Item 1. Business
(a) General Development of Business
Premark International, Inc. (the "Registrant") is a multinational consumer and commercial products company. The Registrant is a Delaware corporation which was organized on August 29, 1986 in connection with the corporate reorganization of Kraft, Inc. ("Kraft"). In the reorganization, the businesses of the Registrant and certain other assets and liabilities of Kraft and its subsidiaries were transferred to the Registrant. On October 31, 1986 the Registrant became a publicly held company through the pro-rata distribution by Kraft to its shareholders of all of the outstanding shares of common stock of the Registrant.
The Registrant's principal operating subsidiaries are Premark FEG Corporation, which owns the operating subsidiaries comprising the Registrant's Food Equipment Group; Wilsonart International, Inc. ("Wilsonart"); The West Bend Company ("West Bend"); Florida Tile Industries, Inc. ("Florida Tile"); Hartco Flooring Company ("Hartco"); Precor Incorporated ("Precor"); and Dart Industries Inc. ("Dart"), which owns the operating subsidiaries comprising the Registrant's Tupperware business. Dart was organized in Delaware in 1928 as a successor to a business originally established in 1902. In 1988, Wilsonart and West Bend were organized in Delaware as separate corporations owned directly by the Registrant, having previously been operating divisions of Dart acquired in 1966 and 1968, respectively. In 1995, Wilsonart changed its name from Ralph Wilson Plastics Company. Premark FEG Corporation was organized in Delaware in 1984, a successor to a business originally incorporated in 1897. Florida Tile, a Florida corporation organized in 1954, was acquired in 1990. Hartco, acquired in 1988, was organized in Tennessee in 1946. Precor, a Delaware corporation, was organized as a Washington corporation in 1981, and was acquired in 1984.
On November 1, 1995, the Registrant announced a plan for a pro-rata distribution to the Registrant's shareholders of all the stock of a Corporation owning the Registrant's Tupperware business. The new corporation, Tupperware Corporation ("Tupperware"), is a worldwide direct selling consumer products company engaged in the manufacture and sale of Tupperware brand products. Tupperware was organized under the laws of the State of Delaware on February 8, 1996 as part of the corporate reorganization of the Registrant in which Dart and its subsidiaries will be transferred to Tupperware. The distribution of Tupperware stock is expected to occur in June, 1996.
(b) Financial Information About Industry Segments
For certain financial information concerning the Registrant's business segments, see Note 10 ("Segments of the Business") of the Notes to the Consolidated Financial Statements of Premark International, Inc., appearing on page 51 of the Annual Report to Shareholders for the year ended December 30, 1995, which is incorporated by reference into this Report by Item 8 hereof.
For certain financial information concerning the Registrant's Tupperware operation, see Note 2 ("Distribution of Tupperware to Shareholders") of the Notes to the Consolidated Financial Statements of Premark International, Inc., appearing on page 45 of the Annual Report to Shareholders for the year ended December 30, 1995, which is incorporated by reference into this Report by Item 8 hereof.
(c) Narrative Description of Business
The Registrant conducts its business through its three continuing business segments: the Food Equipment Group, the Consumer Products Group, and the Decorative Products Group, as well as through its Tupperware operation. A discussion of the four business segments follows.
FOOD EQUIPMENT GROUP
Principal Products, Markets and Distribution
The Food Equipment Group, composed primarily of Premark FEG Corporation and its operating subsidiaries (the "Group"), is a leading manufacturer of commercial food preparation, cooking, storage, and cleaning equipment. For the fiscal years 1995, 1994, and 1993, sales by the Group contributed approximately 35 percent, 33 percent, and 33 percent, respectively, of the sales of the Registrant's businesses, including the Tupperware operation. Revenues from foreign operations constituted approximately 43 percent of the Group's 1995 sales.
The Group's core products include warewashing equipment; food preparation machines, such as mixers, slicers, cutters, meat saws and grinders; weighing and wrapping equipment and related systems; baking and cooking equipment, such as ovens, ranges, fryers, griddles and broilers; and refrigeration equipment. Products are marketed under the trademarks Hobart, Stero, Vulcan, Wolf, Tasselli, Adamatic, Still, Foster, and Ungermann. Ungermann, a German supplier of refrigerating equipment for the baking industry with 1995 sales of about $23 million, was acquired in 1995. The Hobart brand represents about 80% of the Group's sales.
Food equipment products are sold to the retail food industry, including supermarket chains, independent grocers, delicatessens, bakeries, convenience and other food stores, and to the foodservice industry, including independent restaurants, fast-food chains, hospitals, correctional facilities, schools, hotels, resorts, and airlines.
Food equipment products are distributed in more than 100 countries, either through company-owned operations or through distributors, dealers or licensing arrangements covering many areas of the world where a market for such products currently exists. The Group is the only major food equipment manufacturer in the United States with its own nationwide service network for the markets in which it sells, providing not only an important source of income but also an important source for developing new sales. The Group directly services its food machines, warewashers, weigh/wrap equipment, and cooking equipment, while authorized independent agents service refrigeration units and some cooking equipment.
Major new products introduced by the Group in the United States in 1995 included a Hobart Quantum scale/printer system, the Medalist by Hobart line of value-priced mixers and refrigeration equipment, a Hobart 1812 RS scale/slicer, Vulcan- Hart thermal kettles, and Vulcan-Hart Euroline ranges. The Group has announced introduction of a new line of coffee brewers in the U.S. In Europe, the Group introduced in 1995 its Le Maillon product which keeps food cool while being transported, and an expanded Hobart utensil warewasher line.
Raw Materials and Facilities
The Group uses stainless and carbon steel, aluminum, and plastics in the manufacture of its products. These materials are readily available from several sources, and no difficulties have been experienced with respect to their availability, although costs have increased somewhat. In addition to manufacturing certain component parts, the Group also purchases many component parts, such as electrical and electronic components, castings, hardware, fasteners, and bearings. Certain manufacturers utilize tooling provided by the Group for such components.
The Group owns its headquarters building and a major manufacturing complex consisting of four plants in Troy, Ohio. In addition, the Group operates nine manufacturing plants in California, Georgia, Kansas, Maryland, New Jersey, Ohio, and Virginia, and nine manufacturing plants in Canada, France, Italy, the United Kingdom, Germany, and Australia. Most of these plants are owned. The group is building a warewashing plant in China, with anticipated startup in 1997.
Competition
The Group competes in a growing worldwide market which is highly fragmented. No single manufacturer competes with respect to all of the Group's products, and the degree of competition varies among different customer segments and products. The commercial food equipment industry is mature, with growth primarily a function of new construction and replacement sales to existing locations, as well as menu and format changes. The extensiveness of the Group's brand acceptance across a broad range of products is deemed by the Registrant to be a significant competitive advantage. Another important competitive advantage is the group's extensive service network throughout North America and Europe, as well as in major markets in the Far East and Latin America. Competition is also based on numerous other factors, including product quality, performance, reliability, labor savings, price, and energy conservation.
Miscellaneous
The Group had approximately $134 million and $132 million of backlog orders at the end of 1995 and 1994, respectively, after restatement of 1994 for exchange rate effects. The Group considers such orders to be firm, though changes or cancellations of insignificant amounts may occur, and expects that the 1995 backlog orders will be filled in 1996.
DECORATIVE PRODUCTS GROUP
Principal Products, Markets and Distribution
Wilsonart, Florida Tile and Hartco make up the Decorative Products Group. The Decorative Products Group contributed 19 percent, 20 percent, and 20 percent of the sales of the Registrant's businesses, including the Tupperware operation, for the fiscal years 1995, 1994, and 1993, respectively.
Wilsonart manufactures decorative plastic laminate products through a production process utilizing heated high pressure presses. These products, sold principally under the Wilsonart trademark in more than 700 colors, designs, and finishes, are used for numerous interior surfacing applications, including cabinetry, countertops, vanities, store fixtures, and furniture. Approximately 50 percent of the Wilsonart decorative laminate sold is used in residential applications, primarily for surfacing kitchen and bathroom countertops and cabinetry. Decorative laminate applications in the commercial market include office furniture, retail store fixtures, restaurant and hotel furniture, and doors. Wilsonart also manufactures specialty-grade laminates, including chemical-resistant, wear-resistant, and fire-retardant types. Among the specialized applications for Wilsonart laminate are those in laboratory work surfaces, jetways and naval vessels. In 1995, Wilsonart added 36 new designs to its standard laminate product line, and announced introduction of a high-pressure decorative laminate flooring line.
In addition to laminate products, Wilsonart sells a solid surfacing product which is marketed under the Gibraltar brand. The Company also produces and/or sells contact adhesives under the Lokweld trademark, as well as Wilsonart decorative metallic surfacings, and Wilsonart decorative edge moldings for countertops and furniture. In 1995, the company began test marketing a solid surfacing veneer product.
Wilsonart decorative products are sold throughout the United States through wholesale building material distributors and directly to original equipment manufacturers. Export sales are now made to Japan, Ireland, Canada, Mexico, Central and South America, the Caribbean, Australia, New Zealand, Hong Kong, Taiwan, China, Korea, Indonesia, and Singapore. Wilsonart is seeking to expand its distribution network outside the U.S.
Florida Tile manufactures glazed ceramic wall and floor tile products in a wide variety of sizes, shapes, colors, and finishes, which are suitable for residential and commercial uses. Tile products are marketed under the Florida Tile trademark through company-owned and independent distributors. A small portion of Florida Tile's sales are exports. Florida Tile also imports foreign-produced tile products to supplement its line of manufactured products.
Hartco manufactures and distributes high-quality, prefinished and unfinished oak and prefinished maple flooring for residential and commercial applications. Its flooring products are pre-cut parquet panels, laminated three and five-ply maple plank lineal flooring products, laminated two, three and five-ply oak plank lineal flooring products, and 3/4-inch solid strip prefinished and unfinished oak flooring, each of which is sold in a variety of colors and finishes. Hartco's solid strip oak flooring product was introduced in 1995. Hartco also manufactures wood moldings, installation adhesives, and a full line of proprietary floor care products to complement its line of flooring products. These products are marketed under the Hartco trademark to a nationwide network of independent wholesale floor covering distributors, home improvement store chains, and retail buying groups. A small portion of Hartco's sales are exports.
Raw Materials and Facilities
The manufacture of decorative laminates requires various raw materials, including kraft and decorative paper, overlays, and melamine and phenolic resins. Each of these items is available from a limited number of manufacturers, but Wilsonart has not experienced difficulties in obtaining sufficient quantities. The principal raw materials used in Florida Tile products are clay, talc, stains, and frit (ground glass), all of which are available to Florida Tile in sufficient quantities. The principal raw materials used in Hartco's hardwood flooring products are Appalachian red and white oak, maple, steel wire, and various chemicals. All such raw materials are readily available from many sources in sufficient quantities.
Wilsonart owns and operates three manufacturing facilities in Texas and North Carolina, giving it the largest decorative laminate production capacity in North America. Adhesives are produced at two plants located in Louisiana and Texas. Solid surfacing products are manufactured in one facility in Texas, and are also purchased under a supply agreement. Wilsonart has 14 regional distribution centers which are geographically dispersed throughout the United States. Stock items can be delivered within 24 hours, and non-stock items can be produced and delivered within 10 working days. Florida Tile manufactures products in three owned manufacturing plants located in Florida, Georgia and Kentucky. It distributes its products through a network of company-owned and independent distribution outlets. Hartco manufactures its products in an owned manufacturing facility in Tennessee and a leased facility in Kentucky.
Competition
Wilsonart products are sold in highly competitive markets in the United States. Wilsonart has approximately 48 percent of the U.S. market for high pressure decorative laminates. Wilsonart successfully competes with other companies by providing fast product delivery, offering a broad choice of colors, designs, and finishes, and emphasizing quality and service. Florida Tile competes with a number of other domestic and foreign tile manufacturers in a fragmented market. The Registrant believes Florida Tile is the third largest U.S. tile manufacturer, with a market share substantially less than the largest U.S. manufacturer. Foreign-manufactured products account for approximately 55 percent of the U.S. tile market. Important competitive factors in the tile market include price, style, quality, breadth of product line, and service. Hartco competes with a number of other domestic and foreign suppliers of prefinished wood flooring products. Important competitive factors include price, fit, appearance, durability, the variety of finishes and colors, and the complementary molding, adhesive and floor care products. Wilsonart, Florida Tile, and Hartco products compete with other types of surfacing and flooring materials.
Miscellaneous
The Decorative Products Group maintains a continuing program of product development. Its efforts emphasize product design, performance, durability, product enhancement, and new product applications, as well as manufacturing processes. Materials development for laminate products is generally performed by the companies providing those materials.
The group's products are sold for new construction and remodeling, in both the residential and commercial markets. As a consequence, the group's sales are affected by the seasonality of the construction and remodeling industry.
Prices for paper and resin have increased substantially in the last year. Lumber supplies are also at a premium price compared with several years ago, although prices have moderated from the high levels of 1993.
CONSUMER PRODUCTS GROUP
Principal Products, Markets and Distribution
The Consumer Products Group consists of West Bend and Precor. It contributed 8 percent, 9 percent, and 8 percent of the sales of the Registrant's business, including the Tupperware operation, for the fiscal years 1995, 1994, and 1993, respectively.
West Bend manufactures and sells small electric appliances such as bread makers, electric skillets, slow cookers, woks, corn poppers, beverage makers, and electronic timers, primarily under the West Bend trademark. West Bend also manufactures and sells high-quality stainless steel cookware. During 1995, West Bend expanded its bread maker and drip coffeemaker lines. Precor manufactures physical fitness equipment such as treadmills, stationary bicycles, and low-impact climbers, all of which are marketed under the Precor trademark. In 1995, Precor introduced a new line of household treadmills, its Variable Aerobic Trainer walking machine for fitness club use, and its Smart Weights hand- held weights with treadmill remote control.
West Bend small appliances are sold primarily in the United States and Canada, directly to mass merchandisers, department stores, hardware stores, warehouse clubs, and catalog showrooms. West Bend's stainless steel cookware is sold to consumers by independent distributors through dinner parties and by other direct sales methods. Cookware is sold in 31 countries under 23 separate product lines. Precor equipment is sold primarily through specialty fitness equipment retail stores and high-end sporting goods and bicycle stores in the United States and Canada. In Asia, Europe, Latin America, and the Middle East, Precor products are sold primarily through select distributors. While Precor products have been primarily for home use, in recent years Precor has entered the fitness club market.
Raw Materials and Facilities
West Bend uses aluminum, stainless steel, plastic resins, and other materials in the manufacture of its products. Precor uses steel, stainless steel, aluminum, and other materials in the manufacture of its products. Generally, neither West Bend nor Precor has experienced any significant difficulties in obtaining any of these raw materials or products, although the cost of these raw materials has risen. West Bend owns and operates two manufacturing plants in Wisconsin and Mexico. Precor maintains two leased plants in Washington state.
Competition
Products sold by West Bend and Precor compete with products sold by numerous other companies of varying sizes in highly competitive markets. Important competitive factors include price, development of new products, quality, name recognition, product performance, just-in-time delivery, warranties, and service.
Miscellaneous
West Bend's sales in the fourth quarter typically are significantly higher due to the gift-giving season. Precor's business is significantly higher in the first and fourth quarters, when winter weather forces more people to exercise indoors. The Consumer Products Group is dependent on two customers for approximately one-third of its revenues.
TUPPERWARE
Principal Products, Markets and Distribution
Tupperware manufactures and markets a broad line of high quality consumer products for the home and for personal care. In fiscal years 1995, 1994, and 1993, Tupperware contributed approximately 38 percent, 38 percent, and 39 percent, respectively, of the sales of the Registrant's businesses.
The core of the product line continues to be food storage containers which preserve freshness of food through the well- known Tupperware seals. The line has expanded into kitchen, home storage and organizing uses with products such as Modular Mates and Fridge Stackables stackable storage containers, OneTouch canisters, and many specialized containers. In recent years, Tupperware has expanded its offerings in the food preparation and service areas through the addition of a number of products, including double colanders, tumblers and mugs, mixing and serving bowls, serving centers, microwaveable cooking and serving products, and kitchen utensils. It also has a line of children's educational toys, serving products, and gifts.
Products sold by Tupperware are produced primarily by Tupperware in its manufacturing facilities around the world. In some markets, Tupperware sources certain products from third parties and/or contracts with local manufacturers to manufacture its products, utilizing high-quality molds which are supplied by Tupperware. Promotional items provided at product demonstrations include items obtained from outside sources.
Tupperware products are sold in the United States and in more than 100 foreign countries. For the past five years, sales in foreign countries represented on average 80 percent or more of total Tupperware revenues. Market penetration varies significantly throughout the world. "Developing" areas which have low penetration, such as Latin America, Asia, and Eastern Europe, provide significant growth potential. Tupperware's strategy continues to include aggressive expansion into new markets throughout the world during the balance of the decade. New markets entered by Tupperware in 1995 included Poland and several countries in southern Africa. Tupperware intends to establish operations in 1996 in China, additional Eastern European countries, and several Middle Eastern countries. Tupperware is seeking approval to do business in India.
Tupperware's products are distributed worldwide through the "direct selling" method of distribution, in which products are sold to consumers outside traditional retail store channels. Tupperware products are sold directly to distributors or dealers throughout the world. Distributors are granted the right to market Tupperware products using the demonstration method and utilizing the Tupperware trademark. The vast majority of Tupperware's distributorship system is composed of distributors, managers, and dealers who are independent contractors and not employees of Tupperware. In certain limited circumstances, in order to maintain market penetration, rather than utilizing an independent distributor, Tupperware owns the distributorship for a period of time until an independent distributor can be installed.
Key aspects of Tupperware's strategy are expanding its business by enlarging the number of distributors, and increasing the business of existing distributors. Under the Tupperware system, distributors recruit, train and motivate a large sales force to cover the distributor's geographic area. Managers are developed and promoted by distributors to assist the distributor in recruiting, training, and motivating dealers. Managers also continue to hold their own demonstrations.
As of December 30, 1995, the Tupperware distribution system had over 1,670 distributors, 44,000 managers and 790,000 dealers worldwide. The dealer force continues to increase each year.
Tupperware primarily relies on the "demonstration" method of sales, which is designed to enable the purchaser to appreciate through demonstration the features and benefits of Tupperware products. Demonstrations are held in homes, offices, social clubs and other locations. In excess of 13 million demonstrations were held worldwide in 1995. Tupperware products are also promoted through monthly brochures mailed to persons invited to attend various types of demonstrations. Sales of Tupperware products are supported through a program of sales promotions, sales and training aids and motivational conferences for the independent sales force. Tupperware supports its sales force with catalogs, magazine advertising and toll-free telephone ordering, which helps increase its sales levels with hard-to- reach customers.
The distribution of products to consumers is the responsibility of distributors who are required to maintain their own inventory, warehouse facilities and delivery systems. In certain markets, Tupperware offers distributors the use of a delivery system of direct product shipment to dealers or consumers, which is intended to reduce the distributor's investment in inventory and enable distributors to be more cost- efficient.
Raw Materials and Facilities
Products manufactured by Tupperware require plastic resins meeting its specifications. These resins are purchased from a number of large chemical companies, and Tupperware has experienced no difficulties in obtaining adequate supplies. Raw material costs increased significantly during the year, but began to decline in the fourth quarter. Research and development of resins used in Tupperware products are performed by both Tupperware and its suppliers.
Tupperware owns its principal executive office, located in Orlando, Florida. Tupperware owns manufacturing plants in twelve countries, including the United States, and leases an additional plant outside the United States. Tupperware conducts a continuing program of new product design and development at its facilities in Florida, Japan and Belgium. Most of the principal properties of Tupperware and its subsidiaries are owned, and none of the owned principal properties is subject to any material encumbrance.
Competition
There are two primary competitive factors which affect the Tupperware business: 1) competition with other "direct sales" companies for sales personnel and demonstration dates, and 2) competition in the markets for food storage and serving containers, toys, personal care items, and gifts in general. The Registrant believes Tupperware holds a significant market share in each of these markets in many countries. Tupperware's competitive strategies are to continue to expand its direct selling distribution system and to provide high quality, high value products throughout the world.
OTHER INFORMATION RELATING TO THE BUSINESS
Trademarks and Patents. The Registrant considers trademarks and patents to be of importance to its businesses. The Registrant's trademarks represent the leading brand names for most of its product lines. Its businesses have followed the practice of applying for patents with respect to most of the significant patentable developments, and now own a number of patents relating to their products. In certain cases the Registrant has elected common law trade secret protection in lieu of obtaining patent protection. In addition, exclusive and nonexclusive licenses under patents owned by others are utilized. No business is dependent to any material extent upon any single patent or trade secret or group of patents or trade secrets.
Research and Development. For fiscal years ended 1995, 1994 and 1993, the Registrant, including its Tupperware operation, spent approximately $44 million, $44 million, and $41 million, respectively, on research and development activities.
Environmental Laws. Compliance by the Registrant's businesses with federal, state and local environmental protection laws has not in the past had, and is not expected to have in the future, a material effect upon its capital expenditures, liquidity, earnings or competitive position. The Registrant expects to expend approximately $0.2 million through 1997 on capital expenditures related to environmental facilities. In 1995, the Registrant had approximately $0.6 million of capital expenditures for environmental facilities, and approximately $3.3 million of remedial expenditures for environmental sites. See Item 3 for a further discussion of environmental matters.
Employees. The Registrant and its subsidiaries employ approximately 24,300 people, about 6,900 of whom are employed by the Registrant's Tupperware operation. Approximately 18 percent of the Registrant's employees are affiliated with one of the several unions with which the Registrant's subsidiaries have collective bargaining agreements. In recent years there has been no major effort to organize additional persons working for the Registrant's businesses, and there have been no significant work stoppages. The Registrant considers its relations with its employees to be good. The independent consultants, dealers, managers, distributors and franchisees engaged in the direct sale of Tupperware products are not employees of the Registrant.
Properties. The principal executive offices of the Registrant are located in Illinois and are leased. Most of the principal properties of the Registrant and its subsidiaries are owned, and none of the owned principal properties is subject to any encumbrance material to the consolidated operations of the Registrant. The Registrant considers the condition and extent of utilization of the plants, warehouses and other properties in its respective businesses to be generally good, and the capacity of its plants and warehouses generally to be adequate for the needs of its businesses.
Miscellaneous. Except as disclosed above in the narrative descriptions of the Registrant's business segments, none of the Registrant's businesses is seasonal, has working capital practices or backlog conditions material to an understanding of its businesses, is dependent on a small number of customers, or is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the federal government.
For information concerning foreign and domestic operations and export sales, see Note 7 ("Income Taxes") appearing on pages 46 and 47, and "Segments of Business by Geographical Areas" in Note 10 ("Segments of the Business") appearing on page 51 of the Annual Report to Shareholders for the year ended December 30, 1995, which are incorporated by reference into this Report by Item 8 hereof. For information concerning Registrant's discontinued Tupperware operation, see Note 2 ("Distribution of Tupperware to Shareholders") appearing on page 45 of the Annual Report to shareholders for the year ended December 30, 1995.
Executive Officers of the Registrant. Following is a list of the names and ages of all the Executive Officers of the Registrant, indicating all positions and offices with the Registrant held by each such person, and each such person's principal occupations or employment during the past five years. Each such person has been elected to serve until the next annual election of officers of the Registrant (expected to occur on May 1, 1996). The Registrant expects that upon the distribution of Tupperware stock Mr. Batts will resign his position as Chief Executive Officer and assume the position of Tupperware's Chairman of the Board and Chief Executive Officer, Mr. Ringler will become the Registrant's Chief Executive Officer and continue as President, and Messrs. Goings and Rose will resign their positions with the Registrant and continue as Tupperware's President and Chief Operating Officer and Tupperware's Vice President of Taxes and Government Affairs, respectively. The Registrant also expects that Ms. Richardson will resign her position with the Registrant in June, 1996. Name and Age Positions and Offices Held and Principal Occupations or Employment During Past Five Years
Warren L. Batts (63) Chairman of the Board and Chief Executive Officer.
James M. Ringler (50) President and Chief Operating Officer since June 1992, after having served as Executive Vice President, Consumer and Commercial Products since January, 1990, and President, Food Equipment Group since August, 1990.
E. V. Goings (50) Executive Vice President and President of Tupperware Worldwide since November 1992, after serving as a Senior Vice President of Sara Lee Corporation. Prior thereto, Mr. Goings served in various executive positions with Avon Products, Inc.
Joseph W. Deering (55) Group Vice President of Premark and President of Premark's Food Equipment Group since June 1992, after serving as President of Leucadia National's Manufacturing group. Prior thereto, Mr. Deering served in various executive positions with Philips Industries, Inc.
Thomas W. Kieckhafer (57) Corporate Vice President and President of The West Bend Company.
James C. Coleman (56) Senior Vice President, Human Resources since July 1991. Prior thereto, Mr. Coleman served as Staff Vice President, Personnel Relations for General Dynamics Corporation.
John M. Costigan (53) Senior Vice President, General Counsel and Secretary.
Lawrence B. Skatoff (56) Senior Vice President and Chief Financial Officer since September 1991. Prior thereto, Mr. Skatoff served as Vice President- Finance of Monsanto Company.
L. John Fletcher (52) Vice President and Assistant General Counsel.
Isabelle C. Goossen (44) Vice President, Financial Relations since January 1996, after serving as Vice President, Planning since June 1994, Director of Financial Relations since 1992, and prior thereto as Director in the Planning Department.
Robert W. Hoaglund (57) Vice President and Controller since January 1996. Prior thereto Mr. Hoaglund was Vice President, Control & Information Systems.
Wendy R. Katz (38) Vice President, Internal Audit since May 1992. Prior thereto, Ms. Katz served in various financial positions at Tupperware.
William R. Reeb (48) Corporate Vice President since November 1994, and President and Chief Operating Officer of Wilsonart since August 1993. Prior thereto, Mr. Reeb served as Vice President, Marketing for the Decorative Products Group and Executive Vice President and Vice President of Marketing for Wilsonart.
Lisa Kearns Richardson (43) Vice President and Treasurer since April 1994, after serving as Vice President, Planning and Analysis since February 1991. Prior thereto, Ms. Richardson served as Assistant Controller.
James E. Rose, Jr. (53) Vice President, Taxes and Government Affairs.
Anthony C. Scolaro (47) Vice President, Planning and Business Development since January 1996. Mr. Scolaro was Corporate Development Vice President at Ecolab, Inc. from 1994 to 1996, and was Assistant to the President at Rykoff-Sexton, Inc. from 1989 to 1994.
Item 2.

Item 2. Properties
For information concerning material properties of the Registrant and its subsidiaries, see the information under the sub-captions "Narrative Description of Business" in Section (c) of Item 1 above and "Properties" under the caption "Other Information Relating To The Business" in Section (c) of Item 1 above.
Item 3.

Item 3. Legal Proceedings
The Registrant and its subsidiaries have pending against them a number of legal and administrative proceedings. Among such proceedings are those involving the discharge of materials into or otherwise relating to the protection of the environment. Certain of such proceedings involve federal environmental laws such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as well as state and local laws. The Registrant establishes reserves with respect to certain of such sites. Because of the involvement of other parties and the uncertainty of potential environmental impacts, the eventual outcomes of such actions and the cost and timing of expenditures cannot be estimated with certainty. It is not expected that the outcome of such proceedings, either individually or in the aggregate, will have a material adverse effect on the Registrant's consolidated financial position, results of operations, or any individual year's cash flow.
Kraft has assumed any liabilities arising out of any legal proceedings in connection with certain divested or discontinued former Dart businesses, including matters alleging product liability, environmental liability and infringement of patents.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The stock price information set forth in Note 12 ("Quarterly Summary (unaudited)") appearing on page 52 of the Annual Report to Shareholders for the year ended December 30, 1995 is incorporated by reference into this Report. The information set forth in Note 13 ("Shareholders' Rights Plan") on page 53 of the Annual Report to Shareholders for the year ended December 30, 1995 is incorporated by reference into this Report. As of March 4, 1996, the Registrant had 23,030 shareholders of record.
Item 6.

Item 6. Selected Financial Data
The information set forth under the caption "Selected Financial Data" on pages 38 and 39 of the Annual Report to Shareholders for the year ended December 30, 1995 is incorporated by reference into this Report.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information entitled "Financial Review" set forth on pages 33 through 37 of the Annual Report to Shareholders for the year ended December 30, 1995 constitutes "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated by reference into this Report.
Item 8.

Item 8. Financial Statements and Supplementary Data
(a) The following Consolidated Financial Statements of Premark International, Inc. and Report of Independent Accountants set forth on pages 40 through 53, and on page 54, respectively, of the Annual Report to Shareholders for the year ended December 30, 1995 are incorporated by reference into this Report:
Consolidated Statements of Operations, Cash Flows and Shareholders' Equity--Years ended December 30, 1995, December 31, 1994 and December 25, 1993;
Consolidated Balance Sheet--December 30, 1995 and December 31, 1994;
Notes to the Consolidated Financial Statements; and
Report of Independent Accountants dated February 23, 1996.
(b) The supplementary data regarding quarterly results of operations contained in Note 12 ("Quarterly Summary (Unaudited)") of the Notes to the Consolidated Financial Statements of Premark International, Inc. on page 52 of the Annual Report to Shareholders for the year ended December 30, 1995 is incorporated by reference into this Report.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
The information as to the Directors of the Registrant set forth under the sub-caption "Board of Directors" appearing under the caption "Election of Directors" on pages 2 through 4 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 1, 1996 is incorporated by reference into this Report. The information as to the Executive Officers of the Registrant is included in Part I hereof under the caption "Executive Officers of the Registrant" in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
Item 11.

Item 11. Executive Compensation
The information set forth under the caption "Compensation of Directors" on page 17 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 1, 1996, and the information on pages 11 through 16 of such Proxy Statement relating to executive officers' compensation is incorporated by reference into this Report.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Security Ownership of Certain Beneficial Owners" on page 6 and "Security Ownership of Management" on page 5 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 1, 1996 is incorporated by reference into this Report.
Item 13.

Item 13. Certain Relationships and Related Transactions
None
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K
(a) (1) List of Financial Statements
The following Consolidated Financial Statements of Premark International, Inc. and Report of Independent Accountants set forth on pages 40 through 53, and on page 54, respectively, of the Annual Report to Shareholders for the year ended December 30, 1995 are incorporated by reference into this Report by Item 8 hereof:
Consolidated Statements of Operations, Cash Flows and Shareholders' Equity--Years ended December 30, 1995, December 31, 1994 and December 25, 1993;
Consolidated Balance Sheet--December 30, 1995 and December 31, 1994;
Notes to the Consolidated Financial Statements; and
Report of Independent Accountants dated February 23, 1996.
(a) (2) List of Financial Statement Schedules
The following consolidated financial statement schedule (numbered in accordance with Regulation S-X) of Premark International, Inc. is included in this Report:
Report of Independent Accountants on Financial Statement Schedule, page 33 of this Report; and
Schedule II--Valuation and Qualifying Accounts for the three years ended December 30, 1995, page 34 of this Report.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information called for therein is included elsewhere in the financial statements or related notes contained or incorporated by reference herein.
(a) (3) List of Exhibits: (numbered in accordance with Item 601 of Regulation S-K)
Exhibit Number Description
* 3.1 Restated Certificate of Incorporation (Exhibit 3A to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1991)
3.2 Amended By-Laws
* 4.1 Form of Common Stock Certificate (Exhibit 3 to the Registrant's Current Report on Form 8-K dated March 20, 1989)
* 4.2 Rights Agreement dated March 7, 1989 (Exhibit 1 to the Registrant's Current Report on Form 8-K dated March 20, 1989)
* 4.3 Form of Right Certificate of Common Stock Purchase Right (Exhibit 1 to the Registrant's Current Report on Form 8-K dated March 20, 1989)
* 4.4 Form of Indenture (Revised) in connection with the Registrant's Form S-3 Registration Statement No. 33-35137 (Exhibit (c)(3) to the Registrant's Current Report on Form 8-K dated September 17, 1990)
*10.1 Reorganization and Distribution Agreement dated as of September 4, 1986 (Exhibit 2 to Registration of Securities on Form 10 dated September 8, 1986, File No. 1-9256)
*10.2 Tax Sharing Agreement dated as of September 4, 1986 (Exhibit 10C to Registration of Securities on Form 10 dated September 8, 1986, File No. 1-9256)
*10.3 Facilities and Guarantee Agreement, as amended, and Termination Agreement dated as of September 4, 1986 (Exhibit 10D to Registration of Securities on Form 10 dated September 8, 1986, File No. 1-9256)
*10.4 $250,000,000 Credit Agreement dated as of June 15, 1994 (Exhibit (10) to the Registrant's Quarterly Report on Form 10-Q for the 27 weeks ended July 2, 1994)
10.5 Form of Distribution Agreement by and among Premark International, Inc., Tupperware Corporation and Dart Industries Inc.
10.6 Form of Tax Sharing Agreement by and between Premark International, Inc. and Tupperware Corporation.
COMPENSATORY PLANS OR ARRANGEMENTS [10G-10N]
10.7 Form of Employee Benefits and Compensation Allocation Agreement by and between Premark International, Inc. and Tupperware Corporation.
*10.8 Premark International, Inc. 1994 Incentive Plan (Exhibit 4.1 to the Registrant's Form S-8 Registration Statement No. 33-53561 dated May 4, 1994)
*10.9 Premark International, Inc. Supplemental Benefits Plan (Exhibit 10L to the Registrant's Annual Report on Form 10-K for the year ended December 28, 1991)
*10.10 Premark International, Inc. Change of Control Policy, as amended 1989 (Exhibit 4 to the Registrant's Current Report on Form 8-K dated March 20, 1989)
*10.11 Form of Employment Agreement entered into on March 7, 1989 between the Registrant and certain executive officers (Exhibit 5 to the Registrant's Current Report on Form 8-K dated March 20, 1989)
*10.12 Employment Agreement entered into on June 2, 1992 between the Registrant and Joseph W. Deering (Exhibit 10M to the Registrant's Annual Report on Form 10-K for the year ended December 26, 1992)
*10.13 Employment Agreement dated November 9, 1992 between Registrant and E. V. Goings (Exhibit 10N to the Registrant's Annual Report on Form 10-K for the year ended December 25, 1993)
*10.14 Premark International, Inc. Director Stock Plan, as amended 1993 (Exhibit 10O to the Registrant's Annual Report on Form 10-K for the year ended December 25, 1993)
11 A statement of computation of 1995 per share earnings
13 Pages 30 through 54 of the Annual Report to Shareholders of the Registrant for the year ended December 30, 1995
21 Subsidiaries of the Registrant as of March 15,
23 Manually signed Consent of Independent Accountants to the incorporation of their report by reference into the prospectuses contained in specified registration statements on Form S-8 and Form S-3
24 Powers of Attorney
27 Financial Data Schedule
*Document has heretofore been filed with the Commission and is incorporated by reference and made a part hereof.
The Registrant agrees to furnish, upon request of the Commission, a copy of all constituent instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries.
(b) Reports on Form 8-K
During the quarter ended December 30, 1995 the Registrant filed a Current Report on Form 8-K dated November 2, 1995 reporting the Registrant's November 1, 1995 announcement of a plan providing for, among other things, a pro-rata distribution to Registrant's shareholders of all of the stock of a corporation owning Registrant's Tupperware business.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Premark International, Inc.
Our audits of the consolidated financial statements referred to in our report dated February 23, 1996 appearing on page 54 of the 1995 Annual Report to Shareholders of Premark International, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Price Waterhouse LLP Chicago, Illinois February 23, 1996
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.
Premark International, Inc. (Registrant)
By WARREN BATTS Warren L. Batts Chairman of the Board and Chief Executive Officer
March 25, 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.
Signature Title
WARREN L. BATTS Chairman of the Board of Directors, Warren L. Batts Chief Executive Officer and Director (Principal Executive Officer)
LAWRENCE B. SKATOFF Senior Vice President and Chief Lawrence B. Skatoff Financial Officer (Principal Financial Officer)
ROBERT W. HOAGLUND Vice President and Controller Robert W. Hoaglund (Principal Accounting Officer)
* Director William O. Bourke
* Director Dr. Ruth M. Davis
* Director Lloyd C. Elam, M.D.
* Director E.V. Goings
* Director Clifford J. Grum
* Director Joseph E. Luecke
* Director Bob Marbut
* Director John B. McKinnon
* Director David R. Parker
* Director Robert M. Price
JAMES M. RINGLER President, Chief Operating Officer and James M. Ringler Director
* Director Janice D. Stoney
*By John M. Costigan John M. Costigan Attorney-in-fact March 25, 1996
EXHIBIT INDEX
Exhibit No. Description Page
11 A statement of computation of 27-28 1995 per share earnings
13 Pages 30 through 54 of the 29-66 Annual Report to Shareholders of the Registrant for the year ended December 30, 1995
22 Subsidiaries of the Registrant 67-69 as of March 10, 1995
23 Manually signed Consent of 70 Independent Accountants to the incorporation of their report by reference into the prospec- tuses contained in specified registration statements on Form S-8 and Form S-3
24 Powers of Attorney 71-72
27 Financial Data Schedule 73


ITEM 1 - BUSINESS
May Drilling Partnership 1984-3 (the "Drilling or General Partnership") and May Limited Partnership 1984-3 (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 accrued.
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 shown 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 66.4% to the limited partner and 33.6% 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 General Partnership 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 CUSTOMERS
For the years ended December 31, 1995, 1994 and 1993, purchases by each of the following companies 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 actions it believes 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 concentrated in one prospect in south Louisiana. Natural gas accounts for 57% of estimated future gross revenues in the Limited Partnership's reserve report as of December 31, 1995.
SIGNIFICANT PROSPECT
At December 31, 1995, the following prospect accounted for all 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.
MONTET PROSPECT. The Montet prospect is located in Lafayette Parish, Louisiana. The Limited Partnership's interest in the prospect contains one productive well and has estimated remaining net proved reserves of 39,000 bbls of oil and 383,000 mcf of gas as of December 31, 1995. The Limited Partnership's working interest in this well is 15%. The prospect produces from one zone, the Bol Mex 3 formation at approximately 15,275 feet.
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 531 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 primarily for distributions to partners. Future distributions depend on, among other things, continuation of current or higher oil and gas prices and markets for production.
The Limited Partnership has net working capital of $654,000 at December 31, 1995. This working capital, together with cash flows generated from operations, may be used to fund future distributions.
Proved reserves and discounted future net revenues (discounted at 10% and before general and administrative expenses) attributable to proved reserves were estimated at 39,000 bbls and 383,000 mcf valued at $1,423,000 in 1995 and 36,000 bbls and 320,000 mcf valued at $1,084,000 in 1994. The Partnership's oil and gas reserves were revised upward during 1995 based upon the continued performance of the Freddie Aker.
RESULTS OF OPERATIONS - ---------------------
1995 COMPARED TO 1994 - ---------------------
OIL REVENUE
Oil revenue decreased $37,000 during 1995 as compared with 1994. The decrease is comprised of a 14% decrease in production, partially offset by an increase in the average price from $16.18 per barrel in 1994 to $17.67 per barrel in 1995. The decrease in production from 40,675 barrels in 1994 to 35,169 barrels in 1995 is primarily due to decreased state allowable production limits combined with normal production declines.
GAS REVENUE
Gas revenue decreased $286,000 during 1995 as compared with 1994. The decrease is due to a decrease in the average gas price from $2.27 per mcf during 1994 to $1.98 per mcf during 1995 combined with a 19% decrease in production. The decrease in production from 435,640 mcf in 1994 to 353,904 mcf in 1995 is due to decreased state allowable production limits as well as normal production declines.
LEASE OPERATING
Lease operating expense increased $3,000 during 1995 as compared with 1994 primarily due to increased maintenance activity during 1995.
PRODUCTION TAXES
Production taxes decreased $9,000 during 1995 as compared with 1994 as a result of decreased oil and gas revenue during 1995.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $2,000 during 1995 as compared with 1994 primarily due to an increase in the allocation of overhead from the general partner.
DEPLETION
Depletion expense increased $3,000 during 1995 as compared with 1994 due to an increase in capitalized costs during 1995.
LITIGATION SETTLEMENT
Litigation settlement expense during 1995 represents the costs of a lawsuit settlement which is further discussed in Item 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ----
FINANCIAL STATEMENTS:
Independent Auditors' Report 10
Balance Sheets at December 31, 1995 and 1994 - May Drilling Partnership 1984-3 11
Balance Sheets at December 31, 1995 and 1994 - May Limited Partnership 1984-3 12
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 - May Limited Partnership 1984-3 13
Statements of Changes in Partners' Capital for the Years Ended December 31, 1995, 1994 and 1993 - May Limited Partnership 1984-3 14
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 - May Limited Partnership 1984-3 15
Notes to Financial Statements - May Drilling Partnership 1984-3 and May Limited Partnership 1984-3 16-18
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 19
INDEPENDENT AUDITORS' REPORT ----------------------------
TO THE PARTNERS OF MAY DRILLING PARTNERSHIP 1984-3 AND MAY LIMITED PARTNERSHIP 1984-3:
We have audited the financial statements of May Drilling Partnership 1984-3 ("General Partnership") and May Limited Partnership 1984-3 ("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 1984-3 BALANCE SHEETS (In thousands)
Note: The statements of operations and cash flows for May Drilling Partnership 1984-3 are not presented because such information is equal to the Limited Partners' share of such activity as presented in the May Limited Partnership 1984-3 financial statements. The May Drilling Partnership carries its investment in May Limited Partnership 1984-3 on the equity method. The May Limited Partnership 1984-3 financial statements should be read in conjunction with this balance sheet.
MAY LIMITED PARTNERSHIP 1984-3 BALANCE SHEETS (In thousands)
MAY LIMITED PARTNERSHIP 1984-3 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands, except for Units)
MAY LIMITED PARTNERSHIP 1984-3 STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
MAY LIMITED PARTNERSHIP 1984-3 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
The accompanying notes are an integral part of the financial statements.
MAY DRILLING PARTNERSHIP 1984-3 AND MAY LIMITED PARTNERSHIP 1984-3
NOTES TO FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES AND OTHER MATTERS
GENERAL PARTNERSHIP
May Drilling Partnership 1984-3, 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 1984-3 (the "Limited Partnership"). The General Partnership was formed on November 7, 1984, with investors ("Participants") subscribing an aggregate of $6,599,000 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 1985, May assessed the Participants 5% of initial contributions. No additional assessments have been made since 1985.
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 each year 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 production of crude oil, natural gas and petroleum products. The Limited Partnership's oil and gas reserves are concentrated in one prospect 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. As of December 31, 1995, all such contributions had been accrued.
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 CUSTOMERS
For the years ended December 31, 1995, 1994 and 1993, purchases by each of the following companies 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 $.01 in 1995, $-0- in 1994 and $.03 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.
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.
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 the existing well.
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 amounts due from HPI were $86,000 and $99,000 as of December 31, 1995 and 1994, respectively. 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 $44,000 in 1995, $43,000 in 1994 and $53,000 in 1993.
(3) LEGAL PROCEEDING
In the fourth quarter of 1995, the parties settled the lawsuit styled Stutes v. Hallwood Petroleum, Inc. et al. The plaintiff alleged that as a result of exposure to benzene in the petroleum he was hauling from various wells owned and operated by the Limited Partnership and the approximately 80 other named defendants, he contracted myelogenous leukemia. The Limited Partnership's share of the settlement not covered by insurance was $8,000.
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.
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 37.8% 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. 2- 89194, 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 1984-3 MAY LIMITED PARTNERSHIP 1984-3 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 --------- ----- -----
Vice President /s/Robert S. Pfeiffer (Principal February 29, 1996 --------------------------- Accounting ----------------- Robert S. Pfeiffer Officer)