs approximated $385,000 for the year ended November 30, 1998,
$193,000 for the six months ended November 30,1997, and $301,000
and $224,000 for the years ended May 31,1997 and May 31,1996
respectively.

1., Continued

INCOME (LOSS) PER SHARE

The Company has adopted SFAS 128 Earnings Per Share (SFAS 128),
which has changed the method for calculating income per share.
SFAS 128 requires the presentation of "basic" and "diluted"
income per share on the face of the income statement. Prior
period income per share data has been restated in accordance
with SFAS 128. Income per common share is computed by dividing
net income by the weighted average number of common shares
and common equivalent shares outstanding during each period.

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 loss in 1998 and the year
ended May 31, 1996, 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. The only reconcil-
ing item between the shares used in the computation of basic
and diluted earnings per share for the six months ended
November 30, 1997 and the year ended May 31, 1997, is the effect
of stock options of 17,291 and 2,419, respectively.

TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES

Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities provides accounting and reporting
standards for transfers and servicing of financial assets and
based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings.

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. 125,
the sales of the receivables are reflected as a reduction of
trade accounts receivable. At November 30, 1998, there were
$1,824,000 of receivables outstanding which the Company has sold
relating to this agreement.

USE OF ESTIMATES

Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.

2. INVENTORIES

Major classes of inventory are:

November 30, November 30,
1998 1997
Raw materials $ 1,503,784 $1,593,469
Work in process 4,147,554 3,340,641
Finished goods 3,736,923 3,820,359
Total $9,388,261 $8,754,469

3. PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant
and equipment, at cost, are: November 30, November 30,
1998 1997
Land $ 180,909 $ 180,909
Buildings and improvements 2,615,573 2,615,573
Manufacturing machinery and
equipment 7,346,289 7,257,729
Trucks and automobiles 155,654 148,817
Furniture and fixtures 119,882 120,346
Total $ 10,418,307 $ 10,323,374

4. ACCRUED EXPENSES

Major components of accrued expenses are:
November 30, November 30,
1998 1997
Salaries, wages and commissions $ 337,682 $ 285,806
Other 826,589 503,578
Total $1,164,271 $ 789,384

5. LOAN AND CREDIT AGREEMENTS

Line of Credit

In April 1998, the Company amended its revolving line of credit
agreement.

The agreement allows for borrowings up to $6,000,000 based upon
a percentage of the Company's accounts receivable and inventory
and allows for letters of credit up to an aggregate amount of
$300,000. At November 30, 1998, the Company has borrowed $4,368,303
and has $100,000 in outstanding letters of credit. The interest rate
is based on the bank's referenced rate and is variable based upon
certain performance objectives with a maximum of plus .50% of the
referenced rate and a minimum of plus zero (8.25% at November 30,
1998).

The amendment also provides for a restructured long-term loan in
the principal amount of $1,991,000. The principal amount is
repayable in monthly installments of $23,700 with the final payment
due August 2000 unless the revolving credit facility is renewed.
In the event that the term of the revolving line of credit is
subsequently extended, the term loan shall continue to amortize
based upon the payment schedule outlined above.

All loans, advances and other obligations, liabilities and
indebtedness of the Company are secured by all present and future
assets. Unused borrowings under the revolving line of credit
were $393,646 at November 30, 1998. The Company pays an unused
line fee equal to three-eighths of one percent of the unused
portion of the revolving line of credit.

5., Continued

Long-term Debt

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

November 30, November 30,
1998 1997
Installment promissory note dated
April 23, 1998, in the original
principal sum of $1,991,000,payable
in monthly installments of $23,700
plus interest at one-half percent
over the bank's national money market
rate, (8.25%), secured (a) $ 1,848,800 $ 1,207,000

State of Iowa Community Development
Block Grant promissory notes at
zero percent interest, maturity
2006 with quarterly principal
payments of $11,111 (b) 444,444 488,889

State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly
payments of $7,814. 226,350 239,062

Total long-term debt 2,519,594 1,934,951

Less current portion of
long-term debt 359,862 483,157

Long-term debt, excluding
current portion $2,159,732 $ 1,451,794

(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. The Company was in compliance
with all applicable covenants at November 30, 1998,except for covenants
pertaining to the fixed charge coverage ratio and capital expenditures.
The Company has received waivers of these covenants from the Bank.
Retained earnings of $6,087,694 are restricted and are not available
for the payment of dividends.

(b) $100,000 of this debt will be forgiven upon the satisfactory
completion of certain performance target obligations at the contract
expiration date of June 30, 1998 and the first year anniversary of
this date, June 30, 1999.

A summary of the minimum maturities of long-term debt follows:

Year Amount
1999 $359,862
2000 $1,640,100
2001 $75,023
2002 $72,474
2003 $72,750
Thereafter $299,384

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. Company contributions
approximated $170,000 for the year ended November 30, 1998,
$54,000 for the six months ended November 30, 1997 and $0 for each
of the years ended May 31, 1997 and 1996.

7. STOCK OPTION PLANS

Under the 1991 Employee Option Plan, stock options may be granted
to key employees to purchase shares of common stock of the Company
at a price not less than its fair market value at the date the
options are granted. Options granted may be either nonqualified
or incentive 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 100,000 shares of common
stock may be granted. Each option will be for a period of ten 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, 1998, the Company had
approximately 38,000 shares available for issuance pursuant to
subsequent grants.

Under the 1991 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 45,000 common shares may be granted
under the Plan. Each option will be for a period of ten 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, 1998, the Company had
approximately 15,000 shares available for issuance pursuant to
subsequent grants.

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

Nov. 30, Nov. 30, May 31, May 31,
1998 1997 1997 1996
Options outstanding at
beginning of period 92,552 87,552 78,763 77,988

Granted 10,526 5,000 20,000 35,563

Canceled or other disposition - - (11,211) (34,788)

Options outstanding at
end of period 103,078 92,552 87,552 78,763

Options price range
for the period $4.750 $4.750 $4.750 $4.750
to to to to
$10.375 $10.375 $10.375 $11.125

Options exercisable at end
of period 77,420 60,151 57,701 48,115

At November 30, 1998 and 1997,the weighted-average remaining contractual life of
options outstanding was 6.1 years and 6.7 years respectively and the weighted
average exercise price was $7.14 and $6.87 respectively. The weighted average
exercise price for options exercisable at November 30, 1998 was $7.31.

7., Continued

The Company accounts for stock options in accordance with the
provisions of the (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 year ended November 30, 1998,
the six month period ended November 30, 1997 and each of the years
ended May 31, 1996 and 1997. In 1997, the Company adopted (FASB)
Statement No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. FASB
Statement 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
FASB Statement 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 FASB Statement No. 123.

The per share weighted-average fair value of stock options granted
during the year ended November 30, 1998, the six-month period ended
November 30, 1997 and each of the years ended May 31, 1997 and
May 31, 1996 was $4.07, $4.11, $4.06 and $4.47, respectively,
on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions: November 30, 1998-
expected dividend yield 0.0%, risk-free interest rate of 4.83%,
expected volatility factor of 36.55%, and an expected life of 10 years;
November 30,1997 - expected dividend yield 0.0%, risk-free
interest rate of 5.86%, expected volatility factor of 36.87%, and an
expected life of 10 years; May 31, 1997 - expected dividend yield 0.0%,
risk-free interest rate of 6.75%, expected volatility factor of 36.70%,
and an expected life of 10 years; May 31, 1996 - expected dividend
yield 0.0%, risk-free interest rate of 6.74%, expected volatility
factor of 38.50%, 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 consolidated financial statements. Had the Company recorded
compensation cost based on the fair value at the grant date for its
stock options under FASB Statement No. 123, the Company's net income
(loss) and income (loss) per share would have been reduced to the
pro forma amounts indicated below:

November 30 November 30 May 31, May 31,
1998 1997 1997 1996
Net income (loss)
As reported $(323,888) $490,689 $80,023 $(771,927)
Pro forma $(355,947) $464,005 $52,803 $(797,380)

Diluted income(loss)
per share
As reported $(.26) $.39 $.07 $(.72)
Pro forma $(.29) $.37 $.04 $(.73)

8. INCOME TAXES

Total income tax expense (benefit) for the year ended November 30, 1998
the six-month period ended November 30, 1997 and for each of the years
ended May 31, 1997, and 1996,consists of the following:

November 30, November 30, May 31, May 31,
1998 1997 1997 1996

Current:
Federal $ (78,290) $ 64,485 $ 9,453 $ -
State - - 11,237 4,220
(78,290) 64,485 20,690 4,220

Deferred:
Federal (159,145) 200,655 33,544 (320,210)
State - - (9,012) (54,061)
(159,145) 200,655 24,532 (374,271)

$(237,435) $ 265,140 $45,222 $(370,051)

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

November 30, November 30, May 31, May 31,
1998 1997 1997 1996
Statutory Federal
income tax rate (34.0%) 34.0% 34.0% (34.0%)
Increase(decrease)due to:
State income taxes,
net of Federal income
tax benefit - - 1.1 (2.9)
Research development
and state tax
credits (12.1) (1.3) - -
Other-net 3.8 2.4 1.0 4.5
(42.3%) 35.1% 36.1% (32.4%)

Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
November 30, 1998 and 1997,and May 31, 1997 and 1996 are presented
below:

November 30, November 30, May 31, May 31,
1998 1997 1997 1996
Deferred tax assets:
Net operating loss
carryforward $41,608 $ - $ 56,122 $134,187
Tax credits 117,278 16,034 35,552 -
Accrued expenses not
deducted until paid 129,336 50,053 95,419 138,530
Inventory
capitalization 274,536 302,945 274,067 191,106
Asset reserves 86,633 95,394 182,893 260,313
Other - - - 10,386

Total deferred
tax assets 649,391 464,426 644,053 734,522

Deferred tax
liability
Depreciation 140,949 115,129 94,101 160,038

Net deferred
tax assets $508,442 $349,297 $549,952 $574,484

8., Continued

There was no valuation allowance for deferred tax assets at
November 30, 1998 and 1997, and May 31, 1997 and 1996. 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. Based upon the reversal of deferred
tax liabilities, the expiration dates of tax credits and carry-
forwards and projected future taxable income, management believes
it is more likely than not the Company will realize the benefits
of the November 30, 1998 deferred tax assets.

The Company has available approximately $92,000 of research and
development credits and $25,000 of Iowa Jobs Tax Credits which
will expire beginning in the year 2007 and 2008, respectively.
The Company also has approximately $122,000 of net operating loss
carryforwards which will expire in 2013.

9. LITIGATION AND CONTINGENCIES

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

10. ACQUISITIONS

On November 25, 1998 the Company entered into an agreement to
purchase certain fixed assets, accounts receivable and inventory
from United Farm Tools, Inc. relating to the manufacture and
distribution of grain drill equipment. The total purchase is
approximately $1,086,000. As of November 30, 1998 the Company
had purchased approximately $239,000 of accounts receivable.
The remaining assets will be delivered and recorded in Fiscal 1999.

On August 30, 1996, the Company acquired certain fixed assets and
inventories from Logan Harvesters, Inc. relating to the manufacture
and distribution of potato farm equipment. The total purchase price
was approximately $2,750,000. The Company issued 145,000 shares of
the Company's common stock, with the balance of the purchase price
in cash.

On September 23, 1996, the Company acquired certain fixed assets
and inventories from DMI, Inc. relating to the manufacture and
distribution of grain wagons. The total cash purchase price was
approximately $290,000.

11. INDUSTRY SEGMENT INFORMATION

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 $9,569,238 for the year ended November 30, 1998, $609,554 for
the six-month period ended November 30, 1997 and $1,581,553, and
$2,119,020 for each of the years ended May 31, 1997 and 1996
respectively. Accounts receivable from this customer are unsecured.
Accounts receivable from this customer were $1,449,944 at November 30,
1998, $209,805 at November 30, 1997 and $94,986, and $54,637 at
May 31, 1997 and 1996 respectively.

12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, defines fair value of a financial instrument at the
amount at which the instrument could be exchanged in a current
transaction between willing parties. At November 30, 1998 and
1997, the carrying amount approximates fair value for cash
and cash equivalents, accounts receivable, accounts payable, notes
payable to bank, long-term debt and other current liabilities.

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

13. TRANSITION PERIOD REPORTING REQUIREMENT

As required by the change in year end explained in footnote 1,
the Company's unaudited financial information for the six-month
period ended November 30, 1996 is as follows.

Unaudited
November 30,
1996

Net Sales $7,275,685
Gross Profit 1,741,649
Income Tax Benefit 64,107
Net Loss $ 119,056
Basic and diluted loss per share $ .10

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 25,1999

ART'S-WAY MANUFACTURING CO., INC.

By: _____________________________ By: _______________________
J. David Pitt William T. Green
President 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 25,1999
James L. Koley Chairman of the Board Date
and Director

______________________________ February 25,1999
J. David Pitt President and Director Date

______________________________ February 25,1999
George A. Cavanaugh, Jr. Director Date

______________________________ February 25,1999
Donald A. Cimpl Director Date

______________________________ February 25,1999
Herbert H. Davis, Jr. Director Date

______________________________ February 25,1999
Douglas McClellan Director Date

_____________________________ February 25,1999
J. Ward McConnell, Jr. Director Date

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

Allowance for Doubtful Accounts

Balance, May 31, 1996 $ 26,975

Additions:
Charged to Operating Expenses 2,834

Deduct:
Accounts Charged Off 4,809

Balance, May 31, 1997 $ 25,000

Additions:
Charged to Operating Expenses 6,000

Deduct:
Accounts Charged Off

Balance, November 30, 1997 $ 31,000

Additions:
Charged to Operating Expenses 174,000

Deduct:
Accounts Charged Off -

Balance, November 30, 1998 $ 205,000