Item 1. Business.
Principal Products
The registrant and its subsidiaries (hereinafter collectively referred to as the "Company") mill and sell graded and finished balsa lumber in standard sizes and balsa wood strips and blocks. "Standard sizes" of balsa lumber are measured in boardfeet (12" x 12" x 1") for the English system of measure or in cubic meters for the metric system of measure. Shipments to Europe, (except the U.K.) and Japan are made in cubic meters while shipments to the U.S. and the U.K. are in boardfeet. The Company, for production and statistical purposes, converts all metric measurements into boardfeet, thus the Company's "standard" is boardfeet. The Company also manufactures and sells custom-made bonded panels, blocks and beams of balsa wood, and a flexible balsa wood block mat called "Contourkore ."
Glued-up balsa blocks are marketed in two ways. Part is sold directly to customers in block or panel form, the balance is shipped to the Company's factory in Northvale, N.J. for further processing into Contourkore and other products. Blocks and Contourkore are used by the Company's customers to manufacture a variety of products by laminating metal or fiberglass reinforced plastic skins to both sides of the balsa, thereby creating a sandwich structure in which balsa is the core or center. The products manufactured by the Company's customers include fiberglass boats, aircraft cargo pallets, aircraft flooring, fiberglass storage and processing tanks and fiberglass tub and shower bottoms. Balsa lumber is used mostly by the hobby industry to manufacture model airplanes.
In addition, the Company sells a non-balsa continuous strand fabric, imported from Holland and Japan and resold without further manufacturing. This product is marketed as "Coremat" and "BaltekMat" to the pleasure boat industry.
In September 1995 the Company entered into an agreement with Airex AG of Sins, Switzerland, a division of A.L. Alusuisse - Lanza Group to become the sole North American source of Airex(R) (a registered trademark of Aires AG) and Airlite(TM), structural PVC foam products. The Company does not expect sales or income to be generated from these foam products until mid to late 1996. However these additional products, together with its Balsa products, should solidify the Company's leadership as a complete supplier to the composite structural core market and result in growth opportunities for the future.
All the Company's balsa and shrimp are produced in Latin America, principally in Ecuador, South America. The dependence on foreign countries for raw materials represents some inherent risks. However, the Company, or its predecessors, have maintained operations in Ecuador since 1940. The Company does not consider its reliance on Ecuador to represent an undue business risk; in fact, the Company believes that operating in Ecuador is one of its strengths, where quality raw materials are produced at a reasonable cost in a politically stable atmosphere.
The Company is also in the aquaculture business, specifically shrimp farming in Ecuador. This operation consists of a hatchery, a farm and a packing plant. Shrimp larvae are supplied by the hatchery to the farm and after harvest, transferred to the packing plant for processing and shipment to customers in the United States and Europe.
Principal Markets and Methods of Distribution
The Company's balsa products are sold throughout the United States, Canada, Europe, Japan, and Australia to approximately 1,600 ultimate users. The Company's salesmen are used extensively in the sale of its balsa products. Approximately 40% of its balsa product sales are made by the Company directly. The remainder of the sales are handled through regional distributors in the United States, Europe, Canada, and Japan. Sales of Contourkore to customers outside the United States are handled through a wholly-owned Foreign Sales Corporation.
In 1995, approximately 40% of all the shrimp production was sold to the U.S. market through food brokers; the balance was sold to the European market.
Competitive Conditions
As part of their overall business, other companies, with aggregate facilities and financial resources substantially greater than those of the Company, manufacture and sell various natural and synthetic products for nearly all the purposes for which balsa lumber and products are sold by the Company. Some of these competitive products are produced and sold at a lower cost than the Company's balsa lumber and products, and sales of these competing products are substantially greater than the Company's sales of balsa lumber and products.
The Company's shrimp business competes against many larger companies which produce shrimp through similar methods in addition to fishing for shrimp in the traditional method of trawling.
Material Customer
During the period ended December 31, 1995, the Company had sales to one customer in excess of 10% of the Company's consolidated revenues.
Backlog
As of December 31, 1995, the Company had a backlog of orders believed to be firm in the total amount of $5,955,000 all of which is reasonably expected to be filled within the current fiscal year.
As of December 31, 1994, the Company had a backlog of orders believed to be firm in the total amount of $9,671,000.
Sources and Availability of Raw Materials
The Company acquires, partly from its own plantations and partly from others, substantially all of its balsa wood from western and coastal Ecuador, accessible by roads so that the balsa lumber can be transported by truck to its sawmills. The Company considers the timber presently standing in this area, combined with its planned plantation expansion program, to be ample to supply all the Company's requirements in the foreseeable future. The Company also receives small quantities of balsa from other Latin American countries. The resins, fiberglass and other materials used in the Company's manufacturing processes are available from numerous commercial sources. To date the Company has experienced no difficulty in obtaining such materials needed for its operations.
The Company owns and operates a shrimp farm and a shrimp hatchery in Ecuador for the production of a steady and plentiful supply of shrimp. The hatchery supplies substantially all the larvae required by the Company's ponds. The Company also owns a shrimp packing company in Ecuador, thereby achieving complete vertical integration of the shrimp business.
Patents, Trademarks and Licenses
The Company features its registered trademark "Belcobalsa(R)" for lumber, dimension stock, and bonded panels and blocks, "Contourkore(R)" "LamPrep(R)" and "AL-600(R)" for the flexible wood block mat, "Durakore(R)", a balsa hardwood composite, "D100(R) " for end-grain panels and "Decolite(R)" a balsa composite panel used as an alternative to plywood, and low-density laminate bulkers, marketed as "BaltekMat(R)" and "Firet Coremat(R)".
The Company also features "Airlite(TM)", a cross-linked PVC foam, and "Airex(R)" (registered trademark of Airex AG) a linear foam.
Estimated Research Costs
The Company has incurred approximately $415,000 during 1995 for research and development, compared to expenditures of $447,000 in 1994 and $535,000 in 1993. All expenditures are related to the balsa division and include customer service activities. The Company continues to actively explore possible new applications of balsa, and new manufacturing processes.
Environmental Impact
The Company has experienced no material impact upon its capital expenditures, earnings or competitive position as a result of its compliance with federal, state or local provisions relating to the protection of the environment. Balsa is not a rainforest species, nor does it grow in the rainforest. It is usually harvested within five years. The fast growth rate makes balsa similar to short-cycle agricultural crops and an ideal tree species for forest plantations.
Employees
The Company has approximately 956 employees in Ecuador, 125 in the United States and 10 in Europe, aggregating 1091 employees.
Seasonality
The Company's business is not seasonal.
Classes of Products
The following table sets forth the amount and percentage of total sales and revenue represented by each of the Company's product classes in the three years ended December 31, 1995 (dollars in thousands):
Segment Information
The Company is engaged in two lines of business, that of manufacturing and supplying balsa wood and balsa wood products, laminate bulkers and PVC foams, used principally as the core material in various industries, and in the aquaculture business, namely, shrimp farming in Ecuador.
Reference is made to the information set forth in Note 11 to the Notes to Consolidated Financial Statements, Part II, Item 8 hereof, with respect to assets and operating results for different business segments.
Foreign Operations
The Company, through its Ecuadorean subsidiaries, owns and operates five woodworking plants and approximately 15,346 acres of forest land in Ecuador. In addition, the Company owns and operates a shrimp farm on approximately 2,000 acres, a shrimp hatchery and a shrimp packing plant.
At the Company's woodworking plants, rough balsa lumber is received from independent loggers and then processed into finished lumber and other manufactured products.
The Company's shrimp ponds are stocked with larvae. After feeding, controlling the pond environment and monitoring the growth of the shrimp for a period of approximately six months, the shrimp are harvested, frozen, packed and sold for export.
The Company, through its European subsidiaries, operates sales offices in France, the United Kingdom and Denmark.
Reference is made to the information set forth in Note 11 to the Notes to Consolidated Financial Statements, Part II, Item 8 hereof, with respect to assets and operating results by geographic areas.
Foreign Sales
Approximately 29% of the Company's net sales for the year ended December 31, 1995 was derived from sales to customers outside the United States.
No prediction can be made as to any future increase or decrease of the Company's foreign business. The Company has experienced differences in profitability between foreign and domestic sales due to the changing value of the U.S. dollar in relation to the foreign currencies of countries where its products are sold.
Item 2.

Item 2. Properties.
The Company owns or leases the properties indicated in the following table:
All of the above properties except the shrimp farming land, hatchery and packing plant are used in the balsa wood business.
The lease of the property at Northvale, New Jersey, continues until February 28, 2002, at an average annual rental of approximately $383,000. The lease of the Company's office space in Paris continues until March 31, 1998 at an annual rental equivalent to approximately $28,800. The lease of the Company's office in Croydon, U.K. runs until December 25, 2008 at an annual rental of approximtely $13,200.
All of the Company's properties, plants and equipment are considered to be presently sufficient for their respective purposes.
Item 3.

Item 3. Legal Proceedings.
Not Applicable.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
There was no submission of matters to a vote of security holders during the fourth quarter of 1995.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded in the over-the-counter market (NASDAQ). The following is the bid price range for the last two years.
The Company had approximately 216 stockholders of record as of March 1, 1996.
No cash dividends were paid during the past two years.
Item 6.

Item 6. Selected Financial Data.
Management's Discussion and Analysis of Item 7.

Item 7. Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio (current assets divided by current liabilities) decreased in 1995 to 2.50:1 from 2.97:1, after increasing in 1994 from 2.87:1.
Cash was provided and used in varying amounts during the three year period, principally as a result of changes in the elements of current assets and current liabilities and in the amount of cash provided by net income. Inventories increased in 1995 and 1993 but decreased in 1994. The increase in 1995 was due to new products and inventory buildup for anticipated increases in sales. The 1994 decrease was caused by greater sales than anticipated. The increase in 1993 was due to an inventory buildup in anticipation of the 1994 sales increase.
Cash used in investing activities for the three year period was due to increased investments in balsa plantations, replacement of old equipment, reconstruction of the shrimp ponds and purchase of new equipment required for the manufacture of the Company's new products. The Company has no material commitments for capital expenditures.
Debt increased in 1995 and 1993 due to working capital and investment requirements. In 1994 the company repaid debt of $1,887,000 from funds generated by profits.
The Company had unused lines of credit of $5.0 million with a domestic bank, $1.8 million with Ecuadorean banks and $1.0 million with European banks. The Company expects that future operations and its unused lines of credit will provide sufficient resources to support its planned expansion and to maintain its favorable liquid position.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Total sales increased 14%, 24% and 15% in 1995, 1994 and 1993, respectively. The gains in all three years were due to increased demands from all industries using our balsa products together with substantial increases in shrimp sales.
Balsa sales were favorably affected by the continuing recovery of the pleasure boat industry. The pleasure boat industry represented approximately 40% of the Company's 1995 balsa sales. Fluctuating interest rates make it impossible to forecast short or long range trends in the boating industry. The increases in balsa sales in all three years were due to volume increases, increased sales of value-added products and to price increases. The Company continues to explore and develop alternative applications for its balsa products.
Shrimp sales were $9,364,000, $7,297,000 and $5,084,000 in 1995, 1994 and 1993, respectively. The substantial increases in 1995 and 1994, after a decline in 1993, were the result of increased world wide market prices and increased yield at the Company's shrimp farm. The decline in 1993 was due to unfavorable weather conditions in Ecuador, where the shrimp farm is located, during the first nine months of 1993. The Company 's reconstruction program to increase yields at its shrimp farm commenced in the middle of 1993 and has proved successful. The program should be concluded in 1997.
Cost of products sold as a percentage of sales was approximately the same in 1995 and 1994 after increasing 2% in 1993. All three years were affected in varying degrees by inflationary pressures on operating expenses partially offset by currency devaluation and operating efficiencies resulting from the 1994 and earlier restructuring. Additionally, 1995 and 1994 benefited from increased absorption of overhead expenses due to increased production. The Company recorded a special charge of $323,977 in 1994 associated with a decision to reduce costs by making operational and personnel changes at the Company's factories in Ecuador. This charge was effected within the year with no related reserve balance remaining at year end.
Selling, general and administrative expenses as a percentage of sales remained approximately the same in 1995 as in 1994 due mostly to the addition of sales personnel required to market the Company's existing and new products and to support the Company's continuing search for new markets and applications for its products. These additions were offset by increased absorption of fixed expenses. The decline in 1994 by 3% and in 1993 by 4% was due to a better absorption of fixed expenses as a result of increased sales.
Sales and expenses were slightly affected in all three years by the different exchange rates applied in translating the books of accounts of the Company's European subsidiaries.
Interest expense increased in 1995 and 1994 due to rising interest rates and increased borrowings after declining in 1993 as a result of lower interest rates.
Translation losses varied greatly during the three year period. Translation losses are caused by the relationship of the U.S. dollar to the foreign currencies in the countries where the Company operates, and arise when translating foreign currency balance sheets into U.S. dollars in order to present consolidated financial statements. Management is unable to forecast the impact of translation gains or losses on future periods due to the unpredictability in the fluctuation of foreign exchange rates.
The effective income tax rate amounted to 21% in 1995, 39% in 1994, and 40% in 1993. Reconciliation of the effective rate with the U.S. statutory rate is detailed in footnote 8 to the financial statements.
In summary of the foregoing discussion, the Company realized net income of $1,962,253, $1,212,459, and $112,835 in 1995, 1994 and 1993, respectively.
Item 8.

Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the registrant and subsidiaries, and supplemental schedule are annexed hereto and made part hereof.
Changes in and Disagreements With Accountants Item 9.

Item 9. on Accounting and Financial Disclosure.
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant.
Omitted from this Report since a definitive Proxy Statement, pursuant to Regulation 14A containing the required information, will be filed with the Commission not later than 120 days after the close of registrant's fiscal year.
Item 11.

Item 11. Executive Compensation.
Omitted from this Report since a definitive Proxy Statement, pursuant to Regulation 14A containing the required information, will be filed with the Commission not later than 120 days after the close of the registrant's fiscal year.
Security Ownership of Certain Beneficial Item 12.

Item 12. Owners and Management.
Omitted from this Report since a definitive Proxy Statement, pursuant to Regulation 14A containing the required information, will be filed with the Commission not later than 120 days after the close of the registrant's fiscal year.
Item 13.

Item 13. Certain Relationships and Related Transactions.
Inapplicable.
PART IV
Exhibits, Financial Statement Item 14.

Item 14. Schedules, and Reports on Form 8-K
(a)(1) and (2) Consolidated Financial Statements and Financial Statement Schedule
See Index to Consolidated Financial Statements and Financial Statement Schedule annexed hereto and made part hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by or on behalf of the registrant for the quarter ended December 31, 1995, the last quarter in the period covered by this Annual Report on Form 10-K.
(c) List of Exhibits
Exhibit No. Item Filing - ----------- ---- ------ 3 Articles of Incorporation Pre-Filed (Bylaws)
10 Material Contracts None
21 Subsidiaries of Registrant Filed Herewith
27 Financial Data Schedule Filed Herewith
SIGNATURES
Pursuant to the requirements of Section 13 of 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.
BALTEK CORPORATION Registrant
By /s/ Jacques Kohn --------------------------- Jacques Kohn, President
By /s/ Benson J. Zeikowitz ---------------------------- Benson J. Zeikowitz, Treasurer (Principal Financial officer and Principal accounting officer)
Dated: March 21, 1996
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 date indicated.
By /s Margot W. Kohn By /s/ Jacques Kohn ----------------------------- ----------------------------- Margot W. Kohn, Jacques Kohn, Director Director
By /s/ Theodore Ness By /s/ Benson J. Zeikowitz ----------------------------- ----------------------------- Theodore Ness, Benson J. Zeikowitz, Director Director
Dated: March 21, 1996
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE AS OF DECEMBER 31, 1995 AND 1994 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
PREPARED FOR FILING AS PART OF THE ANNUAL REPORT (FORM 10-K) TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1995
**********
BALTEK CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PREPARED FOR FILING AS PART OF THE ANNUAL REPORT (FORM 10-K) TO THE SECURITIES AND EXCHANGE COMMISSION YEAR ENDED DECEMBER 31, 1995 - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1995
Consolidated Statements of Changes in Stockholders' Equity for Each of the Three Years in the Period Ended December 31, 1995
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1995
Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended December 31, 1995
FINANCIAL STATEMENT SCHEDULE AS OF AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995:
II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because of the absence of the conditions under which they are required or because the required information called for is set forth in the consolidated financial statements or notes thereto.
Deloitte & Touche LLP [GRAPHIC -- COMPANY LOGO] ____________________________________________________________ Two Hilton Court Telephone: (201) 631-7000 P.O. Box 319 Facsimile: (201) 631-7459 Parsippany, New Jersey 07054-0319
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Baltek Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Baltek Corporation and its subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Corporation'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 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, such consolidated financial statements present fairly, in all material respects, the financial position of Baltek Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/Deloitte & Touche LLP
March 11, 1996
BALTEK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Baltek Corporation is a multinational manufacturing and marketing company. The Company's lines of business are supplying core materials (principally balsa products) to various composite industries, farming and processing shrimp, and manufacturing and selling balsa lumber and other balsa wood products. The Company reported its sales in two segments in 1995: the balsa segment including all balsa sales and other materials sold to the composite industry (80%), and the shrimp segment (20%).
The principal market for the Company's core materials and balsa products is in the United States, while the shrimp market is divided between the United States and Europe.
The balsa and shrimp products are produced in Ecuador, South America. The supply of raw materials has been without interruption for over 50 years. The balsa and shrimp identifiable assets located at various facilities in Ecuador are included in the Company's consolidated balance sheet and total approximately $23 million at December 31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - Cash equivalents consist of short-term highly liquid investments with maturities of three months or less when purchased. Investments are carried at cost, which approximates market.
In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from Baltek's operations in foreign countries are calculated based on their reporting currencies. As a result of this, amounts related to changes in assets and liabilities reported on the consolidated statement of cash flows will not necessarily agree to changes in the corresponding balances on the consolidated balance sheets. The effect of exchange rate changes on cash balances held in foreign currencies is reported on a separate line below cash flows from financing activities.
Inventories - Inventories are valued at the lower of cost or market. Cost is determined by use of the first-in, first-out (FIFO) method.
Property - Property, plant and equipment is stated at cost. Depreciation is provided for depreciable assets over their estimated useful lives using various accepted depreciation methods. The assets under capital leases and leasehold improvements are amortized over their useful lives, or the life of the lease, whichever is shorter. The cost of major improvements to existing facilities is capitalized. The cost of repairs, maintenance and replacements which do not significantly improve or extend the life of the respective assets is charged to expense as incurred.
Income Taxes - Taxes on current income are provided by the Company and each subsidiary as prescribed by local tax laws. The Company follows the practice of comprehensive interperiod income tax allocation. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 required a change from the deferred method's income statement approach of accounting for income taxes under APB Opinion 11 to an asset and liability approach of accounting for income taxes. Under the asset and liability approach of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Timber and Timberlands - Timberlands are carried at cost. Deferred cultivation costs represent the cost of preparing, clearing and seeding the Company's balsa wood plantations. Amortization of timber and timberlands is based on units of production. Timber carrying costs, which include the regular maintenance and overseeing of timberlands, are expensed as incurred.
Foreign Currency Translation - The financial statements of the Company's foreign subsidiaries are remeasured into U.S. dollars, the Company's functional currency, in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The majority of the foreign exchange gains and losses relate to the manufacturing process in Ecuador, and such amounts are separately stated in the accompanying consolidated statements of operations.
Research and Development - Research and development costs are charged to expense as incurred. Research and development expenditures, including customer service activities, charged to operations were $414,675, $447,311 and $534,781 in 1995, 1994 and 1993, respectively.
Concentrations of Credit Risk - Baltek's principal products, balsa lumber and related end products, as well as shrimp products, are sold to a number of markets, including boating, transportation, military, hobby, and the retail food industry. Baltek's products are sold throughout the United States, Canada, Europe, Japan and Australia to approximately 1,600 ultimate users. Credit risk related to Baltek's trade receivables is limited due to the large number of customers in differing industries and geographic areas.
Income Per Common Share - Income per common share amounts are computed based on the weighted average number of shares outstanding during the period.
Foreign Currency Risk Management - The Company uses foreign currency forward contracts to reduce currency exchange rate risk on firm commitment purchases denominated in foreign currencies. Gains or losses resulting from these contracts are deferred and are included in the purchase price of the materials. The maximum term of these contracts is less than one year.
Use of Estimates - In conformity with generally accepted accounting principles, the Company's financial statements include the use of estimates and assumptions which have been developed by management based on available facts and information. Actual results could differ from those estimates.
Revenue Recognition - The Company generally recognizes revenues when goods are shipped.
Reclassifications - Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation.
3. INVENTORIES
Inventories of the balsa and shrimp segments are summarized as follows:
Included in the above amounts are inventories relating to the Company's shrimp operations of $1,337,154 and $976,751 at December 31, 1995 and 1994, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
Shrimp properties consist principally of shrimp ponds, a hatchery and a packing plant.
5. TIMBER AND TIMBERLANDS
Timber and timberlands are comprised of the following:
6. NOTES PAYABLE
Notes payable under various agreements at December 31, 1995 and 1994 consist of the following:
The Company has an unsecured revolving line of credit with a domestic bank for a maximum credit limit of $5,000,000 with interest at the bank's prime rate. This line of credit, which is renewable annually, expires on May 31, 1996. There were no borrowings outstanding against this line of credit at December 31, 1995. The Company was in compliance with all related loan covenants at December 31, 1995.
The Ecuadorian bank loans are unsecured. At December 31, 1995, unused lines of credit available under Ecuadorian borrowing arrangements amounted to approximately $1,830,000, and under European borrowing arrangements amounted to approximately $998,000.
The credit facilities discussed above do not require compensating balances or the payment of commitment fees. The weighted average interest rate on borrowings outstanding at December 31, 1995 and 1994 was 11.3% and 9.8%, respectively. The carrying amount of the notes payable approximates their fair value based on the short-term nature and the terms of the loans. These amounts were paid subsequent to the balance sheet date at par.
7. COMMON STOCK AND STOCK OPTIONS
The weighted average number of common shares outstanding used in the calculation of income per common share amounts was 2,523,261 in 1995, 1994 and 1993.
The Company has a stock option plan under which options to purchase up to 100,000 shares may be granted to certain key employees. As of December 31, 1995, 2,000 options were available for grant and no options were outstanding.
8. INCOME TAXES
The Company adopted SFAS 109 as of January 1, 1993. Such adoption resulted in no net effect on the Company's consolidated statement of operations.
Income (loss) before income taxes is comprised of:
The provision (benefit) for income taxes for the years ended December 31, 1995, 1994 and 1993 consists of the following:
The reconciliation between the Company's effective tax rate and the statutory Federal tax rate for 1995, 1994 and 1993 is as follows:
As a result of various incentives provided by the Ecuadorian government, the effective foreign tax rate is lower than the U.S. Federal statutory tax rate.
Significant components of the Company's deferred tax assets and liabilities are as follows:
As of December 31, 1994, the Company had a full valuation allowance recorded against the foreign tax credit carryforwards of $140,000. Management believed that it was more likely than not that the credits would expire unutilized. The Company was, however, able to utilize these credits and has included the income from the reversal of the valuation allowance in the tax provision for the year ended December 31, 1995.
The total current and noncurrent amounts presented above, to the extent not shown separately on the consolidated balance sheets, are included in other assets (current and noncurrent) and accrued expenses and other liabilities.
The Company does not accrue Federal income taxes on the equity in the undistributed earnings of its foreign subsidiaries, which amounted to approximately $5,775,000 at December 31, 1995, because such earnings are permanently reinvested. It is not practicable to estimate the tax liability that might arise if these earnings were remitted.
9. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan under which an annual contribution may be paid from accumulated profits at the discretion of the Board of Directors for the benefit of eligible employees upon their retirement. Contributions to this plan by the Company amounted to $327,445 and $281,787 in 1995 and 1994, respectively. There were no contributions to the plan by the Company in 1993.
The Company has adopted an amendment to the profit sharing plan described above providing an election to all participants, pursuant to Section 401(k) of the Internal Revenue Code, to defer between 2 percent and 10 percent of salary. Amounts deferred are paid to the trustee of the plan. The amendment does not provide for matching Company contributions.
Certain employees of the Company's Ecuadorian subsidiary companies are covered by termination and retirement plans incorporated under statutory requirements of labor laws and collective bargaining agreements. Included in the accompanying consolidated balance sheets are union employee termination benefits which approximate unpaid vested benefits under such plans. The amount of benefits to be received by an employee is established by the collective bargaining agreements and is based on length of service and compensation. Provisions of approximately $111,000, $63,000 and $106,000 were charged to income during 1995, 1994 and 1993, respectively.
10. LEASES
The Company leases its office space and plant facilities in Northvale, New Jersey, under a long-term capital lease agreement which expires in 2002. The lease provides that the Company pay all real estate taxes, maintenance and insurance relating to the facilities. Accumulated amortization related to the asset under capital lease at December 31, 1995 and 1994 was $957,851 and $707,965, respectively.
Rent expense under operating leases relates principally to office buildings and amounted to $53,343, $51,210 and $51,701 in 1995, 1994 and 1993, respectively.
Future minimum lease payment obligations, as of December 31, 1995, for the capital lease described above, as well as operating leases, are summarized below. The operating leases are for space at the Company's offices in England and France and space in a warehouse in Norwood, New Jersey, for which lease payments begin in 1996.
11. SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in two segments, as a manufacturer and supplier of balsa wood products used principally as a core material in various industries, and in the shrimp farming business. Information about the Company's operations by segment for 1995, 1994 and 1993 is as follows:
Information pertaining to the Company's operations in different geographic areas is as follows:
Transfers between geographic areas are at prices which permit the recovery of manufacturing costs and a reasonable operating profit. The majority of export sales from the Company's United States operations were to unaffiliated customers in Europe.
Sales to one customer from the Balsa segment amounted to approximately 13%, 13% and 20% of total revenues in 1995, 1994 and 1993, respectively.
12. SPECIAL CHARGE
In 1994, the Company recorded a special charge of $323,977, associated with a decision to reduce costs by making personnel changes at the Company's mills in Ecuador. This charge was comprised primarily of severance payments for 68 employees. This action was effected within 1994 and no related reserve balance remained by year-end 1994.
******


ITEM 1 - BUSINESS
May Drilling Partnership 1983-1 (the "Drilling or General Partnership") and May Limited Partnership 1983-1 (the "Limited Partnership") were organized by May Petroleum Inc. ("May") to explore for and develop oil and gas reserves primarily in Texas, Oklahoma and Louisiana. Funds received from the sale and production of oil and gas reserves are used to pay the obligations of the Limited Partnership. Funds not required by the Limited Partnership as working capital are distributed to the participants in the Drilling Partnership and the general partner.
The general partner of the Limited Partnership is EDP Operating, Ltd., which is one of the operating partnerships for Hallwood Energy Partners, L. P. ("HEP"). The Drilling Partnership is the sole limited partner of the Limited Partnership. The Limited Partnership does not have any subsidiaries, nor does it engage in any other kind of business. The Limited Partnership has no employees and is operated by Hallwood Petroleum, Inc. ("HPI"), a subsidiary of HEP. In February 1996, HPI employed 133 full-time employees.
Pursuant to the terms of the general partnership agreement and the limited partnership agreement, HEP is obligated, from time to time, to contribute certain amounts, in property, cash or unreimbursed services, to the Limited Partnership. As of December 31, 1995, all such required contributions had been made.
PARTICIPATION IN EXPENSES AND REVENUES
The principal expenses and revenues of the Limited Partnership are shared by the general partner and the Drilling Partnership as set forth in the following table. The charges and credits to participants in the Drilling Partnership are shared among the participants in proportion to their ownership of units of participation.
In 1996, the sharing ratio will be 57.7% to the limited partner and 42.3% to the general partner.
To the extent that the characterization of any expense of the Limited Partnership depends on its deductibility for federal income tax purposes, the proper characterization is determined by the general partner (according to its intended characterization on the Limited Partnership's federal income tax return) in good faith at the time the expense is to be charged or credited. Such characterization will control related charges and credits to the partners regardless of any subsequent determination by the Internal Revenue Service or a court of law that the reported expenses should be otherwise characterized for tax purposes.
COMPETITION
Oil and gas must compete with coal, atomic energy, hydro-electric power and other forms of energy. See also "Marketing" for a discussion of the market structure for oil and gas sales.
REGULATION
Production and sale of oil and gas is subject to federal and state governmental regulations in a variety of ways including environmental regulations, labor law, interstate sales, excise taxes and federal, state and Indian lands royalty payments. Failure to comply with these regulations may result in fines, cancellation of licenses to do business and cancellation of federal, state or Indian leases.
The production of oil and gas is subject to regulation by the state regulatory agencies in the states in which the Limited Partnership does business. These agencies make and enforce regulations to prevent waste of oil and gas and to protect the rights of owners to produce oil and gas from a common reservoir. The regulatory agencies regulate the amount of oil and gas produced by assigning allowable production rates to wells capable of producing oil and gas.
FEDERAL INCOME TAX CONSIDERATIONS
The Limited Partnership and the GeneralPartnership are partnerships for federal income tax purposes. Consequently, they are not taxable entities; rather, all income, gains, losses, deductions and credits are passed through and taken into account by the partners on their individual federal income tax returns. In general, distributions are not subject to tax so long as such distributions do not exceed the partner's adjusted tax basis. Any distributions in excess of the partner's adjusted tax basis are taxed generally as capital gains.
MARKETING
The oil and gas produced from the properties owned by the Limited Partnership has typically been marketed through normal channels for such products. Oil has generally been sold to purchasers at field prices posted by the principal purchasers of crude oil in the areas where the producing properties are located. The majority of the Limited Partnership's gas production is sold on the spot market and is transported in intrastate and interstate pipelines. Both oil and natural gas are purchased by refineries, major oil companies, public utilities and other users and processors of petroleum products.
Factors which, if they were to occur, might adversely affect the Limited Partnership include decreases in oil and gas prices, the availability of a market for production, rising operational costs of producing oil and gas, compliance with and changes in environmental control statutes and increasing costs and difficulties of transportation.
SIGNIFICANT CUSTOMER
For the years ended December 31, 1995, 1994 and 1993, purchases by the following company exceeded 10% of the total oil and gas revenues of the Limited Partnership:
Although the Limited Partnership sells the majority of its production to one purchaser, there are numerous other purchasers in the area, so the loss of its significant customer would not adversely affect the Limited Partnership's operations.
ENVIRONMENTAL CONSIDERATIONS
The exploration for, and development of, oil and gas involve the extraction, production and transportation of materials which, under certain conditions, can be hazardous or can cause environmental pollution problems. In light of the present general interest in environmental problems, the general partner cannot predict what effect possible future public or private action may have on the business of the Limited Partnership. The general partner is continually taking all action necessary in its operations to ensure conformity with applicable federal, state and local environmental regulations and does not presently anticipate that the compliance with federal, state and local environmental regulations will have a material adverse effect upon capital expenditures, earnings or the competitive position of the Limited Partnership in the oil and gas industry.
INSURANCE COVERAGE
The Limited Partnership is subject to all the risks inherent in the exploration for, and development of, oil and gas, including blowouts, fires and other casualties. The Limited Partnership maintains insurance coverage as is customary for entities of a similar size engaged in operations similar to the Limited Partnership's, but losses can occur from uninsurable risks or in amounts in excess of existing insurance coverage. The occurrence of an event which is not insured or not fully insured could have an adverse impact upon the Limited Partnership's earnings and financial position.
ITEM 2

ITEM 2 - PROPERTIES
The Limited Partnership's oil and gas reserves are located in prospects in south Louisiana. The Limited Partnership's reserves are predominantly natural gas, which accounts for 86% of estimated future gross revenues in the Limited Partnership's reserve report as of December 31, 1995.
SIGNIFICANT PROSPECTS
At December 31, 1995, the following prospects accounted for approximately 96% of the Limited Partnership's proved oil and gas reserves. Reserve quantities were obtained from the December 31, 1995 reserve report prepared by HPI's petroleum engineers.
BOUDREAUX PROSPECT. The Boudreaux prospect is located in Lafayette Parish, Louisiana. The Limited Partnership's interest in the prospect has remaining net proved reserves of 12,000 bbls of oil and 574,000 mcf of gas as of December 31, 1995, all of which are developed and producing at December 31, 1995. The Limited Partnership's working interest in this prospect ranges up to 1.2%.
MEAUX PROSPECT. The Meaux prospect is located in Lafayette Parish, Louisiana. The Limited Partnership's interest in the prospect has remaining net proved reserves of 300 bbls of oil and 33,000 mcf of gas as of December 31, 1995, all of which are developed and producing at December 31, 1995. The Limited Partnership's working interest is 8.5%.
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS
For a description of legal proceedings affecting the Limited Partnership, please refer to Item 8 - Note 3.
ITEM 4

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted to a vote of participants during the fourth quarter of 1995.
PART II -------
ITEM 5

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) The registrant's securities consist of partnership interests which are not traded on any exchange and for which no established public trading market exists.
b) As of December 31, 1995, there were approximately 369 holders of record of partnership interests in the Drilling Partnership.
c) Distributions paid by the Limited Partnership were as follows (in thousands):
ITEM 6

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Material changes in the Limited Partnership's cash position for the years ended December 31, 1995 and 1994 are summarized as follows:
Cash provided by operating activities in 1995 was used for distributions to the general partners and additions to oil and gas properties. The Limited Partnership has net working capital of $155,000. This working capital, together with future net cash flows generated from operations, may be used to fund future distributions. Future distributions depend on, among other things, continuation of current or higher oil and gas prices, markets for production and future development costs, and the outcome of the litigation described in Item 8, Note 3.
The Limited Partnership's ability to generate funds adequate to meet its future needs will be largely dependent upon its ability to continue to develop its existing reserves. Proved reserves and discounted future net revenues (discounted at 10% and before general and administrative expenses) from proved reserves were estimated at 12,000 bbls and 632,000 mcf valued at $1,086,000 in 1995 and 13,000 bbls and 637,000 mcf valued at $969,000 in 1994. The increase in discounted future net revenues and the fluctuation in the quantities resulted primarily from an increase in year end oil and gas prices as well as changes in the estimated rates of production on certain wells.
During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 provides the standards for accounting for the impairment of various long- lived assets. The Limited Partnership is required to adopt SFAS 121 no later than 1996. The Limited Partnership uses the full cost method of accounting for its only long-lived assets, which requires an impairment to be recorded when total capitalized costs exceed the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves. Therefore, the adoption of SFAS 121 is not expected to have a material effect on the financial position or results of operations of the Limited Partnership.
RESULTS OF OPERATIONS - ---------------------
1995 COMPARED TO 1994 - ---------------------
OIL REVENUE
Oil revenue increased $3,000 during 1995 as compared with 1994. The increase is comprised of an increase in the average oil price from $16.03 per barrel in 1994 to $17.68 per barrel in 1995 combined with a 2% increase in production as shown in the table below. The increase in production is due to increased state allowable production limits, partially offset by normal production declines as well as the temporary abandonment of one well and the sale of another during the second quarter of 1994.
GAS REVENUE
Gas revenue decreased $8,000 during 1995 as compared with 1994. The decrease is due to a decrease in the average gas price from $2.14 per mcf during 1994 to $1.83 per mcf during 1995, partially offset by a 12% increase in production as shown below. The increase in production is due to increased state allowable production limits, partially offset by normal production declines as well as the temporary abandonment of one well and the sale of another during the second quarter of 1994.
The following table summarizes the Limited Partnership's share of production from the Limited Partnership's significant properties for 1995 and 1994.
LEASE OPERATING
Lease operating expense decreased $10,000 during 1995 as compared with 1994 primarily due to the sale of the Warwick Richard #1 during the second quarter of 1994 and the temporary abandonment of the Duhon #1.
PRODUCTION TAXES
Production taxes increased $6,000 during 1995 as compared with 1994 as a result of the settlement of a lawsuit which resulted in lower in production taxes during 1994.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $23,000 during 1995 as compared with 1994 primarily due to a decrease in the allocation of overhead from the general partner.
DEPLETION
Depletion expense increased $7,000 during 1995 as compared with 1994 due to a higher depletion rate caused by the 11% increase in oil and gas production during 1995.
LITIGATION SETTLEMENT
Litigation settlement expense during 1995 primarily represents amounts paid in connection with the settlement of a royalty dispute on the Duhon #1 well.
1994 COMPARED TO 1993 - ---------------------
OIL REVENUE
Oil revenue decreased $22,000 in 1994 as compared to 1993. The average oil price decreased from $17.89 per barrel in 1993 to $16.03 per barrel in 1994. Oil production decreased 38% as shown in the table below, primarily due to the reduction in state allowable production limits, as well as normal production declines.
GAS REVENUE
Gas revenue decreased $170,000 as compared to 1993. Gas production decreased 43% as shown in the table below, primarily due to the reduction in state allowable production limits, as well as normal production declines. The average gas price decreased from $2.26 per mcf in 1993 to $2.14 per mcf in 1994.
The following table summarizes the Limited Partnership's share of production from the Limited Partnership's significant properties for 1994 and 1993.
LEASE OPERATING
Lease operating expense decreased $4,000 in 1994 as compared to 1993, primarily due to the sale of the Warwick Richard #1 in the second quarter of 1994.
PRODUCTION TAXES
Production taxes decreased $17,000 in 1994 as compared to 1993, primarily due to the decrease in revenue mentioned previously.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $23,000 in 1994 as compared to 1993, due to a decrease in allocation of overhead from the general partner.
DEPLETION
Depletion expense decreased $24,000 in 1994 as compared to 1993, primarily due to a lower depletion rate.
LITIGATION SETTLEMENT
Litigation settlement expense during 1993 represents the costs of a lawsuit settlement which is discussed in Item 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
FINANCIAL STATEMENTS:
Independent Auditors' Report 12
Balance Sheets at December 31, 1995 and 1994 - May Drilling Partnership 1983-1 13
Balance Sheets at December 31, 1995 and 1994 - May Limited Partnership 1983-1 14
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 - May Limited Partnership 1983-1 15
Statements of Changes in Partners' Capital for the Years Ended December 31, 1995, 1994 and 1993 - May Limited Partnership 1983-1 16
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 - May Limited Partnership 1983-1 17
Notes to Financial Statements - May Drilling Partnership 1983-1 and May Limited Partnership 1983-1 18-21
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 22
INDEPENDENT AUDITORS' REPORT -----------------------------
TO THE PARTNERS OF MAY DRILLING PARTNERSHIP 1983-1 AND MAY LIMITED PARTNERSHIP 1983-1:
We have audited the financial statements of May Drilling Partnership 1983-1 ("General Partnership") and May Limited Partnership 1983-1 ("Limited Partnership") as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, listed in the accompanying index at Item 8. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the General Partnership and the Limited Partnership at December 31, 1995 and 1994, and the results of operations and cash flows of the Limited Partnership for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado February 27, 1996
MAY DRILLING PARTNERSHIP 1983-1 BALANCE SHEETS (In thousands)
Note: The statements of operations and cash flows for May Drilling Partnership 1983-1 are not presented because such information is equal to the Limited Partners' share of such activity as presented in the May Limited Partnership 1983-1 financial statements. The May Drilling Partnership carries its investment in May Limited Partnership 1983-1 on the equity method. The May Limited Partnership 1983-1 financial statements should be read in conjunction with this balance sheet.
MAY LIMITED PARTNERSHIP 1983-1 BALANCE SHEETS (In thousands)
MAY LIMITED PARTNERSHIP 1983-1 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands, except for Units)
MAY LIMITED PARTNERSHIP 1983-1 STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
MAY LIMITED PARTNERSHIP 1983-1 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
MAY DRILLING PARTNERSHIP 1983-1 AND MAY LIMITED PARTNERSHIP 1983-1
NOTES TO FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES AND OTHER MATTERS
GENERAL PARTNERSHIP
May Drilling Partnership 1983-1, a Texas general partnership (the "General Partnership"), was organized by May Petroleum Inc. ("May") for the purpose of oil and gas exploration through May Limited Partnership 1983-1 (the "Limited Partnership"). The General Partnership was formed on May 31, 1983, with investors ("Participants") subscribing an aggregate of $4,713,000 in assessable $1,000 units. After the expenditure of the initial contributions of the Participants, additional mandatory assessments from each Participant are provided for under the terms of the general partnership agreement in an amount up to 25% of the initial contribution of the Participant. During 1984, May assessed the Participants 13% of initial contributions. No additional assessments have been made since 1984.
The general partnership agreement requires that the manager, Hallwood Energy Partners, L. P. ("HEP"), offer to repurchase partnership interests from Participants for cash at amounts to be determined by appraisal of the Limited Partnership's net assets no later than December 31, 1988, and during the two succeeding years, if such net assets are positive. The manager has made repurchase offers in all years since 1989 and intends to make a repurchase offer in 1996.
As the General Partnership is the sole limited partner of the Limited Partnership, its results of operations, cash flows and changes in partners' capital are equal to the limited partner's share of the Limited Partnership's results of operations, cash flows and changes in partners' capital as set forth herein. Therefore, separate statements of operations, cash flows and changes in partners' capital are not presented for the General Partnership.
LIMITED PARTNERSHIP
The Limited Partnership, a Texas limited partnership, was organized by May and the General Partnership for the purpose of oil and gas exploration and the production of crude oil, natural gas and petroleum products. The Limited Partnership's oil and gas reserves are located in prospects in south Louisiana. Among other things, the terms of the limited partnership agreement (the "Agreement") give the general partner the authority to borrow funds. The Agreement also requires that the general partner's total capital contributions to the Limited Partnership as of each year end, including unrecovered general partner acreage and equipment advances, must be compared to total Limited Partnership expenditures from inception to date, and if such contributions are less than 15% of such expenditures, an additional contribution in the amount of the deficiency is required. At December 31, 1995, no additional contributions were necessary to comply with this requirement.
On June 30, 1987, May sold to HEP all of its economic interest in the Limited Partnership and account receivable balances due from the Limited Partnership. HEP became the general partner of the Limited Partnership in 1988.
SHARING OF COSTS AND REVENUES
Capital costs, as defined by the Agreement, for commercially productive wells and the costs related to the organization of the Limited Partnership are borne by the general partner. Noncapital costs and direct expenses, as defined by the Agreement, are charged 1% to the general partner and 99% to the limited partner. Oil and gas sales, operating expenses and general and administrative overhead are shared so that the general partner's allocation will equal the percentage that the amount of Limited Partnership expenses, as defined, allocated to the general partner bears to the aggregate amount of Limited Partnership expenses allocated to the general partner and the limited partner, plus 15 percentage points, but in no event will the general partner's allocation exceed 50%. The sharing ratio for each of the last three years was as follows:
SIGNIFICANT CUSTOMER
For the years ended December 31, 1995, 1994 and 1993, purchases by the following company exceeded 10% of the total oil and gas revenues of the Limited Partnership:
Although the Limited Partnership sells the majority of its production to one purchaser, there are numerous other purchasers in the area, so the loss of its significant customer would not adversely affect the Limited Partnership's operations.
INCOME TAXES
No provision for federal income taxes is included in the financial statements of the Limited Partnership or the General Partnership because, as partnerships, they are not subject to federal income tax and the tax effects of their activities accrue to the partners. The partnerships' tax returns, the qualification of the General and Limited Partnerships as partnerships for federal income tax purposes, and the amount of taxable income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to the partnerships' taxable income or loss, the tax liability of the partners could change accordingly.
OIL AND GAS PROPERTIES
The Limited Partnership follows the full cost method of accounting for oil and gas properties and, accordingly, capitalizes all costs associated with the exploration and development of oil and gas reserves.
The capitalized costs of evaluated properties, including the estimated future costs to develop proved reserves, are amortized on the units of production basis. Full cost amortization per dollar of gross oil and gas revenues was $.22 in 1995, $.19 in 1994 and $.16 in 1993.
Capitalized costs are limited to an amount not to exceed the present value of estimated future net cash flows. No valuation adjustment was required in 1995, 1994 or 1993. Significant price declines in the future could cause the Limited Partnership to experience valuation adjustments and could reduce the amount of future cash flow available for distributions and operations.
Generally no gains or losses are recognized on the sale or disposition of oil and gas properties. Maintenance and repairs are charged against income when incurred.
During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 provides the standards for accounting for the impairment of various long- lived assets. The Limited Partnership is required to adopt SFAS 121 no later than 1996. The Limited Partnership uses the full cost method of accounting for its only long-lived assets, which requires an impairment to be recorded when total capitalized costs exceed the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves. Therefore, the adoption of SFAS 121 is not expected to have a material effect on the financial position or results of operations of the Limited Partnership.
GAS BALANCING
The Limited Partnership uses the sales method for accounting for gas balancing. Under this method, the Limited Partnership recognizes revenue on all of its sales of production, and any over production or under production is recovered at a future date.
As of December 31, 1995, the net imbalance to the Limited Partnership's interest is not considered material. Current imbalances can be made up with production from existing wells or from wells which will be drilled as offsets to current producing wells.
USE OF ESTIMATES
The preparation of the financial statements for the Limited Partnership and General Partnership in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
RELATED PARTY TRANSACTIONS
Hallwood Petroleum, Inc. ("HPI"), a subsidiary of the general partner, pays all costs and expenses of operations and receives all revenues associated with the Limited Partnership's properties. At month end, HPI distributes revenues in excess of costs to the Limited Partnership.
The amount due from HPI as of December 31, 1995 was $8,000 and the amount due to HPI was $2,000 as of December 31, 1994. These balances represent net revenues less operating costs and expenses.
CASH FLOWS
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform to the classifications used in the current year.
(2) GENERAL AND ADMINISTRATIVE OVERHEAD
HPI conducts the day to day operations of the Limited Partnership and other affiliated partnerships of HEP. The costs of operating the entities are allocated to each partnership based upon the time spent on that partnership. General and administrative overhead allocated by HPI to the Limited Partnership totaled $73,000, $99,000 and $120,000 in 1995, 1994 and 1993.
(3) LEGAL PROCEEDINGS
In June 1993, 14 lawsuits were filed against the Limited Partnership in the 15th Judicial District Court, Lafayette Parish, Louisiana, Docket Nos. 93-2332-F through 93-2345-F, styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al. The plaintiffs in the lawsuits claim that they have valid leases covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Mary Guilbeau #1 well and Duhon #1 well, which represent approximately 3% to 4% of the Limited Partnership's interest in these properties, and are entitled to a portion of the production from the wells dating from February 1990. The Limited Partnership has not recognized revenue attributable to the contested leases since January 1993. These revenues, totaling $20,000 at December 31, 1995, have been placed in escrow pending resolution of the lawsuits. At this time, the Limited Partnership believes that the difference between the escrowed amount and the amount of any liability that may result upon resolution of this matter will not be material.
In February 1994, the Limited Partnership and the other parties to the lawsuit styled SAS Exploration, Inc. v. Hall Financial Group, Inc. et al. settled the lawsuit. The plaintiffs alleged that certain leases in the A. L. Boudreaux #1 and A. M. Duhon #1 wells expired and terminated at the end of their primary terms as a result of production being from the Bol Mex 4 Sand rather than the A. B. Sand. In the settlement, the Limited Partnership and the plaintiffs cross- conveyed interests in certain leases to one another and the Limited Partnership paid the plaintiffs $102,000. The cash paid by the Limited Partnership was reflected as litigation settlement expense in the December 31, 1993 financial statements. The interest conveyance resulted in a decrease in the Limited Partnership's reserves as of December 31, 1993 totaling 66,000 mcf of gas, 1,400 barrels of oil and $124,000 in future net revenues, discounted at 10%.
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)
The following tables contain certain costs and reserve information related to the Limited Partnership's oil and gas activities. The Limited Partnership has no long-term supply agreements and all reserves are located within the United States.
COSTS INCURRED -
OIL AND GAS RESERVES -
Certain reserve value information is provided directly to partners pursuant to the Agreement. Accordingly, such information is not presented herein.
(a) See Note 3 to financial statements.
ITEM 9

ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III --------
ITEM 10

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Drilling Partnership and Limited Partnership are managed by affiliates of HEP and do not have directors or executive officers.
ITEM 11

ITEM 11 - EXECUTIVE COMPENSATION
The partnerships pay no salaries or other direct remuneration to officers, directors or key employees of the general partner or HPI. The Limited Partnership reimburses the general partner for general and administrative costs incurred on behalf of the partnerships. See Note 2 to the Financial Statements.
ITEM 12

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the general partner, no person owns of record or beneficially more than 5% of the Drilling Partnership's outstanding units, other than HEP, the address of which is 4582 S. Ulster Street Parkway, Denver, Colorado 80237, and which beneficially owns approximately 38.8% of the outstanding units. The general partner of HEP is Hallwood Energy Corporation. ITEM 13

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information with respect to the Limited Partnership and its relationships and transactions with the general partner, see Part I, Item 1 and Part II, Item 7.
PART IV ---------
ITEM 14

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements and Schedules: See Index at Item 8.
b. Reports on Form 8-K - None.
c. Exhibits:
3.1 The General Partnership Agreement and the Limited Partnership Agreement filed as an Exhibit to Registration Statement No. 0-11311, are incorporated herein by reference.
SIGNATURES - ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Partnerships have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
MAY DRILLING PARTNERSHIP 1983-1 MAY LIMITED PARTNERSHIP 1983-1 BY: EDP OPERATING, LTD., GENERAL PARTNER
BY: HALLWOOD G.P., INC. GENERAL PARTNER
By: /s/William L. Guzzetti ------------------------- William L. Guzzetti President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Robert S. Pfeiffer Vice President February 29, 1996 --------------------------- (Principal ----------------- Robert S. Pfeiffer Accounting Officer)