##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
  þ
    
    Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
 For The Fiscal Year Ended December 31, 2005
 or
 o
    
    Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
 For The Transition Period From     To
 Commission file number 0-23732
 WINSTON HOTELS, INC.
  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
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Class
    
    Name of Exchange upon Which RegisteredCommon Stock, $0.01 par value per share
    
    New York Stock Exchange8.00% Series B Cumulative Preferred Stock, $0.01 par value per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 þ
 o þ o
 o þ
  Documents Incorporated By Reference




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##### 



TABLE OF CONTENTS
 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
 PART I.Item 1.
    
    BUSINESSItem 1A.
    
    RISK FACTORSItem 1B.
    
    UNRESOLVED STAFF COMMENTSItem 2.
    
    PROPERTIESItem 3.
    
    LEGAL PROCEEDINGSItem 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART II.Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 6.
    
    SELECTED FINANCIAL DATAItem 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A.
    
    CONTROLS AND PROCEDURESItem 9B.
    
    OTHER INFORMATIONPART III.Item 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTItem 11.
    
    EXECUTIVE COMPENSATIONItem 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IV.Item 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURES
 2




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##### 



SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
   
    
    lower than expected revenue per available room, occupancy, average daily rates, and gross
operating margins,
    
    impact on our hotels and the markets in which we operate from terrorist attacks and natural disasters,
    
    changes in general economic conditions, which affect the travel industry,
    
    the degree and nature of our direct competition,
    
    properties held for sale will not sell,
    
    franchise licenses will not be renewed,
    
    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,
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, and
    
    the failure to attract joint venture opportunities.
  3




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##### 



PART I.   ($ in thousands, except per share amounts)
 Item 1. BUSINESS.
 GENERAL
     SIGNIFICANT DEVELOPMENTS
 Hotel Ownership
 Dispositions
 
    
    In September 2005, the Company recorded a $12.4 million (net of allocation to minority
interest) non-cash impairment charge relating to two hotels. On November 4, 2005, the
Companys Board of Directors adopted a formal plan to sell the two hotels. The Company is
currently marketing both hotels for sale.
    
    In May 2005, the Company sold the Hilton Head, South Carolina Hampton Inn for $4.4
million in cash, net of closing costs.
    
    In January 2005, the Company sold the Chester, Virginia Comfort Inn for $5.2 million,
net of closing costs and the Greenville, South Carolina Comfort Inn for $1.9 million, net
of closing costs.
    
    The Company sold the Wilmington, North Carolina Hampton Inn in February 2004 and sold
the Las Vegas, Nevada Hampton Inn in June 2004 for an aggregate gain of $16.
  4




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##### 



Acquisitions, Development Projects and Joint Ventures
 
    
    In December 2005, the Company closed on the purchase of land in the Mayfaire Town Center
development in Wilmington, N.C. for $1.4 million and is building a 119-room Hilton Garden
Inn.
    
    In October 2005, the Company acquired six hotels with an aggregate of 698 rooms for
$46.9 million.
    
    In August 2005, the Company invested $3.0 million in a joint venture with Stanley
Holdings, LLC to acquire a 60% ownership interest in the 138-room Stanley Hotel in Estes
Park, Colorado.
    
    In September 2005, the Company acquired the 116-room Hampton Inn & Suites Baltimore
Inner Harbor in Maryland for $16.3 million.
    
    In July 2005, the Company formed a joint venture with DeHoff Development Company
(DeHoff), a diversified real estate owner and developer. The joint venture is building a
121-room Hilton Garden Inn at Gateway Corporate Park, adjacent to the Akron-Canton Airport
in Green, Ohio, for approximately $12.0 million.
    
    In July 2005, the Company closed on the purchase of 4.5 acres of land in the Forrestal
Center of Princeton University for $2.9 million and is building a 142-room Homewood Suites
hotel for an estimated all-in cost of approximately $19.6 million.
    
    In December 2004, the Company formed a new joint venture, Winston Kansas City, LP with
U.S. Bancorp Community Development Corporation to acquire a historic residential building
in Kansas City, MO and to convert the building to a 123-room Courtyard by Marriott hotel.
The hotel is scheduled to open during the second quarter of 2006.
    
    In December 2004, the Company acquired the 135-room Courtyard by Marriott in Roanoke,
Virginia.
    
    In March 2004, the Company purchased the remaining equity interests in the Hilton Garden
Inns in Evanston, Illinois and Windsor, Connecticut.
    
    During 2003, the Company entered into a joint venture, Chapel Hill Hotel Associates, LLC
(Chapel Hill Hotel Associates), with Chapel Hill Investments, LLC to develop and own
hotel properties. The Company currently owns a 48.78% interest in both Chapel Hill Hotel
Associates, which owns the Chapel Hill Courtyard by Marriott (opened September 2004), and
Chapel Hill Lessee Company, LLC (Chapel Hill Lessee), which leases the Chapel Hill
Courtyard by Marriott from Chapel Hill Hotel Associates.
  Hotel Financing
 
    
    In December 2005, the $2.2 million Hilton Garden Inn in Tampa, FL hotel loan was
prepaid in full.
    
    In October 2005, the Company purchased from an affiliate of Credit Suisse First Boston
a $14.0 million portfolio of four senior participation interests in certain mezzanine
loans.
    
    In August 2005, the Company closed on a $2.0 million participation in a $20.0 million
interest only senior bridge loan to finance a 95-unit condo hotel conversion project in
Miami, Florida.
    
    In May 2005, the Company announced a program with GE Commercial Franchise Finance
(GEFF) to provide a highly streamlined, cost-effective loan program for hoteliers. Under
the program, GEFF expects to provide loans collateralized by a first mortgage loan for up
to 85% of a projects cost and the Company would fund approximately 25% of the total loan
amount, which is the first loss piece, or the B note, of the mortgage loan. Borrowers
will work with GEFF and the Company as one seamless entity, which is expected to reduce
significantly the time and cost to finance hotel projects, compared to having to deal with
two separate lenders. In February 2006, the Company closed on its first loan under the
program.
    
    In March 2005, the Company purchased from Lehman Brothers $2.8 million of B-notes for
$2.3 million.
    
    In February 2005, the Company issued a $3.4 million mezzanine loan to finance the
development of a 165-room Hampton Inn & Suites in Albany, New York.
    
    In January 2005, the Company issued a $1.4 million loan to the buyer of the Comfort Inn
in Greenville, SC.
 5




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##### 




    
    In December 2004, the Company provided $6.0 million of a $38 million senior loan to
finance the acquisition and conversion of the 347-room Radisson Resort on the island of
Kauai to a condo hotel. In December 2005, this loan was prepaid in full.
    
    In December 2004, the Company issued a $6.0 million mezzanine loan to finance the
acquisition of, and capital improvements at, the 157-room La Posada de Santa Fe Resort in
Santa Fe, New Mexico.
    
    In October 2004, the Company issued a $5.5 million mezzanine loan to finance the
construction of a 188-room Residence Inn by Marriott Hotel in St. Louis, MO.
    
    In June 2004, the Company issued a $6.0 million B-note to finance the acquisition, major
refurbishment, and conversion of the 290-room Cornhusker Square Hotel in Lincoln, NE. In
March 2005, this loan was prepaid in full.
    
    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.
  SEGMENTS
 Hotel Ownership
 General.
 aloft aloft
 Property Leasing and Management.
   6




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##### 



Franchise Agreements.
    Year of Expiration
    
    Number of Hotels
    
    Year of Expiration
    
    Number of Hotels2007
    
    3
    
    2016
    
    22008
    
    4
    
    2017
    
    112009
    
    3
    
    2018
    
    52010
    
    2
    
    2019
    
    62011
    
    2
    
    2020
    
    12012
    
    2
    
    2022
    
    32013
    
    4
    
    2023
    
    12014
    
    1
    
    2024
    
    32015
    
    1
    
    2025
    
    1
  7




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##### 



Acquisitions of Additional Hotels.
  
    
    properties in locations with relatively high demand for rooms, a relatively low supply of
hotel properties and relatively high barriers to entry into the hotel business, such as a
scarcity of suitable sites or zoning restrictions;
    
    successful hotels available at favorable prices;
    
    newly developed hotels;
    
    hotels that could benefit from repositioning;
    
    hotels that could benefit from substantial rehabilitation; and
    
    hotels that could benefit from new management and additional hotel capital.
 Developing Hotels on Selected Sites. aloft aloft
 Disposition of Hotels.
 Seasonality.
 8




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##### 



Competition.
 Hotel Financing
  EMPLOYEES
  ENVIRONMENTAL MATTERS
  9
             AVAILABLE INFORMATION
  10




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##### 



Item 1A. RISK FACTORS.
  Risks Relating to Our Business
 Our ability to make distributions to our shareholders depends upon the ability of our hotel
managers to operate our hotels effectively.
 e.g.
   Additional terrorist attacks, such as the events of September 11, 2001 and the threat of additional
terrorist attacks could have an adverse effect on our results of operations.
  We may not have access to financing for acquiring or developing additional hotels, or for providing
hotel loans.
 11
         We have a significant level of debt that may limit our ability to take certain actions.
  
    
    impair our ability to obtain additional financing, if needed, for working capital, capital expenditures, acquisitions
or other purposes in the future;
    
    require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing
our funds available for operations, future business opportunities and other purposes;
    
    place us at a disadvantage compared to competitors that have less debt;
    
    restrict our ability to adjust rapidly to changing market conditions; and
    
    increase our vulnerability to adverse economic, industry and business conditions.
  Our indebtedness imposes limitations on our operations and subjects us to risk of default.
   12




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##### 



Rising interest rates could adversely affect our cash flow.
  We may not be able to complete development of new hotels on time or within budget.
  
    
    construction delays or cost overruns that may increase project costs;
    
    competition for suitable development sites and/or the emergence of unanticipated competition from other hotels;
    
    uncertainties as to market demand or deterioration in market demand after commencement of development;
    
    receipt of zoning, land use, building, construction, occupancy and other required governmental permits and
authorizations; and
    
    substantial development costs in connection with projects that are not completed.
  Hotels that we develop have no operating history and may not achieve levels of occupancy that
result in levels of operating income that provide us with an attractive return on our investment.
  Property ownership through joint ventures could limit our control of those investments.
  Our business could be disrupted if we need to find a new manager upon termination of an existing
management agreement.
 13
      If we decide to sell hotels, we may not be able to sell those hotels on favorable terms.
  If third parties for whom we develop hotels default on their loans, we may be required to complete
the development of those hotels at our own expense.
  We may face conflicts of interest relating to sales of hotels acquired from affiliates.
  We depend on key personnel, the loss of which could have a material adverse effect on our Company.
  Risks Related to Hotel Lending Program
 The hotel mortgage loans that we originate and purchase are subject to the risks of delinquency and
foreclosure, which could result in losses to us.
  
    
    increased costs imposed on hotel owners by franchisors such as hot and cold breakfasts, new linens and other required
improvements;
 14
      
    
    property management decisions;
    
    property location and condition;
    
    competition from comparable types of properties;
    
    changes in specific industry segments;
    
    declines in regional or local real estate values, or occupancy rates; and
    
    increases in interest rates, real estate tax rates and other operating expenses.
  The B-Notes in which we invest may be subject to additional risks relating to the privately
negotiated structure and terms of the transaction, which may result in losses to us.
  Investments in mezzanine loans involve greater risks of loss than senior loans collateralized by
income producing properties.
  Our hotel loan program subjects us to the unique risks of a mezzanine lender.
 15
        Risks Relating to the Real Estate Industry
 Our performance and the value of our stock are subject to risks associated with the hotel industry.
 Our hotels are subject to operating risks of the hotel industry that could reduce our revenue,
gross operating margins, and ability to make distributions to shareholders.
  
    
    competition for guests from other hotels, many of which have substantial marketing and financial resources;
    
    faster growth in room supply than in room demand growth in our markets;
    
    increases in operating costs due to inflation and other factors which may not be offset in the future by increased room
rates;
    
    seasonality, with higher hotel revenues occurring in the second and third calendar quarters;
    
    increases in energy costs, airline fares and other expenses related to travel, which may deter traveling;
    
    terrorist incidents, which may also deter traveling;
    
    adverse effects of general and local economic conditions;
    
    a general inability to control costs, thereby resulting in lower gross operating profit; and
    
    risks generally associated with the ownership of hotels and real estate, as discussed below.
 Our entire business is concentrated in particular segments of a single industry.
  Large-scale military deployments may adversely impact the occupancy rates and revenues from our two
hotels located in communities that have a large military population.
   16
      We may incur higher costs as a result of the proximity of our hotels to the coast.
  Our hotel concentration in the Southeastern United States subjects us to increased risks than if
our portfolio were more geographically diversified.
  Conditions of franchise agreements could adversely affect us.
   17
      Year of Expiration
    
    Number of Hotels
    
    Year of Expiration
    
    Number of Hotels2007
    
    3
    
    2016
    
    22008
    
    4
    
    2017
    
    112009
    
    3
    
    2018
    
    52010
    
    2
    
    2019
    
    62011
    
    2
    
    2020
    
    12012
    
    2
    
    2022
    
    32013
    
    4
    
    2023
    
    12014
    
    1
    
    2024
    
    32015
    
    1
    
    2025
    
    1
  Operating costs and capital expenditures could adversely affect our cash flow.
  
    
    the possibility of environmental problems;
    
    construction cost overruns and delays;
    
    uncertainties as to market demand or deterioration in market demand after commencement of renovation;
    
    the emergence of unanticipated competition from other hotels; and
    
    displacement of room revenues due to rooms being out of order.
  We must compete with larger entities for acquisition and franchising opportunities.
  Our performance and value are subject to the condition of the real estate industry.
 We may not be able to sell hotels when appropriate.
  18
      We may not be able to defer taxes on gains from sales of hotels.
  Compliance with the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations and
other changes in accounting rules and regulations could adversely affect our results of operations.
    Liability for environmental matters could adversely affect our financial condition.
 19
         Black mold claims could adversely affect our financial condition.
  Liability for underground storage tanks could adversely affect our financial condition.
  20
      Liability for uninsured and underinsured losses could adversely affect our financial condition and
results of operations.
  The cost of compliance with the Americans with Disabilities Act and other changes in governmental
rules and regulations could adversely affect our cash flow.
  Increases in property taxes could adversely affect our cash flow.
  Risks Relating to an Investment in our Capital Stock
 The price of our securities may be affected by changes in market interest rates.
  The ability of our shareholders to effect a change in control is limited.
 Stock ownership limitations could inhibit changes in control.
  Our ability to issue preferred stock could inhibit changes in control.
  21
      Risks Relating to REIT Status
 We are subject to tax risks as a result of our REIT status.
    Item 1B. UNRESOLVED STAFF COMMENTS.
  Item 2. PROPERTIES.
  22
      2005
    
    
    2004Numberof
    
    
    Room
    
    Average
    
    Occupancy
    
    
    Room
    
    Average
    
    OccupancyHotel Name
    
    
    Rooms
    
    
    Revenue
    
    Daily Rate
    
    Percentage
    
    
    Revenue
    
    Daily Rate
    
    PercentageComfort Inns/SuitesComfort Inn Charleston, SC
    
    
    
    129
    
    
    
    $
    2,434
    
    
    $
    75.37
    
    
    
    68.6
    %
    
    
    $
    2,409
    
    
    $
    72.89
    
    
    
    70.1
    %Comfort Inn Durham, NC
    
    
    
    136
    
    
    
    
    2,165
    
    
    
    64.38
    
    
    
    67.6
    %
    
    
    
    2,123
    
    
    
    61.72
    
    
    
    68.1
    %Comfort Inn Fayetteville, NC
    
    
    
    123
    
    
    
    
    2,439
    
    
    
    64.20
    
    
    
    62.3
    %
    
    
    
    3,350
    
    
    
    61.31
    
    
    
    84.8
    %Comfort Inn Wilmington, NC
    
    
    
    146
    
    
    
    
    2,011
    
    
    
    63.21
    
    
    
    59.7
    %
    
    
    
    1,642
    
    
    
    60.41
    
    
    
    50.9
    %Comfort Suites Orlando, FL
    
    
    
    213
    
    
    
    
    2,935
    
    
    
    54.50
    
    
    
    68.9
    %
    
    
    
    2,823
    
    
    
    49.56
    
    
    
    72.7
    %Courtyard by MarriottsCourtyard by Marriott Ann Arbor, MI
    
    
    
    160
    
    
    
    
    4,238
    
    
    
    101.14
    
    
    
    71.7
    %
    
    
    
    4,091
    
    
    
    94.70
    
    
    
    73.8
    %Courtyard by Marriott Houston, TX
    
    
    
    197
    
    
    
    
    3,344
    
    
    
    83.75
    
    
    
    55.5
    %
    
    
    
    2,849
    
    
    
    84.26
    
    
    
    46.9
    %Courtyard by Marriott Houston, TX (Northwest) (4)
    
    
    
    128
    
    
    
    
    428
    
    
    
    77.25
    
    
    
    70.9
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Courtyard by Marriott Roanoke, VA (2)
    
    
    
    135
    
    
    
    
    3,756
    
    
    
    97.09
    
    
    
    78.5
    %
    
    
    
    64
    
    
    
    64.94
    
    
    
    48.7
    %Courtyard by Marriott Wilmington, NC
    
    
    
    128
    
    
    
    
    2,895
    
    
    
    86.07
    
    
    
    72.0
    %
    
    
    
    2,566
    
    
    
    76.85
    
    
    
    71.3
    %Courtyard by Marriott Winston Salem, NC
    
    
    
    122
    
    
    
    
    2,592
    
    
    
    77.54
    
    
    
    75.1
    %
    
    
    
    2,525
    
    
    
    76.44
    
    
    
    74.0
    %Fairfield InnFairfield Inn Ann Arbor, MI
    
    
    
    110
    
    
    
    
    1,976
    
    
    
    76.01
    
    
    
    64.7
    %
    
    
    
    1,803
    
    
    
    69.40
    
    
    
    64.5
    %Hampton Inn/SuitesHampton Inn & Suites Gwinnett, GA
    
    
    
    136
    
    
    
    
    2,987
    
    
    
    85.13
    
    
    
    70.7
    %
    
    
    
    2,587
    
    
    
    75.59
    
    
    
    68.8
    %Hampton Inn & Suites Baltimore, MD (3)
    
    
    
    116
    
    
    
    
    1,427
    
    
    
    148.16
    
    
    
    68.1
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Hampton Inn Boone, NC
    
    
    
    95
    
    
    
    
    1,778
    
    
    
    83.69
    
    
    
    61.3
    %
    
    
    
    1,787
    
    
    
    81.01
    
    
    
    63.5
    %Hampton Inn Brunswick, NC
    
    
    
    129
    
    
    
    
    2,656
    
    
    
    76.83
    
    
    
    73.7
    %
    
    
    
    2,626
    
    
    
    79.94
    
    
    
    69.6
    %Hampton Inn Cary, NC
    
    
    
    129
    
    
    
    
    2,064
    
    
    
    73.26
    
    
    
    59.8
    %
    
    
    
    1,712
    
    
    
    62.79
    
    
    
    57.7
    %Hampton Inn Charlotte, NC
    
    
    
    126
    
    
    
    
    2,294
    
    
    
    76.59
    
    
    
    65.1
    %
    
    
    
    1,727
    
    
    
    71.58
    
    
    
    52.7
    %Hampton Inn Durham, NC
    
    
    
    136
    
    
    
    
    2,729
    
    
    
    76.49
    
    
    
    71.9
    %
    
    
    
    2,471
    
    
    
    69.21
    
    
    
    71.7
    %Hampton Inn Jacksonville, NC
    
    
    
    122
    
    
    
    
    2,537
    
    
    
    69.54
    
    
    
    81.9
    %
    
    
    
    2,080
    
    
    
    64.18
    
    
    
    72.6
    %Hampton Inn Perimeter, GA
    
    
    
    131
    
    
    
    
    2,694
    
    
    
    85.35
    
    
    
    66.0
    %
    
    
    
    2,242
    
    
    
    74.46
    
    
    
    62.8
    %Hampton Inn Raleigh, NC
    
    
    
    141
    
    
    
    
    2,618
    
    
    
    79.35
    
    
    
    64.1
    %
    
    
    
    2,504
    
    
    
    66.19
    
    
    
    73.3
    %Hampton Inn Southlake, GA
    
    
    
    126
    
    
    
    
    2,485
    
    
    
    77.03
    
    
    
    70.2
    %
    
    
    
    2,183
    
    
    
    69.20
    
    
    
    68.4
    %Hampton Inn Springfield, MA
    
    
    
    126
    
    
    
    
    3,098
    
    
    
    98.28
    
    
    
    68.5
    %
    
    
    
    2,994
    
    
    
    93.81
    
    
    
    69.2
    %Hampton Inn White Plains, NY
    
    
    
    156
    
    
    
    
    5,070
    
    
    
    117.44
    
    
    
    75.8
    %
    
    
    
    4,748
    
    
    
    110.29
    
    
    
    75.4
    %Hilton Garden InnHilton Garden Inn Albany, NY
    
    
    
    155
    
    
    
    
    4,534
    
    
    
    114.12
    
    
    
    70.2
    %
    
    
    
    4,681
    
    
    
    107.32
    
    
    
    76.9
    %Hilton Garden Inn Alpharetta, GA
    
    
    
    164
    
    
    
    
    3,282
    
    
    
    89.05
    
    
    
    61.6
    %
    
    
    
    3,068
    
    
    
    83.46
    
    
    
    61.2
    %Hilton Garden Inn Evanston, IL (1)
    
    
    
    178
    
    
    
    
    5,963
    
    
    
    126.55
    
    
    
    72.5
    %
    
    
    
    6,248
    
    
    
    120.24
    
    
    
    79.8
    %Hilton Garden Inn Raleigh, NC
    
    
    
    155
    
    
    
    
    4,447
    
    
    
    113.80
    
    
    
    69.1
    %
    
    
    
    4,440
    
    
    
    104.35
    
    
    
    75.0
    %Hilton Garden Inn Windsor, CT (1)
    
    
    
    157
    
    
    
    
    3,811
    
    
    
    98.61
    
    
    
    67.4
    %
    
    
    
    3,735
    
    
    
    97.40
    
    
    
    66.7
    %Holiday Inn/Express/SelectHoliday Inn at Tinton Falls, NJ
    
    
    
    174
    
    
    
    
    4,375
    
    
    
    108.35
    
    
    
    63.6
    %
    
    
    
    4,558
    
    
    
    102.04
    
    
    
    70.1
    %Holiday Inn Express Abingdon, VA
    
    
    
    81
    
    
    
    
    1,499
    
    
    
    74.36
    
    
    
    68.2
    %
    
    
    
    1,361
    
    
    
    70.47
    
    
    
    65.2
    %Holiday Inn Express Clearwater, FL
    
    
    
    126
    
    
    
    
    2,358
    
    
    
    76.44
    
    
    
    66.7
    %
    
    
    
    2,079
    
    
    
    63.73
    
    
    
    70.2
    %Holiday Inn Secaucus, NJ
    
    
    
    161
    
    
    
    
    5,374
    
    
    
    115.95
    
    
    
    78.9
    %
    
    
    
    3,962
    
    
    
    106.92
    
    
    
    78.0
    %Holiday Inn Select Garland, TX
    
    
    
    242
    
    
    
    
    2,859
    
    
    
    59.18
    
    
    
    54.3
    %
    
    
    
    2,619
    
    
    
    58.60
    
    
    
    50.5
    %Homewood SuitesHomewood Suites Alpharetta, GA
    
    
    
    112
    
    
    
    
    2,479
    
    
    
    89.57
    
    
    
    67.7
    %
    
    
    
    2,393
    
    
    
    87.06
    
    
    
    67.1
    %Homewood Suites Cary, NC
    
    
    
    150
    
    
    
    
    3,493
    
    
    
    90.66
    
    
    
    70.4
    %
    
    
    
    3,409
    
    
    
    85.72
    
    
    
    72.4
    %Homewood Suites Durham, NC
    
    
    
    96
    
    
    
    
    2,529
    
    
    
    99.18
    
    
    
    72.8
    %
    
    
    
    2,462
    
    
    
    88.14
    
    
    
    79.5
    %Homewood Suites Houston, TX
    
    
    
    92
    
    
    
    
    2,729
    
    
    
    101.62
    
    
    
    80.0
    %
    
    
    
    2,509
    
    
    
    100.78
    
    
    
    73.9
    %Homewood Suites Lake Mary, FL
    
    
    
    112
    
    
    
    
    3,249
    
    
    
    96.63
    
    
    
    82.3
    %
    
    
    
    3,003
    
    
    
    88.32
    
    
    
    83.0
    %Homewood Suites Phoenix, AZ
    
    
    
    126
    
    
    
    
    2,539
    
    
    
    83.93
    
    
    
    65.8
    %
    
    
    
    2,437
    
    
    
    78.38
    
    
    
    67.4
    %Homewood Suites Raleigh, NC
    
    
    
    137
    
    
    
    
    3,435
    
    
    
    94.88
    
    
    
    72.4
    %
    
    
    
    3,328
    
    
    
    90.36
    
    
    
    73.5
    %Quality SuitesQuality Suites Charleston, SC
    
    
    
    168
    
    
    
    
    3,614
    
    
    
    80.66
    
    
    
    73.1
    %
    
    
    
    4,075
    
    
    
    79.00
    
    
    
    83.9
    %Residence InnResidence Inn Phoenix, AZ
    
    
    
    168
    
    
    
    
    3,385
    
    
    
    88.20
    
    
    
    62.6
    %
    
    
    
    3,026
    
    
    
    79.67
    
    
    
    61.8
    %Towneplace SuitesTowneplace Suties Austin, TX (4)
    
    
    
    127
    
    
    
    
    351
    
    
    
    69.62
    
    
    
    64.0
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Towneplace Suties Birmingham, AL (4)
    
    
    
    127
    
    
    
    
    443
    
    
    
    77.56
    
    
    
    72.5
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Towneplace Suties Bryan, TX (4)
    
    
    
    94
    
    
    
    
    270
    
    
    
    79.57
    
    
    
    58.2
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Towneplace Suties Houston, TX (Northwest) (4)
    
    
    
    128
    
    
    
    
    389
    
    
    
    73.88
    
    
    
    66.3
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Towneplace Suties Houston, TX (Clearlake) (4)
    
    
    
    94
    
    
    
    
    328
    
    
    
    75.97
    
    
    
    74.0
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Total for 49 Hotels
    
    
    
    6,720
    
    
    
    $
    133,385
    
    
    $
    87.52
    
    
    
    68.3
    %
    
    
    $
    119,299
    
    
    $
    81.55
    
    
    
    68.9
    %
 
 (1)
    
    Purchased the remaining equity interests in these hotels in March 2004, thus they are now wholly owned.(2)
    
    Purchased in December 2004.(3)
    
    Purchased in August 2005.(4)
    
    Purchased in October 2005. 23
      2005
    
    
    2004Numberof
    
    
    Room
    
    Average
    
    Occupancy
    
    
    Room
    
    Average
    
    OccupancyHotel Name (Percentage owned by Company)
    
    
    Rooms
    
    
    Revenue
    
    Daily Rate
    
    Percentage
    
    
    Revenue
    
    Daily Rate
    
    PercentageConsolidatedCourtyard by Marriott Chapel Hill, NC (48.78%) (3)
    
    
    
    147
    
    
    
    $
    4,117
    
    
    $
    108.73
    
    
    
    70.6
    %
    
    
    $
    742
    
    
    $
    98.62
    
    
    
    50.7
    %Stanley Hotel Estes Park, CO (60%) (4)
    
    
    
    138
    
    
    
    
    1,829
    
    
    
    159.94
    
    
    
    55.6
    %
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Hampton Inn Ponte Vedra, FL (49%)
    
    
    
    118
    
    
    
    
    2,936
    
    
    
    96.98
    
    
    
    70.3
    %
    
    
    
    2,875
    
    
    
    80.41
    
    
    
    82.8
    %Total Consoldiated Joint Ventures
    
    
    
    403
    
    
    
    $
    8,882
    
    
    $
    111.62
    
    
    
    67.8
    %
    
    
    $
    3,617
    
    
    $
    83.57
    
    
    
    74.6
    %Unconsolidated (13.05%)Courtyard by Marriott Shelton, CT (1)
    
    
    
    158
    
    
    
    $
    3,313
    
    
    $
    105.36
    
    
    
    53.5
    %
    
    
    $
    1,791
    
    
    $
    81.06
    
    
    
    45.0
    %Fairfield Inn & Suites West Des Moines, IA
    
    
    
    102
    
    
    
    
    2,059
    
    
    
    77.03
    
    
    
    71.8
    %
    
    
    
    1,961
    
    
    
    71.53
    
    
    
    73.4
    %Springhill Suites by Marriott Houston, TX
    
    
    
    190
    
    
    
    
    4,161
    
    
    
    79.20
    
    
    
    75.6
    %
    
    
    
    2,160
    
    
    
    71.32
    
    
    
    43.3
    %Springhill Suites by Marriott West Des Moines, IA (2)
    
    
    
    95
    
    
    
    
    1,605
    
    
    
    86.29
    
    
    
    52.5
    %
    
    
    
    443
    
    
    
    65.94
    
    
    
    57.9
    %Total Unconsolidated Joint Ventures
    
    
    
    545
    
    
    
    $
    11,138
    
    
    $
    86.13
    
    
    
    64.4
    %
    
    
    $
    6,355
    
    
    $
    73.45
    
    
    
    51.5
    %
 
 (1)
    
    Acquired February 2004 as a Ramada hotel. Began operations as a Courtyard by Marriott hotel beginning February 2005.(2)
    
    Acquired September 2004 as a Quality Suites hotel. Began operations as a Springhill Suites by Marriott hotel beginning April 2005.(3)
    
    Opened September 2004.(4)
    
    Acquired August 2005.  Item 3. LEGAL PROCEEDINGS.
  Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  24
      Our Executive Officers
  Charles M. Winston, 76
 Robert W. Winston, III, 44
 Joseph V. Green, 55
 Kenneth R. Crockett, 49
 Brent V. West, 38
 25
      PART II.
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 Market Price of and Dividends on the Registrants Common Equity
  Cash Distribution DeclaredPrice Range
    
    Per Common ShareHigh
    
    Low2005First Quarter
    
    $
    11.91
    
    
    $
    10.95
    
    
    $
    0.15Second Quarter
    
    
    11.78
    
    
    
    10.20
    
    
    
    0.15Third Quarter
    
    
    11.84
    
    
    
    9.82
    
    
    
    0.15Fourth Quarter
    
    
    10.38
    
    
    
    9.47
    
    
    
    0.152004First Quarter
    
    $
    11.24
    
    
    $
    9.92
    
    
    $
    0.15Second Quarter
    
    
    10.83
    
    
    
    8.24
    
    
    
    0.15Third Quarter
    
    
    11.24
    
    
    
    10.02
    
    
    
    0.15Fourth Quarter
    
    
    11.81
    
    
    
    10.58
    
    
    
    0.15
  Securities Authorized for Issuance Under Equity Compensation Plans
   Number of securities to be
    
    Weighted average
    
    Number of securities remainingissued upon exercise of
    
    exercise price of
    
    available for future issuanceoutstanding options,
    
    outstanding options,
    
    under equity compensationPlan Category
    
    warrants and rights
    
    warrants and rights
    
    plansEquity compensation
plans approved by
security holders
    
    
    100,000
    
    
    $
    11.18
    
    
    
    1,668,543
  26
      Item 6. SELECTED FINANCIAL DATA.
  (in thousands, except per share amounts)Years Ended December 31,
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Operating Data: (a) (b)Total revenue
    
    $
    151,030
    
    
    $
    129,462
    
    
    $
    114,004
    
    
    $
    81,578
    
    
    $
    48,129Income from continuing operations
    
    
    18,341
    
    
    
    17,104
    
    
    
    10,317
    
    
    
    1,193
    
    
    
    8,495Income (loss) from continuing operations
available to common shareholders
    
    
    10,981
    
    
    
    8,069
    
    
    
    3,379
    
    
    
    (5,745
    )
    
    
    1,557Income (loss) from continuing operations per common
share
    
    
    0.42
    
    
    
    0.31
    
    
    
    0.16
    
    
    
    (0.30
    )
    
    
    0.09Net income (c)
    
    
    5,253
    
    
    
    16,883
    
    
    
    7,705
    
    
    
    902
    
    
    
    10,485Net income (loss) available to common shareholders (c)
    
    
    (2,107
    )
    
    
    7,848
    
    
    
    767
    
    
    
    (6,036
    )
    
    
    3,547Net income (loss) per common share -
basic and fully diluted (c)
    
    $
    (0.08
    )
    
    $
    0.30
    
    
    $
    0.03
    
    
    $
    (0.31
    )
    
    $
    0.21Weighted average number of common shares  basic
    
    
    26,302
    
    
    
    26,224
    
    
    
    21,770
    
    
    
    19,308
    
    
    
    16,926Weighted average number of common shares  diluted
    
    
    27,680
    
    
    
    27,555
    
    
    
    23,086
    
    
    
    19,308
    
    
    
    18,239Distributions per common share
    
    $
    0.60
    
    
    $
    0.60
    
    
    $
    0.60
    
    
    $
    0.60
    
    
    $
    0.99Balance Sheet Data (at end of period) (b):Total assets
    
    $
    527,693
    
    
    $
    424,380
    
    
    $
    387,261
    
    
    $
    357,442
    
    
    $
    376,904Total debt
    
    
    257,770
    
    
    
    154,925
    
    
    
    120,484
    
    
    
    138,706
    
    
    
    170,584Shareholders equity
    
    
    223,211
    
    
    
    240,241
    
    
    
    231,934
    
    
    
    194,515
    
    
    
    184,205
 
 (a)
    
    As a result of the acquisition of the leasehold interest for 47 hotels from Interstate Hotels
& Resorts, Inc effective July 1, 2002, the assumption of the leasehold interest for two hotels
from Intercontinental Group on July 1, 2003 and the acquisition of the leasehold interest for
one hotel from Prime Hospitality Corp. in March 2004, none of the Companys wholly owned
hotels remain under a long-term lease with a third party. In addition, the acquisition price
of $17.7 million to acquire the leases from Interstate was expensed in 2002. As such, there
is limited comparability between the 2005, 2004, 2003, 2002 and 2001 selected data.(b)
    
    The Company sold and acquired various hotels during the past five years (See Notes 5 and 6 to
the Consolidated Financial Statements for details on the activities during the last three
years). Also per the provisions of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, the Company consolidated the results of some of its joint ventures as of
December 31, 2003 (See Note 7 to Consolidated Financial Statements). As such, there is
limited comparability between the 2005, 2004, 2003, 2002 and 2001 selected data.(c)
    
    For 2005, 2004 and 2003 net income, net income (loss) available to common shareholders and
net income (loss) available to common shareholders per common share included non-cash
impairment charges of $12.4 million, $0.4 million and $2.4 million (net of allocation to
minority interest), respectively. As such, there is limited comparability between the 2005
amounts and those of, 2004, 2003, 2002 and 2001. Funds From Operations (FFO)
  27
      (in thousands)Years Ended December 31,
    
    2005 (a)
    
    2004
    
    2003
    
    2002
    
    2001Net income (b)
    
    $
    5,253
    
    
    $
    16,883
    
    
    $
    7,705
    
    
    $
    902
    
    
    $
    10,485(Gain) loss on sale of discontinued operations
    
    
    (383
    )
    
    
    (16
    )
    
    
    
    
    
    
    764
    
    
    
    682Gain on sale of unconsolidated joint venture hotel
    
    
    (551
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle
    
    
    382
    
    
    
    
    
    
    
    448
    
    
    
    
    
    
    
    Minority interest in Partnership allocation of income (loss)
    
    
    (96
    )
    
    
    398
    
    
    
    224
    
    
    
    (399
    )
    
    
    118Minority interest in Partnership allocation of gain
(loss) on sale of discontinued operations
    
    
    17
    
    
    
    1
    
    
    
    
    
    
    
    (46
    )
    
    
    Minority interest in Partnership allocation of gain
on sale of unconsolidated joint venture hotel
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest in Partnership allocation of income
(loss) from discontinued operations
    
    
    (33
    )
    
    
    9
    
    
    
    19
    
    
    
    33
    
    
    
    154Minority interest in Partnership allocation of
cumulative effect of change in accounting principle
    
    
    (18
    )
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    Depreciation
    
    
    16,962
    
    
    
    15,222
    
    
    
    15,078
    
    
    
    16,083
    
    
    
    16,474Depreciation from discontinued operations
    
    
    1,302
    
    
    
    2,189
    
    
    
    2,799
    
    
    
    3,702
    
    
    
    4,318Depreciation from joint ventures
    
    
    889
    
    
    
    501
    
    
    
    855
    
    
    
    801
    
    
    
    563FFO (b)
    
    
    23,750
    
    
    
    35,187
    
    
    
    27,108
    
    
    
    21,840
    
    
    
    32,794Loss on redemption of Series A preferred stock
    
    
    
    
    
    
    (1,720
    )
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividend
    
    
    (7,360
    )
    
    
    (7,315
    )
    
    
    (6,938
    )
    
    
    (6,938
    )
    
    
    (6,938
    )FFO Available to Common Shareholders (b)
    
    $
    16,390
    
    
    $
    26,152
    
    
    $
    20,170
    
    
    $
    14,902
    
    
    $
    25,856
 
 (a)
    
    For 2005, net income, FFO and FFO available to common shareholders include a non-cash
impairment charge of $12.4 million (net of allocation to minority interest). Excluding this
impairment charge, net income, FFO and FFO available to common shareholders would have been
$18.0 million, $36.1 million and $28.8 million, respectively.(b)
    
    See the notes to the selected financial data above for further items that limit comparability
between the 2005, 2004, 2003, 2002 and 2001 net income, FFO and FFO available to common
shareholders. 28
      Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.($in thousands, except per share amounts)
  OVERVIEW
  Hotel Ownership
      Hotel Financing
  29
      Strategy and Forecasted Operating Conditions
  Improving Results at Our Hotels.
 
    
    The Company seeks to direct our hotel managers to increase revenues and minimize
operating costs. Forecasts for the lodging industry continue to be favorable and the
Company believes the improving trends in the lodging industry create the opportunity for
improvements in the operating results of its hotels in 2006.
    
    The Company also implements selective capital improvements designed to increase
profitability consistent with franchisor standards and mandates. During the year ended
December 31, 2005, the Company spent $15.6 million for capital improvement at, its hotels.
The Company expects total capital expenditures for improvements during 2006 of
approximately $15 million, including approximately $7.3 million for franchisor mandated
items.
 Improving Our Hotel Portfolio.
 
    
    The Company is focused on acquiring hotels with a favorable current yield and an
opportunity for appreciation. During 2005, the Company acquired six Marriott-branded
hotels, the Hampton Inn & Suites in Baltimores Inner Harbor and a 60 percent ownership
interest in the Stanley Hotel in Estes Park, Colorado. The Company focuses on acquiring
additional hotels, or ownership interests in hotels, with strong national franchise
affiliations or hotel properties with the potential to obtain these franchise affiliations
in the full service, extended stay, mid-scale without food and beverage, upscale,
and upper upscale market segments.
    
    The Company also has the in-house capability to develop hotels. In 2005, the Company
began construction on four hotels at an expected total cost of an aggregate of
approximately $62 million. The Company expects two to open in 2006, and the other two to
open early 2007. The Company was also designated a preferred developer for the new
select-service aloftbrand by Starwood and is currently reviewing several potential
development sites on which it can build and own aloft-branded hotels. As the cost of
building a new hotel in many markets is now comparable to, or lower than, prices for
existing hotels the Company is continually looking to develop additional hotel properties.
 30
      
    
    The Company intends to sell older, underperforming hotels or hotels that the Company
believes no longer meet the Companys yield objectives and investing the funds in selected
hotel development, acquisitions of hotels and hotel loans. During 2005, the Company sold
three hotels for aggregate net proceeds of $11.5 million. The Company recorded a $12.4
million (net of allocation to minority interest) non-cash impairment charge in the third
quarter relating to two hotels. On November 4, 2005, the Companys Board of Directors
adopted a formal plan to sell the two hotels. Accordingly, both of these hotels are
classified as assets held for sale on the Companys Consolidated Balance Sheet and are
included in discontinued operations on the Companys Consolidated Statements of Operations.
Should the Company complete a sale of these hotels, there can be no assurance that the net
proceeds from sale will equal the Companys carrying value, in which case an additional
impairment charge may be necessary at that time.
 Expanding Our Hotel Loan Program.
 
    
    A key element of the Companys strategy is originating or acquiring hotel loans. The
Company has an active pipeline to originate or acquire additional hotel loans during 2006.
During 2005, the Company announced a program with GE Commercial Franchise Finance (GEFF)
to provide a highly streamlined, cost-effective loan program for hoteliers. In February of
2006 the Company closed on its first loan in conjunction with this program.
  RESULTS OF OPERATIONS
 2005 COMPARED TO 2004 AND 2004 COMPARED TO 2003
 HOTEL OWNERSHIP SEGMENT
 Revenues
  2005 vs. 2004
    
    2004 vs. 2003Years Ended December 31, (a)
    
    2005
    
    2004
    
    2003
    
    Percentage Change
    
    Percentage ChangeHotel room revenues
    
    $
    136,472
    
    
    $
    117,475
    
    
    $
    102,301
    
    
    
    16.2
    %
    
    
    14.8
    %RevPAR
    
    $
    62.59
    
    
    $
    58.32
    
    
    $
    54.32
    
    
    
    7.3
    %
    
    
    7.4
    %Occupancy
    
    
    68.9
    %
    
    
    69.7
    %
    
    
    67.7
    %
    
    
    -1.1
    %
    
    
    3.0
    %Average daily rate (ADR)
    
    $
    90.89
    
    
    $
    83.64
    
    
    $
    80.27
    
    
    
    8.7
    %
    
    
    4.2
    %
 
 (a)
    
    Includes all owned or partially owned consolidated hotels, excluding discontinued operation
as of December 31, 2005. Room
 31
      Food and Beverage
 Other Operating Departments
 Percentage Lease Revenue
 Expenses
 Rooms
 Food and Beverage
 Other Operating Departments
 32
      Property Operating
 Real Estate Taxes and Property and Casualty Insurance
 Franchise Costs
 Maintenance and Repair Costs
 Management Fees
 Depreciation and Amortization
  Percentage Lease Expense
 33
      Lease/Management Agreement Acquisition
 Interest Expense
  (Income) Loss Allocation to Minority Interest in Consolidated Joint Ventures (
 Income Tax Benefit (Expense)
 Equity in Income (Loss) of Unconsolidated Joint Ventures
 34
      HOTEL FINANCING SEGMENT
 General and Administrative
 Interest and Other Income
 Interest Expense
  GENERAL CORPORATE INCOME AND EXPENSES
  General and Administrative
 Interest and Other Income
 35
      Income (Loss) Allocation to Minority Interest in Partnership
 Discontinued Operations
  Cumulative Effect of a Change in Accounting Principle, Net 
 LIQUIDITY AND CAPITAL RESOURCES
 Overview
  Operating
   36
      Investing
 Overview
  Investment in hotel properties
    Proceeds from sale of hotel properties
   Issuance of notes receivable
 37
         Collection of notes receivable
  Acquisition of minority interest
  Investment in unconsolidated joint venture
  Financing
 Overview
  Net increase (decrease) in lines of credit
   38
      Proceeds from mortgage loans
   Payment of mortgage loans
  Proceeds from issuance of shares
   Distributions to shareholders
  Seasonality
  39
      OFF-BALANCE SHEET ARRANGEMENTS
  CONTRACTUAL OBLIGATIONS
  Less than 1
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    year
    
    1 - 3 years
    
    3 - 5 years
    
    yearsMortgage loans (See Note 10)
    
    $
    99,874
    
    
    $
    2,484
    
    
    $
    61,985
    
    
    $
    21,367
    
    
    $
    14,038Interest payments on mortgage loans (a)
    
    $
    23,588
    
    
    $
    6,761
    
    
    $
    12,976
    
    
    $
    3,496
    
    
    $
    355Corporate office lease (See Note 18)
    
    $
    1,770
    
    
    $
    384
    
    
    $
    798
    
    
    $
    588
    
    
    $
    
 
 (a)
    
    Interest payments on mortgage loans are based on the interest rate effective as of December
31, 2005 and the 30-day LIBOR forward curve as of February 28, 2006, respectively (See Note 10
to the Consolidated Financial Statements). OTHER MATTERS
 Critical Accounting Policies
  Allowances for Doubtful Accounts
 Accounts Receivable.
 Notes Receivable.
 40
      Accounting
for Long-Lived Assets
 General.
 Impairment on Planned Dispositions
 Asset Retirement Obligation
 Accounting for Joint Ventures
  41
      Franchise Agreements
   Year of Expiration
    
    Number of Hotels
    
    Year of Expiration
    
    Number of Hotels2007
    
    3
    
    2016
    
    22008
    
    4
    
    2017
    
    112009
    
    3
    
    2018
    
    52010
    
    2
    
    2019
    
    62011
    
    2
    
    2020
    
    12012
    
    2
    
    2022
    
    32013
    
    4
    
    2023
    
    12014
    
    1
    
    2024
    
    32015
    
    1
    
    2025
    
    1
  Recently Issued Accounting Standards
  42
      Item 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
($ in thousands)
   December 31, 2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Total
    
    Fair ValueVariable rate  GE line:
    
    $
    139,700
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    139,700
    
    
    $
    139,700Average interest rate
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )Variable rate  Marathon
    
    $
    8,596
    
    
    $
    1,200
    
    
    $
    8,400
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    18,196
    
    
    $
    18,196Average interest rate
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Mortgage loans:Fixed rate  GECC
    
    $
    1,715
    
    
    $
    1,846
    
    
    $
    58,396
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    61,957
    
    
    $
    62,753Average interest rate
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %Variable rate  Evanston, ILHilton Garden Inn
    
    $
    262
    
    
    $
    281
    
    
    $
    300
    
    
    $
    321
    
    
    $
    343
    
    
    $
    9,837
    
    
    $
    11,344
    
    
    $
    11,344Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )Consolidated joint venture
loans:Fixed rate  The Stanley
Hotel
    
    $
    202
    
    
    $
    232
    
    
    $
    245
    
    
    $
    263
    
    
    $
    11,973
    
    
    $
    
    
    
    $
    12,915
    
    
    $
    12,828Average interest rate
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %Fixed rate  Chapel Hill, NCCourtyard by Marriott
    
    $
    213
    
    
    $
    229
    
    
    $
    247
    
    
    $
    267
    
    
    $
    7,951
    
    
    $
    
    
    
    $
    8,907
    
    
    $
    9,099Average interest rate
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %Variable rate  Ponte
Vedra, FLHampton Inn
    
    $
    92
    
    
    $
    100
    
    
    $
    109
    
    
    $
    119
    
    
    $
    130
    
    
    $
    4,201
    
    
    $
    4,751
    
    
    $
    4,751Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
 
 (a)
    
    Rate is 30-day to 180-day LIBOR plus 1.75% to 2.50%, (30-day and 180-day LIBOR were
4.39% and 4.70%, respectively, at December 31, 2005).(b)
    
    Rate is 30-day LIBOR plus 2.25% or 4.5% or 5.5%, (30-day LIBOR was 4.39%, at December
31, 2005).(c)
    
    Rate is 30-day LIBOR plus 3.0% (30-day LIBOR was 4.39% at December 31, 2005). 43
      December 31, 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Total
    
    Fair ValueVariable rate  Wachovia line:
    
    $
    66,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    66,850
    
    
    $
    66,850Average interest rate
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )Mortgage loans:Fixed rate  GECC
    
    $
    1,593
    
    
    $
    1,715
    
    
    $
    1,846
    
    
    $
    58,396
    
    
    $
    
    
    
    $
    
    
    
    $
    63,550
    
    
    $
    64,419Average interest rate
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %Variable rate  Evanston, ILHilton Garden Inn
    
    $
    245
    
    
    $
    262
    
    
    $
    281
    
    
    $
    300
    
    
    $
    321
    
    
    $
    10,181
    
    
    $
    11,590
    
    
    $
    11,590Average interest rate
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Consolidated joint venture loans:Variable rate  Chapel Hill, NCCourtyard by Marriott
    
    $
    8,100
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,100
    
    
    $
    8,100Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )Variable rate  Ponte Vedra, FLHampton Inn
    
    $
    84
    
    
    $
    92
    
    
    $
    100
    
    
    $
    109
    
    
    $
    119
    
    
    $
    4,331
    
    
    $
    4,835
    
    
    $
    4,835Average interest rate
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
 
 (a)
    
    Rate is 30-day to 180-day LIBOR plus 1.75% to 2.50%, (30-day and 180-day LIBOR were
2.40% and 2.78%, respectively, at December 31, 2004).(b)
    
    Rate is 30-day LIBOR plus 3.0% (30-day LIBOR was 2.40% at December 31, 2004).(c)
    
    Rate is 30-day LIBOR plus 3.8% (30-day LIBOR was 2.40% at December 31, 2004). Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 Form 10-K
 Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
  Item 9A. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
 Internal Control  Integrated
Framework Internal Control Integrated Framework
 44
      Changes in Internal Control Over Financial Reporting
  Item 9B. OTHER INFORMATION.
  PART III.
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
   Item 11. EXECUTIVE COMPENSATION.
  Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  45
      PART IV.
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    Financial Statements and Schedules. The following financial statements and schedules are
included in this report:
 
 (b)
    
    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, and 10.23 through
10.37.
 Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (incorporated by reference to (i)
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q (File No. 001-13233) as
filed with the Securities and Exchange Commission on August 4, 1999, (ii) Exhibit
4.4(b) to the Companys Registration Statement on Form 8-A (File No. 001-13233) as
filed with the Securities and Exchange Commission on January 30, 2004 and (iii)
Exhibit 3.1(b) to the Companys Quarterly Report on Form 10-Q (File No. 001-13233) as
filed with the Securities and Exchange Commission on August 5, 2005).3.2
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K (File No. 001-13233) 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 (File No. 333-7662) as filed with
the Securities and Exchange Commission, effective May 25, 1994).4.2
    
    Specimen certificate for 8.00% Series B Cumulative Preferred Stock (incorporated by
reference to Exhibit 4.3 to the Companys Registration Statement on Form 8-A (File
No. 001-13233) as filed with the Securities and Exchange Commission on January 30,
2004).4.3
    
    Form of Articles of Amendment to the Restated Articles of Incorporation Establishing
and Fixing the Rights and Preferences of the 8.00% Series B Cumulative Preferred
Stock (incorporated by reference to Exhibit 4.4(b) to the Companys Registration
Statement on Form 8-A (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) as filed with
the Securities and Exchange Commission on September 15, 1997).
 46
      Exhibit
    
    Description10.3
    
    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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No.
001-13233) as filed with the Securities and Exchange Commission on November 12,
2003).10.9
    
    Amendment No. 8 dated as of February 24, 2004, to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership (incorporated by
reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K (File No.
001-13233) as filed with the Securities and Exchange Commission on March 12, 2004).10.10
    
    Limitation of Future Hotel Ownership and Development Agreement (incorporated by
reference to Exhibit 10.37 to the Companys Registration Statement on Form S-11 (File
No. 33-91230) 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 (File
No. 333-60079) 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
(File No. 001-13233) 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
(File No. 001-13233) as filed with the Securities and Exchange Commission on October
14, 2003).
 47
      Exhibit
    
    Description10.14
    
    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 (File No. 001-13233) 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 (File No. 001-13233) 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
    
    Master Repurchase Agreement Between Marathon Structured Finance Fund, LP and Winston
Finance Partners LLC dated as of October 5, 2004 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 001-13233) as
filed with the Securities and Exchange Commission on October 12, 2004).10.17
    
    Loan Agreement dated as of March 11, 2005 by and between Winston SPE II LLC and
General Electric Capital Corporation (incorporated by reference to Exhibit 10.20 to
the Companys Annual Report on Form 10-K (File No. 001-13233) as filed with the
Securities and Exchange Commission on March 16, 2005).10.18
    
    Second Amendment to Loan Agreement by and between Winston SPE II LLC and General
Electric Capital Corporation, dated as of October 31, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No.
001-13233) as filed with the Securities and Exchange Commission on November 7, 2005).10.19
    
    Form of Mortgage Security Agreement and Fixture Filing dated March 11, 2005 by
Winston SPE II LLC (incorporated by reference to Exhibit 10.21 to the Companys
Annual Report on Form 10-K (File No. 001-13233) as filed with the Securities and
Exchange Commission on March 16, 2005).10.20
    
    Form of Deed of Trust, Security Agreement and Fixture Filing dated March 11, 2005 by
Winston SPE II LLC (incorporated by reference to Exhibit 10.22 to the Companys
Annual Report on Form 10-K (File No. 001-13233) as filed with the Securities and
Exchange Commission on March 16, 2005).10.21
    
    Form Master Lease Agreement dated as of January 1, 2005 with Barclay Hospitality
Services, Inc., our TRS Lessee (incorporated by reference to Exhibit 10.30 to the
Companys Annual Report on Form 10-K (File No. 001-13233) as filed with the
Securities and Exchange Commission on March 16, 2005).10.22
    
    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 (File No.
001-13233) as filed with the Securities and Exchange Commission on August 13, 2003).10.23
    
    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 (Filed No. 001-13233) as filed with the Securities and
Exchange Commission on March 14, 2003).10.24
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement, dated January 2, 2003,
by and between Robert W. Winston, III and Winston Hotels, Inc. (incorporated by
reference to Exhibit 10.34 to the Companys Annual Report on Form 10-K (File No.
001-13233) as filed with the Securities and Exchange Commission on March 16, 2005).
 48
      Exhibit
    
    Description10.25
    
    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 (File No. 001-13233) as filed with the Securities and
Exchange Commission on March 14, 2003).10.26
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated January 2, 2003,
by and between Kenneth R. Crockett and Winston Hotels, Inc. (incorporated by
reference to Exhibit 10.36 to the Companys Annual Report on Form 10-K (File No.
001-13233) as filed with the Securities and Exchange Commission on March 16, 2005).10.27
    
    Amendment No. 2 dated February 14, 2006 to Employment Agreement dated January 2,
2003, by and between Kenneth R. Crockett and Winston Hotels, Inc. (incorporated by
reference to the description in Item 1.01 of the Companys Current Report on Form 8-K
(File No. 001-13233) as filed with the Securities and Exchange Commission on February
17, 2006).10.28
    
    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 (File No. 001-13233) as filed with the Securities and
Exchange Commission on March 14, 2003).10.29
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated January 2, 2003,
by and between Joseph V. Green and Winston Hotels, Inc. (incorporated by reference to
Exhibit 10.38 to the Companys Annual Report on Form 10-K (File No. 001-13233) as
filed with the Securities and Exchange Commission on March 16, 2005).10.30
    
    Employment Agreement dated March 30, 2004, by and between Brent V. West and Winston
Hotels, Inc. (incorporated by reference to Exhibit 10.39 to the Companys Annual
Report on Form 10-K (File No. 001-13233) as filed with the Securities and Exchange
Commission on March 16, 2005).10.31
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated March 30, 2004,
by and between Brent V. West and Winston Hotels, Inc. (incorporated by reference to
Exhibit 10.40 to the Companys Annual Report on Form 10-K (File No. 001-13233) as
filed with the Securities and Exchange Commission on March 16, 2005).10.32
    
    Employment Agreement dated March 30, 2004, by and between James P. Frey and Winston
Hotels, Inc. (incorporated by reference to Exhibit 10.41 to the Companys Annual
Report on Form 10-K (File No. 001-13233) as filed with the Securities and Exchange
Commission on March 16, 2005).10.33
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement dated March 30, 2004,
by and between James P. Frey and Winston Hotels, Inc. (incorporated by reference to
Exhibit 10.42 to the Companys Annual Report on Form 10-K (File No. 001-13233) as
filed with the Securities and Exchange Commission on March 16, 2005).10.34
    
    Summary of 2004 and 2005 executive officer compensation (incorporated by reference to
the description in Item 1.01 of the Companys Current Report on Form 8-K (File No.
001-13233) as filed with the Securities and Exchange Commission on February 7, 2005).10.35
    
    Summary of 2004 and 2005 Non-Employee Director compensation (incorporated by
reference to the description in Item 1.01 of the Companys Current Report on Form 8-K
(File No. 001-13233) as filed with the Securities and Exchange Commission on February
7, 2005).10.36
    
    Summary of 2005 and 2006 executive officer compensation (incorporated by reference to
the description in Item 1.01 of the Companys Current Report on Form 8-K (File No.
001-13233) as filed with the Securities and Exchange Commission on February 17,
2006).
 49
      Exhibit
    
    Description10.37
    
    Summary of 2005 and 2006 Non-Employee Director compensation (incorporated by
reference to the description in Item 1.01 of the Companys Current Report on Form 8-K
(File No. 001-13233) as filed with the Securities and Exchange Commission on February
17, 2006).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP).31.1
    
    Certification of Principal Executive Officer of Annual Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a).31.2
    
    Certification of Principal Financial Officer of Annual Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a).32.1
    
    Certification of Robert W. Winston, III, Chief Executive Officer of Winston Hotels,
Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Joseph V. Green, Chief Financial Officer of Winston Hotels, Inc.,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 50
      Report of Independent Registered Public Accounting Firm
 
  Consolidated financial statements and financial statement schedules
 
  Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
 51
      52
      WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2004  ($ in thousands)
 2005
    
    2004ASSETSLand
    
    $
    55,758
    
    
    $
    46,215Buildings and improvements
    
    
    422,081
    
    
    
    382,458Furniture and equipment
    
    
    63,048
    
    
    
    54,661Operating properties
    
    
    540,887
    
    
    
    483,334Less accumulated depreciation
    
    
    139,259
    
    
    
    134,261401,628
    
    
    
    349,073Properties under development
    
    
    25,139
    
    
    
    3,962Net investment in hotel properties
    
    
    426,767
    
    
    
    353,035Assets held for sale
    
    
    11,009
    
    
    
    7,037Corporate furniture fixtures and equipment, net
    
    
    371
    
    
    
    397Cash
    
    
    15,047
    
    
    
    4,115Accounts receivable, net
    
    
    3,820
    
    
    
    2,676Notes receivable
    
    
    38,050
    
    
    
    30,849Investment in joint ventures
    
    
    1,795
    
    
    
    2,512Deferred expenses, net
    
    
    6,807
    
    
    
    3,759Prepaid expenses and other assets
    
    
    12,556
    
    
    
    7,976Deferred tax asset
    
    
    11,471
    
    
    
    12,024Total assets
    
    $
    527,693
    
    
    $
    424,380LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYLines of credit
    
    $
    157,896
    
    
    $
    66,850Mortgage loans
    
    
    99,874
    
    
    
    88,075Accounts payable and accrued expenses
    
    
    27,915
    
    
    
    13,066Distributions payable
    
    
    6,011
    
    
    
    5,994Total liabilities
    
    
    291,696
    
    
    
    173,985Minority interest
    
    
    12,786
    
    
    
    10,154Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred stock, Series B, $.01 par value, 5,000,000 shares authorized,
3,680,000 shares issued and outstanding (liquidation preference of
$93,840)
    
    
    37
    
    
    
    37Common stock, $.01 par value, 50,000,000 shares authorized,
26,509,002 and 26,397,574 shares issued and outstanding
    
    
    265
    
    
    
    264Additional paid-in capital
    
    
    325,238
    
    
    
    323,947Unearned compensation
    
    
    (1,454
    )
    
    
    (1,145
    )Distributions in excess of earnings
    
    
    (100,875
    )
    
    
    (82,862
    )Total shareholders equity
    
    
    223,211
    
    
    
    240,241Total liabilities, minority interest and shareholders equity
    
    $
    527,693
    
    
    $
    424,380
  53
      WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2004 and 2003  (in thousands, except per share amounts)
 2005
    
    2004
    
    2003Operating revenue:Rooms
    
    $
    136,472
    
    
    $
    117,475
    
    
    $
    102,301Food and beverage
    
    
    10,239
    
    
    
    7,589
    
    
    
    5,617Other operating departments
    
    
    4,069
    
    
    
    3,516
    
    
    
    3,587Percentage lease revenue
    
    
    
    
    
    
    701
    
    
    
    2,141Joint venture fee income
    
    
    250
    
    
    
    181
    
    
    
    358Total operating revenue
    
    
    151,030
    
    
    
    129,462
    
    
    
    114,004Hotel operating expenses:Rooms
    
    
    29,886
    
    
    
    25,822
    
    
    
    23,097Food and beverage
    
    
    7,697
    
    
    
    5,715
    
    
    
    4,272Other operating departments
    
    
    3,070
    
    
    
    2,632
    
    
    
    2,547Undistributed operating expenses:Property operating expenses
    
    
    29,736
    
    
    
    25,705
    
    
    
    21,349Real estate taxes and property and casualty insurance
    
    
    7,038
    
    
    
    6,148
    
    
    
    5,576Franchise costs
    
    
    9,910
    
    
    
    8,492
    
    
    
    7,356Maintenance and repair
    
    
    7,838
    
    
    
    6,575
    
    
    
    5,798Management fees
    
    
    4,264
    
    
    
    2,914
    
    
    
    2,403General and administrative
    
    
    7,943
    
    
    
    6,858
    
    
    
    5,924Depreciation
    
    
    18,285
    
    
    
    15,957
    
    
    
    15,079Amortization
    
    
    1,519
    
    
    
    1,405
    
    
    
    953Percentage lease expense
    
    
    
    
    
    
    
    
    
    
    4,610Lease/management agreement acquisition
    
    
    
    
    
    
    
    
    
    
    1,300Total operating expenses
    
    
    127,186
    
    
    
    108,223
    
    
    
    100,264Operating income
    
    
    23,844
    
    
    
    21,239
    
    
    
    13,740Interest and other income
    
    
    7,045
    
    
    
    2,196
    
    
    
    1,202Interest expense
    
    
    (11,633
    )
    
    
    (7,157
    )
    
    
    (7,257
    )Income before allocation to minority interest in Partnership,
allocation to minority interest in consolidated joint ventures,
income taxes, and equity in income (loss)
of unconsolidated joint ventures
    
    
    19,256
    
    
    
    16,278
    
    
    
    7,685Income allocation to minority interest in Partnership
    
    
    (537
    )
    
    
    (398
    )
    
    
    (224
    )(Income) loss allocation to minority interest in consolidated joint ventures
    
    
    (410
    )
    
    
    (255
    )
    
    
    36Income tax benefit (expense)
    
    
    (593
    )
    
    
    1,540
    
    
    
    1,627Equity in income (loss) of unconsolidated joint ventures
    
    
    625
    
    
    
    (61
    )
    
    
    1,193Income from continuing operations
    
    
    18,341
    
    
    
    17,104
    
    
    
    10,317Discontinued operations:Income (loss) from discontinued operations
    
    
    (704
    )
    
    
    204
    
    
    
    246Net gain on sale of discontinued operations
    
    
    366
    
    
    
    15
    
    
    
    Loss on impairment of assets held for sale
    
    
    (12,386
    )
    
    
    (440
    )
    
    
    (2,430
    )Income before cumulative effect of changes in accounting
principles
    
    
    5,617
    
    
    
    16,883
    
    
    
    8,133Cumulative effect of changes in accounting principles  net
    
    
    (364
    )
    
    
    
    
    
    
    (428
    )Net income
    
    
    5,253
    
    
    
    16,883
    
    
    
    7,705Preferred stock distribution
    
    
    (7,360
    )
    
    
    (7,315
    )
    
    
    (6,938
    )Loss on redemption of Series A preferred stock
    
    
    
    
    
    
    (1,720
    )
    
    
    Net income (loss) available to common shareholders
    
    $
    (2,107
    )
    
    $
    7,848
    
    
    $
    767Basic weighted average number of common shares outstanding
    
    
    26,302
    
    
    
    26,224
    
    
    
    21,770Diluted weighted average number of common shares outstanding
    
    
    27,680
    
    
    
    27,555
    
    
    
    23,086Income (loss) per common share basic and diluted:Income from continuing operations
    
    $
    0.42
    
    
    $
    0.31
    
    
    $
    0.16Loss from discontinued operations
    
    
    (0.49
    )
    
    
    (0.01
    )
    
    
    (0.11
    )Loss from cumulative effect of changes in accounting principles  net
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Net income (loss) available to common shareholders
    
    $
    (0.08
    )
    
    $
    0.30
    
    
    $
    0.03Per share dividends to common shareholders
    
    $
    0.60
    
    
    $
    0.60
    
    
    $
    0.60
  54
      WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years ended December 31, 2005, 2004 and 2003  (in thousands, except per share amounts)
 AccumulatedAdditional
    
    
    
    
    
    Distributions
    
    Other
    
    TotalPreferred Stock
    
    Common Stock
    
    Paid-in
    
    Unearned
    
    In Excess of
    
    Comprehensive
    
    ShareholdersShares
    
    Dollars
    
    Shares
    
    Dollars
    
    Capital
    
    Compensation
    
    Earnings
    
    Loss
    
    EquityBalances 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 A share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,938
    )
    
    
    
    
    
    
    (6,938
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    826
    
    
    
    
    
    
    
    
    
    
    
    826Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,705
    
    
    
    Unrealized loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,672Balances at December 31, 2003
    
    
    3,000
    
    
    $
    30
    
    
    
    26,271
    
    
    $
    263
    
    
    $
    307,089
    
    
    $
    (527
    )
    
    $
    (74,888
    )
    
    $
    (33
    )
    
    $
    231,934Issuance of shares and other
    
    
    3,680
    
    
    
    37
    
    
    
    127
    
    
    
    1
    
    
    
    90,108
    
    
    
    (1,328
    )
    
    
    
    
    
    
    
    
    
    
    88,818Redemption of preferred A stock
    
    
    (3,000
    )
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    (73,250
    )
    
    
    
    
    
    
    (1,720
    )
    
    
    
    
    
    
    (75,000
    )Distributions ($0.60 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,822
    )
    
    
    
    
    
    
    (15,822
    )Distributions ($0.353 per preferred A share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,059
    )
    
    
    
    
    
    
    (1,059
    )Distributions ($1.70 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,256
    )
    
    
    
    
    
    
    (6,256
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    710Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,883
    
    
    
    Unrealized gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,916Balances at December 31, 2004
    
    
    3,680
    
    
    $
    37
    
    
    
    26,398
    
    
    $
    264
    
    
    $
    323,947
    
    
    $
    (1,145
    )
    
    $
    (82,862
    )
    
    $
    
    
    
    $
    240,241Issuance of shares and other
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    1
    
    
    
    1,291
    
    
    
    (1,256
    )
    
    
    
    
    
    
    
    
    
    
    36Distributions ($0.60 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,906
    )
    
    
    
    
    
    
    (15,906
    )Distributions ($2.00 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,360
    )
    
    
    
    
    
    
    (7,360
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    947Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,253
    
    
    
    
    
    
    
    5,253Balances at December 31, 2005
    
    
    3,680
    
    
    $
    37
    
    
    
    26,509
    
    
    $
    265
    
    
    $
    325,238
    
    
    $
    (1,454
    )
    
    $
    (100,875
    )
    
    $
    
    
    
    $
    223,211
  55
      WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003  ($ in thousands)
 2005
    
    2004
    
    2003Cash flows from operating activities:Net income
    
    $
    5,253
    
    
    $
    16,883
    
    
    $
    7,705Adjustments to reconcile net income to net cash
provided by operating activities:Income (loss) allocation to minority interest
    
    
    (86
    )
    
    
    386
    
    
    
    89Income (loss) allocation to consolidated joint ventures
    
    
    410
    
    
    
    255
    
    
    
    (36
    )Depreciation
    
    
    19,599
    
    
    
    18,147
    
    
    
    17,878Amortization
    
    
    1,541
    
    
    
    1,437
    
    
    
    985Deferred income tax expense (benefit)
    
    
    553
    
    
    
    (2,203
    )
    
    
    (2,496
    )Net gain on sale of hotel properties
    
    
    (383
    )
    
    
    (16
    )
    
    
    Loss on impairment of assets held for sale
    
    
    12,993
    
    
    
    462
    
    
    
    2,583Equity in (income) loss of unconsolidated joint ventures
    
    
    (625
    )
    
    
    61
    
    
    
    (1,193
    )Distributions from joint ventures
    
    
    971
    
    
    
    126
    
    
    
    1,863Unearned compensation amortization
    
    
    947
    
    
    
    710
    
    
    
    826Cumulative effect of changes in accounting principles,
net
    
    
    364
    
    
    
    
    
    
    
    428Changes in assets and liabilities:Lease revenue receivable
    
    
    
    
    
    
    179
    
    
    
    (179
    )Accounts receivable
    
    
    (1,144
    )
    
    
    (171
    )
    
    
    (495
    )Prepaid expenses and other assets
    
    
    (4,712
    )
    
    
    677
    
    
    
    (1,735
    )Accounts payable and accrued expenses
    
    
    4,930
    
    
    
    1,615
    
    
    
    (1,149
    )Net cash provided by operating activities
    
    
    40,611
    
    
    
    38,548
    
    
    
    25,074Cash flows from investing activities:Investment in hotel properties
    
    
    (102,156
    )
    
    
    (36,802
    )
    
    
    (9,062
    )Proceeds from sale of hotel properties
    
    
    10,086
    
    
    
    10,533
    
    
    
    Issuance of notes receivable
    
    
    (21,700
    )
    
    
    (25,833
    )
    
    
    Collection of notes receivable
    
    
    15,924
    
    
    
    
    
    
    
    Acquisition of minority interest
    
    
    
    
    
    
    (8,163
    )
    
    
    Investment in unconsolidated joint ventures
    
    
    7,262
    
    
    
    (1,092
    )
    
    
    (779
    )Franchise fees
    
    
    
    
    
    
    (152
    )
    
    
    Net cash used in investing activities
    
    
    (90,584
    )
    
    
    (61,509
    )
    
    
    (9,841
    )Cash flows from financing activities:Net increase (decrease) in lines of credit
    
    
    91,033
    
    
    
    37,650
    
    
    
    (43,100
    )Proceeds from mortgage loans
    
    
    940
    
    
    
    7,946
    
    
    
    153Payment of mortgage loans
    
    
    (2,141
    )
    
    
    (11,155
    )
    
    
    (1,374
    )Proceeds from issuance of Series B preferred shares, net
    
    
    
    
    
    
    88,794
    
    
    
    Proceeds from issuance of common shares, net
    
    
    
    
    
    
    
    
    
    
    50,465Redemption of Series A preferred shares, net
    
    
    
    
    
    
    (75,000
    )
    
    
    Distributions to shareholders
    
    
    (23,249
    )
    
    
    (23,013
    )
    
    
    (19,834
    )Distributions to minority interest in partnership
    
    
    (779
    )
    
    
    (779
    )
    
    
    (779
    )Distributions to minority interest in consolidated
joint ventures, net of contributions
    
    
    (677
    )
    
    
    (859
    )
    
    
    Fees paid in connection with financing activities
    
    
    (4,222
    )
    
    
    (2,131
    )
    
    
    1,391Net cash provided by (used in) financing activities
    
    
    60,905
    
    
    
    21,453
    
    
    
    (13,078
    )Net increase (decrease) in cash
    
    
    10,932
    
    
    
    (1,508
    )
    
    
    2,155Cash at beginning of period
    
    
    4,115
    
    
    
    5,623
    
    
    
    1,510Cash from initial consolidation of joint ventures
    
    
    
    
    
    
    
    
    
    
    1,958Cash at end of period
    
    $
    15,047
    
    
    $
    4,115
    
    
    $
    5,623Supplemental disclosure:Cash paid for interest (net of amounts capitalized)
    
    $
    11,193
    
    
    $
    6,992
    
    
    $
    7,946Summary of non-cash investing and financing activities:Distributions to shareholders declared but not paid
    
    $
    5,816
    
    
    $
    5,799
    
    
    $
    5,675Distributions to minority interest declared but not paid
    
    $
    195
    
    
    $
    195
    
    
    $
    195Issuance of stock grants
    
    $
    1,256
    
    
    $
    1,328
    
    
    $
    757Adjustment to minority interest due to
issuance of common stock
    
    $
    36
    
    
    $
    23
    
    
    $
    791Sale of hotel property for note receivable
    
    $
    1,425
    
    
    $
    
    
    
    $
    Interest rate swap adjustment to market value
    
    $
    
    
    
    $
    (33
    )
    
    $
    33Contribution of assets by joint venture partners
    
    $
    3,818
    
    
    $
    
    
    
    $
    Asset retirement obligation
    
    $
    393
    
    
    $
    
    
    
    $
    Purchase of Stanley hotel with mortgage loan
    
    $
    13,000
    
    
    $
    
    
    
    $
    
  56
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 1. ORGANIZATION
      57
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
   Accounting for Long-Lived Assets
 Investment in Hotel Properties.
 General.
 Impairment on Planned Dispositions.
 58
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
  Cash and Cash Equivalents
  Accounts Receivable
  Notes Receivable
   Investment in Joint Ventures.
   Deferred Expenses
  59
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 Income Taxes
   Franchise Agreements
   Year of Expiration
    
    Number of Hotels
    
    Year of Expiration
    
    Number of Hotels2007
    
    
    3
    
    
    
    2016
    
    
    
    22008
    
    
    4
    
    
    
    2017
    
    
    
    112009
    
    
    3
    
    
    
    2018
    
    
    
    52010
    
    
    2
    
    
    
    2019
    
    
    
    62011
    
    
    2
    
    
    
    2020
    
    
    
    12012
    
    
    2
    
    
    
    2022
    
    
    
    32013
    
    
    4
    
    
    
    2023
    
    
    
    12014
    
    
    1
    
    
    
    2024
    
    
    
    32015
    
    
    1
    
    
    
    2025
    
    
    
    1
  60
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 Revenue Recognition
 .
 Derivative Financial Instruments
  Concentration of Credit Risks
  Estimates
  Recently Issued Accounting Standards
     61
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
  Asset retirement obligation as of January 1, 2003
    
    
    $
    555Accretion expense
    
    
    
    31Asset retirement obligation as of December 31, 2003
    
    
    
    586Accretion expense
    
    
    
    33Asset retirement obligation as of December 31, 2004
    
    
    
    619Accretion expense
    
    
    
    35Asset retirement obligation as of December 31, 2005
    
    
    $
    654
  2005
    
    2004
    
    2003Net income (loss) available to common shareholders, as
reported
    
    $
    (2,107
    )
    
    $
    7,848
    
    
    $
    767Add: Cumulative effect of change in accounting principle -
net
    
    
    364
    
    
    
    
    
    
    
    Deduct: Accretion expense
    
    
    (35
    )
    
    
    (33
    )
    
    
    (31
    )Deduct: Depreciation expense
    
    
    (13
    )
    
    
    (13
    )
    
    
    (13
    )Pro forma net income (loss) available to common shareholders
    
    $
    (1,791
    )
    
    $
    7,802
    
    
    $
    723Earnings (loss) per share:Basic and diluted  as reported
    
    $
    (0.08
    )
    
    $
    0.30
    
    
    $
    0.03Basic and diluted  pro forma
    
    $
    (0.07
    )
    
    $
    0.30
    
    
    $
    0.03
   3. MINORITY INTEREST IN PARTNERSHIP
   62
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
  4. CONCENTRATION RISK
    5. DISCONTINUED OPERATIONS
    63
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 2005
    
    2004
    
    2003Total revenue
    
    $
    8,408
    
    
    $
    13,514
    
    
    $
    14,696Total expenses
    
    
    9,185
    
    
    
    13,963
    
    
    
    15,300Loss from hotel operations
    
    
    (777
    )
    
    
    (449
    )
    
    
    (604
    )Allocation to minority interest in Partnership  (income)
loss from discontinued operations
    
    
    33
    
    
    
    (9
    )
    
    
    (19
    )Gain on sale of discontinued operations
    
    
    383
    
    
    
    16
    
    
    
    Allocation to minority interest in Partnership -
gain on sale of discontinued operations
    
    
    (17
    )
    
    
    (1
    )
    
    
    Loss on impairment of asset held for sale
    
    
    (12,993
    )
    
    
    (462
    )
    
    
    (2,583
    )Allocation to minority interest in Partnership  loss on
impairment of assets held for sale
    
    
    607
    
    
    
    22
    
    
    
    153Income tax benefit
    
    
    40
    
    
    
    662
    
    
    
    869Loss from discontinued operations
    
    $
    (12,724
    )
    
    $
    (221
    )
    
    $
    (2,184
    )
 6. HOTEL DEVELOPMENT AND ACQUISITION
 Development of Princeton Homewood Suites
  Development of Wilmington Hilton Garden Inn
  Acquisition of Hampton Inn & Suites Baltimore Inner Harbor
  Acquisition of Six Hotels
  64
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 7. SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES
   Consolidated
Joint Ventures   Hotels Under Development
   Operating Hotels
   65
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
    66
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
  2005
    
    
    2004Gateway Hotel Lessee, LLCAssets
    
    $
    2,336
    
    
    $
    Liabilities
    
    
    36
    
    
    
    Equity
    
    $
    2,300
    
    
    $
    Winston Kansas City, LPAssets
    
    $
    16,984
    
    
    $
    3,962Liabilities
    
    
    1,887
    
    
    
    Equity
    
    $
    15,097
    
    
    $
    3,962Stanley AssociatesAssets
    
    $
    18,192
    
    
    $
    Liabilities
    
    
    13,059
    
    
    
    Equity
    
    $
    5,133
    
    
    $
    Stanley LesseeAssets
    
    $
    789
    
    
    $
    Liabilities
    
    
    650
    
    
    
    Equity
    
    $
    139
    
    
    $
    131 East Redwood, LLCAssets
    
    $
    1,372
    
    
    $
    Liabilities
    
    
    428
    
    
    
    Equity
    
    $
    944
    
    
    $
    Marsh Landing Hotel AssociatesAssets
    
    $
    6,532
    
    
    $
    7,044Liabilities
    
    
    4,782
    
    
    
    4,978Equity
    
    $
    1,750
    
    
    $
    2,066March Landing LesseeAssets
    
    $
    48
    
    
    $
    Liabilities
    
    
    43
    
    
    
    Equity
    
    $
    5
    
    
    $
    Chapel Hill Hotel AssociatesAssets
    
    $
    13,431
    
    
    $
    13,576Liabilities
    
    
    10,712
    
    
    
    9,916Equity
    
    $
    2,719
    
    
    $
    3,660Chapel Hill LesseeAssets
    
    $
    151
    
    
    $
    130Liabilities
    
    
    68
    
    
    
    187Equity (deficit)
    
    $
    83
    
    
    $
    (57
    )
 67
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 2005
    
    
    2004
    
    
    2003Gateway Hotel Lessee, LLCRevenue
    
    $
    
    
    
    $
    
    
    
    $
    Expense
    
    
    14
    
    
    
    
    
    
    
    Net loss
    
    $
    (14
    )
    
    $
    
    
    
    $
    Winston Kansas City, LPRevenue
    
    $
    
    
    
    $
    
    
    
    $
    Expense
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    
    
    
    $
    
    
    
    $
    Stanley AssociatesRevenue
    
    $
    852
    
    
    $
    
    
    
    $
    Expense
    
    
    719
    
    
    
    
    
    
    
    Net income
    
    $
    133
    
    
    $
    
    
    
    $
    Stanley LesseeRevenue
    
    $
    3,836
    
    
    $
    
    
    
    $
    Expense
    
    
    3,697
    
    
    
    
    
    
    
    Net income
    
    $
    139
    
    
    $
    
    
    
    $
    131 East Redwood, LLCRevenue
    
    $
    1,569
    
    
    $
    
    
    
    $
    Expense
    
    
    1,644
    
    
    
    
    
    
    
    Net loss
    
    $
    (75
    )
    
    $
    
    
    
    $
    Marsh Landing Hotel AssociatesRevenue
    
    $
    1,247
    
    
    $
    1,487
    
    
    $
    1,422Expense
    
    
    893
    
    
    
    761
    
    
    
    785Net income
    
    $
    354
    
    
    $
    726
    
    
    $
    637March Landing LesseeRevenue
    
    $
    2,982
    
    
    $
    
    
    
    $
    Expense
    
    
    2,978
    
    
    
    
    
    
    
    Net income
    
    $
    4
    
    
    $
    
    
    
    $
    Chapel Hill Hotel AssociatesRevenue
    
    $
    1,956
    
    
    $
    387
    
    
    $
    6Expense
    
    
    1,865
    
    
    
    757
    
    
    
    76Net income (loss)
    
    $
    91
    
    
    $
    (370
    )
    
    $
    (70
    )Chapel Hill LesseeRevenue
    
    $
    4,629
    
    
    $
    838
    
    
    $
    Expense
    
    
    4,489
    
    
    
    896
    
    
    
    Net income (loss)
    
    $
    140
    
    
    $
    (58
    )
    
    $
    
  68
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)
 Unconsolidated Joint Ventures
     As of December 31,
    
    2005
    
    2004Gross fixed assets
    
    $
    40,791
    
    
    $
    47,599Accumulated depreciation
    
    
    (2,912
    )
    
    
    (2,178
    )Other assets
    
    
    4,304
    
    
    
    5,107Total assets
    
    
    42,183
    
    
    
    50,528Liabilities
    
    
    4,053
    
    
    
    3,303Outstanding loans
    
    
    25,954
    
    
    
    30,768Total liabilities
    
    
    30,007
    
    
    
    34,071Equity
    
    
    12,176
    
    
    
    16,457Companys share of equity
    
    
    1,644
    
    
    
    2,077Companys additional basis
    
    
    151
    
    
    
    435Investment in joint ventures
    
    $
    1,795
    
    
    $
    2,512
 69
      WINSTON HOTELS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands,except per share amounts)
 Years Ended December 31,
    
    2005
    
    2004
    
    2003Revenues
    
    $
    16,516
    
    
    $
    11,198
    
    
    
    4,615Hotel department expenses
    
    
    (4,874
    )
    
    
    (3,693
    )
    
    
    (1,285
    )Management fees
    
    
    (762
    )
    
    
    (513
    )
    
    
    (220
    )Undistributed and fixed expenses
    
    
    (9,847
    )
    
    
    (7,062
    )
    
    
    (2,879
    )Gain on sale of hotel
    
    
    6,291
    
    
    
    
    
    
    
    Hotel net income (loss)
    
    
    7,324
    
    
    
    (70
    )
    
    
    231Charlesbank Ventures 87% share of net income (loss)
    
    
    6,372
    
    
    
    (61
    )
    
    
    201Corporate charges
    
    
    (303
    )
    
    
    (250
    )
    
    
    (124
    )Charlesbank Venture net income (loss)
    
    
    6,069
    
    
    
    (311
    )
    
    
    77Winstons 15% share of Charlesbank
Venture net income (loss)
    
    
    910
    
    
    
    (47
    )
    
    
    12Amortization of investment true-up
    
    
    (285
    )
    
    
    (14
    )
    
    
    (8
    )Equity in income (loss) of
unconsolidated joint ventures
    
    $
    625
    
    
    $
    (61
    )
    
    $
    4
  Previous
Joint Ventures
    70
      WINSTON HOTELS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands,except per share amounts)
 8. NOTES RECEIVABLE
  Notes receivable as of December 31,
    
    2005
    
    2004$1.1 million mezzanine loan collateralized by the
ownership interest of the entity that owns the Hilton
Garden Inn in Atlanta (Sugarloaf), Georgia, matures
December 2006 at an interest rate of 30-day LIBOR
plus 7.36%, with interest-only payments through
maturity, with additional interest of 2% of gross
monthly revenues until maturity of which 25% is paid
currently and 75% is accrued, at maturity Company
will receive greater of accrued interest or 15% of
the appreciation in value
    
    $
    1,080
    
    
    $
    1,080$2.2 million mezzanine loan collateralized by the
ownership interest of the entity that owns the Hilton
Garden Inn in Tampa FL, matures January 2006, at an
interest rate of 30-day LIBOR plus 8.44%, with
interest-only payments through maturity, with
additional interest of 2% of gross monthly revenues
until maturity of which 25% is paid currently and 75%
is accrued, at maturity Company will receive greater
of accrued interest or 20% of the appreciation in
value, paid in full December 2005
    
    
    
    
    
    
    2,186$1.8 million mezzanine loan collateralized by the
ownership interest of the entity that owned the
Hampton Inn & Suites in Baltimore, MD, at an interest
rate of 30-day LIBOR plus 10.21%, with interest and
principal payments based on a ten year amortization,
with additional accrued interest of 10% of gross
monthly revenues until maturity, at maturity Company
received the greater of accrued interest or 60% of
the appreciation in value, paid in full September
2005 (See Note 6)
    
    
    
    
    
    
    1,683$2.4 million mezzanine loan collateralized by the
ownership interest of the entity that owns the
Sheraton hotel in Atlantic Beach, NC, matures
February 2009, at an interest rate of 60-day LIBOR
(with a 2% floor) plus 9%, with interest-only
payments through maturity, with additional interest
of 2% of outstanding principal balance accruing
monthly
    
    
    2,400
    
    
    
    2,400$6 million B-note collateralized by the Cornhusker
Square Hotel in Lincoln, NE, matures June 2006, at an
interest rate of 10%, interest only payments until
maturity or payoff, paid in full March 2005
    
    
    
    
    
    
    6,000$5.5 million mezzanine loan collateralized by the
ownership interest of the entity that owns the
Residence Inn by Marriott in St. Louis, MO, matures
October 2009, at an interest rate of 30-day LIBOR
plus 10.25%, with interest only for the first two
years of operations and interest and principal
payments thereafter based on a ten year amortization
schedule, with additional interest of 3% of
outstanding principal balance accruing monthly
    
    
    5,500
    
    
    
    5,500$6.0 million participation in a $38 million senior
loan collateralized by the Radisson Resort in Kauai,
matures December 2005 with two extension periods of
three months and 12 months, respectively, at an
interest rate of 11%, with interest only payments
until maturity, paid in full December 2005
    
    
    
    
    
    
    6,000$6.0 million mezzanine loan collateralized by the
ownership interest of the entity that owns the
LaPosada de Santa Fe Resort in Santa Fe, New Mexico,
matures December 2007, at an interest rate of 30-day
LIBOR plus 9%, with interest only payments until
maturity
    
    
    6,000
    
    
    
    6,000$1.4 million loan collateralized by the Comfort Inn
in Greenville, SC, matures January 2010, at an
interest rate of prime plus 1.5%, with fixed
principal payments of $6 plus interest until maturity
(See Note 5)
    
    
    1,366
    
    
    
 71
      WINSTON HOTELS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands,except per vshare amounts)
 Notes receivable as of December 31,
    
    2005
    
    2004$3.4 million mezzanine loan collateralized by the
ownership interest of the entity that owns the
Hampton Inn & Suites in Albany NY, matures August
2011, at an interest rate of 30-day LIBOR plus 9.41%,
with interest only payments until maturity, with
additional interest of 4% accruing monthly until
maturity
    
    
    3,375
    

    
    
    $2.8 million in B-notes purchased for $2.3 million
collateralized by second mortgages on the SpringHill
Suites and TownePlace Suites in Boca Raton FL and the
TownePlace Suites in Fort Lauderdale FL, matures
September 2011, at an effective interest rate of 9.3%
(and a yield to maturity of 11.7%), interest and
principal payments based on a six and one-half year
amortization schedule
    
    
    2,329
    
    
    
    $2.0 million participation in a $20 million senior
bridge loan collateralized by a hotel/condo project
in Miami FL, matures August 2007, at an interest rate
of 11%, with interest only payments until maturity
    
    
    2,000
    
    
    
    $14.0 million in four mezzanine loans collateralized
by senior participation interests in four loans of
Walton Street Capital that owns the four Marriott
Renaissance hotels, matures October 2008 with two
one-year extensions, at an interest rate of 30-day
LIBOR plus 4.5%, with interest only payments until
maturity
    
    
    14,000
    
    
    
    Total notes receivable
    
    $
    38,050
    
    
    $
    30,849Total interest receivables related to notes
    
    $
    1,152
    
    
    $
    1,153
  9. DEFERRED EXPENSES
  2005
    
    
    2004Franchise fees
    
    $
    1,787
    
    
    $
    1,813Debt facility fees
    
    
    11,116
    
    
    
    6,61412,903
    
    
    
    8,427Less accumulated amortization
    
    
    6,096
    
    
    
    4,668Deferred expenses, net
    
    $
    6,807
    
    
    $
    3,759
 10. CREDIT FACILITIES AND MORTGAGE LOANS
 Credit
Facilities
   72
      WINSTON HOTELS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands,except per vshare amounts)
       73
      WINSTON HOTELS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands,except per vshare amounts)
 Mortgage
Loans
  December 31,
    
    2005
    
    2004Ten-year loan with GECC collateralized by 14 hotels
with a carrying value of $105.8 million, matures
December 1, 2008, with a 25-year amortization period,
at a fixed interest rate of 7.375%, with interest and
principal payments.
    
    $
    61,957
    
    
    $
    63,550Ten-year loan with GECC collateralized by the Ponte
Vedra Hampton Inn with a carrying value of $6.3
million, matures February 1, 2011, with a 10-year
amortization period, at a variable interest rate of
30-day LIBOR plus 3%, with interest and principal
payments.
    
    
    4,751
    
    
    
    4,835Ten-year loan with GECC collateralized by the
Evanston Hilton Garden Inn with a carrying value of
$20.7 million, matures August 1, 2011, with a 10-year
amortization period, at a variable interest rate of
30-day LIBOR plus 3%, with interest and principal
payments.
    
    
    11,344
    
    
    
    11,590Construction loan converted to permanent loan on
March 8, 2005, collateralized by the Chapel Hill
Courtyard by Marriott Hotel with a carrying value of
$12.8 million, matures March 8, 2010, with a 20-year
amortization period, at a variable interest rate of
30-day LIBOR plus 3.8% converted to a fixed interest
rate of 7.51% on March 8, 2005, with interest and
principal payments.
    
    
    8,907
    
    
    
    8,100Five-year loan collateralized by the Stanley Hotel
with a carrying value of $17.0 million, matures
August 11, 2010, with a 10-year amortization period,
at a fixed interest rate of 6.19%, with interest and
principal payments.
    
    
    12,915
    
    
    Total
    
    $
    99,874
    
    
    $
    88,075
  11. INCOME TAXES
   74
      WINSTON HOTELS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands,except per vshare amounts)
  Years ended December 31,
    
    2005
    
    2004
    
    2003Federal
    
    $
    495
    
    
    $
    (1,971
    )
    
    $
    (2,233
    )State
    
    
    58
    
    
    
    (232
    )
    
    
    (263
    )Income tax expense (benefit)
    
    $
    553
    
    
    $
    (2,203
    )
    
    $
    (2,496
    )
  December 31,
    
    2005
    
    2004Net operating loss
    
    $
    7,090
    
    
    $
    7,136Amortization of lease acquisition cost
    
    
    4,472
    
    
    
    5,112Valuation allowance
    
    
    (49
    )
    
    
    Other
    
    
    (42
    )
    
    
    (224
    )Deferred tax asset
    
    $
    11,471
    
    
    $
    12,024
  Years ended December 31,
    
    2005
    
    2004
    
    2003Statutory federal income tax expense
    
    $
    1,939
    
    
    $
    5,123
    
    
    $
    1,801State tax expense
    
    
    228
    
    
    
    603
    
    
    
    212Other income tax expense (benefit)
    
    
    393
    
    
    
    (69
    )
    
    
    (34
    )Non-taxable REIT income tax benefit
    
    
    (2,007
    )
    
    
    (7,860
    )
    
    
    (4,475
    )Income tax expense (benefit)
    
    $
    553
    
    
    $
    (2,203
    )
    
    $
    (2,496
    )
  Years ended December 31,
    
    2005
    
    2004
    
    2003GAAP net income
    
    $
    5,253
    
    
    $
    16,883
    
    
    $
    7,705Plus GAAP net loss on taxable subsidiary included above
    
    
    29
    
    
    
    3,801
    
    
    
    4,072GAAP net income from REIT operations
    
    
    5,282
    
    
    
    20,684
    
    
    
    11,777Book / tax differences on depreciation and amortization
    
    
    854
    
    
    
    928
    
    
    
    3,029Book / tax differences on deferred lease revenue
    
    
    (44
    )
    
    
    327
    
    
    
    Book / tax differences on loss on sale of property
    
    
    (2,918
    )
    
    
    (319
    )
    
    
    Book / tax differences on loss on impairment of assets
    
    
    12,993
    
    
    
    461
    
    
    
    2,583Book / tax differences on other items, net
    
    
    (345
    )
    
    
    617
    
    
    
    1,444Taxable income subject to REIT distribution requirements
    
    $
    15,822
    
    
    $
    22,698
    
    
    $
    18,833
 12. DERIVATIVE INSTRUMENTS
  75
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
   13. CAPITAL STOCK
      76
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  14. EARNINGS PER SHARE
  2005
    
    
    2004
    
    
    2003Income from continuing operations
    
    $
    18,341
    
    
    $
    17,104
    
    
    $
    10,317Less: preferred stock distributions
    
    
    (7,360
    )
    
    
    (7,315
    )
    
    
    (6,938
    )Less: loss on redemption of Series A preferred stock
    
    
    
    
    
    
    (1,720
    )
    
    
    Income from continuing operations available to common shareholders
    
    $
    10,981
    
    
    $
    8,069
    
    
    $
    3,379Loss from discontinued operations
    
    $
    (12,724
    )
    
    $
    (221
    )
    
    $
    (2,184
    )Loss from cumulative effect of changes in accounting principles
    
    $
    (382
    )
    
    $
    
    
    
    $
    (448
    )Net income (loss) available to common shareholders
    
    
    (2,125
    )
    
    
    7,848
    
    
    
    747Plus: income from continuing operations allocated to minority interest
    
    
    537
    
    
    
    398
    
    
    
    224Plus: loss from discontinued operations allocated to minority interest
    
    
    (623
    )
    
    
    (12
    )
    
    
    (135
    )Plus: loss from cumulative effect of changes in accounting
principles allocated to minority interest
    
    
    18
    
    
    
    
    
    
    
    20Net income (loss) available to common shareholders assuming dilution
    
    $
    (2,193
    )
    
    $
    8,234
    
    
    $
    856Weighted average number of common shares
    
    
    26,302
    
    
    
    26,224
    
    
    
    21,770Minority interest units with redemption rights
    
    
    1,298
    
    
    
    1,298
    
    
    
    1,298Stock options and unvested stock grants
    
    
    80
    
    
    
    33
    
    
    
    18Weighted average number of common shares assuming dilution
    
    
    27,680
    
    
    
    27,555
    
    
    
    23,086Earnings per share  basic and dilutedIncome from continuing operations available to common shareholders
    
    $
    0.42
    
    
    $
    0.31
    
    
    $
    0.16Loss from discontinued operations
    
    
    (0.49
    )
    
    
    (0.01
    )
    
    
    (0.11
    )Loss from cumulative effect of changes in accounting principles
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Net income (loss) available to common shareholders
    
    $
    (0.08
    )
    
    $
    0.30
    
    
    $
    0.03
 15. STOCK INCENTIVE PLAN
   77
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Average RemainingExercise Price
    
    Options Outstanding
    
    Options Exercisable
    
    Contractual Life (months)$  9.38
    
    10,000
    
    10,000
    
    41 (a)$11.38
    
    90,000
    
    90,000
    
    1  (b)
 (a)
    
    Expire on April 18, 2009(b)
    
    Expired on January 1, 2006 and were not exercised.    Stock Option Agreements
  December 31,
    
    2005
    
    2004
    2003Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    152,000
    
    
    $
    11.20
    
    
    
    795,000
    
    
    $
    11.07
    
    
    
    795,000
    
    
    $
    11.07Forfeited
    
    
    (52,000
    )
    
    $
    11.24
    
    
    
    (643,000
    )
    
    $
    11.04
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    100,000
    
    
    $
    11.18
    
    
    
    152,000
    
    
    $
    11.20
    
    
    
    795,000
    
    
    $
    11.07Options exercisable at year-end
    
    
    100,000
    
    
    
    
    
    
    
    152,000
    
    
    
    
    
    
    
    788,750
 78
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  2005
    
    
    2004
    
    
    2003Net income (loss) available to common shareholders, as reported
    
    $
    (2,107
    )
    
    $
    7,848
    
    
    $
    767Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    
    
    
    
    1
    
    
    
    18Pro forma net income (loss) available to common shareholders
    
    
    (2,107
    )
    
    
    7,847
    
    
    
    749Earnings (loss) per share:Basic and diluted  as reported
    
    $
    (0.08
    )
    
    $
    0.30
    
    
    $
    0.03Basic and diluted  pro forma
    
    $
    (0.08
    )
    
    $
    0.30
    
    
    $
    0.03
 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
  17. SEGMENT REPORTING
   79
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Year ended December 31, 2005:Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    151,030
    
    
    $
    
    
    
    $
    
    
    
    $
    151,030Operating expenses
    
    
    (99,439
    )
    
    
    (13
    )
    
    
    (7,930
    )
    
    
    (107,382
    )Depreciation and amortization
    
    
    (19,804
    )
    
    
    
    
    
    
    
    
    
    
    (19,804
    )Interest and other income
    
    
    
    
    
    
    6,648
    
    
    
    397
    
    
    
    7,045Interest expense
    
    
    (9,615
    )
    
    
    (2,018
    )
    
    
    
    
    
    
    (11,633
    )Income (loss) before allocation to minority interest
in Partnership, allocation to minority interest in
consolidated joint ventures, income taxes, and
equity in income of unconsolidated joint ventures
    
    
    22,172
    
    
    
    4,617
    
    
    
    (7,533
    )
    
    
    19,256Income allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    (537
    )
    
    
    (537
    )Income allocation to minority interest in consolidated
joint ventures
    
    
    (410
    )
    
    
    
    
    
    
    
    
    
    
    (410
    )Income tax expense
    
    
    (593
    )
    
    
    
    
    
    
    
    
    
    
    (593
    )Equity in income of unconsolidated joint ventures
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    625Income (loss) from continuing operations
    
    $
    21,794
    
    
    $
    4,617
    
    
    $
    (8,070
    )
    
    $
    18,341Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,724
    )Cumulative effect of change in accounting principle  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (364
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,253Total assets
    
    $
    488,491
    
    
    $
    39,202
    
    
    $
    
    
    
    $
    527,693
 Year ended December 31, 2004:Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    129,462
    
    
    $
    
    
    
    $
    
    
    
    $
    129,462Operating expenses
    
    
    (84,003
    )
    
    
    (60
    )
    
    
    (6,798
    )
    
    
    (90,861
    )Depreciation and amortization
    
    
    (17,362
    )
    
    
    
    
    
    
    
    
    
    
    (17,362
    )Interest and other income
    
    
    
    
    
    
    1,923
    
    
    
    273
    
    
    
    2,196Interest expense
    
    
    (6,703
    )
    
    
    (454
    )
    
    
    
    
    
    
    (7,157
    )Income (loss) before allocation to minority interest
in Partnership, allocation to minority interest in
consolidated joint ventures, income taxes, and
equity in loss of unconsolidated joint ventures
    
    
    21,394
    
    
    
    1,409
    
    
    
    (6,525
    )
    
    
    16,278Income allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    (398
    )
    
    
    (398
    )Income allocation to minority interest in consolidated
joint ventures
    
    
    (255
    )
    
    
    
    
    
    
    
    
    
    
    (255
    )Income tax benefit
    
    
    1,540
    
    
    
    
    
    
    
    
    
    
    
    1,540Equity in loss of unconsolidated joint ventures
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Income (loss) from continuing operations
    
    $
    22,618
    
    
    $
    1,409
    
    
    $
    (6,923
    )
    
    $
    17,104Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (221
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,883Total assets
    
    $
    392,378
    
    
    $
    32,002
    
    
    $
    
    
    
    $
    424,380
 80
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Year ended December 31, 2003:Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    114,004
    
    
    $
    
    
    
    $
    
    
    
    $
    114,004Operating expenses
    
    
    (78,308
    )
    
    
    (79
    )
    
    
    (5,845
    )
    
    
    (84,232
    )Depreciation and amortization
    
    
    (16,032
    )
    
    
    
    
    
    
    
    
    
    
    (16,032
    )Interest and other income
    
    
    
    
    
    
    862
    
    
    
    340
    
    
    
    1,202Interest expense
    
    
    (7,050
    )
    
    
    (207
    )
    
    
    
    
    
    
    (7,257
    )Income (loss) before allocation to minority interest
in Partnership, allocation to minority interest in
consolidated joint ventures, income taxes, and
equity in income of unconsolidated joint ventures
    
    
    12,614
    
    
    
    576
    
    
    
    (5,505
    )
    
    
    7,685Income allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    (224
    )
    
    
    (224
    )Loss allocation to minority interest in consolidated
joint ventures
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Income tax benefit
    
    
    1,627
    
    
    
    
    
    
    
    
    
    
    
    1,627Equity in income of unconsolidated joint ventures
    
    
    1,193
    
    
    
    
    
    
    
    
    
    
    
    1,193Income (loss) from continuing operations
    
    $
    15,470
    
    
    $
    576
    
    
    $
    (5,729
    )
    
    $
    10,317Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,184
    )Cumulative effect of change in accounting principle  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (428
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,705Total assets
    
    $
    381,732
    
    
    $
    5,529
    
    
    $
    
    
    
    $
    387,261
 18. COMMITMENTS AND CONTINGENCIES
     81
      WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  19.
    
    QUARTERLY FINANCIAL DATA (UNAUDITED)
  2005
    
    First
    
    Second
    
    Third (a)
    
    FourthTotal operating revenue
    
    $
    33,088
    
    
    $
    38,692
    
    
    $
    39,779
    
    
    $
    39,471Operating income
    
    
    4,263
    
    
    
    7,368
    
    
    
    7,282
    
    
    
    4,931Income from continuing operations
    
    
    3,270
    
    
    
    5,595
    
    
    
    5,754
    
    
    
    3,722Income (loss) from discontinued operations
    
    
    (292
    )
    
    
    181
    
    
    
    (12,662
    )
    
    
    49Net income (loss)
    
    
    2,978
    
    
    
    5,776
    
    
    
    (6,908
    )
    
    
    3,407Preferred stock distributions
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (1,840
    )Net income (loss) available to common shareholders
    
    
    1,138
    
    
    
    3,936
    
    
    
    (8,748
    )
    
    
    1,567Weighted average number of common shares
    
    
    26,283
    
    
    
    26,298
    
    
    
    26,314
    
    
    
    26,314Weighted average number of common shares assuming
dilution
    
    
    27,601
    
    
    
    27,611
    
    
    
    27,620
    
    
    
    27,654Basic and diluted earnings per common share:Income from continuing operations
    
    
    0.05
    
    
    
    0.14
    
    
    
    0.16
    
    
    
    0.07Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    (0.49
    )
    
    
    Cumulative effect of change in accounting
principle  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net income (loss) available to common
shareholders
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    (0.33
    )
    
    $
    0.06
 2004
    
    First
    
    Second
    
    Third
    
    FourthTotal operating revenue
    
    $
    30,369
    
    
    $
    33,782
    
    
    $
    33,732
    
    
    $
    31,579Operating income
    
    
    4,587
    
    
    
    6,774
    
    
    
    5,757
    
    
    
    4,121Income from continuing operations
    
    
    3,502
    
    
    
    5,437
    
    
    
    4,858
    
    
    
    3,307Income (loss) from discontinued operations
    
    
    265
    
    
    
    74
    
    
    
    45
    
    
    
    (605
    )Net income
    
    
    3,767
    
    
    
    5,511
    
    
    
    4,903
    
    
    
    2,702Preferred stock distributions
    
    
    (1,795
    )
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (1,840
    )Loss on redemption of Series A preferred stock
    
    
    (1,720
    )
    
    
    
    
    
    
    
    
    
    
    Net income available to common shareholders
    
    
    1,972
    
    
    
    3,671
    
    
    
    3,063
    
    
    
    (858
    )Weighted average number of common shares
    
    
    26,216
    
    
    
    26,217
    
    
    
    26,230
    
    
    
    26,234Weighted average number of common shares
assuming dilution
    
    
    27,578
    
    
    
    27,542
    
    
    
    27,542
    
    
    
    27,556Basic and diluted earnings per common share:Income from continuing operations
    
    
    0.00
    
    
    
    0.14
    
    
    
    0.12
    
    
    
    0.05Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income available to common shareholders
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.03
 
 (a)
    
    During the third quarter of 2005, the Company recorded a $12.4 million (net of allocation to
minority interest) impairment charge relating to two hotels. On November 4, 2005, the
Companys Board adopted a formal plan to sell the two hotels therefore the amount, net of
minority interest, is included in income (loss) from discontinued operations (See Note 5). 20.
    
    SUBSEQUENT EVENTS
  82
      WINSTON HOTELS, INC.
SCHEDULE II  VALUATION AND QUALIFYING DISCOUNTS
For the Years Ended December 31, 2005, 2004 and 2003  ($ in thousands)
 AdditionsBalance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    costs and
    
    other
    
    
    
    
    
    end ofDescription
    
    of Period
    
    expenses
    
    accounts
    
    Deductions
    
    periodAllowance for
doubtful
accounts  hotel
receivablesDecember 31, 2005
    
    
    $111
    
    
    $
    68
    
    
    $
    
    
    
    $
    155
    
    
    $
    24December 31, 2004
    
    
    103
    
    
    
    179
    
    
    
    
    
    
    
    171
    
    
    
    111December 31, 2003
    
    
    110
    
    
    
    114
    
    
    
    
    
    
    
    121
    
    
    
    103
 83
      WINSTON HOTELS, INC
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2005($ in thousands)
 Life UponWhichDepreciationCost Capitalized
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Net Book Value
    
    Date of
    
    in LatestInitial Cost
    
    Subsequent to Acquisition
    
    Gross Amounts Carried at Close of Period
    
    Depreciation
    
    Land, Buildings
    
    Acquisition /
    
    IncomeBuildings and
    
    
    
    
    
    Buildings and
    
    
    
    
    
    Buildings and
    
    
    
    
    
    Buildings and
    
    and
    
    Opening if
    
    Statement isDescription
    
    Encumbrances
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Total
    
    Improvements
    
    Improvements
    
    Constructed
    
    ComputedHampton InnBaltimore, MD
    
    n/a
    
    $
    2,320
    
    
    $
    14,940
    
    
    
    
    
    
    
    
    
    
    
    2,320
    
    
    
    14,940
    
    
    
    17,260
    
    
    
    181
    
    
    
    17,079
    
    
    
    9/2/05
    
    
    
    30Boone, NC
    
    (a)
    
    
    264
    
    
    
    2,750
    
    
    
    168
    
    
    
    1,006
    
    
    
    432
    
    
    
    3,756
    
    
    
    4,188
    
    
    
    1,686
    
    
    
    2,502
    
    
    
    6/2/94
    
    
    
    30Brunswick, GA
    
    (a)
    
    
    716
    
    
    
    3,887
    
    
    
    66
    
    
    
    946
    
    
    
    782
    
    
    
    4,833
    
    
    
    5,615
    
    
    
    2,025
    
    
    
    3,590
    
    
    
    6/2/94
    
    
    
    30Cary, NC
    
    (a)
    
    
    613
    
    
    
    4,596
    
    
    
    55
    
    
    
    1,214
    
    
    
    668
    
    
    
    5,810
    
    
    
    6,478
    
    
    
    2,594
    
    
    
    3,884
    
    
    
    6/2/94
    
    
    
    30Charlotte, NC
    
    (b)
    
    
    833
    
    
    
    3,609
    
    
    
    65
    
    
    
    658
    
    
    
    898
    
    
    
    4,267
    
    
    
    5,165
    
    
    
    1,767
    
    
    
    3,398
    
    
    
    6/2/94
    
    
    
    30Durham, NC
    
    (a)
    
    
    634
    
    
    
    4,582
    
    
    
    20
    
    
    
    1,570
    
    
    
    654
    
    
    
    6,152
    
    
    
    6,806
    
    
    
    2,497
    
    
    
    4,309
    
    
    
    6/2/94
    
    
    
    30Jacksonville, NC
    
    (a)
    
    
    473
    
    
    
    4,140
    
    
    
    66
    
    
    
    818
    
    
    
    539
    
    
    
    4,958
    
    
    
    5,497
    
    
    
    1,981
    
    
    
    3,516
    
    
    
    6/2/94
    
    
    
    30Perimeter , GA
    
    (b)
    
    
    914
    
    
    
    6,293
    
    
    
    31
    
    
    
    334
    
    
    
    945
    
    
    
    6,627
    
    
    
    7,572
    
    
    
    2,058
    
    
    
    5,514
    
    
    
    7/19/96
    
    
    
    30Ponte Vedra, FL
    
    (c)
    
    
    1,506
    
    
    
    5,218
    
    
    
    63
    
    
    
    461
    
    
    
    1,569
    
    
    
    5,679
    
    
    
    7,248
    
    
    
    1,123
    
    
    
    6,125
    
    
    
    12/1/00
    
    
    
    30Raleigh, NC
    
    (b)
    
    
    697
    
    
    
    5,955
    
    
    
    49
    
    
    
    1,565
    
    
    
    746
    
    
    
    7,520
    
    
    
    8,266
    
    
    
    2,822
    
    
    
    5,444
    
    
    
    5/18/95
    
    
    
    30Southlake, GA
    
    (a)
    
    
    680
    
    
    
    4,065
    
    
    
    68
    
    
    
    877
    
    
    
    748
    
    
    
    4,942
    
    
    
    5,690
    
    
    
    2,110
    
    
    
    3,580
    
    
    
    6/2/94
    
    
    
    30W. Springfield, MA
    
    (b)
    
    
    916
    
    
    
    5,253
    
    
    
    46
    
    
    
    996
    
    
    
    962
    
    
    
    6,249
    
    
    
    7,211
    
    
    
    1,837
    
    
    
    5,374
    
    
    
    7/14/97
    
    
    
    30White Plains, NY
    
    (b)
    
    
    1,382
    
    
    
    10,763
    
    
    
    72
    
    
    
    910
    
    
    
    1,454
    
    
    
    11,673
    
    
    
    13,127
    
    
    
    3,329
    
    
    
    9,798
    
    
    
    10/29/97
    
    
    
    30Hampton Inn & SuitesGwinnett, GA
    
    (b)
    
    
    557
    
    
    
    6,959
    
    
    
    86
    
    
    
    412
    
    
    
    643
    
    
    
    7,371
    
    
    
    8,014
    
    
    
    2,368
    
    
    
    5,646
    
    
    
    7/18/96
    
    
    
    30Comfort InnCharleston, SC
    
    (b)
    
    
    438
    
    
    
    5,853
    
    
    
    39
    
    
    
    2,653
    
    
    
    477
    
    
    
    8,506
    
    
    
    8,983
    
    
    
    2,762
    
    
    
    6,221
    
    
    
    5/18/95
    
    
    
    30Durham, NC
    
    (a)
    
    
    947
    
    
    
    6,208
    
    
    
    89
    
    
    
    729
    
    
    
    1,036
    
    
    
    6,937
    
    
    
    7,973
    
    
    
    2,721
    
    
    
    5,252
    
    
    
    11/29/94
    
    
    
    30Fayetteville, NC
    
    (a)
    
    
    1,223
    
    
    
    8,047
    
    
    
    32
    
    
    
    1,118
    
    
    
    1,255
    
    
    
    9,165
    
    
    
    10,420
    
    
    
    3,398
    
    
    
    7,022
    
    
    
    11/29/94
    
    
    
    30Wilmington, NC
    
    (a)
    
    
    532
    
    
    
    5,889
    
    
    
    49
    
    
    
    1,023
    
    
    
    581
    
    
    
    6,912
    
    
    
    7,493
    
    
    
    2,956
    
    
    
    4,537
    
    
    
    6/2/94
    
    
    
    30Comfort SuitesOrlando, FL
    
    (b) (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5/1/97
    
    
    
    30Homewood SuitesAlpharetta, GA
    
    (a)
    
    
    985
    
    
    
    6,621
    
    
    
    56
    
    
    
    418
    
    
    
    1,041
    
    
    
    7,039
    
    
    
    8,080
    
    
    
    1,971
    
    
    
    6,109
    
    
    
    5/22/98
    
    
    
    30Cary, NC
    
    (b)
    
    
    1,010
    
    
    
    12,367
    
    
    
    81
    
    
    
    991
    
    
    
    1,091
    
    
    
    13,358
    
    
    
    14,449
    
    
    
    4,461
    
    
    
    9,988
    
    
    
    7/9/96
    
    
    
    30Clear Lake, TX
    
    (b)
    
    
    879
    
    
    
    5,978
    
    
    
    9
    
    
    
    416
    
    
    
    888
    
    
    
    6,394
    
    
    
    7,282
    
    
    
    1,970
    
    
    
    5,312
    
    
    
    9/13/96
    
    
    
    30Durham, NC
    
    (a)
    
    
    1,074
    
    
    
    6,136
    
    
    
    (90
    )
    
    
    926
    
    
    
    984
    
    
    
    7,062
    
    
    
    8,046
    
    
    
    1,744
    
    
    
    6,302
    
    
    
    11/14/98
    
    
    
    30Lake Mary, FL
    
    (a)
    
    
    871
    
    
    
    6,987
    
    
    
    53
    
    
    
    599
    
    
    
    924
    
    
    
    7,586
    
    
    
    8,510
    
    
    
    1,923
    
    
    
    6,587
    
    
    
    11/4/98
    
    
    
    30Phoenix, AZ
    
    (a)
    
    
    1,402
    
    
    
    9,763
    
    
    
    73
    
    
    
    325
    
    
    
    1,475
    
    
    
    10,088
    
    
    
    11,563
    
    
    
    2,581
    
    
    
    8,982
    
    
    
    6/1/98
    
    
    
    30Raleigh, NC
    
    (a)
    
    
    1,008
    
    
    
    10,076
    
    
    
    34
    
    
    
    632
    
    
    
    1,042
    
    
    
    10,708
    
    
    
    11,750
    
    
    
    2,779
    
    
    
    8,971
    
    
    
    3/9/98
    
    
    
    30Holiday Inn ExpressAbingdon, VA
    
    (a)
    
    
    918
    
    
    
    2,263
    
    
    
    (458
    )
    
    
    610
    
    
    
    460
    
    
    
    2,873
    
    
    
    3,333
    
    
    
    822
    
    
    
    2,511
    
    
    
    5/7/96
    
    
    
    30 - 40Clearwater, FL
    
    (a)
    
    
    510
    
    
    
    5,854
    
    
    
    108
    
    
    
    1,136
    
    
    
    618
    
    
    
    6,990
    
    
    
    7,608
    
    
    
    2,068
    
    
    
    5,540
    
    
    
    8/6/97
    
    
    
    30Holiday Inn SelectDallas, TX
    
    n/a (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5/7/96
    
    
    
    30Holiday InnSecaucus, NJ
    
    n/a
    
    
    
    
    
    
    13,699
    
    
    
    7
    
    
    
    2,090
    
    
    
    7
    
    
    
    15,789
    
    
    
    15,796
    
    
    
    4,225
    
    
    
    11,571
    
    
    
    5/27/98
    
    
    
    30Tinton Falls, NJ
    
    (a)
    
    
    1,261
    
    
    
    4,337
    
    
    
    44
    
    
    
    2,323
    
    
    
    1,305
    
    
    
    6,660
    
    
    
    7,965
    
    
    
    1,733
    
    
    
    6,232
    
    
    
    4/21/98
    
    
    
    30Courtyard by MarriottAnn Arbor, MI
    
    (b)
    
    
    902
    
    
    
    9,850
    
    
    
    67
    
    
    
    1,564
    
    
    
    969
    
    
    
    11,414
    
    
    
    12,383
    
    
    
    3,268
    
    
    
    9,115
    
    
    
    9/30/97
    
    
    
    30Chapel Hill, NC
    
    (c)
    
    
    1,535
    
    
    
    9,156
    
    
    
    15
    
    
    
    508
    
    
    
    1,550
    
    
    
    9,664
    
    
    
    11,214
    
    
    
    465
    
    
    
    10,749
    
    
    
    9/1/94
    
    
    
    30Houston, TX
    
    (a)
    
    
    1,211
    
    
    
    9,154
    
    
    
    157
    
    
    
    2,725
    
    
    
    1,368
    
    
    
    11,879
    
    
    
    13,247
    
    
    
    3,507
    
    
    
    9,740
    
    
    
    7/14/97
    
    
    
    30Houston
(Northwest), TX
    
    (a)
    
    
    1,400
    
    
    
    9,794
    
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    
    9,794
    
    
    
    11,194
    
    
    
    27
    
    
    
    11,167
    
    
    
    10/31/05
    
    
    
    30Roanoke, VA
    
    n/a
    
    
    1,194
    
    
    
    9,781
    
    
    
    39
    
    
    
    8
    
    
    
    1,233
    
    
    
    9,789
    
    
    
    11,022
    
    
    
    358
    
    
    
    10,664
    
    
    
    12/16/94
    
    
    
    30Wilmington, NC
    
    (b)
    
    
    742
    
    
    
    5,907
    
    
    
    71
    
    
    
    491
    
    
    
    813
    
    
    
    6,398
    
    
    
    7,211
    
    
    
    1,867
    
    
    
    5,344
    
    
    
    12/19/96
    
    
    
    30Winston-Salem, NC
    
    (a)
    
    
    915
    
    
    
    5,202
    
    
    
    55
    
    
    
    692
    
    
    
    970
    
    
    
    5,894
    
    
    
    6,864
    
    
    
    1,197
    
    
    
    5,667
    
    
    
    10/3/98
    
    
    
    30 - 40Hilton Garden InnAlbany, NY
    
    (a)
    
    
    1,168
    
    
    
    11,236
    
    
    
    78
    
    
    
    142
    
    
    
    1,246
    
    
    
    11,378
    
    
    
    12,624
    
    
    
    2,917
    
    
    
    9,707
    
    
    
    5/8/98
    
    
    
    30Alpharetta, GA
    
    (a)
    
    
    1,425
    
    
    
    11,719
    
    
    
    39
    
    
    
    380
    
    
    
    1,464
    
    
    
    12,099
    
    
    
    13,563
    
    
    
    3,105
    
    
    
    10,458
    
    
    
    3/17/98
    
    
    
    30Evanston, IL
    
    (c)
    
    
    2,225
    
    
    
    15,620
    
    
    
    39
    
    
    
    2,999
    
    
    
    2,264
    
    
    
    18,619
    
    
    
    20,883
    
    
    
    1,996
    
    
    
    18,887
    
    
    
    7/1/01
    
    
    
    30 - 40Raleigh, NC
    
    (a)
    
    
    1,901
    
    
    
    9,209
    
    
    
    54
    
    
    
    233
    
    
    
    1,955
    
    
    
    9,442
    
    
    
    11,397
    
    
    
    2,384
    
    
    
    9,013
    
    
    
    5/8/98
    
    
    
    30Windsor, CT
    
    n/a
    
    
    2,031
    
    
    
    11,238
    
    
    
    18
    
    
    
    (375
    )
    
    
    2,049
    
    
    
    10,863
    
    
    
    12,912
    
    
    
    1,489
    
    
    
    11,423
    
    
    
    9/1/00
    
    
    
    30 - 40TownePlace SuitesAustin, TX
    
    (a)
    
    
    1,000
    
    
    
    3,475
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    3,475
    
    
    
    4,475
    
    
    
    9
    
    
    
    4,466
    
    
    
    10/31/05
    
    
    
    30Birmingham, AL
    
    (a)
    
    
    1,200
    
    
    
    7,533
    
    
    
    
    
    
    
    
    
    
    
    1,200
    
    
    
    7,533
    
    
    
    8,733
    
    
    
    21
    
    
    
    8,712
    
    
    
    10/31/05
    
    
    
    30Clearlake, TX
    
    (a)
    
    
    900
    
    
    
    4,468
    
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    4,468
    
    
    
    5,368
    
    
    
    12
    
    
    
    5,356
    
    
    
    10/31/05
    
    
    
    30College Station, TX
    
    (a)
    
    
    1,000
    
    
    
    6,459
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    6,459
    
    
    
    7,459
    
    
    
    18
    
    
    
    7,441
    
    
    
    10/31/05
    
    
    
    30Houston
(Northwest), TX
    
    (a)
    
    
    1,100
    
    
    
    6,200
    
    
    
    
    
    
    
    
    
    
    
    1,100
    
    
    
    6,200
    
    
    
    7,300
    
    
    
    17
    
    
    
    7,283
    
    
    
    10/31/05
    
    
    
    30Quality SuitesCharleston, SC
    
    (b)
    
    
    912
    
    
    
    11,224
    
    
    
    39
    
    
    
    1,194
    
    
    
    951
    
    
    
    12,418
    
    
    
    13,369
    
    
    
    4,658
    
    
    
    8,711
    
    
    
    5/18/95
    
    
    
    30Residence InnPhoenix, AZ
    
    (b)
    
    
    2,076
    
    
    
    13,311
    
    
    
    106
    
    
    
    1,415
    
    
    
    2,182
    
    
    
    14,726
    
    
    
    16,908
    
    
    
    3,733
    
    
    
    13,175
    
    
    
    3/3/98
    
    
    
    30Fairfield InnAnn Arbor, MI
    
    (a)
    
    
    542
    
    
    
    3,743
    
    
    
    200
    
    
    
    1,040
    
    
    
    742
    
    
    
    4,783
    
    
    
    5,525
    
    
    
    1,345
    
    
    
    4,180
    
    
    
    9/30/97
    
    
    
    30Stanley Hotel
    
    (c)
    
    
    2,858
    
    
    
    13,942
    
    
    
    
    
    
    
    
    
    
    
    2,858
    
    
    
    13,942
    
    
    
    16,800
    
    
    
    194
    
    
    
    16,606
    
    
    
    8/5/05
    
    
    
    30$
    53,800
    
    
    $
    381,309
    
    
    $
    1,958
    
    
    $
    40,772
    
    
    $
    55,758
    
    
    $
    422,081
    
    
    $
    477,839
    
    
    $
    99,079
    
    
    $
    378,760
 84
      (a)
    
    As of December 31, 2005, property served as collateral for the $215 million line of credit
(See Note 10).(b)
    
    As of December 31, 2005, property served as collateral for the $71 million note through GE
Capital Corporation (See Note 10).(c)
    
    As of December 31, 2005, property served as collateral for
an individual mortgage note (See Note 10).(d)
    
    As of December 31, 2005, property is held for sale (See Note 5). Reconciliation of Real Estate:
    
    2005
    
    2004
    
    2003Balance at beginning of period
    
    $
    428,673
    
    
    $
    421,897
    
    
    $
    384,859Acquisitions during period
    
    
    78,589
    
    
    
    21,666
    
    
    
    Dispositions during period
    
    
    (5,657
    )
    
    
    (13,438
    )
    
    
    Reclassification to held for sale
    
    
    (18,656
    )
    
    
    (7,678
    )
    
    
    (5,969
    )Impairment (See Note 5)
    
    
    (12,993
    )
    
    
    
    
    
    
    Asset retirement obligation (See Note 2)
    
    
    133
    
    
    
    
    
    
    
    Consolidation of joint ventures
    
    
    
    
    
    
    
    
    
    
    39,041Additions during period
    
    
    7,750
    
    
    
    6,226
    
    
    
    3,966Balance at end of period
    
    $
    477,839
    
    
    $
    428,673
    
    
    $
    421,897
 Reconciliation of Accumulated Depreciation:
    
    2005
    
    2004
    
    2003Balance at beginning of period
    
    
    95,732
    
    
    
    89,087
    
    
    
    75,212Depreciation for period
    
    
    14,273
    
    
    
    12,296
    
    
    
    12,772Dispositions during period
    
    
    (1,977
    )
    
    
    (3,181
    )
    
    
    Asset retirement obligation (See Note 2)
    
    
    37
    
    
    
    
    
    
    
    Consolidation of joint ventures
    
    
    
    
    
    
    
    
    
    
    2,631Reclassification to held for sale
    
    
    (8,986
    )
    
    
    (2,470
    )
    
    
    (1,528
    )Balance at end of period
    
    $
    99,079
    
    
    $
    95,732
    
    
    $
    89,087
  85
      WINSTON HOTELS, INC.
SCHEDULE IV  MORTGAGE LOANS ON REAL ESTATE
As of December 31, 2005
($ in thousands)
 Principalamount ofloans subjectFinal
    
    Periodic
    
    
    
    Face
    
    Carrying
    
    to delinquentInterest
    
    maturity
    
    payment
    
    
    
    amount of
    
    amount of
    
    principal orDescription
    
    rate
    
    date
    
    terms
    
    Prior liens
    
    mortgages
    
    mortgages
    
    interestThree cross
collateralized
B-notes,
subordinate to a
first mortgage,
collateralized
by the Spring
Hill Suites and
TownePlace
Suites in Boca
Raton, FL and
TownePlace
Suites in Fort
Lauderdale, FL
    
    Effective rate of
9.3% and yield to
maturity of 11.7%
    
    September 2011
    
    Fixed payments of $22 with
interest and principal based on a
6.5 year amortization table with
a balloon of $2.4 million at
maturity
    
    $
    
    $
    2,784
    
    
    $
    2,329
    
    
    $A $2 million
piece of a $20
million senior
participating
note
collateralized
by a hotel condo
project in
Miami, FL
    
    Fixed rate of 11%
    
    August 2007
    
    Interest only until maturity
    
    
    
    
    2,000
    
    
    
    2,000
    
    
    Mortgage
collateralized by
the Comfort Inn in
Greenville, SC
    
    Prime plus 1.5%
    
    January 2010
    
    Fixed principal payments of $6
plus interest, with balance of
approximately $1.1 million due at
maturity
    
    
    
    
    1,425
    
    
    
    1,366
    
    
    $
    
    $
    6,209
    
    
    $
    5,695
    
    
    $
 Reconciliation of Carrying Amount of Mortgages:Years ended December 31,
    
    2005
    
    2004
    
    2003Balance at beginning of period
    
    $
    12,000
    
    
    $
    
    
    
    $
    Additions during period:New mortgage loans
    
    $
    6,209
    
    
    $
    12,000
    
    
    $
    Discount
    
    
    (459
    )
    
    
    
    
    
    
    $
    5,750
    
    
    $
    12,000
    
    
    $
    Deductions during period:Early prepayment of loans
    
    $
    (12,000
    )
    
    $
    
    
    
    $
    Collections of principal
    
    
    (99
    )
    
    
    
    
    
    
    Amortization of discount
    
    
    44
    
    
    
    
    
    
    
    $
    (12,055
    )
    
    $
    
    
    
    $
    Balance at close of period
    
    $
    5,695
    
    
    $
    12,000
    
    
    $
    
 86
      SIGNATURES
  WINSTON HOTELS, INC.By:
    
    /s/ Robert W. Winston, IIIRobert W. Winston, IIIChief Executive OfficerDate: March 14, 2006
  Signature
    
    Title
    
    Date/s/ Charles M. Winston
    
    Chairman of the Board of Directors
    
    March 14, 2006Charles M. Winston/s/ Robert W. Winston, III
    
    Chief Executive Officer and Director
    
    March 14, 2006Robert W. Winston, III
    
    (Principal Executive Officer)/s/ Joseph V. Green
    
    President and Chief Financial Officer
    
    March 14, 2006Joseph V. Green/s/ Brent V. West
    
    Vice President and Chief Accounting Officer
    
    March 14, 2006Brent V. West/s/ Edwin B. Borden
    
    Director
    
    March 14, 2006Edwin B. Borden/s/ Thomas F. Darden, II
    
    Director
    
    March 14, 2006Thomas F. Darden, II/s/ Richard L. Daugherty
    
    Director
    
    March 14, 2006Richard L. Daugherty/s/ David C. Sullivan

David C. Sullivan
    
    Director
    
    March 14, 2006
 87
      Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (incorporated by
reference to (i) Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q (File No. 001-13233) as filed with the Securities and
Exchange Commission on August 4, 1999, (ii) Exhibit 4.4(b) to the
Companys Registration Statement on Form 8-A (File No. 001-13233)
as filed with the Securities and Exchange Commission on January
30, 2004 and (iii) Exhibit 3.1(b) to the Companys Quarterly
Report on Form 10-Q (File No. 001-13233) as filed with the
Securities and Exchange Commission on August 5, 2005).3.2
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to the Companys Annual Report on Form 10-K (File No.
001-13233) 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 (File No. 333-7662) as filed with the Securities and Exchange
Commission, effective May 25, 1994).4.2
    
    Specimen certificate for 8.00% Series B Cumulative Preferred Stock
(incorporated by reference to Exhibit 4.3 to the Companys
Registration Statement on Form 8-A (File No. 001-13233) as filed
with the Securities and Exchange Commission on January 30, 2004).4.3
    
    Form of Articles of Amendment to the Restated Articles of
Incorporation Establishing and Fixing the Rights and Preferences
of the 8.00% Series B Cumulative Preferred Stock (incorporated by
reference to Exhibit 4.4(b) to the Companys Registration
Statement on Form 8-A (File No. 001-13233) 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 (File No. 001-13233)
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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File No. 001-13233) as filed
with the Securities and Exchange Commission on March 15, 2002).
 88
      Exhibit
    
    Description10.7
    
    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 (File No. 001-13233) 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 (File No. 001-13233) as
filed with the Securities and Exchange Commission on November 12,
2003).10.9
    
    Amendment No. 8 dated as of February 24, 2004, to Second Amended
and Restated Agreement of Limited Partnership of WINN Limited
Partnership (incorporated by reference to Exhibit 10.9 to the
Companys Annual Report on Form 10-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on March 12, 2004).10.10
    
    Limitation of Future Hotel Ownership and Development Agreement
(incorporated by reference to Exhibit 10.37 to the Companys
Registration Statement on Form S-11 (File No. 33-91230) 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 (File No. 333-60079) 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 (File No. 001-13233) 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 (File No. 001-13233) 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 (File
No. 001-13233) 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 (File
No. 001-13233) 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
    
    Master Repurchase Agreement Between Marathon Structured Finance
Fund, LP and Winston Finance Partners LLC dated as of October 5,
2004 (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K (File No. 001-13233) as filed with the
Securities and Exchange Commission on October 12, 2004).10.17
    
    Loan Agreement dated as of March 11, 2005 by and between Winston
SPE II LLC and General Electric Capital Corporation (incorporated
by reference to Exhibit 10.20 to the Companys Annual Report on
Form 10-K (File No. 001-13233) as filed with the Securities and
Exchange Commission on March 16, 2005).10.18
    
    Second Amendment to Loan Agreement by and between Winston SPE II
LLC and General Electric Capital Corporation, dated as of October
31, 2005 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on November 7, 2005).
 89
      Exhibit
    
    Description10.19
    
    Form of Mortgage Security Agreement and Fixture Filing dated March
11, 2005 by Winston SPE II LLC (incorporated by reference to
Exhibit 10.21 to the Companys Annual Report on Form 10-K (File
No. 001-13233) as filed with the Securities and Exchange
Commission on March 16, 2005).10.20
    
    Form of Deed of Trust, Security Agreement and Fixture Filing dated
March 11, 2005 by Winston SPE II LLC (incorporated by reference to
Exhibit 10.22 to the Companys Annual Report on Form 10-K (File
No. 001-13233) as filed with the Securities and Exchange
Commission on March 16, 2005).10.21
    
    Form Master Lease Agreement dated as of January 1, 2005 with
Barclay Hospitality Services, Inc., our TRS Lessee (incorporated
by reference to Exhibit 10.30 to the Companys Annual Report on
Form 10-K (File No. 001-13233) as filed with the Securities and
Exchange Commission on March 16, 2005).10.22
    
    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 (File No. 001-13233) as
filed with the Securities and Exchange Commission on August 13,
2003).10.23
    
    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 (Filed No. 001-13233) as filed with the Securities and
Exchange Commission on March 14, 2003).10.24
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement,
dated January 2, 2003, by and between Robert W. Winston, III and
Winston Hotels, Inc. (incorporated by reference to Exhibit 10.34
to the Companys Annual Report on Form 10-K (File No. 001-13233)
as filed with the Securities and Exchange Commission on March 16,
2005).10.25
    
    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 (File
No. 001-13233) as filed with the Securities and Exchange
Commission on March 14, 2003).10.26
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement
dated January 2, 2003, by and between Kenneth R. Crockett and
Winston Hotels, Inc. (incorporated by reference to Exhibit 10.36
to the Companys Annual Report on Form 10-K (File No. 001-13233)
as filed with the Securities and Exchange Commission on March 16,
2005).10.27
    
    Amendment No. 2 dated February 14, 2006 to Employment Agreement
dated January 2, 2003, by and between Kenneth R. Crockett and
Winston Hotels, Inc. (incorporated by reference to the description
in Item 1.01 of the Companys Current Report on Form 8-K (File No.
001-13233) as filed with the Securities and Exchange Commission on
February 17, 2006).10.28
    
    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 (File
No. 001-13233) as filed with the Securities and Exchange
Commission on March 14, 2003).10.29
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement
dated January 2, 2003, by and between Joseph V. Green and Winston
Hotels, Inc. (incorporated by reference to Exhibit 10.38 to the
Companys Annual Report on Form 10-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on March 16, 2005).10.30
    
    Employment Agreement dated March 30, 2004, by and between Brent V.
West and Winston Hotels, Inc. (incorporated by reference to
Exhibit 10.39 to the Companys Annual Report on Form 10-K (File
No. 001-13233) as filed with the Securities and Exchange
Commission on March 16, 2005).
 90
      Exhibit
    
    Description10.31
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement
dated March 30, 2004, by and between Brent V. West and Winston
Hotels, Inc. (incorporated by reference to Exhibit 10.40 to the
Companys Annual Report on Form 10-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on March 16, 2005).10.32
    
    Employment Agreement dated March 30, 2004, by and between James P.
Frey and Winston Hotels, Inc. (incorporated by reference to
Exhibit 10.41 to the Companys Annual Report on Form 10-K (File
No. 001-13233) as filed with the Securities and Exchange
Commission on March 16, 2005).10.33
    
    Amendment No. 1 dated January 1, 2005 to Employment Agreement
dated March 30, 2004, by and between James P. Frey and Winston
Hotels, Inc. (incorporated by reference to Exhibit 10.42 to the
Companys Annual Report on Form 10-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on March 16, 2005).10.34
    
    Summary of 2004 and 2005 executive officer compensation
(incorporated by reference to the description in Item 1.01 of the
Companys Current Report on Form 8-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on February 7, 2005).10.35
    
    Summary of 2004 and 2005 Non-Employee Director compensation
(incorporated by reference to the description in Item 1.01 of the
Companys Current Report on Form 8-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on February 7, 2005).10.36
    
    Summary of 2005 and 2006 executive officer compensation
(incorporated by reference to the description in Item 1.01 of the
Companys Current Report on Form 8-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on February 17, 2006).10.37
    
    Summary of 2005 and 2006 Non-Employee Director compensation
(incorporated by reference to the description in Item 1.01 of the
Companys Current Report on Form 8-K (File No. 001-13233) as filed
with the Securities and Exchange Commission on February 17, 2006).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm
(PricewaterhouseCoopers LLP).31.1
    
    Certification of Principal Executive Officer of Annual Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification of Principal Financial Officer of Annual Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).32.1
    
    Certification of Robert W. Winston, III, Chief Executive Officer
of Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Joseph V. Green, Chief Financial Officer of
Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 91