##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
 For The Quarterly Period Ended March 31, 2007
 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
    
    56-1624289(State of incorporation)
    
    (I.R.S. Employer Identification No.)2626 Glenwood Avenue Raleigh, North Carolina
    
    27608(Address of principal executive offices)
    
    (Zip Code)
 (919) 510-6019
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS
 PageSAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
    
    
    3PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsUnaudited Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006
    
    
    4Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2007 and 2006
    
    
    5Unaudited Consolidated Statement of Shareholders Equity for the three months ended
March 31, 2007
    
    
    6Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2006
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    30Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    46PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    46Item 1A.
    
    Risk Factors
    
    
    47Item 6.
    
    Exhibits
    
    
    48SIGNATURES
    
    
    49EXHIBIT INDEX
    
    
    50
 2




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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
   
    
    risks and uncertainties related to the previously announced merger transaction with
Inland American Real Estate Trust, Inc., including, among other things:
 
    
    the occurrence of any event, change or other circumstances that could give rise to
the termination of the merger agreement;
    
    the outcome of any legal proceedings that have been or may be instituted against our
company or our operating partnership and others relating to the merger agreement;
    
    the inability to complete the merger and the other transactions contemplated by the
merger agreement due to the failure to obtain the requisite common shareholder approval
or the failure to satisfy other conditions to consummation of the merger and the other
transactions contemplated by the merger agreement;
    
    the failure of the merger and the other transactions contemplated by the merger
agreement to be completed for any other reason;
    
    the risks that the merger and the other transactions contemplated by the merger
agreement divert the attention of our employees;
    
    the significant restrictions on our business activities, including our ability to
pay dividends on our common stock, that are imposed on us and our subsidiaries by the
merger agreement; and
    
    the effect of the announcement of the merger and the other transactions contemplated
by the merger agreement on our stock price, customer relationships, operating results
and business generally;
 
    
    the failure to purchase the previously announced New York hotels;
    
    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; and
    
    the failure to make additional hotel loans and investments in non-distressed and distressed hotel assets.
 
 3




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##### 



Item 1. Financial Statements
 WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS  (in thousands, except per share amounts)
 March 31, 2007
    
    December 31, 2006ASSETSLand
    
    $
    59,597
    
    
    $
    59,803Buildings and improvements
    
    
    427,651
    
    
    
    430,968Furniture and equipment
    
    
    66,883
    
    
    
    66,745Operating properties
    
    
    554,131
    
    
    
    557,516Less accumulated depreciation
    
    
    139,835
    
    
    
    140,826414,296
    
    
    
    416,690Properties under development and land for development
    
    
    5,192
    
    
    
    11,748Net investment in hotel properties
    
    
    419,488
    
    
    
    428,438Assets held for sale
    
    
    11,834
    
    
    
    10,327Corporate furniture, fixtures and equipment, net
    
    
    520
    
    
    
    551Cash
    
    
    43,363
    
    
    
    7,822Accounts receivable, net
    
    
    3,149
    
    
    
    2,723Notes receivable
    
    
    29,530
    
    
    
    52,146Investment in joint ventures
    
    
    3,927
    
    
    
    4,210Deferred expenses, net
    
    
    8,792
    
    
    
    9,490Prepaid expenses and other assets
    
    
    16,188
    
    
    
    14,135Deferred tax asset
    
    
    10,506
    
    
    
    10,367Total assets
    
    $
    547,297
    
    
    $
    540,209LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYLines of credit
    
    $
    5,250
    
    
    $
    7,850Mortgage loans
    
    
    240,707
    
    
    
    231,694Accounts payable and accrued expenses
    
    
    18,889
    
    
    
    21,479Distributions payable
    
    
    1,840
    
    
    
    6,413Total liabilities
    
    
    266,686
    
    
    
    267,436Minority interest
    
    
    15,592
    
    
    
    13,804Commitments and contingencies (See Notes 2 and 14)
    
    
    
    
    
    
    Shareholders equity:Preferred stock, Series B, $.01 par value, 5,000 shares authorized, 3,680
shares issued and outstanding (liquidation preference of $93,840)
    
    
    37
    
    
    
    37Common stock, $.01 par value, 50,000 shares authorized,
29,415 and 29,191 shares issued and outstanding
at March 31, 2007 and December 31, 2006, respectively
    
    
    294
    
    
    
    292Additional paid-in capital
    
    
    352,312
    
    
    
    351,274Distributions in excess of earnings
    
    
    (87,624
    )
    
    
    (92,634
    )Total shareholders equity
    
    
    265,019
    
    
    
    258,969Total liabilities, minority interest and shareholders equity
    
    $
    547,297
    
    
    $
    540,209
  4




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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)
 Three Months Ended March 31,
    
    2007
    
    2006Operating revenue:Rooms
    
    $
    39,613
    
    
    $
    33,268Food and beverage
    
    
    2,448
    
    
    
    1,993Other operating departments
    
    
    1,257
    
    
    
    1,082Joint venture fee income
    
    
    68
    
    
    
    52Total operating revenue
    
    
    43,386
    
    
    
    36,395Hotel operating expenses:Rooms
    
    
    7,903
    
    
    
    6,934Food and beverage
    
    
    1,920
    
    
    
    1,696Other operating departments
    
    
    948
    
    
    
    819Undistributed operating expenses:Property operating expenses
    
    
    9,100
    
    
    
    7,597Real estate taxes and property and casualty insurance
    
    
    2,112
    
    
    
    1,716Franchise costs
    
    
    2,756
    
    
    
    2,251Maintenance and repair
    
    
    2,139
    
    
    
    1,882Management fees
    
    
    1,528
    
    
    
    1,293General and administrative
    
    
    6,328
    
    
    
    3,028Depreciation
    
    
    5,591
    
    
    
    4,691Amortization
    
    
    546
    
    
    
    489Total operating expenses
    
    
    40,871
    
    
    
    32,396Operating income
    
    
    2,515
    
    
    
    3,999Extinguishment of debt
    
    
    (272
    )
    
    
    Loss on sale of note receivable
    
    
    (5,322
    )
    
    
    Interest and other income
    
    
    1,720
    
    
    
    1,386Interest expense
    
    
    (3,896
    )
    
    
    (4,412
    )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
    
    
    (5,255
    )
    
    
    973Loss allocation to minority interest in Partnership
    
    
    237
    
    
    
    34Loss allocation to minority interest in consolidated joint ventures
    
    
    213
    
    
    
    134Income tax expense
    
    
    (11
    )
    
    
    (27
    )Equity in income of unconsolidated joint ventures
    
    
    1,304
    
    
    
    22Income (loss) from continuing operations
    
    
    (3,512
    )
    
    
    1,136Discontinued operations:Income from discontinued operations
    
    
    366
    
    
    
    895Gain on sale of discontinued operations
    
    
    9,996
    
    
    
    4,249Net income
    
    
    6,850
    
    
    
    6,280Preferred stock distribution
    
    
    (1,840
    )
    
    
    (1,840
    )Net income available to common shareholders
    
    $
    5,010
    
    
    $
    4,440Basic weighted average number of common shares outstanding
    
    
    28,974
    
    
    
    26,418Diluted weighted average number of common shares outstanding
    
    
    28,974
    
    
    
    26,418Income (loss) per common share basic and diluted:Loss from continuing operations
    
    $
    (0.18
    )
    
    $
    (0.03
    )Income from discontinued operations
    
    
    0.35
    
    
    
    0.20Net income available to common shareholders
    
    $
    0.17
    
    
    $
    0.17Per share dividends to common shareholders
    
    $
    
    
    
    $
    0.15
  5




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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007  (in thousands, except per share amounts)
 Additional
    
    Distributions
    
    TotalPreferred Stock
    
    Common Stock
    
    Paid-in
    
    In Excess of
    
    ShareholdersShares
    
    Dollars
    
    Shares
    
    Dollars
    
    Capital
    
    Earnings
    
    EquityBalances at December 31, 2006
    
    
    3,680
    
    
    $
    37
    
    
    
    29,191
    
    
    $
    292
    
    
    $
    351,274
    
    
    $
    (92,634
    )
    
    $
    258,969Issuance of shares and other
    
    
    
    
    
    
    
    
    
    
    224
    
    
    
    2
    
    
    
    8
    
    
    
    
    
    
    
    10Restricted stock expense recognition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    1,030Distributions ($0.50 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,840
    )
    
    
    (1,840
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,850
    
    
    
    6,850Balances at March 31, 2007
    
    
    3,680
    
    
    $
    37
    
    
    
    29,415
    
    
    $
    294
    
    
    $
    352,312
    
    
    $
    (87,624
    )
    
    $
    265,019
  6




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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  ($ in thousands)
 Three Months Ended March 31,
    
    2007
    
    2006Cash flows from operating activities:Net income
    
    $
    6,850
    
    
    $
    6,280Adjustments to reconcile net income to net cash
provided by operating activities:Income allocation to minority interest
    
    
    221
    
    
    
    215Loss allocation to minority interest in consolidated joint ventures
    
    
    (213
    )
    
    
    (134
    )Depreciation
    
    
    5,774
    
    
    
    5,405Amortization
    
    
    549
    
    
    
    498Deferred income tax benefit
    
    
    (139
    )
    
    
    (183
    )Extinguishment of debt
    
    
    272
    
    
    
    Loss on sale of note receivable
    
    
    5,322
    
    
    
    Gain on sale of hotel properties
    
    
    (10,438
    )
    
    
    (4,455
    )Equity in income of unconsolidated joint ventures
    
    
    (1,304
    )
    
    
    (22
    )Distributions from joint ventures
    
    
    401
    
    
    
    71Unearned compensation amortization
    
    
    1,030
    
    
    
    836Changes in assets and liabilities:Accounts receivable
    
    
    (426
    )
    
    
    243Prepaid expenses and other assets
    
    
    (2,053
    )
    
    
    (1,892
    )Accounts payable and accrued expenses
    
    
    (2,904
    )
    
    
    (722
    )Net cash provided by operating activities
    
    
    2,942
    
    
    
    6,140Cash flows from investing activities:Investment in hotel properties
    
    
    (10,360
    )
    
    
    (9,267
    )Proceeds from sale of state historic tax credits
    
    
    2,923
    
    
    
    Proceeds from sale of hotel properties
    
    
    19,644
    
    
    
    8,461Issuance of notes receivable
    
    
    (1,294
    )
    
    
    (806
    )Collection and sale of notes receivable
    
    
    18,833
    
    
    
    17Distributions from (investment in) unconsolidated joint ventures
    
    
    1,186
    
    
    
    (7,391
    )Deposit for potential hotel acquisitions
    
    
    
    
    
    
    (6,625
    )Franchise and loan origination costs
    
    
    (60
    )
    
    
    (186
    )Net cash provided by (used in) investing activities
    
    
    30,872
    
    
    
    (15,797
    )Cash flows from financing activities:Net increase (decrease) in lines of credit
    
    
    (2,600
    )
    
    
    20,300Proceeds from mortgage loans
    
    
    9,209
    
    
    
    3,406Payment of mortgage loans
    
    
    (196
    )
    
    
    (611
    )Distributions to shareholders
    
    
    (6,218
    )
    
    
    (5,816
    )Distributions to minority interest in partnership
    
    
    (195
    )
    
    
    (195
    )Contributions from (distributions to) minority interest
in consolidated joint ventures
    
    
    1,790
    
    
    
    (97
    )Deposit for new CMBS rate lock
    
    
    
    
    
    
    (3,000
    )Fees paid in connection with financing activities
    
    
    (63
    )
    
    
    (483
    )Net cash provided by financing activities
    
    
    1,727
    
    
    
    13,504Net increase in cash
    
    
    35,541
    
    
    
    3,847Cash at beginning of period
    
    
    7,822
    
    
    
    15,047Cash at end of period
    
    $
    43,363
    
    
    $
    18,894Supplemental disclosure:Cash paid for income taxes
    
    $
    40
    
    
    $
    170Cash paid for interest (net of amounts capitalized)
    
    $
    3,108
    
    
    $
    4,788
  7




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 1. ORGANIZATION
      8




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  2. PROPOSED MERGER
   1)
    
    each common unit of IAA shall be converted into one validly issued, fully paid and
nonassessable common unit of the surviving entity of the merger;2)
    
    each share of the Companys common stock issued and outstanding immediately prior to the
Effective Time (other than shares owned by the Company, Inland and their respective
subsidiaries) will be converted into, and cancelled in exchange for, the right to receive an
amount in cash to be paid by Inland equal to $15.00, without interest (the Common Share
Merger Consideration);3)
    
    each share of the Companys Series B Preferred Stock, issued and outstanding immediately
prior to the Effective Time, will be converted into, and cancelled in exchange for, the
right to receive an amount in cash to be paid by Inland equal to the sum of (i) $25.44 per
share (if the Effective Time occurs on or prior to June 30, 2007) or $25.38 per share (if
the Effective Time occurs after June 30, 2007 and on or prior to September 30, 2007) plus
(ii) any accrued and unpaid dividends as of the Effective Time; and4)
    
    each partnership interest in the Partnership that is not specifically designated as a
Series B preferred unit, issued and outstanding immediately prior to the Effective Time,
will be converted into, and cancelled in exchange for, the right to receive an amount in
cash equal to the Common Share Merger Consideration, multiplied by a conversion factor (as
defined in the Amended and Restated Agreement of Limited Partnership of the Partnership),
which as of the date hereof is one (1).
  9




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
       3. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 Basis of Presentation
  10




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Principles of Consolidation
  Accounting for Long-Lived Assets
 Investment in Hotel Properties.
 General.
 Impairment on Planned Dispositions.
 11




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Recently Issued Accounting Standards
   4. MINORITY INTEREST IN PARTNERSHIP
   5. CONCENTRATION RISK
   12




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  6. DISCONTINUED OPERATIONS
    2007
    
    2006Total revenue
    
    $
    3,062
    
    
    $
    7,595Total expenses
    
    
    2,816
    
    
    
    6,867Income from hotel operations
    
    
    246
    
    
    
    728Allocation to minority interest in Partnership  income
from discontinued operations
    
    
    (16
    )
    
    
    (43
    )Gain on sale of discontinued operations
    
    
    10,438
    
    
    
    4,455Allocation to minority interest in Partnership -
gain on sale of discontinued operations
    
    
    (442
    )
    
    
    (206
    )Income tax benefit
    
    
    136
    
    
    
    210Income from discontinued operations
    
    $
    10,362
    
    
    $
    5,144
 13




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 7. HOTEL DEVELOPMENT AND ACQUISITION
 Developments
 Downtown Raleigh. aloft
 Raleigh Aloft. aloft aloft
 Roanoke Residence Inn.
 Wilmington Hilton Garden Inn.
 Joint Venture Developments.
 Acquisitions
 Courtyard by Marriott in St. Charles, IL.
 Potential Acquisition of Two New York Hotels
 8. SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES
  14




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Consolidated Joint Ventures
 Operating Hotels
      15




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
    16




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006Gateway Hotel AssociatesAssets
    
    $
    11,877
    
    
    $
    10,105Liabilities
    
    
    8,138
    
    
    
    6,460Equity
    
    $
    3,739
    
    
    $
    3,645Gateway Hotel LesseeAssets
    
    $
    158
    
    
    $
    98Liabilities
    
    
    359
    
    
    
    228Equity
    
    $
    (201
    )
    
    $
    (130
    )Winston Kansas City, LPAssets
    
    $
    19,901
    
    
    $
    23,198Liabilities
    
    
    14,057
    
    
    
    14,304Equity
    
    $
    5,844
    
    
    $
    8,894Stanley AssociatesAssets
    
    $
    19,029
    
    
    $
    18,193Liabilities
    
    
    13,852
    
    
    
    12,884Equity
    
    $
    5,177
    
    
    $
    5,309Stanley LesseeAssets
    
    $
    1,151
    
    
    $
    1,059Liabilities
    
    
    907
    
    
    
    386Equity
    
    $
    244
    
    
    $
    673131 East Redwood (Tenant) LLCAssets
    
    $
    1,268
    
    
    $
    1,353Liabilities
    
    
    594
    
    
    
    550Equity
    
    $
    674
    
    
    $
    803Marsh Landing Hotel AssociatesAssets
    
    $
    6,673
    
    
    $
    6,542Liabilities
    
    
    4,710
    
    
    
    4,713Equity
    
    $
    1,963
    
    
    $
    1,829Marsh Landing LesseeAssets
    
    $
    271
    
    
    $
    188Liabilities
    
    
    254
    
    
    
    171Equity
    
    $
    17
    
    
    $
    17Chapel Hill Hotel AssociatesAssets
    
    $
    14,367
    
    
    $
    12,967Liabilities
    
    
    10,207
    
    
    
    10,192Equity
    
    $
    4,160
    
    
    $
    2,775Chapel Hill LesseeAssets
    
    $
    595
    
    
    $
    410Liabilities
    
    
    364
    
    
    
    271Equity
    
    $
    231
    
    
    $
    139
 17




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##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended March 31,
    
    2007
    
    
    2006Gateway Hotel AssociatesRevenue
    
    $
    264
    
    
    
    Expense
    
    
    (450
    )
    
    
    Net loss
    
    $
    (186
    )
    
    
    Gateway Hotel LesseeRevenue
    
    $
    764
    
    
    
    Expense
    
    
    (836
    )
    
    
    Net loss
    
    $
    (72
    )
    
    
    Winston Kansas City, LPRevenue
    
    $
    416
    
    
    
    Expense
    
    
    (543
    )
    
    
    (40
    )Net loss
    
    $
    (127
    )
    
    
    (40
    )Stanley AssociatesRevenue
    
    $
    422
    
    
    
    395Expense
    
    
    (554
    )
    
    
    (413
    )Net loss
    
    $
    (132
    )
    
    
    (18
    )Stanley LesseeRevenue
    
    $
    1,285
    
    
    
    886Expense
    
    
    (1,714
    )
    
    
    (1,491
    )Net loss
    
    $
    (429
    )
    
    
    (605
    )131 East Redwood (Tenant) LLCRevenue
    
    $
    1,151
    
    
    
    1,068Expense
    
    
    (1,280
    )
    
    
    (1,203
    )Net loss
    
    $
    (129
    )
    
    
    (135
    )Marsh Landing Hotel AssociatesRevenue
    
    $
    371
    
    
    
    357Expense
    
    
    (222
    )
    
    
    (201
    )Net income
    
    $
    149
    
    
    
    156Marsh Landing LesseeRevenue
    
    $
    895
    
    
    
    856Expense
    
    
    (895
    )
    
    
    (832
    )Net income
    
    $
    
    
    
    
    24Chapel Hill Hotel AssociatesRevenue
    
    $
    563
    
    
    
    508Expense
    
    
    (487
    )
    
    
    (480
    )Net income
    
    $
    76
    
    
    
    28Chapel Hill LesseeRevenue
    
    $
    1,365
    
    
    
    1,197Expense
    
    
    (1,273
    )
    
    
    (1,179
    )Net income
    
    $
    92
    
    
    
    18
  18




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Unconsolidated Joint Ventures
 Hotel Under Development
  Operating Hotels
     19




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
   March 31, 2007
    
    
    December 31, 2006Gross fixed assets
    
    $
    27,693
    
    
    $
    41,418Accumulated depreciation
    
    
    (3,654
    )
    
    
    (4,860
    )Other assets
    
    
    4,974
    
    
    
    3,653Total assets
    
    
    29,013
    
    
    
    40,211Miscellaneous liabilities
    
    
    5,171
    
    
    
    4,847Mortgage loans:Ten-year loan
collateralized by
West Des Moines
Fairfield Inn and
Suites hotel,
matures February
2013, with a
20-year
amortization
period, at an
interest rate of
30-day LIBOR plus 3%.
    
    
    2,739
    
    
    
    2,760Five-year loan
collateralized by
Houston Springhill
Suites hotel,
matures October
2009, with a
20-year
amortization
period, at a fixed
rate of 6.57% for
$4.8 million of the
original note, and
a variable interest
rate of 30-day
LIBOR plus 3.8% for
the remaining $4.9
million of the
original note.
    
    
    9,148
    
    
    
    9,210Five-year loan
collateralized by
West Des Moines
Springhill Suites
hotel, matures July
2010, with a
20-year
amortization
period, at an
interest rate of
90-day LIBOR plus 3.5%.
    
    
    4,572
    
    
    
    4,598Five-year loan
collateralized by
Shelton Courtyard
by Marriott hotel,
matures February
2007 with two
additional one year
extensions,
interest only, at
an interest rate of
30-day LIBOR plus 3.35%.
    
    
    
    
    
    
    9,000Total liabilities
    
    
    21,630
    
    
    
    30,415Equity
    
    
    7,383
    
    
    
    9,796Companys share of equity
    
    
    1,119
    
    
    
    1,534Companys additional basis
    
    
    144
    
    
    
    145Investment in joint ventures
    
    $
    1,263
    
    
    $
    1,679
 20




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended March 31,
    
    2007
    
    2006Revenues
    
    $
    3,855
    
    
    $
    3,847Hotel department expenses
    
    
    (1,142
    )
    
    
    (2,110
    )Management fees
    
    
    (131
    )
    
    
    (144
    )Undistributed and fixed expenses
    
    
    (2,560
    )
    
    
    (1,351
    )Gain on sale of hotel
    
    
    10,100
    
    
    
    Hotel net income
    
    
    10,122
    
    
    
    242Charlesbank Ventures 87% share of net income
    
    
    8,806
    
    
    
    211Corporate charges
    
    
    (103
    )
    
    
    (52
    )Charlesbank Venture net income
    
    
    8,703
    
    
    
    159Winstons 15% share of Charlesbank
Venture net income
    
    
    1,305
    
    
    
    24Amortization of investment true-up
    
    
    (1
    )
    
    
    (2
    )Equity in income of unconsolidated joint ventures
    
    $
    1,304
    
    
    $
    22
 9. NOTES RECEIVABLE
  March 31,
    
    DecemberNotes receivable as of
    
    2007
    
    31, 2006$1.1 million mezzanine loan collateralized by the
ownership interest in the entity that owns the Hilton
Garden Inn in Atlanta (Sugarloaf) GA; matured
December 2006; 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, paid off in January 2007.
    
    $
    
    
    
    $
    1,080$2.4 million mezzanine loan collateralized by the
ownership interest in the entity that owns the
Sheraton hotel in Atlantic Beach, NC; matures
February 2009; 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$6.0 million mezzanine loan collateralized by the
ownership interest in the entity that owns the
LaPosada de Santa Fe Resort in Santa Fe, NM; matures
December 2007; interest rate of 30-day LIBOR plus 9%,
with interest only payments until maturity.
    
    
    6,000
    
    
    
    6,000$1.4 million first mortgage loan collateralized by
the Comfort Inn in Greenville, SC; matures January
2010; interest rate of prime plus 1.5%, with fixed
principal payments of $6 plus interest until maturity
paid off in May 2007.
    
    
    1,271
    
    
    
    1,294$3.4 million mezzanine loan collateralized by the
ownership interest in the entity that owns the
Hampton Inn & Suites in Albany, NY; matures August
2011; 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
    
    
    
    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; effective interest rate of 9.3% (and
a yield to maturity of 11.7%), interest and principal
payments.
    
    
    2,339
    
    
    
    2,338
 21




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 March 31,
    
    DecemberNotes receivable as of
    
    2007
    
    31, 2006$14.0 million from four mezzanine loans
collateralized by senior participation interests in
four loans to Walton Street Capital, which owns four
Marriott Renaissance hotels; matures October 2008
with two one-year extensions; interest rate of 30-day
LIBOR plus 4.5%, with interest only payments until
maturity, one of the four loans was prepaid in
December 2006, another was prepaid in January 2007,
and the remaining two were prepaid in April 2007.
    
    
    8,750
    
    
    
    11,250$2.3 million B-note, of a $12 million total loan
amount for a 140-room Hilton Garden Inn under
construction in Columbia, SC; collateralized by a
second mortgage on the hotel project; interest rate
of 90-day LIBOR plus 6.12% during the construction
period with a 6.00% accrual, and 90-day LIBOR plus
5.87% during year one with a 6.00% accrual and 90-day
LIBOR plus 7.87% for years two through five of the
permanent loan with a 4.00% accrual; funded ratably
over the construction period.
    
    
    2,250
    
    
    
    2,250$1.7 million B note for a 122-room Hilton Garden
Inn under construction in Tuscaloosa, AL;
collateralized by a second mortgage on the hotel
project; interest rate of 90-day LIBOR plus 7.63%
during the construction period with an incremental
3.29% accrual; thereafter the interest rate is 90-day
LIBOR plus 7.43%, with an incremental 3.29% accrual
during the first year only; the accrual is due upon
maturity, which is five years from the date the
property opens to the general public; funded ratably
over the construction period.
    
    
    1,589
    
    
    
    1,318$2.2 million five-year B note for a 101-room
Hampton Inn & Suites under construction in
Murfreesboro, TN; interest rate of 30-day LIBOR plus
6.05%, with an additional 3.86% accrual per annum;
payments are interest only during construction of the
hotel and the first 12 months of hotel operations and
thereafter include principal payments based on a
25-year amortization period; funded ratably over the
construction period.
    
    
    1,215
    
    
    
    533$20.3 million B note as part of a $66 million
senior note to fund the $91.5 million refinance and
refurbishment of the Lady Luck casino and adjacent
hotel; interest at a fixed rate of 12.63% for two
years with two one-year extensions, sold February
2007.
    
    
    
    
    
    
    20,308$2.2 million mezzanine loan collateralized by the
ownership interest in the entity that owns the
Homewood Suites in Denver, CO; interest rate of
30-day LIBOR plus 7.50%.
    
    
    
    
    
    
    $1.2 million B note, as part of a total $7.8
million financing, collateralized by a 104-room
Holiday Inn Express under construction in Webster,
NY, construction-to-five-year permanent loan,
interest at 90-day LIBOR plus approximately 7.00%,
with an additional 3.94% of the original principal
balance accruing until the loan is paid in full;
funded ratably over the construction period.
    
    
    341
    
    
    
    Total notes receivable
    
    $
    29,530
    
    
    $
    52,146Total interest receivable and deposit related to notes
    
    $
    1,194
    
    
    $
    1,759
   22




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
   10. INCOME TAXES
   11. EARNINGS PER SHARE
  23




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended March 31,
    
    2007
    
    
    2006Income (loss) from continuing operations
    
    $
    (3,512
    )
    
    $
    1,136Less: preferred stock distributions
    
    
    (1,840
    )
    
    
    (1,840
    )Loss from continuing operations
available to common shareholders
    
    $
    (5,352
    )
    
    $
    (704
    )Income from discontinued operations
    
    $
    10,362
    
    
    $
    5,144Net income available to common shareholders
    
    $
    5,010
    
    
    $
    4,440Weighted average number of common shares basic and diluted
    
    
    28,974
    
    
    
    26,418Earnings per share  basic and dilutedLoss from continuing operations
available to common shareholders
    
    $
    (0.18
    )
    
    $
    (0.03
    )Income from discontinued operations
    
    $
    0.35
    
    
    $
    0.20Net income available to common shareholders basic and diluted
    
    $
    0.17
    
    
    $
    0.17
   12. CREDIT FACILITIES AND MORTGAGE LOANS
 Credit Facilities
   24




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
   Mortgage Loans
  March 31,
    
    December2007
    
    31, 2006Collateralized by wholly-owned hotelsSixteen ten-year CMBS loans collateralized by 16 hotels, at a
fixed interest rate of 5.94%, interest only for four years,
thereafter interest and principal payments based on a 30-year
amortization period.
    
    $
    176,000
    
    
    $
    176,000Five-year first mortgage loan collateralized by the Homewood
Suites hotel in Princeton, NJ, at a variable interest rate of
90-day LIBOR plus 1.75%, principal and interest payments
starting on May 1, 2007, (paid off April 2007).
    
    
    12,600
    
    
    
    9,868Five-year recourse construction-to-permanent first mortgage
loan for $9.0 million, collateralized by the Hilton Garden
Inn hotel which opened during March 2007 in Wilmington, NC,
at a variable interest rate of 30-day LIBOR plus 1.8%,
interest added to principal during construction, (paid off
May 2007).
    
    
    7,475
    
    
    
    3,156Five-year construction-to-permanent first mortgage loan for
$7.0 million, collateralized by the Residence Inn hotel under
construction in Roanoke, VA, at a variable interest rate of
30-day LIBOR plus 1.5%, interest added to principal during
construction, principal and interest payments starting after
the final disbursement.
    
    
    
    
    
    
    Collateralized by consolidated joint venture hotels (See Note
8)Five-year loan collateralized by the Chapel Hill Courtyard by
Marriott hotel matures March 8, 2010, at a fixed interest
rate of 7.51%, with interest and principal payments based on
a 20-year amortization period.
    
    
    8,638
    
    
    
    8,694Ten-year loan collateralized by the Ponte Vedra Hampton Inn
hotel, matures February 1, 2011, at a variable interest rate
of 30-day LIBOR plus 3%, with interest and principal
payments.
    
    
    4,635
    
    
    
    4,659Five-year loan collateralized by the Stanley hotel matures
August 11, 2010, with a 10-year amortization period, at a
fixed interest rate of 6.19%, with interest and principal
payments.
    
    
    12,642
    
    
    
    12,696Five-year first mortgage loan collateralized by the Courtyard
by Marriott hotel in Kansas City, MO, matures November 1,
2011, at a variable interest rate of 90-day LIBOR plus 1.75%,
principal and interest payments based on a 20-year
amortization period.
    
    
    10,817
    
    
    
    10,879Five-year first mortgage loan collateralized by the Hilton
Garden Inn hotel in Akron, OH, at a variable interest rate of
90-day LIBOR plus 1.75%, principal and interest payments
starting on May 1, 2007.
    
    
    7,900
    
    
    
    5,742Total
    
    $
    240,707
    
    
    $
    231,694
 25




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  13. SEGMENT REPORTING
  Three Months Ended March 31, 2007:Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    43,386
    
    
    $
    
    
    
    $
    
    
    
    $
    43,386Operating expenses
    
    
    (28,406
    )
    
    
    (2
    )
    
    
    (6,326
    )
    
    
    (34,734
    )Depreciation and amortization
    
    
    (6,137
    )
    
    
    
    
    
    
    
    
    
    
    (6,137
    )Extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (272
    )
    
    
    (272
    )Loss on sale of note receivable
    
    
    
    
    
    
    (5,322
    )
    
    
    
    
    
    
    (5,322
    )Interest and other income
    
    
    
    
    
    
    1,500
    
    
    
    220
    
    
    
    1,720Interest expense
    
    
    (3,100
    )
    
    
    (796
    )
    
    
    
    
    
    
    (3,896
    )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
    
    
    5,743
    
    
    
    (4,620
    )
    
    
    (6,378
    )
    
    
    (5,255
    )Loss allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    237Loss allocation to minority interest in consolidated
joint ventures
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    213Income tax expense
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )Equity in income of unconsolidated joint ventures
    
    
    1,304
    
    
    
    
    
    
    
    
    
    
    
    1,304Income (loss) from continuing operations
    
    $
    7,249
    
    
    $
    (4,620
    )
    
    $
    (6,141
    )
    
    $
    (3,512
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,362Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,850Total assets
    
    $
    516,573
    
    
    $
    30,724
    
    
    $
    
    
    
    $
    547,297
 26




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended March 31, 2006:Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    36,395
    
    
    $
    
    
    
    $
    
    
    
    $
    36,395Operating expenses
    
    
    (24,188
    )
    
    
    
    
    
    
    (3,028
    )
    
    
    (27,216
    )Depreciation and amortization
    
    
    (5,180
    )
    
    
    
    
    
    
    
    
    
    
    (5,180
    )Interest and other income
    
    
    
    
    
    
    1,243
    
    
    
    143
    
    
    
    1,386Interest expense
    
    
    (3,791
    )
    
    
    (621
    )
    
    
    
    
    
    
    (4,412
    )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
    
    
    3,236
    
    
    
    622
    
    
    
    (2,885
    )
    
    
    973Loss allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    34Loss allocation to minority interest in consolidated
joint ventures
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    134Income tax expense
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (27
    )Equity in income of unconsolidated joint ventures
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Income (loss) from continuing operations
    
    $
    3,365
    
    
    $
    622
    
    
    $
    (2,851
    )
    
    $
    1,136Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,144Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,280Total assets
    
    $
    500,140
    
    
    $
    40,069
    
    
    $
    
    
    
    $
    540,209
 14. COMMITMENTS AND CONTINGENCIES
 Merger Agreement
  Law suit related to Och-Ziff Merger
 Whitney v. Winston Hotels, Inc., et al.
 Legal Action Related to Tribeca Hotel
  27




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Various Legal Actions
  Franchise Agreements
    Year of Expiration
    
    Number of Hotels2007
    
    12008
    
    22009
    
    22010
    
    12011
    
    22012
    
    22013
    
    42014
    
    12015
    
    12016
    
    22017
    
    102018
    
    32019
    
    62020
    
    12022
    
    32023
    
    12024
    
    32025
    
    12026
    
    12027
    
    22031
    
    1
  28




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  
 29




---



##### 



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations($ in thousands except room revenue statistics)
    1)
    
    each common unit of IAA shall be converted into one validly issued, fully paid and
nonassessable common unit of the surviving entity of the merger;2)
    
    each share of the Companys common stock issued and outstanding immediately prior to
the Effective Time (other than shares owned by the Company, Inland and their respective
subsidiaries) will be converted into, and cancelled in exchange for, the right to receive
an amount in cash to be paid by Inland equal to $15.00, without interest;3)
    
    each share of the Companys Series B Preferred Stock, issued and outstanding
immediately prior to the Effective Time, will be converted into, and cancelled in exchange
for, the right to receive an amount in cash to be paid by Inland equal to the sum of (i)
$25.44 per share (if the Effective Time occurs on or prior to June 30, 2007) or $25.38 per
share (if the Effective Time occurs after June 30, 2007 and on or prior to September 30,
2007) plus (ii) any accrued and unpaid dividends as of the Effective Time; and4)
    
    each partnership interest in the Partnership that is not specifically designated as a
Series B preferred unit, issued and outstanding immediately prior to the Effective Time,
will be converted into, and cancelled in exchange for, the right to receive an amount in
cash equal to the Common Share Merger Consideration, multiplied by a conversion factor (as
defined in the Amended and Restated Agreement of Limited Partnership of the Partnership),
which as of the date hereof is one (1).
  30




---



##### 



Where the following Managements Discussion and Analysis discusses our future plans, strategies and
activities, such discussion assumes that the Merger is not, and will not be, completed. Because
the Merger will not occur unless our common shareholders approve the Merger and because the Merger
is subject to a number of other conditions precedent (many of which are outside our control), there
can be no assurance that the Merger will occur. If the Merger does not occur, there may be a
negative impact on our common and preferred stock prices. See Risk Factors  Risks Related to
the Proposed Merger  Failure to complete the Merger could negatively impact our stock price and
our future business and financial results.
 OVERVIEW
  31




---



##### 



Hotel Ownership
     Hotel Financing
  32




---



##### 



Results of Operations for the Three Months Ended March 31, 2007 (2007) versus the Three Months
Ended March 31, 2006 (2006)
 HOTEL OWNERSHIP SEGMENT
 Revenues
  2007 vs. 20062007 vs. 2006
    
    PercentageMarch 31,
    
    2007
    
    2006
    
    Change
    
    ChangeHotel room revenues
    
    $
    39,613
    
    
    $
    33,268
    
    
    $
    6,345
    
    
    
    19.1
    %RevPAR
    
    $
    72.75
    
    
    $
    67.09
    
    
    $
    5.66
    
    
    
    8.4
    %Occupancy
    
    
    65.9
    %
    
    
    70.2
    %
    
    
    -4.3
    %
    
    
    -6.1
    %Average daily rate (ADR)
    
    $
    110.36
    
    
    $
    95.61
    
    
    $
    14.75
    
    
    
    15.4
    %
  2007 vs. 20062007 vs. 2006
    
    PercentageMarch 31,
    
    2007
    
    2006
    
    Change
    
    ChangeHotel room revenues
    
    $
    36,866
    
    
    $
    33,268
    
    
    $
    3,598
    
    
    
    10.8
    %RevPAR
    
    $
    74.36
    
    
    $
    67.09
    
    
    $
    7.27
    
    
    
    10.8
    %Occupancy
    
    
    67.8
    %
    
    
    70.2
    %
    
    
    -2.4
    %
    
    
    -3.4
    %Average daily rate (ADR)
    
    $
    109.73
    
    
    $
    95.61
    
    
    $
    14.12
    
    
    
    14.8
    %
 Room
 Food and Beverage
 Other Operating Departments
 Expenses
 Room 
 Food and Beverage
 33




---



##### 



Other Operating Departments
 Property Operating 
 Real Estate Taxes and Property and Casualty Insurance 
 Franchise
 Maintenance and Repair
 Management Fees
 Depreciation and Amortization
 Interest Expense
   34




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##### 



Loss Allocation to Minority Interest in Consolidated Joint Ventures
 Income Tax Expense 
 Equity in Income of Unconsolidated Joint Ventures 
 HOTEL FINANCING SEGMENT
 General and Administrative
 Interest and Other Income
 Interest Expense
 Loss on sale of loan receivable 
 GENERAL CORPORATE INCOME AND EXPENSES
  General and Administrative
 35




---



##### 



Interest and Other Income
 Loss Allocation to Minority Interest in Partnership
 Discontinued Operations
   LIQUIDITY AND CAPITAL RESOURCES
 Recent Development 3⁄4 Proposed Merger
   Overview
  36




---



##### 



Operating
  Investing
 Overview
  Investment in hotel properties
    37




---



##### 



Proceeds from state historic tax credits
  Proceeds from sale of hotel properties
   Issuance of notes receivable
   Collection and sale of notes receivable
  Distributions from (investment in) unconsolidated joint venture
  Deposit for potential hotel acquisitions
  38




---



##### 



Financing
 Overview
  Proceeds from issuance of and redemption of securities
  Net increase (decrease) in lines of credit
    Proceeds from mortgage loans
  39




---



##### 



Payment of mortgage loans
  Distributions to shareholders
  SEASONALITY
  OFF-BALANCE SHEET ARRANGEMENTS
  CONTRACTUAL OBLIGATIONS
  CRITICAL ACCOUNTING POLICIES
  Allowances for Doubtful Notes Receivable
  40




---



##### 



Accounting for Long-Lived Assets
 General.
 Impairment on Planned Dispositions
 Franchise Agreements
  Recently Issued Accounting Standards
  41




---



##### 



Funds From Operations (FFO) and FFO Available to Common Shareholders
    
    
    The Company entered into a definitive agreement on February 21,
2007 pursuant to which the Company agreed, subject to the approval
of the Companys common stockholders and other closing conditions,
to merge with and into an affiliate of Och-Ziff. On March 8,
2007, the Company received an unsolicited offer from Inland
subsequently confirmed in a letter from Inland dated March 27,
2007. On April 2, 2007, the Company entered into an Agreement and
Plan of Merger with Inland and IAA. The Company has incurred
merger related costs of approximately $3.0 million during 2007.
 
    
    In February 2007, the Company closed on the sale of its junior
participation interest in the Lady Luck loan to the loans senior
participant for approximately $15.2 million, resulting in a loss
of $5.3 million, including a put fee and accrued, unpaid interest.
 
    
    In October 2004, the Company entered into a $50.0 million master
repurchase agreement with Marathon. In February 2007, the Company
terminated this master repurchase agreement. Write-off of related
deferred expenses of $0.3 million is included in extinguishment of
debt in the Consolidated Statements of Operations.
 
    
    One of the Companys taxable REIT subsidiaries provided
development services to one of the Companys consolidated joint
ventures, and recorded development fee income. This income is
taxable and therefore income tax expense related to the
development fees, totaling $0.3 million for 2006 is included in
the Consolidated Statements of Operations. Since the joint
ventures income is consolidated into the Companys financial
statements, the development fee income is eliminated in
consolidation.
 42




---



##### 



WINSTON HOTELS, INC.
RECONCILIATION OF NET INCOME TO FFO,
FFO AVAILABLE TO COMMON SHAREHOLDERS AND
FFO AVAILABLE TO COMMON SHAREHOLDERS, EXCLUDING UNUSUAL CHARGES  ($ in thousands)
 Three Months Ended March 31,
    
    2007
    
    2006Net income
    
    $
    6,850
    
    
    $
    6,280Gain on sale of discontinued operations
    
    
    (10,438
    )
    
    
    (4,456
    )(Gain) loss on sale of unconsolidated joint venture hotel
    
    
    (1,318
    )
    
    
    1Minority interest in Partnership allocation of loss
    
    
    (237
    )
    
    
    (34
    )Minority interest in Partnership allocation of gain
on sale of discontinued operations
    
    
    442
    
    
    
    206Minority interest in Partnership allocation of income
from discontinued operations
    
    
    16
    
    
    
    43Depreciation
    
    
    5,016
    
    
    
    4,304Depreciation from discontinued operations
    
    
    183
    
    
    
    714Depreciation from joint ventures
    
    
    349
    
    
    
    258FFO
    
    
    863
    
    
    
    7,316Preferred stock dividend
    
    
    (1,840
    )
    
    
    (1,840
    )FFO Available to Common Shareholders
    
    $
    (977
    )
    
    $
    5,476Unusual Charges:Loss on sale of note receivable
    
    
    5,322
    
    
    
    Merger related costs
    
    
    3,014
    
    
    
    Write off of unamortized debt costs
    
    
    272
    
    
    
    Tax on joint venture development fees
    
    
    
    
    
    
    261FFO Available to Common Shareholders,
Excluding Unusual Charges
    
    $
    7,631
    
    
    $
    5,737
 43




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk ($ in thousands)
   44




---



##### 



As of March 31, 2007
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    Total
    
    Fair ValueVariable rate  GE line:
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Average interest rate
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )Variable rate  Marathon facilities (h):
    
    $
    
    
    
    $
    5,250
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,250
    
    
    $
    5,250Average interest rate
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Mortgage loans:Fixed rate  CMBS
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    959
    
    
    $
    2,099
    
    
    $
    172,942
    
    
    $
    176,000
    
    
    $
    176,000Average interest rate
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %Variable
rate  Princeton, NJ Homewood Suites (h)
    
    $
    124
    
    
    $
    199
    
    
    $
    214
    
    
    $
    229
    
    
    $
    246
    
    
    $
    11,588
    
    
    $
    12,600
    
    
    $
    12,600Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )Variable
rate  Wilmington, NC Hilton Garden Inn (g) (h)
    
    $
    7,475
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,475
    
    
    $
    7,475Average interest rate
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )Variable
rate  Roanoke, VA Residence Inn (g)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Average interest rate
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )Consolidated joint venture loans:Fixed rate
 Chapel Hill, NC Courtyard by Marriott
    
    $
    173
    
    
    $
    247
    
    
    $
    267
    
    
    $
    7,951
    
    
    $
    
    
    
    $
    
    
    
    $
    8,638
    
    
    $
    8,605Average interest rate
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %Variable
rate  Ponte Vedra, FL Hampton Inn
    
    $
    76
    
    
    $
    109
    
    
    $
    119
    
    
    $
    130
    
    
    $
    4,201
    
    
    $
    
    
    
    $
    4,635
    
    
    $
    4,635Average interest rate
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )Fixed rate  The Stanley Hotel
    
    $
    185
    
    
    $
    245
    
    
    $
    263
    
    
    $
    11,949
    
    
    $
    
    
    
    $
    
    
    
    $
    12,642
    
    
    $
    12,600Average interest rate
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %Variable
rate  Kansas City, MO Courtyard by Marriott
    
    $
    195
    
    
    $
    276
    
    
    $
    296
    
    
    $
    318
    
    
    $
    9,732
    
    
    $
    
    
    
    $
    10,817
    
    
    $
    10,817Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )Variable
rate  Akron, OH Hilton Garden Inn
    
    $
    122
    
    
    $
    195
    
    
    $
    209
    
    
    $
    225
    
    
    $
    241
    
    
    $
    6,908
    
    
    $
    7,900
    
    
    $
    7,900Average 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 5.32% and 5.33%,
respectively, at March 31, 2007).(b)
    
    Rate is 30-day LIBOR plus 2.25%.(c)
    
    Rate is 90-day LIBOR plus 1.75% (90-day LIBOR was 5.35% at March 31, 2007).(d)
    
    Construction-to-permanent note of $9.0 million. Rate is 30-day LIBOR plus 1.80%.(e)
    
    Construction-to-permanent note of $7.0 million with a balance of $0 at March 31, 2007. Rate is 30-day LIBOR plus 1.50%.(f)
    
    Rate is 30-day LIBOR plus 3.0%.(g)
    
    Construction-to-permanent notes will not have final payment schedules until they become permanent.The table above shows the expected maturity for these notes to be the year that the note is expected to be
converted to the permanent note (See Note 12 to the Consolidated Financial Statements).(h)
    
    Prepaid in full during the second quarter of 2007. 45




---



##### 



Item 4. Controls and Procedures
     PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
 Whitney v. Winston Hotels, Inc., et al.
   46




---



##### 



Item 1A. Risk Factors.
  Risks Related to the Proposed Merger
  Failure to complete the Merger could negatively impact our stock price and our future business and
financial results.
   
    
    being required, under certain circumstances, including if we sign a
definitive agreement with respect to a superior proposal from another
potential buyer, to pay a termination fee of $11.0 million to Inland;
    
    being required, under certain circumstances, including if we breach
the Merger Agreement, to reimburse Inland for up to $9.0 million of
its transaction costs and expenses;
    
    being required, in the event of termination of the Merger Agreement
under certain circumstances, to repay the $20.0 million to Inland,
that was paid to Och-Ziff in connection with the termination of the
Och-Ziff Merger Agreement;
    
    having incurred certain costs relating to the Merger that are payable
whether or not the Merger is completed, including legal, accounting,
financial advisor and printing fees; and
    
    having had the focus of management directed toward the Merger and
integration planning instead of on our core business and other
opportunities that could have been beneficial to us.
 47




---



##### 



Provisions of the Merger Agreement may deter alternative business combinations and could negatively
impact our stock price if the Merger Agreement is terminated in certain circumstances or otherwise
fails to close.
  Our stock price and businesses may be adversely affected if the Merger is not completed.
  While the Merger Agreement is in effect, we are subject to significant restrictions on our business
activities, and activities relating to the Merger may divert the attention of our employees.
  Item 6.
  48




---



##### 



SIGNATURES
  WINSTON HOTELS, INC.Date May 8, 2007
    /s/ Joseph V. GreenJoseph V. GreenPresident and Chief Financial Officer
(Authorized officer and Principal Financial
Officer) 49




---



##### 



EXHIBIT INDEX
 Exhibit
    
    Description2.1
    
    Agreement and Plan of Merger, dated February 21, 2007, by and among Winston Hotels, Inc.,
WINN Limited Partnership, Wilbur Acquisition Holding Company, LLC and Wilbur Acquisition,
Inc. (incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form
8-K (File No. 001-13233) as filed with the Securities and Exchange Commission on February
23, 2007).2.2
    
    Agreement and Plan of Merger, dated April 2, 2007, by and among Winston Hotels, Inc.,
WINN Limited Partnership, Inland American Real Estate Trust, Inc. and Inland American
Acquisition (Winston), LLC, (incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K (File No. 001-13233) as filed with the Securities and Exchange
Commission on April 3, 2007).3.1
    
    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).31.1*
    
    Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a).31.2*
    
    Certification of Principal Financial Officer 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.
 
 *
    
    Filed herewith. 50