ITEM 1. Business
Parker & Parsley Producing Properties 87-B, Ltd. (the "Registrant") is a limited partnership organized in 1987 under the laws of the state of Texas. The managing general partner is Parker & Parsley Development L.P. ("PPDLP"). PPDLP's general partner is Parker & Parsley Petroleum USA, Inc. ("PPUSA"). The managing general partner during the year ended December 31, 1994 was Parker & Parsley Development Company ("PPDC"). PPDC was merged into PPDLP on January 1, 1995. See Item 12 (c).
A Registration Statement, as amended, filed pursuant to the Securities Act of 1933, registering limited partnership interests aggregating $30,000,000 in a series of Texas limited partnerships formed under the Parker & Parsley Producing Properties Program-I, was declared effective by the Securities and Exchange Commission on February 20, 1987. On December 28, 1987, the offering of limited partnership interests in the Registrant, the second partnership formed under such statement, was closed, with interests aggregating $6,095,500 being sold to 573 subscribers.
The Registrant's primary business plan and objectives are to purchase producing oil and gas properties and distribute the cash flow from operations to its partners. The Registrant is not involved in any industry segment other than oil and gas. See "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data" of this report for a summary of the Registrant's revenue, income and identifiable assets.
The principal markets during 1995 for the oil produced by the Registrant were refineries and oil transmission companies that have facilities near the Registrant's oil producing properties. The principal markets for the Registrant's gas were companies that have pipelines located near the Registrant's gas producing properties. Of the Registrant's oil and gas revenues for 1995, approximately 66% was attributable to sales made to Phibro Energy, Inc.
Because of the demand for oil and gas, the Registrant does not believe that the termination of the sales of its products to any one customer would have a material adverse impact on its operations. The loss of a particular customer for gas may have an effect if that particular customer has the only gas pipeline located in the areas of the Registrant's gas producing properties. The Registrant believes, however, that the effect would be temporary, until alternative arrangements could be made.
Federal and state regulation of oil and gas operations generally includes the fixing of maximum prices for regulated categories of natural gas, the imposition of maximum allowable production rates, the taxation of income and other items and the protection of the environment. Although the Registrant believes that its business operations do not impair environmental quality and that its costs of complying with any applicable environmental regulations are not currently significant, the Registrant cannot predict what, if any, effect these environmental regulations may have on its current or future operations.
The Registrant does not have any employees of its own. PPUSA employs 623 persons, many of whom dedicated a part of their time to the conduct of the Registrant's business during the period for which this report is filed. The Registrant's managing general partner, PPDLP through PPUSA, supplies all management functions
No material part of the Registrant's business is seasonal and the Registrant conducts no foreign operations.
ITEM 2.

ITEM 2. Properties
The Registrant's properties consist primarily of leasehold interests in properties on which oil and gas wells are located. Such property interests are often subject to landowner royalties, overriding royalties and other oil and gas leasehold interests.
The Registrant completed seven purchases of producing properties. These acquisitions involved the purchase of working interests in 54 properties of which all are operated by the managing general partner. The Registrant also participated in the drilling of two oil and gas wells during 1988 which were completed as producers. Additionally, the Registrant purchased 15 overriding royalty interests effective January 1, 1990 and two additional overriding royalty interests during 1991. Seventeen uneconomical wells have been abandoned; one well in 1989, two wells in 1991, two wells in 1992, six in 1993, three wells in 1994 and three wells in 1995.
For information relating to the Registrant's estimated proved oil and gas reserves at December 31, 1995, 1994 and 1993 and changes in such quantities for the years then ended, see Note 7 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below. Such reserves have been estimated by the engineering staff of PPUSA with a review by an independent petroleum consultant.
ITEM 3.

ITEM 3. Legal Proceedings
The Registrant is not aware of any material legal proceedings (other than routine litigation in the ordinary course of the Registrant's business) to which it is a party or to which its property is subject.
ITEM 4.

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

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
At March 8, 1996, the Registrant had 12,191 outstanding limited partnership interests held of record by 600 subscribers. There is no established public trading market for the limited partner ship interests. Under the limited partnership agreement, PPDLP has made certain commitments to purchase partnership interests at a computed value.
Revenues which, in the sole judgement of the managing general partner, are not required to meet the Registrant's obligations are distributed to the partners at least quarterly in accordance with the limited partnership agreement. During the years ended December 31, 1995 and 1994, $353,613 and $266,567, respectively, of such revenue-related distributions were made to the limited partners.
ITEM 6.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of operations
The Registrant's 1995 oil and gas revenues increased to $921,034 from $907,637 in 1994. The increase in revenues was the net result of an increase in the average price received per barrel of oil produced and sold, offset by a slight decline in barrels of oil produced and sold, a 6% decline in mcf of gas produced and sold and a decrease in the average price received per mcf of gas. In 1995, 43,188 barrels of oil were sold compared to 43,656 in 1994, a decrease of 468 barrels. In 1995, 108,168 mcf of gas were sold compared to 115,012 in 1994, a decrease of 6,844 mcf. Because of the decline characteristics of the Registrant's oil and gas properties, management expects a certain amount of decline in production to continue in the future until the Registrant's economically recoverable reserves are fully depleted.(1)
The average price received per barrel of oil increased $1.21, or 8%, from $15.90 in 1994 to $17.11 in 1995, while the average price received per mcf of gas decreased from $1.86 in 1994 to $1.68 in 1995. The market price for oil and gas has been extremely volatile in the past decade, and management expects a certain amount of volatility to continue in the foreseeable future.(1) The Registrant may therefore sell its future oil and gas production at average prices lower or higher than that received in 1995.(1)
Salvage income received from equipment disposals of $1,660 during 1995 was derived from equipment credits received on wells that were plugged and abandoned in prior years, as compared to $7,747 in equipment credits received on prior year abandonments during 1994. A loss on abandoned property of $4,769 was recognized during 1995. This loss was the result of $1,165 in proceeds received from equipment salvage on two abandoned wells, less the write-off of remaining capitalized well costs of $5,934. During 1994, a gain of $12,493 resulted from proceeds received from equipment salvage on two fully depleted abandoned wells. Expenses incurred to plug and abandon these properties decreased from $22,674 in 1994 to $8,153 in 1995.
Total costs and expenses decreased in 1995 to $771,512 as compared to $1,099,693 in 1994, a decrease of $328,181, or 30%. The decrease was attributable to declines in production costs, abandoned property costs and depletion, offset by increases in loss on abandoned properties, general and administration expenses ("G&A") and the impairment of oil and gas properties.
Production costs were $471,114 in 1995 and $556,124 in 1994, resulting in an $85,010 decrease, or 15%. The decrease was the result of a reduction in well repair and maintenance costs.
G&A's components are independent accounting and engineering fees, computer services, postage and managing general partner personnel costs. During this period, G&A increased, in aggregate, from $27,229 in 1994 to $27,631 in 1995. The Registrant paid the managing general partner $23,322 in 1995 and $19,388 in 1994 for G&A incurred on behalf of the Registrant. G&A is allocated, in part, to the Registrant by the managing general partner. The Partnership agreement limits allocated G&A to 2% of the initial contributions of the limited partners during the year of activation and the following calendar year. During each of the years
the year of activation and the following calendar year. During each of the years following such two-year period, allocated G&A will not exceed 3% of the gross oil and gas revenues. Such allocated expenses are determined by the managing general partner based upon its judgement of the level of activity of the Registrant relative to the managing general partner's activities and other entities it manages. The method of allocation has varied in certain years and may do so again depending on the activities of the managed entities.(1)
Depletion was $154,885 in 1995 compared to $493,666 in 1994, a decrease of $338,781, or 69%. This decrease was the result of several properties being fully depleted in 1994. These properties reached their economic limit due to the downward revision of oil reserves during 1994. Depletion was computed property-by-property utilizing the unit-of-production method based upon the dominant mineral produced, generally oil. Oil production decreased 468 barrels in 1995 from 1994, while oil reserves of barrels were revised upward by 83,282 barrels, or 19%.
Effective for the fourth quarter of 1995 the Registrant adopted 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") which requires that long-lived assets held and used by an entity, including oil and gas properties accounted for under the successful efforts method of accounting, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the assets, an impairment is recognized based on the asset's fair value as determined for oil and gas properties by discounting their expected future cash flows at a discount rate commensurate with the risks involved in the industry. As a result of the natural gas price environment and the Registrant's expectation of future cash flows from its oil and gas properties at the time of review, the Registrant recognized a non-cash charge of $104,960 associated with the adoption of SFAS 121.
1994 compared to 1993
The Registrant's 1994 oil and gas revenues decreased to $907,637 from $1,045,994 in 1993, a decrease of 13%. The decrease in revenues resulted from a 4% decline in barrels of oil produced and sold, a 12% decline in mcf of gas produced and sold and decreases in the average price received per barrel of oil and mcf of gas. In 1994, 43,656 barrels of oil were sold compared to 45,679 in 1993, a decrease of 2,023 barrels. In 1994, 115,012 mcf of gas were sold compared to 130,491 in 1993, a decrease of 15,479 mcf. The production declines were the result of the decline characteristics of the Registrant's oil and gas properties.
The average price received per barrel of oil decreased $1.17 from $17.07 in 1993 to $15.90 in 1994, while the average price received per mcf of gas decreased from $2.04 in 1993 to $1.86 in 1994.
Total costs and expenses decreased in 1994 to $1,099,693 as compared to $1,182,414 in 1993, a decrease of $82,721, or 7%. The decrease was attributable
to declines in production costs, G&A and abandoned property costs, offset by an increase in depletion.
Production costs were $556,124 in 1994 and $719,600 in 1993, resulting in a $163,476 decrease, or 23%. Decreases in well repair and down-hole maintenance and in workover costs were attributable to the decline in production costs.
Salvage income from equipment disposals of $7,747 during 1994 was derived from equipment credits received on wells that were plugged and abandoned in prior years, as compared to no equipment credits received on prior year abandonments during 1993. Gains on abandoned properties of $12,493 and $16,649 were recognized during 1994 and 1993, respectively. These gains were the result of proceeds received from equipment salvage on two fully depleted abandoned wells in 1994 and six fully depleted abandoned wells in 1993. Accordingly, expenses incurred to plug and abandon these properties decreased from $58,228 in 1993 to $22,674 in 1994.
G&A's components are independent accounting and engineering fees, computer services, postage and managing general partner personnel costs. During this period, G&A decreased, in aggregate, 13% from $31,378 in 1993 to $27,229 in 1994. The Registrant paid the managing general partner $19,388 in 1994 and $24,527 in 1993 for G&A incurred on behalf of the Registrant.
Depletion was $493,666 in 1994 compared to $373,208 in 1993, an increase of $120,458, or 32%. This increase was the result of several properties being fully depleted in 1994. These properties reached their economic limit due to the downward revision of oil reserves during 1994. Oil production decreased 2,023 barrels in 1994 from 1993, while oil reserves of barrels were revised downward by 55,250 barrels, or 10%.
Impact of inflation and changing prices on sales and net income
Inflation impacts the fixed overhead rate charges of the lease operating expenses for the Registrant. During 1993, the annual change in the index of average weekly earnings of crude petroleum and gas production workers issued by the U.S. Department of Labor, Bureau of Labor Statistics, decreased by 1.1%. The 1994 annual change in average weekly earnings increased by 4.8%. The 1995 index (effective April 1, 1995) increased 4.4%. The impact of inflation for other lease operating expenses is small due to the current economic condition of the oil industry.
The oil and gas industry experienced volatility during the past decade because of the fluctuation of the supply of most fossil fuels relative to the demand for such products and other uncertainties in the world energy markets causing significant fluctuations in oil and gas prices. Since December 31, 1994, prices for oil production have fluctuated throughout the year. The price per barrel for oil production similar to the Registrant's ranged from approximately $16.00 to $19.00. For February 1996, the average price for the Registrant's oil was approximately $18.00.
Prices for natural gas are subject to ordinary seasonal fluctuations, and this volatility of natural gas prices may result in production being curtailed and, in some cases, wells being completely shut-in.(1)
Liquidity and capital resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased to $476,380 during the year ended December 31, 1995, a $240,769 increase from the year ended December 31, 1994. The increase was due to an increase in oil and gas sales and reductions in production costs, abandoned property costs and G&A. The increase in oil and gas sales was primarily attributable to higher average prices received per barrel of oil produced and sold. The reduced production costs reflected lower well repair and downhole maintenance costs. The decline in abandoned property costs was attributable to a smaller working interest in the three wells abandoned in 1995 as compared to the three wells abandoned in 1994. G&A decreased due to less direct expense allocated by the managing general partner.
Net Cash Provided by (Used in) Investing Activities
The Registrant's investing activities during 1995 included $26,426 for expenditures related to repair and maintenance activity on several oil and gas properties, as compared to $121,915 during 1994.
The Registrant received $1,155 and $7,349 during 1995 and 1994, respectively, from the salvage of equipment on abandoned properties. Equipment disposals on active properties yielded proceeds of $5,713 and $7,747 during 1995 and 1994, respectively.
Net Cash Used in Financing Activities
Cash was sufficient in 1995 for distributions to the partners of $357,751 of which $353,613 was distributed to the limited partners and $4,138 to the managing general partner. In 1994, cash was sufficient for distributions to the partners of $268,689 of which $266,567 was distributed to the limited partners and $2,122 to the managing general partner.
It is expected that future net cash provided by operations will be sufficient for any capital expenditures and any distributions.(1) As the production from the properties declines, distributions are also expected to decrease.(1)
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(1) This statement is a forward looking statement that involves risks and uncertainties. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward looking statement.
ITEM 8.

ITEM 8. Financial Statements and Supplementary Data
The Registrant's audited financial statements are included elsewhere herein.
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 Registrant does not have any officers or directors. Under the limited partnership agreement, the Registrant's managing general partner, PPDLP, is granted the exclusive right and full authority to manage, control and administer the Registrant's business. PPUSA, the sole general partner of PPDLP, is a wholly-owned subsidiary of Parker & Parsley Petroleum Company (the "Company"), a publicly-traded corporation on the New York Stock Exchange.
Set forth below are the names, ages and positions of the directors and executive officers of PPUSA. Directors of PPUSA are elected to serve until the next annual meeting of stockholders or until their successors are elected and qualified.
Age at December 31, Name 1995 Position
Scott D. Sheffield 43 Chairman of the Board and Director
James D. Moring (a) 59 President, Chief Executive Officer and Director
Timothy A. Leach 36 Executive Vice President and Director
Steven L. Beal 36 Senior Vice President, Treasurer and Chief Financial Officer
Mark L. Withrow 48 Senior Vice President and Secretary
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(a) Mr. Moring retired from the Company and subsidiaries effective January 1, 1996. Mr. Sheffield assumed the positions of President and Chief Executive Officer of PPUSA effective January 1, 1996.
Scott D. Sheffield. Mr. Sheffield, a graduate of The University of Texas with a Bachelor of Science degree in Petroleum Engineering, has been the President and a Director of the Company since May 1990 and has been the Chairman of the Board and Chief Executive Officer since October 1990. Mr. Sheffield joined PPDC, the principal operating subsidiary of the Company, as a petroleum engineer in 1979. Mr. Sheffield served as Vice President - Engineering of PPDC from September 1981 until April 1985 when he was elected President and a Director of PPDC. In March 1989, Mr. Sheffield was elected Chairman of the Board and Chief Executive Officer of PPDC. On January 1, 1995, Mr. Sheffield resigned as President and Chief Executive Officer of PPUSA, but remained Chairman of the Board and a Director of PPUSA. On January 1, 1996, Mr. Sheffield reassumed the positions of President and Chief Executive Officer of PPUSA. Before joining PPDC, Mr. Sheffield was principally occupied for more than three years as a production and reservoir engineer for Amoco Production Company.
James D. Moring. Mr. Moring, a graduate of Texas Tech University with a Bachelor of Science degree in Petroleum Engineering has been a Director of the Company since October 1990 and was Senior Vice President - Operations of the Company from October 1990 until May 1993, when he was appointed Executive Vice President - Operations. Mr. Moring has been principally occupied since July 1982 as the supervisor of the drilling, completion, and production operations of PPDC and its affiliates and has served as an officer of PPDC since January 1983. Mr. Moring has been Senior Vice President - Operations and a Director of PPDC since June 1989 and in May 1993, Mr. Moring was appointed Executive Vice President - Operations. Mr. Moring was elected President and Director and appointed Chief Executive Officer of PPUSA on January 1, 1995. Effective January 1, 1996, Mr. Moring retired from the Company and subsidiaries. In the five years before joining PPDC, Mr. Moring was employed as a Division Operations Manager with Moran Exploration, Inc. and its predecessor.
Timothy A. Leach. Mr. Leach, a graduate of Texas A&M University with a Bachelor of Science degree in Petroleum Engineering and the University of Texas of the Permian Basin with a Master of Business Administration degree, was elected Executive Vice President - Engineering of the Company on March 21, 1995. Mr. Leach had been serving as Senior Vice President Engineering since March 1993 and served as Vice President - Engineering of the Company from October 1990 to March 1993. Mr. Leach was elected Executive Vice President of PPUSA on December 1, 1995. He had joined PPDC as Vice President - Engineering in September 1989. Prior to joining PPDC, Mr. Leach was employed as Senior Vice President and Director of First City Texas - Midland, N.A.
Steven L. Beal. Mr. Beal, a graduate of the University of Texas with a Bachelor of Business Administration degree in Accounting and a certified public accountant, was elected Senior Vice President - Finance of the Company in January 1995 and Chief Financial Officer of the Company on March 21, 1995. On January 1, 1995, Mr. Beal was elected Senior Vice President, Treasurer and Chief Financial Officer of PPUSA. Mr. Beal has been the Company's Chief Accounting Officer since November 1992 and been the Company's Treasurer since October 1990. Mr. Beal joined PPDC as Treasurer in March 1988 and was elected Vice President - Finance in October 1991. Prior to joining PPDC, Mr. Beal was employed as an audit manager of Price Waterhouse.
Mark L. Withrow. Mr. Withrow, a graduate of Abilene Christian University with Bachelor of Science degree in Accounting and Texas Tech University with a Juris Doctorate degree, was Vice President - General Counsel of the Company from February 1991 to January 1995, when he was appointed Senior Vice President - General Counsel, and has been the Company's Secretary since August 1992. On January 1, 1995, Mr. Withrow was elected Senior Vice President and Secretary of PPUSA. Mr. Withrow joined PPDC in January 1991. Prior to joining PPDC , Mr. Withrow was the managing partner of the law firm of Turpin, Smith, Dyer, Saxe & MacDonald, Midland, Texas.
ITEM 11.

ITEM 11. Executive Compensation
The Registrant does not have any directors or officers. Management of the Registrant is vested in PPDLP, the managing general partner. The Registrant
participates in oil and gas activities through an income tax partnership (the "Program") pursuant to the Program agreement. Under the limited partnership agreement, PPDLP pays 1% of the Registrant's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, PPDLP is allocated 1% of the Registrant's revenues. See Notes 6 and 9 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below for information regarding fees and reimbursements paid to the managing general partner or its affiliates by the Registrant.
The Registrant does not directly pay any salaries of the executive officers of PPUSA, but does pay a portion of PPUSA's general and administrative expenses of which these salaries are a part. See Note 6 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below.
ITEM 12.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Beneficial owners of more than five percent
The Registrant is not aware of any person who beneficially owns 5% or more of the outstanding limited partnership interests of the Registrant. PPDLP owned 196 limited partner interests at January 1, 1996.
(b) Security ownership of management
The Registrant does not have any officers or directors. The managing general partner of the Registrant, PPDLP, has the exclusive right and full authority to manage, control and administer the Registrant's business. Under the limited partnership agreement, limited partners holding a majority of the outstanding limited partnership interests have the right to take certain actions, including the removal of the managing general partner or any other general partner. The Registrant is not aware of any current arrangement or activity which may lead to such removal. The Registrant is not aware of any officer or director of PPUSA who beneficially owns limited partnership interests in the Registrant.
(c) Changes in control
On January 1, 1995, PPDLP, a Texas limited partnership, became the sole managing general partner of Parker & Parsley Producing Properties 87-B, Ltd., as a result of the merger into it of PPDC, a Delaware corporation, and an affiliate of PPDLP and the Company, which previously served as the managing general partner of the Registrant. PPDLP has, therefore, succeeded to all of the rights and obligations of PPDC and will manage and conduct the property, business and affairs of the Registrant.
ITEM 13.

ITEM 13. Certain Relationships and Related Transactions
Transactions with the managing general partner or its affiliates
Pursuant to the limited partnership agreement, the Registrant had the following related party transactions with the managing general partner or its affiliates during the years ended December 31:
1995 1994 1993 --------- --------- --------- Payment of lease operating and supervision charges in accordance with standard industry operating agreements $ 153,156 $ 178,054 $ 203,041
Reimbursement of general and administrative expenses $ 23,322 $ 19,388 $ 24,527
Receipt of proceeds for the salvage value of retired oil and gas equipment $ 6,498 $ 18,684 $ 30,239
Under the limited partnership agreement, the managing general partner pays 1% of the Registrant's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, it is allocated 1% of the Registrant's revenues. Also, see Notes 6 and 9 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below, regarding the Registrant's participation with the managing general partner in oil and gas activities of the Program.
PART IV
ITEM 14.

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements
The following are filed as part of this annual report:
Independent Auditors' Report
Balance sheets as of December 31, 1995 and 1994
Statements of operations for the years ended December 31, 1995, 1994 and 1993
Statements of partners' capital for the years ended December 31, 1995, 1994 and 1993
Statements of cash flows for the years ended December 31, 1995, 1994 and 1993
Notes to financial statements
2. Financial statement schedules
All financial statement schedules have been omitted since the required information is in the financial statements or notes thereto, or is not applicable nor required.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference as part of this annual report.
S I G N A T U R E S
Pursuant to the requirements 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.
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD.
Dated: March 29, 1996 By: Parker & Parsley Development L.P., Managing General Partner
By: Parker & Parsley Petroleum USA, Inc. ("PPUSA"), General Partner
By: /s/ Scott D. Sheffield ------------------------------- Scott D. Sheffield, President
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.
/s/ Scott D. Sheffield President, Chairman of the Board, March 29, 1996 - ------------------------- Chief Executive Officer and Scott D. Sheffield Director of PPUSA
/s/ Timothy A. Leach Executive Vice President March 29, 1996 - ------------------------- and Director of PPUSA Timothy A. Leach
/s/ Steven L. Beal Senior Vice President, March 29, 1996 - ------------------------- Treasurer and Chief Steven L. Beal Financial Officer of PPUSA
/s/ Mark L. Withrow Senior Vice President and March 29, 1996 - ------------------------- Secretary of PPUSA Mark L. Withrow
INDEPENDENT AUDITORS' REPORT
The Partners Parker & Parsley Producing Properties 87-B, Ltd. (A Texas Limited Partnership):
We have audited the financial statements of Parker & Parsley Producing Properties 87-B, Ltd. as listed in the accompanying index under Item 14(a). These financial statements are the responsibility of the Partnership's 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, the financial statements referred to above present fairly, in all material respects, the financial position of Parker & Parsley Producing Properties 87-B, Ltd. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Notes 2 and 3 to the financial statements, the Partnership changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of in 1995 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
Midland, Texas March 8, 1996
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD. (A Texas Limited Partnership)
BALANCE SHEETS December 31
1995 1994 ----------- ----------- ASSETS
Current assets: Cash and cash equivalents, all interest bearing deposits $ 135,981 $ 36,910 Accounts receivable - affiliate 43,366 82,820 ---------- ---------- Total current assets 179,347 119,730
Oil and gas properties - at cost, based on the successful efforts accounting method 4,897,763 4,902,973 Accumulated depletion (3,118,603) (2,864,181) ---------- ----------
Net oil and gas properties 1,779,160 2,038,792 ---------- ----------
$ 1,958,507 $ 2,158,522 ========== =========== PARTNERS' CAPITAL
Partners' capital: Limited partners (12,191 interests) $ 1,939,382 $ 2,136,837 Managing general partner 19,125 21,685 ---------- ----------
$ 1,958,507 $ 2,158,522 ========== ==========
The accompanying notes are an integral part of these statements.
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD. (A Texas Limited Partnership)
STATEMENTS OF OPERATIONS For the years ended December 31
1995 1994 1993 ---------- ---------- ---------- Revenues: Oil and gas sales $ 921,034 $ 907,637 $1,045,994 Interest income 6,554 4,902 7,573 Gain on abandoned properties - 12,493 16,649 Salvage income from equipment disposals 1,660 7,747 - --------- --------- ---------
Total revenues 929,248 932,779 1,070,216
Costs and expenses: Production costs 471,114 556,124 719,600 Abandoned property costs 8,153 22,674 58,228 Loss on abandoned properties 4,769 - - General and administrative expenses 27,631 27,229 31,378 Depletion 154,885 493,666 373,208 Impairment of oil and gas properties 104,960 - - --------- --------- ---------
Total costs and expenses 771,512 1,099,693 1,182,414 --------- --------- ---------
Net income (loss) $ 157,736 $ (166,914) $ (112,198) ========= ========= =========
Allocation of net income (loss): Managing general partner $ 1,578 $ (1,669) $ (1,122) ========= ========= =========
Limited partners $ 156,158 $ (165,245) $ (111,076) ========= ========= =========
Net income (loss) per limited partnership interest $ 12.81 $ (13.55) $ (9.11) ========= ========= =========
The accompanying notes are an integral part of these statements.
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD. (A Texas Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Managing general Limited partner partners Total --------- ---------- ----------
Partners' capital at January 1, 1993 $ 31,383 $3,159,439 $3,190,822
Distributions (4,785) (479,714) (484,499)
Net loss (1,122) (111,076) (112,198) -------- --------- ---------
Partners' capital at December 31, 1993 25,476 2,568,649 2,594,125
Distributions (2,122) (266,567) (268,689)
Net loss (1,669) (165,245) (166,914) -------- --------- ---------
Partners' capital at December 31, 1994 21,685 2,136,837 2,158,522
Distributions (4,138) (353,613) (357,751)
Net income 1,578 156,158 157,736 -------- --------- ---------
Partners' capital at December 31, 1995 $ 19,125 $1,939,382 $1,958,507 ======== ========= =========
The accompanying notes are an integral part of these statements.
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD. (A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS For the years ended December 31
1995 1994 1993 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 157,736 $(166,914) $(112,198) Adjustments to reconcile net income (loss) to net cash provided by operating activities: (Gain) loss on abandoned properties 4,769 (12,493) (16,649) Salvage income from equipment disposals (1,660) (7,747) - Depletion 154,885 493,666 373,208 Impairment of oil and gas properties 104,960 - - Changes in assets: (Increase) decrease in accounts receivable 55,690 (70,901) 68,642 -------- -------- -------- Net cash provided by operating activities 476,380 235,611 313,003
Cash flows from investing activities:
(Additions) disposals of oil and gas equipment (26,426) (121,915) 7,028 Proceeds from salvage income on equipment disposals 5,713 7,747 - Proceeds from equipment salvage on abandoned properties 1,155 7,349 16,649 -------- -------- -------- Net cash provided by (used in) investing activities (19,558) (106,819) 23,677
Cash flows from financing activities: Cash distributions to partners (357,751) (268,689) (484,499) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 99,071 (139,897) (147,819) Cash and cash equivalents at beginning of year 36,910 176,807 324,626 -------- -------- -------- Cash and cash equivalents at end of year $ 135,981 $ 36,910 $ 176,807 ======== ======== ========
The accompanying notes are an integral part of these statements.
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD. (A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993
Note 1. Organization and nature of operations
Parker & Parsley Producing Properties 87-B, Ltd. (the "Partnership") is a limited partnership organized in 1987 under the laws of the State of Texas.
The Partnership engages primarily in oil and gas production in Texas and is not involved in any industry segment other than oil and gas.
Note 2. Summary of significant accounting policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Impairment of long-lived assets - Effective for the fourth quarter of 1995 the Partnership adopted the provisions of 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"). Consequently, the Partnership reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In this circumstance, the Partnership recognizes an impairment loss for the amount by which the carrying value of the asset exceeds the fair value of the asset.
The Partnership accounts for long-lived assets to be disposed of at the lower of their carrying amount or fair value less costs to sell once management has committed to a plan to dispose of the assets.
Oil and gas properties - The Partnership utilizes the successful efforts method of accounting for its oil and gas properties and equipment. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method on a property-by-property basis based on proved oil (dominant mineral) reserves as determined by the engineering staff of Parker & Parsley Petroleum USA, Inc. ("PPUSA"), the sole general partner of Parker & Parsley Development L.P. ("PPDLP"), the Partnership's managing general partner, and reviewed by independent petroleum consultants. The carrying amounts of properties sold or otherwise disposed of and the related allowances for depletion are eliminated from the accounts and any gain or loss is included in operations.
Prior to the adoption of SFAS 121 in the fourth quarter, the Partnership's aggregate oil and gas properties were stated at cost not in excess of total
estimated future net revenues and the estimated fair value of oil and gas assets not being depleted.
Use of estimates in the preparation of financial statements - Preparation of the accompanying financial statements 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 reporting amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Organization costs - Organization costs are capitalized and amortized on the straight-line method over 60 months.
Net income (loss) per limited partnership interest - The net income (loss) per limited partnership interest is calculated by using the number of outstanding limited partnership interests.
Income taxes - A Federal income tax provision (credit) has not been included in the financial statements as the income (loss) of the Partnership is included in the individual Federal income tax returns of the respective partners.
Statements of cash flows - For purposes of reporting cash flows, cash and cash equivalents include depository accounts held by banks.
General and administrative expenses - General and administrative expenses are allocated in part to the Partnership by the managing general partner or its affiliates. Such allocated expenses are determined by the managing general partner based upon its judgement of the level of activity of the Partnership relative to the managing general partner's activities and other entities it manages. The method of allocation has varied in certain years and may do so again depending on the activities of the managed entities.
Environmental - The Partnership is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Partnership to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.
Note 3. Impairment of long-lived assets
The Partnership adopted SFAS 121 effective for the fourth quarter of 1995. SFAS 121 requires that long-lived assets held and used by an entity, including oil and gas properties accounted for under the successful efforts method of accounting, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets to be disposed of are to be accounted for at the lower of carrying amount or fair value less cost to sell when management has committed to a plan to dispose of the assets. All companies, including successful efforts oil and gas companies, are required to adopt SFAS 121 for fiscal years beginning after December 15, 1995.
In order to determine whether an impairment had occurred, the Partnership estimated the expected future cash flows of its oil and gas properties and compared such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount was recoverable. For those oil and gas properties for which the carrying amount exceeded the estimated future cash flows, an impairment was determined to exist; therefore, the Partnership adjusted the carrying amount of those oil and gas properties to their fair value as determined by discounting their expected future cash flows at a discount rate commensurate with the risks involved in the industry. As a result, the Partnership recognized a non-cash charge of $104,960 related to its oil and gas properties during the fourth quarter of 1995.
As of December 31, 1995, management had not committed to sell any Partnership assets.
Note 4. Income taxes
The financial statement basis of the Partnership's net assets and liabilities was $599,645 less than the tax basis at December 31, 1995.
The following is a reconciliation of net income (loss) per statements of operations with the net income (loss) per Federal income tax returns for the years ended December 31: 1995 1994 1993 --------- --------- --------- Net income (loss) per statements of operations $ 157,736 $(166,914) $(112,198) Intangible development costs capitalized for financial reporting purposes and expensed for tax reporting purposes (623) (110,435) - Depletion and depreciation provisions for tax reporting purposes (over) under amounts for financial reporting purposes (23,603) 241,597 (6,698) Impairment of oil and gas properties for financial reporting purposes 104,960 - - Abandoned property costs for tax reporting purposes over amounts for financial reporting purposes - (13,094) (33,127) Accrued expense for financial reporting purposes under amounts for tax reporting purposes - - (9,736) Other, net 535 4,631 11,286 -------- -------- -------- Net income (loss) per Federal income tax returns $ 239,005 $ (44,215) $(150,473) ======== ======== ========
Note 5. Oil and gas producing activities
The following is a summary of the costs incurred, whether capitalized or expensed, related to the Partnership's oil and gas producing activities for the years ended December 31: 1995 1994 1993 --------- ---------- --------- Property acquisition costs $ 10,852 $ 21,844 $ 28,834 ======== ========= ======== Development costs $ 623 $ 127,068 $ - ======== ========= ========
Capitalized oil and gas properties consist of the following:
1995 1994 1993 ----------- ----------- ----------- Proved properties: Property acquisition costs $ 3,354,752 $ 3,360,585 $ 3,396,794 Completed wells and equipment 1,543,011 1,542,388 1,415,320 ---------- ---------- ---------- 4,897,763 4,902,973 4,812,114 Accumulated depletion (3,118,603) (2,864,181) (2,426,135) ---------- ---------- ---------- Net capitalized costs $ 1,779,160 $ 2,038,792 $ 2,385,979 ========== ========== ==========
During 1995, the Partnership recognized a non-cash charge against oil and gas properties of $104,960 associated with the adoption of SFAS 121. See Note 3.
Note 6. Related party transactions
Pursuant to the limited partnership agreement, the Partnership had the following related party transactions with the managing general partner or its affiliates during the years ended December 31:
1995 1994 1993 --------- --------- --------- Payment of lease operating and supervision charges in accordance with standard industry operating agreements $ 153,156 $ 178,054 $ 203,041
Reimbursement of general and administrative expenses $ 23,322 $ 19,388 $ 24,527
Receipt of proceeds for the salvage value of retired oil and gas equipment $ 6,498 $ 18,684 $ 30,239
The Partnership participates in oil and gas activities through an income tax partnership (the "Program") pursuant to the Program agreement. PPDLP, P&P Producing Properties 87-B Employees ("EMPL") and the Partnership are parties to the Program agreement. EMPL is a general partnership organized for the benefit of certain employees of PPUSA.
The costs and revenues of the Program are allocated to PPDLP, EMPL and the Partnership as follows: PPDLP (1) and EMPL Partnership ----------- ----------- Revenues: Revenues from oil and gas production, proceeds from sales of producing properties and all other revenues: Before payout 4.040405% 95.959595% After payout 19.191920% 80.808080% Costs and expenses: Property acquisition costs, operating costs, general and administrative expenses and other costs: Before payout 4.040405% 95.959595% After payout 19.191920% 80.808080%
(1) Excludes PPDLP's 1% general partner ownership which is allocated at the Partnership level and 196 limited partner interests owned by PPDLP.
Note 7. Oil and gas information (unaudited)
The following table presents information relating to the Partnership's estimated proved oil and gas reserves at December 31, 1995, 1994 and 1993 and changes in such quantities during the years then ended. All of the Partnership's reserves are proved and located within the United States. The Partnership's reserves are based on an evaluation prepared by the engineering staff of PPUSA and reviewed by an independent petroleum consultant, using criteria established by the Securities and Exchange Commission. Reserve value information is available to limited partners pursuant to the Partnership agreement and, therefore, is not presented. Oil (bbls) Gas (mcf) ---------- ---------- Net proved reserves at January 1, 1993 572,446 1,830,081 Revisions of estimates of January 1, 1993 11,077 (19,069) Production (45,679) (130,491) ---------- ---------- Net proved reserves at December 31, 1993 537,844 1,680,521 Revisions of estimates of December 31, 1993 (55,250) (62,621) Production (43,656) (115,012) ---------- ---------- Net proved reserves at December 31, 1994 438,938 1,502,888 Revisions of estimates of December 31, 1994 83,282 411,623 Production (43,188) (108,168) ---------- ---------- Net proved reserves at December 31, 1995 479,032 1,806,343 ========== ==========
The estimated present value of future net revenues of proved reserves, calculated using December 31, 1995 prices of $19.35 per barrel of oil and $1.90 per mcf of gas, discounted at 10% was approximately $2,816,000 and undiscounted was $5,451,000 at December 31, 1995.
The Partnership emphasizes that reserve estimates are inherently imprecise and, accordingly, the estimates are expected to change as future information becomes available.
Note 8. Major customers
The following table reflects the major customers of the Partnership's oil and gas sales during the years ended December 31:
1995 1994 1993 ---- ---- ----
Phibro Energy, Inc. 66% 62% 60% GPM Gas Corporation - 15% 11% Western Gas Resources, Inc. - 10% 10% Phillips Petroleum Company - - 10%
PPDLP is party to a long-term agreement pursuant to which PPDLP and affiliates are to sell to Phibro Energy, Inc. ("Phibro") substantially all crude oil (including condensate) which any of such entities has the right to market from time to time. On December 29, 1995, PPDLP and Phibro entered into a Memorandum of Agreement ("Phibro MOA") that cancels the prior crude oil purchase agreement between the parties and provides for adjusted terms effective December 1, 1995. The price to be paid for oil purchased under the Phibro MOA is to be competitive with prices paid by other substantial purchasers in the same area who are significant competitors of Phibro. The price to be paid for oil purchased under the Phibro MOA also includes a market-related bonus that may vary from month to month based upon spot oil prices at various commodity trade points. The term of the Phibro MOA is through June 30, 1998, and it may continue thereafter subject to termination rights afforded each party. Although Phibro was required to post a $16 million letter of credit in connection with purchases under the prior agreement, it is anticipated that this security requirement will be replaced by a $25 million payment guarantee by Phibro's parent company, Salomon Inc.
Note 9. Organization and operations
The Partnership was organized December 28, 1987 as a limited partnership under the Texas Uniform Limited Partnership Act for the purpose of acquiring producing properties. The following is a brief summary of the more significant provisions of the limited partnership agreement:
Managing general partner - On January 1, 1995, PPDLP, a Texas limited partnership, became the sole managing general partner of the Partnership as a result of the merger into it of Parker & Parsley Development Company ("PPDC"), a Delaware corporation, and an affiliate of PPDLP and the Company, and which previously served as the managing general partner of the Partnership. PPDLP has, therefore, succeeded to all of the rights and obligations of PPDC and will manage and conduct the property, business and affairs of the Partnership, including the development drilling program in which the Partnership participates. PPDLP has the power and authority to manage, control and administer all Partnership affairs. Under the limited partnership agreement, the managing general partner pays 1% of the
Partnership's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, it is allocated 1% of the Partnership's revenues.
Limited partner liability - The maximum amount of liability of any limited partner is the total contributions of such partner plus his share of any undistributed profits.
Initial capital contributions - The limited partners entered into subscription agreements for aggregate capital contributions of $6,095,500. PPDLP is required to contribute amounts equal to 1% of initial Partnership capital less commission and offering expenses allocated to the limited partners and to contribute amounts necessary to pay costs and expenses allocated to it under the Partnership agreement to the extent its share of revenues does not cover such costs.
PARKER & PARSLEY PRODUCING PROPERTIES 87-B, LTD.
INDEX TO EXHIBITS
The following documents are incorporated by reference in response to Item 14(c):
Exhibit No. Description Page
4(a) Agreement of Limited Partnership of - Parker & Parsley Producing Properties 87-B, Ltd.
4(b) Form of Subscription Agreement and - Power of Attorney
4(c) Specimen Certificate of Limited Partnership - Interest
10(a) Operating Agreement -
10(b) Exploration and Development Program - Agreement


ITEM 1.
Business
(a) General Development of Business
Super 8 Motels Northwest I is a Washington limited partnership (the "Partnership") which was formed to invest in and operate two "economy" motels located in the state of Washington (the "Motels"). The Partnership operates the Motels as a franchise of Super 8 Motels, Inc., the national franchiser of the "Super 8" tradename. The General Partner of the Partnership is Gerald L. Whitcomb.
The Partnership was formed in March 1980. The Limited Partnership Units of the Partnership (the "Units") were offered and sold by selected broker-dealers on a best efforts basis in the states of Washington, Oregon, Montana, Idaho and Alaska.
The Partnership's total offering of $6,000,000 (6,000 Units at $1,000 each) was fully subscribed and the offering closed in February 1982.
(b) Financial Information About Industry Segments.
Not applicable as the registrant operates in a single industry (motels) and within that industry only in the economy motel category. For financial information generally, see "Financial Statements."
(c) Narrative Description of Business.
The motel properties were developed and are being operated as economy motels in the locations indicated below. Both properties are franchisees of the national "Super 8" motel chain. The economy motel concept provides for a clean, comfortable average-size motel room that has all the basic amenities required by the traveling public at a price lower than that of most surrounding motel properties of equal quality.
All guest rooms are equipped with direct-dial telephone, color television and tub/shower combination, and are fully carpeted, sound proofed and insulated. Guests are allowed to use major national credit cards and cash checks with V.I.P. Club membership. Vending machines are also available.
Each property has interior hallways, a lobby with a manager's office, an employee lounge, an in-house laundry and a manager's apartment. No restaurants are located on either property.
The 120-room Super 8 Motel at Sea-Tac is located near the Seattle/Tacoma International Airport and provides additional special services to the traveling public: long parking privileges, airport courtesy telephone, and free limousine transportation to and from the airport.
The 90-room Super 8 Motel at Federal Way provides a special parking area for commercial trucks, guest laundry facilities and a travelers lounge. Adjacent to the property are two family style restaurants owned and operated by non affiliated companies.
Both motels historically experience seasonal fluctuations in occupancy, the low point occurring in the winter months and peaking in late summer.
The motels provide full or part-time employment for approximately 39 people (Sea-Tac 22, Federal Way 17).
(d) Financial Information About Foreign and Domestic Operations and Export Sales.
The Partnership operates only in one geographic area, the Puget Sound region of Washington State. For financial information generally, see "Financial Statements."
ITEM 2

ITEM 2
Properties
(a) Location and General Characteristics.
The Partnership owns two parcels of real property, both purchased during the year ended December 31, 1981. The Sea-Tac property is located at 192nd Street at Old Highway 99 in King County, Washington. Construction commenced on the Sea-Tac parcel in August 1981 and it opened in March 1982. The Federal Way property is located at 348th Street and 16th Avenue in Federal Way, King County, Washington. Construction commenced on the Federal Way property in March 1982 and was completed in September 1982.
Both motels are of frame construction with stucco exteriors, tile roofs and have full fire alarm system. Heating and cooling is by individual room through the wall heat pumps.
The approximate size of the buildings is as follows:
Both motels underwent major renovations in 1987 at an approximate total cost of $328,000. An approximately $1,000,000 renovation of the Sea-Tac property commenced in February 1995, with one-half of the property closed for a substantial period of time. The Sea-Tac renovation was completed in February, 1996. During the course of renovating the Sea-Tac property, an abandoned residential oil tank was discovered as was other petroleum products located underneath the building. Upon discovery of these items, the Partnership immediately engaged an environmental consulting firm as well as legal counsel and both the tank and the soils which were found to contain unsuitable levels of petroleum products were removed from the site and properly disposed of.
Both motels are in operation as economy motels. For utilization of these properties see Item 7.
See Item 1 (c) for further information on each property.
ITEM 3

ITEM 3
Legal Proceeding
The Partnership is not party to any material legal proceedings. ITEM 4

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

ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters
The Units are owned by approximately 1,050 investors.
There is no established public trading market for the units and no significant transactions in units between a willing buyer and a willing seller have occurred since the original offering of limited partnership units. Because of this, the Partnership is unable to determine a fair market value for the units.
Distributions of cash to the Limited Partners made during 1995 totaled $600,000. Distributions of cash to the Limited Partners during 1994 and 1993 were $600,000 for each year.
ITEM 6.

ITEM 6. Selected Financial Data*
*In filings prior to the year ended December 31, 1994, with the United States Securities and Exchange Commission (the "SEC"), and in the Partnership's prior years' financial statements, the Partnership did not accrue unpaid property management fees due to the uncertainty of payment. During the year ended December 31, 1994, the Partnership changed its method of accounting for such fees and the above information was restated for 1993, 1992, and 1991 to account for such fees so that Net Income, Long Term Debt and Net Income Per Unit was revised to accrue the expense when incurred and reflect the associated liability on the balance sheet.
**Net of amortization and depreciation
Detailed financial data is provided in the form of audited Financial Statements as of December 31, 1995 and 1994 and for each of the three years ended December 31, 1995, 1994 and 1993. These statements show the results of operations, changes in partners' equity, cash flows and additional financial disclosures.
ITEM 7.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
At December 31, 1995, the Partnership's current assets exceeded its current liabilities by $48,802 which was $76,030 less than the difference between current assets and current liabilities on December 31, 1994. This drop is largely attributable to the funds the Partnership expended in renovating its Sea-Tac property (see the discussion below), and the loss of available rooms during the renovation. Further, as in the recent past, because the months of January, February, and March are the slowest season of occupancy, the Partnership must carefully manage its cash during those months. Nevertheless, the Partnership was able to make a distribution to its limited partners on January 31, 1996, of $150,000.
The interest rate on the Partnership's primary mortgage was 7.5% in 1995 and 1994. This adjustable rate loan provides for an interest rate adjustment each January determined as the lesser of 1% per annum, or an amount equal to the monthly median cost of funds index for FSLIC insured savings and loan associations plus 3.75% per annum. The rate in effect for 1996 is 8.5% per annum.
The interest rate on the long term loan funding the Sea-Tac renovation is variable, based on the lender's prime rate plus 1% per annum and is payable in interest only payments through March 31, 1996. The bank's prime rate of interest at December 31, 1995, was 8.5% per annum.
At December 31, 1995, both the Sea-Tac and Federal Way properties completed their thirteenth full years of operation. Comparative operational statistics follow:
*"Gross Room Rate" is defined as total room revenue divided by total rooms sold.
The Sea-Tac motel renovation contributed to the significant decrease in rooms rented at the property. The number of rented rooms for the partnership decreased from 46,138 during 1994 to 43,594 in 1995, a decrease of 2,544 rooms. The slight increase in the gross room rate was not enough to offset the drop in occupancy caused by the Sea-Tac renovation. Total revenues of the Partnership decreased $96,232 from $2,415,274 in 1994 to $2,319,042 in 1995.
Net income of the Partnership decreased by $650,953 in 1995 from the prior year, from $783,376 for the year ended December 31, 1994 to $132,423 for the year ended December 31, 1995. Increases in direct operating expenses and fixed charges, coupled with decreased revenues, largely contributed to the decrease in net income of the Partnership.
Direct operating expenses increased to $444,939 as a result of the increase in maintenance, repairs and supplies due to the renovation of the Sea-Tac location. Indirect operating expenses grew by $14,336, primarily as a result in increases in advertising and promotion, insurance, and other expenses.
Increases in professional services and administrative fees resulted in a $47,292 rise in administrative and general costs during 1995 when compared to 1994.
The $48,679 increase in fixed charges resulted from increases in depreciation and interest expense.
On February 16, 1993, the Board of Directors of Super 8 Motels, Inc., the Partnership's franchiser, announced an agreement to sell the company to Hospitality Franchise Systems, Inc. The sale was consummated in 1993. Hospitality Franchise Systems, Inc., the world's largest franchiser of hotel rooms, is a publicly-held company whose stock is traded on the New York Stock Exchange under the symbol "HFS." The company has more than 4,400 franchised Super 8 Motels, Days Inn, Howard Johnson, Ramada and other motel brands with over 300,000 rooms in the United States, Canada, Mexico, India, and Europe.
HFS operates its franchise business in a manner that respects the separate identity of each brand. They maintain separate marketing campaigns, additional general franchise services, and separate reservation systems and "800" numbers. Having over 4,200 properties worldwide provides enormous opportunities in marketing, purchasing, and technology. This transaction made available to Super 8 franchisees HFS's operational, marketing, and franchise sales experience.
Nationwide the Super 8 motel chain continues to grow, increasing the name familiarity of the chain.
The Super 8 "Superline" national reservation system and "VIP Club" (approximately 3,000,000 members) continue to be improved.
Prior to 1985, the Partnership had been accruing, as an expense and as a liability, the Motels' property management fees. Even though the obligation to pay those fees exists, the terms of the partnership agreement of the Partnership did not allow them to be paid until such time as the limited partners have received a cumulative annual 10% return on their adjusted capital investment. In previous filings with the United States Securities and Exchange Commission (the "SEC"), and in the Partnership's prior years' financial statements, the Partnership's accounting policy regarding these fees was to expense them when paid (instead of when earned) and to not accrue unpaid property management fees as a liability on the face of the balance sheet.
In 1994, the Partnership changed its accounting policy for property management fees to reflect, on the Partnership's income statement, the expense when the obligation to pay the fee was incurred and to accrue the corresponding liability on the face of the Partnership's balance sheet. Thus, the financial information contained in this report conforms with that reporting position. Currently, previously incurred but unpaid management fees total approximately $605,000. Attention is directed to Note 7 in the Partnership's Financial Statements, for a discussion of property management fees. Additionally, see the discussion in Part II, Item 6, "Selected Financial Data" of this report.
ITEM 8

ITEM 8 Financial Statements
See Independent Auditors Report and Financial Statements, pages 2 through 14, for financial statements incorporated herein by reference; and Item 14 for a list of the Financial Statement Schedules filed as a part of this report. ITEM 9

ITEM 9 Disagreements on Accounting and Financial Disclosure
None. PART III
ITEM 10.

ITEM 10.
Directors and Executive Officers of the Registrant
The sole General Partner of the Partnership is Gerald L. Whitcomb.
Gerald L. Whitcomb, age 52, was educated at the University of Nebraska with majors in economics and business finance and obtained a JD. in Law. He practiced law in Shelton, Washington from 1969 to 1979. Since 1979, he has been involved in the management of the Peninsula Group, Inc., (formerly known as Super 8 Motels Northwest, Inc.) and its affiliates. -
Mr. Whitcomb is the principal organizer and stockholder of The Peninsula Group Incorporated and its subsidiaries, one of which was the General Partner of Shelton Super 8 Motel Associates. Mr. Whitcomb is the general partner of Super 8 Motels Northwest II, a limited partnership whose limited partnership units were registered under the Securities Act of 1933. He is also a partner in Super 8 Motel Developers, which is General Partner of Super 8 Motels of Lacey Associates, the General Partner of Super 8 Motels Northwest I, Juneau Motel Associates, Anchorage Motel Associates and Peninsula Motel Associates, all Washington limited partnerships. Mr. Whitcomb is the Managing Partner of Tongass Motel Associates, an Alaska general partnership, Mr. Whitcomb is partner in Peninsula Properties Partnership, a Washington partnership.
Due to a change in management of the Partnership's General Partner's offices where the individual responsible for ensuring that appropriate filings are made with the SEC, some recently required filings on Forms 3, 4 or 5 appear not to have been timely made. The Partnership is working closely with its counsel to promptly rectify any such delinquent filings.
ITEM 11.

ITEM 11. Executive Compensation
The General Partner received no salary or bonus compensation from the Partnership during fiscal year ended December 31, 1995. See Item 13.
ITEM 12.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The General Partner, together with family members, owns twelve of the Limited Partnership Units in addition to his General Partner Interest. See Note 3 of Notes to the "Financial Statements" for a discussion of distributions and allocations of profits and losses.
ITEM 13.

ITEM 13. Certain Relationships and Related Transactions
See the Notes to the Partnership's Financial Statements.
A portion of Note 6 relating to property management fees payable to an affiliate of the general partner follows:
"Payment of property management fees is subordinated to receipt by the limited partners of a cumulative, pre-tax return on their adjusted capital investment of 10% per annum. This I0% was achieved as of June 30, 1992. Effective July 1, 1992 the Partnership began paying monthly the current management fees. Prior to December 31, 1992, the Partnership then determined, based upon working capital needs of Northwest I, that the first six months of 1992 and all of 1991 management fees were to be paid. Management fees paid during 1992 were $124,403 for 1992 and $111,973 for 1991. Management fees paid during 1993 were $115,480 for 1993. Management fees paid during 1994 were $119,617 for 1994 and $115,594 for 1990. Management fees paid during 1995 were $115,938 for 1995." PART IV
ITEM 14.

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on form 8-K
Exhibits incorporated by reference
1.2 Subscription Agreement (which is filed as Exhibit B to the Prospectus).
3.1 Certificate and Agreement of Limited Partnership of the Registrant (which is filed as Exhibit "A" to the Prospectus).
6.1 Opinion of Counsel to the Partnership.
Exhibits filed herewith. Financial Statements of the Registrant for the years ended December 31, 1995, 1994 and 1993. Financial Statements include: Report of Independent Public Accountants Balance Sheet Statement of Income Statement of Changes in Partners' Equity Statement of Cash Flows Notes to Financial Statements
January, 1996 Partnership newsletter mailed to limited partners.
There were no reports filed on Form 8-K during 1995.
Financial Data Schedule for the year ended December 31, 1995 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:
Gerald L. Whitcomb March 28, 1996 - - --------------------- ---------------------- GERALD L. WHITCOMB Date General Partner SUPER 8 MOTELS NORTHWEST I
INDEPENDENT AUDITOR'S REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993 CONTENTS
INDEPENDENT AUDITOR'S REPORT
To the General and Limited Partners Super 8 Motels Northwest I
We have audited the accompanying balance sheets of Super 8 Motels Northwest I as of December 31, 1995 and 1994, and the related statements of income, changes in partners' equity, and cash flows for the three years ended December 31, 1995, 1994, and 1993. These financial statements are the responsibility of the partnership's 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, the financial statements referred to above present fairly, in all material respects, the financial position of Super 8 Motels Northwest I as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the three years ended December 31, 1995, 1994, and 1993, in conformity with generally accepted accounting principles.
As described in Note 7, the accompanying financial statements for the year ended December 31, 1993, have been restated to reflect the accrual of property management fees.
MOSS ADAMS LLP
Tacoma, Washington February 5, 1996
- 1 - SUPER 8 MOTELS NORTHWEST I BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these financial statements.
- 2 - SUPER 8 MOTELS NORTHWEST I BALANCE SHEET
LIABILITIES AND PARTNERS' EQUITY
The accompanying notes are an integral part of these financial statements.
- 3 - SUPER 8 MOTELS NORTHWEST I STATEMENT OF INCOME
The accompanying notes are an integral part of these financial statements.
- 4 - SUPER 8 MOTELS NORTHWEST I STATEMENT OF CHANGES IN PARTNERS' EQUITY
The accompanying notes are an integral part of these financial statements.
- 5 - SUPER 8 MOTELS NORTHWEST I STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
- 6 - SUPER 8 MOTELS NORTHWEST I STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
- 7 - SUPER 8 MOTELS NORTHWEST I NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - PARTNERSHIP OPERATIONS
DESCRIPTION OF BUSINESS - SUPER 8 MOTELS NORTHWEST I IS A WASHINGTON LIMITED PARTNERSHIP. THE PARTNERSHIP OWNS AND OPERATES TWO MOTELS: ONE IN FEDERAL WAY, WASHINGTON, AND ONE IN THE VICINITY OF THE SEATTLE-TACOMA INTERNATIONAL AIRPORT.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents - Cash equivalents are investments with maturity at date of purchase of three months or less.
(b) Inventory - Inventory consists of various operating supplies which have been valued at cost.
(c) Property, Equipment, and Depreciation - Property and equipment are stated at cost and are dep eciated using straight-line and accelerated methods over estimated useful lives as follows:
(d) Franchise Fees - Initial franchise fees are stated at cost and are being amortized over 20 years using the straight-line method.
(e) Income Taxes - No provision has been made in the accompanying financial statements for federal or state income taxes as taxable income or loss of the partnership is allocated to and included in the taxable income of the partners. See Note 5 for additional discussion.
(f) Income per Limited Partnership Unit - Net income per limited partnership unit is computed by dividing the limited partners' share of net income by the limited partners' units outstanding for each year.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Accrued Vacation - It is the partnership's policy to expense vacation pay as paid rather than as earned as required by generally accepted accounting principles. The effect upon the financial statements is not significant.
(h) Concentration of Credit Risk - The partnership has bank deposits in excess of federal deposit insurance limits. The partnership's management does not anticipate any adverse effect on its financial position resulting from the credit risk.
(i) Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
(j) Loan Fees - Loan fees in connection with financing for remodeling the Sea-Tac motel are amortized over a five-year period.
NOTE 3 - DISTRIBUTIONS AND ALLOCATIONS OF PROFITS AND LOSSES
Distributions - Under the partnership agreement, on a quarterly basis, the general partner determines the amount, if any, of cash available for distribution and distributes cash as follows:
- 1% to the general partner and 99% to the limited partners until the limited partners have received a cumulative pretax return on their adjusted capital investment equal to 10% per year through the end of the partnership year for which the distribution is being made, then
- Payment of the unpaid balance of property management fees (see Note 6), then
- Any remaining cash will be allocated 15% to the general partner and 85% to the limited partners.
Profit and Losses - Profits and losses are allocated 1% to the general partner and 99% to the limited partners until the limited partners' have received a cumulative pretax return of 10% per year on their adjusted capital investment; and thereafter, 15% to the general partner and 85% to the limited partners. At the years ended December 31, 1995, 1994, and 1993, the limited partners received a cumulative pretax return of 10% and the partnership's net income for these years has been allocated 15% to the general partner and 85% to the limited partners.
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NOTE 4 - LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994, consisted of the following:
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NOTE 4 - LONG-TERM DEBT (CONTINUED)
Based on the December 31, 1995, interest rate, principal payments required on these notes during each of the next five years and thereafter are as follows:
NOTE 5 - INCOME TAXES
The cost of certain assets and the amount of certain expenses reported for federal income tax purposes are different from the amounts reported under generally accepted accounting principles in the accompanying financial statements. The differences arise primarily from:
(a) Depreciating land improvements and buildings for financial reporting purposes sing the straight-line method over a 30 year life, and for federal income tax purposes using the straight-line method over 15, 18, or 31.5 year lives.
(b) Depreciating furniture and equipment for financial reporting purposes using the straight-line method over a five year life, and for federal income tax purposes using the accelerated cost recovery method or the modified accelerated cost recovery method over a five or a seven year life.
(c) Deducting sales tax incurred prior to 1987 on property and equipment acquisitions as an expense for federal income tax purposes and capitalizing it for financial reporting purposes.
(d) Amortizing capitalized interest for federal income tax purposes using a ten year life and for financial reporting purposes amortizing it over the lifeof the building.
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NOTE 5 - INCOME TAXES (CONTINUED)
Following is a reconciliation of net income for financial reporting purposes to net income for federal income tax reporting purposes for the years ended December 31, 1995, 1994, and 1993:
NOTE 6 - RELATED-PARTY TRANSACTIONS
Transactions between the partnership and the general partner, Gerald L. Whitcomb, and between the partnership and affiliates of the general partner are as follows:
The partnership has a management agreement with an affiliate of the general partner to employ the affiliate for a period of 20 years as manager of the motels owned by the partnership. The agreement provides for payment of a property management fee to the affiliate equal to 5% of the partnership's gross revenues from motel operations in addition to reimbursement of certain out-of-pocket cost incurred by the affiliate in connection with management of the property. The 5% base fees are property management fees. The reimbursements of out-of-pocket costs are recorded as administrative service fees.
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NOTE 6 - RELATED-PARTY TRANSACTIONS (CONTINUED)
Payment of property management fees is subordinated to receipt by the limited partners of a cumulative, pretax return on their adjusted capital investment of 10% per annum. This 10% was achieved as of June 30, 1992. Effective July 1, 1992, management began paying monthly the current management fees. Prior to December 31, 1992, management then determined, based upon working capital needs of Northwest I, that the first six months of 1992 and all of 1991 management fees were to be paid. Management fees paid during 1992 were $124,403 for 1992 and $111,973 for 1991. Management fees paid during 1993 were $115,480 for 1993. Management fees paid during 1994 were $119,617 for 1994 and $115,594 for 1990.
Management fees paid during 1995 were $115,938 for 1995.
However, since the partnership agreement states that the management fees are to be paid out of operational cash flow, after paying the 10% return to limited partners, no payment for management fees relating to 1990 and before has been made. These unpaid management fees totaling $605,348 will be paid only when sufficient operational cash flow is experienced. In 1994 all management fees were accrued with restatement of prior years' information. See Note 7 for further discussion.
NOTE 7 - PRIOR-PERIOD ADJUSTMENT
As discussed in the last two paragraphs of Note 6, management did not previously accrue unpaid property management fees because management then believed that such fees were not probable of payment. In 1994 the partnership adopted the accrual method of accounting for unpaid property management fees. Accordingly, the accompanying December 31, 1993, financial statements were restated.
A summary of the effect of this restatement on the 1993 financial statements is as follows:
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NOTE 8 - COMMITMENT
(a) Franchise Agreement - The partnership has purchased franchise rights to provide motel services to the general public using a system commonly known as Super 8 Motels. An initial franchise fee of $15,000 was paid for each motel and the partnership is committed to pay additional fees equal to 4% of gross room revenue for the 20 year term of the agreement. The franchise agreement with Super 8 Motels, Inc. to pay 1% of gross room revenue to the national advertising fund was terminated December 31, 1995.
(b) Lease Commitments - The partnership has an operating lease for equipment at the Sea-Tac motel. The term of the operating lease is 3.5 years.
Minimum lease payments based on current rents are as follows:
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents - The carrying amount approximates fair value because of the short-term maturity of those instruments.
Long-Term Debt - The carrying amounts of the partnership's borrowings under its long-term revolving credit agreement and notes payable approximate fair value.
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