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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, 2003 Commission file number 0-23732 WINSTON HOTELS, INC. (Exact name of registrant as specified in its charter) North Carolina
(State of incorporation)
    
    56-1624289
(I.R.S. Employer Identification Number)
 2626 Glenwood Avenue, Suite 200
Raleigh, North Carolina
(Address of principal executive offices)
    
    27608
(Zip Code)
 (919) 510-6019
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value per share 
8.00% Series B Cumulative Preferred Stock, $0.01 par value per share
(Title of Class)
    
    
    
    New York Stock Exchange
New York Stock Exchange
(Name of Exchange upon Which Registered)
 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 x No o 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. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o The aggregate market value of the registrants Common Stock, $0.01 par
value per share, at June 30, 2003, held by those persons deemed by the
registrant to be non-affiliates was approximately $154,382,412. As of March 1, 2004, there were 26,340,292 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 4, 2004
    
    Part III




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WINSTON HOTELS, INC. Form 10-K Annual Report INDEX PagePART I.ITEM 1.
    
    BUSINESS
    
    
    3ITEM 2.
    
    PROPERTIES
    
    
    11ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    13ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    13PART II.ITEM 5.
    
    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    14ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    15ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    34ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    35ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    35ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    36PART III.ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    36ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    36ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    36ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    36ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    36PART IV.ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    
    37SIGNATURES
    
    
    
    
    41
 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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, and providing loans to the hotel industry. The
Company conducts substantially all of its operations through its operating
partnership, WINN Limited Partnership, (the Partnership). The Company
operates so as to qualify as a real estate investment trust (REIT) for
federal income tax purposes. During 2003, the Company invested in two additional properties through its
joint venture with Charlesbank Capital Partners, LLC. The Company owns an
indirect 13.05 percent interest in these hotels. As of December 31, 2003, the
Company owned or was invested in 50 hotel properties in 16 states having an
aggregate of 7,028 rooms. This included 44 wholly owned properties with an
aggregate of 6,170 rooms, a 49 percent ownership in two joint venture hotels
with an aggregate of 296 rooms, a 57.65 percent ownership in one joint venture
hotel with 157 rooms, and an indirect 13.05 percent ownership interest in three
joint venture hotels with an aggregate of 405 rooms. The Company also had
issued mezzanine loans to owners of three hotels with an aggregate of 391
rooms. The Company also held a 48.78 percent ownership interest in another
joint venture that is currently constructing a 147-room Courtyard by Marriott
hotel that is scheduled to open in the third quarter of 2004. 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, 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 45 wholly owned hotels and two joint venture hotels,
for total consideration of approximately $19.5 million. During 2003, the
Company assumed the leasehold interests for one wholly owned hotel and, along
with its joint venture partner, the leasehold interests for one joint venture
hotel, at no cost. As of December 31, 2003, 43 of the Companys 44 wholly owned hotels and
two of its six joint venture hotels, the Evanston, IL Hilton Garden Inn and the
Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay. The
other wholly owned hotel, the Secaucus, NJ Holiday Inn, continued to be
operated under a lease with a third party lessee. (In March 2004, the Company
negotiated the transfer of this lease to Barclay at no cost). One joint
venture hotel, the Windsor, CT Hilton Garden Inn, was leased to an entity owned
57.65 percent by Barclay. The remaining three joint venture hotels, the West
Des Moines, IA Fairfield Inn & Suites, the Beachwood, OH Courtyard by Marriott,
and the Houston, TX Best Western Park Place Suites, did not operate under
leases. As of December 31, 2003, Alliance Hospitality Management, LLC (Alliance)
managed 41 of the Companys 50 hotels, Concord Hospitality Enterprises Company
(Concord) managed three hotels, Promus Hotels, Inc., an affiliate of Hilton
Hotels Corporation (Hilton) managed two hotels, and Sage Hospitality
Resources, LLC (Sage), Prism Hospitality, L.P. (Prism), Noble Investment
Group, Ltd. (Noble) and Prime Hospitality Corp. (Prime) 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. 3




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Follow-on Common Stock Offering The Company raised net proceeds of approximately $50.5 million as a result
of a follow-on Common Stock offering in which the Company sold an additional
6,037,500 common shares. The follow-on offering was completed in October 2003
with the exercise of the underwriters over-allotment option, which included
787,500 common shares of the total 6,037,500 common shares. The Company
initially used the net proceeds to pay down its then outstanding balance under
its $125 million line of credit, and plans to use the resulting availability
under the line to fund the Companys hotel lending business, to acquire hotels
or interests in hotels through joint ventures, and/or for general corporate
purposes. Narrative Description of Business Growth Strategy The Companys primary growth strategy is designed to enhance shareholder
value by increasing cash available for distribution per share of Common Stock
through: (i) improving hotel operating results; (ii) acquiring, either directly
or through joint ventures, additional hotels, or ownership interests in hotels,
that meet the Companys investment criteria; and (iii) financing activities
whereby the Company initiates hotel loans to third party hotel owners. Improve 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 increase operating results through 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 $27.8 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 $26.8 million spent on repairs and maintenance items during that
same period. Acquisitions Among others, the Company intends to acquire 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. In particular, the Company will consider acquiring
mid-scale without food and beverage hotels, such as Hampton Inn, Hampton Inn
and Suites, Holiday Inn, and Fairfield Inn by Marriott; upscale hotels such as
Hilton Garden Inn, Courtyard by Marriott, Homewood Suites by Hilton, Residence
Inn, Spring Hill Suites by Marriott and Staybridge by Holiday Inn; and upper
upscale hotels such as full service Marriott, Hilton, Embassy Suites and
Sheraton; (see Managements Discussion and Analysis of Financial Condition and
Results of Operations  Forward Looking Statements). The Company intends to consider investments in hotel properties that meet
one or more of the following criteria: (i) 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; (ii) successful hotels
available at favorable prices; (iii) newly developed hotels; (iv) hotels that
could benefit from repositioning; (v) hotels that could benefit from
substantial rehabilitation; and (vi) hotels that could benefit from new
management and additional hotel capital. The Company believes that its
relationships with its lessees, managers and franchisors will provide
additional potential investment opportunities. 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 one hotel in 2001
and four hotels in 2002 for approximately $17.6 million. The Company did not
sell any hotels during 2003. Joint Ventures During the fourth quarter of 2002, the Company formed a joint venture (the
Charlesbank Venture) with Boston-based Charlesbank Capital Partners, LLC
(Charlesbank). The Charlesbank Venture intends to acquire more than $100
million of hotel assets. Charlesbank is a private investment firm managing
capital on behalf of institutional investors. The Company owns 15% of the
Charlesbank Venture and Charlesbank owns 85%. The Charlesbank Venture focuses
on acquisitions that the partners believe have 4




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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, 2003, the
Charlesbank Venture had invested in three hotels 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 is expected to be converted to a Spring Hill Suites
by Marriott in the second quarter of 2004. 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 three hotels is approximately
$30 million. The Company earns an asset management fee equal to 0.50% of the
total cost of the assets purchased by the Charlesbank Venture. 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. 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 is
currently developing a Courtyard by Marriott hotel in Chapel Hill, NC, (the
Chapel Hill Courtyard) which is expected to open in the summer of 2004. The
Company currently owns a 48.78 percent interest in the Chapel Hill Joint
Venture, while Chapel Hill Investments, LLC owns a 51.22 percent 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). The Company will receive $700 for development services
provided during construction. Chapel Hill Investments, LLC is owned 52 percent
by Charles Winston and James Winston, both of whom are directors of the
Company, and 48 percent by three unrelated private investors. 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 entered into a joint venture agreement (the
Hall Joint Venture), with an affiliate of Hall Financial Group, (Hall).
The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and
retained a 50% interest (or $1,750) in the note through the joint venture. 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
owns 50% of the Hall Joint Venture, and Hall owns the remaining 50%. In addition to the joint ventures described above, the Company has entered
into two joint ventures with Regent Partners, Inc. (Regent) and one joint
venture with Marsh Landing Investment, L.L.C. (the Marsh Landing Joint
Venture). 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 one hotel. These hotels consist of a Hilton Garden Inn
located in Evanston, IL, and a Hilton Garden Inn located in Windsor, CT, having
a combined total of 453 rooms. The Company owns a 49% interest in its Marsh
Landing Joint Venture, which owns a 118-room Hampton Inn located in Ponte
Vedra, FL. Two of our directors, Charles M. Winston and James H. Winston, own
the remaining 51% of the joint venture. During 2003 the Company earned asset
management fees equal to 1.0% of the total revenues of each of these three
joint venture hotels. We continue to seek additional prudent joint venture
opportunities where the Company can leverage its hotel asset management and
development expertise into attractive investments. Pursuant to the provisions of FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), 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 has consolidated the
balance sheets of the Evanston Joint Venture, the Windsor Joint Venture and the
Marsh Landing Joint Venture, and began to consolidate the operations of these
three joint ventures on January 1, 2004. Per the provisions of FIN 46, the
Company has not consolidated the balance sheet or operations of either the Hall
Joint Venture or the Charlesbank joint venture as of December 31, 2003, and
does not expect to do so in the future. Hotel Financing As of December 31, 2003, the Company had issued three mezzanine loans. In
addition to the Hall mezzanine loan, the Company had two other mezzanine loans
outstanding, totaling approximately $3.3 million to third party hotel owners.
In February 2004, the Company issued its fourth mezzanine loan in the amount of
$2.4 million. 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% 5




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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 leverage its hotel underwriting and development expertise into attractive
investments. The Company expects to use a portion of the $50.5 million in cash
proceeds from its follow-on common stock offering in October 2003, a portion of
the $12.9 million in net cash proceeds remaining from its Series B Cumulative
Preferred Stock offering in February 2004, (see Recent Developments below)
and possibly a portion of the remaining availability under its $125 million
line of credit to provide loans to the hotel industry. Recent Developments In February 2004, the Company sold its 118-room Hampton Inn in Wilmington,
NC for net cash proceeds of $3.4 million, resulting in a gain of approximately
$0.3 million. The Company also issued its fourth mezzanine loan, totaling $2.4
million, to the owner of the 200-room Sheraton hotel in Atlantic Beach, NC. In February 2004, the Charlesbank Venture invested in a fourth 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 is a Ramada Inn that the partners expect to convert
to a Courtyard by Marriott in early 2005. The total cost of the project is
expected to be approximately $14 million (including approximately $5 million in
renovation costs), approximately $9 million 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. In February 2004, the Company completed the issuance of 3,680,000 shares
of its 8.00% Series B Cumulative Preferred Stock. The net proceeds raised
totaled approximately $89 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 proceeds of approximately $12.9 million to pay down its then
outstanding balance under its $125 million line of credit, and plans to use the
resulting availability under the line to fund the Companys hotel lending
business, to acquire hotels or interests in hotels through joint ventures,
and/or for general corporate purposes. The costs capitalized as part of the issuance of the Series A Cumulative
Preferred Stock in September 1997 totaled approximately $1.7 million as of
February 2004 and will be recorded as a reduction in net income (loss)
available to common shareholders in the first quarter of 2004. 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
percent of the Evanston hotel and 42.35 percent of the Windsor hotel. The
amount paid for Regents ownership interest in the Evanston Hilton Garden Inn
totaled approximately $6.9 million, and was based on a value of $25.25 million
for the sale of the hotel, net of debt assumed of approximately $11.8 million,
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 $1.2 million, and was based on
a value of $12.25 million for the sale of the hotel, net of debt paid off of
approximately $9.3 million. As a result of the purchases, the Company owns 100
percent 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 will assume the lease of the Windsor hotel from
Windsor Lessee Company LLC. As of December 31, 2003, one wholly owned property, the Secaucus, NJ
Holiday Inn, continued to be operated under a long-term lease with Prime. In
March 2004, the Company negotiated the transfer of this lease to Barclay at no
cost. The Company also expects to receive payment from Prime of approximately
$300 as part of the negotiated settlement. The Secaucus, NJ Holiday Inn
produced a net loss to Prime of approximately $160 for the year ended December
31, 2003. Operations and Property Management As of December 31, 2003, Alliance managed 41 of the Companys 50 hotels,
Concord managed three hotels, Hilton managed two hotels, and Sage, Prism, and
Noble each managed one hotel. One wholly owned property continued to be
operated under a long-term lease with Prime. In March 2004, the Company
negotiated the transfer of this lease to Barclay at no cost. The information below, regarding the hotel managers and third party lessee
of the Companys hotels, is as of December 31, 2003: Alliance, a hotel management company, operated 41 of the Companys hotels. Concord, a hotel development and management company, operated a total of
37 hotels in eight states and Canada. 6




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Hilton, a New York Stock Exchange listed company, is a developer, owner,
manager or franchisor of 2,100 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,
Hampton Inn, Homewood Suites by Hilton, Red Lion Hotels & Inns and Conrad
International. Sage, a hotel management company, operated a total of 96 hotels in 33
states. Prism, a hotel management company, operated a total of 40 hotels in 13
states. Noble, a hotel development and management company, operated 20 upscale,
full service, mid-market and all-suites hotels in six states. Noble holds a 79
percent ownership interest in Alliance. Prime, a New York Stock Exchange listed company, owned, operated, managed
or franchised over 240 hotels throughout North America. Prime, one of the
nations premier lodging companies, operates three proprietary brands, Prime
Hotels & Resorts (full-service), AmeriSuites (all-suites) and Wellesley Inns &
Suites (limited-service). It also owns and/or manages hotels operated under
franchise agreements with national hotel chains. Franchise Agreements All of the Companys hotels operate under franchise licenses from national
hotel franchisors including Marriott International, Inc., Hilton Hotels
Corporation, 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, 2003, of the 50 hotels franchise licenses, including
six joint venture hotels, two expire 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,
nine expire in 2018, one expires in 2020, four expire in 2022, two expire in
2023 and one expires in 2024. 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. 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 14 employees as of March 1, 2004. We believe that our
relations with our employees are good. 7




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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-Garland (Dallas), Texas and the Comfort Inn-Greenville,
South Carolina. In each of 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 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. The Company believes that its hotels are 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. Although the Company does not intend to request a ruling from the
Internal Revenue Service (the Service) as to its REIT status, the Company, in
connection with its February 2004 preferred stock offering, has obtained the
opinion of its legal counsel that the Company qualifies as a REIT, which
opinion is based on certain assumptions and 8




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##### 



representations and is not binding on the Service or any court. 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 properties. Under the RMA, the Company may now own up to 100% of one or more taxable
REIT subsidiaries (TRS). A TRS is a taxable corporation that may lease
hotels under certain circumstances, provide services to the Company, and
perform activities such as third
party management, development, and other independent business activities.
Overall, no more than 20% of the value of the Companys assets may consist of
securities of one or more TRSs. In addition, no more than 25% of the Companys
gross income for any year, excluding all TRS revenues, but including any
dividends received from TRSs, may consist of dividends from one or more TRSs
and other income that is not derived from real estate sources. Under the RMA, a TRS is permitted to lease hotels from the Company as long
as the hotels are operated on behalf of the TRS by a third party manager who
satisfies the following requirements:  (1)
    
    such manager is, or is related to a person who is, actively
engaged in the trade or business of operating qualified lodging
facilities for any person unrelated to the Company and the TRS;(2)
    
    such manager does not own, directly or indirectly, more than
35% of the Companys stock;(3)
    
    no more than 35% of such manager is owned, directly or
indirectly, by one or more persons owning 35% or more of the
Companys stock; and(4)
    
    the Company does not directly or indirectly derive any income
from such manager. The RMA limits the deductibility of interest paid or accrued by a TRS to
the Company to assure that the TRS is subject to an appropriate level of
corporate taxation. The RMA also imposes a 100% excise tax on transactions
between a TRS and the Company or its tenants that are not on an arms-length
basis. 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
    
    
    74
    
    
    Chairman of the Board of DirectorsRobert W. Winston, III
    
    
    42
    
    
    Chief Executive OfficerJoseph V. Green
    
    
    53
    
    
    President, Chief Financial Officer and SecretaryKenneth R. Crockett
    
    
    47
    
    
    Chief Operating OfficerBrent V. West
    
    
    36
    
    
    Vice President and Chief Accounting Officer
 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 39 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. 9




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##### 



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. Available Information The Company maintains an Internet site, http://www.winstonhotels.com,
which contains additional information concerning the Company. The Company
makes available free of charge through its Internet 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 Internet site is neither part of nor
incorporated into this report on Form 10-K. 10




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##### 



ITEM 2. PROPERTIES As of December 31, 2003, the Company owned 44 hotels with an aggregate of
6,170 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, 2003 and 2002. 2003
    
    2002Number of
    
    Room Revenue
    
    Average
    
    Occupancy
    
    Room Revenue
    
    Average
    
    OccupancyHotel Name
    
    Rooms
    
    (in thousands)
    
    Daily Rate
    
    Percentage
    
    (in thousands)
    
    Daily Rate
    
    PercentageComfort Inns/SuitesComfort Inn Augusta, GA *
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,157
    
    
    $
    59.94
    
    
    
    47.8
    %Comfort Inn Charleston, SC
    
    
    128
    
    
    
    2,389
    
    
    
    71.91
    
    
    
    71.1
    %
    
    
    2,488
    
    
    
    72.60
    
    
    
    73.4
    %Comfort Inn Chester, VA
    
    
    122
    
    
    
    1,646
    
    
    
    58.44
    
    
    
    63.2
    %
    
    
    1,597
    
    
    
    60.02
    
    
    
    59.7
    %Comfort Inn Clearwater, FL *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    572
    
    
    
    58.97
    
    
    
    60.8
    %Comfort Inn Durham, NC
    
    
    138
    
    
    
    2,085
    
    
    
    62.50
    
    
    
    66.2
    %
    
    
    2,147
    
    
    
    65.12
    
    
    
    65.4
    %Comfort Inn Fayetteville, NC
    
    
    176
    
    
    
    3,307
    
    
    
    55.88
    
    
    
    92.1
    %
    
    
    2,668
    
    
    
    52.89
    
    
    
    78.5
    %Comfort Inn Greenville, SC
    
    
    188
    
    
    
    1,094
    
    
    
    46.71
    
    
    
    33.8
    %
    
    
    1,275
    
    
    
    50.84
    
    
    
    36.2
    %Comfort Inn Wilmington, NC
    
    
    146
    
    
    
    1,650
    
    
    
    54.93
    
    
    
    56.4
    %
    
    
    1,651
    
    
    
    54.57
    
    
    
    56.8
    %Comfort Suites Orlando, FL
    
    
    214
    
    
    
    2,454
    
    
    
    46.97
    
    
    
    66.9
    %
    
    
    2,463
    
    
    
    52.06
    
    
    
    60.6
    %Courtyard by MarriottsCourtyard by Marriott Ann Arbor, MI
    
    
    160
    
    
    
    3,650
    
    
    
    95.06
    
    
    
    65.8
    %
    
    
    4,106
    
    
    
    97.48
    
    
    
    72.1
    %Courtyard by Marriott Houston, TX
    
    
    197
    
    
    
    2,918
    
    
    
    84.06
    
    
    
    48.3
    %
    
    
    3,376
    
    
    
    88.03
    
    
    
    53.3
    %Courtyard by Marriott Wilmington, NC
    
    
    128
    
    
    
    2,332
    
    
    
    75.63
    
    
    
    66.0
    %
    
    
    2,297
    
    
    
    74.93
    
    
    
    65.6
    %Courtyard by Marriott Winston Salem, NC
    
    
    122
    
    
    
    2,275
    
    
    
    73.57
    
    
    
    69.4
    %
    
    
    2,159
    
    
    
    74.73
    
    
    
    64.8
    %Fairfield InnFairfield Inn Ann Arbor, MI
    
    
    110
    
    
    
    1,719
    
    
    
    68.97
    
    
    
    62.1
    %
    
    
    1,823
    
    
    
    71.93
    
    
    
    63.1
    %Hampton Inn/SuitesHampton Inn & Suites Gwinnett, GA
    
    
    136
    
    
    
    2,557
    
    
    
    78.39
    
    
    
    65.7
    %
    
    
    2,521
    
    
    
    80.27
    
    
    
    63.3
    %Hampton Inn Boone, NC
    
    
    95
    
    
    
    1,860
    
    
    
    82.78
    
    
    
    64.8
    %
    
    
    2,098
    
    
    
    83.33
    
    
    
    72.6
    %Hampton Inn Brunswick, NC
    
    
    129
    
    
    
    2,584
    
    
    
    67.72
    
    
    
    81.0
    %
    
    
    2,573
    
    
    
    65.16
    
    
    
    84.2
    %Hampton Inn Cary, NC
    
    
    129
    
    
    
    1,741
    
    
    
    65.29
    
    
    
    56.6
    %
    
    
    1,914
    
    
    
    66.03
    
    
    
    61.6
    %Hampton Inn Charlotte, NC
    
    
    125
    
    
    
    1,698
    
    
    
    69.61
    
    
    
    53.5
    %
    
    
    1,719
    
    
    
    71.12
    
    
    
    53.0
    %Hampton Inn Chester, VA *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,095
    
    
    
    69.18
    
    
    
    68.0
    %Hampton Inn Durham, NC
    
    
    136
    
    
    
    2,452
    
    
    
    68.73
    
    
    
    71.8
    %
    
    
    2,621
    
    
    
    67.22
    
    
    
    78.0
    %Hampton Inn Hilton Head, SC
    
    
    125
    
    
    
    1,636
    
    
    
    64.34
    
    
    
    55.7
    %
    
    
    1,667
    
    
    
    72.11
    
    
    
    50.7
    %Hampton Inn Jacksonville, NC
    
    
    122
    
    
    
    2,166
    
    
    
    64.14
    
    
    
    75.8
    %
    
    
    2,047
    
    
    
    62.67
    
    
    
    73.6
    %Hampton Inn Las Vegas, NV
    
    
    127
    
    
    
    2,065
    
    
    
    60.84
    
    
    
    73.2
    %
    
    
    1,718
    
    
    
    55.68
    
    
    
    66.6
    %Hampton Inn Perimeter, GA
    
    
    131
    
    
    
    2,025
    
    
    
    73.61
    
    
    
    57.5
    %
    
    
    2,107
    
    
    
    82.13
    
    
    
    53.6
    %Hampton Inn Raleigh, NC
    
    
    141
    
    
    
    2,188
    
    
    
    68.90
    
    
    
    61.7
    %
    
    
    2,274
    
    
    
    71.60
    
    
    
    61.7
    %Hampton Inn Southern Pines, NC *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,047
    
    
    
    62.77
    
    
    
    57.1
    %Hampton Inn Southlake, GA
    
    
    126
    
    
    
    2,073
    
    
    
    70.30
    
    
    
    64.1
    %
    
    
    2,216
    
    
    
    70.78
    
    
    
    68.1
    %Hampton Inn Springfield, MA
    
    
    126
    
    
    
    2,832
    
    
    
    91.62
    
    
    
    67.3
    %
    
    
    2,903
    
    
    
    91.10
    
    
    
    69.8
    %Hampton Inn White Plains, NY
    
    
    156
    
    
    
    4,387
    
    
    
    107.61
    
    
    
    71.6
    %
    
    
    4,721
    
    
    
    112.17
    
    
    
    73.9
    %Hampton Inn Wilmington, NC
    
    
    118
    
    
    
    1,723
    
    
    
    65.27
    
    
    
    61.3
    %
    
    
    1,659
    
    
    
    66.61
    
    
    
    57.8
    %Hilton Garden InnHilton Garden Inn Albany, NY
    
    
    155
    
    
    
    4,261
    
    
    
    100.57
    
    
    
    74.9
    %
    
    
    4,269
    
    
    
    98.02
    
    
    
    77.0
    %Hilton Garden Inn Alpharetta, GA
    
    
    164
    
    
    
    2,854
    
    
    
    85.40
    
    
    
    55.8
    %
    
    
    2,768
    
    
    
    91.70
    
    
    
    50.4
    %Hilton Garden Inn Raleigh, NC
    
    
    155
    
    
    
    4,276
    
    
    
    104.98
    
    
    
    72.0
    %
    
    
    4,158
    
    
    
    109.39
    
    
    
    67.2
    %Holiday
Inn/Express/SelectHoliday Inn at Tinton Falls, NJ
    
    
    174
    
    
    
    4,395
    
    
    
    104.72
    
    
    
    67.1
    %
    
    
    4,677
    
    
    
    104.21
    
    
    
    72.1
    %Holiday Inn Express Abingdon, VA
    
    
    81
    
    
    
    1,373
    
    
    
    68.95
    
    
    
    67.4
    %
    
    
    1,321
    
    
    
    67.67
    
    
    
    66.1
    %Holiday Inn Express Clearwater, FL
    
    
    127
    
    
    
    1,741
    
    
    
    60.17
    
    
    
    62.4
    %
    
    
    1,750
    
    
    
    63.26
    
    
    
    59.7
    %Holiday Inn Secaucus, NJ
    
    
    160
    
    
    
    4,292
    
    
    
    108.47
    
    
    
    67.8
    %
    
    
    4,941
    
    
    
    115.25
    
    
    
    73.4
    %Holiday Inn Select Garland, TX
    
    
    242
    
    
    
    2,420
    
    
    
    63.98
    
    
    
    42.8
    %
    
    
    2,664
    
    
    
    66.59
    
    
    
    44.9
    %Homewood SuitesHomewood Suites Alpharetta, GA
    
    
    112
    
    
    
    2,362
    
    
    
    83.49
    
    
    
    69.2
    %
    
    
    2,287
    
    
    
    84.12
    
    
    
    66.5
    %Homewood Suites Cary, NC
    
    
    150
    
    
    
    3,071
    
    
    
    84.99
    
    
    
    69.4
    %
    
    
    3,273
    
    
    
    100.85
    
    
    
    75.2
    %Homewood Suites Durham, NC
    
    
    96
    
    
    
    2,377
    
    
    
    87.44
    
    
    
    77.6
    %
    
    
    2,221
    
    
    
    88.38
    
    
    
    71.7
    %Homewood Suites Houston, TX
    
    
    92
    
    
    
    2,548
    
    
    
    94.90
    
    
    
    80.0
    %
    
    
    2,605
    
    
    
    92.56
    
    
    
    83.8
    %Homewood Suites Lake Mary, FL
    
    
    112
    
    
    
    2,541
    
    
    
    84.02
    
    
    
    74.0
    %
    
    
    2,614
    
    
    
    96.50
    
    
    
    66.3
    %Homewood Suites Phoenix, AZ
    
    
    126
    
    
    
    2,265
    
    
    
    77.97
    
    
    
    63.2
    %
    
    
    2,052
    
    
    
    81.95
    
    
    
    54.5
    %Homewood Suites Raleigh, NC
    
    
    137
    
    
    
    3,111
    
    
    
    89.63
    
    
    
    69.4
    %
    
    
    3,039
    
    
    
    87.47
    
    
    
    69.5
    %Quality SuitesQuality Suites Charleston, SC
    
    
    168
    
    
    
    3,745
    
    
    
    78.72
    
    
    
    77.6
    %
    
    
    3,580
    
    
    
    77.13
    
    
    
    75.7
    %Residence InnResidence Inn Phoenix, AZ
    
    
    168
    
    
    
    2,746
    
    
    
    72.89
    
    
    
    61.4
    %
    
    
    2,723
    
    
    
    74.07
    
    
    
    60.0
    %Total for 48 Hotels
    
    
    6,170
    
    
    $
    111,884
    
    
    $
    76.54
    
    
    
    65.0
    %
    
    $
    117,621
    
    
    $
    78.11
    
    
    
    64.1
    %*  Denotes hotel sold in 2002.
 11




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##### 



In addition to our wholly-owned hotels, we maintain investments in joint
ventures that in the aggregate owned six hotels as of December 31, 2003. The
following table sets forth certain unaudited information about the hotels owned
through joint ventures with third parties for the years ended December 31, 2003
and 2002. 2003
    
    2002Number 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
    
    
    $
    2,152
    
    
    $
    103.57
    
    
    
    75.1
    %
    
    $
    
    
    
    $
    
    
    
    
    Fairfield Inn & Suites West Des Moines, IA (2)
    
    
    102
    
    
    
    1,665
    
    
    
    67.95
    
    
    
    65.8
    %
    
    
    756
    
    
    
    55.54
    
    
    
    58.0
    %Hampton Inn Ponte Vedra, FL
    
    
    118
    
    
    
    2,759
    
    
    
    79.01
    
    
    
    81.1
    %
    
    
    2,442
    
    
    
    78.90
    
    
    
    71.9
    %Hilton Garden Inn Evanston, IL (3)
    
    
    178
    
    
    
    4,983
    
    
    
    111.72
    
    
    
    68.6
    %
    
    
    4,606
    
    
    
    108.70
    
    
    
    65.2
    %Hilton Garden Inn Windsor, CT (3)
    
    
    157
    
    
    
    3,549
    
    
    
    97.51
    
    
    
    63.5
    %
    
    
    3,728
    
    
    
    99.91
    
    
    
    65.1
    %Best Western Park Place Suites Houston, TX (4)
    
    
    190
    
    
    
    515
    
    
    
    62.70
    
    
    
    43.0
    %
    
    
    
    
    
    
    
    
    
    
    Total for 6 Hotels
    
    
    858
    
    
    $
    15,623
    
    
    $
    92.22
    
    
    
    67.9
    %
    
    $
    11,532
    
    
    $
    92.82
    
    
    
    65.8
    %
   (1)
    
    Denotes hotel opened May 2003.(2)
    
    Denotes hotel acquired May 2002.(3)
    
    The Company purchased the remaining equity interests in these hotels in March 2004, thus they are now wholly
owned. See Business  Recent Developments.(4)
    
    Denotes hotel acquired September 2003. Expected to operate as a Springhill Suites by
Marriott hotel beginning April 2004. 12




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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 41 of the Companys hotels as of December 31, 2003, 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 or the third
party lessee, 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, 2003. 13




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##### 



PART II. 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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, 2004, the Company had 1,153 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 and the cash
distributions declared per share: Price Range
    
    CashDistributionsDeclaredHigh
    
    Low
    
    Per Share2003First 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
    
    
    
    0.152002First Quarter
    
    $
    9.70
    
    
    $
    7.82
    
    
    $
    0.15Second Quarter
    
    
    9.76
    
    
    
    8.32
    
    
    
    0.15Third Quarter
    
    
    9.25
    
    
    
    7.20
    
    
    
    0.15Fourth Quarter
    
    
    8.09
    
    
    
    6.34
    
    
    
    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s policy is to make regular
quarterly distributions to its shareholders. Securities Authorized for Issuance Under Equity Compensation Plans Equity Compensation Plan Information The following table sets forth information as of December 31, 2003 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 remainingNumber of securities to be
    
    Weighted average
    
    available for future issuanceissued upon exercise of
    
    exercise price of
    
    under equity compensationoutstanding options,
    
    outstanding options,
    
    plans (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in the first column)Equity compensation plans
approved by security holders (1)
    
    
    795,000
    
    
    $
    11.07
    
    
    
    1,128,651
   (1)
    
    As of December 31, 2003, 1,128,651 shares of Common Stock remain available
for future issuance under the Stock Incentive Plan. See Note 12 to
consolidated financial statements. 14




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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, 2003, 2002, 2001, 2000 and 1999
(in thousands, except per share amounts) 2003
    
    2002
    
    2001
    
    2000
    
    1999Operating Data: (1)Total revenue
    
    $
    128,766
    
    
    $
    91,453
    
    
    $
    54,653
    
    
    $
    61,302
    
    
    $
    60,145Operating income
    
    
    14,647
    
    
    
    3,191
    
    
    
    22,580
    
    
    
    30,077
    
    
    
    29,434Net income
    
    
    7,705
    
    
    
    902
    
    
    
    10,485
    
    
    
    15,055
    
    
    
    16,901Net income (loss) available to common shareholders
    
    
    767
    
    
    
    (6,036
    )
    
    
    3,547
    
    
    
    8,117
    
    
    
    9,963Net income (loss) per common share
    
    
    0.03
    
    
    
    (0.31
    )
    
    
    0.21
    
    
    
    0.48
    
    
    
    0.61Weighted average number of common shares
    
    
    21,770
    
    
    
    19,308
    
    
    
    16,926
    
    
    
    16,890
    
    
    
    16,467Distributions per common share
    
    
    0.60
    
    
    
    0.60
    
    
    
    0.99
    
    
    
    1.12
    
    
    
    1.12Pro forma amounts assuming SAB 101 is
applied retroactively:Net income available to common shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,846Net income per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.60Balance Sheet Data (at end of period) (2):Cash
    
    $
    5,623
    
    
    $
    1,510
    
    
    $
    887
    
    
    $
    167
    
    
    $
    28Investment in hotel properties
    
    
    348,201
    
    
    
    321,839
    
    
    
    350,087
    
    
    
    366,882
    
    
    
    388,870Total assets
    
    
    387,261
    
    
    
    357,442
    
    
    
    376,904
    
    
    
    394,310
    
    
    
    406,071Total debt
    
    
    120,484
    
    
    
    138,706
    
    
    
    170,584
    
    
    
    172,672
    
    
    
    174,475Shareholders equity
    
    
    231,934
    
    
    
    194,515
    
    
    
    184,205
    
    
    
    198,716
    
    
    
    209,078Other Data:Cash provided by (used in):Operating activities
    
    $
    25,074
    
    
    $
    20,446
    
    
    $
    37,854
    
    
    $
    39,589
    
    
    $
    39,952Investing activities
    
    
    (9,841
    )
    
    
    5,013
    
    
    
    (6,473
    )
    
    
    (10,231
    )
    
    
    (12,658
    )Financing activities
    
    
    (13,078
    )
    
    
    (24,836
    )
    
    
    (30,661
    )
    
    
    (29,219
    )
    
    
    (27,299
    )Adjusted Funds From Operations Available to Common
Shareholders (3)
    
    
    21,404
    
    
    
    24,019
    
    
    
    26,583
    
    
    
    31,268
    
    
    
    31,793Cash Available for Distribution (4)
    
    
    15,674
    
    
    
    18,167
    
    
    
    20,416
    
    
    
    24,922
    
    
    
    25,571Adjusted EBITDA (5)
    
    
    37,192
    
    
    
    42,913
    
    
    
    47,331
    
    
    
    52,770
    
    
    
    52,078
   (1)
    
    Due to the acquisition of the leasehold interest for 47 hotels from
Interstate effective July 1, 2002, and the assumption of the leasehold interest
for two hotels from Intercontinental Group on July 1, 2003, only one of the
Companys wholly owned hotels remained under a long-term lease with a third
party as of December 31, 2003, the Secaucus, NJ Holiday Inn. The acquisition
price of $17,668 to acquire the leases from Interstate was expensed. As such,
there is limited comparability between the annual results for 2003, 2002 and
prior years.(2)
    
    Per the provisions of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), the Company consolidated the balance
sheets of three 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 2003 and prior years (see Note 4 to consolidated financial statements).(3)
    
    Funds from operations (FFO), as defined by the National Association of
Real Estate Investment Trusts (NAREIT), is net income (loss) (determined in
accordance with generally accepted accounting principles (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 adjusts FFO
by adding lease/management agreement 15




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##### 



acquisition expense, loss on impairment of asset held for sale, cumulative
effect of change in accounting principle, and the change in deferred revenue
during the period to eliminate the impact of Staff Accounting Bulletin No. 101
(see Note 2 to the Consolidated Financial Statements), and subtracting income
tax benefit. The Company refers to this further adjustment to FFO as Adjusted
Funds From Operations or AFFO. The Company further subtracts preferred
share distributions from AFFO to arrive at AFFO Available to Common
Shareholders. The calculations of FFO and AFFO may vary from entity to entity
and as such the presentation of FFO and AFFO by the Company may not be
comparable to other similarly titled measures of other reporting companies.
The Company supplementally provides AFFO primarily due to the fact that the
acquisition of the Companys leasehold interests for 47 hotels from Interstate
Hotels and Resorts in July 2002 and for two hotels from Intercontinental in
July 2003, may not result in a meaningful comparison between the annual results
for 2002 and other years. FFO and AFFO are not intended to represent cash
flows for the period. FFO and AFFO have not been presented as an alternative
to operating income, but as an indicator of operating performance, 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 AFFO (combined with the
Companys primary GAAP presentations required by the Securities and Exchange
Commission) helps improve our equity holders ability to understand our
operating performance. The Company only uses FFO and AFFO as supplemental
measures of operating performance. Shown below is a reconciliation of net
income (loss) to FFO, AFFO and to AFFO Available to Common Shareholders.(4)
    
    The Company computes Cash Available for Distribution (CAD) as AFFO
Available to Common Shareholders less capital expenditures. Capital
expenditures are calculated as 5% of room revenues in accordance with our
percentage leases. CAD is a supplemental industry-wide measure of REIT
operating performance that measures a REITs ability to generate cash and to
distribute dividends to its shareholders. The Company believes CAD (combined
with the Companys primary GAAP presentations) helps improve our equity
holders ability to understand our operating performance (including our ability
to make required distributions to maintain our REIT status (see Risk Factors;
Risks Relating to REIT Status attached as Exhibit 99.1)). The Company only
uses CAD as a supplemental measure of operating performance. The calculation
of CAD may vary from entity to entity and as such the presentation of CAD by
the Company may not be comparable to other similarly titled measures of other
reporting companies. CAD is not intended to represent cash flows for the
period. CAD has not been presented as an alternative to operating income, but
as an indicator of operating performance, and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles. See reconciliation of AFFO
Available to Common Shareholders to CAD below.(5)
    
    The Company computes adjusted earnings before interest, taxes,
depreciation and amortization (Adjusted EBITDA) by adding AFFO, (see footnote
3 above for explanation of reconciliation from net income to AFFO) interest
expense (including the Companys share of interest expense from its joint
ventures) and amortization expense. Adjusted EBITDA is a supplemental
industry-wide measure of REIT operating performance. The Company believes
Adjusted EBITDA (combined with the Companys primary GAAP presentations) helps
improve our equity holders ability to understand our operating performance and
makes it easier than before to compare the results of one REIT with another.
The Company only uses Adjusted EBITDA as a supplemental measure of operating
performance. The calculation of Adjusted EBITDA may vary from entity to entity
and as such the presentation of Adjusted EBITDA by the Company may not be
comparable to other similarly titled measures of other reporting companies.
Adjusted EBITDA is not intended to represent cash flows for the period.
Adjusted EBITDA has not been presented as an alternative to operating income,
but as an indicator of operating performance, and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles. See reconciliation of net
income to Adjusted EBITDA below. 16




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##### 



WINSTON HOTELS, INC.
Reconciliation and Calculation of FFO, AFFO, AFFO Available to Common Shareholders and CAD
For the years ended December 31, 2003, 2002, 2001, 2000 and 1999
(in thousands) 2003
    
    2002
    
    2001
    
    2000
    
    1999Net income
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485
    
    
    $
    15,055
    
    
    $
    16,901Loss on sale of property
    
    
    
    
    
    
    764
    
    
    
    682
    
    
    
    850
    
    
    
    239Minority interest allocation
    
    
    260
    
    
    
    (369
    )
    
    
    236
    
    
    
    575
    
    
    
    951Minority interest allocation of loss on sale of
discontinued operations
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    Minority interest allocation of earnings (losses) from
discontinued operations
    
    
    (18
    )
    
    
    3
    
    
    
    36
    
    
    
    50
    
    
    
    75Depreciation
    
    
    17,686
    
    
    
    18,868
    
    
    
    19,342
    
    
    
    19,659
    
    
    
    19,171Depreciation  discontinued operations
    
    
    192
    
    
    
    917
    
    
    
    1,450
    
    
    
    1,434
    
    
    
    1,394Depreciation from joint ventures
    
    
    855
    
    
    
    801
    
    
    
    563
    
    
    
    84
    
    
    
    Funds From Operations (FFO)
    
    $
    26,680
    
    
    $
    21,840
    
    
    $
    32,794
    
    
    $
    37,707
    
    
    $
    38,731Loss on impairment of asset held for sale
    
    
    2,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest allocation  loss on impairment of
asset held for sale
    
    
    (153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle
    
    
    449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest allocation of cumulative effect of
change in accounting principle
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred revenue
    
    
    
    
    
    
    (1,226
    )
    
    
    727
    
    
    
    499
    
    
    
    Lease/management agreement acquisition expense
    
    
    1,300
    
    
    
    17,668
    
    
    
    
    
    
    
    
    
    
    
    Income tax benefit
    
    
    (2,348
    )
    
    
    (7,401
    )
    
    
    
    
    
    
    
    
    
    
    Income tax expense (benefit) from
discontinued operations
    
    
    (148
    )
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    Adjusted Funds from Operations (AFFO)
    
    $
    28,342
    
    
    $
    30,957
    
    
    $
    33,521
    
    
    $
    38,206
    
    
    $
    38,731Preferred stock dividend
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )AFFO Available to Common Shareholders
    
    $
    21,404
    
    
    $
    24,019
    
    
    $
    26,583
    
    
    $
    31,268
    
    
    $
    31,793AFFO Available to Common Shareholders
    
    $
    21,404
    
    
    $
    24,019
    
    
    $
    26,583
    
    
    $
    31,268
    
    
    $
    31,793Capital expenditures*
    
    
    5,512
    
    
    
    5,662
    
    
    
    5,972
    
    
    
    6,326
    
    
    
    6,222Capital expenditures of joint ventures*
    
    
    218
    
    
    
    190
    
    
    
    195
    
    
    
    20
    
    
    
    Cash Available for Distribution (CAD)
    
    $
    15,674
    
    
    $
    18,167
    
    
    $
    20,416
    
    
    $
    24,922
    
    
    $
    25,571*  Capital expenditures are shown as 5% of room
revenues, as required under the Companys
percentage leases, and
do not represent actual capital expendituresCapital Expenditures  ActualWholly owned hotels
    
    $
    7,211
    
    
    $
    5,254
    
    
    $
    8,627
    
    
    $
    6,682
    
    
    $
    6,033Joint venture hotels
    
    
    225
    
    
    
    163
    
    
    
    30
    
    
    
    
    
    
    
    Total capital expenditures  actual
    
    $
    7,436
    
    
    $
    5,417
    
    
    $
    8,657
    
    
    $
    6,682
    
    
    $
    6,033
 17




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##### 



WINSTON HOTELS, INC.
Reconciliation and Calculation of Adjusted EBITDA
For the years ended December 31, 2003, 2002, 2001, 2000 and 1999
(in thousands) 2003
    
    2002
    
    2001
    
    2000
    
    1999Net income
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485
    
    
    $
    15,055
    
    
    $
    16,901Loss on sale of property
    
    
    
    
    
    
    764
    
    
    
    682
    
    
    
    850
    
    
    
    239Minority interest allocation
    
    
    260
    
    
    
    (369
    )
    
    
    236
    
    
    
    575
    
    
    
    951Minority interest allocation of loss on sale of
discontinued operations
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    Minority interest allocation of earnings (losses) from
discontinued operations
    
    
    (18
    )
    
    
    3
    
    
    
    36
    
    
    
    50
    
    
    
    75Depreciation
    
    
    17,686
    
    
    
    18,868
    
    
    
    19,342
    
    
    
    19,659
    
    
    
    19,171Depreciation  discontinued operations
    
    
    192
    
    
    
    917
    
    
    
    1,450
    
    
    
    1,434
    
    
    
    1,394Depreciation from joint ventures
    
    
    855
    
    
    
    801
    
    
    
    563
    
    
    
    84
    
    
    
    Loss on impairment of asset held for sale
    
    
    2,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest allocation  loss on impairment of
asset held for sale
    
    
    (153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle
    
    
    449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest allocation of cumulative effect of
change in accounting principle
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred revenue
    
    
    
    
    
    
    (1,226
    )
    
    
    727
    
    
    
    499
    
    
    
    Lease/management agreement acquisition expense
    
    
    1,300
    
    
    
    17,668
    
    
    
    
    
    
    
    
    
    
    
    Income tax benefit
    
    
    (2,348
    )
    
    
    (7,401
    )
    
    
    
    
    
    
    
    
    
    
    Income tax expense (benefit) from
discontinued operations
    
    
    (148
    )
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    7,257
    
    
    
    10,478
    
    
    
    12,170
    
    
    
    13,491
    
    
    
    12,513Interest expense from joint ventures
    
    
    583
    
    
    
    637
    
    
    
    680
    
    
    
    140
    
    
    
    Amortization expense
    
    
    985
    
    
    
    832
    
    
    
    951
    
    
    
    933
    
    
    
    834Amortization expense from discontinued operations
    
    
    
    
    
    
    9
    
    
    
    9
    
    
    
    
    
    
    
    Amortization expense from joint ventures
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted EBITDA
    
    $
    37,192
    
    
    $
    42,913
    
    
    $
    47,331
    
    
    $
    52,770
    
    
    $
    52,078
 18




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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, 2003, the Company owned or
was invested in 50 hotel properties in 16 states having an aggregate of 7,028
rooms. This included 44 wholly owned properties with an aggregate of 6,170
rooms, a 49 percent ownership in two joint venture hotels with an aggregate of
296 rooms, a 57.65 percent ownership in one joint venture hotel with 157 rooms,
and an indirect 13.05 percent ownership interest in three joint venture hotels
with an aggregate of 405 rooms. The Company also had issued mezzanine loans to
owners of three hotels with an aggregate of 391 rooms. The Company also held a
48.78 percent ownership interest in another joint venture that is currently
constructing a 147-room Courtyard by Marriott hotel that is scheduled to open
in the third quarter of 2004. 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,
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
circumstances such as 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, 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 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. Simultaneous with acquiring the leasehold interests from Interstate,
Barclay entered into new management contracts with Interstate for 33 of the 47
hotels covered by the leases. These five-year contracts were terminable by
Barclay after June 30, 2003 at no cost, subject to certain conditions and
limitations. Six of the 47 hotels continued to be managed by Interstate
Management and Investment Corporation (IMIC). Effective July 1, 2003, the
Company terminated its management contracts with Interstate, at no cost.
Effective July 1, 2003, the Company also terminated the management agreements
with IMIC by paying a termination fee of $1.3 million, which was expensed in
the third quarter of 2003. During 2003, the Company also assumed the leasehold
interests for one wholly owned hotel and, along with its joint venture partner,
the leasehold interests for one joint venture hotel, at no cost. The
management of all 41 of these properties, along with most of the hotels
management personnel and other employees, was transferred to Alliance
Hospitality Management, LLC (Alliance). 19




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##### 



As of December 31, 2003, 43 of the Companys 44 wholly owned hotels and
two of its six joint venture hotels, the Evanston, IL Hilton Garden Inn and the
Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay. One
joint venture hotel, the Windsor, CT Hilton Garden Inn, was leased to an entity
owned 57.65 percent by Barclay, which represents the same percent ownership of
the joint venture by the Company. The remaining three joint venture hotels,
the West Des Moines, IA Fairfield Inn & Suites, the Beachwood, OH Courtyard by
Marriott, and the Houston, TX Best Western Park Place Suites, did not operate
under leases. As of December 31, 2003, one wholly owned property, the Secaucus, NJ
Holiday Inn, continued to be operated under a long-term lease with Prime. In
March 2004, the Company negotiated the transfer of this lease to Barclay at no
cost. The Company also expects to receive payment from Prime of approximately
$300 as part of the negotiated settlement. The Secaucus, NJ Holiday Inn
produced a net loss to Prime of approximately $160 for the year ended December
31, 2003. As of December 31, 2003, Alliance managed 41 of the Companys 50 hotels,
Concord Hospitality Enterprises Company (Concord) managed three hotels,
Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation (Hilton)
managed two hotels, and Sage Hospitality Resources, LLC (Sage), Prism
Hospitality, L.P. (Prism), Noble Investment Group, Ltd. (Noble) and Prime
Hospitality Corp. (Prime) 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. 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
Policies, Recently Issued Accounting Standards and Liquidity and Capital
Resources. Critical Accounting Policies 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. If the financial
condition of its hotel guests, mezzanine loan borrowers, or other borrowers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Accounting for Joint Ventures As of December 31, 2003 the Company had a 15 percent ownership interest in
its Charlesbank joint venture, (which in turn owned an 87 percent ownership
interest in its WCC Project Company LLC joint venture), a 49 percent ownership
interest in one of its joint ventures with Regent, a 57.65 percent interest in
the other joint venture with Regent, a 49 percent ownership interest in its
Marsh Landing joint venture, and a 48.78 percent interest in its Chapel Hill
joint venture. The WCC Project Company LLC joint venture owned three hotels,
and the two Regent joint ventures and the Marsh Landing joint venture each
owned one hotel. The Chapel Hill joint venture owned one hotel which is
currently under construction and expected to open in the third quarter of 2004. Per the provisions of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), as of December 31, 2003, the Company
determined that the Charlesbank joint venture does not have to be consolidated
and therefore, the Company used the equity method to recognize its share of net
income or loss from this joint venture during 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, 2003. 20




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##### 



As of December 31, 2003, for three of its joint ventures created prior to
January 31, 2003, the Company determined that they are considered to be VIEs
and the Company is considered to be the primary beneficiary. These include the
two Regent joint ventures and the Marsh Landing joint venture. Therefore, per
the provisions of FIN 46, the Company has consolidated the assets and
liabilities of these joint ventures into its Consolidated Balance Sheet as of
December 31, 2003. Per FIN 46, for these three joint ventures, the Company
will not consolidate the results of operations until the first quarter of 2004.
The Chapel Hill joint venture was created in August 2003. Therefore, per FIN
46, the Company has consolidated the joint ventures assets, liabilities, and
results of operations beginning with the third quarter 2003. 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 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. 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, 2003. 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 to the acquisition of the leasehold interests for 47 hotels from
Interstate on July 1, 2002, and the assumption of the leasehold interests for
two hotels from Intercontinental Group on July 1, 2003, the results of
operations for the years ended December 31, 2003, December 31, 2002, and
December 31, 2001 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 table below outlines the Companys wholly owned hotel properties as of
December 31, 2001, 2002 and 2003. The Company made no acquisitions of hotels,
other than through joint ventures, during the periods presented. December 31, 2001
    
    December 31, 2002
    
    December 31, 2003Hotels sold
    
    Properties
    
    Hotels sold
    
    Properties
    
    Hotels sold
    
    Propertiesduring the
    
    owned at
    
    during the
    
    owned at
    
    during the
    
    owned atyear
    
    year end
    
    year
    
    year end
    
    year
    
    year endType of Hotel
Limited-service hotels
    
    
    1
    
    
    
    27
    
    
    
    4
    
    
    
    23
    
    
    
    
    
    
    
    23Extended-stay hotels
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Full-service hotels
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Total
    
    
    1
    
    
    
    48
    
    
    
    4
    
    
    
    44
    
    
    
    
    
    
    
    44
 21




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##### 



Actual Results  Years Ended December 31, 2003, 2002 and 2001 REVENUE Rooms, Food and Beverage and Other Operating Departments Revenue The
increase in hotel revenues from 2001 to 2002, and 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. Percentage Lease Revenue Percentage lease revenue declined from 2001 to
2002 and from 2002 to 2003. This decline is primarily due to the acquisition
of the leasehold interests from Interstate on July 1, 2002. 2001 included a
full year of percentage lease revenue from all wholly owned hotels. Effective
July 1, 2002, the percentage lease revenue for all but two wholly owned hotels
was received from Barclay and eliminated in consolidation. Therefore, 2002
included six months of percentage lease revenue for all but two hotels that
remained under long term leases with third parties for the entire year. These
two hotels included the Secaucus, NJ Holiday Inn and the Las Vegas, NV Hampton
Inn. Effective, July 1, 2003, the Company acquired the leasehold interest for
the Las Vegas, NV Hampton Inn. Therefore, 2003 included a full year of
percentage lease revenue for one hotel and six months of percentage lease
revenue for one hotel. Interest and Other Income Interest and other income decreased from
$2,166 in 2001 to $1,458 in 2002. The decline is primarily due to a decrease
in third party development and purchasing fees related to our Evanston joint
venture hotel and Tampa, FL Hilton Garden Inn for which we have provided
mezzanine financing. Interest and other income increased from $1,458 in 2002
to $1,560 in 2003. This increase was driven primarily by interest income
earned on our mezzanine loan provided for the Baltimore Hampton Inn & Suites
for twelve months in 2003 versus one month in 2002. EXPENSES Rooms, Food and Beverage, Other Operating Departments Expenses The
increase in these hotel expenses from 2001 to 2002, and 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. Property Operating Costs, Franchise Costs, Maintenance and Repair Costs
and Management Fees The increase in these hotel expenses from 2001 to 2002,
and 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. Real Estate Taxes and Property and Casualty Insurance Real estate taxes
and property insurance costs decreased from $6,361 in 2001 to $6,259 in 2002
and to $6,163 in 2003. The declines in both years are due to decreases in
property taxes due to successful tax appeals and downward property valuation
trends associated with lower revenues, decreases in ground rent expense as a
result of lower room revenues at the corresponding hotel, offset by an increase
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. General and Administrative General and administrative expense decreased
from $5,419 in 2001 to $4,843 in 2002 and increased to $5,922 in 2003. The
decrease in 2002 was primarily attributable to lower expenses associated with
mezzanine financing, acquisition and development activities. The increase in
2003 was primarily attributable to an increase in legal costs associated with
transferring lease and management contracts of our hotels totaling $391, an
increase in professional fees of $138, and an increase in payroll costs
totaling $521. Depreciation and Amortization Depreciation expense declined $474 from
2001 to 2002 and $1,182 from 2002 to 2003. The decreases in depreciation
expense are associated with the sale of one property in 2001 and lower
depreciation expense on furniture, fixtures and equipment. Amortization
expense remained relatively consistent all three years. Interest Interest expense decreased from $12,170 in 2001 to $10,478 in
2002 and to $7,257 in 2003. This decrease was due to both a decline in
weighted average interest rates, from 7.03% in 2001 to 6.85% in 2002 to 5.55%
in 2003, as well as a decline in the weighted average outstanding debt balance
from $172,022 in 2001 to $152,879 in 2002 to $130,807 in 2003. 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 22




---



##### 



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 reduce the then outstanding debt balance. Loss on Sale of Property The Company did not sell any hotels during
2003. The net loss on sales of property in 2002 is reported as loss on sale of
discontinued operations  see Discontinued Operationsbelow and Note 15 in
Notes to Consolidated Financial Statements. The loss on sale of property in
2001 represents the loss experienced on the sale of the Raleigh, NC Comfort Inn
in June 2001. Income Tax Benefit The income tax benefit for 2003 is a result of the
net loss experienced by Barclay during 2003. The income tax benefit for 2002
is a result of the cost of acquiring the leases from Interstate, which was
expensed for financial reporting purposes and will be amortized over the lives
of the leases for tax purposes, and the net loss experienced by Barlcay during
2002. Equity in Income of Unconsolidated Joint Ventures Equity in income of
unconsolidated joint ventures increased from $523 in 2001 to $1,172 in 2002 and
to $1,193 in 2003. The increase from 2001 to 2002 is primarily due to the
Evanston Hilton Garden Inn hotel being open for the entire year during 2002
versus only being open from July through December in 2001. The increase from
2002 to 2003 is due to an increase in earnings from the Evanston and Marsh
Landing joint ventures of $255 related to improved hotel operations, an
increase in earnings from the Charlesbank joint venture of $57 due to the
addition of the Beachwood and Houston Park Place hotels in 2003, offset by a
decline in earnings from the Windsor joint venture of $291 due to diminishing
operations and acquisition of the lease at 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. As of December 31, 2003, the Company owned 57.65
percent of the new lessee of the Hilton Garden Inn hotel and Regent Partners,
Inc., the Companys joint venture partner, owned the remaining 42.35 percent.
This property incurred a net loss of $327 for the period of July 1, 2003
through December 31, 2003. Due to the Companys adoption of FIN 46, the operations of the Evanston,
Marsh Landing and Windsor joint ventures will be consolidated beginning in the
first quarter of 2004. The Company will continue to account for the
Charlesbank Joint Venture in 2004 as it has in 2003 and 2002, as an
unconsolidated joint venture under the equity method of accounting. Discontinued Operations 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 and the
operating results of all of these properties are shown as discontinued
operations for all periods presented. Lease/Management Agreement Acquisition As discussed above, effective
July 1, 2003, the Company, through Barclay, terminated its management
agreements with IMIC by paying a termination fee of $1.3 million, 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
reduction in net income from 2001 to 2002, and the increase in net income from
2002 to 2003. Due to the acquisition of the leasehold interests from Interstate and
Intercontinental Group, the results of operations for the year ended December
31, 2003 versus the results of operations for the year ended December 31, 2002,
and the results of operations for the year ended December 31, 2002 versus the
results of operations for the year ended December 31, 2001, 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, 2003, 2002 and 2001, shown below is selected pro forma
financial information on a same store basis for the years ended December 31,
2003, 2002 and 2001, as if the acquisition of the leasehold interests from
Interstate and Intercontinental Group occurred on January 1, 2001. This
information is shown for the hotels that were open for the entire periods
presented and does not include discontinued operations or the hotel sold during
2001. 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 hotels for which the leasehold
interests were acquired, as well as adjustments to undistributed property
operating expenses to remove management company corporate costs, and to make
adjustments to management fees to reflect the fee structure per the new
management agreements. 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 23




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##### 



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, 2003, 2002 and 2001 (in thousands) For purposes of this pro forma disclosure, all years shown include the 43
wholly owned hotels that were owned during each of the years, plus two hotels
owned by joint ventures (the Evanston, IL Hilton Garden Inn owned by the Regent
joint venture and the Ponte Vedra, FL Hampton Inn, owned by the Marsh Landing
joint venture), for which Barclay was the lessee on July 1, 2003 as a result of
the acquisition of the leases from Interstate and Intercontinental Group. This
disclosure does not include one wholly owned hotel as of December 31, 2003, the
Greenville, SC Comfort Inn, as this hotel was classified as held for sale
during 2003. 2003
    
    2002
    
    2001Revenue:Rooms
    
    $
    114,246
    
    
    $
    114,580
    
    
    $
    116,588Other hotel revenue
    
    
    11,383
    
    
    
    12,487
    
    
    
    12,653Percentage lease revenue
    
    
    2,141
    
    
    
    2,426
    
    
    
    2,811Interest and other income
    
    
    1,560
    
    
    
    1,458
    
    
    
    2,166Total revenue
    
    
    129,330
    
    
    
    130,951
    
    
    
    134,218Hotel operating expenses:Rooms
    
    
    27,008
    
    
    
    26,406
    
    
    
    25,945Other hotel operating expenses
    
    
    8,403
    
    
    
    8,704
    
    
    
    8,623Undistributed operating expenses:Property operating costs
    
    
    25,103
    
    
    
    23,374
    
    
    
    22,941Real estate taxes and property and casualty insurance
    
    
    6,163
    
    
    
    6,259
    
    
    
    6,346Other operating costs
    
    
    17,711
    
    
    
    17,947
    
    
    
    17,600Percentage lease expense
    
    
    4,610
    
    
    
    4,162
    
    
    
    2,248Depreciation and amortization
    
    
    18,671
    
    
    
    19,700
    
    
    
    20,195General and administrative
    
    
    5,922
    
    
    
    4,843
    
    
    
    5,419Lease/management agreement acquisition
    
    
    1,300
    
    
    
    
    
    
    
    Total expenses
    
    
    114,891
    
    
    
    111,395
    
    
    
    109,317Proforma operating income
    
    $
    14,439
    
    
    $
    19,556
    
    
    $
    24,901
 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: 2003
    
    2002
    
    2001Proforma operating income
    
    $
    14,439
    
    
    $
    19,556
    
    
    $
    24,901Rooms revenue
    
    
    (1,030
    )
    
    
    (59,856
    )
    
    
    (116,588
    )Other hotel revenue
    
    
    (14
    )
    
    
    (6,283
    )
    
    
    (12,653
    )Percentage lease revenue
    
    
    481
    
    
    
    26,641
    
    
    
    49,676Rooms expenses
    
    
    339
    
    
    
    13,426
    
    
    
    25,945Other hotel operating expenses
    
    
    16
    
    
    
    4,324
    
    
    
    8,623Property operating costs
    
    
    302
    
    
    
    11,404
    
    
    
    22,941Real estate taxes and property and casualty insurance
    
    
    
    
    
    
    
    
    
    
    (15
    )Other operating costs
    
    
    114
    
    
    
    9,653
    
    
    
    17,600Percentage lease expense
    
    
    
    
    
    
    1,994
    
    
    
    2,248Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (98
    )Lease/management agreement acquisition
    
    
    
    
    
    
    (17,668
    )
    
    
    Actual operating income
    
    $
    14,647
    
    
    $
    3,191
    
    
    $
    22,580
 24




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##### 



PRO FORMA REVENUE Room Revenue Room revenue decreased from $116,588 in 2001 to $114,580 in
2002 and to $114,246 in 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
3.2% from $53.30 in 2001 to $51.60 in 2002, and 0.7% from $51.60 in 2002 to
$51.24 in 2003. Average daily rate for the year declined 3.6% from $82.02 in
2001 to $79.04 in 2002, and 2.2% from $79.04 in 2002 to $77.28 in 2003.
Occupancy rates increased slightly from 65.0% in 2001 to 65.3% in 2002, and
increased slightly more in 2003 to 66.3%. The decrease in room revenue in 2002
due to a decline in RevPAR was partially offset by an increase of $2,761 in
room revenue from the Evanston, IL Hilton Garden Inn hotel that opened in July
2001. Other Hotel Revenue Other hotel revenue consists of food and beverage
revenue and other operating departments revenue. Other hotel revenue declined
from $12,653 in 2001 to $12,487 in 2002, and to $11,383 in 2003. These
decreases are primarily due to the continuing trend of declining telephone
revenue as hotel customers rely increasingly more on their own mobile phones
and calling cards for telecommunications. Percentage Lease Revenue This balance for each year represents the
percentage lease revenue from the Secaucus, NJ Holiday Inn hotel, the Companys
only hotel that remained under a third party lease as of December 31, 2003. PRO FORMA EXPENSES As a percentage of total hotel revenue, hotel operating expenses increased
for the year from 58.1% in 2001 to 60.2% in 2002, and to 62.3% in 2003. 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 $34,658 in 2001 to $35,110 in 2002, and to $35,411 in
2003. The increase from 2001 to 2002 was driven by a $423 increase in payroll
costs in the rooms department. The increase from 2002 to 2003 was driven
primarily by a $740 increase in rooms department payroll costs offset by
savings in the telephone and food and beverage departments of $301 and a
decline in property taxes and insurance of $96. 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 $40,541 in 2001 to $41,321 in 2002, and to $42,814 in
2003. The increase from 2001 to 2002 was primarily comprised of a $857
increase in sales and marketing and a $631 increase in repairs and maintenance
attributable to both payroll and operating expenses. These increases were
offset by declines of $278, $144 and $265 in general and administrative,
utilities and franchise fees, respectively, all related to decreasing
occupancy. The increase from 2002 to 2003 was primarily comprised of an
increase in repairs and maintenance of $484 due to higher engineer payroll
costs, an increase in general and administrative of $165 and an increase in
utilities of $420 due to higher occupancy. See Actual Results  Years Ended December 31, 2003, 2002, and 2001 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 2003, was principally derived from the net operating cash flows from the
operations of its hotels. For the year ended December 31, 2003 and 2002, cash
flow provided by operating activities was $25,074 and $20,446, respectively.
The increase in cash flow provided by operations is primarily due to the cost
to acquire the leasehold interests for 47 hotels from Interstate effective July
1, 2002. 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 2003, the Company declared total distributions of
$20,753, $13,815 to its common shareholders and $6,938 to its preferred
shareholders. As shown in the table below, based on the Companys 2003
taxable income, the Company was required to distribute approximately $16,950 to
maintain its REIT status. 25




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GAAP net income
    
    $
    7,705Plus GAAP net loss on taxable subsidiary
included above
    
    
    4,072GAAP net income from REIT operations
    
    
    11,777Book / tax differences on depreciation and amortization
    
    
    3,029Book / tax differences on loss on impairment of asset held for sale
    
    
    2,583Other book / tax differences, net
    
    
    1,444Taxable income subject to distribution requirement
    
    
    18,833Distribution requirement
    
    
    90
    %Taxable income required to be distributed
    
    $
    16,950
 The Company declared a quarterly common share dividend of $0.15 per share
for each quarter during 2003. 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. The Company raised net proceeds of approximately $50.5 million as a result
of a follow-on Common Stock offering in which the Company sold an additional
6,037,500 common shares. The follow-on offering was completed in October 2003
with the exercise of the underwriters over-allotment option, which included
787,500 common shares of the total 6,037,500 common shares. The Company
initially used the net proceeds to pay down its then outstanding balance under
its $125 million line of credit, and plans to use the resulting availability
under the line of credit to fund the Companys hotel lending business, to
acquire hotels or interests in hotels through joint ventures, and/or for
general corporate purposes. In February 2004, the Company completed the issuance of 3,680,000 shares
of its 8.00% Series B Cumulative Preferred Stock. The net proceeds raised
totaled approximately $89 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 proceeds of approximately $12.9 million to pay down its then
outstanding balance under its $125 million line of credit, and plans to use the
resulting availability under the line of credit to fund the Companys hotel
lending business, to acquire hotels or interests in hotels through joint
ventures, and/or for general corporate purposes. The costs capitalized as part of the issuance of the Series A Cumulative
Preferred Stock in September 1997 totaled approximately $1.7 million as of
February 2004 and will be recorded as a reduction in net income (loss)
available to common shareholders in the first quarter of 2004. The Companys net cash used in investing activities during the year ended
December 31, 2003 totaled $9,841, consisting of capital expenditures and
renovations of hotels totaling $9,062 and investment in joint ventures of $779. 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, 2003
in accordance with FASB No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. The property, which is immediately available for sale, is
actively being marketed for sale through a broker. The Company sold four
hotels during 2002, including the Clearwater, FL Comfort Inn in May, the
Southern Pines, NC Hampton Inn in August, the Augusta, GA Comfort Inn in
November and the Chester, VA Comfort Inn in December. The total net proceeds
were $13,257. 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 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 will undergo extensive renovations which are expected to be completed
by June 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
percent. An additional 2.00 percent 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. The Borrower made initial equity investments equal to approximately
18% of the total cost of 26




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the 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. 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 entered into a joint venture agreement (the
Hall Joint Venture), with an affiliate of Hall Financial Group, (Hall).
The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and
retained a 50% interest (or $1,750) in the note through the joint venture. 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
owns 50% of the Hall Joint Venture, and Hall owns the remaining 50%. If at any
time, (i) the Company and Hall (the Members) cannot resolve a disagreement
within 30 days after written notice from one Member to the other, or (ii) any
Member transfers its interest to an entity that is not considered an affiliate
of such Member, then either Member (the non-transferring Member in the case of
clause (ii) above), shall have the option to give notice to the other of its
intent to buy or sell its interests to the other Member. If this option is
exercised, the Member that elects to do so must set forth an all cash price
that reflects the net book value of the assets and liabilities of the Hall
Joint Venture in its notice to the other Member. Within 10 days after
receiving the notice, the Member who receives this notice must then decide
whether to buy the interests of the other Member or sell its interests to the
other Member. Within 20 days after making the determination of which Member
will be the buyer and which Member will be the seller, the Members are
obligated to complete the purchase and sale. If the purchasing Member defaults
on its obligation to consummate the purchase, 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 75% of the previously determined closing price, or (ii) carry on as if
the option to purchase or buy had never been exercised. 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 opens. The Company also
accrues interest monthly (Accrued Interest) at an annual interest rate of 12%
during this same time. Once the hotel opens, the Company will receive monthly
principal and interest payments based on a 10-year amortization period and an
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 monthly
revenues thereafter through October 29, 2005; 4% of 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 the Hall Joint Venture with 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 give the Hall Joint Venture 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. In 2001 and 2000, the Company made three mezzanine loans totaling $3,516
to third party hotel owners. 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, 2005. Noble Investments LLC has
provided the Company with a guarantee in the amount of $400, due to a
deficiency in the debt service coverage ratio required by the mezzanine loan.
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. Both loans are subject to
prepayment penalties during the first three years. 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. In addition to earning interest income, the Company
also provided development and purchasing services to Noble during each hotels
construction stage for additional fee income. The Company co-developed the
Sugarloaf Hotel and developed the Tampa Hotel. During 2001 and 2000, these
fees totaled $645 and $137, respectively. 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 equity
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. 27




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Neither borrower is currently in default under either loan. The Atlanta
(Sugarloaf) project opened during the second quarter of 2001, and the Tampa
project opened during the first quarter of 2002. In 2001, the Company also
provided mezzanine financing totaling $250, which represents a participating
interest in a $5,478 mezzanine loan to the owner of a 769-room resort hotel in
Orlando, FL. This loan was written off as uncollectible in 2002 due to the
severe impact on the Orlando area from the terrorist events of September 11,
2001 and the resulting poor economic conditions. 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 is
currently developing a Courtyard by Marriott hotel in Chapel Hill, NC, (the
Chapel Hill Courtyard) which is expected to open in the summer of 2004. The
Company currently owns a 48.78 percent interest in the Chapel Hill Joint
Venture, while Chapel Hill Investments, LLC owns a 51.22 percent 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). The Companys Preferred Contribution requires 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 percent, plus an accrued dividend at
an annual yield of 8 percent. Once the hotel opens, 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 that percentage
that will generate an annual dividend yield of 10 percent. The percentage rate
to be added to 30-day LIBOR will not be known until the day the hotel opens.
The Company will receive $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 percent by Charles Winston and James Winston, both of whom are
directors of the Company, and 48 percent 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 investment balance in the Chapel Hill Joint Venture of $1,990 and its
Preferred Contribution amount of $1,453 at December 31, 2003 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 Charlesbank Venture intends to acquire more than $100
million of hotel assets. Charlesbank is a private investment firm managing
capital on behalf of institutional investors. 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, 2003, the Charlesbank Venture had invested in
three 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 is expected to be converted to a Spring Hill Suites by Marriott in
the second quarter of 2004. 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 three hotels is approximately $30
million. The Company earns an 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, 2003, the
Companys investment in the Charlesbank Venture totaled $1,015. The Company,
through the Charlesbank Venture, receives cash distributions of any operating
profits from WCC Project Company LLC on a quarterly basis. In February 2004, the Charlesbank Venture invested in a fourth 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 is a Ramada Inn that the partners expect to convert
to a Courtyard by Marriott in early 2005. The total cost of the project is
expected 28




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##### 



to be approximately $14,000 (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 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. In 2000, the Company entered into a joint venture agreement with Marsh
Landing Investment, LLC (Marsh) to jointly develop an $8 million, 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 an 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
percent of the Evanston hotel and 42.35 percent 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 percent 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 will
assume 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 percent of Windsor Hotel Associates, LLC, the Company owned 49
percent, and Regent owned 36 percent. Subsequent to the default under the
lease agreement, Intercontinental Group forfeited its share of ownership, with
the result that the Company owned 57.65 percent and Regent owned 42.35 percent
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 percent by the 29




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Company and 42.35 percent by Regent. The Las Vegas, NV Hampton Inn hotel is
owned 100 percent by the Company. On July 1, 2003, Barclay assumed the lease
of the Las Vegas Hampton Inn. During 2003, the Company received cash distributions from its joint
ventures totaling $1,863. 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 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 its Chapel Hill Joint Venture. As of December 31, 2003, the
Company has 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 will be consolidated beginning with the first quarter of
2004. As of December 31, 2003, the total assets of the consolidated joint
ventures were $49,160, total liabilities were $29,074 ($27,706 of which
represented long-term debt), and total equity was $20,086. For the years ended
December 31, 2003 and 2002, the total revenue of the consolidated joint
ventures was $8,662 and $6,256, and total expenses were $6,329 and $3,756,
resulting in net income of $2,333 and $2,500, respectively. During the year
ended December 31, 2003, the unaudited financial statements of the consolidated
joint ventures reflected aggregate cash flow provided by operating activities
of $4,612, cash used in investing activities of $1,873, principally for hotel
additions, and cash used in financing activities of $637, principally in the
form of loan proceeds and capital contributions less distributions to joint
venture partners. As of December 31, 2003, the total assets of the
unconsolidated joint ventures were $24,642, total liabilities were $15,272
($13,956 of which represented long-term debt), and total equity was $9,370.
The Companys share of the total assets, liabilities, long-term debt and equity
of these unconsolidated joint ventures equated to $3,216, $1,993, $1,821 and
$1,223, respectively. For the years ended December 31, 2003 and 2002, the
total revenue of the unconsolidated joint ventures was $4,615 and $782, and
total expenses were $4,508 and $911, resulting in net income (loss) of $107 and
($129), respectively. During the year ended December 31, 2003, the unaudited
financial statements of the unconsolidated joint ventures reflected aggregate
cash flow provided by operating activities of $1,400, cash used in investing
activities of $13,775, principally for hotel additions, and cash provided by
financing activities of $12,472, principally in the form of loan proceeds and
capital contributions less distributions to joint venture partners. During 2003, the Company spent $7,092 or 6.4% of room revenue, in
connection with the renovation of its wholly owned hotels and plans to spend
approximately $8,000 during 2004. In connection with the Companys acquisition
of the leasehold interests for 47 of its hotels from Interstate on July 1,
2002, Barclay became the franchisee under the franchise licenses for the
respective hotels. As a result of this change, the Company elected to incur
additional capital expenditures during 2003 consistent with certain franchisor
requirements. These capital expenditures are funded from operating cash flow,
and possibly from borrowings under the Companys $125,000 line of credit (the
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 6.1% and 5.7% of room
revenues in 2003 and 2002, respectively. The Companys net cash used in financing activities during the year ended
December 31, 2003 totaled $13,078. This net use of cash was primarily due to
the payments made to decrease the outstanding debt balance of the Line by
$43,100, payments of distributions to shareholders totaling $19,834 and the
payments of distributions to the Partnerships minority interest totaling $779.
This amount also includes principal payments totaling $1,221 related to the
Companys $71,000 fixed rate note. These cash outflows were offset by cash
received from the issuance of 6.038 million common shares for net cash proceeds
totaling $50,465 and minority interest contributions to consolidated joint
ventures totaling $2,100. During each quarter in 2003, the Company paid cash dividends per common
and preferred share of $0.15 and $0.578125, respectively, equating to $0.60 and
$2.31, respectively, on an annual basis. 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 2004. The Companys $125,000, three-year line of credit (the Line) bears
interest at rates from LIBOR plus 1.75% to 2.50%, based on the Companys
consolidated debt leverage ratio. As of December 31, 2003 the Line was
collateralized with 30 of the Companys hotels, with a net book value of
$195,763 as of December 31, 2003. During 2003, the Company reduced the
outstanding balance under its line of credit by $43,100, from $72,300 to
$29,200. The Companys articles of incorporation limit its debt to 60% of the
cost of its investment in hotel properties, or approximately $284 as of
December 31, 2003. The Companys availability under the Line totaled approximately $95,800 as
of December 31, 2003. Availability is calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the
Line. The Line requires 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,
2003. The failure to comply with any of these covenants would cause a default
under our line of credit. 30




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##### 



Furthermore, our line of credit provides that any default under, or
acceleration of, any of our other debt, any debt of WINN Limited Partnership or
any debt of our subsidiaries, including any default under its GECC fixed-rate
loan or otherwise, will constitute a default under the Line. Any of these
defaults, if not waived, could result in the acceleration of the indebtedness
under our line of credit. If this occurs, we may not be able to repay our debt
or borrow sufficient funds to refinance it, in which case we would not be able
to make distributions to our shareholders. The Company had $65,031 in debt at December 31, 2003 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 $111,227 as of December 31, 2003. All 44 of the Companys wholly owned hotels as of December 31, 2003 were
pledged as collateral for the Companys debt securities, 30 against the
outstanding balance under the Line and 14 against the outstanding balance under
the GE Capital loan. On December 18, 2000, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This transaction
effectively replaced the Companys variable interest rate based on 30-day LIBOR
on $50,000 of outstanding debt under the Line with a fixed interest rate of
5.915% until December 18, 2002, at which time the swap matured. On January 31, 2003, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the 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 with a fixed interest rate of 1.505%. The Lines
interest rate spread is currently 1.75%, equaling a fixed rate of 3.255%. As of December 31, 2003, 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 thanContractural Obligations
    
    Total
    
    1 Year
    
    1 - 3 Years
    
    3 - 5 Years
    
    5 YearsLong-term debt
    
    $
    65,031
    
    
    $
    1,480
    
    
    $
    3,308
    
    
    $
    60,243
    
    
    $
    Long-term debt of consolidated JVs
    
    
    26,253
    
    
    
    9,828
    
    
    
    684
    
    
    
    790
    
    
    
    14,951Corporate office lease
    
    
    435
    
    
    
    372
    
    
    
    63
    
    
    
    
    
    
    
    Total Contractural Obligations
    
    $
    91,719
    
    
    $
    11,680
    
    
    $
    4,055
    
    
    $
    61,033
    
    
    $
    14,951Other Commercial CommitmentsLine of Credit
    
    $
    29,200
    
    
    $
    29,200
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Other Commercial Commitments
    
    $
    29,200
    
    
    $
    29,200
    
    
    $
    
    
    
    $
    
    
    
    $
    
 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
percent 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 2003 taxable income to
shareholders, we were required to distribute approximately $16,950 in order to
maintain our REIT status as described above. We distributed approximately
$13,815 to common shareholders and $6,938 to preferred shareholders for the
year ended December 31, 2003, which exceeded our required distributions. During 2003 the Company signed a construction contract with a builder, to
construct a Courtyard by Marriott hotel in Chapel Hill, NC, which will be owned
by the Companys consolidated Chapel Hill joint venture. The contract sum is
$7,942 and the construction completion date is expected to be September 2004. 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 Line,
additional follow-on offerings, joint venture agreements, the net sale proceeds
of hotel 31




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##### 



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 As of December 31, 2003, the Company participated in five joint venture
arrangements to own and develop hotel properties and three mezzanine loans.
Historically, the Company has accounted for its unconsolidated 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. 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 applies immediately to variable interest entities
created after January 31, 2003, which affects 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 a variable interest acquired by the Company before
February 1, 2003, which affects our remaining joint ventures and mezzanine
loans. The management of the Company has analyzed the terms and provisions of
each of these arrangements, 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 percent
interest, has consolidated the balance sheet of the Marsh Landing Joint Venture
as of December 31, 2003, and will consolidate the results of operations
beginning with the first quarter of 2004. For the year ended December 31,
2003, total revenue of the joint venture was $1,422, total expenses were $785,
resulting in a net income of $637. As of December 31, 2003, total assets of
the joint venture were $7,293, total liabilities were $4,959, resulting in
stockholders equity totaling $2,334. The Companys share of equity of this
joint venture totaled $1,144 as of December 31, 2003. 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 percent interest, has accounted for and will continue
to account for its investment under the equity method of accounting. For the
year ended December 31, 2003, total revenue of the Charlesbank joint venture
was $4,615, total expenses were $4,508, resulting in net income of $107. As of
December 31, 2003, total assets of the joint venture were $24,642, total
liabilities were $15,272, resulting in stockholders equity totaling $9,370.
The Companys equity balance exposed to loss as a result of its involvement in
this joint venture totaled $1,222 as of December 31, 2003. Regent Joint Ventures: As of December 31, 2003, these two joint ventures owned the Windsor, CT
Hilton Garden Inn (the Windsor Joint Venture) and the Evanston, IL Hilton
Garden Inn (the Evanston Joint Venture) (see Note 17 to Notes to Consolidated
Financial Statements). These joint ventures are considered to be VIEs and the
Company is considered to be the primary beneficiary. Therefore, the Company,
which owned a 57.65 percent interest and a 49 percent interest, respectively,
has consolidated the balance sheets of the Windsor Joint Venture and the
Evanston Joint Venture as of December 31, 2003, and will consolidate the
results of operations beginning with the first quarter of 2004. For the year
ended December 31, 2003, total revenue of the Windsor Joint Venture and the
Evanston Joint Venture was $1,852 and $3,188, respectively, total expenses were
$1,245 and $1,703, respectively, resulting in net income of $607 and $1,485,
respectively. As of December 31, 2003, total assets of the joint ventures were
$15,649 and $20,259, respectively, total liabilities were $9,614 and $12,402,
respectively, resulting in stockholders equity totaling $6,035 and $7,857,
respectively. The Companys share of equity of these joint ventures totaled
$7,330 as of December 31, 2003. As of December 31, 2003, the Company also owned a 57.65% interest in
Windsor Lessee Company, LLC, the lessee of the Windsor, CT Hilton Garden Inn.
The Company assumed its interest in Windsor Lessee Company, LLC on July 1, 2003
at no cost. This joint venture is considered to be a VIE and the Company is
considered to be the primary beneficiary. As of December 31, 2003, the Company
consolidated the balance sheet of Windsor Lessee Company, LLC and will
consolidate the results of operations beginning with the first quarter of 2004.
For the year ended December 31, 2003, total revenue of Windsor Lessee Company,
LLC was 32




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##### 



$2,193, total expenses were $2,520, resulting in a net loss of $(327). As of
December 31, 2003, total assets of Windsor Lessee Company, LLC were $197, total
liabilities were $367, resulting in stockholders equity totaling $(170). Chapel Hill Joint Venture: 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, has consolidated
the joint ventures results of operations and balance sheet beginning with the
third quarter 2003. For the year ended December 31, 2003, total revenue of the
joint venture was $6, total expenses were $76, resulting in a net loss of $70.
As of December 31, 2003, total assets of the joint venture were $5,762, total
liabilities were $1,732, including $154 of long term debt, resulting in
stockholders equity totaling $4,030. The Companys share of equity of this
joint venture totaled $1,966 and its preferred member interest investment
totaled $1,453 as of December 31, 2003 (see Note 3 to consolidated financial
statements). 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 will 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 $246, respectively, as of December 31, 2003. 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
percent 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 will 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 $1,750 and $259, respectively, as of December 31, 2003. In April 2003, FASB issued Statement of Financial Accounting Standards No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). FASB Statements No. 133 Accounting for
Derivative Instruments and Hedging Activities and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, establish
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 149 amends Statement 133 for
certain decisions made by the Board as part of the Derivatives Implementation
Group (DIG) process. This Statement contains amendments relating to FASB
Concepts Statement No. 7, Using Cash Flow Information and Present Value in
Accounting Measurements, and FASB Statements No. 65, Accounting for Certain
Mortgage Banking Activities, No. 91 Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from
Certain Required Disclosures about Financial Instruments for Certain Nonpublic
Entities. The adoption of SFAS No. 149 did not have a material impact on the
Company. In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS No.
150). SFAS No. 150 requires issuers to classify certain freestanding
financial instruments as liabilities. These freestanding financial instruments
include mandatory redeemable financial instruments, obligations to repurchase
the issuers equity shares by transferring assets and certain obligations to
issue a variable number of shares. The provisions of SFAS No. 150 are
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Company. 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 the
line of credit to make distributions to the equity holders. 33




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##### 



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 risk factors described in Exhibit 99.1 to this Annual Report on Form
10-K. 
  ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     ($in thousands) As of December 31, 2003, the Companys exposure to market risk for a
change in interest rates related to its debt outstanding under the Line, its
debt from consolidated joint ventures, and its interest receivable from
mezzanine loans. Debt outstanding under the Line totaled $29,200 at December
31, 2003. The Line, which expires in December 2004, bears interest generally
at rates from 30-day LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the
Companys consolidated debt leverage ratio. The Companys current interest
rate is 30-day LIBOR plus 1.75%. On January 31, 2003, the Company completed an
interest rate swap on $50,000 of its outstanding variable rate debt under the
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 with a fixed interest rate of
1.505%. The Lines interest rate spread is currently 1.75%, equaling a fixed
rate of 3.255%. The differential paid or received on interest rate agreements
is recognized as an adjustment to interest expense over the life of the swap.
The weighted average interest rate on the Line for 2003 and 2002 was 3.75% and
6.45%, respectively (see Note 7 to the consolidated financial statements). At
December 31, 2003, the Company had $0 of variable rate debt outstanding under
the Line that was exposed to fluctuations in the market rate of interest. The definitive extent of the Companys interest rate risk under the Line
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 interest expense would not
have increased based on the amount of variable rate debt outstanding and
exposed to fluctuations in the market rate of interest at December 31, 2003.
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
    
    MethodCash, lease revenue receivable,
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: 34




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##### 



2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueLiabilities:Long-term debt  GE Capital Corporation
    
    $
    65,031
    
    
    $
    67,368
    
    
    $
    66,406
    
    
    $
    66,637Long-term debt  consolidated joint ventures
    
    
    26,253
    
    
    
    26,253
    
    
    
    
    
    
    
    Due to banks
    
    
    29,200
    
    
    
    29,200
    
    
    
    72,300
    
    
    
    72,300Interest 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, 2003: Maturity Date
    
    Fixed Rate Debt
    
    Interest Rate2004
    
    $
    1,480
    
    
    
    7.375
    %2005
    
    
    1,593
    
    
    
    7.375
    %2006
    
    
    1,715
    
    
    
    7.375
    %2007
    
    
    1,846
    
    
    
    7.375
    %2008
    
    
    58,397
    
    
    
    7.375
    %Thereafter
    
    
    
    
    
    
    Total
    
    $
    65,031
    
    
    
    7.375
    %
 The following table presents the aggregate maturities of the Companys
consolidated joint ventures variable rate debt principal and interest rates by
maturity dates at December 31, 2003: Evanston Joint Venture
    
    Windsor Joint Venture
    
    Marsh Landing Joint Venture
    
    Chapel Hill Joint VentureMaturity
    
    Variable
    
    Interest
    
    Variable
    
    Interest
    
    Variable
    
    Interest
    
    Construction
    
    InterestDate
    
    Rate Debt
    
    Rate
    
    Rate Debt
    
    Rate
    
    Rate Debt
    
    Rate
    
    Debt
    
    Rate2004
    
    $
    229
    
    
    Libor + 3%
    
    $
    9,367
    
    
    Libor + 2.45%
    
    $
    78
    
    
    Libor + 3%
    
    $
    154
    
    
    Libor + 3.80%2005
    
    
    245
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    84
    
    
    Libor + 3%
    
    
    
    
    
    
    2006
    
    
    262
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    92
    
    
    Libor + 3%
    
    
    
    
    
    
    2007
    
    
    281
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    100
    
    
    Libor + 3%
    
    
    
    
    
    
    2008
    
    
    300
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    109
    
    
    Libor + 3%
    
    
    
    
    
    
    Thereafter
    
    
    10,502
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    4,450
    
    
    Libor + 3%
    
    
    
    
    
    
    Total
    
    $
    11,819
    
    
    
    
    
    
    $
    9,367
    
    
    
    
    
    
    $
    4,913
    
    
    
    
    
    
    $
    154
 
 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 of this report on Form 10-K. 
 ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 35




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##### 



ITEM 9A.     CONTROLS AND PROCEDURES (a)      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 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) 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 are effective in timely alerting them to material information
relating to the Company required to be included in the Companys periodic SEC
filings. There has been no change in the Companys internal control over
financial reporting during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 PART III. 
 ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on the Companys directors is incorporated by reference from
the Companys Proxy Statement (under the heading Proposal 1: Election of
Directors) to be filed with respect to the Annual Meeting of Shareholders to
be held May 4, 2004. Information on the Companys executive officers is
included under the caption Executive Officers of the Registrant on pages 9
and 10 of this report on Form 10-K. The Board of Directors has determined that Thomas F. Darden, II is an
audit committee financial expert as that term is defined in the rules
promulgated by the Securities and Exchange Commission pursuant to the
Sarbanes-Oxley Act of 2002, and additionally, has determined that Mr. Darden is
independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act. The Company has adopted a Code of Business Conduct and Ethics that applies
to the Companys Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer and has posted the Code of Business Conduct and Ethics on
its Web site. The Company intends to satisfy the disclosure requirement under
Item 10 of Form 8-K relating to amendments to or waivers from any provision of
the Code of Business Conduct and Ethics applicable to the Companys Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer by
posting that information on the Companys Web site at www.winstonhotels.com. 
 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 4, 2004. 
  ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 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 4, 2004. 
 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
4, 2004. 
 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 4,
2004. 36




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##### 



PART IV. 
 ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)      Financial Statements and Schedules. The financial statements and schedules listed below are included in this report. Financial Statements and Schedules
    
    Form 10-K PageReport of Independent Auditors
    
    
    42Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    43Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001
    
    
    44Consolidated Statements of Shareholders Equity for the years ended December
31, 2003, 2002 and 2001
    
    
    45Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001
    
    
    46Notes to Consolidated Financial Statements
    
    
    47Schedule III  Real Estate and Accumulated Depreciation as of December 31,
2003
    
    
    66Notes to Schedule III
    
    
    68
 (b)     Reports on Form 8-K. The Company filed the following reports on Form 8-K for the quarter ended
December 31, 2003:  (1)
    
    The Company filed a current report on Form 8-K dated October 2,
2003, pursuant to Item 5 of Form 8-K. Included in this From 8-K was
the Fifth Amendment to the Companys Second Amended and Restated
Syndicated Credit Agreement dated September 8, 2003, attached as
Exhibit 10.1.(2)
    
    The Company filed a current report on Form 8-K dated October
14, 2003, pursuant to Item 5 of Form 8-K. Included in the Form 8-K
was the Companys disclosure that its Board of Directors approved
changes to amend the Winston Hotels, Inc. Stock Incentive Plan (As
Amended May 1998). These changes were made in connection with
changes to the Companys Executive Deferred Compensation Plan and are
described in the Amendments to Winston Hotels, Inc. Stock Incentive
Plan, which were attached as Exhibit 4.1. The Amended and Restated
Winston Hotels, Inc. Executive Deferred Compensation Plan was
attached as Exhibit 4.2.(3)
    
    The Company furnished a current report on Form 8-K dated
November 5, 2003, pursuant to Item 12 of Form 8-K. Included in the
Form 8-K was the Companys press release announcing its operating
results for the third quarter ended September 30, 2003, attached as
Exhibit 99.1. 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, 10.27, 10.28, and 10.29. Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation (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).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 9.25% Series A Cumulative Preferred Stock (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 September 15, 1997).
 37




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##### 



4.3
    
    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).4.4
    
    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.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)).
 38




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##### 



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
    
    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).10.19
    
    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).10.20
    
    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).10.21
    
    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).10.22
    
    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).
 39




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##### 



10.23
    
    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).10.24
    
    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).10.25
    
    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).10.26
    
    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).10.27
    
    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).10.28
    
    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).10.29
    
    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).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Accountants (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.99.1
    
    Risk Factors.
 40




---



##### 



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, III
Chief Executive Officer Date: March 12, 2004 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

Charles M. Winston
    
    Chairman of the Board of Directors
    
    March 12, 2004/s/ Robert W. Winston, III

Robert W. Winston, III
    
    Chief Executive Officer
and Director
(Principal Executive Officer)
    
    March 12, 2004/s/ Joseph V. Green

Joseph V. Green
    
    President and Chief Financial Officer
    
    March 12, 2004/s/ Brent V. West

Brent V. West
    
    Vice President and Chief
Accounting Officer
    
    March 12, 2004/s/ Edwin B. Borden

Edwin B. Borden
    
    Director
    
    March 12, 2004/s/ Thomas F. Darden, II

Thomas F. Darden, II
    
    Director
    
    March 12, 2004/s/ Richard L. Daugherty

Richard L. Daugherty
    
    Director
    
    March 12, 2004/s/ James H. Winston

James H. Winston
    
    Director
    
    March 12, 2004/s/ David C. Sullivan

David C. Sullivan
    
    Director
    
    March 12, 2004
 41




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##### 



Report of Independent Auditors To the Board of Directors and Shareholders
of Winston Hotels, Inc.: 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, 2003 and 2002, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
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 schedule are the responsibility of the
Companys management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 15 to the consolidated financial statements, in 2002, the
Company adopted Statement of Financial Accounting Standard No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets. 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. PricewaterhouseCoopers LLP Raleigh, North Carolina
March 10, 2004 42




---



##### 



WINSTON HOTELS, INC
CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002($ in thousands, except per share amounts) 2003
    
    2002ASSETSInvestment in hotel properties:Land
    
    $
    44,788
    
    
    $
    39,348Buildings and improvements
    
    
    377,109
    
    
    
    345,511Furniture and equipment
    
    
    51,323
    
    
    
    44,332Operating properties
    
    
    473,220
    
    
    
    429,191Less accumulated depreciation
    
    
    128,540
    
    
    
    109,152344,680
    
    
    
    320,039Properties under development
    
    
    3,521
    
    
    
    1,800Net investment in hotel properties
    
    
    348,201
    
    
    
    321,839Assets held for sale
    
    
    2,100
    
    
    
    Corporate FF&E, net
    
    
    621
    
    
    
    735Cash
    
    
    5,623
    
    
    
    1,510Accounts receivable
    
    
    2,505
    
    
    
    1,958Lease revenue receivable
    
    
    179
    
    
    
    Notes receivable
    
    
    5,016
    
    
    
    5,016Investment in joint ventures
    
    
    1,607
    
    
    
    9,117Deferred expenses, net
    
    
    2,935
    
    
    
    2,954Prepaid expenses and other assets
    
    
    8,653
    
    
    
    6,988Deferred tax asset
    
    
    9,821
    
    
    
    7,325Total assets
    
    $
    387,261
    
    
    $
    357,442LIABILITIES AND SHAREHOLDERS EQUITYDue to banks
    
    $
    29,200
    
    
    $
    72,300Long-term debt
    
    
    91,284
    
    
    
    66,406Accounts payable and accrued expenses
    
    
    11,484
    
    
    
    11,679Distributions payable
    
    
    5,870
    
    
    
    4,951Total liabilities
    
    
    137,838
    
    
    
    155,336Minority interest
    
    
    17,489
    
    
    
    7,591Commitments and contingenciesShareholders equity:Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding (liquidation preference
of $76,734)
    
    
    30
    
    
    
    30Common stock, $.01 par value, 50,000,000 shares authorized,
26,270,805 and 20,148,334 shares issued and outstanding
    
    
    263
    
    
    
    201Additional paid-in capital
    
    
    307,089
    
    
    
    256,720Accumulated other comprehensive loss
    
    
    (33
    )
    
    
    Unearned compensation
    
    
    (527
    )
    
    
    (596
    )Distributions in excess of earnings
    
    
    (74,888
    )
    
    
    (61,840
    )Total shareholders equity
    
    
    231,934
    
    
    
    194,515Total liabilities and shareholders equity
    
    $
    387,261
    
    
    $
    357,442
 The accompanying notes are an integral part of the consolidated financial statements. 43




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##### 



WINSTON HOTELS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2003, 2002 and 2001(in thousands, except per share amounts) 2003
    
    2002
    
    2001Revenue:Rooms
    
    $
    113,215
    
    
    $
    54,724
    
    
    $
    Food and beverage
    
    
    7,201
    
    
    
    3,898
    
    
    
    Other operating departments
    
    
    4,169
    
    
    
    2,306
    
    
    
    Percentage lease revenue
    
    
    2,621
    
    
    
    29,067
    
    
    
    52,487Interest and other income
    
    
    1,560
    
    
    
    1,458
    
    
    
    2,166Total revenue
    
    
    128,766
    
    
    
    91,453
    
    
    
    54,653Hotel operating expenses:Rooms
    
    
    26,670
    
    
    
    12,980
    
    
    
    Food and beverage
    
    
    5,437
    
    
    
    2,873
    
    
    
    Other operating departments
    
    
    2,952
    
    
    
    1,507
    
    
    
    Undistributed operating expenses:Property operating expenses
    
    
    24,801
    
    
    
    11,970
    
    
    
    Real estate taxes and property and casualty insurance
    
    
    6,163
    
    
    
    6,259
    
    
    
    6,361Franchise costs
    
    
    8,144
    
    
    
    3,895
    
    
    
    Maintenance and repair
    
    
    6,774
    
    
    
    3,166
    
    
    
    Management fees
    
    
    2,675
    
    
    
    1,233
    
    
    
    Percentage lease expense
    
    
    4,610
    
    
    
    2,168
    
    
    
    General and administrative
    
    
    5,922
    
    
    
    4,843
    
    
    
    5,419Depreciation
    
    
    17,686
    
    
    
    18,868
    
    
    
    19,342Lease/management agreement acquisition
    
    
    1,300
    
    
    
    17,668
    
    
    
    Amortization
    
    
    985
    
    
    
    832
    
    
    
    951Total operating expenses
    
    
    114,119
    
    
    
    88,262
    
    
    
    32,073Operating income
    
    
    14,647
    
    
    
    3,191
    
    
    
    22,580Interest expense
    
    
    7,257
    
    
    
    10,478
    
    
    
    12,170Income (loss) before loss on sale of properties, allocation to minority
interest, allocation to consolidated joint ventures, income taxes,
and equity in income of unconsolidated joint ventures
    
    
    7,390
    
    
    
    (7,287
    )
    
    
    10,410Loss on sale of properties
    
    
    
    
    
    
    
    
    
    
    (682
    )Income (loss) allocation to minority interest
    
    
    260
    
    
    
    (369
    )
    
    
    236Loss allocation to consolidated joint ventures
    
    
    (36
    )
    
    
    
    
    
    
    Income tax benefit
    
    
    (2,348
    )
    
    
    (7,401
    )
    
    
    Equity in income of unconsolidated joint ventures
    
    
    1,193
    
    
    
    1,172
    
    
    
    523Income from continuing operations
    
    
    10,707
    
    
    
    1,655
    
    
    
    10,015Discontinued operations:Income (loss) from discontinued operations
    
    
    (144
    )
    
    
    (35
    )
    
    
    470Loss on sale of discontinued operations
    
    
    
    
    
    
    (718
    )
    
    
    Loss on impairment of asset held for sale
    
    
    (2,430
    )
    
    
    
    
    
    
    Income before cumulative effect of change in accounting principle
    
    
    8,133
    
    
    
    902
    
    
    
    10,485Cumulative effect of change in accounting principle  net
    
    
    (428
    )
    
    
    
    
    
    
    Net income
    
    
    7,705
    
    
    
    902
    
    
    
    10,485Preferred stock distribution
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )Net income (loss) applicable to common shareholders
    
    $
    767
    
    
    $
    (6,036
    )
    
    $
    3,547Income (loss) per common share:Basic and diluted:Income (loss) from continuing operations
    
    $
    0.17
    
    
    $
    (0.27
    )
    
    $
    0.18Income (loss) from discontinued operations
    
    
    (0.12
    )
    
    
    (0.04
    )
    
    
    0.03Loss per common share from cumulative effect of change
in accounting principle  net
    
    
    (0.02
    )
    
    
    
    
    
    
    Net income (loss) per common share
    
    $
    0.03
    
    
    $
    (0.31
    )
    
    $
    0.21Weighted average number of common shares
    
    
    21,770
    
    
    
    19,308
    
    
    
    16,926Weighted average number of common shares assuming dilution
    
    
    23,086
    
    
    
    19,308
    
    
    
    18,239
 The accompanying notes are an integral part of the consolidated financial statements. 44




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##### 



WINSTON HOTELS, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2003, 2002 and 2001(in thousands, except per share amounts) Preferred Stock
    
    Common Stock
    
    Additional
    
    
    
    Distribution
    
    AccumulatedOther
    
    TotalPaid-in
    
    Unearned
    
    in Excess of
    
    Comprehensive
    
    Shareholders'Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Earnings
    
    Income (Loss)
    
    EquityBalances at December 31, 2000
    
    
    3,000
    
    
    $
    30
    
    
    
    16,897
    
    
    $
    169
    
    
    $
    229,796
    
    
    $
    (771
    )
    
    $
    (30,508
    )
    
    $
    
    
    
    $
    198,716Issuance of shares and other
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    313
    
    
    
    (198
    )
    
    
    
    
    
    
    
    
    
    
    115Distributions ($0.99 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,756
    )
    
    
    
    
    
    
    (16,756
    )Distributions ($2.31 per preferred share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,938
    )
    
    
    
    
    
    
    (6,938
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    427
    
    
    
    
    
    
    
    
    
    
    
    427Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,485
    
    
    
    Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245
    )Unrealized gain/loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,599
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,641Balances 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 (loss):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
    )
    
    $
    231,934
 The accompanying notes are an integral part of the consolidated financial statements. 45




---



##### 



WINSTON HOTELS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001($ in thousands) 2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485Adjustments to reconcile net income to net cash provided by
operating activities:Income (loss) allocation to minority interest
    
    
    68
    
    
    
    (414
    )
    
    
    272Loss allocation to consolidated joint ventures
    
    
    (36
    )
    
    
    
    
    
    
    Depreciation
    
    
    17,878
    
    
    
    19,785
    
    
    
    20,792Amortization
    
    
    985
    
    
    
    845
    
    
    
    968Income tax benefit
    
    
    (2,496
    )
    
    
    (7,325
    )
    
    
    Mezzanine loan loss provision
    
    
    
    
    
    
    250
    
    
    
    Loss on sale or impairment of properties
    
    
    2,583
    
    
    
    764
    
    
    
    682Income allocations from joint ventures
    
    
    (1,193
    )
    
    
    (1,172
    )
    
    
    (523
    )Distributions from joint ventures
    
    
    1,863
    
    
    
    1,331
    
    
    
    1,029Unearned compensation amortization
    
    
    826
    
    
    
    501
    
    
    
    427Cumulative effect of change in accounting principle
    
    
    449
    
    
    
    
    
    
    
    Changes in assets and liabilities:Lease revenue receivable
    
    
    (179
    )
    
    
    4,786
    
    
    
    2,341Accounts receivable
    
    
    (495
    )
    
    
    (1,958
    )
    
    
    Prepaid expenses and other assets
    
    
    (1,735
    )
    
    
    (1,971
    )
    
    
    677Deferred percentage lease revenue
    
    
    
    
    
    
    (1,226
    )
    
    
    727Accounts payable and accrued expenses
    
    
    (1,149
    )
    
    
    5,348
    
    
    
    (23
    )Net cash provided by operating activities
    
    
    25,074
    
    
    
    20,446
    
    
    
    37,854Cash flows from investing activities:Note receivable
    
    
    
    
    
    
    (1,750
    )
    
    
    (2,436
    )Deferred acquisition costs
    
    
    
    
    
    
    (209
    )
    
    
    Investment in joint ventures
    
    
    (779
    )
    
    
    (1,103
    )
    
    
    21Refund of deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    220Sale of hotel properties and land parcel
    
    
    
    
    
    
    13,257
    
    
    
    4,308Proceeds from lawsuit settlement
    
    
    
    
    
    
    
    
    
    
    850Investment in hotel properties, net
    
    
    (9,062
    )
    
    
    (5,182
    )
    
    
    (9,436
    )Net cash provided by (used in) investing activities
    
    
    (9,841
    )
    
    
    5,013
    
    
    
    (6,473
    )Cash flows from financing activities:Payment of distributions to minority interest
    
    
    (779
    )
    
    
    (779
    )
    
    
    (1,454
    )Payment of distributions to shareholders
    
    
    (19,834
    )
    
    
    (18,542
    )
    
    
    (25,887
    )Proceeds from issuance of common shares, net
    
    
    50,465
    
    
    
    26,897
    
    
    
    Decrease in long term debt
    
    
    (1,221
    )
    
    
    (1,278
    )
    
    
    (1,188
    )Net decrease in due to bank
    
    
    (43,100
    )
    
    
    (30,600
    )
    
    
    (900
    )Minority interest contribution to consolidated joint ventures
    
    
    2,100
    
    
    
    
    
    
    
    Fees paid in connection with financing facilities
    
    
    (709
    )
    
    
    (534
    )
    
    
    (1,232
    )Net cash used in financing activities
    
    
    (13,078
    )
    
    
    (24,836
    )
    
    
    (30,661
    )Net increase in cash
    
    
    2,155
    
    
    
    623
    
    
    
    720Cash at beginning of year
    
    
    1,510
    
    
    
    887
    
    
    
    167Cash from initial consolidation of joint ventures
    
    
    1,958
    
    
    
    
    
    
    
    Cash at end of year
    
    $
    5,623
    
    
    $
    1,510
    
    
    $
    887Supplemental disclosure:Cash paid for interest
    
    $
    7,946
    
    
    $
    9,860
    
    
    $
    13,193Summary of non-cash investing and financing activities:Distributions to shareholders declared but not paid
    
    $
    5,675
    
    
    $
    4,756
    
    
    $
    4,273Distributions to minority interest declared but not paid
    
    
    195
    
    
    
    195
    
    
    
    195Interest rate swap adjustment to market value
    
    
    33
    
    
    
    (1,844
    )
    
    
    1,844Adjustment to minority interest due to issuance of common stock and
change in other comprehensive loss
    
    
    791
    
    
    
    538
    
    
    
    115Deferred equity compensation
    
    
    757
    
    
    
    555
    
    
    
    198
 The accompanying notes are an integral part of the consolidated financial statements. 46




---



##### 



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, 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,
2003, the Companys ownership in the Partnership was 95.29%. As of December 31, 2003, the Company owned or was invested in 50 hotel
properties in 16 states having an aggregate of 7,028 rooms. This included 44
wholly owned properties with an aggregate of 6,170 rooms, a 49 percent
ownership in two joint venture hotels with an aggregate of 296 rooms, a 57.65
percent ownership in one joint venture hotel with 157 rooms, and an indirect
13.05 percent ownership interest in three joint venture hotels with an
aggregate of 405 rooms. The Company also has issued mezzanine loans to owners
of three hotels with an aggregate of 391 rooms. The Company also held a 48.78
percent ownership interest in another joint venture that is currently
constructing a 147-room Courtyard by Marriott hotel that is scheduled to open
in the third quarter of 2004. 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,
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. Simultaneous with acquiring the leasehold interests from Interstate,
Barclay entered into new management contracts with Interstate for 33 of the 47
hotels covered by the leases. These five-year contracts were terminable by
Barclay after June 30, 2003 at no cost, subject to certain conditions and
limitations. Six of the 47 hotels continued to be managed by Interstate
Management and Investment Corporation (IMIC). Effective July 1, 2003, the
Company terminated its management contracts with Interstate, at no cost.
Effective July 1, 2003, the Company also terminated the management agreements
with IMIC by paying a termination fee of $1.3 million, which was expensed in
the third quarter of 2003. During 2003, the Company also assumed the leasehold
interests for one wholly owned hotel and, along with its joint venture partner,
the leasehold interests for one joint venture hotel, at no cost. The
management of all 41 of these properties, along with most of the hotels
management personnel and other employees, was transferred to Alliance
Hospitality Management, LLC, (Alliance). As of December 31, 2003, 43 of the Companys 44 wholly owned hotels and
two of its six joint venture hotels, the Evanston, IL Hilton Garden Inn and the
Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay. One
joint venture hotel, the 47




---



##### 



Windsor, CT Hilton Garden Inn, was leased to an entity
owned 57.65 percent by Barclay, which represents the same percent
ownership of the joint venture by the Company. The remaining three joint
venture hotels, the West Des Moines, IA Fairfield Inn & Suites, the Beachwood,
OH Courtyard by Marriott, and the Houston, TX Best Western Park Place Suites,
did not operate under leases. As of December 31, 2003, one wholly owned property, the Secaucus, NJ
Holiday Inn, continued to be operated under a long-term lease with Prime. In
March 2004, the Company negotiated the transfer of this lease to Barclay at no
cost. The Company also expects to receive payment from Prime of approximately
$300 as part of the negotiated settlement. The Secaucus, NJ Holiday Inn
produced a net loss to Prime of approximately $160 for the year ended December
31, 2003. As of December 31, 2003, Alliance managed 41 of the Companys 50 hotels,
Concord Hospitality Enterprises Company (Concord) managed three hotels,
Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation (Hilton)
managed two hotels, and Sage Hospitality Resources, LLC (Sage), Prism
Hospitality, L.P. (Prism), Noble Investment Group, Ltd. (Noble) and Prime
Hospitality Corp. (Prime) 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. 2.     Summary of Significant Accounting Policies: Principles of Consolidation.The consolidated financial statements
include the accounts of Winston Hotels, Inc., the Partnership, Barclay and
three joint ventures which were consolidated as of December 31, 2003 in
accordance with the provision of FASB Interpretation No. 46 (revised December
2003) Consolidation of Variable Interest Entities. The consolidated
financial statements also include the Chapel Hill joint venture that the
Company began consolidating in the third quarter of 2003. 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 Venture Properties.Investment in joint venture
properties 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. 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). Revenue Recognition and Impact of SAB 101.Room revenue is recognized
at the time of rental. Staff Accounting Bulletin No. 101 (SAB 101) was
issued by the Securities and Exchange Commission in December 1999 and adopted
by the Company effective January 1, 2000. SAB 101 requires that a lessor not
recognize contingent rental income until the lessee has achieved annual
specified hurdles. As of December 31, 2003 and 2002, one and two of the
Companys wholly owned hotels were leased to third party lessees, respectively.
SAB 101 has no impact on the Companys interim or annual cash flow from its
third party lessees, and therefore, on its ability to pay dividends. 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 Derivative Instruments). 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. 48




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##### 



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 either
capitalized to properties when purchased, or expensed. Minority Interest.Minority interest as of December 31, 2003 and 2002,
consists of Minority Interest in Partnership of $7,671 and $7,591, respectively
and Minority Interest in Consolidated Joint Ventures of $9,818 and $0,
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
liability. The Companys minority interest liability 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 liability (see Note 4). The Companys minority interest
liability is: (i) increased or decreased by its joint venture partners
pro-rata share of the net income or net loss 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, 2003 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. Year Ended December 31,2003
    
    2002
    
    2001Net income (loss) applicable to common shareholders, as reported
    
    $
    767
    
    
    $
    (6,036
    )
    
    $
    3,547Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects
    
    
    18
    
    
    
    90
    
    
    
    143Pro forma net income (loss) applicable to common shareholders
    
    
    749
    
    
    
    (6,126
    )
    
    
    3,404Earnings (loss) per share:Basic and diluted  as reported
    
    $
    0.03
    
    
    $
    (0.31
    )
    
    $
    0.21Basic and diluted  pro forma
    
    $
    0.03
    
    
    $
    (0.32
    )
    
    $
    0.20
 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. 49




---



##### 



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 2003, 2002, and 2001 are considered to be return of capital.
For federal income tax purposes, approximately 14%, 41%, and 39% of the
distributions declared on the Companys Common Stock in 2003, 2002, and 2001,
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, 2003,
bank account balances exceeded federal depository insurance limits by
approximately $7,983. 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 is
currently developing a Courtyard by Marriott hotel in Chapel Hill, NC, (the
Chapel Hill Courtyard) which is expected to open in the summer of 2004. The
Company currently owns a 48.78 percent interest in the Chapel Hill Joint
Venture, while Chapel Hill Investments, LLC owns a 51.22 percent 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). The Companys Preferred Contribution requires dividends to be
paid monthly in cash to the Company during construction of the hotel at an
annual yield of 30-day LIBOR plus 5.885 percent, plus an accrued dividend at an
annual yield of 8 percent. Once the hotel opens, 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 in cash
to the Company equal to a floating rate equal to 30-day LIBOR plus that
percentage that will generate an annual dividend yield of 10 percent. The
percentage rate to be added to 30-day LIBOR will not be known until the day the
hotel opens. The Company will receive $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 percent by Charles Winston and James Winston, both
of whom are directors of the Company, and 48 percent 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 investment balance in the Chapel Hill Joint Venture
of $1,990 and its Preferred Contribution amount of $1,453 at December 31, 2003
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 Charlesbank Venture intends to acquire more than $100
million of hotel assets. Charlesbank is a private investment firm managing
capital on behalf of institutional investors. 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, 2003, the Charlesbank Venture had invested in
three 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 is expected to be converted to a Spring Hill Suites by Marriott in
the second quarter of 2004. 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 three hotels is approximately $30
million. The Company earns an 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 50




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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,
2003, the Companys investment in the Charlesbank Venture totaled $1,015. The
Company, through the Charlesbank Venture, receives cash distributions of any
operating profits from WCC Project Company LLC on a quarterly basis. In February 2004, the Charlesbank Venture invested in a fourth 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 is a Ramada Inn that the partners expect to convert
to a Courtyard by Marriott in early 2005. The total cost of the project is
expected to be approximately $14,000 (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 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. During 2000, the Company entered a joint venture agreement with Marsh
Landing Investment, LLC (Marsh) to jointly develop an $8 million, 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. The Company is
providing on-going asset management services to the joint venture for
additional fee income. 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s investment balance in the
Marsh Landing Joint Venture at December 31, 2003 of $1,179 has been eliminated
in consolidation. 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
(see Note 17). 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. The
Company provided development and asset purchasing services during the
construction of each hotel for fees, and during 2003 provided on-going asset
management services to generate additional fee income. The Companys
investment balance in the Regent joint ventures at December 31, 2003 of $6,538
has been eliminated in consolidation. 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 percent of Windsor Hotel Associates, LLC, the Company owned 49
percent, and Regent owned 36 percent. Subsequent to the default under the
lease agreement, Intercontinental Group forfeited its share of ownership, with
the result that the Company owned 57.65 percent and Regent owned 42.35 percent
of Windsor Hotel Associates, LLC. On July 1, 2003, Windsor Lessee Company LLC
assumed the lease 51




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of the Windsor Hilton Garden Inn hotel. As of December 31,
2003, Windsor Lessee Company LLC was owned 57.65 percent by the Company and
42.35 percent by Regent. The Las Vegas, NV Hampton Inn hotel is owned 100
percent by the Company. On July 1, 2003, Barclay assumed the lease of the Las
Vegas Hampton Inn. 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
percent of the Evanston hotel and 42.35 percent 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 percent 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 will
assume the lease of the Windsor hotel from Windsor Lessee Company LLC. 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 consolidated the balance
sheet and operations of its Chapel Hill Joint Venture. As of December 31,
2003, the Company has 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 will be consolidated beginning with the
first quarter of 2004 (see discussion of FIN 46 under Note 4 below). As of
December 31, 2003, the total assets of the consolidated joint ventures were
$49,160, total liabilities were $29,074 ($27,706 of which represented long-term
debt), and total equity was $20,086. For the years ended December 31, 2003 and
2002, the total revenue of the consolidated joint ventures was $8,662 and
$6,256, and total expenses were $6,329 and $3,756, resulting in net income of
$2,333 and $2,500, respectively. During the year ended December 31, 2003, the
unaudited financial statements of the consolidated joint ventures reflected
aggregate cash flow provided by operating activities of $4,612, cash used in
investing activities of $1,873, principally for hotel additions, and cash used
in financing activities of $637, principally in the form of loan proceeds and
capital contributions less distributions to joint venture partners. As of
December 31, 2003, the total assets of the unconsolidated joint ventures were
$24,642, total liabilities were $15,272 ($13,956 of which represented long-term
debt), and total equity was $9,370. The Companys share of the total assets,
liabilities, long-term debt and equity of these unconsolidated joint ventures
equated to $3,216, $1,993, $1,821 and $1,223, respectively. For the years
ended December 31, 2003 and 2002, the total revenue of the unconsolidated joint
ventures was $4,615 and $782, and total expenses were $4,508 and $911,
resulting in net income (loss) of $107 and ($129), respectively. During the
year ended December 31, 2003, the unaudited financial statements of the
unconsolidated joint ventures reflected aggregate cash flow provided by
operating activities of $1,400, cash used in investing activities of $13,775,
principally for hotel additions, and cash provided by financing activities of
$12,472, principally in the form of loan proceeds and capital contributions
less distributions to joint venture partners. As mentioned above, 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.     Recently Issued Accounting Standards: As of December 31, the Company participated in five joint venture
arrangements to own and develop hotel properties and three mezzanine loans.
Historically, the Company has accounted for its unconsolidated 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. FIN 46 generally requires consolidation by the
party that has a majority of the risk and/or 52




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rewards, referred to as the
primary beneficiary. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, which affects 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, which affects our remaining joint ventures and mezzanine
loans. The management of the Company has analyzed the terms and provisions of
each of these arrangements, 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 percent
interest, has consolidated the balance sheet of the Marsh Landing Joint Venture
as of December 31, 2003, and will consolidate the results of operations
beginning with the first quarter of 2004. For the year ended December 31,
2003, total revenue of the joint venture was $1,422, total expenses were $785,
resulting in a net income of $637. As of December 31, 2003, total assets of
the joint venture were $7,293, total liabilities were $4,959, resulting in
stockholders equity totaling $2,334. The Companys share of the equity of
this joint venture totaled $1,144 as of December 31, 2003. 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 percent interest, has accounted for and will continue
to account for its investment under the equity method of accounting. For the
year ended December 31, 2003, total revenue of the Charlesbank Joint Venture
was $4,615, total expenses were $4,508, resulting in net income of $107. As of
December 31, 2003, total assets of the joint venture were $24,642, total
liabilities were $15,272, resulting in stockholders equity totaling $9,370.
The Companys equity balance exposed to loss as a result of its involvement in
this joint venture totaled $1,222 as of December 31, 2003. Regent Joint Ventures: As of December 31, 2003, these two joint ventures owned the Windsor, CT
Hilton Garden Inn (the Windsor Joint Venture) and the Evanston, IL Hilton
Garden Inn (the Evanston Joint Venture) (see Note 17). These joint ventures
are considered to be VIEs and the Company is considered to be the primary
beneficiary. Therefore, the Company, which owned a 57.65 percent interest and
a 49 percent interest, respectively has consolidated the balance sheets of the
Windsor Joint Venture and the Evanston Joint Venture as of December 31, 2003,
and will consolidate the results of operations beginning with the first quarter
of 2004. For the year ended December 31, 2003, total revenue of the Windsor
Joint Venture and the Evanston Joint Venture was $1,852 and $3,188,
respectively, total expenses were $1,245 and $1,703, respectively, resulting in
net income of $607 and $1,485, respectively. As of December 31, 2003, total
assets of the joint ventures were $15,649 and $20,259, respectively, total
liabilities were $9,614 and $12,402, respectively, resulting in stockholders
equity totaling $6,035 and $7,857, respectively. The Companys share of the
equity of these joint ventures totaled $7,330 as of December 31, 2003. As of December 31, 2003, the Company also owned a 57.65% interest in
Windsor Lessee Company, LLC, the lessee of the Windsor, CT Hilton Garden Inn.
The Company assumed its interest in Windsor Lessee Company, LLC on July 1, 2003
at no cost. This joint venture is considered to be a VIE and the Company is
considered to be the primary beneficiary. As of December 31, 2003, the Company
consolidated the balance sheet of Windsor Lessee Company, LLC and will
consolidate the results of operations beginning with the first quarter of 2004.
For the year ended December 31, 2003, total revenue of Windsor Lessee Company,
LLC was $2,193, total expenses were $2,520 resulting in a net loss of $(327).
As of December 31, 2003, total assets of Windsor Lessee Company, LLC were $197,
total liabilities were $367, resulting in stockholders deficit totaling
$(170). Chapel Hill Joint Venture: 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, has consolidated
the joint ventures results of operations and balance sheet beginning with the
third quarter 2003. For the year ended December 31, 2003, total revenue of the
joint venture was $6, total expenses were $76, resulting in a net loss of $70.
As of December 31, 2003, total assets of the joint venture were $5,762, total
liabilities were $1,732, including $154 of long term debt, resulting in
stockholders equity totaling $4,030. The Companys share of the equity of
this joint venture totaled $1,966 as of December 31, 2003, and its preferred
member interest investment totaled $1,453 as of December 31, 2003 (see Note 3
above). 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 will 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 $246, respectively, as of December 31, 2003. 53




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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
percent 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 will 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 $1,750 and
$259, respectively, as of December 31, 2003. As summarized above, per the provisions of FIN 46, the Company has
consolidated 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 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 for.
These remaining lives ranged from 2 to 27 years as of December 31, 2003. In April 2003, FASB issued Statement of Financial Accounting Standards No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). FASB Statements No. 133 Accounting for
Derivative Instruments and Hedging Activities and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, establish
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 149 amends Statement 133 for
certain decisions made by the Board as part of the Derivatives Implementation
Group (DIG) process. This Statement contains amendments relating to FASB
Concepts Statement No. 7, Using Cash Flow Information and Present Value in
Accounting Measurements, and FASB Statements No. 65, Accounting for Certain
Mortgage Banking Activities, No. 91 Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from
Certain Required Disclosures about Financial Instruments for Certain Nonpublic
Entities. The adoption of SFAS No. 149 did not have a material impact on the
Company. In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS No.
150). SFAS No. 150 requires issuers to classify certain freestanding
financial instruments as liabilities. These freestanding financial instruments
include mandatory redeemable financial instruments, obligations to repurchase
the issuers equity shares by transferring assets and certain obligations to
issue a variable number of shares. The provisions of SFAS No. 150 are
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Company. 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 will undergo extensive renovations which are expected to be completed
by June 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
percent. An additional 2.00 percent 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. The Borrower made initial equity investments equal to approximately
18% of the total cost of the 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. 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 entered into a joint venture agreement (the
Hall Joint Venture), with an affiliate of Hall Financial Group, (Hall).
The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and
retained a 50% interest (or $1,750) in the note through the joint venture. 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
owns 50% of the Hall Joint Venture, and Hall owns the remaining 50%. The
Company 54




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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 opens. The Company also accrues
interest monthly (Accrued Interest) at an annual rate of 12% during this same
time. Once the hotel opens, the Company will receive 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 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 the Hall Joint Venture with 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 give the Hall Joint
Venture 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. In 2001 and 2000, the Company made three mezzanine loans totaling $3,516
to third party hotel owners. 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, 2005. Noble Investments LLC has
provided the Company with a guarantee in the amount of $400, due to a
deficiency in the debt service coverage ratio required by the mezzanine loan.
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. Both loans are subject to
prepayment penalties during the first three years. 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. In addition to earning interest income, the Company
also provided development and purchasing services to Noble during each hotels
construction stage for additional fee income. The Company co-developed the
Sugarloaf Hotel and developed the Tampa Hotel. During 2001 and 2000, these
fees totaled $645 and $137, respectively. 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. Neither borrower is currently in
default under either loan. The Atlanta (Sugarloaf) project opened during the
second quarter of 2001, and the Tampa project opened during the first quarter
of 2002. In 2001, the Company also provided mezzanine financing totaling $250,
which represents a participating interest in a $5,478 mezzanine loan to the
owner of a 769-room resort hotel in Orlando, FL. This loan was written off as
uncollectible in 2002 due to the severe impact on the Orlando area of the
terrorist events of September 11, 2001 and the resulting poor economic
conditions. 6.     Deferred Expenses: At December 31, 2003 and 2002 deferred expenses consisted of: 2003
    
    2002Franchise fees
    
    $
    1,679
    
    
    $
    1,592Debt facility fees
    
    
    4,492
    
    
    
    3,5676,171
    
    
    
    5,159Less accumulated amortization
    
    
    3,236
    
    
    
    2,205Deferred expenses, net
    
    $
    2,935
    
    
    $
    2,954
 55




---



##### 



7.     Debt: The Companys outstanding debt balance as of December 31, 2003 consisted
of the following: The Companys $125,000, three-year line of credit (the Line) bears
interest at rates from LIBOR plus 1.75% to 2.50%, based on the Companys
consolidated debt leverage ratio. The Companys current rate is LIBOR plus
1.75%. A commitment fee of 0.05% is also payable quarterly on the unused
portion of the Line. The Company had collateralized the Line with 30 of its
hotels, with a carrying value of $195,763 as of December 31, 2003. The
Companys availability under the Line totaled approximately $95,800 as of
December 31, 2003. Availability is calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the
Line. The Line requires 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,
2003. The Line matures December 31, 2004. On December 18, 2000, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This swap
matured on December 18, 2002. This transaction effectively replaced the
Companys variable interest rate based on 30-day LIBOR on $50,000 of the Line
with a fixed interest rate of 5.915% until December 18, 2002. On January 31, 2003, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the 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 with a fixed interest rate of 1.505%. The Lines
interest rate spread is currently 1.75%, equaling a fixed rate of 3.255%. The
fair market value of the interest rate swap as of December 31, 2003 was $(33)
and is shown as Accumulated other comprehensive loss on the accompanying
Consolidated Balance Sheets. 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 $111,227 as of December 31, 2003, serve as collateral for the
loan. The Company used the net proceeds from the loan to pay down the then
existing line of credit balance. As of December 31, 2003, $65,031 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
$2,766 as of December 31, 2003 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 + 3%. The Ponte Vedra Hampton Inn, with a carrying value of
$6,837 as of December 31, 2003, serves as collateral for the loan. As of
December 31, 2003, $4,913 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, 2004,
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
Line (see Note 17). The ten-year loan carries a variable interest rate of
Libor + 3%. The Evanston Hilton Garden Inn, with a carrying value of $19,056
as of December 31, 2003, serves as collateral for the loan. As of December 31,
2003, $11,815 was outstanding. 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 (see Note 17). The loan carried a variable interest rate of
Libor + 2.45%. The Windsor Hilton Garden Inn, with a carrying value of $15,059
as of December 31, 2003, served as collateral for the loan. As of December 31,
2003, $9,367 was outstanding. 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 bears interest at a variable rate of Libor + 3.8%. The Company is
using the net proceeds from the loan to construct the Chapel Hill Courtyard by
Marriott Hotel. As of December 31, 2003, $158 was outstanding. The funding
cutoff date for the loan is October 1, 2004 at which time the interest rate
will be fixed and the payments will be determined. As of December 31, 2003 and 2002 the Companys outstanding debt balance
under its Line totaled $29,200 and $72,300, respectively. From January 1, 2002
through December 18, 2002, interest rates on $50,000 of outstanding debt under
the Line were at 5.915% plus 2.00%, or 5.915% plus 2.25%, with the remainder at
LIBOR plus 2.00% or 2.25%. From December 18, 2002 through March 31, 2003,
interest rates on all outstanding debt under the Line were at LIBOR plus 2.00%.
From March 31, 2003 through December 31, 2003, interest rates on $50,000 of
outstanding debt under the 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%. Interest costs were
payable monthly in arrears. As of December 31, 2003 and 2002 the weighted
average interest rates on the outstanding balance under the Line were 3.75% and
6.45%, respectively. During the years ended December 31, 2003, 2002 and 2001,
the Company capitalized interest of $30, $0, and $0, respectively, related to
hotels under development or major renovation. 56




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##### 



As of December 31, 2003, the Companys future scheduled debt obligations are
as follows: Year
    
    Amount2004
    
    $
    40,5082005
    
    
    1,9232006
    
    
    2,0692007
    
    
    2,2272008
    
    
    58,806Thereafter
    
    
    14,951$
    120,484
 Our Articles of Incorporation limit our debt to 60% of the cost of our
investment in hotel properties, or approximately $284 million as of December
31, 2003. 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 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, 2003 and 2002 are as follows: 2003
    
    2002Deferred:Federal
    
    $
    2,299
    
    
    $
    6,748State
    
    
    197
    
    
    
    577Income tax benefit
    
    $
    2,496
    
    
    $
    7,325
 The deferred tax benefit was calculated using an effective tax rate of 38
percent applied to the net loss of Barclay and other temporary differences
primarily related to the acquisition of the leases from Interstate. The
Company believes that Barclay will generate sufficient future taxable income to
realize in full this deferred tax asset. Accordingly, no valuation allowance
has been recorded as of December 31, 2003. As of December 31, 2003, the
Company had net operating losses totaling $11,008 for federal and state income
tax purposes with expiration dates through 2023. The components of the deferred tax asset as of December 31, 2003 and 2002
are as follows: 57




---



##### 



2003
    
    2002Net operating loss
    
    $
    4,183
    
    
    $
    1,173Amortization of lease acquisition cost
    
    
    5,753
    
    
    
    6,395Other
    
    
    (115
    )
    
    
    (243
    )$
    9,821
    
    
    $
    7,325
 A reconciliation of the Companys statutory income tax rate of 35% to the
effective tax rate for the years ended December 31, 2003 and December 31, 2002
is as follows: 2003
    
    2002Statutory U.S. federal income tax expense (benefit)
    
    $
    1,854
    
    
    $
    (2,392
    )Other income tax expense (benefit)
    
    
    125
    
    
    
    (53
    )Non-taxable REIT income tax benefit
    
    
    (4,475
    )
    
    
    (4,880
    )Income tax benefit
    
    $
    (2,496
    )
    
    $
    (7,325
    )
 The following table reconciles GAAP net income to taxable REIT income for
the years ended December 31, 2003, 2002, and 2001: 2003
    
    2002
    
    2001GAAP net income
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485Plus GAAP net loss on taxable subsidiary
included above
    
    
    4,072
    
    
    
    11,940
    
    
    
    GAAP net income from REIT operations
    
    
    11,777
    
    
    
    12,842
    
    
    
    10,485Book/tax differences on depreciation and amortization
    
    
    3,029
    
    
    
    4,392
    
    
    
    4,314Book/tax differences on deferred lease revenue
    
    
    
    
    
    
    (1,266
    )
    
    
    727Book/tax differences on loss on sale of property
    
    
    
    
    
    
    (831
    )
    
    
    (266
    )Book/tax differences on loss on impairment of asset held for sale
    
    
    2,583
    
    
    
    
    
    
    
    Other book/tax differences, net
    
    
    1,444
    
    
    
    (954
    )
    
    
    375Taxable income subject to REIT distribution requirements
    
    $
    18,833
    
    
    $
    14,183
    
    
    $
    15,635
 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 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. The Companys financing facilities consist 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. 58




---



##### 



As of December 31, 2002, the Company did not have any derivative financial
instruments. However, on January 31, 2003, the Company completed an interest
rate swap on $50,000 of its outstanding variable rate debt under the 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 with a fixed interest rate of 1.505%. The
Lines interest rate spread is currently 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) will be reclassified into earnings in the same
periods in which the hedged interest payments affect earnings. 10.     Capital Stock: In March, 2002, the Company completed a Common Stock offering, selling
2.75 million shares, which generated net cash proceeds totaling $23,389. In
addition, in April, 2002, the Company sold an additional 412,500 Common Shares
generating net cash proceeds of $3,508. The Company used the proceeds to
reduce its outstanding debt balance under the Line. 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 Line, and plans to use the
resulting availability under the Line to fund the Companys hotel lending
business, to acquire hotels or interests in hotels through joint ventures,
and/or for general corporate purposes. 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 $89,000, 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 $12,900 to pay down its then
outstanding balance under its $125 million line of credit, and plans to use the
resulting availability under the line of credit to fund the Companys hotel
lending business, to acquire hotels or interests in hotels through joint
ventures, and/or for general corporate purposes. 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 will be recorded as a reduction in net income (loss) available to
common shareholders in the first quarter of 2004. 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, 2003, the total number of partnership units outstanding 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: 2003
    
    2002
    
    2001Net income
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485Less: preferred shares distribution
    
    
    6,938
    
    
    
    6,938
    
    
    
    6,938Net income (loss) applicable to common shareholders
    
    
    767
    
    
    
    (6,036
    )
    
    
    3,547Plus: income allocation to minority interest
    
    
    89
    
    
    
    
    
    
    
    236Net income (loss) assuming dilution
    
    $
    856
    
    
    $
    (6,036
    )
    
    $
    3,783
 59




---



##### 



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 31,2003
    
    2002
    
    2001Weighted average number of common shares
    
    
    21,770
    
    
    
    19,308
    
    
    
    16,926Weighted average partnership units with
    
    
    
    
    
    
    redemption rights
    
    
    1,298
    
    
    
    
    
    
    
    1,298Stock options and stock grants
    
    
    18
    
    
    
    
    
    
    
    15Weighted average number of common shares
assuming dilution
    
    
    23,086
    
    
    
    19,308
    
    
    
    18,239
 As of December 31, 2002, there were 1,298,480 partnership units
outstanding, 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 1,128,651 as of December
31, 2003. During 2003, 2002 and 2001, the Company granted awards of Common Stock to
certain executive officers and Vice Presidents. The total numbers of shares
granted were 84,326, 115,000, and 28,000, 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
2003, 2002, and 2001 vest 20% immediately and 20% on the anniversary of the
grant date over each of the next four years. 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 2003, 2002 and 2001 net income
would have been a decrease of $18, $90, and $143, respectively, and a
corresponding decrease in net income (loss) per Common Share of $0.00, $0.01
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 were $0.24. There were no options
granted in 2003, 2002, or 2001. A summary of the status of stock options granted under the Plan as of
December 31, 2003, 2002 and 2001, and changes during the years ended on those
dates, is presented below: 60




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##### 



2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    795,000
    
    
    $
    11.07
    
    
    
    1,055,000
    
    
    $
    11.13
    
    
    
    1,100,000
    
    
    $
    11.13Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (260,000
    )
    
    
    11.31
    
    
    
    (45,000
    )
    
    
    11.04Outstanding at end of year
    
    
    795,000
    
    
    $
    11.07
    
    
    
    795,000
    
    
    $
    11.07
    
    
    
    1,055,000
    
    
    $
    11.13Options exercisable at year-end
    
    
    788,750
    
    
    
    
    
    
    
    730,500
    
    
    
    
    
    
    
    790,750
 The following table summarizes information about the Plan at December 31, 2003: Exercise
    
    Options
    
    Options
    
    Average RemainingPrice
    
    Outstanding
    
    Exercisable
    
    Contractual Life (years)$  8.50
    
    
    25,000
    
    
    
    18,750
    
    
    
    6.1$  8.75
    
    
    260,000
    
    
    
    260,000
    
    
    
    5.0$  9.38
    
    
    12,000
    
    
    
    12,000
    
    
    
    5.4$10.00
    
    
    28,000
    
    
    
    28,000
    
    
    
    0.4$11.31
    
    
    50,000
    
    
    
    50,000
    
    
    
    1.8$11.38
    
    
    90,000
    
    
    
    90,000
    
    
    
    2.0$12.38
    
    
    50,000
    
    
    
    50,000
    
    
    
    4.4$13.19
    
    
    250,000
    
    
    
    250,000
    
    
    
    4.0$13.88
    
    
    30,000
    
    
    
    30,000
    
    
    
    3.8
 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
February 2005. Commitments for minimum rental payments are as follows: Year ending December 31:
    
    Amount2004
    
    $
    3722005
    
    
    63Total
    
    $
    435
 Rental expense for the years ended December 31, 2003, 2002 and 2001 was
$273, $323, and $327, respectively. As of December 31, 2003, the Company had future lease commitments from its
single third party lessee under the percentage lease through 2008 (see Note
17). Minimum future rental payments contractually due to the Company under
this non-cancelable operating lease were as follows: Year ending December 31:
    
    Amount2004
    
    $
    2,1532005
    
    
    2,1532006
    
    
    2,1532007
    
    
    2,1532008
    
    
    897Total
    
    $
    9,509
 61




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##### 



Effective July 1, 2002, the Company, through its TRS Lessee, Barclay,
acquired the leasehold interests for 47 of its hotels from Capstar Winston
Company, L.L.C., a wholly owned subsidiary of Meristar. Under the terms of the
percentage leases, the Companys third party lessees are obligated to pay the
Company the greater of base rents or percentage rents. The Company earned
minimum base rents of $2,559, $19,145, and $34,872 for the years ended December
31, 2003, 2002 and 2001, respectively, and percentage rents of $62, $10,773,
and $19,883 for the years ended December 31, 2003, 2002, and 2001,
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 2003, 2002 and
2001 related to this land lease totaled $212, $307, and $388, respectively.
Minimum future rental payments contractually due by the Company under this
lease are as follows: 2004  $110, 2005  $110, 2006  $110, 2007  $110, 2008
 $110 and thereafter  $5,940. 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
percent 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 2003 taxable
income to shareholders, we were required to distribute approximately $16,950 in
order to maintain our REIT status as described above. We distributed
approximately $13,815 to common shareholders and $6,938 to preferred
shareholders, which exceeded our required distributions. During 2003 the Company signed a construction contract with a builder, to
construct a Courtyard by Marriott hotel in Chapel Hill, NC, which will be owned
by the Companys consolidated Chapel Hill joint venture. The contract sum is
$7,942 and the construction completion date is expected to be September 2004. 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
    
    MethodCash, lease revenue receivable,
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: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueLiabilities:Long-term debt  GE Capital Corporation
    
    $
    65,031
    
    
    $
    67,368
    
    
    $
    66,406
    
    
    $
    66,637Long-term debt  consolidated joint ventures
    
    
    26,253
    
    
    
    26,253
    
    
    
    
    
    
    
    Due to banks
    
    
    29,200
    
    
    
    29,200
    
    
    
    72,300
    
    
    
    72,300Interest rate swap
in a net liability position
    
    
    33
    
    
    
    33
    
    
    
    
    
    
    
    
 62




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##### 



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, 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, 2003. The property, which is
immediately available for sale, is actively being marketed for sale through a
broker. Four of our wholly owned hotels were sold during 2002. The operating
results for these five hotels are included in discontinued operations in the
statements of operations for all periods presented. The Company has not
allocated interest expense to the results of the discontinued operations in
accordance with EITF No. 87-24. This change has resulted in certain
reclassifications to the 2002 and 2001 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: 2003
    
    2002
    
    2001Total revenue
    
    $
    1,135
    
    
    $
    2,789
    
    
    $
    2,293Total expenses
    
    
    1,445
    
    
    
    2,745
    
    
    
    1,787Income (loss) from discontinued operations
    
    
    (310
    )
    
    
    44
    
    
    
    506Allocation to minority interest  income (loss) from
discontinued operations
    
    
    (18
    )
    
    
    2
    
    
    
    36Loss on sale of discontinued operations
    
    
    
    
    
    
    (764
    )
    
    
    Allocation to minority interest  loss on sale of
discontinued operations
    
    
    
    
    
    
    (45
    )
    
    
    Loss on impairment of asset held for sale
    
    
    (2,583
    )
    
    
    
    
    
    
    Allocation to minority interest  loss on impairment of asset
held for sale
    
    
    153
    
    
    
    
    
    
    
    Income tax expense (benefit)
    
    
    (148
    )
    
    
    76
    
    
    
    Income (loss) from discontinued operations
    
    $
    (2,574
    )
    
    $
    (753
    )
    
    $
    470
 63




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##### 



16.     Quarterly Financial Data (Unaudited): Summarized unaudited quarterly results of operations for the years ended
December 31, 2003 and 2002 are as follows: 2003
    
    First
    
    Second
    
    Third
    
    FourthTotal revenue
    
    $
    30,135
    
    
    $
    33,934
    
    
    $
    34,140
    
    
    $
    30,557Total expenses
    
    
    29,204
    
    
    
    30,420
    
    
    
    32,071
    
    
    
    29,681Income before allocation to minority interest, allocation to
consolidated joint ventures, income tax benefit, and equity
in income (loss) of unconsolidated joint ventures
    
    
    931
    
    
    
    3,514
    
    
    
    2,069
    
    
    
    876Income (loss) allocation to minority interest
    
    
    (9
    )
    
    
    109
    
    
    
    132
    
    
    
    28Loss allocation to consolidated joint ventures
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (26
    )Income tax benefit
    
    
    (513
    )
    
    
    (107
    )
    
    
    (1,059
    )
    
    
    (669
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    135
    
    
    
    (81
    )
    
    
    499
    
    
    
    640Income from continuing operations
    
    
    1,588
    
    
    
    3,431
    
    
    
    3,505
    
    
    
    2,183Discontinued operationsLoss from
discontinued operations, net
    
    
    (55
    )
    
    
    (34
    )
    
    
    (39
    )
    
    
    (16
    )Loss 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) applicable to common shareholders
    
    $
    (201
    )
    
    $
    1,663
    
    
    $
    (634
    )
    
    $
    (61
    )Income (loss) per common share:Basic and diluted:Income (loss) from continuing operations
    
    $
    (0.01
    )
    
    $
    0.08
    
    
    $
    0.09
    
    
    $
    0.02Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.12
    )
    
    
    Loss per common share from cumulative effect of change
in accounting principle  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income (loss) per common share
    
    $
    (0.01
    )
    
    $
    0.08
    
    
    $
    (0.03
    )
    
    $
    
 2002
    
    First
    
    Second
    
    Third
    
    FourthTotal revenue
    
    $
    9,792
    
    
    $
    10,057
    
    
    $
    41,628
    
    
    $
    29,976Total expenses
    
    
    11,132
    
    
    
    27,958
    *
    
    
    31,198
    
    
    
    28,452Income (loss) before allocation to minority interest, income
tax benefit, and equity in income (loss) of unconsolidated
joint ventures
    
    
    (1,340
    )
    
    
    (17,901
    )
    
    
    10,430
    
    
    
    1,524Income (loss) allocation to minority interest
    
    
    (207
    )
    
    
    (787
    )
    
    
    549
    
    
    
    76Income tax benefit
    
    
    
    
    
    
    (6,714)
    *
    
    
    (458
    )
    
    
    (229
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    5
    
    
    
    (56
    )
    
    
    25
    
    
    
    1,198Income (loss) from continuing operations
    
    
    (1,128
    )
    
    
    (10,456
    )
    
    
    10,364
    
    
    
    2,875Discontinued operationsIncome (loss) from discontinued operations, net
    
    
    34
    
    
    
    87
    
    
    
    (24
    )
    
    
    (132
    )Income (loss) on sale of discontinued operations
    
    
    
    
    
    
    (742
    )
    
    
    (622
    )
    
    
    646Net Income
    
    
    (1,094
    )
    
    
    (11,111
    )
    
    
    9,718
    
    
    
    3,389Preferred stock distribution
    
    
    (1,734
    )
    
    
    (1,734
    )
    
    
    (1,734
    )
    
    
    (1,736
    )Net income (loss) applicable to common shareholders
    
    $
    (2,828
    )
    
    $
    (12,845
    )
    
    $
    7,984
    
    
    $
    1,653Income (loss) per common share:Basic and diluted:Income (loss) from continuing operations
    
    $
    (0.16
    )
    
    $
    (0.61
    )
    
    $
    0.43
    
    
    $
    0.06Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    0.03Net income (loss) per common share
    
    $
    (0.16
    )
    
    $
    (0.64
    )
    
    $
    0.40
    
    
    $
    0.09
 * - During the second quarter of 2002, the Company acquired the
leasehold interests for 47 of its hotels from Interstate. The acquisition cost
of $17,668 was expensed and a related income tax benefit of $6,714 was
recorded. 64




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##### 



17.     Subsequent Events: In February 2004, the Company sold its 118-room Hampton Inn in Wilmington,
NC for net cash proceeds of $3.4 million, resulting in a gain of approximately
$0.3 million. The Company also issued its fourth mezzanine loan, totaling $2.4
million, to the owner of the 200-room Sheraton hotel in Atlantic Beach, NC (see
Note 5). In February 2004, the Charlesbank Venture invested in a fourth 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 is a Ramada Inn that the partners expect to convert
to a Courtyard by Marriott in early 2005. The total cost of the project is
expected to be approximately $14 million (including approximately $5 million in
renovation costs), approximately $9 million of which is financed through debt.
New Castle owns a 13 percent interest in the project while the Charlesbank
Venture owns 87 percent, so that the Company has an indirect 13.05 percent
ownership interest in WNC Project Company LLC. In February 2004, the Company completed the issuance of 3,680,000 shares
of its 8.00% Series B Cumulative Preferred Stock. The net proceeds raised
totaled approximately $89 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 proceeds of approximately $12.9 million to pay down its then
outstanding balance under its $125 million line of credit, and plans to use the
resulting availability under the line to fund the Companys hotel lending
business, to acquire hotels or interests in hotels through joint ventures,
and/or for general corporate purposes. The costs capitalized as part of the issuance of the Series A Cumulative
Preferred Stock in September 1997 totaled approximately $1.7 million as of
February 2004 and will be recorded as a reduction in net income (loss)
available to common shareholders in the first quarter of 2004. 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
percent of the Evanston hotel and 42.35 percent of the Windsor hotel. The
amount paid for Regents ownership interest in the Evanston Hilton Garden Inn
totaled approximately $6.9 million, and was based on a value of $25.25 million
for the sale of the hotel, net of debt assumed of approximately $11.8 million,
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 $1.2 million, and was based on
a value of $12.25 million for the sale of the hotel, net of debt paid off of
approximately $9.3 million. As a result of the purchases, the Company owns 100
percent 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 will assume the lease of the Windsor hotel from
Windsor Lessee Company LLC. As of December 31, 2003, one wholly owned property, the Secaucus, NJ
Holiday Inn, continued to be operated under a long-term lease with Prime. In
March 2004, the Company negotiated the transfer of this lease to Barclay at no
cost. The Company also expects to receive payment from Prime of approximately
$300 as part of the negotiated settlement. The Secaucus, NJ Holiday Inn
produced a net loss to Prime of approximately $160 for the year ended December
31, 2003. 65




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##### 



WINSTON HOTELS, INC
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2003($ in thousands) Cost Capitalized SubsequentInitial Cost
    
    to Acquisition
    
    Gross Amounts Carried at Close of PeriodBuildings and
    
    
    
    
    
    Buildings and
    
    
    
    
    
    Buildings andDescription
    
    Encumbrances
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    TotalHampton Inn
Boone, NC
    
    
    (a
    )
    
    $
    264
    
    
    $
    2,750
    
    
    $
    131
    
    
    $
    758
    
    
    $
    395
    
    
    $
    3,508
    
    
    $
    3,903Hampton Inn
Brunswick, GA
    
    
    (a
    )
    
    
    716
    
    
    
    3,887
    
    
    
    12
    
    
    
    834
    
    
    
    728
    
    
    
    4,721
    
    
    
    5,449Hampton Inn
Cary, NC
    
    
    (a
    )
    
    
    613
    
    
    
    4,596
    
    
    
    13
    
    
    
    1,066
    
    
    
    626
    
    
    
    5,662
    
    
    
    6,288Hampton Inn
Charlotte, NC
    
    
    (b
    )
    
    
    833
    
    
    
    3,609
    
    
    
    38
    
    
    
    517
    
    
    
    871
    
    
    
    4,126
    
    
    
    4,997Hampton Inn
Durham, NC
    
    
    (a
    )
    
    
    634
    
    
    
    4,582
    
    
    
    20
    
    
    
    1,334
    
    
    
    654
    
    
    
    5,916
    
    
    
    6,570Hampton Inn & Suites
Gwinnett, GA
    
    
    (b
    )
    
    
    557
    
    
    
    6,959
    
    
    
    22
    
    
    
    160
    
    
    
    579
    
    
    
    7,119
    
    
    
    7,698Hampton Inn
Hilton Head, SC
    
    
    (a
    )
    
    
    310
    
    
    
    3,969
    
    
    
    10
    
    
    
    998
    
    
    
    320
    
    
    
    4,967
    
    
    
    5,287Hampton Inn
Jacksonville, NC
    
    
    (a
    )
    
    
    473
    
    
    
    4,140
    
    
    
    18
    
    
    
    542
    
    
    
    491
    
    
    
    4,682
    
    
    
    5,173Hampton Inn
Las Vegas, NV
    
    
    (a
    )
    
    
    856
    
    
    
    7,945
    
    
    
    20
    
    
    
    234
    
    
    
    876
    
    
    
    8,179
    
    
    
    9,055Hampton Inn
Perimeter , GA
    
    
    (b
    )
    
    
    914
    
    
    
    6,293
    
    
    
    3
    
    
    
    141
    
    
    
    917
    
    
    
    6,434
    
    
    
    7,351Hampton Inn
Ponte Vedra, FL
    
    
    (c
    )
    
    
    1,506
    
    
    
    5,218
    
    
    
    55
    
    
    
    413
    
    
    
    1,561
    
    
    
    5,631
    
    
    
    7,192Hampton Inn
Raleigh, NC
    
    
    (b
    )
    
    
    697
    
    
    
    5,955
    
    
    
    44
    
    
    
    1,561
    
    
    
    741
    
    
    
    7,516
    
    
    
    8,257Hampton Inn
Southlake, GA
    
    
    (a
    )
    
    
    680
    
    
    
    4,065
    
    
    
    24
    
    
    
    727
    
    
    
    704
    
    
    
    4,792
    
    
    
    5,496Hampton Inn
W. Springfield, MA
    
    
    (b
    )
    
    
    916
    
    
    
    5,253
    
    
    
    6
    
    
    
    841
    
    
    
    922
    
    
    
    6,094
    
    
    
    7,016Hampton Inn
White Plains, NY
    
    
    (b
    )
    
    
    1,382
    
    
    
    10,763
    
    
    
    52
    
    
    
    747
    
    
    
    1,434
    
    
    
    11,510
    
    
    
    12,944Hampton Inn
Wilmington, NC
    
    
    (a
    )
    
    
    460
    
    
    
    3,208
    
    
    
    36
    
    
    
    630
    
    
    
    496
    
    
    
    3,838
    
    
    
    4,334Comfort Inn
Charleston, SC
    
    
    (b
    )
    
    
    438
    
    
    
    5,853
    
    
    
    28
    
    
    
    2,493
    
    
    
    466
    
    
    
    8,346
    
    
    
    8,812Comfort Inn
Chester, VA
    
    
    (a
    )
    
    
    661
    
    
    
    6,447
    
    
    
    6
    
    
    
    499
    
    
    
    667
    
    
    
    6,946
    
    
    
    7,613
   [Continued from above table, first column(s) repeated] Life UponWhichAccumulated
    
    
    
    
    
    
    
    
    
    Depreciation inDepreciation
    
    Net Book Value
    
    
    
    
    
    Latest IncomeBuildings and
    
    Land, Buildings
    
    Date of
    
    Statement isDescription
    
    Improvements
    
    and Improvements
    
    Acquisition
    
    ComputedHampton Inn
Boone, NC
    
    $
    1,459
    
    
    $
    2,444
    
    
    
    6/2/94
    
    
    
    30Hampton Inn
Brunswick, GA
    
    
    1,719
    
    
    
    3,730
    
    
    
    6/2/94
    
    
    
    30Hampton Inn
Cary, NC
    
    
    2,112
    
    
    
    4,176
    
    
    
    6/2/94
    
    
    
    30Hampton Inn
Charlotte, NC
    
    
    1,412
    
    
    
    3,585
    
    
    
    6/2/94
    
    
    
    30Hampton Inn
Durham, NC
    
    
    2,050
    
    
    
    4,520
    
    
    
    6/2/94
    
    
    
    30Hampton Inn & Suites
Gwinnett, GA
    
    
    1,801
    
    
    
    5,897
    
    
    
    7/18/96
    
    
    
    30Hampton Inn
Hilton Head, SC
    
    
    1,745
    
    
    
    3,542
    
    
    
    11/29/94
    
    
    
    30Hampton Inn
Jacksonville, NC
    
    
    1,688
    
    
    
    3,485
    
    
    
    6/2/94
    
    
    
    30Hampton Inn
Las Vegas, NV
    
    
    1,579
    
    
    
    7,476
    
    
    
    5/20/98
    
    
    
    30Hampton Inn
Perimeter , GA
    
    
    1,584
    
    
    
    5,767
    
    
    
    7/19/96
    
    
    
    30Hampton Inn
Ponte Vedra, FL
    
    
    629
    
    
    
    6,563
    
    
    
    12/1/00
    
    
    
    30Hampton Inn
Raleigh, NC
    
    
    2,343
    
    
    
    5,914
    
    
    
    5/18/95
    
    
    
    30Hampton Inn
Southlake, GA
    
    
    1,800
    
    
    
    3,696
    
    
    
    6/2/94
    
    
    
    30Hampton Inn
W. Springfield, MA
    
    
    1,367
    
    
    
    5,649
    
    
    
    7/14/97
    
    
    
    30Hampton Inn
White Plains, NY
    
    
    2,421
    
    
    
    10,523
    
    
    
    10/29/97
    
    
    
    30Hampton Inn
Wilmington, NC
    
    
    1,437
    
    
    
    2,897
    
    
    
    6/2/94
    
    
    
    30Comfort Inn
Charleston, SC
    
    
    2,300
    
    
    
    6,512
    
    
    
    5/18/95
    
    
    
    30Comfort Inn
Chester, VA
    
    
    2,242
    
    
    
    5,371
    
    
    
    11/29/94
    
    
    
    30
 66




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##### 



Cost Capitalized SubsequentInitial Cost
    
    to Acquisition
    
    Gross Amounts Carried at Close of PeriodBuildings and
    
    
    
    
    
    Buildings and
    
    
    
    
    
    Buildings andDescription
    
    Encumbrances
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    TotalComfort Inn
Durham, NC
    
    
    (a
    )
    
    
    947
    
    
    
    6,208
    
    
    
    40
    
    
    
    664
    
    
    
    987
    
    
    
    6,872
    
    
    
    7,859Comfort Inn
Fayetteville, NC
    
    
    (a
    )
    
    
    1,223
    
    
    
    8,047
    
    
    
    17
    
    
    
    875
    
    
    
    1,240
    
    
    
    8,922
    
    
    
    10,162Comfort Inn
Wilmington, NC
    
    
    (a
    )
    
    
    532
    
    
    
    5,889
    
    
    
    31
    
    
    
    900
    
    
    
    563
    
    
    
    6,789
    
    
    
    7,352Comfort Suites
Orlando, FL
    
    
    (b
    )
    
    
    1,357
    
    
    
    10,180
    
    
    
    46
    
    
    
    1,110
    
    
    
    1,403
    
    
    
    11,290
    
    
    
    12,693Homewood Suites
Alpharetta, GA
    
    
    (a
    )
    
    
    985
    
    
    
    6,621
    
    
    
    40
    
    
    
    96
    
    
    
    1,025
    
    
    
    6,717
    
    
    
    7,742Homewood Suites
Cary, NC
    
    
    (b
    )
    
    
    1,010
    
    
    
    12,367
    
    
    
    62
    
    
    
    808
    
    
    
    1,072
    
    
    
    13,175
    
    
    
    14,247Homewood Suites
Clear Lake, TX
    
    
    (b
    )
    
    
    879
    
    
    
    5,978
    
    
    
    6
    
    
    
    343
    
    
    
    885
    
    
    
    6,321
    
    
    
    7,206Homewood Suites
Durham, NC
    
    
    (a
    )
    
    
    1,074
    
    
    
    6,136
    
    
    
    (113
    )
    
    
    754
    
    
    
    961
    
    
    
    6,890
    
    
    
    7,851Homewood Suites
Lake Mary, FL
    
    
    (a
    )
    
    
    871
    
    
    
    6,987
    
    
    
    26
    
    
    
    308
    
    
    
    897
    
    
    
    7,295
    
    
    
    8,192Homewood Suites
Phoenix, AZ
    
    
    (a
    )
    
    
    1,402
    
    
    
    9,763
    
    
    
    28
    
    
    
    81
    
    
    
    1,430
    
    
    
    9,844
    
    
    
    11,274Homewood Suites
Raleigh, NC
    
    
    (a
    )
    
    
    1,008
    
    
    
    10,076
    
    
    
    17
    
    
    
    484
    
    
    
    1,025
    
    
    
    10,560
    
    
    
    11,585Holiday Inn Express
Abingdon, VA
    
    
    (a
    )
    
    
    918
    
    
    
    2,263
    
    
    
    (480
    )
    
    
    555
    
    
    
    438
    
    
    
    2,818
    
    
    
    3,256Holiday Inn Express
Clearwater, FL
    
    
    (a
    )
    
    
    510
    
    
    
    5,854
    
    
    
    51
    
    
    
    1,003
    
    
    
    561
    
    
    
    6,857
    
    
    
    7,418Holiday Inn Select
Dallas, TX
    
    
    (a
    )
    
    
    1,060
    
    
    
    13,615
    
    
    
    153
    
    
    
    3,434
    
    
    
    1,213
    
    
    
    17,049
    
    
    
    18,262Holiday Inn
Secaucus, NJ
    
    
    (a
    )
    
    
    
    
    
    
    13,699
    
    
    
    
    
    
    
    1,301
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000Holiday Inn
Tinton Falls, NJ
    
    
    (a
    )
    
    
    1,261
    
    
    
    4,337
    
    
    
    7
    
    
    
    1,675
    
    
    
    1,268
    
    
    
    6,012
    
    
    
    7,280Courtyard by Marriott
Ann Arbor, MI
    
    
    (b
    )
    
    
    902
    
    
    
    9,850
    
    
    
    36
    
    
    
    1,127
    
    
    
    938
    
    
    
    10,977
    
    
    
    11,915Courtyard by Marriott
Houston, TX
    
    
    (a
    )
    
    
    1,211
    
    
    
    9,154
    
    
    
    99
    
    
    
    2,188
    
    
    
    1,310
    
    
    
    11,342
    
    
    
    12,652Courtyard by Marriott
Wilmington, NC
    
    
    (b
    )
    
    
    742
    
    
    
    5,907
    
    
    
    5
    
    
    
    144
    
    
    
    747
    
    
    
    6,051
    
    
    
    6,798Courtyard by Marriott
Winston-Salem, NC
    
    
    (a
    )
    
    
    915
    
    
    
    5,202
    
    
    
    11
    
    
    
    590
    
    
    
    926
    
    
    
    5,792
    
    
    
    6,718
   [Continued from above table, first column(s) repeated] Life UponWhichAccumulated
    
    
    
    
    
    
    
    
    
    Depreciation inDepreciation
    
    Net Book Value
    
    
    
    
    
    Latest IncomeBuildings and
    
    Land, Buildings
    
    Date of
    
    Statement isDescription
    
    Improvements
    
    and Improvements
    
    Acquisition
    
    ComputedComfort Inn
Durham, NC
    
    
    2,286
    
    
    
    5,573
    
    
    
    11/29/94
    
    
    
    30Comfort Inn
Fayetteville, NC
    
    
    2,886
    
    
    
    7,276
    
    
    
    11/29/94
    
    
    
    30Comfort Inn
Wilmington, NC
    
    
    2,472
    
    
    
    4,880
    
    
    
    6/2/94
    
    
    
    30Comfort Suites
Orlando, FL
    
    
    2,549
    
    
    
    10,144
    
    
    
    5/1/97
    
    
    
    30Homewood Suites
Alpharetta, GA
    
    
    1,479
    
    
    
    6,263
    
    
    
    5/22/98
    
    
    
    30Homewood Suites
Cary, NC
    
    
    3,418
    
    
    
    10,829
    
    
    
    7/9/96
    
    
    
    30Homewood Suites
Clear Lake, TX
    
    
    1,522
    
    
    
    5,684
    
    
    
    9/13/96
    
    
    
    30Homewood Suites
Durham, NC
    
    
    1,206
    
    
    
    6,645
    
    
    
    11/14/98
    
    
    
    30Homewood Suites
Lake Mary, FL
    
    
    1,371
    
    
    
    6,821
    
    
    
    11/4/98
    
    
    
    30Homewood Suites
Phoenix, AZ
    
    
    1,859
    
    
    
    9,415
    
    
    
    6/1/98
    
    
    
    30Homewood Suites
Raleigh, NC
    
    
    2,040
    
    
    
    9,545
    
    
    
    3/9/98
    
    
    
    30Holiday Inn Express
Abingdon, VA
    
    
    649
    
    
    
    2,607
    
    
    
    5/7/96
    
    
    
    30Holiday Inn Express
Clearwater, FL
    
    
    1,539
    
    
    
    5,879
    
    
    
    8/6/97
    
    
    
    30Holiday Inn Select
Dallas, TX
    
    
    4,565
    
    
    
    13,697
    
    
    
    5/7/96
    
    
    
    30Holiday Inn
Secaucus, NJ
    
    
    3,129
    
    
    
    11,871
    
    
    
    5/27/98
    
    
    
    30Holiday Inn
Tinton Falls, NJ
    
    
    1,295
    
    
    
    5,985
    
    
    
    4/21/98
    
    
    
    30Courtyard by Marriott
Ann Arbor, MI
    
    
    2,468
    
    
    
    9,447
    
    
    
    9/30/97
    
    
    
    30Courtyard by Marriott
Houston, TX
    
    
    2,646
    
    
    
    10,006
    
    
    
    7/14/97
    
    
    
    30Courtyard by Marriott
Wilmington, NC
    
    
    1,410
    
    
    
    5,388
    
    
    
    12/19/96
    
    
    
    30Courtyard by Marriott
Winston-Salem, NC
    
    
    862
    
    
    
    5,856
    
    
    
    10/3/98
    
    
    
    30
 67




---



##### 



Cost Capitalized SubsequentInitial Cost
    
    to Acquisition
    
    Gross Amounts Carried at Close of PeriodBuildings and
    
    
    
    
    
    Buildings and
    
    
    
    
    
    Buildings andDescription
    
    Encumbrances
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    TotalHilton Garden Inn
Albany, NY
    
    
    (a
    )
    
    
    1,168
    
    
    
    11,236
    
    
    
    18
    
    
    
    60
    
    
    
    1,186
    
    
    
    11,296
    
    
    
    12,482Hilton Garden Inn
Alpharetta, GA
    
    
    (a
    )
    
    
    1,425
    
    
    
    11,719
    
    
    
    1
    
    
    
    76
    
    
    
    1,426
    
    
    
    11,795
    
    
    
    13,221Hilton Garden Inn
Evanston, IL
    
    
    (d
    )
    
    
    2,225
    
    
    
    15,620
    
    
    
    
    
    
    
    (64
    )
    
    
    2,225
    
    
    
    15,556
    
    
    
    17,781Hilton Garden Inn
Raleigh, NC
    
    
    (a
    )
    
    
    1,901
    
    
    
    9,209
    
    
    
    13
    
    
    
    71
    
    
    
    1,914
    
    
    
    9,280
    
    
    
    11,194Hilton Garden Inn
Windsor, CT
    
    
    (e
    )
    
    
    2,031
    
    
    
    11,238
    
    
    
    
    
    
    
    799
    
    
    
    2,031
    
    
    
    12,037
    
    
    
    14,068Quality Suites
Charleston, SC
    
    
    (b
    )
    
    
    912
    
    
    
    11,224
    
    
    
    2
    
    
    
    1,141
    
    
    
    914
    
    
    
    12,365
    
    
    
    13,279Residence Inn
Phoenix, AZ
    
    
    (b
    )
    
    
    2,076
    
    
    
    13,311
    
    
    
    66
    
    
    
    450
    
    
    
    2,142
    
    
    
    13,761
    
    
    
    15,903Fairfield Inn
Ann Arbor, MI
    
    
    (a
    )
    
    
    542
    
    
    
    3,743
    
    
    
    71
    
    
    
    716
    
    
    
    613
    
    
    
    4,459
    
    
    
    5,072$
    43,997
    
    
    $
    340,925
    
    
    $
    791
    
    
    $
    36,184
    
    
    $
    44,788
    
    
    $
    377,109
    
    
    $
    421,897
   [Continued from above table, first column(s) repeated] Life UponWhichAccumulated
    
    
    
    
    
    
    
    
    
    Depreciation inDepreciation
    
    Net Book Value
    
    
    
    
    
    Latest IncomeBuildings and
    
    Land, Buildings
    
    Date of
    
    Statement isDescription
    
    Improvements
    
    and Improvements
    
    Acquisition
    
    ComputedHilton Garden Inn
Albany, NY
    
    
    2,128
    
    
    
    10,354
    
    
    
    5/8/98
    
    
    
    30Hilton Garden Inn
Alpharetta, GA
    
    
    2,290
    
    
    
    10,931
    
    
    
    3/17/98
    
    
    
    30Hilton Garden Inn
Evanston, IL
    
    
    992
    
    
    
    16,789
    
    
    
    7/1/01
    
    
    
    30Hilton Garden Inn
Raleigh, NC
    
    
    1,723
    
    
    
    9,471
    
    
    
    5/8/98
    
    
    
    30Hilton Garden Inn
Windsor, CT
    
    
    1,010
    
    
    
    13,058
    
    
    
    9/1/00
    
    
    
    30Quality Suites
Charleston, SC
    
    
    3,893
    
    
    
    9,386
    
    
    
    5/18/95
    
    
    
    30Residence Inn
Phoenix, AZ
    
    
    2,735
    
    
    
    13,168
    
    
    
    3/3/98
    
    
    
    30Fairfield Inn
Ann Arbor, MI
    
    
    977
    
    
    
    4,095
    
    
    
    9/30/97
    
    
    
    30$
    89,087
    
    
    $
    332,810
  (a)
    
    Property serves as collateral for the $125,000 line of credit which
closed effective December 19, 2001 (see Note 7).(b)
    
    Property serves as collateral for the $71,000 note through GE Capital
Corporation (see Note 7).(c)
    
    Property serves as collateral for the $5,100 note through GE Capital
Corporation (see Note 7).(d)
    
    Property serves as collateral for the $12,300 note through GE Capital
Corporation (see Note 7).(e)
    
    Property serves as collateral for the $9,385 note through Compass Bank
(see Note 7). WINSTON HOTELS, INC.
NOTES TO SCHEDULE III 2003
    
    2002(a
    )
    
    Reconciliation of Real Estate:Balance at beginning of period
    
    $
    384,859
    
    
    $
    400,138Acquisitions during period
    
    
    
    
    
    
    Dispositions during period
    
    
    
    
    
    
    17,931Consolidation of Joint Ventures
    
    
    39,041
    
    
    
    Reclassification to held for sale
    
    
    5,969
    
    
    
    Additions during period
    
    
    3,966
    
    
    
    2,652Balance at end of period
    
    $
    421,897
    
    
    $
    384,859(b
    )
    
    Reconciliation of Accumulated Depreciation:Balance at beginning of period
    
    
    75,212
    
    
    
    66,642Depreciation for period
    
    
    12,772
    
    
    
    13,240Dispositions during period
    
    
    
    
    
    
    4,670Consolidation of Joint Ventures
    
    
    2,631Reclassification to held for sale
    
    
    1,528
    
    
    
    Balance at end of period
    
    $
    89,087
    
    
    $
    75,212
  (c)
    
    The aggregate cost of land, buildings and improvements for
federal tax purposes is approximately $405,648.


68



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##### 



INDEX TO EXHIBITS Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation (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).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 9.25% Series A Cumulative Preferred Stock (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 September 15, 1997).4.3
    
    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).4.4
    
    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).
 69




---



##### 



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.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
    
    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).10.19
    
    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).
 70




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##### 



10.20
    
    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).10.21
    
    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).10.22
    
    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).10.23
    
    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).10.24
    
    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).10.25
    
    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).10.26
    
    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).10.27
    
    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).10.28
    
    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).10.29
    
    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).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Accountants (PricewaterhouseCoopers LLP).31.1
    
    Section 302 Certification of Chief Executive Officer.
 71




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##### 



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.99.1
    
    Risk Factors.
 72