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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Commission file number 0-23732 WINSTON HOTELS, INC.  North Carolina
    
    56-1624289(State of incorporation)
    
    (I.R.S. Employer Identification Number)2626 Glenwood Avenue, Suite 200Raleigh, North Carolina
    
    27608(Address of principal executive offices)
    
    (Zip Code)
 (919) 510-6019
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Class
    
    Name of Exchange upon Which RegisteredCommon Stock, $0.01 par value per share
    
    New York Stock Exchange8.00% Series B Cumulative Preferred Stock, $0.01 par value per share
    
    New York Stock Exchange
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ Noo Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þ Noo The aggregate market value of the registrants Common Stock, $0.01 par value per share, at
June 30, 2004, held by those persons deemed by the registrant to be non-affiliates was
approximately $258,235,088. As of March 1, 2005, there were 26,513,427 shares of the registrants Common Stock, $0.01 par
value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document
    
    Where Incorporated1.     Proxy Statement for Annual Meeting of Shareholders to be held on May 3, 2005
    
    Part III




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WINSTON HOTELS, INC. Form 10-K Annual ReportINDEX PagePART I.ITEM 1.
    
    BUSINESS
    
    
    3ITEM 2.
    
    PROPERTIES
    
    
    10ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    12ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    12PART II.ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    13ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    14ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    16ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    38ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    40ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    40ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    40ITEM 9B.
    
    OTHER INFORMATION
    
    
    41PART III.ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    41ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    41ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    42ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    42ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    42PART IV.ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    42SIGNATURES
    
    
    
    
    47
  2




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PART I. 
 ITEM 1. BUSINESS General Development of Business Winston Hotels, Inc., (the Company) headquartered in Raleigh, North Carolina, owns hotel
properties and interests in hotel properties through joint ventures, provides loans to the hotel
industry, and provides hotel development and asset management services. The Company conducts
substantially all of its operations through its operating partnership, WINN Limited Partnership,
(the Partnership). The Company and the Partnership (together with the Partnerships wholly-owned
subsidiaries, Barclay Hospitality Services Inc. (Barclay), Winston SPE, LLC, Winston SPE II, LLC,
and Winston Finance LLC), are collectively referred to as the Company. As of December 31, 2004,
the Companys ownership in the Partnership was 95.31%. The Company operates so as to qualify as a
real estate investment trust (REIT) for federal income tax purposes. During 2004, the Company acquired one hotel, sold two hotels, and invested in three additional
hotels through joint ventures. During 2004, the Company also made five loans to hotel owners in
connection with acquisitions, developments and redevelopments. As of December 31, 2004, the
Company owned or was invested in, through its equity interests in joint venture entities, 52 hotel
properties in 15 states having an aggregate of 7,320 rooms. This included 45 wholly-owned
properties with an aggregate of 6,397 rooms, a 49% ownership interest in one joint venture hotel
with 118 rooms, a 48.78% ownership interest in one joint venture hotel with 147 rooms, and a 13.05%
ownership interest in five joint venture hotels with an aggregate of 658 rooms. The Company also
had issued loans to owners of eight hotels having an aggregate of 1,573 rooms. The Company does
not hold an ownership interest in any of the hotels for which it has provided mezzanine financing.
All of the Companys hotels are operated under franchises from nationally recognized franchisors
including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group
PLC, (formerly Six Continents PLC) and Choice Hotels International. Narrative Description of Business Growth Strategies The Companys primary growth strategies are designed to enhance shareholder value by
increasing cash available for distribution per share of Common Stock through:  
    improving existing hotel operations;
    acquiring, either directly or through joint ventures, additional hotels, or
ownership interests in hotels, that meet the Companys investment criteria;
    developing hotels on selected sites; and
    financing activities whereby the Company provides loans to third party hotel owners
in connection with acquisitions and developments. Improve Existing Hotel Operations The Company seeks to increase operating cash flow and profit through aggressive asset
management and the strategic investment of capital in its portfolio. The Company works closely
with each hotel manager to continually find ways to improve operating results by increasing
revenues and decreasing expenses. The Companys hotel managers are trained in all aspects of hotel
operations, including customer service improvement strategies, rate negotiations with corporate and
other clients, direct hotel sales and marketing techniques. Additionally, hotel managers seek to
take advantage of all available advertising and marketing programs, both national and regional,
with the franchisors of the Companys hotels. The Company maintains strong, strategic
relationships with both its franchisors and managers and focuses on selecting the best, most
appropriate franchisor and manager for each property. Over the past four years, the Company has
spent approximately $32.9 million upgrading and renovating existing wholly-owned hotels in order to
enhance their competitive position and improve cash flow. This is in addition to approximately
$27.3 million spent on repairs and maintenance items during that same period. Operations and Property Management.As of December 31, 2004, Alliance managed 42 of the Companys
52 hotels, Concord managed four hotels, Hilton managed three hotels, and New Castle, Prism, and
Noble each managed one hotel. One wholly-owned property was operated under a long-term lease with
Prime until March 2004, when the Company negotiated the transfer of this lease to Barclay. 3




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The information below, regarding the hotel managers of the Companys hotels, is as of December
31, 2004: Alliance, a hotel management company, operated 42 of the Companys hotels. Concord, a hotel development and management company, operated a total of 43 hotels in ten
states and Canada. Hilton, a New York Stock Exchange listed company, is a developer, owner, manager or franchisor
of 2,216 hotels, resorts and vacation ownership properties. Its portfolio includes many of the
worlds best known and most highly regarded hotel brands, including Hilton, Doubletree, Embassy
Suites Hotels, Hampton Inn, Hampton Inn & Suites, Homewood Suites by Hilton, Hilton Garden Inn,
Hilton Grand Vacation Company and Conrad. Prism, a hotel management company, operated a total of 29 hotels in 10 states. Noble, a hotel development and management company, operated 23 upscale, full service,
mid-market and all-suites hotels in six states. Noble holds a 79% ownership interest in Alliance. New Castle Hotels & Resorts, a hotel management company, operated a total of 20 hotels in
seven states and Canada. Franchise Agreements.All of the Companys hotels operate under franchise licenses from national
hotel franchisors including Marriott International, Inc., Hilton Hotels Corporation,
Intercontinental Hotels Group PLC, (formerly Six Continents PLC) and Choice Hotels International.
The Company anticipates that most of the additional hotel properties in which it invests will be
operated under franchise licenses with these same franchisors. Franchisors provide a variety of
benefits for franchisees including national advertising, publicity and other marketing programs
designed to increase brand awareness, training of personnel, continuous review of quality standards
and centralized reservation systems. The hotel franchise licenses generally specify certain management, operational, record
keeping, accounting, reporting and marketing standards and procedures with which the Company must
comply. The franchise licenses obligate the Company to comply with the franchisors standards and
requirements with respect to training of operational personnel, safety, insurance, the types of
services and products ancillary to guest room services that may be provided, display of signs, and
the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and
other common areas. As of December 31, 2004, of the 52 hotels franchise licenses, including seven joint venture
hotels, one expires in 2006, two expire in 2007, four expire in 2008, three expire in 2009, two
expire in 2010, three expire in 2011, one expires in 2013, one expires in 2015, two expire in 2016,
13 expire in 2017, eight expire in 2018, one expires in 2020, four expire in 2022, two expire in
2023, four expire in 2024 and one expires in 2025. The franchise agreements provide for
termination at the franchisors option upon the occurrence of certain events, including the
Companys failure to pay royalties and fees or perform its other covenants under the franchise
agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the
franchise without the consent of the franchisor, or failure to comply with applicable law or
maintain applicable standards in the operation and condition of the relevant hotel. The franchise
agreements will not renew automatically upon expiration. The Company is responsible for making all
payments under the franchise agreements to the franchisors. Under the franchise agreements, the
Company pays a franchise fee generally between 4% and 5% of room revenues, plus additional fees
that amount to between 3% and 4% of room revenues from the hotels. The Companys franchisors periodically inspect the Companys hotels to ensure that they meet
certain brand standards primarily pertaining to the condition of the property and its guest service
scores. In connection with these routine reviews, as of June 30, 2004, the Company had received
default notices from the franchisor for two of its hotels. As of December 31, 2004, both of these
properties have been reinspected. One has received an acceptable rating. The other hotel passed
the reinspection for all product improvement issues, but received an unacceptable rating due to its
customer service scores falling below brand standards. We believe this decline in customer service
scores was due, in part, to the ongoing construction to comply with the brands product improvement
requirements. The Company expects to cure this deficiency to comply with the franchisors
standards and expects to receive an acceptable rating for the hotel. Since June 30, 2004, the
Company has received default notices from the franchisor for five other hotels. Four of these
notices pertain to low guest service scores while the other notice was received for failure to
complete a product improvement plan on schedule. The Company is currently in the process of curing
these deficiencies to comply with the franchisors standards and expects to receive an acceptable
rating for all hotels. Acquisitions of Additional Hotels One of the Companys primary growth strategies is the acquisition of additional hotels. The
Company is continually looking for acquisition opportunities to either wholly-own additional hotels
or to own additional interests in hotels through joint ventures. The Company focuses on acquiring
additional hotels, or ownership interests in hotels, with strong national franchise affiliations in
the 4




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mid-scale without food and beverage, upscale, and upper upscale market segments, or
hotel properties with the potential to obtain these franchise affiliations. In particular, the
Company will consider acquiring mid-scale without food and beverage hotels, such as Hampton Inn,
Hampton Inn & Suites, Holiday Inn, and Fairfield Inn by Marriott; upscale hotels such as Hilton
Garden Inn, Courtyard by Marriott, Homewood Suites by Hilton, Residence Inn by Marriott, SpringHill
Suites by Marriott and Staybridge by Holiday Inn; and upper upscale hotels such as full service
Marriott, Hilton, Embassy Suites and Sheraton. The Company intends to consider investments in hotel properties that meet one or more of the
following criteria:  
    properties in locations with relatively high demand for rooms, a relatively low
supply of hotel properties and relatively high barriers to entry into the hotel
business, such as a scarcity of suitable sites or zoning restrictions;
    successful hotels available at favorable prices;
    newly developed hotels;
    hotels that could benefit from repositioning;
    hotels that could benefit from substantial rehabilitation; and
    hotels that could benefit from new management and additional hotel capital. The Company believes that its relationships with its managers and franchisors will provide
additional potential investment opportunities. Direct Hotel Investment. In December 2004, the Company acquired the Courtyard by Marriott hotel in
Roanoke, VA for $12.1 million. Also in December 2004, the Company acquired an historic residential
building in Kansas City, MO for $3.1 million. The property will undergo extensive renovations and
is expected to be converted to a Courtyard by Marriott hotel in the second quarter of 2006, with an
expected total cost of $16.7 million, net of tax credits totaling $7.7 million. As the Company acquires hotels, or interests in hotels, the Company also continually evaluates
its portfolio and considers selling hotels that no longer meet its long-term investment objectives.
The Company sold two hotels in 2004 for gross proceeds, in the aggregate, totaling approximately
$10.9 million. Investment in Hotels Through Joint Ventures. The Company currently has investments in the
following joint ventures:  
    The Company owns 49% of the Marsh Landing joint venture that owns the 118-room Hampton Inn in Ponte Vedra, FL.
    The Company owns an indirect 13.05% interest in the WCC Project Company LLC joint venture that owns four hotels:  
    the 102-room Fairfield Inn & Suites in West Des Moines, IA;
    the 113-room Courtyard by Marriott in Beachwood, OH;
    the 190-room SpringHill Suites by Marriott in Houston, TX; and
    the 95-room Quality Suites in West Des Moines, IA that is in the process of being
renovated and is expected to be converted to a SpringHill Suites by Marriott during
the second quarter of 2005.  
    The Company owns an indirect 13.05% interest in the WNC Project Company LLC joint
venture that owns one hotel, the 158-room Courtyard by Marriott in Shelton, CT. The
joint venture completed its renovations and conversion of this hotel to a Courtyard by
Marriott during the first quarter of 2005.
    The Company owns 48.78% of the Chapel Hill joint venture that owns a 147-room
Courtyard by Marriott in Chapel Hill, NC that opened in September of 2004. Under the terms of the joint ventures, the Company has provided property development and
purchasing services and will continue to provide ongoing asset management services for additional
fees. The Company receives cash distributions of the joint ventures operating profits, if any, on
a quarterly basis. 5




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Developing Hotels on Selected Sites The Company has the in-house capability to develop hotels. Since its initial public offering
in 1994, the Company has developed several of its wholly-owned hotels, and has completed major
renovations for certain hotels owned through joint ventures and for certain hotels for which the
Company has provided financing. As noted above, the Company owns 48.78% of the Chapel Hill joint
venture that owns a 147-room Courtyard by Marriott in Chapel Hill, NC that opened in September of
2004. The Company developed this hotel for the joint venture and earned development fees totaling
$0.7 million during construction. Also in December 2004, the Company acquired an historic
residential building in Kansas City, MO for $3.1 million. The property will undergo extensive
renovations and is expected to be converted to a Courtyard by Marriott hotel in the second quarter
of 2006, with an expected total cost of $16.7 million, net of tax credits totaling $7.7 million.
The Company typically earns development fees for its services provided to develop joint venture
hotels. The Company is continually looking to develop additional hotel properties, either to
wholly-own or to own through joint ventures, which meet its investment criteria. Hotel Financing As of December 31, 2004, the Company had issued eight loans to third party hotel owners with
an aggregate outstanding principal balance totaling approximately $30.8 million. The Company
issued five of these loans totaling $25.8 million during 2004. The Company plans to continue to
expand its hotel lending business in the future. The Companys lending program is designed to
provide loans to the hotel industry, primarily by either originating single loans, or through the
purchase of the first loss piece of collateralized mortgage backed securities (CMBS) transactions
which typically contain multiple hotel properties. However, the Company may also issue whole loans
and then potentially sell the senior portion of the loan. The Companys loan amount is typically
10% to 25% of the projects all-in cost, ranging from approximately $1 million to approximately $15
million. The Company will primarily provide financing between 60% and 85% of the lesser of the
projects all-in cost or fair market value. Loans will typically be issued for hotels with between
100 and 450 rooms. We continue to seek additional prudent financing opportunities where the
Company can capitalize on its hotel underwriting and development expertise. The Company expects to
use a portion of the availability under its $155 million line of credit with General Electric
Capital Corporation (GECC) and the $50 million line of credit with Marathon Structured Finance
Fund, LP to provide loans to the hotel industry. Recent Developments Hotel Sales The Company sold two hotels during January 2005. The Chester, VA Comfort Inn was sold for
$5.2 million in cash, net of closing costs. The Greenville, SC Comfort Inn was sold for $1.8
million, net of closing costs, of which the Company received approximately $0.4 million in cash
proceeds and a note receivable for $1.425 million. The note requires fixed principal payments over
five years and bears interest at a rate of prime plus 1.5%. Both of these properties were held for
sale as of December 31, 2004. Estimated impairment losses have been recorded during 2004 and 2003
on these two hotels such that no material gain or loss will be recognized in 2005 related to these
sales. Hotel Loans Albany, NY Hampton Inn & Suites.In February 2005, the Company issued a $3.375 million
mezzanine loan to finance the development of a 165-room Hampton Inn & Suites in Albany, NY. M&T
Realty provided an $11.5 million first mortgage loan. The Companys loan is subordinate to the M&T
Realty first mortgage loan. The term of the Companys loan is 6.5 years. During the term of the
loan, interest will be payable at 30-day LIBOR plus 9.41%. In addition during this period,
interest in the amount of 4.00% shall accrue and be added to the outstanding principal balance
thereof, and shall be due and payable upon repayment of the loan. Interest will not be paid on the
accrued interest. Florida Hotels.In March 2005, the Company purchased from Lehman Brothers $2.8 million of
B-notes for $2.3 million. The fixed-rate notes are secured by second mortgages on three hotels
with a weighted average yield at the time of purchase of 9.3%, and have a remaining term of
approximately six years. The three B-Notes, which are debt subordinated to the first mortgage A
note, are cross-collateralized. The A note is secured by the first mortgages on each of the three
assets, which are held in a CMBS trust. The loans are secured by a 146-room Springhill Suites and
a 91-room TownePlace Suites, both in Boca Raton, FL, and a 95-room TownePlace Suites in Fort
Lauderdale, FL. GECC Line of Credit On March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (SPE
II), entered into a five-year credit facility with GECC (the GE Line). The Company subsequently
borrowed funds under the GE Line on March 14, 2005 6




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and used these funds to pay off all outstanding debt under the Companys previous $125 million
line of credit, terminating this prior credit facility. The GE Line provides for revolving loan
commitments and letters of credit up to $155 million. The GE Line bears interest at rates from
LIBOR plus 1.75% to 2.50%, based on the ratio of the underwritten net operating income of the
hotels that collateralize the GE Line to the outstanding principal debt balance. The current rate
is LIBOR plus 2.00%. Competition The hotel industry is highly competitive with various participants competing on the basis of
price, level of service and geographic location. The Companys hotels compete with other hotel
properties in their geographic markets. Some of the Companys competitors may have greater
marketing and financial resources than the Company and the managers of the Companys hotels.
Several of the Companys hotels are located in areas in which they may compete with other Company
hotels for business. The Company competes for acquisition opportunities with entities that may
have greater financial resources than the Company. These entities may generally be able to accept
more risk than the Company can prudently manage, including risks with respect to the
creditworthiness of a hotel manager. Employees The Company had 17 employees as of March 1, 2005. We believe that our relations with our
employees are good. Environmental Matters Under various federal, state and local laws and regulations, an owner or operator of real
estate may be liable for the costs of removal or remediation of certain hazardous or toxic
substances on such property. Such laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore,
a person that arranges for the disposal or transports for disposal or treatment of a hazardous
substance at another property may be liable for the costs of removal or remediation of hazardous
substances released into the environment at that property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances, or the failure to promptly
remedy such substances, may adversely affect the owners ability to use or sell such real estate or
to borrow using such real estate as collateral. Certain environmental laws and common law
principles could be used to impose liability for the release of and exposure to hazardous
substances, including asbestos-containing materials (ACMs) released into the air, and third
parties may seek recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous substances, including ACMs. In
connection with the ownership and operation of its hotels, the Company or the property managers, as
the case may be, may be potentially liable for such costs. Phase I environmental site assessments (ESAs) were obtained on all of the Companys hotels.
The Phase I ESAs were intended to identify potential sources of contamination for which the hotels
may be responsible and to identify readily apparent environmental regulatory compliance concerns.
The Phase I ESAs included historical reviews of the hotels, reviews of certain public records,
preliminary investigations of the sites and surrounding properties, screening for the presence of
asbestos, PCBs (polychlorinated biphenyls) and underground storage tanks, and the preparation and
issuance of a written report. The Phase I ESAs did not include invasive procedures, such as soil
sampling or ground water analysis. The Phase I ESA reports have not revealed any environmental
condition, liability or compliance concern that the Company believes would have a material adverse
effect on the Companys business, assets or results of operations, nor is the Company aware of any
such condition, liability or compliance concern. Nevertheless, it is possible that these reports
do not reveal all environmental conditions, liabilities or compliance concerns or that there are
material environmental conditions, liabilities or compliance concerns that arose at a hotel after
the related Phase I ESA report was completed of which the Company is unaware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will not impose any
material environmental liability for existing conditions at the Companys hotels, or (ii) the
current environmental condition of the hotels will not be affected by the condition of the
properties in the vicinity of the hotels (such as the presence of leaking underground storage
tanks) or by third parties unrelated to the Company. In addition to the ESAs, the Company also obtained asbestos surveys for the Holiday Inn Select
in Garland (Dallas), Texas and the Courtyard by Marriott in Houston, Texas. In the asbestos
surveys, the consultants discovered the presence of ACMs. The Company is monitoring the presence
of the ACMs with the assistance of its consultants. During 2002, the Company invested in the Beachwood, OH Courtyard by Marriott hotel, which is
currently owned by WCC Project Company LLC. The Companys current indirect ownership interest in
this hotel is 13.05%. Prior to making its initial investment, the Company knew that black mold
existed at the hotel and engaged consultants with expertise in black mold remediation and performed
extensive research to satisfy itself that the black mold condition could be eradicated through
renovation and repair procedures. Following the completion of such remediation procedures, the
Company believes that all of the black mold has been removed from this hotel, which opened for
business in April 2003. Because black mold is a naturally occurring fungus, the spores of 7




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which can be transported by outside air currents, there can be no assurance that black mold
will not again enter and grow in this hotel or that it will not be found in the Companys other
hotel properties. Portions of the soil and groundwater under the Durham, NC Hampton Inn have been contaminated
by one or more leaking underground storage tanks from an adjacent property owned by a third-party.
The North Carolina Department of Environmental and Natural Resources classified the adjacent
property as low risk and issued a No Further Action determination in November 2003. A Phase II
ESA file review was conducted in February 2005 to review and obtain regulatory files related to the
leaking underground tanks on the adjacent property. The Phase II indicated that the Durham, NC
Hampton Inn is restricted from use of groundwater and recommended additional investigation to
determine the extent of contamination, if any, from the leaking tanks. We expect to conduct such
additional investigation in the near future. We believe liability for future cleanup, if any, of
this subsurface contamination most likely would be imposed on the third-party owner of the leaking
underground storage tanks and not us. We could, however, be responsible for cleanup of this site
if, for instance, the owner of the leaking tanks refused or were financially unable to conduct a
cleanup. In addition to the costs of cleanup, environmental contamination can affect the value of
a property and, therefore, an owners ability to borrow funds using the property as collateral or
to sell the property. The costs to clean up a contaminated property, to defend against a claim, or
to comply with environmental laws could be material and could adversely affect the funds available
for distribution to our shareholders. We can make no assurances that (1) future laws or
regulations will not impose material environmental liabilities or (2) the current environmental
condition of our hotel properties will not be affected by the condition of the properties in the
vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by
third parties unrelated to us. The Company believes that its hotels have been operated in compliance in all material respects
with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic
substances and other environmental matters. The Company has not been notified by any governmental
authority of any material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental substances in connection with any of its properties. Tax Status The Company elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended, effective for its short taxable year ended December 31, 1994. The Company
believes that it qualifies for taxation as a REIT, and with certain exceptions, the Company will
not be subject to tax at the corporate level on its taxable income that is distributed to the
shareholders of the Company. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least 90% of its annual
taxable income. Failure to qualify as a REIT will render the Company subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular corporate rates and
distributions to the shareholders in any such year will not be deductible by the Company. Seasonality The Companys operations historically have been seasonal in nature, reflecting higher revenue
per available room (RevPAR) during the second and third quarters. This seasonality can be
expected to cause fluctuations in the Companys quarterly operating profits. To the extent that
cash flow from operations is insufficient during any quarter, due to temporary or seasonal
fluctuations in revenue, the Company expects to utilize cash on hand or borrowings under the line
of credit to make distributions to its equity holders. Executive Officers of the Company The following table lists the executive officers of the Company: Name
    
    Age
    
    PositionCharles M. Winston
    
    
    75
    
    
    Chairman of the Board of DirectorsRobert W. Winston, III
    
    
    43
    
    
    Chief Executive OfficerJoseph V. Green
    
    
    54
    
    
    President, Chief Financial Officer and SecretaryKenneth R. Crockett
    
    
    48
    
    
    Chief Operating OfficerBrent V. West
    
    
    37
    
    
    Vice President and Chief Accounting OfficerJames P. Frey
    
    
    61
    
    
    Vice President
 8




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Charles M. Winston.Charles Winston has served as Chairman of the Board of Directors since
March 15, 1994. Mr. Winston is a native of North Carolina and a graduate of the University of
North Carolina at Chapel Hill with an A.B. degree. Mr. Winston has more than 40 years of
experience in developing and operating full service restaurants and hotels. Mr. Winston is Robert
Winstons father and brother of James Winston, a director of the Company. Robert W. Winston, III.Robert Winston has served as Chief Executive Officer and Director of
the Company since March 15, 1994. Mr. Winston served as the Companys President from March 15,
1994 through January 14, 1999 and from November 9, 2002 through November 4, 2003. Mr. Winston also
served as Secretary for the periods from March 1994 through May 1995 and from October 1997 until
May 5, 1998. Mr. Winston is a native of North Carolina and a graduate of the University of North
Carolina at Chapel Hill with a B.A. degree in economics. Mr. Winston is Charles Winstons son and
nephew of James Winston, a director of the Company. Joseph V. Green.Mr. Green has served as President of the Company since November 4, 2003, as
Executive Vice President and Chief Financial Officer since May 18, 1999 and as Secretary since
November 9, 2002. Mr. Green has also served as Executive Vice President  Acquisitions and Finance
from January 1, 1998 through May 18, 1999, after having advised Winston Hospitality, Inc. on
matters regarding hotel acquisitions and finance since 1993, including the initial public offering
of WHI. Mr. Green is a graduate of East Carolina University, was awarded his J.D. degree from Wake
Forest University School of Law and received a Master of Laws in Taxation from Georgetown
University. Kenneth R. Crockett.Mr. Crockett has served as Chief Operating Officer of the Company since
November 4, 2003. Mr. Crockett served as the Companys Executive Vice President of Development
from January 1998 through November 5, 2003 and also served as the Companys Senior Vice President
of Development from September 1995 through January 1998. Mr. Crockett is a graduate of the
University of North Carolina at Chapel Hill with a B.S. degree in Business Administration. Prior
to joining the Company, Mr. Crockett was an Associate Partner for project development in commercial
real estate at Capital Associates, a real estate development firm located in Raleigh, North
Carolina. Brent V. West.Mr. West was appointed Vice President and Chief Accounting Officer in October
2002. He joined the Company as Vice President and Controller in September 1997 and served as Vice
President of Finance and Controller from May 1999 through October 2002. Mr. West began his career
with KPMG and prior to joining the Company, held the position of Corporate Controller for Coastal
Physician Group, Inc. Mr. West is a CPA and is a graduate of Plattsburgh State University College,
Plattsburgh, New York, with a B.S. degree in Accounting. James P. Frey. Mr. Frey has served as Vice President of the Company since January 2000.
Prior to joining the Company he worked for Hilton Hotels Corporation in various capacities, where
his responsibilities included overseeing the construction of 35 hotels and administering annual
capital refurbishment and expenditures totaling $35 million per year. Mr. Frey has over 40 years
experience in the hotel industry. Available Information The Company maintains a Web site, http://www.winstonhotels.com, which contains additional
information concerning the Company. The Company makes available free of charge through its Web
site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. The Companys Corporate Governance
Guidelines and Code of Business Conduct and Ethics and the charters of the Audit, Compensation and
Nominating and Corporate Governance Committees are also available on the Companys Web site at
www.winstonhotels.com, and are available in print to any shareholder upon request in writing to
Winston Hotels, Inc., c/o Vice President and Chief Accounting Officer, 2626 Glenwood Avenue, Suite
200, Raleigh, NC 27608. Information on the Companys Web site is neither part of nor incorporated
into this report on Form 10-K. 9




---



##### 



ITEM 2. PROPERTIES Our principal executive offices are located at 2626 Glenwood Avenue, Suite 200, Raleigh, North
Carolina 27608. We carry out all aspects of our businesses at that location. We lease
approximately 18,900 square feet at our headquarters building, of which approximately 7,900 square
feet is sub-leased to other parties. We believe that our present facilities, together with current
options to extend lease terms and occupy additional space, are adequate for our current and
presently projected needs. As of December 31, 2004, the Company owned 45 hotels with an aggregate
of 6,397 rooms. The following table sets forth, by franchise affiliation, certain unaudited
information with respect to our wholly-owned hotels for the years ended December 31, 2004 and 2003. 2004
    
    
    
    
    

    2003Number of
    
    
    
    
    
    
    
    
    Room Revenue
    
    
    Average
    
    
    Occupancy
    
    
    
    
    
    
    
    
    Room Revenue
    
    
    Average
    
    
    OccupancyHotel Name
    
    
    
    
    
    
    Rooms
    
    
    
    
    
    
    
    
    (in thousands)
    
    
    Daily Rate
    
    
    Percentage
    
    
    
    
    
    
    
    
    (in thousands)
    
    
    Daily Rate
    
    
    PercentageComfort Inns/SuitesComfort Inn Charleston, SC
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    
    $
    2,409
    
    
    $
    72.89
    
    
    
    70.1
    %
    
    
    
    
    
    
    
    $
    2,389
    
    
    $
    71.91
    
    
    
    71.1
    %Comfort Inn Chester, VA (4)
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    
    
    1,696
    
    
    
    58.93
    
    
    
    64.5
    %
    
    
    
    
    
    
    
    
    1,646
    
    
    
    58.44
    
    
    
    63.2
    %Comfort Inn Durham, NC
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    2,123
    
    
    
    61.72
    
    
    
    68.1
    %
    
    
    
    
    
    
    
    
    2,085
    
    
    
    62.50
    
    
    
    66.2
    %Comfort Inn Fayetteville, NC
    
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    
    
    3,350
    
    
    
    61.31
    
    
    
    84.8
    %
    
    
    
    
    
    
    
    
    3,307
    
    
    
    55.88
    
    
    
    92.1
    %Comfort Inn Greenville, SC (4)
    
    
    
    
    
    
    
    188
    
    
    
    
    
    
    
    
    
    1,323
    
    
    
    50.61
    
    
    
    38.0
    %
    
    
    
    
    
    
    
    
    1,094
    
    
    
    46.71
    
    
    
    33.8
    %Comfort Inn Wilmington, NC
    
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    
    
    1,642
    
    
    
    60.41
    
    
    
    50.9
    %
    
    
    
    
    
    
    
    
    1,650
    
    
    
    54.93
    
    
    
    56.4
    %Comfort Suites Orlando, FL
    
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    
    
    2,823
    
    
    
    49.56
    
    
    
    72.7
    %
    
    
    
    
    
    
    
    
    2,454
    
    
    
    46.97
    
    
    
    66.9
    %Courtyard by MarriottsCourtyard by Marriott Ann Arbor, MI
    
    
    
    
    
    
    
    160
    
    
    
    
    
    
    
    
    
    4,091
    
    
    
    94.70
    
    
    
    73.8
    %
    
    
    
    
    
    
    
    
    3,650
    
    
    
    95.06
    
    
    
    65.8
    %Courtyard by Marriott Houston, TX
    
    
    
    
    
    
    
    197
    
    
    
    
    
    
    
    
    
    2,849
    
    
    
    84.26
    
    
    
    46.9
    %
    
    
    
    
    
    
    
    
    2,918
    
    
    
    84.06
    
    
    
    48.3
    %Courtyard by Marriott Roanoke, VA (2)
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    
    
    64
    
    
    
    64.94
    
    
    
    48.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Courtyard by Marriott Wilmington, NC
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    2,566
    
    
    
    76.85
    
    
    
    71.3
    %
    
    
    
    
    
    
    
    
    2,332
    
    
    
    75.63
    
    
    
    66.0
    %Courtyard by Marriott Winston Salem, NC
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    
    
    2,525
    
    
    
    76.44
    
    
    
    74.0
    %
    
    
    
    
    
    
    
    
    2,275
    
    
    
    73.57
    
    
    
    69.4
    %Fairfield InnFairfield Inn Ann Arbor, MI
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    69.40
    
    
    
    64.5
    %
    
    
    
    
    
    
    
    
    1,719
    
    
    
    68.97
    
    
    
    62.1
    %Hampton Inn/SuitesHampton Inn & Suites Gwinnett, GA
    
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    2,587
    
    
    
    75.59
    
    
    
    68.8
    %
    
    
    
    
    
    
    
    
    2,557
    
    
    
    78.39
    
    
    
    65.7
    %Hampton Inn Boone, NC
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    1,787
    
    
    
    81.01
    
    
    
    63.5
    %
    
    
    
    
    
    
    
    
    1,860
    
    
    
    82.78
    
    
    
    64.8
    %Hampton Inn Brunswick, NC
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    
    
    2,626
    
    
    
    79.94
    
    
    
    69.6
    %
    
    
    
    
    
    
    
    
    2,584
    
    
    
    67.72
    
    
    
    81.0
    %Hampton Inn Cary, NC
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    
    
    1,712
    
    
    
    62.79
    
    
    
    57.7
    %
    
    
    
    
    
    
    
    
    1,741
    
    
    
    65.29
    
    
    
    56.6
    %Hampton Inn Charlotte, NC
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    1,727
    
    
    
    71.58
    
    
    
    52.7
    %
    
    
    
    
    
    
    
    
    1,698
    
    
    
    69.61
    
    
    
    53.5
    %Hampton Inn Durham, NC
    
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    2,471
    
    
    
    69.21
    
    
    
    71.7
    %
    
    
    
    
    
    
    
    
    2,452
    
    
    
    68.73
    
    
    
    71.8
    %Hampton Inn Hilton Head, SC
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    1,545
    
    

    
    69.98
    
    
    
    48.2
    %
    
    
    
    
    
    
    
    
    1,636
    
    
    
    64.34
    
    
    
    55.7
    %Hampton Inn Jacksonville, NC
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    
    
    2,080
    
    
    
    64.18
    
    
    
    72.6
    %
    
    
    
    
    
    
    
    
    2,166
    
    
    
    64.14
    
    
    
    75.8
    %Hampton Inn Las Vegas, NV (1)
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    
    
    1,308
    
    
    
    68.68
    
    
    
    82.8
    %
    
    
    
    
    
    
    
    
    2,065
    
    
    
    60.84
    
    
    
    73.2
    %Hampton Inn Perimeter, GA
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    2,242
    
    
    
    74.46
    
    
    
    62.8
    %
    
    
    
    
    
    
    
    
    2,025
    
    
    
    73.61
    
    
    
    57.5
    %Hampton Inn Raleigh, NC
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    2,504
    
    
    
    66.19
    
    
    
    73.3
    %

    
    
    
    
    
    
    
    
    2,188
    
    
    
    68.90
    
    
    
    61.7
    %Hampton Inn Southlake, GA
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    2,183
    
    
    
    69.20
    
    
    
    68.4
    %
    
    
    
    
    
    
    
    
    2,073
    
    
    
    70.30
    
    
    
    64.1
    %Hampton Inn Springfield, MA
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    2,994
    
    
    
    93.81
    
    
    
    69.2
    %
    
    
    
    
    
    
    
    
    2,832
    
    
    
    91.62
    
    
    
    67.3
    %Hampton Inn White Plains, NY
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    4,748
    
    
    
    110.29
    
    
    
    75.4
    %
    
    
    
    
    
    
    
    
    4,387
    
    
    
    107.61
    
    
    
    71.6
    %Hampton Inn Wilmington, NC (1)
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    86
    
    
    
    56.41
    
    
    
    39.2
    %
    
    
    
    
    
    
    
    
    1,723
    
    
    
    65.27
    
    
    
    61.3
    %Hilton Garden InnHilton Garden Inn Albany, NY
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    4,681
    
    
    
    107.32
    
    
    
    76.9
    %
    
    
    
    
    
    
    
    
    4,261
    
    
    
    100.57
    
    
    
    74.9
    %Hilton Garden Inn Alpharetta, GA
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    
    
    3,068
    
    
    
    83.46
    
    
    
    61.2
    %
    
    
    
    
    
    
    
    
    2,854
    
    
    
    85.40
    
    
    
    55.8
    %Hilton Garden Inn Evanston, IL (3)
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    6,248
    
    
    
    120.24
    
    
    
    79.8
    %
    
    
    
    
    
    
    
    
    4,983
    
    
    
    111.72
    
    
    
    68.6
    %Hilton Garden Inn Raleigh, NC
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    4,440
    
    
    
    104.35
    
    
    
    75.0
    %
    
    
    
    
    
    
    
    
    4,276
    
    
    
    104.98
    
    
    
    72.0
    %Hilton Garden Inn Windsor, CT (3)
    
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    
    
    3,735
    
    
    
    97.40
    
    
    
    66.7
    %
    
    
    
    
    
    
    
    
    3,549
    
    
    
    97.51
    
    
    
    63.5
    %Holiday Inn/Express/SelectHoliday Inn at Tinton Falls, NJ
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    4,558
    
    
    
    102.04
    
    
    
    70.1
    %
    
    
    
    
    
    
    
    
    4,395
    
    
    
    104.72
    
    
    
    67.1
    %Holiday Inn Express Abingdon, VA
    
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    
    
    1,361
    
    
    
    70.47
    
    
    
    65.2
    %
    
    
    
    
    
    
    
    
    1,373
    
    
    
    68.95
    
    
    
    67.4
    %Holiday Inn Express Clearwater, FL
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    
    
    2,079
    
    
    
    63.73

    
    
    
    70.2
    %
    
    
    
    
    
    
    
    
    1,741
    
    
    
    60.17
    
    
    
    62.4
    %Holiday Inn Secaucus, NJ
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    
    
    4,567
    
    
    
    106.85
    
    
    
    72.6
    %
    
    
    
    
    
    
    
    
    4,292
    
    
    
    108.47
    
    
    
    67.8
    %Holiday Inn Select Garland, TX
    
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    
    
    2,619
    
    
    
    58.60
    
    
    
    50.5
    %
    
    
    
    
    
    
    
    
    2,420
    
    
    
    63.98
    
    
    
    42.8
    %Homewood SuitesHomewood Suites Alpharetta, GA
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    
    
    2,393
    
    
    
    87.06
    
    
    
    67.1
    %
    
    
    
    
    
    
    
    
    2,362
    
    
    
    83.49
    
    
    
    69.2
    %Homewood Suites Cary, NC
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    3,409
    
    
    
    85.72
    
    
    
    72.4
    %
    
    
    
    
    
    
    
    
    3,071
    
    
    
    84.99
    
    
    
    69.4
    %Homewood Suites Durham, NC
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    2,462
    
    
    
    88.14
    
    
    
    79.5
    %
    
    
    
    
    
    
    
    
    2,377
    
    
    
    87.44
    
    
    
    77.6
    %Homewood Suites Houston, TX
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    2,509
    
    
    
    100.78
    
    
    
    73.9
    %
    
    
    
    
    
    
    
    
    2,548
    
    
    
    94.90
    
    
    
    80.0
    %Homewood Suites Lake Mary, FL
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    
    
    3,003
    
    
    
    88.32
    
    
    
    83.0
    %
    
    
    
    
    
    
    
    
    2,541
    
    
    
    84.02
    
    
    
    74.0
    %Homewood Suites Phoenix, AZ
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    2,437
    
    
    
    78.38
    
    
    
    67.4
    %
    
    
    
    
    
    
    
    
    2,265
    
    
    
    77.97
    
    
    
    63.2
    %Homewood Suites Raleigh, NC
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    3,328
    
    
    
    90.36
    
    
    
    73.5
    %
    
    
    
    
    
    
    
    
    3,111
    
    
    
    89.63
    
    
    
    69.4
    %Quality SuitesQuality Suites Charleston, SC
    
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    
    
    4,075
    
    
    
    79.00
    
    
    
    83.9
    %
    
    
    
    
    
    
    
    
    3,745
    
    
    
    78.72
    
    
    
    77.6
    %Residence InnResidence Inn Phoenix, AZ
    
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    
    
    3,026
    
    
    
    79.67
    
    
    
    61.8
    %
    
    
    
    
    
    
    
    
    2,746
    
    
    
    72.89
    
    
    
    61.4
    %Total for 47 Hotels
    
    
    
    

    
    
    
    6,642
    
    
    
    
    
    
    
    
    $
    125,862
    
    
    $
    80.36
    
    
    
    67.5
    %
    
    
    
    
    
    
    
    $
    120,416
    
    
    $
    78.05
    
    
    
    65.1
    %
   (1)
    
    Sold in 2004.(2)
    
    Purchased in December 2004.(3)
    
    Purchased the remaining equity interests in these hotels in March 2004, thus they are now wholly owned.(4)
    
    Sold in 2005. See Note 7 to Notes to Consolidated Financial Statements for further discussion of debt that encumbers these hotels. 10




---



##### 



In addition to our wholly-owned hotels, we maintain investments in joint ventures that in the
aggregate owned interests in seven hotels as of December 31, 2004. The following table sets forth
certain unaudited information about the hotels owned through joint ventures with third parties for
the years ended December 31, 2004 and 2003. 2004
    
    
    
    
    

    2003Number of
    
    
    
    
    
    
    
    
    Room Revenue
    
    
    Average
    
    
    Occupancy
    
    
    
    
    
    
    
    
    Room Revenue
    
    
    Average
    
    
    OccupancyHotel Name
    
    
    
    
    
    
    Rooms
    
    
    
    
    
    
    
    
    (in thousands)
    
    
    Daily Rate
    
    
    Percentage
    
    
    
    
    
    
    
    
    (in thousands)
    
    
    Daily Rate
    
    
    PercentageCourtyard by Marriott Beachwood, OH (1)
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    
    $
    3,504
    
    
    $
    111.31
    
    
    
    76.1
    %
    
    
    
    
    
    
    
    
    2,152
    
    
    $
    103.57
    
    
    
    75.1
    %Fairfield Inn & Suites West Des Moines,
IA
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    
    
    1,961
    
    
    
    71.53
    
    
    
    73.4
    %
    
    
    
    
    
    
    
    
    1,665
    
    
    
    67.95
    
    
    
    65.8
    %Hampton Inn Ponte Vedra, FL
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    2,875
    
    
    
    80.41
    
    
    
    82.8
    %
    
    
    
    
    
    
    
    
    2,759
    
    
    
    79.01
    
    
    
    81.1
    %Springhill Suites by Marriott Houston,
TX (2)
    
    
    
    
    
    
    
    190
    
    
    
    
    
    
    
    
    
    2,160
    
    
    
    71.32
    
    
    
    43.3
    %
    
    
    
    
    
    
    
    
    515
    
    
    
    62.70
    
    
    
    43.0
    %Ramada Plaza Shelton, CT (3)
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    1,791
    
    
    
    81.06
    
    
    
    45.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Quality Suites West Des Moines, IA (4)
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    443
    
    
    
    65.94
    
    
    
    57.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Courtyard by Marriott Chapel Hill, NC (5)
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    
    
    742
    
    
    
    98.62
    
    
    
    50.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Total for 7 Hotels
    
    
    
    
    
    
    
    923
    
    
    
    
    
    

    
    
    $
    13,476
    
    
    $
    83.56
    
    
    
    60.3
    %
    
    
    
    
    
    
    
    
    7,091
    
    
    $
    80.20
    
    
    
    69.6
    %
   (1)
    
    Opened May 2003.(2)
    
    Acquired September 2003. Began operations as a Springhill Suites by Marriott hotel beginning June 2004.(3)
    
    Acquired February 2004. Began operations as a Courtyard by Marriott hotel beginning February 2005.(4)
    
    Acquired September 2004. Expected to operate as a Springhill Suites by Marriott hotel beginning April 2005.(5)
    
    Opened September 2004. Each hotel is encumbered by a first mortgage loan. 11




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ITEM 3. LEGAL PROCEEDINGS The Company currently is not involved in any legal proceedings, other than routine litigation
incidental to the Companys business, nor are any such proceedings known to be contemplated by
governmental authorities. Alliance, who managed 42 of the Companys hotels as of December 31,
2004, has advised the Company that there are no such proceedings known to be contemplated by
government authorities, and it currently is not involved in any material pending litigation, other
than routine litigation arising in the ordinary course of business, substantially all of which is
expected to be covered by liability insurance. None of the other hotel management companies have
advised the Company that there are any such proceedings known to be contemplated by government
authorities, or that they currently are involved in any material pending litigation. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Companys security holders during the fourth
quarter of the fiscal year ended December 31, 2004. 12




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PART II. 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Price of and Dividends on the Registrants Common Equity The Companys Common Stock trades on the New York Stock Exchange (NYSE) under the symbol
WXH. As of March 1, 2005, the Company had 743 holders of record of its Common Stock. The
following table sets forth, for the indicated periods, the high and low closing prices for the
Common Stock on the NYSE and the cash distributions declared per share: CashDistributionsPrice Range
    
    
    DeclaredHigh
    
    
    Low
    
    
    Per Share2004First Quarter
    
    $
    11.24
    
    
    $
    9.92
    
    
    $
    0.15Second Quarter
    
    
    10.83
    
    
    
    8.24
    
    
    
    0.15Third Quarter
    
    
    11.24
    
    
    
    10.02
    
    
    
    0.15Fourth Quarter
    
    
    11.81
    
    
    
    10.58
    
    
    
    0.152003First Quarter
    
    $
    8.30
    
    
    $
    6.62
    
    
    $
    0.15Second Quarter
    
    
    9.02
    
    
    
    6.74
    
    
    
    0.15Third Quarter
    
    
    9.70
    
    
    
    8.42
    
    
    
    0.15Fourth Quarter
    
    
    10.63
    
    
    
    9.52
    
    
    
    0.15
 Although the declaration of distributions is within the discretion of the Board of Directors
and depends on the Companys results of operations, cash available for distribution, the financial
condition of the Company, tax considerations (including those related to REITs) and other factors
considered important by the Board of Directors, the Company expects to make regular quarterly
distributions in comparable amounts to its shareholders in the foreseeable future. Securities Authorized for Issuance Under Equity Compensation Plans Equity Compensation Plan Information The following table sets forth information as of December 31, 2004 with respect to
compensation plans under which equity securities of the Company are authorized for issuance. The
Company has no such plans that were not approved by security holders. Number of securities to be
    
    
    Weighted average
    
    
    Number of securities remainingissued upon exercise of
    
    
    exercise price of
    
    
    available for future issuanceoutstanding options,
    
    
    outstanding options,
    
    
    under equity compensationPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    plansEquity compensation plans
approved by security holders
    
    
    152,000
    
    
    $
    11.20
    
    
    
    1,723,270
 The Company has not sold any of its unregistered equity securities or purchased any of
its registered equity securities in the twelve months ended December 31, 2004. 13




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ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for the Company that has been
derived from the financial statements and notes thereto. This information should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included elsewhere in this
report. WINSTON HOTELS, INC.
Selected Historical Financial and Other Data
For the Years Ended December 31, 2004, 2003, 2002, 2001, and 2000
(in thousands, except per share amounts) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Operating Data: (1)Total revenue
    
    $
    138,442
    
    
    $
    122,603
    
    
    $
    87,100
    
    
    $
    52,336
    
    
    $
    58,566Operating income
    
    
    20,237
    
    
    
    12,495
    
    
    
    976
    
    
    
    21,420
    
    
    
    28,485Income from continuing operations
    
    
    16,697
    
    
    
    9,740
    
    
    
    706
    
    
    
    8,938
    
    
    
    12,931Income from continuing operations available to common
shareholders
    
    
    7,662
    
    
    
    2,802
    
    
    
    (6,232
    )
    
    
    2,000
    
    
    
    5,993Income from continuing operations per common share
    
    
    0.29
    
    
    
    0.13
    
    
    
    (0.32
    )
    
    
    0.12
    
    
    
    0.32Net income
    
    
    16,883
    
    
    
    7,705
    
    
    
    902
    
    
    
    10,485
    
    
    
    15,055Net income (loss) available to common shareholders
    
    
    7,848
    
    
    
    767
    
    
    
    (6,036
    )
    
    
    3,547
    
    
    
    8,117Net income (loss) per common share  basic and fully diluted
    
    
    0.30
    
    
    
    0.03
    
    
    
    (0.31
    )
    
    
    0.21
    
    
    
    0.48Weighted average number of common shares
    
    
    26,224
    
    
    
    21,770
    
    
    
    19,308
    
    
    
    16,926
    
    
    
    16,890Distributions per common share
    
    
    0.60
    
    
    
    0.60
    
    
    
    0.60
    
    
    
    0.99
    
    
    
    1.12Balance Sheet Data (at end of period) (2):Cash
    
    $
    4,115
    
    
    $
    5,623
    
    
    $
    1,510
    
    
    $
    887
    
    
    $
    167Investment in hotel properties
    
    
    353,035
    
    
    
    348,201
    
    
    
    321,839
    
    
    
    350,087
    
    
    
    366,882Total assets
    
    
    424,380
    
    
    
    387,261
    
    
    
    357,442
    
    
    
    376,904
    
    
    
    394,310Total debt
    
    
    154,925
    
    
    
    120,484
    
    
    
    138,706
    
    
    
    170,584
    
    
    
    172,672Shareholders equity
    
    
    240,241
    
    
    
    231,934
    
    
    
    194,515
    
    
    
    184,205
    
    
    
    198,716Other Data:Cash provided by (used in):Operating activities
    
    $
    38,548
    
    
    $
    25,074
    
    
    $
    20,446
    
    
    $
    37,854
    
    
    $
    39,589Investing activities
    
    
    (61,509
    )
    
    
    (9,841
    )
    
    
    5,013
    
    
    
    (6,473
    )
    
    
    (10,231
    )Financing activities
    
    
    21,453
    
    
    
    (13,078
    )
    
    
    (24,836
    )
    
    
    (30,661
    )
    
    
    (29,219
    )Funds From Operations (3)
    
    
    35,187
    
    
    
    26,680
    
    
    
    21,840
    
    
    
    32,794
    
    
    
    37,707Funds From Operations Available to Common Shareholders (3)
    
    
    26,152
    
    
    
    19,742
    
    
    
    14,902
    
    
    
    25,856
    
    
    
    30,769
    (2) Per the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46), the Company consolidated the balance sheets of some of its joint ventures as of
December 31, 2003. The Company began consolidating the operations of the Chapel Hill joint venture
on July 1, 2003. As such, there is limited comparability between the balance sheet data for 2004,
2003 and prior years (see Note 4 to consolidated financial statements). (3) The Company reports Funds From Operations (FFO) in accordance with the definition of the
National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net income
(loss) (determined in accordance with generally accepted accounting principles, or GAAP),
excluding gains (losses) from sales of property, plus depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO
on the same basis). The Company further subtracts preferred stock dividends from FFO to calculate
FFO available to common shareholders. FFO available to common shareholders is a performance
measure used by the Company in its budgeting and forecasting models, it is discussed during Board 14




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meetings, it is considered when making decisions regarding acquisitions, sales of properties, and
other investments, and the Companys compensation committee determines executive incentive
compensation, in part, based on this measure Actual results are compared to budget and forecast on
a monthly basis. The calculation of FFO and FFO available to common shareholders may vary from
entity to entity, and as such the presentation of FFO and FFO available to common shareholders by
the Company may not be comparable to other similarly titled measures of other reporting companies.
FFO and FFO available to common shareholders are not intended to represent cash flows for the
period. FFO and FFO available to common shareholders have not been presented as an alternative to
operating income, and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP. FFO is a supplemental industry-wide measure of REIT operating performance, the definition of
which was first proposed by NAREIT in 1991 (and clarified in 1995, 1999 and 2002) in response to
perceived drawbacks associated with net income under GAAP as applied to REITs. Since the
introduction of the definition by NAREIT, the term has come to be widely used by REITs. Historical
cost accounting for real estate assets implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead have historically risen or
fallen with market conditions, most industry investors have considered presentations of operating
results for real estate companies that use historical GAAP cost accounting to be insufficient by
themselves. Accordingly, the Company believes FFO and FFO available to common shareholders
(combined with the Companys primary GAAP presentations required by the SEC) help improve our
investors ability to understand the Companys operating performance. Shown below is a
reconciliation of net income to FFO and FFO available to common shareholders. WINSTON HOTELS, INC.
Reconciliation and Calculation of FFO and FFO Available to Common Shareholders
For the years ended December 31, 2004, 2003, 2002, 2001 and 2000
(in thousands) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net income
    
    $
    16,883
    
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485
    
    
    $
    15,055Minority interest in Partnership allocation of income
    
    
    377
    
    
    
    196
    
    
    
    (430
    )
    
    
    153
    
    
    
    461(Gain) loss on sale of discontinued operations
    
    
    (16
    )
    
    
    
    
    
    
    764
    
    
    
    682
    
    
    
    850Minority interest in Partnership allocation of (gain) loss
on sale of discontinued operations
    
    
    1
    
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    Minority interest in Partnership allocation of earnings
from discontinued operations
    
    
    30
    
    
    
    46
    
    
    
    64
    
    
    
    119
    
    
    
    164Depreciation
    
    
    16,919
    
    
    
    16,778
    
    
    
    17,939
    
    
    
    18,394
    
    
    
    18,700Depreciation from discontinued operations
    
    
    492
    
    
    
    1,100
    
    
    
    1,846
    
    
    
    2,398
    
    
    
    2,393Depreciation from joint ventures
    
    
    501
    
    
    
    855
    
    
    
    801
    
    
    
    563
    
    
    
    84Funds From Operations (FFO)
    
    $
    35,187
    
    
    $
    26,680
    
    
    $
    21,840
    
    
    $
    32,794
    
    
    $
    37,707Loss on redemption of Series A Preferred Stock
    
    
    (1,720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividend
    
    
    (7,315
    )
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )FFO Available to Common Shareholders
    
    $
    26,152
    
    
    $
    19,742
    
    
    $
    14,902
    
    
    $
    25,856
    
    
    $
    30,769
 15




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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 ($ in thousands,
except per share amounts)
 Winston Hotels, Inc., (the Company) headquartered in Raleigh, North Carolina, owns hotel
properties and interests in hotel properties through joint ventures, provides loans to the hotel
industry and provides hotel development and asset management services. As of December 31, 2004,
the Company owned or was invested in, through its equity interests in joint venture entities, 52
hotel properties in 15 states having an aggregate of 7,320 rooms. This includes 45 wholly-owned
properties with an aggregate of 6,397 rooms, a 49% ownership interest in one joint venture hotel
with 118 rooms, a 48.78% ownership interest in one joint venture hotel with 147 rooms, and a 13.05%
ownership interest in five joint venture hotels with an aggregate of 658 rooms. The Company also
had issued mezzanine loans to owners of eight hotels with an aggregate of 1,573 rooms. The Company
does not hold an ownership interest in any of the hotels for which it has provided mezzanine
financing. All of the Companys hotels are operated under franchises from nationally recognized
franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental
Hotels Group PLC, (formerly Six Continents PLC) and Choice Hotels International. The Companys primary source of revenue is room revenue generated from its hotel ownership
interests. The Company also generates revenue primarily through food and beverage, telephone,
parking, and other hotel sales and interest income from hotel loans. Operating expenses consist of
the costs to provide these services as well as corporate general and administrative costs, real and
personal property taxes, property and casualty insurance costs, income taxes of our consolidated
taxable REIT subsidiary, depreciation, amortization, and other costs. The Company has significant
fixed-costs associated with owning and operating hotels, which do not necessarily decrease when
market factors cause a reduction in revenue for the property. As a result, changes in RevPAR can
result in a greater percentage change in the Companys earnings and cash flows. The Company seeks
to maximize the value of its portfolio through aggressive asset management, by directing the
managers of its hotels to reduce operating costs and increase revenues, and by completing selective
capital improvements. The Companys primary growth strategies include improving operations at the hotels in which it
holds an ownership interest, acquiring additional hotels or ownership interests in hotels through
joint ventures, developing hotels on selected sites, and providing loans to the hotel industry. Acquisition of Leasehold Interests Prior to January 1, 2001, under the REIT qualification requirements of the Internal Revenue
Code, REITs generally were required to lease their hotels to third party operators. Under the REIT
Modernization Act of 1999 (the RMA), which became effective January 1, 2001, a REIT is permitted
to lease hotels to wholly-owned taxable REIT subsidiaries of the REIT (TRS Lessees). Under the
RMA, the TRS Lessees may not operate the leased hotels and must enter into management agreements
with eligible independent contractors who manage the hotels. Effective July 1, 2002, the Company, through its wholly-owned taxable REIT subsidiary, Barclay
Hospitality Services Inc. (Barclay), acquired the leasehold interests for 47 hotels from CapStar
Winston Company, L.L.C., a wholly-owned subsidiary of MeriStar Hotels & Resorts, Inc. (MeriStar)
for total consideration of approximately $17.7 million. MeriStar has since merged with and become
Interstate Hotels & Resorts, Inc. (Interstate). During 2003, the Company assumed the leasehold
interests from Intercontinental Group for two additional hotels at no cost. In March 2004, the Company negotiated the transfer of the long-term lease with Secaucus
Holding Corporation, a wholly-owned subsidiary of Prime Hospitality Corp. (Prime) for the
Secaucus, NJ Holiday Inn to Barclay. The Company received a net payment from Prime of $269 as part
of the negotiated settlement. This amount is included in percentage lease revenue in the
accompanying consolidated statement of operations for the year ended December 31, 2004. With the
transfer of this lease to Barclay, the Company is no longer the lessor of any hotel leases with
unrelated third parties. Therefore, unless the Company enters into third party hotel leases, as
the lessor, in the future, the Company will not report percentage lease revenue in the future. As of December 31, 2004, all of the Companys wholly-owned hotels and one of its seven joint
venture hotels, the Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay. One
joint venture hotel, the Chapel Hill Courtyard by Marriott, was leased to an entity owned 48.78% by
Barclay. The remaining five joint venture hotels, the West Des Moines, IA Fairfield Inn & Suites,
the Beachwood, OH Courtyard by Marriott, the Houston, TX SpringHill Suites, the Shelton, CT
Courtyard by Marriott, and the West Des Moines, IA Quality Suites hotel, which is currently being
renovated and is expected to be converted to a SpringHill Suites by Marriott during the second
quarter of 2005, did not operate under leases. As of December 31, 2004, Alliance Hospitality Management, LLC (Alliance) managed 42 of the
Companys 52 hotels, Concord Hospitality Enterprises Company (Concord) managed four hotels,
Promus Hotels, Inc., an affiliate of Hilton Hotels 16




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Corporation (Hilton) managed three hotels, and
New Castle Hotels, LLC (New Castle), Prism Hospitality, L.P. (Prism) and Noble Investment
Group, Ltd. (Noble) each managed one hotel. The acquisition of the leasehold interests entitles Barclay to retain the operating profits or
losses from the related hotels, which previously accrued to unrelated third party lessees under the
leases and gives the Company (i) more control over the operations of these hotels, (ii) the
benefits from any operating margin improvements and risk of any operating margin deterioration at
these hotels, and (iii) more flexibility, in that these hotels are no longer encumbered by long
term leases with unrelated third parties that are difficult to amend and expensive to terminate.
All of the hotels continue to operate under the same franchise affiliations as prior to the
acquisition of the leasehold interests. Off-Balance Sheet Arrangements The Companys off-balance sheet arrangements consist primarily of its ownership interest in
its joint venture with Charlesbank. For a further discussion of this joint venture, and its effect
on the Companys financial condition, results of operations and cash flow, see Critical Accounting
Estimates, Recently Issued Accounting Standards and Liquidity and Capital Resources. Critical Accounting Estimates The Companys discussion and analysis of its financial condition and results of operations are
based upon its consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires the Companys management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. The Company believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its consolidated financial statements. Accounts and Notes Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its hotel guests, mezzanine loan borrowers, and other borrowers to make required
payments. The Company reviews its accounts receivable aging report on a monthly basis and
discusses the status of receivable collections with appropriate hotel personnel to determine if
additional allowances are necessary. To analyze the collectibility of the notes receivable, the
Company reviews the monthly operating results of each respective hotel for which it has provided
financing to ensure the borrowers equity is not being eroded. The Company also analyzes the
operating results of the hotel to ensure that the estimated market value exceeds the total debt
outstanding on the property. If the financial results of the respective hotels were to
deteriorate, additional allowances may be required. Accounting for Joint Ventures As of December 31, 2004, the Company had a 15% ownership interest in its Charlesbank joint
venture, (which in turn owned an 87% ownership interest in its WCC Project Company LLC joint
venture and its WNC Project Company LLC joint venture), a 49% ownership interest in its Marsh
Landing joint venture, and a 48.78% interest in its Chapel Hill joint venture. The WCC Project
Company LLC joint venture owned four hotels, the WNC Project Company LLC joint venture owned one
hotel, the Marsh Landing joint venture owned one hotel, and the Chapel Hill joint venture owned one
hotel. Per the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), as of December 31, 2004 and 2003, the Company determined that the Charlesbank
joint venture did not have to be consolidated. The Company accounts for this joint venture under
the equity method in accordance with Statement of Position 78-9, Accounting for Investments in
Real Estate Ventures. The Company recognized its share of net income or loss from this joint
venture during 2004 and 2003 and adjusted the carrying value of its investment accordingly.
Accordingly, the joint ventures assets, liabilities, and equity are not recorded on the Companys
balance sheet as of December 31, 2004 and 2003. The Company determined that the Marsh Landing joint venture is considered to be a variable
interest entity (VIE) and the Company is considered to be the primary beneficiary. Therefore,
per the provisions of FIN 46, the Company has consolidated the assets and liabilities of this joint
venture into its Consolidated Balance Sheet as of December 31, 2004 and 2003, and has consolidated
the results of operations beginning with the first quarter of 2004. The Chapel Hill joint venture
was created in August 2003 and is also considered to be a VIE and the Company is considered to be
the primary beneficiary. Therefore, per FIN 46, the Company has consolidated the joint ventures
assets, liabilities, and results of operations beginning with the third quarter 2003. 17




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##### 



Accounting for Long-Lived Assets The Company evaluates the potential impairment of its individual long-lived assets,
principally its wholly-owned hotel properties and the hotel properties in which it owns an interest
through consolidated joint ventures in accordance with FASB No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets. The Company records an impairment charge when it believes an
investment in hotels has been impaired, such that the Companys estimate of future undiscounted
cash flows, together with its estimate of an anticipated liquidation amount, would not recover the
then current carrying value of the investment in the hotel property, or
when the Company classifies a property as held for sale and the carrying value exceeds fair
market value. The Company considers many factors and makes certain subjective assumptions when
making this assessment, including but not limited to, general market and economic conditions,
operating results over the past several years, the performance of similar properties in the same
market and expected future operating results based on a variety of assumptions. Future adverse
changes in market conditions or poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of the investments, thereby possibly requiring
an impairment charge in the future. In addition, if the Companys assumptions regarding future
undiscounted cash flows and anticipated liquidation amounts are incorrect, a future impairment
charge may be required. Further, the Company currently owns certain hotels for which the carrying
value exceeds current market value. The Company does not believe an impairment charge for these
hotels is appropriate since the Companys forecast of future undiscounted cash flows, including an
anticipated liquidation amount, exceeds the current carrying value. However, should the Company
approve of a plan to sell these properties, an impairment charge would be required. The Company evaluates its investments in joint ventures for impairment by considering a number
of factors including assessing current fair value of the investment to carrying value. If the
current fair value of the investment is less than the carrying value, and there is either an
absence of an ability to recover the carrying value of the investment, or the property does not
appear to have the ability to sustain an earnings capacity that would justify the carrying amount
of the investment, am impairment charge may be required. Income Taxes The Company records a valuation allowance to reduce the deferred tax assets to an amount that
it believes is more likely than not to be realized. Because of expected future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance, the Company has not recorded a valuation allowance to reduce its deferred tax asset as
of December 31, 2004. Should our estimate of future taxable income be less than expected, and/or
our tax planning strategy not be carried out as planned, we would record an adjustment to the
deferred tax asset in the period such determination was made. Results of Operations Due primarily to the acquisition of the leasehold interests for 47 hotels from Interstate on
July 1, 2002, the assumption of the leasehold interests for two hotels from Intercontinental Group
on July 1, 2003, and the acquisition of the leasehold interest for one hotel from Prime Hospitality
Corp. in March 2004, the results of operations for the years ended December 31, 2004, 2003, and
2002 do not result in a meaningful comparison. This is due primarily to recording the operating
results of the hotels, for which the leasehold interests were acquired, on the Companys statements
of operations beginning in the third quarter of 2002. Accordingly, the Company has supplemented
the comparison between years with pro forma information to offer a more meaningful comparison. The tables below outline the Companys wholly-owned and joint venture hotel properties as of
December 31, 2004, 2003 and 2002. During 2004, the Company acquired one wholly-owned hotel,
acquired its joint venture partners ownership in two joint ventures, and sold two wholly-owned
hotels. The Company acquired ownership interests through joint ventures in three hotel properties
during 2004, one hotel property during 2003, and two hotel properties during 2002. 18




---



##### 



WHOLLY-OWNED HOTELS: 2004
    
    
    2003
    
    
    2002Hotels (sold)
    
    
    
    
    
    
    Hotels (sold)
    
    
    
    
    
    
    Hotels (sold)acquired
    
    
    Properties
    
    
    acquired
    
    
    Properties
    
    
    acquired
    
    
    Propertiesduring the
    
    
    owned at year
    
    
    during the
    
    
    owned at year
    
    
    during the
    
    
    owned at yearyear
    
    
    end
    
    
    year
    
    
    end
    
    
    year
    
    
    endType of HotelLimited-service hotels (2)
    
    
    (2
    )
    
    
    21
    
    
    
    
    
    
    
    23
    
    
    
    (4
    )
    
    
    23Extended-stay hotels (3)
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Full-service hotels (4)
    
    
    3
    
    
    
    14
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Total
    
    
    1
    
    
    
    45
    
    
    
    
    
    
    
    44
    
    
    
    (4
    )
    
    
    44
 JOINT VENTURE HOTELS: 2004
    
    
    2003
    
    
    2002Hotels (sold)
    
    
    
    
    
    
    Hotels (sold)
    
    
    
    
    
    
    Hotels (sold)acquired
    
    
    Properties
    
    
    acquired
    
    
    Properties
    
    
    acquired
    
    
    Propertiesduring the
    
    
    owned at year
    
    
    during the
    
    
    owned at year
    
    
    during the
    
    
    owned at yearyear (1)
    
    
    end
    
    
    year
    
    
    end
    
    
    year
    
    
    endType of HotelLimited-service hotels (2)
    
    
    1
    
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    2Extended-stay hotels (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full-service hotels (4)
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    1
    
    
    
    3Total
    
    
    1
    
    
    
    7
    
    
    
    1
    
    
    
    6
    
    
    
    2
    
    
    
    5
   (1)
    
    During 2004 the Company acquired ownership interests in three joint venture hotel
properties. The Company also purchased its joint venture partners ownership interest in two
other hotel properties, thereby acquiring 100% ownership of these hotels. These two
properties are included in the 2004 hotels acquired in the wholly-owned hotels table above and
reduce the number of hotels acquired in the joint venture hotels table above.(2)
    
    Limited-service hotels are typically hotels with rooms-only operations, (i.e. without food and
beverage service).(3)
    
    Extended-stay hotels are comprised of properties that focus on attracting hotel guest for
extended periods of time. These properties quote weekly rates, and their typical guest may
stay 4-7 nights.(4)
    
    Full-service hotels are generally mid-price, upscale hotels with a restaurant, lounge
facilities and meeting space. These hotels report food and beverage revenue. Actual Results  Years Ended December 31, 2004, 2003 and 2002 Revenue Rooms, Food and Beverage and Other Operating Departments Revenue The increase in hotel
revenues from 2002 to 2003 is a result of the acquisition of the leasehold interests from
Interstate and Intercontinental Group. The operating results of the hotels, for which the
leasehold interests were acquired, are reflected on the Companys consolidated statements of
operations beginning July 1, 2002. The increase in hotel revenues from 2003 to 2004 is due, in
part, to the acquisition of the leasehold interest for one hotel from Prime Hospitality Corp.
(Prime) in March 2004, plus the acquisition of our joint venture partners ownership interests in 19




---



##### 



another hotel in March 2004. The increase is also a result of increases in both occupancy and
average daily rates. Occupancy increased 3.5% to 68.6% and average daily rate increased 3.4% to
$81.44 during 2004. Percentage Lease Revenue Percentage lease revenue declined from 2002 to 2003 and from 2003
to 2004 due to the acquisition of the leasehold interests from Interstate on July 1, 2002, the
assumption of the leasehold interests for two hotels from Intercontinental Group on July 1, 2003,
and the acquisition of the leasehold interest for one hotel from Prime Hospitality Corp. in March
2004. The Company sold the Las Vegas, NV Hampton Inn during 2004, one of the hotels for which the
lease was assumed from Intercontinental Group during 2003. Therefore, 2002 includes twelve months
of percentage lease revenue for the Secaucus, NJ
Holiday Inn and only six months of percentage lease revenue for all hotels for which the
leasehold interest were acquired in July 2002. The year ended December 31, 2003 includes twelve
months of percentage lease revenue for the Secaucus, NJ, Holiday Inn and the year ended December
31, 2004 includes three months of percentage lease revenue for the Secaucus, NJ Holiday Inn. The
Company is no longer the lessor of any hotel leases with unrelated third parties, thus will no
longer report percentage lease revenue. Interest and Other IncomeInterest and other income increased from 2002 to 2003 and from 2003
to 2004. These increases were driven primarily by interest income earned on our hotel loans. The
Company plans to continue to expand its hotel lending business in the future. Expenses Rooms, Food and Beverage, Other Operating Departments Expenses The increase in these hotel
expenses from 2002 to 2003 is a result of the acquisition of the leasehold interests from
Interstate and Intercontinental Group. The operating results of the hotels, for which the
leasehold interests were acquired, are reflected on the Companys consolidated statements of
operations beginning July 1, 2002. The increase in these hotel expenses from 2003 to 2004 is due,
in part, to the acquisition of the leasehold interest for one hotel from Prime plus the acquisition
of our joint venture partners ownership interests in another hotel. The increase is also a result
of increases in various operating expenses consistent with the increase in occupancy. Property Operating Costs, Franchise Costs, Maintenance and Repair Costs and Management Fees
The increase in these hotel expenses from 2002 to 2003 is a result of the acquisition of the
leasehold interests from Interstate and Intercontinental Group. The operating results of the 47
hotels, for which the leasehold interests were acquired, are reflected on the Companys
consolidated statements of operations beginning July 1, 2002. The increase in these hotel expenses
from 2003 to 2004 is due, in part, to the acquisition of the leasehold interest for one hotel from
Prime plus the acquisition of our joint venture partners ownership interests in another hotel.
The increase in property operating costs and maintenance and repair costs are also due to increases
in labor costs, utilities, printing, telecommunications, landscaping and other various costs
consistent with the increase in occupancy. The increases in franchise costs and management fees
are due to the related increases in revenues. Real Estate Taxes and Property and Casualty Insurance Real estate taxes and property
insurance costs decreased from 2002 to 2003 and increased from 2003 to 2004. The decrease from
2002 to 2003 is due to a decrease in property taxes due to successful tax appeals and downward
property valuation trends associated with lower revenues, and a decrease in ground rent expense as
a result of lower room revenues at the corresponding hotel, offset by an increase in insurance
premiums. The increase from 2003 to 2004 is due primarily to the consolidation of the operating
results of the certain joint ventures beginning January 1, 2004, offset by a decrease in insurance
premiums. Percentage Lease Expense Beginning July 1, 2002, this expense represented the lease expense
Barclay, as lessee, paid to third party owners of two joint venture hotels, including the Evanston,
IL Hilton Garden Inn and the Ponte Vedra, FL Hampton Inn. Beginning January 1, 2004, the operating
results of these two joint ventures have been consolidated thereby eliminating this expense. General and Administrative General and administrative expense increased from 2002 to 2003
and from 2003 to 2004. The increases in 2003 and 2004 were primarily attributable to increases in
legal, accounting and other professional fees, and payroll costs. The increases in legal fees were
primarily attributable to activity related to the Companys efforts to buy and sell hotels as well
as issue loans to the hotel industry. The increase in accounting and other professional fees is
due, in part, to additional costs of complying with the Sarbanes-Oxley Act of 2002. Depreciation and Amortization Depreciation expense decreased from 2002 to 2003 and increased
from 2003 to 2004. The decrease in depreciation expense from 2002 to 2003 was due to the amount of
assets exceeding their useful life of five years outpacing new additions. The increase from 2003
to 2004 is due primarily to the consolidation of the operating results of certain joint ventures
beginning January 1, 2004. Amortization expense increased from 2002 to 2003 and again from 2003 to
2004 due to the capitalization of financing costs in 2003 to amend the Companys $125 million line
of credit and in 2004 to establish a $50 million master repurchase agreement with Marathon
Stuctured Finance Fund, LP. (See Note 7 to Notes to Consolidated Financial Statements). 20




---



##### 



Interest Interest expense decreased from 2002 to 2003 and from 2003 to 2004. The decrease
from 2002 to 2003 was due to a decline in weighted average interest rates, from 6.85% in 2002 to
5.55% in 2003, as well as a decline in the weighted average outstanding debt balance from $152,879
in 2002 to $130,807 in 2003. Weighted average interest rates increased from 5.55% in 2003 to 6.04%
in 2004 and the weighted average outstanding debt balance continued to decline to $103,439. The
weighted average outstanding debt balance decreased primarily due to the sale of 3.162 million
shares of common stock in March and April 2002, and the sale of 6.038 million shares of common
stock in September and October of 2003. The Company used the net cash proceeds totaling $26,900
and $50,500, respectively, to repay the then outstanding debt balance. Income/(loss)Allocation to Minority Interest in Consolidated Joint Ventures Income/(loss)
allocation to minority interest in consolidated joint ventures increased from 2003 to 2004, due to
the Companys adoption of FIN 46 and the resulting consolidation of
the operations of certain joint ventures beginning in the first quarter of 2004. (See Note 4
to Notes to Consolidated Financial Statements). Income Tax Benefit The income tax benefit for 2003 and 2004 was a result of the net loss
experienced by Barclay during 2003 and 2004. The income tax benefit for 2002 was primarily the
result of the cost of acquiring the leases from Interstate, which was expensed for financial
reporting purposes and is being amortized over the lives of the leases for tax purposes, as well as
the net loss experienced by Barclay during 2002. Equity in Income of Unconsolidated Joint Ventures Equity in income of unconsolidated joint
ventures increased from 2002 to 2003. The increase from 2002 to 2003 is due to an increase in
earnings from the Evanston and Marsh Landing joint ventures related to improved hotel operations,
an increase in earnings from the Charlesbank joint venture due to the addition of two hotels in
2003, offset by a decline in earnings from the Windsor joint venture due to diminishing operations
and acquisition of the lease for that hotel in July 2003. The Windsor joint venture assumed the
lease of the Windsor Hilton Garden Inn hotel on July 1, 2003 at no cost. Equity in income of
unconsolidated joint ventures decreased from 2003 to 2004, due to the Companys adoption of FIN 46,
and the resulting consolidation of the operations of the Evanston, Marsh Landing and Windsor joint
ventures beginning in the first quarter of 2004. The Company will continue to account for the
Charlesbank Joint Venture as an unconsolidated joint venture under the equity method of accounting.
(See Note 4 to Notes to Consolidated Financial Statements). Discontinued Operations During 2004, the Company classified the Chester, VA Comfort Inn as
held for sale, sold the Wilmington, NC Hampton Inn in February 2004, and sold the Las Vegas, NV
Hampton Inn in June 2004. During 2003, the Company classified the Greenville, SC Comfort Inn as
held for sale. The Company sold the Clearwater, FL Comfort Inn in May 2002, the Southern Pines,
NC Hampton Inn in August 2002, the Augusta, GA Comfort Inn in November 2002 and the Chester, VA
Hampton Inn in December 2002. The aggregate net loss on these sales, the loss on impairment of the
assets held for sale and the operating results of all of these properties are shown as discontinued
operations for all periods presented. (See Note 15 to Notes to Consolidated Financial Statements) Lease/Management Agreement Acquisition- Effective July 1, 2003, the Company, through Barclay,
terminated its management agreements with Interstate Management & Investment Company (IMIC) by
paying a termination fee of $1,300, which was expensed in the third quarter of 2003. Also, as
discussed above, effective July 1, 2002, the Company, through Barclay, acquired the leasehold
interests for 47 of its hotels from Interstate. The total consideration of approximately $19,500,
as determined by the Leasehold Acquisition Agreement, was based upon a $17,000 purchase price for
the leasehold interests, adjusted in part for accrued interest and related expenses totaling $668,
and approximately $1,800 of working capital. The cost of the acquisition of the leasehold
interests, including accrued interest and related expenses, but excluding the working capital
acquired totaled $17,668. This cost represents the cancellation of an executory contract and was
expensed in the second quarter of 2002. In addition, a deferred tax benefit of $6,714 was
recognized in the second quarter of 2002 resulting from the timing difference of the $17,668
payment for financial reporting purposes versus tax purposes. The net effect of this transaction
is a reduction in net income of $10,954, the primary reason for the increase in net income from
2002 to 2003. Due primarily to the acquisition of the leasehold interests from Interstate on July 1, 2002,
the assumption of the leasehold interests for two hotels from Intercontinental Group on July 1,
2003, and the acquisition of the leasehold interest for one hotel from Prime in March 2004, the
results of operations for the year ended December 31, 2004 versus the results of operations for the
year ended December 31, 2003, and the results of operations for the year ended December 31, 2003
versus the results of operations for the year ended December 31, 2002, do not result in meaningful
comparisons. This is due primarily to recording the operating results of the hotels, for which the
leasehold interests were acquired, on the Companys statements of operations beginning in the third
quarter of 2002. Therefore, in an effort to make a more meaningful comparison between periods, in
addition to the comparison of actual results of operations for the years ended December 31, 2004,
2003 and 2002, shown below is selected pro forma financial information on a same store basis for
the years ended December 31, 2004, 2003 and 2002, as if the acquisition of the leasehold interests
from Interstate, Intercontinental Group and Prime occurred on January 1, 2002. This information is
shown for the hotels that were open for the entire periods presented and does not include
discontinued operations. The pro forma adjustments include the elimination of the transaction to
acquire the leasehold interests from Interstate and the percentage lease revenue applicable to the
45 wholly-owned 21




---



##### 



hotels for which the leasehold interests were acquired, as well as adjustments to
undistributed property operating expenses to remove management company corporate costs, an
adjustment to remove the one-time expense to acquire management agreements during 2003, and to make
adjustments to management fees to reflect the fee structure per the new management agreements.
Other pro forma adjustments include the removal of two hotels from 2004, one that opened in
September and one that was purchased in December, the addition of one hotel for which the leasehold
interest was purchased in March 2004, and the addition of one hotel that was consolidated beginning
January 1, 2004. The unaudited pro forma financial information does not purport to be indicative
of what the actual results of operations of the Company would have been had the transaction
occurred on the basis assumed above nor are they indicative of results of future operations. The
unaudited pro forma financial information is based upon available information and upon assumptions
and estimates that management believes are reasonable under the circumstances. Selected Unaudited Pro Forma Financial Information  Year Ended December 31, 2004, 2003 and 2002
(in thousands) For purposes of this pro forma disclosure, all years shown include the 42 wholly-owned hotels
that were owned during each of the years, plus one hotel owned by a joint venture (the Ponte Vedra,
FL Hampton Inn, owned by the Marsh Landing joint venture), for which Barclay was the lessee on
December 31, 2004 as a result of the acquisition of the leases from Interstate, Intercontinental
Group, and Prime. This disclosure does not include three wholly-owned hotels as of December 31,
2004, the Roanoke, VA Courtyard by Marriott, the Greenville, SC Comfort Inn and the Chester, VA
Comfort Inn. The Roanoke Courtyard by Marriott was purchased in December 2004 and the Greenville
and Chester Comfort Inns were classified as held for sale as of December 31, 2004. 2004
    
    
    2003
    
    
    2002Revenue:Rooms
    
    $
    124,261
    
    
    $
    116,652
    
    
    $
    118,276Other hotel revenue
    
    
    13,139
    
    
    
    12,866
    
    
    
    14,021Interest and other income
    
    
    181
    
    
    
    227
    
    
    
    142Total revenue
    
    
    137,581
    
    
    
    129,745
    
    
    
    132,439Hotel operating expenses:Rooms
    
    
    28,238
    
    
    
    27,371
    
    
    
    27,038Other hotel operating expenses
    
    
    9,706
    
    
    
    9,701
    
    
    
    10,011Undistributed operating expenses:Property operating costs
    
    
    28,316
    
    
    
    26,052
    
    
    
    25,192Real estate taxes and property and casualty insurance
    
    
    6,517
    
    
    
    6,809
    
    
    
    6,942Other operating costs
    
    
    19,537
    
    
    
    17,934
    
    
    
    18,062Depreciation and amortization
    
    
    18,883
    
    
    
    19,214
    
    
    
    20,118General and administrative
    
    
    6,858
    
    
    
    5,924
    
    
    
    4,842Total expenses
    
    
    118,055
    
    
    
    113,005
    
    
    
    112,205Pro forma operating income
    
    $
    19,526
    
    
    $
    16,740
    
    
    $
    20,234
 22




---



##### 



To help understand the differences between the pro forma information shown above, and the
actual operating results of the Company, shown below is a reconciliation of the pro forma operating
income to the actual operating income: 2004
    
    
    2003
    
    
    2002Pro forma operating income
    
    $
    19,526
    
    
    $
    16,740
    
    
    $
    20,234Rooms revenue
    
    
    201
    
    
    
    (7,841
    )
    
    
    (65,216
    )Other hotel revenue
    
    
    (41
    )
    
    
    (1,573
    )
    
    
    (7,841
    )Joint venture fee income
    
    
    
    
    
    
    131
    
    
    
    128Percentage lease revenue
    
    
    701
    
    
    
    2,141
    
    
    
    27,590Rooms expenses
    
    
    19
    
    
    
    1,932
    
    
    
    14,513Other hotel operating expenses
    
    
    25
    
    
    
    1,371
    
    
    
    5,650Property operating costs
    
    
    52
    
    
    
    2,175
    
    
    
    13,496Real estate taxes and property and casualty insurance
    
    
    (15
    )
    
    
    854
    
    
    
    890Other operating costs
    
    
    (25
    )
    
    
    1,020
    
    
    
    9,060Percentage lease expense
    
    
    
    
    
    
    (4,610
    )
    
    
    (1,211
    )Depreciation and amortization
    
    
    (206
    )
    
    
    1,455
    
    
    
    1,351Lease/management agreement acquisition
    
    
    
    
    
    
    (1,300
    )
    
    
    (17,668
    )Actual operating income
    
    $
    20,237
    
    
    $
    12,495
    
    
    $
    976
 Pro Forma Revenue Room Revenue Room revenue decreased from 2002 to 2003. We believe this was primarily
attributable to a weak economy, as well as the addition of new competing hotels in certain of our
markets, which resulted in revenue per available room (RevPAR) decreasing 1.8% from $53.70 in
2002 to $52.75 in 2003. Average daily rate for the year declined 2.6% from $81.71 in 2002 to
$79.58 in 2003. Occupancy rates increased slightly from 65.7% in 2002 to 66.3% in 2003. Room
revenue increased from 2003 to 2004. We believe this was primarily attributable to a stronger
economy. RevPAR increased 6.0% from $52.75 in 2003 to $55.94 in 2004. Average daily rate for the
year increased 2.4% from $79.58 in 2003 to $81.46 in 2004. Occupancy rates increased 3.6% from
66.3% in 2003 to 68.7% in 2004. Other Hotel Revenue Other hotel revenue consists of food and beverage revenue and other
operating departments revenue. Other hotel revenue declined from 2002 to 2003. This decrease is
primarily due to a decline in food and beverage revenue consistent with the decline in room revenue
as well as the continuing trend of declining telephone revenue as hotel customers rely increasingly
more on their own mobile phones and calling cards for telecommunications. Other hotel revenue
increased from 2003 to 2004. This increase is due to increases in food and beverage revenue due to
increased occupancy, offset by the continuing trend of declining telephone revenue as hotel
customers rely increasingly more on their own mobile phones and calling cards for
telecommunications. Pro Forma Expenses As a percentage of total hotel revenue, hotel operating expenses totaled 60.7% in 2002, 62.6%
in 2003, and 62.4% in 2004. Total hotel revenue includes rooms and other hotel revenue. Hotel
operating expenses include rooms and other operating expenses, as well as undistributed property
operating costs and undistributed other operating costs. Rooms and Other Hotel Operating Expenses Rooms and other hotel operating expenses increased
from 2002 to 2003 and from 2003 to 2004. The increase from 2002 to 2003 was driven primarily by an
increase in payroll costs in the rooms department. The increase from 2003 to 2004 was driven
primarily by an increase in the food department payroll costs and increases in travel agent
commissions and complimentary food and beverage costs, offset by a decrease in payroll costs in the
rooms department. Undistributed Property Operating Expenses Undistributed property operating expenses consist
of general and administrative, sales and marketing, energy, repairs and maintenance, franchise
fees, management fees and other costs. These costs are collectively shown as property operating
costs and other operating costs in the tables above. Undistributed property operating expenses
increased from 2002 to 2003 and from 2003 to 2004. The increase from 2002 to 2003 was primarily
comprised of an increase in repairs and maintenance due to higher payroll costs, an increase in
utility costs and an increase in general liability insurance premiums. The increase from 2003 to
2004 was primarily comprised of an increase in administrative and general payroll costs and various
operating expenses consistent with the increase in occupancy, an increase in sales and marketing
payroll costs, an increase in franchise fees and management fees consistent with the increase in
revenues, an increase in utility costs, an 23




---



##### 



increase in general liability insurance premiums and an
increase in repairs and maintenance operating expenses consistent with the increase in occupancy. See Actual Results  Years Ended December 31, 2004, 2003, and 2002 for explanations of
changes in pro forma balances for the line items not explained in the pro forma discussion above. Liquidity and Capital Resources The Company finances its operations from operating cash flow, which, during 2004, was
principally derived from the net operating cash flows from the operations of its hotels. For the
year ended December 31, 2004 and 2003, cash flow provided by
operating activities was $38,548 and $25,074, respectively. The increase in cash flow
provided by operations is primarily due to an increase in net income. Under federal income tax law provisions applicable to REITs, the Company is required to
distribute at least 90% of its taxable income to maintain its tax status as a REIT. In 2004, the
Company declared total distributions of $23,916, $16,601 to its common shareholders and $7,315 to
its preferred shareholders. As shown in the table below, based on the Companys 2004 taxable
income, the Company was required to distribute approximately $20,428 to maintain its REIT status. GAAP net income
    
    $
    16,883Plus GAAP net loss on taxable subsidiary
included above
    
    
    3,801GAAP net income from REIT operations
    
    
    20,684Book / tax differences on depreciation and amortization
    
    
    928Book / tax differences on loss on impairment of asset held for sale
    
    
    461Other book / tax differences, net
    
    
    625Taxable income subject to distribution requirement
    
    
    22,698Distribution requirement
    
    
    90
    %Taxable income required to be distributed
    
    $
    20,428
 The Company declared a quarterly common share dividend of $0.15 per share for each quarter
during 2004. The Company intends to monitor its dividend policy closely and to act accordingly as
earnings dictate. The Company intends to fund cash distributions to shareholders out of cash flow
from operating activities. The Company may incur indebtedness to meet its dividend policy or the
distribution requirements imposed on the Company under the Internal Revenue Code (including the
requirement that a REIT distribute to its shareholders annually at least 90% of its taxable income)
to the extent that available capital and cash flow from the Companys investments are insufficient
to make such distributions. In February 2004, the Company completed a public offering of 3,680,000 shares of its 8.00%
Series B Cumulative Preferred Stock. The net proceeds raised in the offering totaled approximately
$88.8 million, approximately $76.1 million of which was used to fully redeem the Companys then
outstanding 3,000,000 shares of 9.25% Series A Cumulative Preferred Stock plus accrued dividends.
The Company used the remaining net proceeds of approximately $12.7 million to pay down its then
outstanding balance under its $125 million line of credit. The Companys net cash used in investing activities during the year ended December 31, 2004
totaled $61,509. Additional investments in the Companys consolidated hotels totaled $36,802.
This amount included capital expenditures of $23,924, including the acquisition of one wholly-owned
hotel totaling $12,048 and additional capital improvements to wholly-owned hotels totaling $11,876.
Investment in the Companys consolidated hotels also included $12,878 for the Companys
consolidated joint venture hotels, $8,860 of which was for the development of the Courtyard by
Marriott hotel in Chapel Hill, NC, which opened in September 2004, $3,962 of which was for the
development of the Courtyard by Marriott hotel in Kansas City, MO, and $56 of which was for
additional capital expenditures for the Ponte Vedra, FL Hampton Inn that is owned by the Marsh
Landing joint venture. During the first quarter of 2004, the Company purchased its joint venture
partners ownership interest in both the Evanston and Windsor joint ventures. The total purchase
price of $8,163 exceeded the joint venture partners combined equity balance of $6,315. This
additional purchase price was recorded as a capital addition during the first quarter of 2004. During 2003, the Companys Board of Directors authorized management of the Company to sell the
Greenville, SC Comfort Inn, which is classified as held for sale on the Companys Consolidated
Balance Sheet as of December 31, 2004 and 2003 in 24




---



##### 



accordance with FASB No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. During 2004, the Company entered into a contract to
sell the Chester, VA Comfort Inn and the hotel is classified as held for sale on the Companys
Consolidated Balance Sheet as of December 31, 2004. During the first quarter of 2005, both the
Greenville, SC Comfort Inn and Chester, VA Comfort Inn were sold. The Company sold two hotels
during 2004, including the Wilmington, NC Hampton Inn in February and the Las Vegas, NV Hampton Inn
in June. The total net proceeds were $10,533. Periodically, the Company considers the sale of
certain other hotels that lie outside the Companys mid-scale without food and beverage and
upscale segment focus and plans to use the proceeds to reduce debt, invest in hotel properties,
or provide hotel loans. Hotel Loans As of December 31, 2004, the Company had issued eight loans totaling approximately $30.8
million to third party hotel owners. The Company issued five of these loans totaling $25.8 million
during 2004. The Company plans to continue to expand its hotel lending business in the future.
For more information on these loans, as well as loans issued prior to 2004 and outstanding as of
December 31, 2004, see Note 5 to Notes to Consolidated Financial Statements. Acquisitions In December 2004, the Company acquired the Courtyard by Marriott hotel in Roanoke, VA for
$12.1 million. Also in December 2004, the Company acquired an historic residential building in
Kansas City, MO for $3.1 million. The property will undergo extensive renovations and is expected
to be converted to a Courtyard by Marriott hotel in the second quarter of 2006, with an expected
total cost of $16.7 million, net of tax credits totaling $7.7 million. Joint Ventures The Company currently has investments in four joint ventures:  
    The Company owns 49% of the Marsh Landing joint venture that owns the 118-room Hampton Inn in Ponte Vedra, FL.
    The Company owns an indirect 13.05% interest in the WCC Project Company LLC joint venture
that owns four hotels, the 102-room Fairfield Inn & Suites in West Des Moines, IA, the
113-room Courtyard by Marriott in Beachwood, OH, the 190-room SpringHill Suites by Marriott
in Houston, TX, and the 95-room Quality Suites in West Des Moines, IA that is in the process
of being renovated and is expected to be converted to a SpringHill Suites by Marriott during
the second quarter of 2005.
    The Company owns an indirect 13.05% interest in the WNC Project Company LLC joint venture
that owns one hotel, the 158-room Courtyard by Marriott in Shelton, CT that was converted
from a Ramada Plaza Hotel during the first quarter of 2005.
    The Company owns 48.78% of the Chapel Hill joint venture that owns a 147-room Courtyard by
Marriott in Chapel Hill, NC that opened in September of 2004. The Company has consolidated the results of operations of the Marsh Landing and Chapel Hill
joint ventures for the year ended December 31, 2004, while the results of operations of the WCC
Project Company and WNC Project Company joint ventures were not consolidated. See Notes 3 and 4 in
Notes to Consolidated Financial Statements for more information. During 2004, the Company received cash distributions from its unconsolidated joint ventures
totaling $126. Under the terms of the joint venture agreements, the Company has provided property
development and purchasing services and will continue to provide ongoing asset management services
for additional fee income. Under the terms of the operating agreement for each joint venture, the
Company and its joint venture partner must approve all major decisions, including refinancing or
selling the respective hotels, making loans, changes in partners interests, entering into material
contracts, acquiring assets, and approving all operating and capital expenditure budgets. In accordance with the provisions of FASB Interpretation No. 46 (FIN 46) Consolidation of
Variable Interest Entities, during the third quarter of 2003 the Company consolidated the balance
sheet and operations of its Chapel Hill Joint Venture. As of December 31, 2003, the Company also
consolidated the balance sheets of the Evanston Joint Venture, the Windsor Joint Venture and the
Marsh Landing Joint Venture. The operations of these joint ventures were consolidated beginning
with the first quarter of 2004. During 2004, the Company acquired its joint venture partners
interest in both the Evanston Joint Venture and the Windsor Joint Venture, resulting in the Company
owning 100% of both the Evanton Hilton Garden Inn and the Windsor Hilton Garden Inn. As of
December 31, 2004, the total assets of the consolidated joint ventures, including the Chapel Hill
and Marsh Landing Joint Ventures, were $20,750, total liabilities were $15,081 ($14,388 of which
represented long-term debt), and total equity was $5,669. For the years ended December 31, 2004
and 2003, the total revenue of the consolidated joint ventures (including the Chapel Hill, Marsh
Landing, 25




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Evanston, and Windsor joint ventures) was $2,712 and $8,662, and total expenses were
$2,414 and $6,329, resulting in net income of $298 and $2,333, respectively. During the year
ended December 31, 2004, the financial statements of the consolidated joint ventures (including the
Chapel Hill, Marsh Landing, Evanston, and Windsor joint ventures) reflected aggregate cash flow
provided by operating activities of $1,236, cash used in investing activities of $9,498,
principally for hotel additions, and cash provided by financing activities of $6,388, principally
in the form of loan proceeds and capital contributions less distributions to joint venture
partners. As of December 31, 2004, the total assets of the unconsolidated joint ventures (which
consisted of the WCC Project Company and WNC Project Company joint ventures) were $50,528, total
liabilities were $34,071 ($30,768 of which represented long-term debt), and total equity was
$16,457. The Companys share of the total assets, liabilities, long-term debt and equity of these
unconsolidated joint ventures equated to $6,595, $4,448, $4,015 and $2,147, respectively. For the
years ended December 31, 2004 and 2003, the total revenue of all of the unconsolidated joint
ventures was $11,198 and $4,615, and total expenses were $11,519 and $4,508, resulting in net
income (loss) of ($321) and $107, respectively. During the year ended December 31, 2004, the
unaudited financial statements of the unconsolidated joint ventures reflected aggregate cash flow
provided by operating activities of $3,091, cash used in investing activities of $23,823,
principally for hotel additions, and cash provided by financing activities of $23,657, principally
in the form of loan proceeds and capital contributions less distributions to joint venture
partners. During 2004, the Company spent $11,876 or 9.2% of room revenue, in connection with the
renovation of its wholly-owned hotels and plans to spend approximately $13,400 during 2005.
Approximately $5,600 of the total capital expenditures expected to be made during 2005 is related
to certain franchisor requirements. These capital expenditures are funded from operating cash
flow, and possibly from borrowings under the Companys $155,000 line of credit with GECC (the  GE
Line), sources that are expected to be adequate to fund such capital requirements. These capital
expenditures are in addition to amounts spent on normal repairs and maintenance, which were
approximately 6.0% and 6.1% of room revenues in 2004 and 2003, respectively. The Companys net cash provided by financing activities during the year ended December 31,
2004 totaled $21,453. This amount included net proceeds of $88,794 as a result of the issuance of
3,680,000 shares of Series B Preferred Stock, of which the Company used $75,000 to redeem the
3,000,000 shares of Series A Preferred stock and $1,059 to pay the accrued dividends. The net cash
provided by financing activities also included the payment of additional distributions to
shareholders of $21,954, the payment of distributions to the Partnerships minority interest of
$779, the payment of distributions to consolidated joint ventures minority interest of $859, net
long-term debt payments of $3,209, the payment of $2,131 of fees in connection with financing
facilities and a net increase of $37,650 in the outstanding balance under the corporate line of
credit from $29,200 at December 31, 2003 to $66,850 at December 31, 2004. During each quarter of 2004, the Company declared quarterly cash dividends of $0.15 per common
share. During the first quarter of 2004 the Company declared cash dividends of $0.353 per Series A
preferred share for the period from January 1, 2004 through February 24, 2004 and $0.20 per Series
B preferred share for the period from February 24, 2004 (the issuance date of the new Series B
cumulative preferred stock) through March 31, 2004. During each of the second, third and fourth
quarters of 2004, the Company declared cash dividends of $0.50 per Series B preferred share. In
addition, on an annual basis, the Company expects to have adequate cash flow from operations and
from borrowings to fund its expected debt service, capital expenditures, and dividend obligations
during 2005. The Companys $125,000 line of credit (the  Wachovia Line) bore interest at rates from LIBOR
plus 1.75% to 2.50%, based on the Companys consolidated debt leverage ratio. As of December 31,
2004, the Wachovia Line was collateralized with 28 of the Companys hotels, with a net book value
of $182,679. During 2004, the Company increased the outstanding balance under its the Wachovia
Line by $37,650, from $29,200 to $66,850. The Companys articles of incorporation limit its debt
to 60% of the cost of its investment in hotel properties, or approximately $294,000 as of December
31, 2004. As noted under Recent Developments above, on March 11, 2005, the Company, through its
wholly-owned subsidiary, Winston SPE II LLC (SPE II,) entered into a five-year credit facility
with General Electric Capital Corporation (GECC) (the GE Line). The Company subsequently
borrowed $77.5 million under the GE Line on March 14, 2005 and used these funds to pay off all
outstanding debt under the Companys Wachovia Line, terminating this prior credit facility. The GE
Line provides for revolving loan commitments and letters of credit up to $155,000. The GE Line
bears interest at rates from LIBOR plus 1.75% to 2.50%, based on the ratio of the underwritten net
operating income of the hotels that collateralize the credit facility to the outstanding principal
debt balance. The current interest rate under the GE Line is LIBOR plus 2.00%. The Companys availability under the GE Line totaled approximately $152,400 as of March 14,
2005. Total borrowings of $77,500 plus a $5,000 letter of credit were outstanding. Availability
is calculated each quarter on a trailing twelve-month basis based primarily upon the underwritten
net operating income of the hotels that collateralize the GE Line divided by 13%. If at any time
the outstanding balance of the borrowings exceeds the lesser of $155,000 or SPE IIs trailing
twelve-month underwritten net operating income, the Company must repay the total outstanding
advances to the extent required to eliminate such excess. The GE Line contains customary special
purpose restrictions on SPE II. As long as there is no event of default, there are no restrictions
on the use of the loan proceeds, and the proceeds can be used as the Company determines. The GE
Line includes usual and customary events of default for facilities of this nature and provides
that, upon and during the continuation of an event of default, all outstanding loans 26




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under the line
of credit may be accelerated, GECCs commitments to make any further loans may be terminated and
GECC may foreclose on the collateral. In addition, upon the occurrence of certain insolvency or
bankruptcy related events of default, all outstanding loans under the GE Line will automatically
become due and payable and the lenders commitments to make any further loans will automatically
terminate. The Company has guaranteed the payment and performance by SPE II of certain obligations
under the GE Line. Borrowings under the GE Line are collateralized by 23 hotel properties owned by
the Company located in nine states. In October 2004, the Companys wholly-owned subsidiary, Winston Finance Partners LLC (Winston
Finance), entered into a $50,000 master repurchase agreement with Marathon Structured Finance
Fund, LP (Marathon) to finance the Companys hotel loan investments (assets) on a short-term
basis. Under the agreement, Winston Finance will sell assets to Marathon and agree to repurchase
those assets on a date certain. Typically, the sale and repurchase price will be no more than 65%
of the value of the asset, except for development and redevelopment assets where the limit is 45%
of the asset value. In general, the repurchase price will equal the original sales price of the
asset plus accrued but unpaid interest. The Company typically will pay interest to Marathon at
LIBOR plus 450 basis points for loans made by the Company to acquire existing hotels, and LIBOR
plus 550 basis points, plus one percent of the total loan amount as an origination fee, for loans made by the Company to develop new
hotels or redevelop existing hotels. Marathon gets a security interest in each asset subject to
the facility. For more information regarding the Marathon repurchase agreement and other debt
facilities of the Company, see Note 7 to Notes to Consolidated Financial Statements. The Company had $63,550 in debt at December 31, 2004 that was subject to a fixed interest rate
and fixed monthly payments with GE Capital Corporation. This debt, a ten-year loan with a 25-year
amortization period, carries an interest rate of 7.375%. All unpaid principal and interest are due
on December 1, 2008. The GE Capital loan was collateralized with 14 of the Companys hotels with a
net book value of $108,923 as of December 31, 2004. The Company recorded consolidated debt from joint ventures totaling $12,935 as of December 31,
2004. For further discussion of these debt facilities, see Note 7 to Notes to Consolidated
Financial Statements. As required by the GE Line, on March 14, 2005, the Company entered into an interest rate cap
agreement to eliminate the exposure to increases in 30-day LIBOR over 6.42% on principal balances
up to $155,000 outstanding. The interest rate cap agreement terminates on October 2, 2006. On
January 31, 2003, the Company completed an interest rate swap on $50,000 of its outstanding
variable rate debt under the Wachovia Line. This swap began on March 31, 2003 and matured on
February 27, 2004. This transaction effectively replaced the Companys variable interest rate
based on 30-day LIBOR on $50,000 of the line of credit with a fixed interest rate of 1.505%. As of December 31, 2004, the Companys contractual obligations and commitments (excluding
obligations and commitments pursuant to the Companys unconsolidated joint ventures) were as
follows: Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1 - 3 Years
    
    
    3 - 5 Years
    
    
    5 YearsContractual ObligationsLong-term debt
    
    $
    75,140
    
    
    $
    1,838
    
    
    $
    4,104
    
    
    $
    59,017
    
    
    $
    10,181Long-term debt of consolidated JVs
    
    
    12,935
    
    
    
    8,184
    
    
    
    192
    
    
    
    228
    
    
    
    4,331Corporate office lease
    
    
    1,840
    
    
    
    70
    
    
    
    778
    
    
    
    818
    
    
    
    174Total Contractual Obligations
    
    $
    89,915
    
    
    $
    10,092
    
    
    $
    5,074
    
    
    $
    60,063
    
    
    $
    14,686Other Commercial CommitmentsLine of Credit
    
    $
    66,850
    
    
    $
    66,850
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Other Commercial Commitments
    
    $
    66,850
    
    
    $
    66,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company operates in a manner intended to enable it to qualify as a REIT under the Internal
Revenue Code. A REIT that distributes at least 90% of its taxable income to its shareholders each
year and which meets certain other conditions is not taxed on that portion of its taxable income
which is distributed to shareholders. Based on our 2004 taxable income to shareholders, we were
required to distribute approximately $20,428 in order to maintain our REIT status as described
above. We distributed approximately $16,601 to common shareholders and $7,315 to preferred
shareholders for the year ended December 31, 2004, which exceeded our required distributions. 27




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The Company expects to fund its short term cash needs, including distributions to
shareholders, from operating cash flow and from borrowings under its GE Line. The Company intends
to continue to seek additional mezzanine loan opportunities, as well as other hotel loan
opportunities in general, and to acquire and develop additional hotel properties that meet its
investment criteria. The Company is continually evaluating such opportunities, as well as other
investment opportunities including, but not limited to, the acquisition of assets that require
substantial renovation and repositioning within a particular market. It is expected that future
hotel loans and acquisitions will be financed, in whole or in part, from borrowings under the GE
Line or the Marathon line of credit, additional follow-on offerings, joint venture agreements, the
net sale proceeds of hotel properties and/or from the issuance of other debt or equity securities.
There can be no assurances that the Company will make any further hotel loans or any investment in
additional hotel properties, or that any hotel development will be undertaken, or if commenced,
that it will be completed on schedule or on budget. Furthermore, there can be no assurances that
the Company will be able to obtain any additional financing. Recently Issued Accounting Standards In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs  an amendment of ARB No. 43, (SFAS No. 151), which is effective for fiscal
years beginning after June 15, 2005. SFAS No. 151 will have no impact on the Company. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised
2004), Share-Based Payment, (SFAS No. 123), which is effective for fiscal years beginning after
June 15, 2005. SFAS No. 123 is a revision of FASB Statement No. 123, (Accounting for Stock-Based
Compensation). SFAS No. 123 is not expected to have a material impact on the Companys financial
statements or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 152
Accounting for Real Estate Time-Sharing Transactions, (SFAS No. 152), which is effective for
fiscal years beginning after June 15, 2005. SFAS No. 152 is not expected to have a material impact
on the Companys financial statements or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, (SFAS No. 153), which is
effective for fiscal years beginning after June 15, 2005. SFAS No. 153 is not expected to have a
material impact on the Companys financial statements or results of operations. Seasonality The hotels operations historically have been seasonal in nature, reflecting higher occupancy
during the second and third quarters. This seasonality can be expected to cause fluctuations in
the Companys quarterly operating profits. To the extent that cash flow from operations is
insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company
expects to utilize cash on hand or borrowings under its line of credit to make distributions to the
equity holders. Forward Looking Statements This report contains certain forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. You can identify these statements by use of words like guidance, project, target,
may, will, expect, anticipate, estimate, believes, continue or similar expressions.
These statements represent the Companys judgment and are subject to risks and uncertainties that
could cause actual operating results to differ materially from those expressed or implied in the
forward looking statements, including but not limited to the following risks: changes in general
economic conditions, properties held for sale will not sell, financing risks including the
inability to obtain financing on favorable terms, if at all, development risks including the risks
of construction delays and cost overruns, lower than expected occupancy, average daily rates, and
gross operating margins, non-issuance or delay of issuance of governmental permits, zoning
restrictions, the increase of development costs in connection with projects that are not pursued to
completion, non-payment of hotel loans made to third parties, the failure to make additional hotel
loans and investments in non-distressed and distressed hotel assets, the failure to attract joint
venture opportunities and other risks described under Risk Ractors below. 28




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Risk Factors Risks Relating to Our Business Our ability to make distributions to our shareholders depends upon the ability of our hotel
managers to operate our hotels effectively. In order to qualify as a REIT, we cannot operate any hotel, or directly participate in the
decisions affecting the daily operations of any hotel. Our third-party managers under management
agreements have direct control of the daily operations of our hotels. We do not have the authority
to directly control any particular aspect of the daily operations of any hotel (e.g., setting room
rates). Thus, even if we believe our hotels are being operated in an inefficient or sub-optimal
manner, we may not be able to require a change to the method of operation. Our only alternative
for changing the operation of our hotels may be to replace the third party manager of one or more
hotels in situations where the applicable management agreement permits us to terminate the existing
manager. As a result of the Companys acquisition (through its TRS Lessee) of the leasehold interests
for 47 of its hotels, effective July 1, 2002, for two of its hotels, effective July 1, 2003, and
for one of its hotels effective March 2004, the operating income (loss) of these hotels are
included in the Companys consolidated financial statements. Our income primarily depends upon the
net operating income of our hotels. Our ability to make distributions to our shareholders depends
on the ability of our hotel managers to generate sufficient revenues from our hotels in excess of
operating expenses. Our managers will be affected by factors beyond their control, such as changes
in the level of demand for rooms and related services of our hotels, their ability to maintain and
increase gross revenues and operating margins at our hotels, and other factors. As of December 31,
2004, 42 of our hotels were managed by Alliance. Therefore, any operating difficulties or other
factors specifically affecting Alliances ability to maintain and increase gross revenues and
operating margins at our hotels could significantly adversely affect our financial condition and
results of operations. In addition, our growth strategy contemplates additional hotel acquisitions that meet our
investment criteria and selective development of hotels as market conditions warrant. Our ability
to grow depends, in part, upon the ability of our third-party managers to manage our current and
future hotels effectively. If the third-party managers are not able to operate additional hotels at
current staffing levels and office locations, they may need to hire additional personnel, engage
additional third party managers and/or operate in new geographic locations. If the third-party
managers fail to operate the hotels effectively, our ability to generate income from the hotels
would be adversely affected. The events of September 11, 2001 and threat of additional terrorist attacks, as well as the
weak U.S. economic recovery, have adversely impacted the hotel industry generally, and we have
experienced an adverse effect on our results of operations. Prior to September 11, 2001, our hotels had begun experiencing declining revenue per available
room, or RevPAR, as a result of the slowing U.S. economy. The terrorist attacks of September 11,
2001 and more recent concerns about possible additional terrorist attacks, combined with the
effects of the resulting recession and weak economic recovery, have led to a substantial reduction
in business and leisure travel throughout the United States. We cannot predict the extent to which
additional terrorist attacks, concerns about possible additional terrorist attacks, and the weak
economic recovery will continue to directly or indirectly impact the hotel industry or our
operating results in the future. Depressed RevPAR at our hotels could have an adverse effect on our
results of operations and financial condition, our ability to fund capital improvements and
renovations at our hotels and our ability to make dividend payments necessary to maintain our REIT
tax status. Additional terrorist attacks could have further material adverse effects on the hotel
industry and our operations. We may not have access to financing for acquiring or developing additional hotels, or for
providing hotel loans. Our ability to pursue our growth strategy depends, in part, on our ability to finance
additional hotel acquisitions and development and additional hotel loans. We may not be able to
fund growth solely from cash provided from operating activities because we must distribute at least
90% of our taxable income each year to maintain our tax status as a REIT and normally distribute
100% in order to avoid paying corporate income tax and excise tax on undistributed income.
Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions
and improvements and hotel loans. We cannot assure you that we will be successful in attracting
sufficient debt or equity financing at an acceptable cost to fund future growth. We are subject to
restrictions that may limit our ability to take advantage of expansion opportunities that we
believe are attractive. Our ability to raise additional equity capital will depend on market conditions. We cannot
assure you that we will be able to raise funds through a public or private offering at a time when
we need access to funds. We may seek alternative methods of funding expansion, such as joint
venture development; however, we cannot assure you that such opportunities will be available when
we need them or on acceptable terms. 29




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We have a significant level of debt that may limit our ability to take certain actions. We currently have a significant amount of debt. As of December 31, 2004, we had $66.9 million
outstanding under our Wachovia Line and $63.5 million outstanding under a fixed-rate loan. As of
December 31, 2004, the total liabilities of our consolidated joint ventures were $15.1 million
($14.4 million of which represented long-term debt). As of December 31, 2004, the total liabilities
of our unconsolidated joint ventures were $34.1 million ($30.8 million of which represented
long-term debt). Our proportionate share of the unconsolidated joint ventures total liabilities
and long-term debt equated to $4.4 million and $4.0 million, respectively. Our level of debt could
have important consequences to you. For example, it could:  
    impair our ability to obtain additional financing, if needed, for working
capital, capital expenditures, acquisitions or other purposes in the future;
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing our funds available for operations, future
business opportunities and other purposes;
    place us at a disadvantage compared to competitors that have less debt;
    restrict our ability to adjust rapidly to changing market conditions; and
    increase our vulnerability to adverse economic, industry and business conditions. If we do not have sufficient funds to repay our debt at maturity, it may be necessary for us
to refinance our debt through additional debt financing, private or public offerings of debt
securities or additional equity offerings. If, at the time of any refinancing, prevailing interest
rates or other factors result in higher interest rates on refinancings, increases in interest
expense could adversely affect our cash flow and, consequently, cash available for distribution to
shareholders. If we are unable to refinance our debt on acceptable terms, we may be forced to
dispose of hotels or other assets on disadvantageous terms, potentially resulting in losses and
adverse effects on cash flow from operating activities. If we are unable to make required payments
of principal and interest on debt secured by our hotels, one or more of those properties could be
foreclosed upon by the lender with a consequent loss of revenue and asset value. Our indebtedness imposes limitations on our operations and subjects us to risk of default. On March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (SPE
II), entered into the GE Line. The Company subsequently borrowed funds under the GE Line on March
14, 2005 and used these funds to pay off all outstanding debt under the Companys previous $125
million line of credit, terminating this prior credit facility. The GE Line limits our borrowing
availability to an amount based primarily upon the net operating income of the hotels that serve as
collateral for the GE Line. As a result, on March 14, 2005, we had approximately $152.4 million
available for borrowing under our GE Line, of which $77.5 million was outstanding. If the net
operating income of the hotels provided as collateral declines, and our resulting availability
under the GE Line is less than the balance outstanding, we must repay the total outstanding
advances to the extent required to eliminate the excess or provide additional collateral, which may
not be available, to increase our borrowing availability to the total amount of debt we need, up to
a maximum amount of $155 million. Thirty-seven of our wholly-owned hotels have been pledged as
collateral for our debt facilities, 23 against the GE Line and 14 against the GE Capital CMBS loan.
As of March 14, 2005, five of the Companys wholly-owned properties were unencumbered and remained
eligible to be pledged as collateral for increased borrowing availability under the GE Line. In
addition, our articles of incorporation limit our debt to 60% of the cost of our investment in
hotel properties, or approximately $294 million as of December 31, 2004, which could limit our
ability to use leverage in future investments. The GE Line contains customary special purpose restrictions on SPE II and includes usual and
customary events of default for facilities of this nature. The GE Line further provides that, upon
and during the continuation of an event of default, including our inability to repay the excess
debt over our borrowing availability or provide additional collateral to increase our borrowing
availability, all outstanding loans under the line of credit may be accelerated, the lenders
commitments to make any further loans may be terminated and the lender may foreclose on the
collateral. In addition, upon the occurrence of certain insolvency or bankruptcy related events of
default, all outstanding loans under the GE Line will automatically become due and payable and the
lenders commitment to make any further loans will automatically terminate. Rising interest rates could adversely affect our cash flow. Our borrowings under the GE Line bear interest at a variable rate. Although we have entered
into an interest rate cap agreement that limits our interest rate exposure to increases in 30-day
LIBOR over 6.42% on the outstanding debt under the GE Line, increases in interest rates up to this
limit could increase our interest expense and adversely affect our cash flow. Certain of our 30




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individual hotel loans earn interest at fixed rates. Thus, in a period of rising
interest rates, our interest expense would increase, while the interest we earn on our fixed-rate
debt investments would not change, adversely affecting our profitability. In addition, the value
of our fixed rate hotel loans would be impaired if market interest rates rose, which would make it
difficult for us to sell the loans. We also may incur debt in the future that bears interest at a
variable rate or we may be required to refinance our existing debt at higher interest rates, both
of which could also increase our interest expense and adversely affect our cash flow. We may not be able to complete development of new hotels on time or within budget. We intend to develop additional hotel properties as suitable opportunities arise. New project
development is subject to a number of risks that could cause increased costs or delays in our
ability to generate revenue from any development hotel, reducing our cash available for
distribution to shareholders. These risks include:  
    construction delays or cost overruns that may increase project costs;
    competition for suitable development sites and/or the emergence of unanticipated competition from other hotels;
    uncertainties as to market demand or deterioration in market demand after commencement of development;
    receipt of zoning, land use, building, construction, occupancy and other required
governmental permits and authorizations; and
    substantial development costs in connection with projects that are not completed. We may not be able to complete the development of any projects we begin and, if completed, our
development and construction activities may not be completed in a timely manner or within budget. We also intend to rehabilitate hotels that we believe are underperforming. These
rehabilitation projects will be subject to the same risks as development projects. Hotels that we develop have no operating history and may not achieve levels of occupancy that
result in levels of operating income that provide us with an attractive return on our investment. The new hotels that we develop have no operating history. These hotels, both during the
start-up period and after they have stabilized, may not achieve anticipated levels of occupancy,
average daily room rates, or gross operating margins, and could result in operating losses. Property ownership through joint ventures and partnerships could limit our control of those
investments. Joint ventures or partnerships (other than WINN Limited Partnership) involve risks not
otherwise present for investments we make on our own. It is possible that our co-venturers or
partners may have different interests or goals than we do at any time and that they may take
actions contrary to our requests, policies or objectives, including our policy with respect to
maintaining our qualification as a REIT. Other risks of joint venture investment include impasses
on decisions, because no single co-venturer or partner has full control over the joint venture or
partnership. Each of our venture partners for our existing joint venture properties has the right,
after the first twelve months of the hotels operation, to sell the hotel developed by the joint
venture to us, or, if we elect not to purchase, to sell such hotel to a third party. In addition,
future joint ventures may include other restrictions on us, including requirements that we provide
the joint venture with the right of first offer or right of first refusal to acquire any new
property we consider acquiring directly. Our business could be disrupted if we need to find a new manager upon termination of an
existing management agreement. If our managers fail to materially comply with the terms of their management agreements, we
have the right to terminate such management agreements. Upon termination, we would have to find
another manager to manage the property. We cannot operate the hotels directly due to federal
income tax restrictions. We cannot assure you that we would be able to find another manager or
that, if another manager were found, we would be able to enter into new management agreements
favorable to us. There would be disruption during any change of hotel management that could
adversely affect our operating results. 31




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If we decide to sell hotels, we may not be able to sell those hotels on favorable terms. We have sold six hotels during the past three years, four in 2002 and two in 2004. We also
sold two additional hotels in January 2005. Although none of our other hotels is currently under
contract to sell, we may decide to sell additional hotels in the future. We may not be able to sell
such hotels on favorable terms, and such hotels may be sold at a loss. As with acquisitions, we
face competition for buyers of our hotel properties. Other sellers of hotels may have the
financial resources to dispose of their hotels on unfavorable terms that we would be unable to
accept. If we cannot find buyers for any properties that are designated for sale, we will not be
able to implement our divestiture strategy. In the event that we cannot fully execute our
divestiture strategy or realize the benefits therefrom, we will not be able to fully execute our
growth strategy. If third parties for whom we develop hotels default on their loans, we may be required to
complete the development of those hotels at our own expense. In certain cases where we are offering third party hotel development services in exchange for
fees, we may elect to provide the hotel owner/developer with a construction completion guaranty on
the particular hotel under development. In those cases, if the owner/developer were in default
under the terms and conditions of its senior loans, its senior lenders might seek to compel us to
complete the development of the particular hotel with our own funds, which could materially
adversely affect our business, financial condition and results of operations. We may face conflicts of interest relating to sales of hotels acquired from affiliates. We have acquired 14 hotels in the past from related parties of our affiliates, which include
Robert Winston, our Chief Executive Officer, and Charles Winston, our Chairman of the Board. The
limited partners of WINN Limited Partnership, including Robert Winston and Charles Winston, may
have unrealized gain associated with their interests in these hotels. Our sale of any of those
hotels may cause adverse tax consequences to the limited partners. Therefore, our interests could
conflict with the interests of the limited partners in connection with the disposition of one or
more of those 14 hotels, including limited partners who may be board members or otherwise in a
position to exert influence over other board members who will determine whether we sell these
hotels. We depend on key personnel, the loss of which could have a material adverse effect on our
Company. We depend on the efforts and expertise of our Chief Executive Officer, President and Chief
Financial Officer, Chief Accounting Officer and Chief Operating Officer to drive our day-to-day
operations and strategic business direction. The loss of any of their services could have an
adverse effect on our operations. Our ability to replace key individuals may be difficult because
of the limited number of individuals with the breadth of skills and experience needed to excel in
the hotel industry. There can be no assurance that we would be able to hire, train, retain or
motivate such individuals. Risks Related to Hotel Lending Program The hotel mortgage loans that we originate are subject to delinquency, foreclosure and loss,
which could result in losses to us. Some of our mortgage loans are secured by the hotel property and are subject to risks of
delinquency and foreclosure, and risks of loss. Typically we have no recourse to the personal
assets of our borrowers. The ability of a borrower to repay a loan secured by an income-producing
property typically is dependent primarily upon the successful operation of the property rather than
upon the existence of independent income or assets of the borrower. If the net operating income of
the property is reduced, the borrowers ability to repay the loan may be impaired. Net operating
income of an income-producing property can be affected by the risks particular to real property
described below, as well as, among other things:  
    increased costs imposed on hotel owners by franchisors such as hot and
cold breakfasts, new linens and other required improvements;
    property management decisions;
    property location and condition;
    competition from comparable types of properties;
    changes in specific industry segments; 32




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
    declines in regional or local real estate values, or occupancy rates; and
    increases in interest rates, real estate tax rates and other operating expenses. In the event of any default under a mortgage loan held directly by us, we will bear a
risk of loss of principal to the extent of any deficiency between the value of the collateral and
the principal and accrued interest of the mortgage loan, which could have a material adverse effect
on our cash flow from operations and limit amounts available for distribution to our stockholders.
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will
be deemed to be secured only to the extent of the value of the underlying collateral at the time of
bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be
subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the
lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and
lengthy process that could have a substantial negative effect on our anticipated return on the
foreclosed mortgage loan. We may also be forced to foreclose on properties outside of our
traditional hotel investment expertise, be unable to sell these properties and be forced to incur
substantial expenses to improve operations at the hotel. The B-Notes in which we invest may be subject to additional risks relating to the privately
negotiated structure and terms of the transaction, which may result in losses to us. A B-Note is a mortgage loan typically (i) secured by a first mortgage on a single hotel or
group of related properties and (ii) subordinated to an A-Note secured by the same first mortgage
on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds
remaining for B-Note holders after payment to the A-Note holders. B-Notes reflect similar credit
risks to comparably rated commercial mortgage backed securities. However, since each transaction is
privately negotiated, B-Notes can vary in their structural characteristics and risks. For example,
the rights of holders of B-Notes to control the process following a borrower default may be limited
in certain investments. We cannot predict the terms of each B-Note investment. Further, B-Notes
typically are secured by a single property, and so reflect the increased risks associated with a
single property. B-Notes may also be illiquid, thus we may be unable to dispose of underperforming
or non-performing investments. The higher risks associated with our subordinate position in our
B-Note investments could subject us to increased risk of losses. Investments in mezzanine loans involve greater risks of loss than senior loans secured by
income producing properties. Investments in mezzanine loans take the form of subordinated loans secured by second mortgages
on the underlying property or loans secured by a pledge of the ownership interests in the entity
that directly or indirectly owns the property. These types of investments involve a higher degree
of risk than a senior mortgage loan because the investment may become unsecured as a result of
foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge
of its ownership interests as security, we may not have full recourse to the assets of the property
owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If
a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower
bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a
result, we may not recover some or all of our investment, which could result in losses. In
addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans,
resulting in less equity in the property and increasing the risk of loss of principal. Our hotel lending program subjects us to the unique risks of a mezzanine lender. A mezzanine lender has some of the same risks as a traditional real estate lender, such as
lender liability for improperly exercising control over the borrower and environmental risks as a
potentially responsible party liable for environmental damage in connection with the property owned
by the borrower. A mezzanine lender may enhance these risks by pursuing remedies on default that
afford greater control over the operations of the borrower, especially if the mezzanine lender
exercises its authority as a managing or co-managing member. Courts have discretion to decline to
enforce loan features which purport to limit or modify a mortgagors right to redeem real estate
after a mortgage default and before foreclosure by paying off the loan, and thus some remedies
specified in our mezzanine loans may be unavailable to us. In addition a borrower may allege that
being in the position to control the borrowing entity creates duties by the lender to the borrower,
including fiduciary-like duties that may conflict with the lenders actions to exercise its
remedies. Finally, to be able to protect its mezzanine loan, a mezzanine lender may have to
advance additional funds to cure defaults on senior loans. We may not have the ability to improve
the operations of the hotel property once we exercise our control rights. In some cases, we have
made loans to hotels that do not fit our traditional investment criteria and may not have the
appropriate expertise to manage these properties. We may incur additional costs and resources
which divert attention from our core operations. 33




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Risks Relating to the Real Estate Industry Our performance and the value of our stock are subject to risks associated with the hotel
industry. Our hotels are subject to operating risks of the hotel industry that could reduce our revenue,
gross operating margins, and ability to make distributions to shareholders. Our hotels are subject to all operating risks common to the hotel industry. These factors
could adversely affect the ability of our hotels to generate operating income and therefore affect
our ability to make distributions to our shareholders. These risks include, but are not limited
to:  
    competition for guests from other hotels, many of which have substantial marketing and financial resources;
    faster growth in room supply than in room demand growth in our markets;
    increases in operating costs due to inflation and other factors which may not be
offset in the future by increased room rates;
    seasonality, with higher hotel revenues occurring in the second and third calendar quarters;
    increases in energy costs, airline fares and other expenses related to travel, which may deter traveling;
    terrorist incidents, which may also deter traveling;
    adverse effects of general and local economic conditions;
    a general inability to control costs, thereby resulting in lower gross operating profit; and
    risks generally associated with the ownership of hotels and real estate, as discussed below. Our entire business is concentrated in particular segments of a single industry. Our entire business is hotel-related. Our investment strategies include acquiring additional
hotels, or ownership interests in hotels, with strong national franchise affiliations in the
mid-scale without food and beverage, upscale, and upper upscale market segments, or hotel
properties with the potential to obtain such franchise affiliations. Therefore, a downturn in the
hotel industry, in general, and the segments in which we operate, in particular, will have a
material adverse effect on our income and the amounts available for distribution to our equity
holders. Large-scale military deployments may adversely impact the occupancy rates and revenues from
our two hotels located in communities that have a large military population. Currently, we own two hotels located in communities with a large military presence; one near
Fort Bragg in Fayetteville, North Carolina and one near Camp Lejeune in Jacksonville, North
Carolina. During the Persian Gulf War in the early 1990s, a large number of military personnel
deployed to the Persian Gulf and, additionally, their respective families departed those
communities for the duration of the military members deployment. The two local communities
suffered economic loss as a result. If a large number of military personnel were deployed away
from their permanent duty stations for an extended period, we expect that occupancy rates and
RevPAR at those two hotels would be adversely affected. We may incur higher costs as a result of the proximity of our hotels to the coast. Several of our hotels are located near the Atlantic Ocean and are exposed to more severe
weather than hotels located inland. These hotels are also exposed to salt water and humidity, which
can increase or accelerate wear on the hotels weatherproofing and mechanical, electrical and other
systems. As a result, we may incur additional expenditures for capital improvements. Our hotel concentration in the Southeastern United States subjects us to increased risks than
if our portfolio were more geographically diversified. At December 31, 2004, 31 out of our 45 wholly-owned hotels were located in the five eastern
seaboard states ranging from Virginia to Florida, including 16 hotels located in North Carolina.
Adverse events in these areas, such as economic recessions, 34




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hurricanes or other natural disasters,could cause a loss of revenues from these hotels,
which could have a greater adverse effect on us as a result of our concentration of assets in this area.
Our geographic concentration also
exposes us to risks of oversupply and competition in our principal markets. Each of our hotels
competes with other hotels in its market area. A number of additional hotel rooms will continue to
be built in the markets in which our hotels are located, which could result in too many hotel rooms
in those regions. Significant increases in the supply of hotel rooms without corresponding
increases in demand can have a severe adverse effect on our business, financial condition and
results of operations. Conditions of franchise agreements could adversely affect us. All of our hotels are operated pursuant to franchise agreements with nationally-recognized
hotel brands. In addition, hotels in which we subsequently invest may be operated pursuant to
franchise agreements. A hotels failure to adhere to the terms and conditions of the franchise
agreement could result in the loss or cancellation of its franchise license. We rely on our
managers to conform to such franchisor standards. The franchise agreements generally contain
specific standards for, and restrictions and limitations on, the operation and maintenance of a
hotel in order to maintain uniformity within the franchisors system. These standards are subject
to change over time, in some cases at the discretion of the franchisor, and may restrict our
ability to make improvements or modifications to a hotel without the consent of the franchisor. In
addition, compliance with these standards could require us to incur significant expenses or capital
expenditures even if we do not believe the capital improvements are necessary or desirable or will
result in an acceptable return on our investment. Recently our franchisors have required
improvements to our hotels, such as the provision of hot breakfasts and higher quality linens.
These improvements have proven costly but have not necessarily marginally increased our RevPAR, or
revenue per available room. Our cash available for distribution could be adversely affected if we
must incur substantial costs to maintain a franchise license. If a franchise license terminates due to our failure to make required improvements or to
otherwise comply with its terms, we may be liable to the franchisor for a termination payment.
These termination payments would vary by franchise agreement and by hotel. The loss of a number of
franchise licenses and the related termination payments could have a material adverse effect on our
business, financial condition and results of operations. As of December 31, 2004, of the 52 hotels franchise licenses, including seven joint venture
hotels, ten expire in the next five years, one expires in 2006, two expire in 2007, four expire in
2008, and three expire in 2009. In connection with the expiration of a franchise license or
changing the franchise affiliation of a hotel, we may have to incur significant expenses or capital
expenditures. Moreover, the loss of a franchise license, in the event that it could not be renewed
or is otherwise lost, could have a material adverse effect on the operations and/or the underlying
value of the hotel covered by the franchise because of the loss of association, name recognition,
marketing support and centralized reservation system provided by the franchisor. Any of these
events could have a negative effect on our ability to make distributions to shareholders. The
franchise agreements covering the hotels expire or terminate, without special renewal rights, at
various times and have different remaining terms. Operating costs and capital expenditures could adversely affect our cash flow. Hotels have an ongoing need for renovations and other capital improvements, particularly in
older structures, including periodic replacement of furniture, fixtures and equipment. We are
obligated to pay the cost of certain capital expenditures at the hotels and to pay for furniture,
fixtures and equipment. Franchisors also may require periodic capital improvements to our hotels as
a condition of retaining the franchise licenses. In addition, we intend to invest selectively in
hotels that require significant renovation. Renovation of hotels involves certain risks, including:  
    the possibility of environmental problems;
    construction cost overruns and delays;
    uncertainties as to market demand or deterioration in market demand after commencement of renovation;
    the emergence of unanticipated competition from other hotels; and
    displacement of room revenues due to rooms being out of order. If any of these costs exceed our estimates, the additional costs could have an adverse effect
on our cash available for distribution. 35




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We must compete with larger entities for acquisition and franchising opportunities. We compete for acquisition opportunities with entities that have substantially greater
financial resources than we do. These entities generally may be able to accept more risk than we
can prudently manage, including risks with respect to the creditworthiness of a hotel operator or
the geographic proximity of its investments, and may have better relations with franchisors.
Competition may reduce the number of suitable investment opportunities available to us and increase
the bargaining power of sellers. In addition, other potential buyers who do not need to use a
lessee or a third party operator to operate the hotel may be able to offer a higher price for a
property than we are able to pay. Our performance and value are subject to the condition of the real estate industry. We may not be able to sell hotels when appropriate. Real estate investments generally cannot be sold quickly. We may not be able to vary our
portfolio promptly in response to changes in economic and other conditions. Because we are a REIT,
federal income tax laws limit our ability to sell properties in some situations when it may be
economically advantageous to do so. As a result, returns to our shareholders could be adversely
affected. In addition, we cannot assure you that the market value of any of our hotels will not
decrease in the future, and therefore we may not be able to sell our hotels on favorable terms. Liability for environmental matters could adversely affect our financial condition. Under various federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the costs of investigation
and removal or remediation of hazardous or toxic substances on, under, originating at or in the
property, including fixtures, structures and other improvements located on the property. These laws
often impose liability whether or not the owner or operator knew of (or should have known of), or
caused, the presence of contaminants. Although Phase I environmental site assessments (ESAs)
were obtained on all of the hotels, the Phase I ESAs did not include invasive procedures, such as
soil sampling or ground water analysis. While the Phase I ESA reports have not revealed any
environmental condition, liability or compliance concern that the Company believes would have a
material adverse effect on the Companys business, assets or results of operations, it is possible
that these reports do not reveal all environmental conditions, liabilities or compliance concerns
or that there are material environmental conditions, liabilities or compliance concerns that arose
at a hotel after the related Phase I ESA report was completed of which the Company is unaware. The
costs to clean up a contaminated property, to defend against a claim, or to comply with
environmental laws could be material and could affect the funds available for distributions to
equity holders. Clean-up costs and the owners or operators liability generally are not limited
under these laws and could exceed the value of the property and/or the aggregate assets of the
owner or operator. In addition, the presence of, or failure to properly remediate, contaminants may
adversely affect the owners ability to sell or rent the property or borrow using the real property
as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances
may also be liable for the clean-up costs of the substances at the disposal or treatment facility,
whether or not the facility is or ever was owned or operated by that person. Environmental, health and safety laws and common law principles also govern the presence,
effects, maintenance and removal of hazardous substances, including asbestos-containing materials,
or ACMs. Asbestos has been found in two of our hotels and asbestos or other hazardous substances
may be found in other hotels we own or acquire in the future. Many such laws permit third parties,
including employees and independent contractors, to seek recovery from owners or operators of real
properties for personal injury or property damage associated with exposure to released hazardous
substances, including ACMs. In connection with the ownership of the hotels, we may be considered an
owner or operator and therefore may be potentially liable for any such costs, which could adversely
affect our financial condition. Black mold claims could adversely affect our financial condition. Recent publicity regarding families abandoning their homes because of the presence of
stachyhotrys chartarum (black mold) has raised public consciousness regarding black mold. Black
mold is a greenish-black fungus found worldwide that grows in such places as dry wall, carpet, wall
paper, fiber-board, ceiling tiles, and thermal insulation when the relative humidity is above 55%.
While the scientific community lacks consensus on the health threat, if any, posed by exposure to
black mold, if black mold is detected in any of our hotels, we may be subject to adverse publicity,
which could adversely affect our operations and financial results from that hotel. Such claims
could require us to spend significant time and money in litigation or pay significant damages. In
addition, we may be required to close all or portions of the affected hotel during mold remediation
operations, generally consisting of a thorough cleaning with chlorine bleach and water. Under
certain conditions, black mold may be difficult to eradicate and require us to remove and replace
moldy materials in the hotel. In extreme cases, it may be necessary to perform extensive facility
repairs. The presence of black mold in any hotel also could adversely impact the fair market value
of that hotel. 36




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During 2002, the Company invested in the Beachwood, OH Courtyard by Marriott hotel, which is
currently owned by WCC Project Company LLC. The Companys current indirect ownership interest in
this hotel is 13.05%. Prior to making its initial investment, the Company knew that black mold
existed at the hotel and engaged consultants with expertise in black mold remediation and performed
extensive research to satisfy itself that the black mold condition could be eradicated through
renovation and repair procedures. Following the completion of such remediation procedures, the Company believes
that all of the black mold has been removed from this hotel. The hotel opened in April 2003.
Because black mold is a naturally occurring fungus, the spores of which can be transported by
outside air currents, there can be no assurances that black mold will not again enter and grow in
this hotel or that it will not be found in the Companys other hotel properties. Liability for underground storage tanks could adversely affect our financial condition. Portions of the soil and groundwater under the Durham, NC Hampton Inn have been contaminated
by one or more leaking underground storage tanks from an adjacent property owned by a third-party.
The North Carolina Department of Environmental and Natural Resources classified the adjacent
property as low risk and issued a No Further Action determination in November 2003. A Phase II
ESA file review was conducted in February 2005 to review and obtain regulatory files related to the
leaking underground tanks on the adjacent property. The Phase II indicated that the Durham, NC
Hampton Inn is restricted from use of groundwater and recommended additional investigation to
determine the extent of contamination, if any, from the leaking tanks. We expect to conduct such
additional investigation in the near future. We believe liability for future cleanup, if any, of
this subsurface contamination most likely would be imposed on the third-party owner of the leaking
underground storage tanks and not us. We could, however, be responsible for cleanup of this site
if, for instance, the owner of the leaking tanks refused or were financially unable to conduct a
cleanup. In addition to the costs of cleanup, environmental contamination can affect the value of
a property and, therefore, an owners ability to borrow funds using the property as collateral or
to sell the property. The costs to clean up a contaminated property, to defend against a claim, or
to comply with environmental laws could be material and could adversely affect the funds available
for distribution to our shareholders. We can make no assurances that (1) future laws or
regulations will not impose material environmental liabilities or (2) the current environmental
condition of our hotel properties will not be affected by the condition of the properties in the
vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by
third parties unrelated to us. Liability for uninsured and underinsured losses could adversely affect our financial condition
and results of operations. In the event of a substantial loss, our insurance coverage may not be sufficient to pay the
full current market value or current replacement cost of our lost investment. Certain types of
losses, such as mold, terrorist acts, earthquakes, floods, hurricanes, and other acts of God, may
be uninsurable or not economically insurable. In addition, we may not be able to use insurance
proceeds to replace a damaged or destroyed property as a result of changes in building codes and
ordinances, environmental considerations or other factors. In these circumstances, any insurance
proceeds we receive might not be adequate to restore our economic position with respect to the
damaged or destroyed property and we would be required to seek separate financing for repair and
replacement costs, which may not be available on acceptable terms or at all, or face a loss on our
investment. The cost of compliance with the Americans with Disabilities Act and other changes in
governmental rules and regulations could adversely affect our cash flow. Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations are
required to meet certain federal requirements related to access and use by disabled persons. A
determination that we are not in compliance with the ADA could result in imposition of fines or an
award of damages to private litigants. In addition, other governmental rules and regulations or
enforcement policies affecting the use and operation of the hotels could change, including changes
to building codes and fire and life safety codes. If we are required to spend money to comply with
the ADA or other changes in governmental rules and regulations, our ability to make distributions
to shareholders could be adversely affected. Increases in property taxes could adversely affect our cash flow. Real and personal property taxes on our current and future hotel properties may increase as
property tax rates change and as the properties are assessed or reassessed by taxing authorities.
An increase in property taxes could have an adverse effect on our ability to make distributions to
shareholders. Risks Relating to an Investment in our Capital Stock The price of our securities may be affected by changes in market interest rates. One of the factors that may influence the price of our common stock or preferred stock in
public trading markets is the annual yield from distributions on our common stock or preferred
stock as compared to yields on other financial instruments. Thus, an 37




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increase in market interest rates will result in higher yields on other financial instruments,
which could adversely affect the market price of our common stock or preferred stock. The ability of our shareholders to effect a change in control is limited. Stock ownership limitations could inhibit changes in control. Our articles of incorporation provide that no shareholder may own, directly or indirectly,
more than 9.9% of any class of our outstanding stock without the approval of our Board of
Directors. This limitation may have the effect of precluding an acquisition of control by a third
party without the approval of our board of directors even if a change in control were in our
shareholders best interest. Our ability to issue preferred stock could inhibit changes in control. Our articles of incorporation authorize the board of directors to issue up to 5,000,000 shares
of preferred stock and to establish the preferences and rights of any shares of preferred stock
issued. Currently, there are 3,680,000 shares of preferred stock outstanding. Issuing additional
preferred stock could have the effect of delaying or preventing a change in control even if a
change in control were in our shareholders best interest. Risks Relating to REIT Status We are subject to tax risks as a result of our REIT status. We have operated and intend to continue to operate so as to qualify as a REIT for federal
income tax purposes. Our continued qualification as a REIT will depend on our continuing ability to
meet various requirements concerning the ownership of our outstanding stock, the nature of our
assets, the sources of our income, and the amount of distributions to our shareholders. In order to
qualify as a REIT, we generally are required each year to distribute to our shareholders at least
90% of our taxable income, other than any net capital gain and any taxable income of our TRS
Lessees (except to the extent that our TRS Lessees distribute their taxable income to us). To the
extent that we meet the 90% distribution requirement, but distribute less than 100% of our taxable
income, we will be required to pay income tax on our undistributed income. In addition, we will be
subject to a 4% nondeductible excise tax if the actual amount we pay out to our shareholders in a
calendar year is less than a minimum amount specified under the federal tax laws. Our TRS Lessees
will incur corporate income tax on their taxable income, but will not be subject to any
distribution requirement. The requirement to distribute a substantial portion of our net taxable
income could cause us to distribute amounts that otherwise would be spent on future acquisitions,
unanticipated capital expenditures or repayment of debt, which would require us to borrow funds or
to sell assets to fund the costs of such items. We have made, and intend to continue to make, distributions to our shareholders to comply with
the 90% distribution requirement and to avoid corporate income tax and the nondeductible excise
tax. Our income consists of our share of the income of WINN Limited Partnership, and our cash
available for distribution consists of our share of cash distributions from WINN Limited
Partnership, less capital expenditures and principal debt payments. Differences in timing between
the recognition of taxable income and the receipt of cash available for distribution due to the
seasonality of the hotel industry could require us to borrow funds on a short-term basis to meet
the 90% distribution requirement and to avoid income tax and the nondeductible excise tax. If we were to fail to qualify as a REIT for any taxable year, we would not be allowed to
deduct our distributions to our shareholders in computing our taxable income. Furthermore, we would
be subject to federal income tax, including any applicable alternative minimum tax, on our taxable
income at regular corporate rates. Unless we are entitled to relief under the federal income tax
laws, we also would be disqualified from treatment as a REIT for the four taxable years following
the year during which we lost our qualification. As a result, our cash available for distribution
would be reduced for each of the years involved. Although we currently operate and intend to
continue to operate in a manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause our board of directors, with the consent of
shareholders holding at least two-thirds of the common stock entitled to vote, to revoke the REIT
election. 
 ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  As of December 31, 2004, the Company had exposure to market risk resulting from changes in
interest rates related to its debt outstanding under its $125 million line of credit (the Wachovia
Line), its mortgage debt from consolidated joint ventures, and its interest receivable from hotel
loans. Debt outstanding under the Wachovia Line totaled $66,850 at December 31, 2004. The
Wachovia Line, which was amended in December 2004 to extend the maturity date from December 31,
2004 to March 31, 2005, was replaced with a five-year $155 million line of credit with General
Electric Capital Corporation (the GE Line) on March 14, 2005. 38




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The GE Line bears interest generally at rates from LIBOR plus 1.75% to LIBOR plus 2.50%. The
Companys current interest rate is 30-day LIBOR plus 2.00%. As required by the GE Line, on March
14, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (SPE II), entered
into an interest rate cap agreement to eliminate the exposure to increases in 30-day LIBOR over
6.42% on principal balances up to $155 million outstanding. The interest rate cap agreement
terminates on October 2, 2006. On January 31, 2003, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the $125 million line of credit. This swap
began on March 31, 2003 and matured on February 27, 2004. This transaction effectively replaced
the Companys variable interest rate based on 30-day LIBOR on $50,000 of borrowings under the
Wachovia Line with a fixed interest rate of 1.505%. The differential paid or received on interest
rate agreements was recognized as an adjustment to interest expense over the life of the swap. The
weighted average interest rate on the Wachovia Line for 2004 and 2003 was 3.80% and 3.75%,
respectively (see Note 7 to the consolidated financial statements). At December 31, 2004, the
Company had $66,850 of variable rate debt outstanding under the Wachovia Line that was exposed to
fluctuations in the market rate of interest. The definitive extent of the Companys interest rate risk under its line of credit and its
other consolidated variable interest rate long term debt is not quantifiable or predictable because
of the variability of future interest rates and business financing requirements. If interest rates
increased by 100 basis points, the Companys annual consolidated interest expense would have
increased $596 based on the amount of variable rate debt outstanding and exposed to fluctuations in
the market rate of interest at December 31, 2004. The Company does not enter into derivative or
interest rate transactions for speculative purposes. The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value: Class of Financial Instrument
    
    Method and/or AssumptionCash, lease revenue receivable, accounts
and notes receivable, accounts
payable and accrued expenses:
    
    Carrying amount approximates fair value.Interest rate swap agreement:
    
    Fair value is estimated by obtaining quotes from brokers.Long-term debt  GE Capital Corporation:
    
    Fair value is estimated based on current rates offered to
the Company for debt of the same remaining maturitiesLong-term debt  consolidated joint
ventures, due to banks:
    
    Carrying amount approximates fair value.
 The estimated fair values of the Companys financial instruments are as follows: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueLiabilities:Long-term debt  GE Capital Corporation
    
    $
    75,140
    
    
    $
    76,009
    
    
    $
    65,031
    
    
    $
    67,368Long-term debt  consolidated joint ventures
    
    $
    12,935
    
    
    $
    12,935
    
    
    $
    26,253
    
    
    $
    26,253Due to banks
    
    $
    66,850
    
    
    $
    66,850
    
    
    $
    29,200
    
    
    $
    29,200Interest rate swap
in a net liability position
    
    $
    
    
    
    $
    
    
    
    $
    33
    
    
    $
    33
 The following table presents the aggregate maturities of the Companys GE Capital Corporation
fixed rate debt principal and interest rates by maturity dates at December 31, 2004: Maturity Date
    
    Fixed Rate Debt
    
    
    Interest Rate2005
    
    $
    1,593
    
    
    
    7.375
    %2006
    
    
    1,715
    
    
    
    7.375
    %2007
    
    
    1,846
    
    
    
    7.375
    %2008
    
    
    58,396
    
    
    
    7.375
    %2009
    
    
    
    
    
    
    Thereafter
    
    
    
    
    
    
    Total
    
    $
    63,550
    
    
    
    7.375
    %
 39




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##### 



The following table presents the aggregate maturities of the Companys consolidated variable
rate debt principal and interest rates by maturity dates at December 31, 2004: Evanston Hilton Garden Inn
    
    
    Marsh Landing Joint Venture
    
    
    Chapel Hill Joint VentureMaturity
    
    Variable
    
    
    Interest
    
    
    Variable
    
    
    Interest
    
    
    Variable
    
    
    InterestDate
    
    Rate Debt
    
    
    Rate
    
    
    Rate Debt
    
    
    Rate
    
    
    Rate Debt
    
    
    Rate
    
    
    Total2005
    
    $
    245
    
    
    LIBOR+3%
    
    $
    84
    
    
    LIBOR+3%
    
    $
    8,100
    
    
    LIBOR+3.80%
    
    $
    8,4292006
    
    
    262
    
    
    LIBOR+3%
    
    
    92
    
    
    LIBOR+3%
    
    
    
    
    
    
    
    
    
    
    3542007
    
    
    281
    
    
    LIBOR+3%
    
    
    100
    
    
    LIBOR+3%
    
    
    
    
    
    
    
    
    
    
    3812008
    
    
    300
    
    
    LIBOR+3%
    
    
    109
    
    
    LIBOR+3%
    
    
    
    
    
    
    
    
    
    
    4092009
    
    
    321
    
    
    LIBOR+3%
    
    
    119
    
    
    LIBOR+3%
    
    
    
    
    
    
    
    
    
    
    440Thereafter
    
    
    10,181
    
    
    LIBOR+3%
    
    
    4,331
    
    
    LIBOR+3%
    
    
    
    
    
    
    
    
    
    
    14,512Total
    
    $
    11,590
    
    
    
    
    
    
    $
    4,835
    
    
    
    
    
    
    $
    8,100
    
    
    
    
    
    
    $
    24,525
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this Item 8 are filed with this report on Form 10-K
immediately following the signature page and are listed in Item 15(a) of this report on Form 10-K. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company carried out an evaluation with the participation of the Companys management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13(a)-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer as appropriate, to
allow timely decisions regarding required disclosure. Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, the Company conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control  Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our evaluation under the framework in Internal Control Integrated Framework,
our management concluded that our internal control over financial reporting was effective as of
December 31, 2004. Our managements assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included herein
immediately following the signature pages of this annual report on Form 10-K. Changes in Internal Control Over Financial Reporting There have been no changes in the Companys internal control over financial reporting during
the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. 40




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##### 



ITEM 9B. OTHER INFORMATION On March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (SPE
II), entered into the GE Line. The Company subsequently borrowed funds under the GE Line on March
14, 2005 and used the funds to pay off all outstanding debt under the Wachovia Line, terminating
the Wachovia Line. The GE Line provides for revolving loan commitments and letters of credit up to
the lesser of $155 million or the amount that can be borrowed based primarily on the SPE IIs
trailing twelve-month underwritten net operating income divided by 13%. Borrowings under the GE
Line bear interest at floating rates from LIBOR plus 1.75% to LIBOR plus 2.50% depending on the
ratio, expressed as a percentage, of SPE IIs trailing twelve-month underwritten net operating
income to the then outstanding balance of the loans under the GE Line. In connection with the GE
Line, the Company paid GECC a commitment fee of $969. To the extent that amounts under the GE Line
remain unused, the Company pays quarterly a commitment fee on the unused portion of the loan
commitment. The loans mature on March 11, 2010. In addition, if at any time the outstanding balance of
the borrowings exceeds the lesser of $155 million or SPE IIs trailing twelve-month underwritten
net operating income divided by 13%, Borrower must repay the aggregate outstanding advances to the
extent required to eliminate such excess. The borrowings are collateralized by, among other things, 23 hotel properties owned by the
Company through SPE II located in Arizona, Florida, Georgia, Michigan, New Jersey, New York, North
Carolina, Texas and Virginia. The Company has guaranteed the payment and performance by SPE II, as
borrower, of certain obligations under the GE Line. The GE Line does not impose restrictions on
the Company or its operating partnership, WINN Limited Partnership; however, it does contain
customary special purpose restrictions on SPE II. As long as there is no event of default, there
are no restrictions on the Companys use of loan proceeds. The GE Line includes usual and
customary events of default for facilities of this nature and provides that, upon and during the
continuation of an event of default, all outstanding loans under the GE Line may be accelerated,
the lenders commitments to make any further loans may be terminated and the lender may foreclose
on the collateral. In addition, upon the occurrence of certain insolvency or bankruptcy related
events of default, all outstanding loans under the GE Line will automatically become due and
payable and the lenders commitments to make any further loans will automatically terminate. The
Loan Agreement dated as of March 11, 2005 by and between SPE II and GECC, the Form of Mortgage
Security Agreement and Fixture Filing dated March 11, 2005 by SPE II, and the Form of Deed of
Trust, Security Agreement and Fixture Filing dated March 11, 2005 by SPE II are filed as Exhibits
10.20, 10.21 and 10.22, respectively, to this annual report on Form 10-K and incorporated by
reference herein. On January 1, 2005, the Company, through its subsidiaries, WINN Limited Partnership, Winston
SPE LLC, and SPE II, entered into new lease agreements with Barclay Hospitality Services, Inc.
(Barclay), our wholly-owned taxable REIT subsidiary (TRS) for each of the Companys
wholly-owned hotel properties. The new lease agreements have a term of five years and may be
extended for an additional five (5) year period based on market conditions existing as of the
expiration of the Term. The Company believes the terms of the new leases approximate market terms,
including rent payments. The original leases were structured on market terms prior to the
impending hotel industry recession. Barclay has incurred net operating losses since it began
operating as the Companys TRS on July 1, 2002, resulting in the Companys deferred tax asset
totaling approximately $12 million as of December 31, 2004. Under the new lease agreements, the
Company believes that Barclay will generate sufficient taxable income for the Company to realize in
full its deferred tax asset. 
 PART III. 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on the Companys directors and executive officers is incorporated by reference
from the Companys Proxy Statement (under the headings Proposal 1: Election of Directors and
Section 16(a) Beneficial Ownership Reporting Compliance) to be filed with respect to the Annual
Meeting of Shareholders to be held May 3, 2005. Because our common stock is listed on the New York Stock Exchange (NYSE), our chief
executive officer is required to make, and he has made, an annual certification to the NYSE stating
that he was not aware of any violation by us of the corporate governance listing standards of the
NYSE. Our chief executive officer made his annual certification to that effect to the NYSE as of
June 2, 2004. In addition, we have filed, as exhibits to this Annual Report on Form 10-K for the
year ended December 31, 2004, the certifications of our principal executive officer and principal
financial officer required under Section 302 of the Sarbanes Oxley Act of 2002. 
 ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference from the Companys Proxy Statement (under the
heading Executive Compensation) to be filed with respect to the Annual Meeting of Shareholders to
be held May 3, 2005. 41




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##### 



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information is incorporated by reference from Item 5 herein and from the Companys Proxy
Statement (under the heading Share Ownership of Management and Certain Beneficial Owners) to be
filed with respect to the Annual Meeting of Shareholders to be held May 3, 2005. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference from the Companys Proxy Statement (under the
heading Certain Relationships and Related Transactions) to be filed with respect to the Annual
Meeting of Shareholders to be held May 3, 2005. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES This information is incorporated by reference from the Companys Proxy Statement (under the
heading Principal Accountant Fees and Services) to be filed with respect to the Annual Meeting of
Shareholders to be held May 3, 2005. 
 PART IV. 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Financial Statements and Schedules. The following financial statements and schedules are included in this report: Form 10-K PageReport of Independent Registered Public Accounting Firm
    
    48Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    50Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    51Consolidated Statements of Shareholders Equity for the years ended December 31, 2004, 2003 and 2002
    
    52Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    53Notes to Consolidated Financial Statements
    
    54Schedule II  Valuation and Qualifying Accounts for the years ended December 31, 2004, 2003 and 2002
    
    75Schedule III  Real Estate and Accumulated Depreciation as of December 31, 2004
    
    76Notes to Schedule III
    
    78Schedule IV  Mortgage Loans on Real Estate as of December 31, 2004
    
    79
 Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below. Management
contracts or compensatory plans are filed as Exhibits 10.11, 10.12, 10.13, 10.33, 10.34, 10.35,
10.36, 10.37, 10.38, 10.39, 10.40, 10.41, 10.42, 10.43, and 10.44. Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form
10-Q or filed with the Securities and Exchange Commission on August 4,
1999 and Exhibit 4.4(b) to the Companys Registration Statement on
Form 8-A as filed with the Securities and Exchange Commission on
January 30, 2004.3.2
    
    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2
to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 19, 2001).4.1
    
    Specimen certificate for Common Stock (Incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration No.
33-76602) effective May 25, 1994).4.2
    
    Specimen certificate for 8.00% Series B Cumulative Preferred Stock
(Incorporated by reference to Exhibit 4.3 to the Companys
Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on January 30, 2004).
 42




---



##### 



Exhibit
    
    Description4.3
    
    Form of Articles of Amendment to the Restated Articles of
Incorporation Establishing and Fixing the Rights and Preferences of
the 8.00% Series B Cumulative Preferred Stock (Incorporated by
reference to Exhibit 4.4(b) to the Companys Registration Statement on
Form 8-A as filed with the Securities and Exchange Commission on
January 30, 2004).10.1
    
    Second Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 24, 1997).10.2
    
    Amendment No. 1 dated September 11, 1997, to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on September 15, 1997).10.3
    
    Amendment No. 2 dated December 31, 1997, to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 10.4 to the Companys Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on March 27, 1998 and as amended by Form 10-K/A filed with
the Securities and Exchange Commission on April 1, 1998).10.4
    
    Amendment No. 3 dated September 14, 1998, to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 10.4 to the Companys Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on March 17, 2000).10.5
    
    Amendment No. 4 dated October 1, 1999, to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 4.1 to the Companys Quarterly
Report on Form 10-Q as filed with the Securities and Exchange
Commission on November 12, 1999).10.6
    
    Amendment No. 5 dated as of January 1, 2002, to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.6 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 15, 2002).10.7
    
    Amendment No. 6 dated as of April 2, 2002, to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.7 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 14, 2003).10.8
    
    Amendment No. 7 dated as of October 10, 2003, to Second Amended and Restated Agreement
of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on November 12, 2003).10.9
    
    Amendment No. 8 dated as of February 24, 2004, to Second Amended and Restated Agreement
of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.9 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 12, 2004).10.10
    
    Limitation of Future Hotel Ownership and Development Agreement (Incorporated by
reference to Exhibit 10.37 to the Companys Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration No. 33-91230) effective
May 11, 1995).10.11
    
    Winston Hotels, Inc. Stock Incentive Plan as amended May 1998 (Incorporated by
reference to Exhibit 4.5 to the Companys Registration Statement on Form S-8 as filed
with the Securities and Exchange Commission on July 29, 1998 (Registration No.
333-60079)).
 43




---



##### 



Exhibit
    
    Description10.12
    
    Amendments to Winston Hotels, Inc. Stock Incentive Plan as Amended May 1998
(Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on October 14, 2003).10.13
    
    Amended and Restated Winston Hotels, Inc. Executive Deferred Compensation Plan
(Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on October 14, 2003).10.14
    
    Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated
November 3, 1998 (Incorporated by reference to Exhibit 10.01 to the Companys
Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on
November 16, 1998 and as amended on Form 10-Q/A filed with the Securities and
Exchange Commission on February 23, 1999).10.15
    
    Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital
Company, LLC (Incorporated by reference to Exhibit 10.02 to the Companys Quarterly
Report on Form 10-Q as filed with the Securities and Exchange Commission on November
16, 1998 and as amended on Form 10-Q/A filed with the Securities and Exchange
Commission on February 23, 1999).10.16
    
    Second Amended and Restated Syndicated Credit Agreement, dated as of December 19,
2001, among Wachovia Bank, N.A., Branch Banking and Trust Company, SouthTrust Bank,
N.A., Centura Bank, Winston Hotels, Inc., WINN Limited Partnership and Wachovia Bank,
N.A. as Agent (the Credit Agreement) (Incorporated by reference to Exhibit 10.18 to
the Companys Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 15, 2002).10.17
    
    Fifth Amendment to Second Amended and Restated Syndicated Credit Agreement, dated as
of September 8, 2003 (Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Securities and Exchange Commission on
October 2, 2003).10.18
    
    Sixth Amendment to Second Amended and Restated Syndicated Credit Agreement, dated as
of December 13, 2004.10.19
    
    Master Repurchase Agreement Between Marathon Structured Finance Fund, LP and Winston
Finance Partners LLC dated as of October 5, 2004 (Incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the Securities
and Exchange Commission on October 12, 2004).10.20
    
    Loan Agreement dated as of March 11, 2005 by and between Winston SPE II LLC and
General Electric Capital Corporation.10.21
    
    Form of Mortgage Security Agreement and Fixture Filing dated March 11, 2005 by
Winston SPE II LLC.10.22
    
    Form of Deed of Trust, Security Agreement and Fixture Filing dated March 11, 2005 by
Winston SPE II LLC.10.23
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Wachovia Bank, N.A. for the principal
sum of $48,000,000 pursuant to the Credit Agreement (Incorporated by reference to
Exhibit 10.19 to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 2002).10.24
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Branch Banking and Trust Company for the
principal sum of $40,000,000 pursuant to the Credit Agreement (Incorporated by
reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 15, 2002).
 44




---



##### 



Exhibit
    
    Description10.25
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to SouthTrust Bank, N.A. for the principal
sum of $22,000,000 pursuant to the Credit Agreement (Incorporated by reference to
Exhibit 10.21 to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 2002).10.26
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Centura Bank for the principal sum of
$15,000,000 pursuant to the Credit Agreement (Incorporated by reference to Exhibit
10.22 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 15, 2002).10.27
    
    Extension Agreement; Second Modification Agreement of Form of Deed of Trust,
Assignment of Rents, Security Agreement and Financing Statement used to secure
certain obligations under the Credit Agreement (not including certain variations
existing in the different states where the properties are located) (Incorporated by
reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 15, 2002).10.28
    
    Leasehold Acquisition Agreement, dated as of June 28, 2002, by and among Winston
Hotels, Inc., CapStar Winston Company, LLC, MeriStar Management Company, LLC, Barclay
Hospitality Services Inc. and certain affiliates of the foregoing parties
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K as filed with the Securities and Exchange Commission on July 15, 2002).10.29
    
    Termination Agreement between Barclay Hospitality Services Inc. and Interstate
Management and Investment Corporation, dated as of July 1, 2003 (Incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on August 13, 2003).10.30
    
    Form Master Lease Agreement dated as of January 1, 2005 with Barclay Hospitality
Services, Inc., our TRS Lessee.10.31
    
    Hotel Management Agreement, dated July 1, 2002, by and between Barclay Hospitality
Services, Inc. and MeriStar Management Company, L.L.C. (Incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K as filed with the Securities
and Exchange Commission on July 15, 2002).10.32
    
    Hotel Management Agreement by and between Barclay Hospitality Services, Inc. and
Alliance Hospitality Management, LLC, dated as of July 1, 2003 (Incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on August 13, 2003).10.33
    
    Employment Agreement, dated January 2, 2003, by and between Robert W. Winston, III
and Winston Hotels, Inc. (Incorporated by reference to Exhibit 10.21 to the Companys
Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 14, 2003).10.34
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement, dated January 2, 2003,
by and between Robert W. Winston, III and Winston Hotels, Inc.10.35
    
    Employment Agreement dated January 2, 2003, by and between Kenneth R. Crockett and
Winston Hotels, Inc. (Incorporated by reference to Exhibit 10.22 to the Companys
Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 14, 2003).10.36
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated January 2, 2003,
by and between Kenneth R. Crockett and Winston Hotels, Inc.10.37
    
    Employment Agreement dated January 2, 2003, by and between Joseph V. Green and
Winston Hotels, Inc. (Incorporated by reference to Exhibit 10.23 to the Companys
Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 14, 2003).10.38
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated January 2, 2003,
by and between Joseph V. Green and Winston Hotels, Inc.10.39
    
    Employment Agreement dated March 30, 2004, by and between Brent V. West and Winston
Hotels, Inc.
 45




---



##### 



Exhibit
    
    Description10.40
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated March 30, 2004,
by and between Brent V. West and Winston Hotels, Inc.10.41
    
    Employment Agreement dated March 30, 2004, by and between James P. Frey and Winston
Hotels, Inc.10.42
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement, March 30, 2004, by and
between James P. Frey and Winston Hotels, Inc.10.43
    
    Summary of 2004 and 2005 executive officer compensation (Incorporated by reference to
the description in Item 1.01 of the Companys Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February 7, 2005).10.44
    
    Summary of 2004 and 2005 Non-Employee Director compensation (Incorporated by
reference to the description in Item 1.01 of the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on February 7, 2005).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP).31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
 46




---



##### 



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. WINSTON HOTELS, INC.By:
    /s/ Robert W. Winston, IIIRobert W. Winston, IIIChief Executive Officer Date: March 16, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ Charles M. Winston
    
    Chairman of the Board of Directors
    
    March 16, 2005

Charles M. Winston/s/ Robert W. Winston, III
    
    Chief Executive Officer
and Director
(Principal Executive Officer)
    
    March 16, 2005Robert W. Winston, III/s/ Joseph V. Green
    
    President and Chief Financial Officer
    
    March 16, 2005Joseph V. Green/s/ Brent V. West
    
    Vice President and Chief
Accounting Officer
    
    March 16, 2005Brent V. West/s/ Edwin B. Borden
    
    Director
    
    March 16, 2005Edwin B. Borden/s/ Thomas F. Darden, II
    
    Director
    
    March 16, 2005Thomas F. Darden, II/s/ Richard L. Daugherty
    
    Director
    
    March 16, 2005Richard L. Daugherty/s/ James H. Winston
    
    Director
    
    March 16, 2005James H. Winston/s/ David C. Sullivan
    
    Director
    
    March 16, 2005David C. Sullivan
 47




---



##### 



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders
of Winston Hotels, Inc.: We have completed an integrated audit of Winston Hotels Inc.s 2004 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2004 and audits
of its 2003 and 2002 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below. Consolidated financial statements and financial statement schedules In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a) present fairly, in all material respects, the financial position of Winston Hotels, Inc. and
its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedules listed in the index appearing under Item 15(a) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in Note 4 to the consolidated financial statements, in 2003, the Company adopted FASB
Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting, appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of December 31, 2004 based on criteria established in
Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Frameworkissued by the COSO. The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. 48




---



##### 



Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP
Raleigh, NC
March 11, 2005 49




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##### 



WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2004 and 2003($ in thousands, except per share amounts) 2004
    
    
    2003ASSETSLand
    
    $
    46,215
    
    
    $
    4,788Buildings and improvements
    
    
    382,458
    
    
    
    377,109Furniture and equipment
    
    
    54,661
    
    
    
    51,323Operating properties
    
    
    483,334
    
    
    
    473,220Less accumulated depreciation
    
    
    134,261
    
    
    
    128,540349,073
    
    
    
    344,680Properties under development
    
    
    3,962
    
    
    
    3,521Net investment in hotel properties
    
    
    353,035
    
    
    
    348,201Assets held for sale
    
    
    7,037
    
    
    
    2,100Corporate FF&E, net
    
    
    397
    
    
    
    621Cash
    
    
    4,115
    
    
    
    5,623Accounts receivable, net
    
    
    2,676
    
    
    
    2,505Lease revenue receivable
    
    
    
    
    
    
    179Notes receivable
    
    
    30,849
    
    
    
    5,016Investment in joint ventures
    
    
    2,512
    
    
    
    1,607Deferred expenses, net
    
    
    3,759
    
    
    
    2,935Prepaid expenses and other assets
    
    
    7,976
    
    
    
    8,653Deferred tax asset
    
    
    12,024
    
    
    
    9,821Total assets
    
    $
    424,380
    
    
    $
    387,261LIABILITIES AND SHAREHOLDERS EQUITYDue to banks
    
    $
    66,850
    
    
    $
    29,200Long-term debt
    
    
    88,075
    
    
    
    91,284Accounts payable and accrued expenses
    
    
    13,066
    
    
    
    11,484Distributions payable
    
    
    5,994
    
    
    
    5,870Total liabilities
    
    
    173,985
    
    
    
    137,838Minority interest
    
    
    10,154
    
    
    
    17,489Shareholders equity:Preferred stock, Series A, $.01 par value, 10,000,000 shares
authorized,
3,000,000 shares issued and outstanding
    
    
    
    
    
    
    30Preferred stock, Series B, $.01 par value, 5,000,000 shares
authorized,
3,680,000 shares issued and outstanding (liquidation preference of
$93,840)
    
    
    37
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized,
26,397,574 and 26,270,805 shares issued and outstanding
    
    
    264
    
    
    
    263Additional paid-in capital
    
    
    323,947
    
    
    
    307,089Accumulated other comprehensive loss
    
    
    
    
    
    
    (33
    )Unearned compensation
    
    
    (1,145
    )
    
    
    (527
    )Distributions in excess of earnings
    
    
    (82,862
    )
    
    
    (74,888
    )Total shareholders equity
    
    
    240,241
    
    
    
    231,934Total liabilities, minority interest and shareholders equity
    
    $
    424,380
    
    
    $
    387,261
 The accompanying notes are an integral part of the consolidated financial statements. 50




---



##### 



WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2004, 2003 and 2002(in thousands, except per share amounts) 2004
    
    
    2003
    
    
    2002Revenue:Rooms
    
    $
    124,462
    
    
    $
    108,811
    
    
    $
    53,060Food and beverage
    
    
    9,129
    
    
    
    7,200
    
    
    
    3,898Other operating departments
    
    
    3,969
    
    
    
    4,093
    
    
    
    2,282Percentage lease revenue
    
    
    701
    
    
    
    2,141
    
    
    
    27,590Joint venture fee income
    
    
    181
    
    
    
    358
    
    
    
    270Total revenue
    
    
    138,442
    
    
    
    122,603
    
    
    
    87,100Hotel operating expenses:Rooms
    
    
    28,219
    
    
    
    25,439
    
    
    
    12,525Food and beverage
    
    
    6,763
    
    
    
    5,436
    
    
    
    2,873Other operating departments
    
    
    2,918
    
    
    
    2,894
    
    
    
    1,489Undistributed operating expenses:Property operating expenses
    
    
    28,264
    
    
    
    23,877
    
    
    
    11,695Real estate taxes and property and casualty insurance
    
    
    6,532
    
    
    
    5,955
    
    
    
    6,052Franchise costs
    
    
    8,963
    
    
    
    7,806
    
    
    
    2,168Maintenance and repair
    
    
    7,424
    
    
    
    6,510
    
    
    
    3,775Management fees
    
    
    3,175
    
    
    
    2,598
    
    
    
    3,059Percentage lease expense
    
    
    
    
    
    
    4,610
    
    
    
    1,211General and administrative
    
    
    6,858
    
    
    
    5,924
    
    
    
    4,842Depreciation
    
    
    17,655
    
    
    
    16,778
    
    
    
    17,939Lease/management agreement acquisition
    
    
    
    
    
    
    1,300
    
    
    
    17,668Amortization
    
    
    1,434
    
    
    
    981
    
    
    
    828Total operating expenses
    
    
    118,205
    
    
    
    110,108
    
    
    
    86,124Operating income
    
    
    20,237
    
    
    
    12,495
    
    
    
    976Interest and other income
    
    
    2,196
    
    
    
    1,202
    
    
    
    1,188Interest expense
    
    
    7,157
    
    
    
    7,257
    
    
    
    10,478Income (loss) before allocation to minority interest in Partnership,
allocation to minority interest in consolidated joint ventures,
income taxes, and equity in income (loss) of unconsolidated
joint ventures
    
    
    15,276
    
    
    
    6,440
    
    
    
    (8,314
    )Income (loss) allocation to minority interst in Partnership
    
    
    377
    
    
    
    196
    
    
    
    (430
    )Income (loss) allocation to minority intererest in consolidated
joint ventures
    
    
    255
    
    
    
    (36
    )
    
    
    Income tax benefit
    
    
    (2,114
    )
    
    
    (2,267
    )
    
    
    (7,418
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    (61
    )
    
    
    1,193
    
    
    
    1,172Income from continuing operations
    
    
    16,697
    
    
    
    9,740
    
    
    
    706Discontinued operations:Earnings from discontinued operations
    
    
    611
    
    
    
    823
    
    
    
    914Gain (loss) on sale of discontinued operations
    
    
    15
    
    
    
    
    
    
    
    (718
    )Loss on impairment of asset held for sale
    
    
    (440
    )
    
    
    (2,430
    )
    
    
    Income before cumulative effect of change in accounting principle
    
    
    16,883
    
    
    
    8,133
    
    
    
    902Cumulative effect of change in accounting principle  net
    
    
    
    
    
    
    (428
    )
    
    
    Net income
    
    
    16,883
    
    
    
    7,705
    
    
    
    902Preferred stock distribution
    
    
    (7,315
    )
    
    
    (6,938
    )
    
    
    (6,938
    )Loss on redemption of Series A Preferred Stock
    
    
    (1,720
    )
    
    
    
    
    
    
    Net income (loss) available to common shareholders
    
    $
    7,848
    
    
    $
    767
    
    
    $
    (6,036
    )Income (loss) per common share:Basic and diluted:Income (loss) from continuing operations
    
    $
    0.29
    
    
    $
    0.13
    
    
    $
    (0.32
    )Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    (0.08
    )
    
    
    0.01Loss per common share from cumulative effect of change
in accounting principle  net
    
    
    
    
    
    
    (0.02
    )
    
    
    Net income (loss) per common share
    
    $
    0.30
    
    
    $
    0.03
    
    
    $
    (0.31
    )Weighted average number of common shares
    
    
    26,224
    
    
    
    21,770
    
    
    
    19,308Weighted average number of common shares assuming dilution
    
    
    27,555
    
    
    
    23,086
    
    
    
    19,308
 The accompanying notes are an integral part of the consolidated financial statements. 51




---



##### 



WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2004, 2003 and 2002(in thousands, except per share amounts) Additional
    
    
    
    
    
    
    Distribution
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Unearned
    
    
    in Excess of
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalances at December 31, 2001
    
    
    3,000
    
    
    $
    30
    
    
    
    16,925
    
    
    $
    169
    
    
    $
    230,109
    
    
    $
    (542
    )
    
    $
    (43,717
    )
    
    $
    (1,844
    )
    
    $
    184,205Issuance of shares and other
    
    
    
    
    
    
    
    
    
    
    3,224
    
    
    
    32
    
    
    
    26,611
    
    
    
    (555
    )
    
    
    
    
    
    
    
    
    
    
    26,088Distributions ($0.60 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,087
    )
    
    
    
    
    
    
    (12,087
    )Distributions ($2.31 per preferred share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,938
    )
    
    
    
    
    
    
    (6,938
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    501Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    902
    
    
    
    Unrealized gain/loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,844Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,746Balances at December 31, 2002
    
    
    3,000
    
    
    
    30
    
    
    
    20,149
    
    
    
    201
    
    
    
    256,720
    
    
    
    (596
    )
    
    
    (61,840
    )
    
    
    
    
    
    
    194,515Issuance of shares and other
    
    
    
    
    
    
    
    
    
    
    6,122
    
    
    
    62
    
    
    
    50,369
    
    
    
    (757
    )
    
    
    
    
    
    
    
    
    
    
    49,674Distributions ($0.60 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,815
    )
    
    
    
    
    
    
    (13,815
    )Distributions ($2.31 per preferred share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,938
    )
    
    
    
    
    
    
    (6,938
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    826
    
    
    
    
    
    
    
    
    
    
    
    826Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,705
    
    
    
    Unrealized gain/loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,672Balances at December 31, 2003
    
    
    3,000
    
    
    
    30
    
    
    
    26,271
    
    
    
    263
    
    
    
    307,089
    
    
    
    (527
    )
    
    
    (74,888
    )
    
    
    (33
    )
    
    
    231,934Issuance of shares and other
    
    
    3,680
    
    
    
    37
    
    
    
    127
    
    
    
    1
    
    
    
    90,108
    
    
    
    (1,328
    )
    
    
    
    
    
    
    
    
    
    
    88,818Redemption of Preferred A Stock
    
    
    (3,000
    )
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    (73,250
    )
    
    
    
    
    
    
    (1,720
    )
    
    
    
    
    
    
    (75,000
    )Distributions ($0.60 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,822
    )
    
    
    
    
    
    
    (15,822
    )Distributions ($0.353 per preferred A share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,059
    )
    
    
    
    
    
    
    (1,059
    )Distributions ($1.70 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,256
    )
    
    
    
    
    
    
    (6,256
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    710Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,883
    
    
    
    Unrealized gain/loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,916Balances at December 31, 2004
    
    
    3,680
    
    
    $
    37
    
    
    
    26,398
    
    
    $
    264
    
    
    $
    323,947
    
    
    $
    (1,145
    )
    
    $
    (82,862
    )
    
    $
    
    
    
    $
    240,241
 The accompanying notes are an integral part of the consolidated financial statements. 52




---



##### 



WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002($ in thousands) 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    16,883
    
    
    $
    7,705
    
    
    $
    902Adjustments to reconcile net income to net cash provided by
operating activities:Income (loss) allocation to minority interest in Partnership
    
    
    386
    
    
    
    89
    
    
    
    (414
    )Income (loss) allocation to minority interest in consolidated joint ventures
    
    
    255
    
    
    
    (36
    )
    
    
    Depreciation
    
    
    18,147
    
    
    
    17,878
    
    
    
    19,785Amortization
    
    
    1,437
    
    
    
    985
    
    
    
    845Income tax benefit
    
    
    (2,203
    )
    
    
    (2,496
    )
    
    
    (7,325
    )Mezzanine loan loss provision
    
    
    
    
    
    
    
    
    
    
    250(Gain) loss on sale of hotel properties
    
    
    (16
    )
    
    
    
    
    
    
    764Loss on impairment of hotel properties
    
    
    462
    
    
    
    2,583
    
    
    
    (Income) loss allocations from unconsolidated joint ventures
    
    
    61
    
    
    
    (1,193
    )
    
    
    (1,172
    )Distributions from joint ventures
    
    
    126
    
    
    
    1,863
    
    
    
    1,331Unearned compensation amortization
    
    
    710
    
    
    
    826
    
    
    
    501Cummulative effect of change in accounting principle
    
    
    
    
    
    
    428
    
    
    
    Changes in assets and liabilities:Lease revenue receivable
    
    
    179
    
    
    
    (179
    )
    
    
    4,786Accounts receivable
    
    
    (171
    )
    
    
    (495
    )
    
    
    (1,958
    )Prepaid expenses and other assets
    
    
    677
    
    
    
    (1,735
    )
    
    
    (1,971
    )Deferred percentage lease revenue
    
    
    
    
    
    
    
    
    
    
    (1,226
    )Accounts payable and accrued expenses
    
    
    1,615
    
    
    
    (1,149
    )
    
    
    5,348Net cash provided by operating activities
    
    
    38,548
    
    
    
    25,074
    
    
    
    20,446Cash flows from investing activities:Notes receivable
    
    
    (25,833
    )
    
    
    
    
    
    
    (1,750
    )Deferred acquisition costs
    
    
    (7
    )
    
    
    
    
    
    
    (209
    )Franchise fees
    
    
    (145
    )
    
    
    
    
    
    
    Acquisition of minority interest
    
    
    (8,163
    )
    
    
    
    
    
    
    Investment in unconsolidated joint ventures
    
    
    (1,092
    )
    
    
    (779
    )
    
    
    (1,103
    )Proceeds from sale of hotel properties
    
    
    10,533
    
    
    
    
    
    
    
    13,257Investment in hotel properties
    
    
    (36,802
    )
    
    
    (9,062
    )
    
    
    (5,182
    )Net cash provided by (used in) investing activities
    
    
    (61,509
    )
    
    
    (9,841
    )
    
    
    5,013Cash flows from financing activities:Payment of distributions to minority interest in Partnership
    
    
    (779
    )
    
    
    (779
    )
    
    
    (779
    )Distributions to minority interest in consolidated joint ventures
    
    
    (859
    )
    
    
    
    
    
    
    Payment of distributions to shareholders
    
    
    (23,013
    )
    
    
    (19,834
    )
    
    
    (18,542
    )Proceeds from issuance of common shares, net
    
    
    
    
    
    
    50,465
    
    
    
    26,897Proceeds from issuance of Series B Preferred shares, net
    
    
    88,794
    
    
    
    
    
    
    
    Redemption of Series A Preferred shares
    
    
    (75,000
    )
    
    
    
    
    
    
    Proceeds from long-term debt
    
    
    7,946
    
    
    
    153
    
    
    
    Repayments of long-term debt
    
    
    (11,155
    )
    
    
    (1,374
    )
    
    
    (1,278
    )Net increase (decrease) in due to bank
    
    
    37,650
    
    
    
    (43,100
    )
    
    
    (30,600
    )Minority interest contribution to consolidated joint ventures
    
    
    
    
    
    
    2,100
    
    
    
    Fees paid in connection with financing facilities
    
    
    (2,131
    )
    
    
    (709
    )
    
    
    (534
    )Net cash provided by (used in) financing activities
    
    
    21,453
    
    
    
    (13,078
    )
    
    
    (24,836
    )Net increase (decrease) in cash
    
    
    (1,508
    )
    
    
    2,155
    
    
    
    623Cash at beginning of year
    
    
    5,623
    
    
    
    1,510
    
    
    
    887Cash from initial consolidation of joint ventures
    
    
    
    
    
    
    1,958
    
    
    
    Cash at end of year
    
    $
    4,115
    
    
    $
    5,623
    
    
    $
    1,510Supplemental disclosure:Cash paid for interest
    
    $
    6,992
    
    
    $
    7,946
    
    
    $
    9,860Summary of non-cash investing and financing activities:Distributions to shareholders declared but not paid
    
    $
    5,799
    
    
    $
    5,675
    
    
    $
    4,756Distributions to minority interest declared but not paid
    
    
    195
    
    
    
    195
    
    
    
    195Interest rate swap adjustment to market value
    
    
    (33
    )
    
    
    33
    
    
    
    (1,844
    )Adjustment to minority interest due to issuance of common stock and
change in other comprehensive loss
    
    
    23
    
    
    
    791
    
    
    
    538Deferred equity compensation
    
    
    1,328
    
    
    
    757
    
    
    
    555
 The accompanying notes are an integral part of the consolidated financial statements. 53




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WINSTON HOTELS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 1. Organization: Winston Hotels, Inc., (the Company) headquartered in Raleigh, North Carolina, owns hotel
properties and interests in hotel properties through joint ventures, provides loans to the hotel
industry and provides hotel development and asset management services. The Companys primary
source of revenue is room revenue generated from its hotel ownership interests. The Companys
primary growth strategies include improving operations at the hotels in which it holds an ownership
interest, acquiring additional hotels or ownership interests in hotels through joint ventures,
developing hotels on selected sites, and providing loans to the hotel industry. The Company operates so as to qualify as a real estate investment trust (REIT) for federal
income tax purposes. During 1994, the Company completed an initial public offering of its common
stock (Common Stock), utilizing the majority of the proceeds to acquire one hotel and a general
partnership interest (as the sole general partner) in WINN Limited Partnership (the Partnership).
The Partnership used a substantial portion of the proceeds to acquire nine additional hotel
properties. These ten hotels were acquired from affiliates of the Company. The Company and the
Partnership (collectively the Company) began operations as a REIT on June 2, 1994. As of
December 31, 2004, the Companys ownership in the Partnership was 95.31%. As of December 31, 2004, the Company owned or was invested in 52 hotel properties in 15 states
having an aggregate of 7,320 rooms. This included 45 wholly-owned properties with an aggregate of
6,397 rooms, a 49% ownership in one joint venture hotel with 118 rooms, a 48.78% ownership in one
joint venture hotel with 147 rooms, and an indirect 13.05% ownership interest in five joint venture
hotels with an aggregate of 658 rooms. The Company also has issued mezzanine loans to owners of
eight hotels with an aggregate of 1,573 rooms. The Company does not hold an ownership interest in
any of the hotels for which it has provided mezzanine financing. All of the Companys hotels are
operated under franchises from nationally recognized franchisors including Marriott International,
Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PCL, (formerly Six Continents PLC)
and Choice Hotels International. Acquisition of Leasehold Interests Prior to January 1, 2001, under the REIT qualification requirements of the Internal Revenue
Code, REITs generally were required to lease their hotels to third party operators. Under the REIT
Modernization Act of 1999 (the RMA), which became effective January 1, 2001, a REIT is permitted
to lease hotels to wholly-owned taxable REIT subsidiaries of the REIT (TRS Lessees). Under the
RMA, the TRS Lessees may not operate the leased hotels and must enter into management agreements
with eligible independent contractors who manage the hotels. Effective July 1, 2002, the Company, through its wholly-owned taxable REIT subsidiary, Barclay
Hospitality Services, Inc. (Barclay), acquired the leasehold interests for 47 of its hotels from
CapStar Winston Company, L.L.C., a wholly-owned subsidiary of MeriStar Hotels & Resorts, Inc.
(MeriStar). MeriStar has since merged with and become Interstate Hotels & Resorts, Inc.
(Interstate). The acquisition included leasehold interests for 45 wholly-owned hotels and two
joint venture hotels. The total consideration of approximately $19.5 million, to acquire the
leasehold interests for 47 hotels from Interstate, was based upon a $17 million purchase price for
the leasehold interests, adjusted in part for accrued interest and related expenses totaling
approximately $0.7 million, and $1.8 million of working capital. The total acquisition cost, net
of working capital, of $17.7 million, was expensed in the second quarter of 2002. In addition, a
deferred tax benefit of $6.7 million was recognized in the second quarter of 2002, resulting from
the timing difference of the $17.7 million payment for financial reporting purposes versus tax
purposes. During 2003, the Company also assumed the leasehold interests from Intercontinental
Group for two additional hotels, at no cost. In March 2004, the Company negotiated the transfer of the long-term lease with Secaucus
Holding Corporation, a wholly-owned subsidiary of Prime Hospitality Corp. (Prime) for the
Secaucus, NJ Holiday Inn to Barclay. The Company received a net payment from Prime of $269 as part
of the negotiated settlement. This amount is included in percentage lease revenue in the
accompanying consolidated statement of operations for the year ended December 31, 2004. With the
transfer of this lease to Barclay, the Company is no longer the lessor of any hotel leases with
unrelated third parties. Therefore, unless the Company enters into third party hotel leases, as
the lessor, in the future, the Company will not report percentage lease revenue in the future. As of December 31, 2004, all of the Companys 45 wholly-owned hotels and one of its seven
joint venture hotels, the Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay.
One joint venture hotel, the Chapel Hill Courtyard by Marriott, was leased to an entity owned
48.78% by Barclay. The remaining five joint venture hotels, the West Des Moines, IA Fairfield Inn
& Suites, the Beachwood, OH Courtyard by Marriott, the Houston, TX SpringHill Suites, the Shelton,
CT Courtyard by Marriott and the West Des 54




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Moines Quality Suites hotel, which is currently being renovated and is expected to be
converted to a SpringHill Suites by Marriott during the second quarter of 2005, did not operate
under leases. As of December 31, 2004, Alliance Hospitality Management, LLC (Alliance) managed 42 of the
Companys 52 hotels, Concord Hospitality Enterprises Company (Concord) managed four hotels,
Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation (Hilton) managed three hotels, and
New Castle Hotels, LLC (New Castle), Prism Hospitality, L.P. (Prism) and Noble Investment
Group, Ltd. (Noble) each managed one hotel. The acquisition of the leasehold interests entitles Barclay to retain the operating profits or
losses from the related hotels, which previously accrued to Interstate under the leases and gives
the Company (i) more control over the operations of these hotels, (ii) the benefits from any
operating margin improvements and risk of any operating margin deterioration at these hotels, and
(iii) more flexibility, in that these hotels are no longer encumbered by long term leases with
unrelated third parties that are difficult to amend and expensive to terminate. All of the hotels
continue to operate under the same franchise affiliations as prior to the acquisition of the
leasehold interests. The Companys franchisors periodically inspect the Companys hotels to ensure that they meet
certain brand standards primarily pertaining to the condition of the property and its guest service
scores. In connection with these routine reviews, as of June 30, 2004, the Company had received
default notices from the franchisor for two of its hotels. As of December 31, 2004, both of these
properties have been reinspected. One has received an acceptable rating. The other hotel passed
the reinspection for all product improvement issues, but received an unacceptable rating due to its
customer service scores falling below brand standards. We believe this decline in customer service
scores was due, in part, to the ongoing construction to comply with the brands product improvement
requirements. The Company expects to cure this deficiency to comply with the franchisors
standards and expects to receive an acceptable rating for the hotel. Since June 30, 2004, the
Company has received default notices from the franchisor for five other hotels. Four of these
notices pertain to low guest service scores while the other notice was received for failure to
complete a product improvement plan on schedule. The Company is currently in the process of curing
these deficiencies to comply with the franchisors standards and expects to receive an acceptable
rating for all hotels. 2. Summary of Significant Accounting Policies: Principles of Consolidation.The consolidated financial statements include the accounts of
Winston Hotels, Inc., the Partnership, Barclay and two joint ventures which were consolidated as
discussed in Note 4 in accordance with the provision of FASB Interpretation No. 46 (revised
December 2003) Consolidation of Variable Interest Entities. All significant inter-company
balances and transactions have been eliminated. Investment in Hotel Properties.Hotel properties are recorded at cost and are depreciated
using the straight-line method over estimated useful lives of the assets of 5 and 30 years for
furniture, fixtures and equipment, and buildings and improvements, respectively. Upon disposition,
both the assets and accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to the income statement. The Company expenses repairs and maintenance costs of
the hotels as they are incurred. The Company evaluates long-lived assets for potential impairment in accordance with FASB No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets by analyzing the operating
results, trends and prospects for the Company and considering any other events and circumstances
that might indicate potential impairment. Investment in Joint Ventures.Investment in joint ventures consists of the Companys direct
cash or land contributions to unconsolidated joint ventures, plus capitalized internal costs of
services provided by the Company during the development stage, plus the Companys share of net
income (loss), less distributions received. These internal costs are capitalized at the same
percentage as the Companys ownership interest. In accordance with the provisions of Statement of
Position 78-9, Accounting for Investments in Real Estate Ventures, the Company uses the equity
method to recognize its share of net income or loss of the unconsolidated joint venture it has
invested in (see Note 3). The Company evaluates its investments in joint ventures for impairment by considering a number
of factors including assessing current fair value of the investment to carrying value. If the
current fair value of the investment is less than the carrying value, and there is either an
absence of an ability to recover the carrying value of the investment, or the property does not
appear to have the ability to sustain an earnings capacity that would justify the carrying amount
of the investment, am impairment charge may be required. Revenue Recognition.Room, food and beverage, and other revenue is recognized at the time of
service. 55




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Derivative Financial Instruments.The Company recognizes all derivative financial instruments
as assets and liabilities and measures them at fair value. For derivative financial instruments
that are designated and qualify as a cash flow hedge, the effective portions of changes in fair
value of the derivative are recorded in accumulated other comprehensive income and are recognized
in the
income statement when the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized currently in earnings. Changes in the fair value of
derivatives that do not qualify for hedge treatment are recognized currently in earnings (see Note
9). Deferred Expenses.Included in deferred expenses are franchise fees, loan costs and
acquisition costs which are recorded at cost. Amortization of franchise fees is computed using the
straight-line method over the term of the related franchise agreement. Amortization of loan costs
is computed using the straight-line method, which approximates the effective interest method, over
the period of the related debt facility. Acquisition costs are capitalized to properties when
purchased. Minority Interest.Minority interest as of December 31, 2004 and 2003, consists of Minority
Interest in Partnership of $7,255 and $7,671, respectively, and Minority Interest in Consolidated
Joint Ventures of $2,899 and $9,818 , respectively. Minority Interest in Partnership.Certain hotel properties have been acquired, in part, by
the Partnership, through the issuance of limited partnership units of the Partnership. The equity
interest in the Partnership created by these transactions represents the Companys minority
interest. The Companys minority interest is: (i) increased or decreased by its pro-rata share of
the net income or net loss, respectively, of the Partnership; (ii) decreased by distributions;
(iii) decreased by redemption of partnership units for the Companys Common Stock; and (iv)
adjusted to equal the net equity of the Partnership multiplied by the limited partners ownership
percentage immediately after each issuance of units of the Partnership and/or Common Stock of the
Company through an adjustment to additional paid-in capital. Income (loss) is allocated to
minority interest based on the weighted average percentage ownership throughout the year. Minority Interest in Consolidated Joint Ventures.Certain ownership interests in hotel
properties have been acquired, in part, by the Company, through joint venture agreements. The
equity interests of the Companys joint venture partners of the consolidated joint ventures
represent the Companys minority interest (see Note 4). The Companys minority interest is: (i)
increased or decreased by its joint venture partners pro-rata share of the net income or net loss,
respectively, of the respective joint venture, and (ii) decreased by distributions to its joint
venture partners. Income (loss) is allocated to minority interest in accordance with the
provisions of each joint venture operating agreement. Earnings Per Share.Net income (loss) per common share is computed by dividing net income
(loss) applicable to common shareholders by the weighted-average number of common shares
outstanding during the period. Net income (loss) per common share assuming dilution is computed by
dividing net income (loss) applicable to common shareholders plus income allocated to minority
interest by the weighted-average number of common shares assuming dilution during the period.
Weighted average number of common shares assuming dilution includes common shares and dilutive
common share equivalents, including redeemable limited partnership units, stock options, and
unvested stock grants (see Notes 10 and 11). Distributions.The Companys ability to pay regular quarterly distributions is dependent upon
receipt of distributions from the Partnership, which in turn is dependent upon the results of
operations of the Companys properties. For federal income tax purposes, 2004 distributions
amounted to $0.60 per common share. Stock-based Compensation.The Company has one stock-based employee compensation plan, which
is described more fully in Note 12. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected in net income for
the issuance of options, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) applicable to common shareholders and earnings (loss)
per share as if the Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee compensation. 56




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Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss) available to common shareholders, as reported
    
    $
    7,848
    
    
    $
    767
    
    
    $
    (6,036
    )Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    1
    
    
    
    18
    
    
    
    90Pro forma net income (loss) available to common shareholders
    
    
    7,847
    
    
    
    749
    
    
    
    (6,126
    )Earnings (loss) per share:Basic and diluted  as reported
    
    $
    0.30
    
    
    $
    0.03
    
    
    $
    (0.31
    )Basic and diluted  pro forma
    
    $
    0.30
    
    
    $
    0.03
    
    
    $
    (0.32
    )
 Income Taxes.The Company qualifies as a REIT under Sections 856 to 860 of the Internal
Revenue Code. Effective July 1, 2002, under the REIT Modernization Act, the Company began leasing
its hotels to a wholly-owned taxable REIT subsidiary that is subject to federal and state income
taxes. The Company accounts for income taxes of this subsidiary in accordance with the provisions
of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under
SFAS 109, the Company accounts for income taxes using the asset and liability method under which
deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Earnings and profits, which determine the taxability of distributions to shareholders, differ
from net income reported for financial reporting purposes due primarily to the differences for
federal tax purposes in the estimated useful lives used to compute depreciation and the carrying
value (basis) of the investment in hotel properties. For federal income tax purposes, 0% of the
distributions declared on the Companys Preferred Stock in 2004, 2003, and 2002 are considered to
be return of capital. For federal income tax purposes, approximately 0%, 14%, and 41% of the
distributions declared on the Companys Common Stock in 2004, 2003, and 2002, respectively, are
considered to be return of capital. Concentration of Credit Risk.Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, accounts receivable and notes receivable.
The Company places cash deposits at federally insured depository institutions. At December 31,
2004, bank account balances exceeded federal depository insurance limits by approximately $7,030. Recently Issued Accounting Standards.In November 2004, the FASB issued Statement of
Financial Accounting Standards No. 151, Inventory Costs  an amendment of ARB No. 43, (SFAS No.
151), which is effective for fiscal years beginning after June 15, 2005. SFAS No. 151 will have
no impact on the Company. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised
2004), Share-Based Payment, (SFAS No. 123), which is effective for fiscal years beginning after
June 15, 2005. SFAS No. 123 is a revision of FASB Statement No. 123, (Accounting for Stock-Based
Compensation). SFAS No. 123 is not expected to have a material impact on the Companys financial
statements or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 152
Accounting for Real Estate Time-Sharing Transactions, (SFAS No. 152), which is effective for
fiscal years beginning after June 15, 2005. SFAS No. 152 is not expected to have a material impact
on the Companys financial statements or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, (SFAS No. 153), which is
effective for fiscal years beginning after June 15, 2005. SFAS No. 153 is not expected to have a
material impact on the Companys financial statements or results of operations. Estimates.The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the balance sheet dates and the reported amounts of revenues and expenses during
the periods reported. Actual results could differ from those estimates. 3. Joint Ventures: During the third quarter of 2003, the Company entered into a joint venture agreement (the
Chapel Hill Joint Venture) with Chapel Hill Investments, LLC to develop and own hotel properties.
The Chapel Hill Joint Venture owns the Courtyard by Marriott hotel in Chapel Hill, NC, (the
Chapel Hill Courtyard) which opened in September 2004. The Company currently owns a 48.78%
interest in the Chapel Hill Joint Venture, while Chapel Hill Investments, LLC owns a 51.22%
interest. The Company also has provided an additional $1,453 to capitalize the development of the
hotel in the form of a preferred membership interest (Preferred Contribution). 57




---



##### 



The Companys
Preferred Contribution required monthly dividends to be paid in cash to the Company during
construction of the hotel at an annual yield of 30-day LIBOR plus 5.885%, plus an accrued dividend
at an annual yield of 8%. Once the hotel opened, and until the Preferred Contribution and all
dividends payable and accrued thereon are paid in full, the Companys Preferred Contribution
requires a paid monthly dividend to the Company equal to a floating rate equal to 30-day LIBOR plus
8.16%. The Preferred Contribution also requires monthly dividend payments equal to one percent of
gross revenue and also accrues dividends monthly equal to one percent of gross revenue. The
Company received $700 for development services provided during construction, with the margin on
such fees being recognized as a reduction in depreciation expense over the life of the project.
Chapel Hill Investments, LLC is owned 52% by Charles Winston and James Winston, both of whom are
directors of the Company, and 48% by three unrelated private investors. The Company has
consolidated the results of operations and financial position of this joint venture beginning with
the third quarter 2003. As a result, the Companys share of equity in the Chapel Hill Joint
Venture of $1,785, and its Preferred Contribution totaling $1,453 at December 31, 2004 have been
eliminated in consolidation. During the fourth quarter of 2002, the Company formed a joint venture (the Charlesbank
Venture) with Boston-based Charlesbank Capital Partners, LLC (Charlesbank). The Company owns
15% of the Charlesbank Venture and Charlesbank owns 85%. The Charlesbank Venture focuses on
acquisitions that the partners believe have turnaround or upside potential and can benefit from
additional capital and aggressive asset management, which often includes renovating, repositioning,
rebranding and/or a change in management. As of December 31, 2004, the Charlesbank Venture had
invested in four hotels to date through a joint venture
(WCC Project Company LLC) comprised of Concord Hospitality Enterprises Company (Concord) and
the Charlesbank Venture. The first hotel was a vacant building located in the Beachwood suburb of
Cleveland, OH that was converted into a 113-room Courtyard by Marriott in the second quarter of
2003. The second hotel was a 102-room Fairfield Inn & Suites by Marriott located in Des Moines,
IA, which was converted from a Wingate Inn during the summer of 2002. The third hotel was a Best
Western located in Houston, TX, which was purchased in the fourth quarter of 2003 and was converted
to a SpringHill Suites by Marriott in June 2004. The fourth hotel was a Quality Suites located in
West Des Moines, IA, which is expected to be converted to a SpringHill Suites by Marriot in the
second quarter of 2005. Concord owns a 13% interest in the projects acquired by WCC Project
Company LLC, while the Charlesbank Venture owns 87%, so that the Company has an indirect 13.05%
ownership interest in WCC Project Company LLC. The total cost of these four hotels is
approximately $36 million. The Company earns an annual asset management fee equal to 0.50% of the
total cost of the assets purchased by the Charlesbank Venture. At any time following two years after WCC Project Company LLC first acquires each hotel, the
Manager (the Charlesbank Venture), by written notice to Concord, may require the sale of any one or
more of the hotels to a third party. At any time following twelve months after the acquisition of the first hotel, either the
Manager or Concord can give the other written notice of their election to buy or sell any one or
all of the hotels owned by WCC Project Company LLC at fair market value, as determined under the
Limited Liability Company Agreement of WCC Project Company LLC. The purchasing Member must then,
within three business days, deposit 5% of the fair market value with a title insurance company. If
within twenty days following the deposit the purchasing Member does not wish to proceed, it must
notify the non-purchasing Member who shall then have the right to become the purchasing Member
under the same terms and conditions. If the purchasing Member defaults on its obligation to
consummate the purchase after twenty days of making the deposit, then the non-purchasing Member
shall have the right to (i) be the purchasing Member under the same terms and conditions as the
purchase that failed to close except that the purchase price will be 85% of the previously
determined closing price, (ii) cause each hotel to be terminated and dissolved in accordance with
the operating agreement, or (iii) retain the deposit and continue as if the option to purchase or
buy had never been exercised. As of December 31, 2004, the Companys investment in the Charlesbank
Venture totaled $2,512. In February 2004, the Charlesbank Venture invested in a fifth hotel through a joint venture
with Shelton III Hotel Equity LLC, owned in part by New Castle Hotels LLC (New Castle) and the
Charlesbank Venture (WNC Project Company LLC). This hotel was a Ramada Inn that was converted to
a Courtyard by Marriott in the first quarter of 2005. The total cost of the project was
approximately $13,900 (including approximately $5,000 in renovation costs), approximately $9,000 of
which is financed through debt. New Castle owns a 13% interest in the project while the
Charlesbank Venture owns 87%, so that the Company has an indirect 13.05% ownership interest in WNC
Project Company LLC. At any time following twelve months after WNC Project Company LLC first acquires each hotel,
either the Charlesbank Venture or the Manager (Shelton III Hotel Equity LLC) by written notice to
the other Member, may require the sale of any one or more of the hotels to a third party. At any time following twelve months after the acquisition of the first hotel, either the
Charlesbank Venture or the Manager can give the other written notice of their election to buy or
sell any one or all of the hotels owned by WNC Project Company LLC at fair market value, as
determined under the Limited Liability Company Agreement of WNC Project Company LLC. The
purchasing Member must then, within three business days, deposit 5% of the fair market value with a
title insurance company. If within twenty days following the deposit the purchasing Member does
not wish to proceed, it must notify the non-purchasing Member who shall then have the right to
become the purchasing Member under the same terms and conditions. If the purchasing Member
defaults on its 58




---



##### 



obligation to consummate the purchase after twenty days of making the deposit, then
the non-purchasing Member shall have the right to (i) be the purchasing Member under the same terms
and conditions as the purchase that failed to close except that the purchase price will be 85% of
the previously determined closing price, (ii) cause each hotel to be terminated and dissolved in
accordance with the operating agreement, or (iii) retain the deposit and continue as if the option
to purchase or buy had never been exercised. Under the terms of the Charlesbank Venture, Charlesbank will provide 85% of the total
equity, and the Company will provide the remaining 15% of the total equity committed to each
acquisition. Charlesbank will have the option to expand the venture by committing additional
equity to future acquisitions after the initial equity is committed. The Company anticipates that
the Charlesbank Venture will be able to secure debt financing for approximately 65% of the total
cost of hotel assets that are purchased. The Company, through the Charlesbank Venture, receives
cash distributions of any operating profits from both WCC Project Company LLC and WNC Project
Company LLC on a quarterly basis. In 2000, the Company entered into a joint venture agreement with Marsh Landing Investment, LLC
(Marsh) to jointly develop a 118-room Hampton Inn in Ponte Vedra, FL. This hotel opened in
December 2000. The Company owns 49% of the joint venture, and Marsh, a company owned by Charles M.
Winston and James H. Winston, owns the remaining 51%. Both Charles M. Winston and James H. Winston
serve on the Companys Board of Directors. Marsh currently may offer the Company the right to
purchase Marshs interest in the joint venture and, if the Company refuses to purchase the
interest, Marsh may cause the joint venture to sell the hotel owned by the joint venture to a third
party. In addition, at the Companys option, it has the right to acquire Marshs interest in the
joint venture (1) at any time after December 2005 or (2) if Marsh fails to sell the hotel following
the Companys rejection of an offer by Marsh to sell its interest in the joint venture to the
Company. The Company earns a monthly asset management fee equal to 1% of the total revenues earned
by the joint ventures hotel. In addition to the joint ventures described above, during 1999 the Company entered into two
joint ventures with Regent Partners, Inc. (Regent) to jointly develop and own upscale hotel
properties. As of December 31, 2003, the Company owned a 49% interest in one joint venture with
Regent and a 57.65% interest in the other joint venture, each of which owned an operating hotel.
These hotels consisted of a 178-room Hilton Garden Inn located in Evanston, IL, and a 157-room
Hilton Garden Inn located in Windsor, CT. During 2003, the Company earned an asset management fee
equal to 1% of the total revenues earned by both of the joint ventures hotels. In March 2004, the Company purchased its joint venture partners ownership interest in both
the Evanston, IL Hilton Garden Inn hotel and the Windsor, CT Hilton Garden Inn hotel. Prior to the
purchase, Regent Partners, Inc. owned 51% of the Evanston hotel and 42.35% of the Windsor hotel.
The amount paid for Regents ownership interest in the Evanston Hilton Garden Inn totaled
approximately $6,900, and was based on a value of $25,250 for the sale of the hotel, net of debt
assumed of approximately $11,800, such assumption being subject to the approval of the lenders
under our $125 million line of credit. The amount paid for Regents ownership interest in the
Windsor Hilton Garden Inn totaled approximately $1,200, and was based on a value of $12,250 for the
sale of the hotel, net of debt paid off of approximately $9,300. As a result of these purchases,
the Company owns 100% of the equity in the entities that own the Evanston, IL Hilton Garden Inn and
the Windsor, CT Hilton Garden Inn hotels. Prior to the purchase, Barclay leased the Evanston hotel
and Windsor Lessee Company LLC leased the Windsor hotel. Barclay will continue to lease the
Evanston hotel and, as a result of the purchase, Barclay assumed the lease of the Windsor hotel
from Windsor Lessee Company LLC. Effective July 1, 2003, Intercontinental Group, as lessee, defaulted on its obligations under
the lease agreement for the Windsor, CT Hilton Garden Inn hotel and the Las Vegas, NV Hampton Inn
hotel. At that time, the Windsor Hilton Garden Inn was owned by a joint venture entity, Windsor
Hotel Associates, LLC. Prior to its default under the lease, Intercontinental Group owned 15% of
Windsor Hotel Associates, LLC, the Company owned 49%, and Regent owned 36%. Subsequent to the
default under the lease agreement, Intercontinental Group forfeited its share of ownership, with
the result that the Company owned 57.65% and Regent owned 42.35% of Windsor Hotel Associates, LLC.
On July 1, 2003, Windsor Lessee Company LLC assumed the lease of the Windsor Hilton Garden Inn
hotel. As of December 31, 2003, Windsor Lessee Company LLC was owned 57.65% by the Company and
42.35% by Regent. After the purchase of Regents ownership interest, Barclay assumed the lease of
the Windsor Hotel from Windsor Lessee Company LLC. On July 1, 2003, Barclay assumed the lease of
the Las Vegas Hampton Inn. The Company sold the Las Vegas, NV Hampton Inn hotel during 2004. Under the terms of the operating agreement for each joint venture, the Company and its venture
partner each must approve all major decisions, including refinancing or selling the respective
hotels, making loans, changes in partners interests, entering into material contracts, purchasing
or acquiring assets, and approving operating and capital expenditure budgets. During the third quarter of 2003, the Company began consolidating the balance sheet and
operations of its Chapel Hill Joint Venture. As of December 31, 2003, the Company consolidated the
balance sheets of the Evanston Joint Venture, the Windsor Joint Venture and the Marsh Landing Joint
Venture. The operations of these joint ventures were consolidated beginning with the first quarter
of 2004 (see discussion of FIN 46 under Note 4 below). As noted above, in March 2004 the Company
acquired Regents 59




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ownership interests in both the Evanston Joint Venture and the Windsor Joint
Venture, resulting in the Company owning 100% of the Evanston Hilton Garden Inn and the Windsor
Hilton Garden Inn , respectively. As of December 31, 2004, the total assets of the consolidated
joint ventures, including the Chapel Hill and Marsh Landing Joint Ventures, were $20,750, total
liabilities were $15,081 ($14,388 of which represented long-term debt), and total equity was
$5,669. For the years ended December 31, 2004 and 2003, the total revenue of the consolidated
joint ventures (including the Chapel Hill, Marsh Landing, Evanston, and Windsor joint ventures) was
$2,712 and $8,662, and total expenses were $2,414 and $6,329, resulting in net income of $298 and
$2,333, respectively. During the year ended December 31, 2004, the unaudited financial statements
of the consolidated joint ventures (including the Chapel Hill, Marsh Landing, Evanston, and Windsor
joint ventures) reflected aggregate cash flow provided by operating activities of $1,236, cash used
in investing activities of $9,498, principally for hotel additions, and cash provided by financing
activities of $6,388, principally in the form of loan proceeds and capital contributions less
distributions to joint venture partners. As of December 31, 2004, the total assets of the
unconsolidated joint ventures (including the WCC Project Company and WNC Project Company joint
ventures) were $50,528, total liabilities were $34,071 ($30,768 of which represented long-term
debt), and total equity was $16,457. The Companys share of the total assets, liabilities,
long-term debt and equity of these unconsolidated joint ventures equated to $6,595, $4,448, $4,015
and $2,147, respectively. For the years ended December 31, 2004 and 2003, the total revenue of the
unconsolidated joint ventures was $11,198 and $4,615, and total expenses were $11,519 and $4,508,
resulting in net income (loss) of ($321) and $107, respectively. During the year ended December
31, 2004, the unaudited financial statements of the unconsolidated joint ventures reflected
aggregate cash flow provided by operating activities of $3,091, cash used in investing activities
of $23,823, principally for hotel additions, and cash provided by financing activities of $23,657,
principally in the form of loan proceeds and capital contributions less distributions to joint
venture partners. As mentioned above, as of December 31, 2003, the Company consolidated the balance sheets of
the Evanston Joint Venture, the Windsor Joint Venture and the Marsh Landing Joint Venture. This
consolidation resulted in the following adjustments to the Companys consolidated balance sheet as
of December 31, 2003: net investment in hotel properties increased $39,790, investment in joint
ventures decreased $7,619, properties under development decreased $43, cash increased $1,958,
deferred expenses increased $257, accounts receivable increased $52, prepaid expenses and other
assets decreased $70, long-term debt increased $26,099, accounts payable and accrued expenses
increased $921, minority interest increased $7,754, and distributions in excess of earnings
increased $449. 4. FIN 46: During 2004, the Company participated in the joint venture arrangements and mezzanine loans
noted below. Prior to 2003, the Company accounted for all of its joint venture investments on its
balance sheet as Investments in Joint Ventures and in our statements of operations as Equity in
Income (Loss) of Unconsolidated Joint Ventures under the equity method of accounting. The Financial Accounting Standards Board issued FASB Interpretations No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (ARB No. 51),
in January 2003, and a further interpretation of FIN 46 in December 2003 (FIN 46-R, and
collectively FIN 46). FIN 46 clarifies the application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other parties, referred to as
variable interest entities (VIE). FIN 46 generally requires consolidation by the party that has
a majority of the risk and/or rewards, referred to as the primary beneficiary. FIN 46 applied
immediately to variable interest entities created after January 31, 2003, which affected only our
Chapel Hill Joint Venture, and to variable interest entities in which an enterprise obtains a
variable interest after that date. The Company has implemented FIN 46 as of December 31, 2003 for
its variable interests acquired by the Company before February 1, 2003. The management of the Company has analyzed the terms and provisions of its joint ventures and
hotel loans, and has determined the following: Marsh Landing Joint Venture: This joint venture is considered to be a VIE and the Company is considered to be the primary
beneficiary. Therefore, the Company, which owns a 49% interest, has consolidated the balance sheet
of the Marsh Landing Joint Venture as of December 31, 2003, and consolidated the results of
operations beginning with the first quarter of 2004. For the year ended December 31, 2004, total
revenue of the joint venture was $1,487, total expenses were $761, resulting in a net income of
$726. As of December 31, 2004, total assets of the joint venture were $7,044, total liabilities
were $4,978, resulting in stockholders equity totaling $2,066. The Companys share of equity of
this joint venture totaled $1,012 as of December 31, 2004. 60




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Charlesbank Joint Venture: The Company has determined that it is not required to consolidate the Charlesbank joint
venture as it is not the primary beneficiary. Therefore, the Company, which owns a 15% interest,
has accounted for and will continue to account for its investment under the equity method of
accounting. For the year ended December 31, 2004, total revenue of the Charlesbank joint venture
was $11,198, total expenses were $11,519, resulting in a net loss of ($321). As of December 31,
2004, total assets of the joint venture were $50,528, total liabilities were $34,071, resulting in
stockholders equity totaling $16,457. The Companys equity balance exposed to loss as a result of
its involvement in this joint venture totaled $2,512 as of December 31, 2004. Regent Joint Ventures: During the first quarter of 2004, the Company purchased its joint venture partners ownership
interest in both the Windsor Joint Venture and the Evanston Joint Venture (see Note 3). These two
joint ventures owned the Windsor hotel and the Evanston hotel. These joint ventures were
considered to be VIEs and the Company was considered to be the primary beneficiary. Therefore,
the Company, which owned a 57.65% interest and a 49% interest, respectively, consolidated the
balance sheets of the Windsor Joint Venture and the Evanston Joint Venture beginning as of December
31, 2003, and consolidated the results of operations beginning with the first quarter of 2004. For
the period during 2004 that these properties were owned by joint ventures, total revenues of the
Windsor Joint Venture and the Evanston Joint Venture were $362 and $494, respectively, total
expenses were $240 and $281, respectively, resulting in net income of $122 and $213, respectively. The Company also owned a 57.65% interest in Windsor Lessee Company, LLC, the lessee of the
Windsor hotel. Barclay assumed this lease at the time the Company purchased Regents interest in
the Windsor Joint Venture. This joint venture was considered to be a VIE and the Company was
considered to be the primary beneficiary. The Company consolidated the balance sheet of Windsor
Lessee Company, LLC beginning as of December 31, 2003, and consolidated the results of operations
beginning with the first quarter of 2004. For the period during 2004 that the lessee was a joint
venture, total revenue of Windsor Lessee Company, LLC was $818 and total expenses were $951,
resulting in a net loss of $(133). Chapel Hill Joint Ventures: Chapel Hill Hotel Associates This joint venture is considered to be a VIE, the Company is considered to be the primary
beneficiary and it was created in August 2003 (after January 31, 2003). Therefore, the Company,
which owns a 48.78% interest in Chapel Hill Hotel Associates, LLC, has consolidated the joint
ventures results of operations and balance sheet beginning with the third quarter 2003. For the
year ended December 31, 2004, total revenue of the joint venture was $387, total expenses were
$757, resulting in a net loss of ($370). As of December 31, 2004, total assets of the joint
venture were $13,576, total liabilities were $9,916, resulting in stockholders equity totaling
$3,660. The Companys share of equity of this joint venture totaled $1,785 and its preferred
member interest investment totaled $1,453 as of December 31, 2004 (see Note 3). Chapel Hill Lessee This joint venture is considered to be a VIE, the Company is considered to be the primary
beneficiary and it began operations in May 2004 (after January 31, 2003). Therefore, the Company
has consolidated the joint ventures results of operations and balance sheet beginning with the
second quarter 2004. The Company owns a 48.78% interest in Chapel Hill Lessee Company, LLC, which
is the lessee of the Courtyard by Marriott in Chapel Hill, NC, which opened in September 2004. For
the year ended December 31, 2004, total revenue of the joint venture was $838, total expenses were
$896, resulting in a net loss of $(58). As of December 31, 2004, total assets of the joint venture
were $130, total liabilities were $187, resulting in stockholders deficit totaling $(57). The
Companys share of deficit of this joint venture totaled $(28) as of December 31, 2004. Noble Investment Group Mezzanine Loans: In July 2000, the Company provided a $1,080 mezzanine loan for a Hilton Garden Inn in Atlanta,
GA and in February 2001 provided a $2,186 mezzanine loan for a Hilton Garden Inn in Tampa, FL.
Each of these loans is subordinate to a primary loan for each hotel. Noble Investment Group, Ltd.
(Noble) provided the remainder of the funding and owns and operates the hotels. These two
mezzanine loan arrangements are considered to be variable interests in the entities that own the
hotels, both of which are VIEs. However, the Company is not considered to be the primary
beneficiary. Therefore, the Company does not consolidate the results of operations of the hotels
for which it has provided financing. The Companys total outstanding loan balance and related
interest receivable balance exposed to loss as a result of its involvement in these mezzanine loans
totaled $3,266 and $364, respectively, as of December 31, 2004. 61




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Baltimore, MD Hampton Inn & Suites Mezzanine Loan; In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan to an unrelated
third party owner for the purchase and conversion of a historic office building into a 116-room
Hampton Inn & Suites hotel in Baltimore, MDs Inner Harbor (the Baltimore Hotel). Subsequently,
the Company sold 50% of the loan to an affiliate of Hall Financial Group at face value, or $1,750.
This mezzanine loan is subordinate to a primary loan for the hotel. This mezzanine loan
arrangement is considered to be a variable interest in the entity that owns the hotel, which is a
VIE. However, the Company is not considered to be the primary beneficiary. Therefore, the Company
does not consolidate the results of operations of the hotel for which it has provided financing.
The Companys total outstanding loan balance and related interest receivable balance exposed to
loss as a result of its involvement in this mezzanine loan totaled $1,682 and $388, respectively,
as of December 31, 2004. Atlantic Beach, NC Sheraton Mezzanine Loan: In February 2004, the Company issued a $2,400 mezzanine loan to partially finance the
acquisition of a 200-room Sheraton Hotel in Atlantic Beach, NC. This mezzanine loan arrangement is
considered to be a variable interest in the entity that owns the hotel, which is a VIE. However,
the Company is not considered to be the primary beneficiary. Therefore, the Company does not
consolidate the results of operations of the hotel for which it has provided financing. The
Companys total outstanding loan balance and related interest receivable exposed to loss as a
result of its involvement in this mezzanine loan totaled $2,400 and $66, respectively as of
December 31, 2004. Cornhusker Square Hotel Loan: In June 2004, the Company and Canyon Capital Realty Advisors (Canyon Capital), a national
lending and real estate investment firm provided a $16,850 loan to finance the acquisition and
major refurbishment and conversion of the 290-room Cornhusker Square
Hotel in Lincoln, NE to a full service Marriott. Canyon Capital provided $10,850 as the first, or
A piece of the financing, and the Company provided $6,000 as the second, or B piece. This loan
arrangement is considered to be a variable interest in the entity that owns the hotel, which is a
VIE. However, the Company is not considered to be the primary beneficiary. Therefore, the Company
does not consolidate the results of operations of the hotel for which it has provided financing.
The Companys total outstanding loan balance and related interest receivable exposed to loss as a
result of its involvement in this mezzanine loan totaled $6,000 and $176, respectively as of
December 31, 2004. St. Louis, MO Residence Inn by Marriott Mezzanine Loan: In October 2004, the Company issued a $5,500 mezzanine loan to finance the construction of a
188-room Residence Inn by Marriott Hotel in St. Louis, MO. This loan arrangement is considered to
be a variable interest in the entity that owns the hotel, which is a VIE. However, the Company is
not considered to be the primary beneficiary. Therefore, the Company does not consolidate the
results of operations of the hotel for which it has provided financing. The Companys total
outstanding loan balance and related interest receivable exposed to loss as a result of its
involvement in this mezzanine loan totaled $5,500 and $103, respectively as of December 31, 2004. Radisson Kauai, HI Mezzanine Loan: In December 2004, the Company and Canyon Capital Realty Advisors (Canyon Capital), a
national lending and real estate investment firm, provided $38,000 (the Loan) to finance the
acquisition and conversion of the 347-room Radisson Resort on the island of Kauai to a condo hotel.
Canyon Capital provided $32,000 of the senior participating note, and the Company provided $6,000.
This loan arrangement is considered to be a variable interest in the entity that owns the hotel,
which is a VIE. However, the Company is not considered to be the primary beneficiary. Therefore,
the Company does not consolidate the results of operations of the hotel for which it has provided
financing. The Companys total outstanding loan balance and related interest receivable exposed to
loss as a result of its involvement in this mezzanine loan totaled $6,000 and $46, respectively as
of December 31, 2004. La Posada de Santa Fe Resort, NM Mezzanine Loan: In December 2004, the Company issued a $6,000 mezzanine loan to help finance the acquisition
of and capital improvements at, the 157-room La Posada de Santa Fe Resort in Santa Fe, New Mexico.
This loan arrangement is considered to be a variable interest in the entity that owns the hotel,
which is a VIE. However, the Company is not considered to be the primary beneficiary. Therefore,
the Company does not consolidate the results of operations of the hotel for which it has provided
financing. The Companys total outstanding loan balance exposed to loss as a result of its
involvement in this mezzanine loan totaled $6,000 as of December 31, 2004. There was no interest
receivable as of December 31, 2004. As summarized above, per the provisions of FIN 46, the Company began consolidating the balance
sheets for three of its joint ventures as of December 31, 2003. The Company began consolidating
the balance sheet and results of operations of the Chapel Hill joint venture, which was formed in
August 2003, in the third quarter of 2003. In addition, during the years 2000 through 2003, the
Company recognized as income a portion of development and purchasing fees received for services
provided to these joint ventures, based on its non-ownership interests. Per the provisions of FIN
46, as of December 31, 2003, the Company recorded a one time, cumulative change in accounting
principle adjustment totaling $428 to reduce net income for the margin earned from these fees 62




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previously recorded as income. Going forward, the margin on these fees will be realized as a
reduction in depreciation expense over the lives of the related assets for which the related
services were provided. These remaining lives ranged from 1 to 26 years as of December 31, 2004. 5. Notes Receivable: In February 2004, the Company issued a $2.4 million mezzanine loan to finance the acquisition
of a 200-room Sheraton hotel in Atlantic Beach, NC. The hotel has undergone extensive renovations
which were completed in December 2004. The term of the loan is 5 years, with interest only
payments that carry an interest rate based on 60-day LIBOR (with a 2.0% floor) plus 9.00%. An
additional 2.00% per year of the outstanding principal balance accrues until the earlier of
prepayment or maturity of the loan. The hotel is owned 100% by an unaffiliated single purpose
entity (the Borrower). The Company holds collateral equal to 100% of the ownership interest in
the Borrower. There are certain default provisions under which the Company may declare the loan
immediately due and payable or may step in and take control of the Borrower, including for failure
to maintain specified debt coverage ratios. In June 2004, the Company and Canyon Capital Realty Advisors (Canyon Capital), a national
lending and real estate investment firm, provided $16,850 (the Loan) to finance the acquisition,
major refurbishment, and conversion of the 290-room Cornhusker Square Hotel in Lincoln, NE. The
hotel will remain open during the renovation and is expected to be converted to a full-service
Marriott by the end of the first quarter of 2005. Canyon Capital provided $10,850 as the first, or
A piece of the financing, and the Company provided $6,000 as the second, or B piece. The Companys
B piece of the Loan is subordinate to Canyon Capitals A piece. The term of the Loan is 2 years,
plus a one-year extension at the borrowers election. The Loan plus any accrued interest requires
interest only payments of 10%. Canyon Capital is paid 10.24% on the A piece of the Loan with the
remainder paid to the Company. Additional interest of 1.5% of the Loan plus any accrued interest
accrues to the Company until the earlier of prepayment of the Loan or maturity of the Loan. The
hotel is owned 100% by an unaffiliated single purpose entity. The Companys B piece of the Loan is
collateralized by the second interest in the real estate complex. In October 2004, the Company issued a $5,500 mezzanine loan to finance the construction of a
188-room Residence Inn by Marriott Hotel in St. Louis, MO. The term of the loan is 5 years. The
loan requires interest only payments during construction and throughout the first two years of
operations, and principal payments beginning on the first day of the third year of operations,
based on a 10-year amortization schedule. Throughout the term of the loan, the interest rate is
based on 30-day LIBOR plus 10.25%. An additional 3.00% per year of the outstanding principal
balance accrues until the earlier of prepayment or maturity of the loan. The hotel is owned 100%
by an unaffiliated single purpose entity (the Borrower). The Company holds collateral equal to
100% of the ownership interest in the Borrower. There are certain default provisions under which
the Company may declare the loan immediately due and payable or may step in and take control of the
Borrower, including for failure to maintain specified debt coverage ratios. In December 2004, the Company and Canyon Capital provided $38,000 (the Loan) to finance the
acquisition and conversion of the 347-room Radisson Resort on the island of Kauai to a condo hotel.
Canyon Capital provided $32,000 of the senior participating note, and the Company provided $6,000.
The Companys portion of the Loan is pari-pasu with Canyon Capitals piece. The term of the Loan
is 1 year, with two extension options of three months and 12 months, respectively. The Loan
requires interest only payments of 11%. The hotel is owned 100% by an unaffiliated single purpose
entity. The Companys portion of the Loan is collateralized by the first mortgage interest in the
real estate complex. In December 2004, the Company issued a $6,000 mezzanine loan to finance the acquisition of,
and capital improvements at, the 157-room La Posada de Santa Fe Resort in Santa Fe, New Mexico.
The term of the loan is 3 years, with 2 one-year extension options. The loan requires interest
only payments that carry an interest rate based on 30-day LIBOR plus 9.00%. The hotel is owned
100% by an unaffiliated single purpose entity (the Borrower). The Company holds collateral equal
to 100% of the ownership interest in the Borrower. There are certain default provisions under
which the Company may declare the loan immediately due and payable or may step in and take control
of the Borrower, including for failure to maintain specified debt coverage ratios. In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan for the purchase and
conversion of a historic office building into a 116-room Hampton Inn & Suites hotel in Baltimore,
MDs Inner Harbor (the Baltimore Hotel). Subsequently, the Company sold 50% of the loan to an
affiliate of Hall Financial Group at face value, or $1,750. The total cost of the Baltimore Hotel,
which opened in the first quarter of 2004, was approximately $13,100, net of historic tax credits
of $6,000. The Company is paid interest monthly on its $1,750 share of the $3,500 mezzanine loan, at an
annual interest rate of 30-day LIBOR plus 10.21% from the date the loan was issued through the date
the hotel opened. The Company also accrued interest monthly (Accrued Interest) at an annual
rate of 12% during this same time. Once the hotel opened, the Company receives monthly principal
and interest payments based on a 10-year amortization period and an annual interest rate of 30-day
LIBOR plus 10.21% until the earliest of (a) prepayment of the loan, (b) the initial maturity date
of October 29, 2005, or (c) the earlier of (1) 60 days before the maturity date of the borrowers
construction loan, or (2) the prepayment of the construction loan. Additional interest will accrue
monthly on the loan at a rate of 8% of gross monthly revenues for one year after the hotel opening
date, and at a rate of 10% of gross 63




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monthly revenues thereafter through October 29, 2005; 4% of the
gross monthly revenues will be paid quarterly and the balance will accrue (Accrued
Participation). The Accrued Interest and the Accrued Participation constitute the Aggregate
Accrued Amount. The Disposition Fee associated with the loan equals the greater of (1) the
Aggregate Accrued Amount, (2) 50% of the appreciation in the fair market value (FMV) of the hotel
if the loan is repaid during the first 30 months after the loan was issued, and (3) 60% of the
appreciation in the FMV of the hotel if the loan is repaid thereafter. The repayment amount of the
loan shall equal the outstanding principal balance of the loan, plus (i) all Accrued Interest, (ii)
accrued and unpaid monthly interest, (iii) Accrued Participation, and (iv) the Disposition Fee;
provided however, if that sum does not provide an internal rate of return of 23%, then the
repayment amount will equal the outstanding principal balance of the loan, plus the amount
necessary to provide an internal rate of return of 23%. The Baltimore Hotel is owned 100% by a
single purpose entity (the Borrower) unaffiliated with the Company. The Company holds collateral
equal to 80% of the ownership interest in the Borrower. The Borrower made an initial equity
investment equal to approximately 20% of the total cost of the respective hotel, and there are
certain default provisions under which the Company may declare the loan immediately due and payable
or may step in and take control of the Borrower, including for failure to maintain specified debt
coverage ratios. During 2001, the Company provided $2,186 in mezzanine financing to Noble Investments  Tampa,
LLC to develop a Hilton Garden Inn in Tampa, FL (the Tampa Hotel). The Company receives monthly
interest at annual rates based on 30-day LIBOR plus 8.44% until the earliest of (a) prepayment of
the loan, or (b) January 1, 2006. During 2000, the Company provided $1,080 in mezzanine financing
to Noble Investments  Sugarloaf, LLC to develop a Hilton Garden Inn in Atlanta (Sugarloaf), GA
(the Sugarloaf Hotel). The Company receives monthly interest at annual rates based on 30-day
LIBOR plus 7.36% until the earlier of (a) prepayment of the loan or (b) June 30, 2005. Noble
Investments LLC has provided the Company with a guarantee in the full amount of both loans, due to
a deficiency in the debt service coverage ratio required by the each loan. When each hotel opened,
the Company began to earn interest equal to 2% of gross revenues, 25% of which is paid monthly and
the remainder is accrued (Accrued Interest). On the earlier of prepayment or the maturity date
of each loan, the Company will also receive the greater of the Accrued Interest or, with respect to
the Tampa Hotel, 20% of the appreciation in value, and with respect to the Sugarloaf Hotel, 15% of
the appreciation in value. Both the Tampa Hotel and the Sugarloaf Hotel are owned 100% by
unaffiliated single purpose entities (the Borrowers). The Company holds collateral equal to 100%
of the ownership interest in the Borrowers. The Borrowers made initial equity investments equal to
20% of the total cost of the respective hotel, and there are certain default provisions under which
the Company may declare
the loan immediately due and payable or may step in and take control of the Borrowers, including
for failure to maintain specified debt coverage ratios. The Atlanta (Sugarloaf) project opened
during the second quarter of 2001, and the Tampa project opened during the first quarter of 2002. 6. Deferred Expenses: At December 31, 2004 and 2003 deferred expenses consisted of: 2004
    
    
    2003Franchise fees
    
    $
    1,813
    
    
    $
    1,679Debt facility fees
    
    
    6,614
    
    
    
    4,4928,427
    
    
    
    6,171Less accumulated amortization
    
    
    4,668
    
    
    
    3,236Deferred expenses, net
    
    $
    3,759
    
    
    $
    2,935
 7. Debt: The Companys outstanding debt balance as of December 31, 2004 consisted of the following: The Companys $125,000 line of credit (the Wachovia Line) bore interest at rates from LIBOR
plus 1.75% to 2.50%, based on the Companys consolidated debt leverage ratio. A commitment fee of
0.05% was also payable quarterly on the unused portion of the Wachovia Line. The Company had
collateralized the line of credit with 28 of its hotels, with a carrying value of $182,679 as of
December 31, 2004. The Companys availability under the Wachovia Line totaled approximately
$44,000 as of December 31, 2004. Availability was calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the Wachovia Line. The
Wachovia Line required the Company to maintain certain financial ratios including maximum leverage,
minimum interest coverage and minimum fixed charge coverage, as well as certain levels of unsecured
and secured debt and tangible net worth, all of which the Company was in compliance with as of
December 31, 2004. The Wachovia Line, which had an original maturity date of December 31, 2004,
was amended in December 2004 to extend the maturity date to March 31, 2005. On March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (SPE
II) entered into a credit facility (the GE Line) with General Electric Capital Corporation
(GECC). The Company subsequently borrowed funds under the 64




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GE Line on March 14, 2005 and used
these funds to pay off all outstanding debt under the Wachovia Line, terminating the Wachovia Line.
The GE Line provides for revolving loan commitments and letters of credit up to $155,000. The GE
Line bears interest at rates from LIBOR plus 1.75% to 2.50%, based on the ratio of the underwritten
net operating income of the hotels that collateralize the GE Line to the outstanding principal
balance of the GE Line. The current rate is LIBOR plus 2.00%. A commitment fee of 0.0% to 0.25%
is also payable quarterly on the unused portion of the GE Line. The GE Line is collateralized by
23 of the Companys hotels, with a carrying value of $145,914 as of December 31, 2004. The
Companys availability under the GE Line totaled approximately $152,400 as of March 14, 2005.
Total borrowings of $77,500 plus a $5,000 letter of credit were outstanding. Availability is
calculated each quarter on a trailing twelve-month basis based primarily upon the underwritten net
operating income of the hotels that collateralize the GE Line divided by 13%. The GE Line matures
on March 11, 2010. As required by the GE Line, on March 14, 2005, the Company, through SPE II, entered into an
interest rate cap agreement to eliminate the exposure to increases in 30-day LIBOR over 6.42% on
principal balances up to $155,000 outstanding. The interest rate cap agreement terminates on
October 2, 2006. On January 31, 2003, the Company completed an interest rate swap on $50,000 of
its outstanding variable rate debt under the Wachovia Line. This swap began on March 31, 2003 and
matured on February 27, 2004. This transaction effectively replaced the Companys variable
interest rate based on 30-day LIBOR on $50,000 of the Wachovia Line with a fixed interest rate of
1.505%. On November 3, 1998, the Company closed a $71,000 loan with GE Capital Corporation. The
ten-year loan, with a 25-year amortization period, bears interest at a fixed rate of 7.375%.
Fourteen of the Companys hotels, with a carrying value of $108,923 as of December 31, 2004, serve
as collateral for the loan. As of December 31, 2004, $63,550 was outstanding. All unpaid
principal and interest are due on December 1, 2008. The loan agreement with GE Capital Corporation
requires monthly principal and interest payments of $519 and requires the Company to establish
escrow reserves for the purposes of debt service, capital improvements and property taxes and
insurance. These reserves, which are held by GE Capital Corporation, totaled $1,661 as of December
31, 2004 and are included in prepaid expenses and other assets on the accompanying Consolidated
Balance Sheets. On February 28, 2001, the Marsh Landing Joint Venture closed a $5,100 loan with GE Capital
Corporation. The ten-year loan bears interest at a variable rate of LIBOR plus 3%. The Ponte
Vedra Hampton Inn, with a net book value of $6,603 as of December 31, 2004, serves as collateral
for the loan. As of December 31, 2004, $4,835 was outstanding. All unpaid principal and interest
are due on
February 1, 2011. The loan agreement with GE Capital Corporation requires monthly principal
payments plus interest through February 1, 20011, with the principal portion increasing
approximately 9% on March 1st of each year. On August 31, 2001, the Evanston Joint Venture closed a $12,300 loan with GE Capital
Corporation. In March 2004, the Company assumed the entire balance outstanding under this loan,
subject to the approval of the lenders under the Wachovia Line. The ten-year loan carries a
variable interest rate of LIBOR plus 3%. The Evanston Hilton Garden Inn, with a net book value of
$21,457 as of December 31, 2004, serves as collateral for the loan. As of December 31, 2004,
$11,590 was outstanding. All unpaid principal and interest are due on August 1, 2011. On December 1, 2003, the Windsor Joint Venture extended a $9,385 loan with Compass Bank. In
March 2004, the Company paid the entire balance outstanding under this loan. The loan carried a
variable interest rate of LIBOR plus 2.45%. The Windsor Hilton Garden Inn served as collateral for
the loan. During the third quarter of 2003, the Chapel Hill Joint Venture entered into a $9,147 loan
with GE Capital Corporation. During the construction period the loan bore interest at a variable
rate of LIBOR plus 3.8%. The Company used the net proceeds from the loan to construct the Chapel
Hill Courtyard by Marriott Hotel. As of December 31, 2004, $8,100 was outstanding. On March 8,
2005, the construction loan was converted to a permanent loan, at which time the loan balance was
$9.0 million. The 5-year permanent loan is being amortized over a 20-year period and carries a
fixed rate of interest of 7.51%. In October 2004, the Companys wholly-owned subsidiary, Winston Finance Partners LLC (Winston
Finance), entered into a $50 million master repurchase agreement with Marathon Structured Finance
Fund, LP (Marathon) to finance the Companys hotel loan investments (assets) on a short-term
basis. Under the agreement, Winston Finance will sell assets to Marathon and agree to repurchase
those assets on a date certain. Typically, the sale and repurchase price will be no more than 65%
of the value of the asset, except for development and redevelopment assets where the limit is 45%
of the asset value. In general, the repurchase price will equal the original sales price of the
asset plus accrued but unpaid interest. The Company typically will pay interest to Marathon at
LIBOR plus 450 basis points for loans made by the Company to acquire existing hotels, and LIBOR
plus 550 basis points, plus one percent of the total loan amount as an origination fee, for loans
made by the Company to develop new hotels or redevelop existing hotels. Marathon gets a security
interest in each asset subject to the facility. The repurchase agreement is a $50 million uncommitted lending facility, meaning Marathon must
agree to each asset financed under the agreement. At no time is the facility allowed to exceed $50
million. The facility established by the agreement is set to expire on the one year anniversary of
the agreements effective date. The facility, however, may be renewed for two more successive 65




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##### 



periods of one year, at the option of Winston Finance, as long as no events of default are existing
at that time. If the value of an asset financed under the facility decreases, then Marathon can
require the Company to deposit eligible assets, either cash, letters of credit, or qualified loans,
into a margin account as additional collateral for the facility, or repurchase the asset. Assets
can be repurchased by the Company voluntarily at any time. The Company did not borrow funds under
this facility during 2004. The Company is required to maintain a liquidity facility that is the greater of $5,000,000 or
six months interest on the amount of the facility that has been advanced. That liquidity is
currently in the form of a letter of credit made available by our operating partnership, WINN
Limited Partnership, but could be in a combination of a letter of credit and/or eligible assets
pledged to Marathon. The Company is required to maintain certain routine covenants during the term of the agreement
including, without limitation, providing financial reports to Marathon, maintaining Winston Finance
as a special purpose entity, not undertaking a merger or other fundamental transaction without
Marathons consent, and maintaining the liquidity pledged to Marathon. The agreements require that
all assets subject to the facility have the related loan documents delivered to Branch Banking and
Trust Company, who holds them as a custodian so long as the assets are subject to the facility. As of December 31, 2004 and 2003 the Companys outstanding debt balance under the Wachovia
Line totaled $66,850 and $29,200, respectively. From January 1, 2003 through March 31, 2003,
interest rates on all outstanding debt under the Wachovia Line were at LIBOR plus 2.00%. From
March 31, 2003 through February 28, 2004, interest rates on $50,000 of outstanding debt under the
Wachovia Line were at 1.505% plus 1.75%, or 1.505% plus 2.00%, with the remainder at LIBOR plus
1.75% or 2.00%. From March 1, 2004 through December 31, 2004, interest rates on all outstanding
debt under the Wachovia Line were at LIBOR plus 1.75%. Interest costs were payable monthly in
arrears. As of December 31, 2004 and 2003 the weighted average interest rates on the outstanding
balance under the Wachovia Line were 3.80% and 3.75%, respectively. During the years ended
December 31, 2004, 2003 and 2002, the Company capitalized interest of $62, $30, and $0,
respectively, related to hotels under development or major renovation. As of December 31, 2004, the Companys future scheduled debt obligations are as follows: Year
    
    Amount2005
    
    $
    76,8722006
    
    
    2,0692007
    
    
    2,2272008
    
    
    58,8052009
    
    
    440Thereafter
    
    
    14,512$
    154,925
 Our Articles of Incorporation limit our debt to 60% of the cost of our investment in hotel
properties, or approximately $294 million as of December 31, 2004. 8. Income Taxes: The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as
a REIT, the Company must meet a number of organizational and operational requirements, including a
requirement that it currently distribute at least 90% of its taxable income to its shareholders.
It is managements current intention to adhere to these requirements and maintain the Companys
REIT status. As a REIT, the Company generally will not be subject to corporate level federal
income taxes on taxable income it distributes currently to its shareholders. If the Company fails
to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular
corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT
for subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain state and local taxes on its income and property, and to federal income
and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT
activities conducted through taxable REIT subsidiaries is subject to federal, state and local
income taxes. Prior to July 1, 2002, the Company had not been required to provide for federal income taxes
because dividends paid deductions had been sufficient to offset the REIT taxable income. Effective
July 1, 2002, (under the RMA that became effective January 1, 2001), the Company leases
substantially all of its hotels to its wholly-owned taxable REIT subsidiary, Barclay, which is
subject to federal and state income taxes. The Company accounts for income taxes in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. Under SFAS 109, the Company accounts for income taxes using the 66




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asset and
liability method under which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. The components of income tax benefit before allocation to minority interest for the years
ended December 31, 2004, 2003, and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Deferred:Federal
    
    $
    1,971
    
    
    $
    2,233
    
    
    $
    6,554State
    
    
    232
    
    
    
    263
    
    
    
    771Income tax benefit
    
    $
    2,203
    
    
    $
    2,496
    
    
    $
    7,325
 The deferred tax benefit was calculated using an effective tax rate of 38% applied to the net
loss of Barclay. The Company believes that Barclay will generate sufficient future taxable income
to realize in full its deferred tax asset of $12,024 as of December 31, 2004. Accordingly, no
valuation allowance has been recorded as of December 31, 2004. As of December 31, 2004, the
Company had net operating losses totaling $18,778 for federal and state income tax purposes with
expiration dates through 2024. The components of the deferred tax asset as of December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Net operating loss
    
    $
    7,136
    
    
    $
    4,183Amortization of lease acquisition cost
    
    
    5,112
    
    
    
    5,753Other
    
    
    (224
    )
    
    
    (115
    )$
    12,024
    
    
    $
    9,821
 A reconciliation of the Companys statutory income tax rate of 34% to the effective tax rate
for the years ended December 31, 2004, 2003, and 2002 is as follows: 2004
    
    
    2003
    
    
    2002Statutory U.S. federal income tax expense (benefit)
    
    $
    5,123
    
    
    $
    1,801
    
    
    $
    (2,324
    )State tax expense (benefit)
    
    
    603
    
    
    
    212
    
    
    
    (273
    )Other income tax (benefit) expense
    
    
    (69
    )
    
    
    (34
    )
    
    
    152Non-taxable REIT income tax benefit
    
    
    (7,860
    )
    
    
    (4,475
    )
    
    
    (4,880
    )Income tax benefit
    
    $
    (2,203
    )
    
    $
    (2,496
    )
    
    $
    (7,325
    )
 The following table reconciles GAAP net income to taxable REIT income for the years ended
December 31, 2004, 2003, and 2002: 2004
    
    
    2003
    
    
    2002GAAP net income
    
    $
    16,883
    
    
    $
    7,705
    
    
    $
    902Plus GAAP net loss on taxable subsidiary
included above
    
    
    3,801
    
    
    
    4,072
    
    
    
    11,940GAAP net income from REIT operations
    
    
    20,684
    
    
    
    11,777
    
    
    
    12,842Book / tax differences on depreciation and amortization
    
    
    928
    
    
    
    3,029
    
    
    
    4,392Book / tax differences on deferred lease revenue
    
    
    327
    
    
    
    
    
    
    
    (1,266
    )Book / tax differences on loss on sale of property
    
    
    (319
    )
    
    
    
    
    
    
    (831
    )Book / tax differences on loss on impairment of asset held for sale
    
    
    461
    
    
    
    2,583
    
    
    
    Other book / tax differences, net
    
    
    617
    
    
    
    1,444
    
    
    
    (954
    )Taxable income subject to REIT distribution requirements
    
    $
    22,698
    
    
    $
    18,833
    
    
    $
    14,183
 67




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##### 



9. Derivative Instruments: On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS No. 133 requires an entity to recognize all derivatives as either
assets or liabilities on the balance sheet and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either shareholders equity or net income
depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if
so, the nature of the hedging activity. In the normal course of business, the Company is exposed to the effect of interest rate
changes. The Company limits these risks by following established risk management policies and
procedures including the use of derivatives. Derivatives are used primarily to fix the rate on
debt based on floating-rate indices and to manage the cost of borrowing obligations. The Company
does not use derivatives for trading or speculative purposes. Further, the Company has a policy of
only entering into contracts with major financial institutions based upon their credit ratings and
other factors. The Company uses a variety of methods and assumptions based on market conditions
and risks existing at each balance sheet date to determine the fair values of derivative
instruments. All methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized. As of December 31, 2004, the Companys financing facilities consisted of a $125,000 variable
rate line of credit, a $71,000 fixed rate loan with a ten-year maturity and a twenty-five-year
amortization period, and various individual hotel loans which finance the hotels owned by
consolidated joint ventures (see Note 7). To reduce overall interest cost, the Company uses
interest rate instruments, typically an interest rate cap agreement or an interest rate swap
agreement, to convert a portion of its variable-rate debt to fixed-rate debt. Interest rate
differentials that arise under these agreements are recognized in interest expense over the life of
the contracts. On January 31, 2003, the Company completed an interest rate swap on $50,000 of its outstanding
variable rate debt under the Wachovia Line. This swap began on March 31, 2003 and matured on
February 27, 2004. This transaction effectively replaced the Companys variable interest rate
based on 30-day LIBOR on $50,000 of the Wachovia Line with a fixed interest rate of 1.505%. The
Wachovia Lines interest rate spread was 1.75%, equaling a fixed rate of 3.505%. The interest rate swap agreement that began on March 31, 2003 converted variable payments to
fixed payments and was, therefore, characterized as a cash flow hedge. Cash flow hedges address the
risk associated with future cash flows of debt transactions. Derivative instruments are reported
at their fair values and are included in Accounts payable and accrued expenses on the Companys
Consolidated Balance Sheets. Offsetting adjustments are represented as deferred gains or losses in
Accumulated other comprehensive income (loss). Over time, the unrealized gains and losses held
in Accumulated other comprehensive income (loss) were reclassified into earnings in the same
periods in which the hedged interest payments affect earnings. 10. Capital Stock: In September, 2003, the Company completed a Common Stock offering, selling 5.25 million
shares, which generated net cash proceeds totaling $43,730. In addition, in October, 2003, the
Company sold an additional 787,500 Common Shares generating cash proceeds of $6,735. The Company
used the proceeds to reduce its outstanding debt balance under the Wachovia Line. In February 2004, the Company completed the issuance of 3.68 million shares of its 8.00%
Series B Cumulative Preferred Stock. The net proceeds raised totaled approximately $88,800,
approximately $76,100 of which was used to fully redeem the Companys then outstanding 3.0 million
shares of 9.25% Series A Cumulative Preferred Stock plus accrued dividends. The Company used the
remaining proceeds of approximately $12,700 to pay down its then outstanding balance under the
Wachovia Line. The costs capitalized as part of the issuance of the Series A Cumulative Preferred Stock in
September 1997 totaled approximately $1,720 as of February 2004 and was recorded as a reduction in
net income (loss) available to common shareholders in the first quarter of 2004. For the years ended December 31, 2004, 2003, and 2002, dividends paid to shareholders have
consisted of ordinary income and/or return of capital. During 2004, 2003, and 2002 the Company
declared and paid quarterly cash dividends of $0.15 per common share. The percentage of each
common share dividend that represented return of capital totaled 0%, 14%, and 41% for 2004, 2003,
and 2002, respectively, with the remainder reported as ordinary income. During the first quarter of 2004 the Company declared cash dividends of $0.353 per Series A
preferred share for the period from January 1, 2004 through February 24, 2004 and $0.20 per Series
B preferred share for the period from February 24, 2004 (the issuance date of the new Series B
cumulative preferred stock) through March 31, 2004. During each of the second, third and fourth
quarters of 2004, the Company declared and paid cash dividends of $0.50 per Series B preferred
share. For the years ended December 31, 2003, 68




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##### 



and 2002, the Company declared and paid quarterly
cash dividends of $0.578 per Series A preferred share. All of the preferred dividends for the
years ended December 31, 2004, 2003, and 2002 were reported for tax purposes as 100% ordinary
income. Pursuant to the Partnership Agreement of the Partnership, the holders of limited partnership
units have certain redemption rights (the Redemption Rights), which enable them to cause the
Partnership to redeem their units in the Partnership in exchange for shares of Common Stock on a
one-for-one basis or, at the option of the Company, for an equivalent amount of cash. The number
of shares issuable upon exercise of the Redemption Rights will be adjusted upon the occurrence of
stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would
have the effect of diluting the ownership interests of the limited partners or the shareholders of
the Company. As of December 31, 2004, the total number of partnership units outstanding and
subject to redemption was 1,298,480. 11. Earnings Per Share: The following is a reconciliation of the net income (loss) applicable to common shareholders
used in the net income (loss) per common share calculation to the net income (loss) assuming
dilution used in the net income (loss) per common share  assuming dilution calculation: 2004
    
    
    2003
    
    
    2002Net income
    
    $
    16,883
    
    
    $
    7,705
    
    
    $
    902Less: preferred shares distribution
    
    
    7,315
    
    
    
    6,938
    
    
    
    6,938Less: loss on redemption of Series A Preferred Stock
    
    
    1,720
    
    
    
    
    
    
    
    Net income (loss) applicable to common shareholders
    
    
    7,848
    
    
    
    767
    
    
    
    (6,036
    )Plus: income allocation to minority interest
    
    
    386
    
    
    
    89
    
    
    
    Net income (loss) assuming dilution
    
    $
    8,234
    
    
    $
    856
    
    
    $
    (6,036
    )
 The following is a reconciliation of the weighted average shares used in net income (loss) per
common share to the weighted average shares used in net income (loss) per common share  assuming
dilution: Year Ended December 31,2004
    
    
    2003
    
    
    2002Weighted average number of common shares
    
    
    26,224
    
    
    
    21,770
    
    
    
    19,308Weighted average partnership units with
redemption rights
    
    
    1,298
    
    
    
    1,298
    
    
    
    Stock options and stock grants
    
    
    33
    
    
    
    18
    
    
    
    Weighted average number of common shares
assuming dilution
    
    
    27,555
    
    
    
    23,086
    
    
    
    19,308
 As of December 31, 2002, there were 1,298,480 partnership units outstanding and subject to
redemption, 795,000 stock options outstanding, and 99,160 unvested stock grants outstanding, which
were antidilutive. 12. Stock Incentive Plan: During 1998, the Company amended the Winston Hotels, Inc. Stock Incentive Plan (the Plan).
The amendment increased the number of shares of Common Stock that may be issued under the Plan to
1,600,000 shares plus an annual increase to be added as of January 1 of each year, beginning
January 1, 1999, equal to the lesser of (i) 500,000 shares; (ii) 8.5% of any increase in the number
of authorized and issued shares (on a fully diluted basis) since the immediately preceding January
1; or (iii) a lesser number determined by the Board of Directors. The Plan permits the grant of
incentive or nonqualified stock options, stock appreciation rights, stock awards and performance
shares to participants. Under the Plan, the Compensation Committee of the Company determines the
exercise price of an option. In the case of incentive stock options, the exercise price cannot be
less than the market price of the Companys Common Stock on the date of grant and the maximum term
of an incentive stock option is ten years. Stock options and stock awards are granted upon
approval of the Compensation Committee and generally are subject to vesting over a period of years.
The number of securities that remain available for future issuance under the Plan totaled
1,723,270 as of December 31, 2004. During 2004, 2003 and 2002, the Company granted awards of Common Stock to certain executive
officers and Vice Presidents. The total numbers of shares granted were 74,434, 84,326, and
115,000, respectively. Of the total 115,000 shares granted during 2002, 40,000 were forfeited. Of
the total 84,326 shares granted in 2003, 39,926 shares vested immediately. All other shares
granted in 69




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##### 



2004, 2003, and 2002 vested 20% immediately and 20% on the anniversary of the grant date
over each of the next four years. Recipients of the awards of Common Stock have the option to
defer ownership of, and tax obligations on the value of, the stock until a future date. In doing
so, the Company retains ownership of the Common Stock for the benefit of the employee, and records
treasury stock with an offsetting liability to the recipient. Both of these accounts offset each
other within the Companys stockholders equity. The total cost value of the shares deferred
totaled $1,970 as of December 31, 2004. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS 123). Under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, and as permitted by SFAS 123, no compensation cost has been recognized for options
granted under the Plan. Had the fair value method been used to determine compensation cost, the
impact on the Companys 2004, 2003 and 2002 net income would have been a decrease of $1, $18, and
$90, respectively, and a corresponding decrease in net income (loss) per Common Share of $0.00,
$0.00 and $0.01, respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following assumptions used for grants
in 2000: dividend of $1.12; expected volatility of 26.1%; risk-free interest rate of 5.5%, and an
expected life of five years for all options. The estimated weighted average fair value per share
of the options granted in 2000 was $0.24. There were no options granted in 2004, 2003, 2002 or
2001. A summary of the status of stock options granted under the Plan as of December 31, 2004, 2003
and 2002, and changes during the years ended on those dates, is presented below: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding at beginning
of year
    
    
    795,000
    
    
    $
    11.07
    
    
    
    795,000
    
    
    $
    11.07
    
    
    
    1,055,000
    
    
    $
    11.13Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (643,000
    )
    
    
    11.04
    
    
    
    
    
    
    
    
    
    
    
    (260,000
    )
    
    
    11.31Outstanding at end of year
    
    
    152,000
    
    
    $
    11.20
    
    
    
    795,000
    
    
    $
    11.07
    
    
    
    795,000
    
    
    $
    11.07Options exercisable
at year-end
    
    
    152,000
    
    
    
    
    
    
    
    788,750
    
    
    
    
    
    
    
    730,500
 The following table summarizes information about the Plan at December 31, 2004: Exercise
    
    
    
    
    
    Average RemainingPrice
    
    Options Outstanding
    
    Options Exercisable
    
    Contractual Life (years)$  9.38
    
    12,000
    
    12,000
    
    4.4$11.31
    
    50,000
    
    50,000
    
    0.8$11.38
    
    90,000
    
    90,000
    
    1.0
 13. Commitments: The Company leases its corporate office under a non-cancelable operating lease. Under the
terms of the lease, the Company makes lease payments through May 2010. Commitments for minimum
rental payments are as follows: Year ending December 31:
    
    Amount2005
    
    $
    702006
    
    
    3842007
    
    
    3942008
    
    
    4042009
    
    
    414Thereafter
    
    
    174Total
    
    $
    1,840
 70




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##### 



As of December 31, 2004, the Company had sublease commitments from third party lessees as
follows: 2005  $104, 2006  $100, 2007  $103, 2008  $105, 2009  $108, and thereafter  $45.
Rental expense for the years ended December 31, 2004, 2003 and 2002 was $302, $344, and $348,
respectively. Sublease income for the years ended December 31, 2004, 2003, and 2002 was $129 ,
$71, and $25, respectively. As discussed in Note 1, between July 2002 and December 2004, the Company acquired all of the
third party leases for its wholly-owned hotels. Under the terms of the percentage leases, the
Companys third party lessees were obligated to pay the Company the greater of base rents or
percentage rents. The Company earned minimum base rents of $424, $2,559, and $19,145 for the years
ended December 31, 2004, 2003 and 2002, respectively, and percentage rents of $0, $62, and $10,773
for the years ended December 31, 2004, 2003, and 2002, respectively. The percentage rents are
based on percentages of gross room revenue and certain food and beverage revenues of the lessees. Pursuant to the percentage leases, the Company is obligated to pay 5% of room revenues (7% of
gross room, food and beverage revenues from one of its full-service hotels) to fund periodic
improvements to the buildings and grounds, and the periodic replacement and refurbishment of
furniture, fixtures and equipment. This obligation is cumulative, in that any capital expenditures
made in one year in excess of the required limit shall serve as a credit for future years and
vice-versa. For one of the hotels, the Company leases the land under an operating lease, which expires on
December 31, 2062. Expenses incurred in 2004, 2003 and 2002 related to this land lease totaled
$253, $212, and $307, respectively. Minimum future rental payments contractually due by the
Company under this lease are as follows: 2005  $110, 2006  $110, 2007  $110, 2008  $110, 2009 -
$110 and thereafter  $5,830. The Company operates in a manner intended to enable it to qualify as a REIT under the Internal
Revenue Code. A REIT which distributes at least 90% of its taxable income to its shareholders each
year and which meets certain other conditions is not taxed on that portion of its taxable income
that is distributed to its shareholders. Based on the Companys 2004 taxable income to
shareholders, we were required to distribute approximately $20,428 in order to maintain our REIT
status as described above. We distributed approximately $16,601 to common shareholders and $7,315
to preferred shareholders, which exceeded our required distributions. 14. Disclosures about Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value: Class of Financial Instrument
    
    Method and/or AssumptionCash, lease revenue receivable, accounts
and notes receivable, accounts
payable and accrued expenses:
    
    Carrying amount approximates fair value.Interest rate swap agreement:
    
    Fair value is estimated by obtaining quotes from brokers.Long-term debt  GE Capital Corporation:
    
    Fair value is estimated based on current rates offered to
the Company for debt of the same remaining maturities.Long-term debt  consolidated joint
ventures, due to banks:
    
    Carrying amount approximates fair value.
 The estimated fair values of the Companys financial instruments are as follows: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueLiabilities:Long-term debt - GE Capital Corporation
    
    $
    75,140
    
    
    $
    76,009
    
    
    $
    65,031
    
    
    $
    67,368Long-term debt - consolidated joint ventures
    
    $
    12,935
    
    
    $
    12,935
    
    
    $
    26,253
    
    
    $
    26,253Due to banks
    
    $
    66,850
    
    
    $
    66,850
    
    
    $
    29,200
    
    
    $
    29,200Interest rate swap
in a net liability position
    
    $
    
    
    
    $
    
    
    
    $
    33
    
    
    $
    33
 71




---



##### 



15. Discontinued Operations The Company adopted Statement of Financial Accounting Standard No. 144 (SFAS No. 144)
effective January 1, 2002 which requires, among other things, that the operating results of certain
real estate assets which have been sold subsequent to January 1, 2002, or otherwise qualify as held
for sale (as defined by SFAS No. 144), be included in discontinued operations in the statements of
operations for all periods presented. During 2003 and 2004, the Companys Board of Directors
authorized management of the Company to sell the Greenville, SC Comfort Inn and the Chester, VA
Comfort Inn, respectively, both of which are classified as held for sale on the Companys
Consolidated Balance Sheet as of December 31, 2004. Both of these properties were sold in January
2005. Two of the Companys wholly-owned hotels were sold during 2004, none during 2003, and four
during 2002. The operating results for these hotels are included in discontinued operations in the
statements of operations for all periods presented. The Company has elected not to allocate
interest expense to the results of the discontinued operations in accordance with SFAS No. 144.
These changes have resulted in certain reclassifications to the 2003 and 2002 financial statement
amounts. Condensed financial information of the results of operations for the hotels sold and
classified as held for sale are included in discontinued operations is as follows: 2004
    
    
    2003
    
    
    2002Total revenue
    
    $
    4,534
    
    
    $
    6,097
    
    
    $
    5,954Total expenses
    
    
    3,981
    
    
    
    5,456
    
    
    
    4,883Income from discontinued operations
    
    
    553
    
    
    
    641
    
    
    
    1,071Allocation to minority interest - income from
discontinued operations
    
    
    30
    
    
    
    47
    
    
    
    64Gain (loss) on sale of discontinued operations
    
    
    16
    
    
    
    
    
    
    
    (764
    )Allocation to minority interest - gain (loss) on sale of
discontinued operations
    
    
    1
    
    
    
    
    
    
    
    (46
    )Loss on impairment of asset held for sale
    
    
    (462
    )
    
    
    (2,583
    )
    
    
    Allocation to minority interest - loss on impairment of asset
held for sale
    
    
    22
    
    
    
    153
    
    
    
    Income tax expense (benefit)
    
    
    (88
    )
    
    
    (229
    )
    
    
    93Income (loss) from discontinued operations
    
    $
    186
    
    
    $
    (1,607
    )
    
    $
    196
 72




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##### 



16. Quarterly Financial Data (Unaudited): Summarized unaudited quarterly results of operations for the years ended December 31, 2004 and
2003 are as follows: 2004
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenue
    
    $
    32,847
    
    
    $
    36,710
    
    
    $
    36,694
    
    
    $
    34,387Total expenses
    
    
    29,933
    
    
    
    31,192
    
    
    
    32,337
    
    
    
    31,900Income before allocation to minority interest, allocation to
consolidated joint ventures, income tax benefit, and equity
in income (loss) of unconsolidated joint ventures
    
    
    2,914
    
    
    
    5,518
    
    
    
    4,357
    
    
    
    2,487Income (loss) allocation to minority interest
    
    
    (6
    )
    
    
    180
    
    
    
    143
    
    
    
    60Income (loss) allocation to consolidated joint ventures
    
    
    184
    
    
    
    78
    
    
    
    (52
    )
    
    
    45Income tax benefit
    
    
    (672
    )
    
    
    (280
    )
    
    
    (501
    )
    
    
    (661
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    (21
    )
    
    
    (33
    )
    
    
    (31
    )
    
    
    24Income from continuing operations
    
    
    3,387
    
    
    
    5,507
    
    
    
    4,736
    
    
    
    3,067Discontinued operationsEarnings from discontinued operations, net
    
    
    118
    
    
    
    298
    
    
    
    169
    
    
    
    26Gain (loss) on sale of discontinued operations
    
    
    285
    
    
    
    (270
    )
    
    
    
    
    
    
    Loss on impairment of asset held for sale
    
    
    (23
    )
    
    
    (24
    )
    
    
    (2
    )
    
    
    (391
    )Net income
    
    
    3,767
    
    
    
    5,511
    
    
    
    4,903
    
    
    
    2,702Preferred stock distribution
    
    
    (1,795
    )
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (1,840
    )Loss on redemption of Series A Preferred Stock
    
    
    (1,720
    )
    
    
    
    
    
    
    
    
    
    
    Net income available to common shareholders
    
    $
    252
    
    
    $
    3,671
    
    
    $
    3,063
    
    
    $
    862Income (loss) per common share:Basic and diluted:Income from continuing operations
    
    $
    
    
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.04Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    0.01
    
    
    
    (0.01
    )Net income per common share
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.03
 2003
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenue
    
    $
    29,205
    
    
    $
    32,722
    
    
    $
    32,596
    
    
    $
    29,282Total expenses
    
    
    28,460
    
    
    
    29,559
    
    
    
    30,837
    
    
    
    28,509Income before allocation to minority interest, allocation to
consolidated joint ventures, income tax benefit, and equity
in income (loss) of unconsolidated joint ventures
    
    
    745
    
    
    
    3,163
    
    
    
    1,759
    
    
    
    773Income (loss) allocation to minority interest
    
    
    (22
    )
    
    
    90
    
    
    
    114
    
    
    
    14Loss allocation to consolidated joint ventures
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (26
    )Income tax benefit
    
    
    (484
    )
    
    
    (135
    )
    
    
    (1,039
    )
    
    
    (609
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    135
    
    
    
    (81
    )
    
    
    499
    
    
    
    640Income from continuing operations
    
    
    1,386
    
    
    
    3,127
    
    
    
    3,193
    
    
    
    2,034Discontinued operationsEarnings from discontinued operations, net
    
    
    147
    
    
    
    270
    
    
    
    273
    
    
    
    133Loss on impairment of asset held for sale
    
    
    
    
    
    
    
    
    
    
    (2,366
    )
    
    
    (64
    )Income before cumulative effect of change in accounting principle
    
    
    1,533
    
    
    
    3,397
    
    
    
    1,100
    
    
    
    2,103Cumulative effect of change in accounting principle-net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (428
    )Net income
    
    
    1,533
    
    
    
    3,397
    
    
    
    1,100
    
    
    
    1,675Preferred stock distribution
    
    
    (1,734
    )
    
    
    (1,734
    )
    
    
    (1,734
    )
    
    
    (1,736
    )Net income (loss) available to common shareholders
    
    $
    (201
    )
    
    $
    1,663
    
    
    $
    (634
    )
    
    $
    (61
    )Income (loss) per common share:Basic and diluted:Income (loss) from continuing operations
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.02Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    0.01
    
    
    
    (0.10
    )
    
    
    Loss from cumulative effect of change in accounting principle -
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income (loss) per common share
    
    $
    (0.01
    )
    
    $
    0.08
    
    
    $
    (0.03
    )
    
    $
    
 73




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##### 



17. Subsequent Events: Hotel Sales The Company sold two hotels during January 2005. The Chester, VA Comfort Inn was sold for
$5.2 million in cash, net of closing costs. The Greenville, SC Comfort Inn was sold for $1.8
million, net of closing costs, of which the Company received approximately $0.4 million in cash
proceeds and a note receivable for $1.425 million. The note requires fixed principal payments over
five years and bears interest at a rate of prime plus 1.5%. Both of these properties were held for
sale as of December 31, 2004. Estimated impairment losses have been recorded during 2004 and 2003
on these two hotels such that no material gain or loss will be recognized in 2005 related to these
sales. Hotel Loans Albany, NY Hampton Inn & Suites.In February 2005, the Company issued a $3.375 million
mezzanine loan to finance the development of a 165-room Hampton Inn & Suites in Albany, NY. M&T
Realty provided an $11.5 million first mortgage loan. The Companys loan is subordinate to the M&T
Realty first mortgage loan. The term of the Companys loan is 6.5 years. During the term of the
loan, interest will be payable at 30-day LIBOR plus 9.41%. In addition during this period,
interest in the amount of 4.00% shall accrue and be added to the outstanding principal balance
thereof, and shall be due and payable upon repayment of the loan. Interest will not be paid on the
accrued interest. Florida Hotels. In March 2005, the Company purchased from Lehman Brothers $2.8 million of
B-notes for $2.3 million. The fixed-rate notes are secured by second mortgages on three hotels
with a weighted average yield at the time of purchase of 9.3%, and have a remaining term of
approximately six years. The three B-Notes, which are debt subordinated to the first mortgage A
note, are cross-collateralized. The A note is secured by the first mortgages on each of the three
assets, which are held in a CMBS trust. The loans are secured by a 146-room Springhill Suites and
a 91-room TownePlace Suites, both in Boca Raton, FL, and a 95-room TownePlace Suites in Fort
Lauderdale, FL. GECC Line of Credit On March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (SPE
II), entered into a five-year credit facility with GECC (the GE Line). The Company subsequently
borrowed funds under the GE Line on March 14, 2005 and used these funds to pay off all outstanding
debt under the Companys previous $125 million line of credit, terminating this prior credit
facility. The GE Line provides for revolving loan commitments and letters of credit up to $155
million. The GE Line bears interest at rates from LIBOR plus 1.75% to 2.50%, based on the ratio of
the underwritten net operating income of the hotels that collateralize the GE Line to the
outstanding principal debt balance. The current rate is LIBOR plus 2.00%. 74




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##### 



WINSTON HOTELS, INC. 
 SCHEDULE II  VALUATION AND QUALIFYING DISCOUNTS
 For the Years Ended December 31, 2004, 2003 and 2002
 ($ in thousands)
 AdditionsBalance at
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    Balance atJanuary 1,
    
    
    costs and
    
    
    other
    
    
    
    
    
    
    end ofDescription
    
    2004
    
    
    expenses
    
    
    accounts
    
    
    Deductions
    
    
    periodAllowance for doubtful accounts  hotel receivables
    
    103
    
    
    179
    
    
    
    
    
    
    
    171
    
    
    
    111Allowance for doubtful accounts  notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 AdditionsBalance at
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    Balance atJanuary 1,
    
    
    costs and
    
    
    other
    
    
    
    
    
    
    end ofDescription
    
    2003
    
    
    expenses
    
    
    accounts
    
    
    Deductions
    
    
    periodAllowance for doubtful accounts  hotel receivables
    
    
    110
    
    
    
    114
    
    
    
    
    
    
    
    121
    
    
    
    103Allowance for doubtful accounts  notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 AdditionsBalance at
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    Balance atJanuary 1,
    
    
    costs and
    
    
    other
    
    
    
    
    
    
    end ofDescription
    
    2002
    
    
    expenses
    
    
    accounts (1)
    
    
    Deductions
    
    
    periodAllowance for doubtful accounts  hotel receivables
    
    
    
    
    
    
    60
    
    
    
    66
    
    
    
    16
    
    
    
    110Allowance for doubtful accounts  notes receivable
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    250
    
    
    
    
   (1)
    -
    Balance represents allowance for doubtful accounts balance assumed as part of the Companys acquisition of the leasehold interests for 47 hotels from MeriStar effective July 1, 2002. 75




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##### 



WINSTON HOTELS, INC 
 SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
 as of December 31, 2004
 ($ in thousands)
 Cost Capitalized SubsequentInitial Cost
    
    
    to Acquisition
    
    
    Gross Amounts Carried at Close of PeriodLife UponWhichDepreciationAccumulated
    
    
    Net Book Value
    
    
    
    

    in LatestDepreciation
    
    
    Land, Buildings
    
    
    
    
    IncomeEncum-
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    and
    
    
    Date of
    
    Statement isDescription
    
    brances
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    
    Improvements
    
    
    Improvements
    
    
    Acquisition
    
    ComputedHampton Inn
Boone, NC
    
    (a)
    
    $
    264
    
    
    $
    2,750
    
    
    $
    161
    
    
    $
    918
    
    
    $
    425
    
    
    $
    3,668
    
    
    $
    4,093
    
    
    $
    1,496
    
    
    $
    2,597
    
    
    6/2/94
    
    
    30Hampton Inn
Brunswick, GA
    
    (a)
    
    
    716
    
    
    
    3,887
    
    
    
    30
    
    
    
    919
    
    
    
    746
    
    
    
    4,806
    
    
    
    5,552
    
    
    
    1,829
    
    
    
    3,723
    
    
    6/2/94
    
    
    30Hampton Inn
Cary, NC
    
    (a)
    
    
    613
    
    
    
    4,596
    
    
    
    43
    
    
    
    1,142
    
    
    
    656
    
    
    
    5,738
    
    
    
    6,394
    
    
    
    2,359
    
    
    
    4,035
    
    
    6/2/94
    
    
    30Hampton Inn
Charlotte, NC
    
    (b)
    
    
    833
    
    
    
    3,609
    
    
    
    60
    
    
    
    617
    
    
    
    893
    
    
    
    4,226
    
    
    
    5,119
    
    
    
    1,577
    
    
    
    3,542
    
    
    6/2/94
    
    
    30Hampton Inn
Durham, NC
    
    (a)
    
    
    634
    
    
    
    4,582
    
    
    
    48
    
    
    
    1,516
    
    
    
    682
    
    
    
    6,098
    
    
    
    6,780
    
    
    
    2,274
    
    
    
    4,506
    
    
    6/2/94
    
    
    30Hampton Inn & Suites
Gwinnett, GA
    
    (b)
    
    
    557
    
    
    
    6,959
    
    
    
    55
    
    
    
    352
    
    
    
    612
    
    
    
    7,311
    
    
    
    7,923
    
    
    
    2,076
    
    
    
    5,847
    
    
    7/18/96
    
    
    30Hampton Inn
Hilton Head, SC
    
    (a)
    
    
    310
    
    
    
    3,969
    
    
    
    51
    
    
    
    1,309
    
    
    
    361
    
    
    
    5,278
    
    
    
    5,639
    
    
    
    1,898
    
    
    
    3,741
    
    
    11/29/94
    
    
    30Hampton Inn
Jacksonville, NC
    
    (a)
    
    
    473
    
    
    
    4,140
    
    
    
    47
    
    
    
    705
    
    
    
    520
    
    
    
    4,845
    
    
    
    5,365
    
    
    
    1,789
    
    
    
    3,576
    
    
    6/2/94
    
    
    30Hampton Inn
Las Vegas, NV
    
    (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5/20/98
    
    
    Hampton Inn
Perimeter , GA
    
    (b)
    
    
    914
    
    
    
    6,293
    
    
    
    3
    
    
    
    252
    
    
    
    917
    
    
    
    6,545
    
    
    
    7,462
    
    
    
    1,814
    
    
    
    5,648
    
    
    7/19/96
    
    
    30Hampton Inn
Ponte Vedra, FL
    
    (c)
    
    
    1,506
    
    
    
    5,218
    
    
    
    61
    
    
    
    428
    
    
    
    1,567
    
    
    
    5,646
    
    
    
    7,213
    
    
    
    923
    
    
    
    6,290
    
    
    12/1/00
    
    
    30Hampton Inn
Raleigh, NC
    
    (b)
    
    
    697
    
    
    
    5,955
    
    
    
    44
    
    
    
    1,487
    
    
    
    741
    
    
    
    7,442
    
    
    
    8,183
    
    
    
    2,532
    
    
    
    5,651
    
    
    5/18/95
    
    
    30Hampton Inn
Southlake, GA
    
    (a)
    
    
    680
    
    
    
    4,065
    
    
    
    68
    
    
    
    818
    
    
    
    748
    
    
    
    4,883
    
    
    
    5,631
    
    
    
    1,906
    
    
    
    3,725
    
    
    6/2/94
    
    
    30Hampton Inn
W. Springfield, MA
    
    (b)
    
    
    916
    
    
    
    5,253
    
    
    
    6
    
    
    
    941
    
    
    
    922
    
    
    
    6,194
    
    
    
    7,116
    
    
    
    1,599
    
    
    
    5,517
    
    
    7/14/97
    
    
    30Hampton Inn
White Plains, NY
    
    (b)
    
    
    1,382
    
    
    
    10,763
    
    
    
    70
    
    
    
    770
    
    
    
    1,452
    
    
    
    11,533
    
    
    
    12,985
    
    
    
    2,877
    
    
    
    10,108
    
    
    10/29/97
    
    
    30Hampton Inn
Wilmington, NC
    
    (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6/2/94
    
    
    Comfort Inn
Charleston, SC
    
    (b)
    
    
    438
    
    
    
    5,853
    
    
    
    39
    
    
    
    2,416
    
    
    
    477
    
    
    
    8,269
    
    
    
    8,746
    
    
    
    2,448
    
    
    
    6,298
    
    
    5/18/95
    
    
    30Comfort Inn
Chester, VA
    
    (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11/29/94
    
    
    
 76




---



##### 



Cost Capitalized SubsequentInitial Cost
    
    
    to Acquisition
    
    
    Gross Amounts Carried at Close of PeriodLife UponWhichDepreciationAccumulated
    
    
    Net Book Value
    
    
    
    
    in LatestDepreciation
    
    
    Land, Buildings
    
    
    
    
    IncomeEncum-
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    and
    
    
    Date of
    
    Statement isDescription
    
    brances
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    
    Improvements
    
    
    Improvements
    
    
    Acquisition
    
    ComputedComfort Inn
Durham, NC
    
    (a)
    
    
    947
    
    
    
    6,208
    
    
    
    44
    
    
    
    666
    
    
    
    991
    
    
    
    6,874
    
    
    
    7,865
    
    
    
    2,456
    
    
    
    5,409
    
    
    11/29/94
    
    
    30Comfort Inn
Fayetteville, NC
    
    (a)
    
    
    1,223
    
    
    
    8,047
    
    
    
    18
    
    
    
    832
    
    
    
    1,241
    
    
    
    8,879
    
    
    
    10,120
    
    
    
    3,063
    
    
    
    7,057
    
    
    11/29/94
    
    
    30Comfort Inn
Wilmington, NC
    
    (a)
    
    
    532
    
    
    
    5,889
    
    
    
    36
    
    
    
    937
    
    
    
    568
    
    
    
    6,826
    
    
    
    7,394
    
    
    
    2,714
    
    
    
    4,680
    
    
    6/2/94
    
    
    30Comfort Suites
Orlando, FL
    
    (b)
    
    
    1,357
    
    
    
    10,180
    
    
    
    51
    
    
    
    1,209
    
    
    
    1,408
    
    
    
    11,389
    
    
    
    12,797
    
    
    
    2,985
    
    
    
    9,812
    
    
    5/1/97
    
    
    30Homewood Suites
Alpharetta, GA
    
    (a)
    
    
    985
    
    
    
    6,621
    
    
    
    51
    
    
    
    168
    
    
    
    1,036
    
    
    
    6,789
    
    
    
    7,825
    
    
    
    1,715
    
    
    
    6,110
    
    
    5/22/98
    
    
    30Homewood Suites
Cary, NC
    
    (b)
    
    
    1,010
    
    
    
    12,367
    
    
    
    72
    
    
    
    908
    
    
    
    1,082
    
    
    
    13,275
    
    
    
    14,357
    
    
    
    3,844
    
    
    
    10,513
    
    
    7/9/96
    
    
    30Homewood Suites
Clear Lake, TX
    
    (b)
    
    
    879
    
    
    
    5,978
    
    
    
    9
    
    
    
    346
    
    
    
    888
    
    
    
    6,324
    
    
    
    7,212
    
    
    
    1,746
    
    
    
    5,466
    
    
    9/13/96
    
    
    30Homewood Suites
Durham, NC
    
    (a)
    
    
    1,074
    
    
    
    6,136
    
    
    
    (95
    )
    
    
    866
    
    
    
    979
    
    
    
    7,002
    
    
    
    7,981
    
    
    
    1,469
    
    
    
    6,512
    
    
    11/14/98
    
    
    30Homewood Suites
Lake Mary, FL
    
    (a)
    
    
    871
    
    
    
    6,987
    
    
    
    35
    
    
    
    407
    
    
    
    906
    
    
    
    7,394
    
    
    
    8,300
    
    
    
    1,632
    
    
    
    6,668
    
    
    11/4/98
    
    
    30Homewood Suites
Phoenix, AZ
    
    (a)
    
    
    1,402
    
    
    
    9,763
    
    
    
    50
    
    
    
    213
    
    
    
    1,452
    
    
    
    9,976
    
    
    
    11,428
    
    
    
    2,206
    
    
    
    9,222
    
    
    6/1/98
    
    
    30Homewood Suites
Raleigh, NC
    
    (a)
    
    
    1,008
    
    
    
    10,076
    
    
    
    34
    
    
    
    571
    
    
    
    1,042
    
    
    
    10,647
    
    
    
    11,689
    
    
    
    2,405
    
    
    
    9,284
    
    
    3/9/98
    
    
    30Holiday Inn Express
Abingdon, VA
    
    (a)
    
    
    918
    
    
    
    2,263
    
    
    
    (472
    )
    
    
    569
    
    
    
    446
    
    
    
    2,832
    
    
    
    3,278
    
    
    
    731
    
    
    
    2,547
    
    
    5/7/96
    
    
    30Holiday Inn Express
Clearwater, FL
    
    (a)
    
    
    510
    
    
    
    5,854
    
    
    
    72
    
    
    
    1,125
    
    
    
    582
    
    
    
    6,979
    
    
    
    7,561
    
    
    
    1,802
    
    
    
    5,759
    
    
    8/6/97
    
    
    30Holiday Inn Select
Dallas, TX
    
    (a)
    
    
    1,060
    
    
    
    13,615
    
    
    
    160
    
    
    
    3,559
    
    
    
    1,220
    
    
    
    17,174
    
    
    
    18,394
    
    
    
    5,130
    
    
    
    13,264
    
    
    5/7/96
    
    
    30Holiday Inn
Secaucus, NJ
    
    (a)
    
    
    
    
    
    
    13,699
    
    
    
    
    
    
    
    1,433
    
    
    
    
    
    
    
    15,132
    
    
    
    15,132
    
    
    
    3,677
    
    
    
    11,455
    
    
    5/27/98
    
    
    30Holiday Inn
Tinton Falls, NJ
    
    (a)
    
    
    1,261
    
    
    
    4,337
    
    
    
    10
    
    
    
    1,790
    
    
    
    1,271
    
    
    
    6,127
    
    
    
    7,398
    
    
    
    1,507
    
    
    
    5,891
    
    
    4/21/98
    
    
    30Courtyard by Marriott
Ann Arbor, MI
    
    (b)
    
    
    902
    
    
    
    9,850
    
    
    
    62
    
    
    
    1,181
    
    
    
    964
    
    
    
    11,031
    
    
    
    11,995
    
    
    
    2,861
    
    
    
    9,134
    
    
    9/30/97
    
    
    30Courtyard by Marriott
Chapel Hill, NC
    
    (e)
    
    
    1,535
    
    
    
    9,156
    
    
    
    
    
    
    
    
    
    
    
    1,535
    
    
    
    9,156
    
    
    
    10,691
    
    
    
    87
    
    
    
    10,604
    
    
    
    
    
    30Courtyard by Marriott
Houston, TX
    
    (a)
    
    
    1,211
    
    
    
    9,154
    
    
    
    117
    
    
    
    2,263
    
    
    
    1,328
    
    
    
    11,417
    
    
    
    12,745
    
    
    
    3,053
    
    
    
    9,692
    
    
    7/14/97
    
    
    30Courtyard by Marriott
Roanoke, VA
    
    n/a
    
    
    1,194
    
    
    
    9,781
    
    
    
    
    
    
    
    
    
    
    
    1,194
    
    
    
    9,781
    
    
    
    10,975
    
    
    
    30
    
    
    
    10,945
    
    
    
    
    
    30Courtyard by Marriott
Wilmington, NC
    
    (b)
    
    
    742
    
    
    
    5,907
    
    
    
    19
    
    
    
    270
    
    
    
    761
    
    
    
    6,177
    
    
    
    6,938
    
    
    
    1,625
    
    
    
    5,313
    
    
    12/19/96
    
    
    30Courtyard by Marriott
Winston-Salem, NC
    
    (a)
    
    
    915
    
    
    
    5,202
    
    
    
    15
    
    
    
    616
    
    
    
    930
    
    
    
    5,818
    
    
    
    6,748
    
    
    
    1,025
    
    
    
    5,723
    
    
    10/3/98
    
    
    30
 77




---



##### 



Cost Capitalized Subsequent
    
    
    Gross Amount CarriedInitial Cost
    
    
    to Acquisition
    
    
    at Close of PeriodLife UponWhichNet
    
    
    
    
    DepreciationAccumulated
    
    
    Book Value
    
    
    
    
    in LatestDepreciation
    
    
    Land,
    
    
    
    
    IncomeEncum-
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    
    
    
    
    Buildings and
    
    
    Buildings and
    
    
    Date of
    
    Statement isDescription
    
    brances
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    
    Improvements
    
    
    Improvements
    
    
    Acquisition
    
    ComputedHilton Garden Inn
Albany, NY
    
    (a)
    
    
    1,168
    
    
    
    11,236
    
    
    
    64
    
    
    
    78
    
    
    
    1,232
    
    
    
    11,314
    
    
    
    12,546
    
    
    
    2,516
    
    
    
    10,030
    
    
    5/8/98
    
    
    30Hilton Garden Inn
Alpharetta, GA
    
    (a)
    
    
    1,425
    
    
    
    11,719
    
    
    
    31
    
    
    
    153
    
    
    
    1,456
    
    
    
    11,872
    
    
    
    13,328
    
    
    
    2,689
    
    
    
    10,639
    
    
    3/17/98
    
    
    30Hilton Garden Inn
Evanston, IL
    
    (d)
    
    
    2,225
    
    
    
    15,620
    
    
    
    39
    
    
    
    3,083
    
    
    
    2,264
    
    
    
    18,703
    
    
    
    20,967
    
    
    
    1,447
    
    
    
    19,520
    
    
    7/1/01
    
    
    30Hilton Garden Inn
Raleigh, NC
    
    (a)
    
    
    1,901
    
    
    
    9,209
    
    
    
    35
    
    
    
    144
    
    
    
    1,936
    
    
    
    9,353
    
    
    
    11,289
    
    
    
    2,046
    
    
    
    9,243
    
    
    5/8/98
    
    
    30Hilton Garden Inn
Windsor, CT
    
    n/a
    
    
    2,031
    
    
    
    11,238
    
    
    
    18
    
    
    
    (528
    )
    
    
    2,049
    
    
    
    10,710
    
    
    
    12,759
    
    
    
    1,261
    
    
    
    11,498
    
    
    9/1/00
    
    
    30Quality Suites
Charleston, SC
    
    (b)
    
    
    912
    
    
    
    11,224
    
    
    
    7
    
    
    
    1,109
    
    
    
    919
    
    
    
    12,333
    
    
    
    13,252
    
    
    
    4,242
    
    
    
    9,010
    
    
    5/18/95
    
    
    30Residence Inn
Phoenix, AZ
    
    (b)
    
    
    2,076
    
    
    
    13,311
    
    
    
    95
    
    
    
    897
    
    
    
    2,171
    
    
    
    14,208
    
    
    
    16,379
    
    
    
    3,216
    
    
    
    13,163
    
    
    3/3/98
    
    
    30Fairfield Inn
Ann Arbor, MI
    
    (a)
    
    
    542
    
    
    
    3,743
    
    
    
    103
    
    
    
    741
    
    
    
    645
    
    
    
    4,484
    
    
    
    5,129
    
    
    
    1,155
    
    
    
    3,974
    
    
    9/30/97
    
    
    30$
    44,749
    
    
    $
    342,262
    
    
    $
    1,466
    
    
    $
    40,196
    
    
    $
    46,215
    
    
    $
    382,458
    
    
    $
    428,673
    
    
    $
    95,732
    
    
    $
    332,941
   (a)
    
    As of December 31, 2004, property served as collateral for the $125,000 line of credit (see Note 7).(b)
    
    As of December 31, 2004, property served as collateral for the $71,000 note through GE Capital Corporation (see Note 7).(c)
    
    As of December 31, 2004, property served as collateral for the $5,100 note through GE Capital Corporation (see Note 7).(d)
    
    As of December 31, 2004, property served as collateral for the $12,300 note through GE Capital Corporation (see Note 7).(e)
    
    As of December 31, 2004, property served as collateral for the $9,040 term note through GE Capital Corporation (see Note 7). WINSTON HOTELS, INC. 
 NOTES TO SCHEDULE III
 2004
    
    
    2003(a) Reconciliation of Real Estate:Balance at beginning of period
    
    $
    421,897
    
    
    $
    384,859Acquisitions during period
    
    
    21,666
    
    
    
    Dispositions during period
    
    
    (13,438
    )
    
    
    Consolidation of Joint Ventures
    
    
    
    
    
    
    39,041Reclassification to held for sale
    
    
    (7,678
    )
    
    
    (5,969
    )Additions during period
    
    
    6,226
    
    
    
    3,966Balance at end of period
    
    $
    428,673
    
    
    $
    421,897(b) Reconciliation of Accumulated Depreciation:Balance at beginning of period
    
    
    89,087
    
    
    
    75,212Depreciation for period
    
    
    12,296
    
    
    
    12,772Dispositions during period
    
    
    (3,181
    )
    
    
    Consolidation of Joint Ventures
    
    
    
    
    
    
    2,631Reclassification to held for sale
    
    
    (2,470
    )
    
    
    (1,528
    )Balance at end of period
    
    $
    95,732
    
    
    $
    89,087(c) The aggregate cost of land, buildings and
improvements for federal income tax purposes
is approximately $397,074.
 78




---



##### 



WINSTON HOTELS, INC. 
 SCHEDULE IV  MORTGAGE LOANS ON REAL ESTATE
 As of December 31, 2004
 ($ in thousands)
 Mortgage Loans on Real Estate at Close of Period
    
    
    Interest Earned on MortgagesAmount of PrinicpalCarrying
    
    
    Unpaid at Close of Period
    
    
    Amount of
    
    
    
    
    
    
    Interest Income EarnedAmount of
    
    
    
    
    
    
    Subject to
    
    
    Mortgage Being
    
    
    Interest Due and Accrued
    
    
    During the Year EndedDescription
    
    Prior Liens
    
    
    Mortgages
    
    
    Total
    
    
    Delinquent Interest
    
    
    Forclosed
    
    
    as of December 31, 2004
    
    
    December 31, 2004Cornhusker Square Hotel, Lincoln NB (1)
    
    
    
    
    
    
    6,000
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    176
    
    
    
    495Radisson Kauai Resort, Kauai HI (2)
    
    
    
    
    
    
    6,000
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    46
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    222
    
    
    
    541
   (1)
    
    - This mortgage is subordinate to a $10,850 first mortgage.(2)
    
    - This mortage is part of a $38 million senior participating note. Reconcoliation of Carrying Amount of Mortgages:Balance at beginning of period
    
    
    Additions during period:New mortgage loans
    
    
    12,000Other
    
    
    Deductions during period:Collections of principal
    
    
    Foreclosures
    
    
    Cost of mortgages sold
    
    
    Amortization of premium
    
    
    Other
    
    
    Balance at close of period
    
    
    12,000
 79




---



##### 



INDEX TO EXHIBITS Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form
10-Q or filed with the Securities and Exchange Commission on August 4,
1999 and Exhibit 4.4(b) to the Companys Registration Statement on
Form 8-A as filed with the Securities and Exchange Commission on
January 30, 2004.3.2
    
    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2
to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 19, 2001).4.1
    
    Specimen certificate for Common Stock (Incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration No.
33-76602) effective May 25, 1994).4.2
    
    Specimen certificate for 8.00% Series B Cumulative Preferred Stock
(Incorporated by reference to Exhibit 4.3 to the Companys
Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on January 30, 2004).4.3
    
    Form of Articles of Amendment to the Restated Articles of
Incorporation Establishing and Fixing the Rights and Preferences of
the 8.00% Series B Cumulative Preferred Stock (Incorporated by
reference to Exhibit 4.4(b) to the Companys Registration Statement on
Form 8-A as filed with the Securities and Exchange Commission on
January 30, 2004).10.1
    
    Second Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 24, 1997).10.2
    
    Amendment No. 1 dated September 11, 1997, to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on September 15, 1997).10.3
    
    Amendment No. 2 dated December 31, 1997, to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 10.4 to the Companys Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on March 27, 1998 and as amended by Form 10-K/A filed with
the Securities and Exchange Commission on April 1, 1998).10.4
    
    Amendment No. 3 dated September 14, 1998, to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 10.4 to the Companys Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on March 17, 2000).10.5
    
    Amendment No. 4 dated October 1, 1999, to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
(Incorporated by reference to Exhibit 4.1 to the Companys Quarterly
Report on Form 10-Q as filed with the Securities and Exchange
Commission on November 12, 1999).10.6
    
    Amendment No. 5 dated as of January 1, 2002, to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.6 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 15, 2002).10.7
    
    Amendment No. 6 dated as of April 2, 2002, to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.7 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 14, 2003).
 80




---



##### 



Exhibit
    
    Description10.8
    
    Amendment No. 7 dated as of October 10, 2003, to Second Amended and Restated Agreement
of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on November 12, 2003).10.9
    
    Amendment No. 8 dated as of February 24, 2004, to Second Amended and Restated Agreement
of
Limited Partnership of WINN Limited Partnership (Incorporated by reference to Exhibit
10.9 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 12, 2004).10.10
    
    Limitation of Future Hotel Ownership and Development Agreement (Incorporated by
reference to Exhibit 10.37 to the Companys Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration No. 33-91230) effective
May 11, 1995).10.11
    
    Winston Hotels, Inc. Stock Incentive Plan as amended May 1998 (Incorporated by
reference to Exhibit 4.5 to the Companys Registration Statement on Form S-8 as filed
with the Securities and Exchange Commission on July 29, 1998 (Registration No.
333-60079)).10.12
    
    Amendments to Winston Hotels, Inc. Stock Incentive Plan as Amended May 1998
(Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on October 14, 2003).10.13
    
    Amended and Restated Winston Hotels, Inc. Executive Deferred Compensation Plan
(Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on October 14, 2003).10.14
    
    Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated
November 3, 1998 (Incorporated by reference to Exhibit 10.01 to the Companys
Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on
November 16, 1998 and as amended on Form 10-Q/A filed with the Securities and
Exchange Commission on February 23, 1999).10.15
    
    Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital
Company, LLC (Incorporated by reference to Exhibit 10.02 to the Companys Quarterly
Report on Form 10-Q as filed with the Securities and Exchange Commission on November
16, 1998 and as amended on Form 10-Q/A filed with the Securities and Exchange
Commission on February 23, 1999).10.16
    
    Second Amended and Restated Syndicated Credit Agreement, dated as of December 19,
2001, among Wachovia Bank, N.A., Branch Banking and Trust Company, SouthTrust Bank,
N.A., Centura Bank, Winston Hotels, Inc., WINN Limited Partnership and Wachovia Bank,
N.A. as Agent (the Credit Agreement) (Incorporated by reference to Exhibit 10.18 to
the Companys Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 15, 2002).10.17
    
    Fifth Amendment to Second Amended and Restated Syndicated Credit Agreement, dated as
of September 8, 2003 (Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Securities and Exchange Commission on
October 2, 2003).10.18
    
    Sixth Amendment to Second Amended and Restated Syndicated Credit Agreement, dated as
of December 13, 2004.10.19
    
    Master Repurchase Agreement Between Marathon Structured Finance Fund, LP and Winston
Finance Partners LLC dated as of October 5, 2004 (Incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the Securities
and Exchange Commission on October 12, 2004).10.20
    
    Loan Agreement dated as of March 11, 2005 by and between Winston SPE II LLC and
General
 81




---



##### 



Exhibit
    
    DescriptionElectric Capital Corporation.10.21
    
    Form of Mortgage Security Agreement and Fixture Filing dated March 11, 2005 by
Winston SPE II LLC.10.22
    
    Form of Deed of Trust, Security Agreement and Fixture Filing dated March 11, 2005 by
Winston SPE II LLC.10.23
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Wachovia Bank, N.A. for the principal
sum of $48,000,000 pursuant to the Credit Agreement (Incorporated by reference to
Exhibit 10.19 to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 2002).10.24
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Branch Banking and Trust Company for the
principal sum of $40,000,000 pursuant to the Credit Agreement (Incorporated by
reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 15, 2002).10.25
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to SouthTrust Bank, N.A. for the principal
sum of $22,000,000 pursuant to the Credit Agreement (Incorporated by reference to
Exhibit 10.21 to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 2002).10.26
    
    Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Centura Bank for the principal sum of
$15,000,000 pursuant to the Credit Agreement (Incorporated by reference to Exhibit
10.22 to the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 15, 2002).10.27
    
    Extension Agreement; Second Modification Agreement of Form of Deed of Trust,
Assignment of Rents, Security Agreement and Financing Statement used to secure
certain obligations under the Credit Agreement (not including certain variations
existing in the different states where the properties are located) (Incorporated by
reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 15, 2002).10.28
    
    Leasehold Acquisition Agreement, dated as of June 28, 2002, by and among Winston
Hotels, Inc., CapStar Winston Company, LLC, MeriStar Management Company, LLC, Barclay
Hospitality Services Inc. and certain affiliates of the foregoing parties
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K as filed with the Securities and Exchange Commission on July 15, 2002).10.29
    
    Termination Agreement between Barclay Hospitality Services Inc. and Interstate
Management and Investment Corporation, dated as of July 1, 2003 (Incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on August 13, 2003).10.30
    
    Form Master Lease Agreement dated as of January 1, 2005 with Barclay Hospitality
Services, Inc., our TRS Lessee.10.31
    
    Hotel Management Agreement, dated July 1, 2002, by and between Barclay Hospitality
Services, Inc. and MeriStar Management Company, L.L.C. (Incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K as filed with the Securities
and Exchange Commission on July 15, 2002).10.32
    
    Hotel Management Agreement by and between Barclay Hospitality Services, Inc. and
Alliance Hospitality Management, LLC, dated as of July 1, 2003 (Incorporated by
reference to Exhibit 10.2 to
 82




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##### 



Exhibit
    
    Descriptionthe Companys Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on August 13, 2003).10.33
    
    Employment Agreement, dated January 2, 2003, by and between Robert W. Winston, III
and Winston Hotels, Inc. (Incorporated by reference to Exhibit 10.21 to the Companys
Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 14, 2003).10.34
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement, dated January 2, 2003,
by and between Robert W. Winston, III and Winston Hotels, Inc.10.35
    
    Employment Agreement dated January 2, 2003, by and between Kenneth R. Crockett and
Winston Hotels, Inc. (Incorporated by reference to Exhibit 10.22 to the Companys
Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 14, 2003).10.36
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated January 2, 2003,
by and between Kenneth R. Crockett and Winston Hotels, Inc.10.37
    
    Employment Agreement dated January 2, 2003, by and between Joseph V. Green and
Winston Hotels, Inc. (Incorporated by reference to Exhibit 10.23 to the Companys
Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 14, 2003).10.38
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated January 2, 2003,
by and between Joseph V. Green and Winston Hotels, Inc.10.39
    
    Employment Agreement dated March 30, 2004, by and between Brent V. West and Winston
Hotels, Inc.10.40
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated March 30, 2004,
by and between Brent V. West and Winston Hotels, Inc.10.41
    
    Employment Agreement dated March 30, 2004, by and between James P. Frey and Winston
Hotels, Inc.10.42
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement, March 30, 2004, by and
between James P. Frey and Winston Hotels, Inc.10.43
    
    Summary of 2004 and 2005 executive officer compensation (Incorporated by reference to
the description in Item 1.01 of the Companys Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February 7, 2005).10.44
    
    Summary of 2004 and 2005 Non-Employee Director compensation (Incorporated by
reference to the description in Item 1.01 of the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on February 7, 2005).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP).31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
 83